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S&W Seed Company (NASDAQ:SANW)

F2Q2014 Earnings Conference Call

February 13, 2013 4:30 PM EST

Executives

Robert A. Blum – Managing Partner, Lytham Partners

Mark S. Grewal – President and Chief Executive Officer

Matthew K. Szot – Senior Vice President and Chief Financial Officer

Analysts

Mike F. Malouf – Craig-Hallum Capital Group LLC

Michael E. Cox – Piper Jaffray, Inc.

Matt B. Koranda – ROTH Capital Partners LLC

Brent R. Rystrom – Feltl & Co.

Andrew J. O'Connor – BMO Asset Management Corp.

Frank Smith – Weirton Fund LLC

Ian Gilson – Zacks Investment Research

Operator

Hello, and welcome to the S&W Seed Company Reports Second Quarter 2014 Financial Results Conference Call. All participants will be in listen-only mode for this event. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the call over to Robert Blum of Lytham Partners. Mr. Blum, please go ahead.

Robert A. Blum

Yeah, thanks, Gary, and thank you all for joining us to review the financial results of S&W Seed Company for the second quarter and fiscal year 2014, which ended on December 31, 2013.

With us on the call representing the company today are Mark Grewal, President and Chief Executive Officer; and Matthew Szot, Chief Financial Officer. At the conclusion of today’s prepared remarks, we will open the call for your question-and-answer session. If anyone participating on today’s call does not have a full text copy of the release, you can retrieve it from the company’s website or numerous financial websites on the Internet.

Before we begin with prepared remarks, we submit for the record the following statement. Statements made by the management team of S&W Seed Company during the course of this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended, and such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements describe future expectations, plans, results or strategies and are generally preceded by words such as may, future, plan or planned, will or should, expected, anticipates, draft, eventually or projected. Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events or results to differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those projected in the forward-looking statements as a result of various factors and other risks identified in the company’s 10-K for the fiscal year ended June 30, 2013, and other filings made by the company with the Securities and Exchange Commission.

With that said, let me turn the call over to Mark Grewal, Chief Executive Officer for S&W Seed Company. Mark?

Mark S. Grewal

Thank you, Robert, and good afternoon. As always, we thank you for taking the time to participate on today’s call, and we appreciate your continued interest in S&W. We are just finishing up a three-day run at the World Ag Expo here in Tulare, California. S&W’s presence at the event was notable by the strength of participation at our booth and meetings with farmers from around the world. As well as our full page advertisement on the back cover of the show program that made in the hands of thousands of attendees. The strong response that we get in industry events like this reinforce our strategic plan and make me proud to be associated with S&W.

On today’s call I want to spend a few minutes updating you on the results of the second including our strong gross margin improvement. Provide some insights into the markets we serve, look at our calendar year 2014 production schedule, we view our R&D pipeline and providing outlook for the third quarter and remainder of the fiscal year.

Matt Szot is also here to provide added perspective on details on the quarter. As we talked about the end of last fiscal year, we expected the distribution of revenues in fiscal year 2014 to look quite different from what they were during fiscal year 2013. A big key was a time that it would take for us to become more fully integrated, whether our Australian operations to initiate and execute on out optimization program which is a key driver for us in improving our gross margins.

So let me spend a bit of time in this area. As many of you are aware of the cost of production in Australia can be quite lower than what it is in California. Therefore, the perception around the world is that Australian seeds should be priced at a discount, the California seed as a result of its lower cost of production, but not on the merits of the seed quality itself. However, some Australian variety saw that extremely well in testing when compared to that of U.S. based production. In fact our Australian variety SuperSonic recently outperformed more than 80% of the competition at a trial completed by the University of Arizona, a pick up by 2 tons per acre. So even though the product performs better than many U.S. branded products, its pricing has been at a discount in the market as a result of the lower cost of production and perception of that being from Australia.

And I know are the four facts frustrated Mark Harvey, Dennis joined the rest of the team from SGI. And one of the ways to capture the value of the Australian seed is to blend it with appropriate California seed varieties. Thus creating products that better meet the needs of our end user customers, while being able to charge a price is more commensurate that the value being delivered. During the most recent quarter nearly 40% of our revenues will derive from seed that was comprised of some type of blended or optimize product. This certainly had an impact on helping to improve our gross margins during the quarter, the 20.7% from a 11.6% during the same period a year ago.

While we are seeing more and more of this optimization strategy at work each day and feel there are real opportunities for us to enhance our gross margins as we introduce this optimization program more clearly in the coming years.

Revenues during the quarter were within the company’s stated range or driven by growth in Northern Africa and Mexico offset by decreased sales to Saudi. Looking forward, we continue to evaluate the market conditions in Saudi and believe that inventories are being diminished in the channel heading into the fall planting season, while there can be shifting of revenues from Q4 to Q1, we expect strength from the marketplace as a whole heading into the upcoming fall planting season.

We are expecting some items outside the companies control in Argentina and the United States that will likely ship sales into our 2015 fiscal year. Sales that we anticipated going into Argentina will likely be impacted by the recent currency devaluation. Also as we talked about in the recent press release, we do believe the U.S. market for alfalfa hay will be impacted by the drought which will have the likely effect of transitioning some seed sales into the next fiscal year as water allocations become more clear.

However, we are seeing some real strength in the parts of Northern Africa and especially in New Mexico. I will let Matt go into few more details on the quarter to you shortly, but first let me touch on our 2014 production. I feel as we just finished up our 2013 production and we are diving right into a discussion of our 2014 production.

Clearly it is one of the real benefits of having the diversification that S&W Seed company has right now. While it is still too early in the process to get a read on our exact Australian harvest, I can’t provide you a sense of where we think the harvest will end up.

Our acres under production are similar to last year. So in theory we could deliver similar total pounds to the 2013 harvest.

I’ll be leaving tomorrow everybody, so when we get back I am going to have a lot of better handle on what’s going on there. So I look forward to being with all the growers down under. The one key item the design included and what I just referenced is a recent addition of S&W branded varieties that we are planning in Australia.

As soon as we conclude this conference call, I’m packing up and heading to Australia to work on with our production team to secure acreage for the March/April 2015 harvest. We are currently estimating at least 1000 acres of S&W production will be introduced into Australia next year, but we are certainly hoping for more.

Remember the production in Australia takes place in March/April timeframe and therefore we will be available for sale in our fiscal year that ends in June 2015. In California, we are still obviously early in the process and actually still have a few growers that would like to add production acres.

Compared with last year we have approximately 7% more acreage under contract in California. It’s too early to see where yields will come in at, but as mentioned in our press release last week. I do not believe that our alfalfa seed production in California will be curtailed in any significant way by the drought. The reasons behind this are simple from an economic standpoint. Our California production comes from the Imperial Valley, which is watered from the Colorado River and from the San Joaquin Valley where our seed farmers have access to well water for irrigation.

None of our domestic farming is dry land farming that relies on rain. Achieving good alfalfa seed yields in irrigated fields requires less water compared to other crops. In fact rain anytime during the cropping season can be a detriment to high yields in alfalfa seed production. So we really do not see the drought conditions in California having any real effect on our seed production.

Let me turn the call over to Matt for a review of the quarter in more detail and I will then come back to review our pipeline and expectations for the third quarter and remaining, the remainder of the fiscal year and we will then turn the call over to you guys for any of your questions. Matt?

Matthew K. Szot

Thanks, Mark. Since everyone should have accessed in the summary financials in the press release, let me provide some additional details on a few areas. For the second quarter, revenues totaled a $11.5 million compared to $13.7 million in the prior year. As discussed in our press release, revenues during the quarter were within the company stated range and were led by growth in sales to customers in North Africa and Mexico offset by decreased sales to Saudi Arabia versus the comparable period of the prior year.

Gross margins in the second quarter totaled 20.7%, as compared favorably to Q2 of the prior year, gross margins were a 11.6%. Now the prior year results included a $300,000 stevia charge, so excluding that stevia charge prior year gross margins were 13.8%. Current quarter gross margins also compared favorably to 18.6% in the first quarter of this fiscal year. As Mark touched on nearly 40% of our revenues during the quarter were derived from some type of blended products through out optimization program that positively impacted gross margin.

We believe that gross margins for the year will be in the 20% range on an overall consolidated basis and as the success of our optimization program takes hold and for competitive reasons we will not be providing a breakdown under specific margin by variety types.

We are becoming an integrated company and we will managing inventories on a global basis can sure that we maximize our group stock inventory that we have. Also going forward we will be plant in S&W varieties in Australia which should continue to drive gross margin improvements. As a management team will making a consorted at for drive overall gross margin and that’s translate into improved profitability for this year and the years to come.

SG&A for the quarter totaled $1.5 million compared to $1.1 million for the comparable period of the prior year. The increase in SG&A versus Q2 of the prior year was primarily due to the acquisitions of SGI, which was not completed April 1, 2013 and therefore not included in the prior result.

In addition non-cash stock based compensation totaled $222,000 in the current quarter versus $99,000 in the comparable period of the prior year. SG&A expenses decreased 8% when compared to the first quarter of fiscal 2014 and it’s a reflection of our successful integration of our acquisition and continued cost control.

As a percentage of revenue SG&A expenses were 13% of revenue in the current quarter compared to 8% last year and 13% in the most recent first quarter. Our going forward SG&A quarterly expanded estimated to be in the $1.7 million range per quarter.

From an EBITDA perspective, we saw improvements from Q2 compared with the prior year as well as the most recent first quarter. Adjusted EBITDA totaled $883,000 in the current quarter compared to $516,000 in the second quarter of last year and compared to $695,000 in the first quarter of fiscal 2014.

Regarding the inventory, we ended the quarter with approximately $23 million of seed inventory on hand. Now not included in this numbers seed that we anticipate sourcing in a just in time format, which is part of IVS business model and likewise does not included any seed that will be coming from the out coming Australian our California harvest from 2014.

I’ll now turn the call back over to Mark.

Mark Grewal

Thank you, Matt. Well I know that most of you on Wall Street are focused on the quarter-to-quarter reporting of the company and that is difficult to look out more than a few months. As an agricultural company executives were looking at the long-term. That being said I really excited about the developments taking place within our research and development side.

In terms of our agreement with Monsanto and Forage Genetics for the development of a biotech S&W variety, testing the data is past all the benchmarks so we hope that would. And we expect to increase our plant in sometime in the next 60 days, which will allow us to have commercial quantities available a long variety by the end of 2015.

In terms of our Dormant operations, we are expecting our initial 80,000 pounds of Rhino to be harvested this year. The sale is being made sometime in fiscal year 2015, and we continue to focus on developing relationships with growers to expand production, but more importantly developing relationships with buyers. We are also seeing some great results and some recent trials that we hope to be that we will actually announce soon.

Finally, we continue to make progress on our tropical program. As a reminder, while alfalfa for century has been a staple of Forage production of both warm and cold geographical areas that are considered non-tropical. Tropical areas have historically not had local production of alfalfa due to the traits and limitations of currently available varieties.

Areas such as parts of Brazil, Central States of Africa, North Australia, and even in Asia, Southeast Asia and Vietnam already have large herds that would benefit greatly from a tropical alfalfa to lift productivity. We believe that our current variety and development would be the first of its kind on the market to meet the unique characteristics of these climate types. If we’re successful with the completion of testing, which is targeted to end in April of 2014, we hope to release new variety for the initial stages of commercial seed production during the 2015 harvest cycle.

Also, why I have been relatively quiet on our stevia development program for a while now, our team has been working day and night on the breeding front and feel as though we are making some real strides. We are cautiously optimistic that we will be able to announce some news shortly.

As we discussed on our call last quarter, we will do our best going forward to provide as much insight into the year and upcoming quarter as we possibly can. I believe we have been able to communicate the uniqueness of seed companies from the standpoint that revenues are derived from our inventory levels, which are in essence set each year.

So while we want to be proactive in providing an overview of our expectations, we also want to make sure that we are operating our business to maximize the value of this seed inventory that that happens to me we ship early or later, we will do so. Based upon information currently available to management, we are estimating revenues for the fiscal year to be in the range of $52 million to $58 million. This revenue estimate relates to the devaluation of the currency in Argentina as I talked about, where we had earmarked a certain percentage of our seed to be sold.

We are evaluating that market and feel like shipments may shift to the following fiscal year. We also believe there could be some shifting of seed purchases to customers in the U.S. as water allocations to hay farmers becomes clear in the coming months.

As a reminder I view our seed inventories has more valuable than cash. So we don’t believe our revenues, our revenues opportunities are last at all, but simply moved to a different reporting period. Any possible shifting of revenues in the Q1 should bode well for a very strong fiscal year 2015.

As we look to the third quarter, we believe the revenues will be approximately $7 million. Overall there appears to be good strength in the alfalfa industry right now. No prices continue to remain strong, also the drought in California is creating a shortage of hay available on the market and exports of hay to Asia will continue to keep hay prices up.

We have a great team in S&W and I appreciate all the hard work and dedication that they provide to making S&W leader in the alfalfa seed industry. I believe we are in a great position to be capitalizing our one of the most significant opportunities in the world right now, which is the ability to feed a growing population with fewer resources and providing them with the increased levels of protein they desire under diets.

As always we appreciate your support and we remain dedicated to continue repaying your support many times over. With that said let’s open up the call for your questions. Robert, let me give to the operator?

Robert Blum

Go ahead Gary.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Mike Malouf with Craig-Hallum Capital Group. Please go ahead.

Mike F. Malouf – Craig-Hallum Capital Group LLC

Great, guys and thanks for taking my questions.

Mark S. Grewal

Hey, Mike.

Mike F. Malouf – Craig-Hallum Capital Group LLC

The first question I have is the gross margins came in well ahead of certainly my expectations, great job on that, you are at 40% of the seed that you sold that are have been optimized, where do you think you can take that over time and is that, was that an unusually high number for this quarter?

Mark S. Grewal

Let me start and then you fill it in Matt.

Matthew K. Szot

Sure.

Mark S. Grewal

Mike the real key in and the real focus of believing tomorrow to go to Australia is to actually start the process of taking S&W leaf varieties and growing them there. So what that’s going to do as I think you are aware of is, is actually be able to ship direct to our customers and have that California premium already in place.

That’s the ultimate margin model currently, where we’re gaining ground with optimization is really the old IVS model, and into markets like Mexico where the blended product allows us to put some sort of portion which I’ll let Matt expand on more of Australian seed but add some California variety of strength that’s recognized in the dormancy numbers.

And that had a marked improvement on margin then you’re going to continue to see that, yes Matt you want to add.

Matthew K. Szot

I’ve just I mean for competitive reasons, we’re not going to, we feel it’s really important for us not to disclose margins by variety of types at this stage or growth but we are certainly working on continuing with the optimization program, we have a long way to go but we’re certainly pleased with the progress made to date, and I think that’s reflective of our margins in the current quarter.

And I do think the overall margins that we’ve recorded for the quarter and year-to-date are certainly reflective of margins that we would expect for the remainder of this fiscal year. And we certainly think we have an opportunity to continue to improve those as we further rollout the optimization program as Mark just touched on as we get California proprietary production placed in Australia that’s going to be a significant boost to our margins.

Mike Malouf – Craig-Hallum Capital Group LLC

Okay, great and then that is helpful, I’m sure that every other seed producers probably on the call listening in, so I can imagine the discretion. So, so that’s good, that’s helpful. With regards to the buyers on the dormant side, you had mentioned sort of working on that I know you have, your first harvest coming up here what can you tell us about the opportunity on the sales side, on the dormant side?

Mark S. Grewal

Mike it’s going to be the opportunities are really exciting and they’re actually more than I even thought personally and at a lot of these conferences, we have the Western, five Western Winter Seed Production Conference, we had the Alfalfa Conference back in December, we just are wrapping up the Tulare Farm Program Show and I can tell you that at all these conferences one of the big things that we’re heading up is there an S&W dormancy 4, dormant variety that salt tolerant, see people are really on salt tolerant trades and they are looking for us to take that into dormant.

We just finished some trials, I hope that I will let the partners will be able to get some releases out. So you can see some of these trial results but they’re very exciting because we have two of the varieties that we own Trophy and Rhino really competing well and we have brand new breed varieties of S&W branded products in the dormant range that are showing up in the top as in lot of these trials.

So our job now is to get them out, get them produce and get them in a marketplace that we think is going to be very big. And you know we’re trialing in China and we have some other capabilities that will allow us to get into higher elevations even where we currently sell. So even in California in our current marketplace, there is dormant seed grown in different areas where there is snow. We’re not hitting that market but yet we still have that same area with sales. So we see this as a big expansion where S&W is going to go on the future.

Mike Malouf – Craig-Hallum Capital Group LLC

Great. And then just a follow-up question on that growth, with regards to the Roundup Ready seed, what would you consider commercial quantity and what are the steps that you need to get to that point from here?

Mark S. Grewal

Mike the commercial quantity, I think, if you are under like a quarter million pounds to start with that that’s when you start commercial. Really true commercial things so we have to get those that ramped up. We’ll ramp if the demand is there, we’re going to be able to supply that demand and we’ll ramp it up relatively fast. So that the key right now is where is GMO going to go? I mean, you tell me. When you look at GMO right now with Cheerio spanning GMO and their product, and Grape Nut spanning GMO and their product all the lawsuits going on, where is the Roundup Ready going? So we just got to decide where that is in a format. But we’ll be ready, we will be ready up to growers want it, we’ll get it.

Mike Malouf – Craig-Hallum Capital Group LLC

Great thanks a lot for the color, I appreciate it.

Operator

The next question comes from Michael Cox with Piper Jaffray. Please go ahead.

Michael E. Cox – Piper Jaffray, Inc.

Hey guys, how is it going?

Mark S. Grewal

Good, Mike.

Matthew K. Szot

Hey, Michel, good to hear from you.

Michael E. Cox – Piper Jaffray, Inc.

Matt just one quick on the model, can you provide the pound sold in the quarter?

Matthew K. Szot

Mike, I know we provided that data in the past, but we’ve internally discussed and we think it’s counterproductive to our sales force to be divulge in that information.

Michael E. Cox – Piper Jaffray, Inc.

Okay.

Matthew K. Szot

So, I am just trying to give you more revenue guidance in overall consolidated margin guidance at this point.

Michael E. Cox – Piper Jaffray, Inc.

Okay. That’s fair. In terms of the Saudi customer base what does it take aside from just getting right up to planting season to get those customers off the fence and back in the market buying seed?

Mark S. Grewal

Well there is if now briefly if I can, you had a lot of influx of Australian seekers [ph] they have a decent crop, just slam into that area. And so the question is, is do you want to continue because we’ve got a pretty good revenue model, do you want to still continue to build revenues or do we want to really work on what I think you guys are after that’s net profit. So we’ve really strengthened the margin side and so we could just go in there and dump seed and sell it. But we want to do it right. And to do it right, is to create a varieties that are just far superior than other peoples. And then they maintain our pricing.

So if you want to be a price guy, you can sell right now. We are getting a lot of calls on our seed right now Mike. We’re getting – we’re seeing this really shift around, so I believe that the inventories that were there are disappearing, and there’s going – we’re going to have seed available and I think we’re going to hit this market really strong. And I think it’s believe a strongest fourth quarter we’ve ever had.

Matthew K. Szot

Yes, Mike and this Mat. Certainly we’re getting indications that Saudi – the Saudi market is going to heat up quite a bit here as we go into the fall planting season, which certainly is going to board well for our Q4 and into next year.

Michael Cox – Piper Jaffray

In terms of the California drive I appreciate the – that the way that this the seed production takes place, but we refer some antidote of growers just simply not planting this all coming season because of the water restrictions and so curious what the risk is that your grower customers leave fields follow this year, just curious what your thoughts on that potential risk as you look ahead.

Mark S. Grewal

Okay, are we talking seed or hay.

Michael Cox – Piper Jaffray

Is it be for hay?

Mark S. Grewal

Okay. There is definitely going to be a decrease in acreage in hay, in California, in the San Joaquin Valley, but you are also going to see a shift at increase of hay an Imperial Valley of California and down into Mexico which were see a very strong demand and into the neighboring states. So like if you look at that hay report you will see Washington, Oregon, Idaho, Nevada, and Utah, New Mexico increase by California’s decreasing right in the Colorado.

So that acreage is just going to shift out of the San Joaquin valley. The bottom line as your dairies them, dairy there might is there Mike so who ever can’t grow hay at these types of prices that are all time high with zero inventory can they will be growing. So they don’t want the freight, so they are still going to try to get us as closer as they can, but this is superior drought in the valley and its – its even made worse by the politics of the federal law – water laws on environment regulations. So hopefully this will get I don’t know and will get it turnaround rest of the spring will bring some rain and but that will have an effect on hay there is no doubt about it.

Matthew K. Szot

Right and Mike I do want to stress, seed sales into the San Joaquin valley for hay production do represent a very small percentage of our overall revenues. So it certainly it’s decreasing our California sales in the current year, which is why Mark narrowed the revenue guidance that were providing, but overall its not have a material adverse impact on our business.

Michael Cox – Piper Jaffray

Okay. It sounds great thanks a lot guys.

Operator

The next question comes from Philip Shen with ROTH Capital. Please go ahead.

Matt B. Koranda – ROTH Capital Partners LLC

Hey, guys, this is Matt on for Phil, guys. How is going?

Mark S. Grewal

Hi, Matt.

Matt B. Koranda – ROTH Capital Partners LLC

So a couple of quick questions, thanks for taking my questions. So just continuing on just briefly with the drought thing and will be the dead horse anymore here, but one more thing on that. So we understand the drought won’t affect production in terms of seeds, but maybe could you breakout how it might impact the cost for your grower base?

Mark S. Grewal

Well, on seed, it’s not going to impact our cost, because we have fixed contracts.

Matt B. Koranda – ROTH Capital Partners LLC

But for the grower base in general, can you breakout how that might affect cost for them?

Mark S. Grewal

They will have a higher water cost Matt.

Matt B. Koranda – ROTH Capital Partners LLC

Okay.

Mark S. Grewal

So because they say, there is only two types of water, aboveground and below. And if you don’t have the aboveground resources, you’ve got to pump. So if you pump, you have increased electrical costs, and that’s type of well costs, machinery costs, and that’s a higher rate for water, so their costs will be impacted with a little bit higher production.

Matt B. Koranda – ROTH Capital Partners LLC

Okay, all right. And could you maybe provide just a little more color on that like how much, what percentage of their total costs would water represent?

Mark S. Grewal

It depends on where you are. So what I suggest if you really want to get into that level of details, just give me a few days while I’m traveling and I’ll try to get – I’ll try to gather some data for you and then you can take that where you want.

Matt B. Koranda – ROTH Capital Partners LLC

Okay. All right, that’s fair. And then just one more here on the guidance, could you discuss sort of in terms of the revenue guidance, how much of the change was due to the focus on gross margins versus the shift in shipment mix that you talked about?

Matthew K. Szot

Well, I think as we look to the top end of the range, Argentina contributed to a portion of that, we had some number, we had some revenue penciled in for Argentina with the currency devaluation we want to pull that out of our model. And California – the situation in California resolves another driving factor, but…

Matt B. Koranda – ROTH Capital Partners LLC

Okay, great.

Mark S. Grewal

Does that answer, or do you want more detail.

Matt B. Koranda – ROTH Capital Partners LLC

That’s helpful guys. That’s it from us here, thanks.

Mark S. Grewal

You bet. Thank you, Matt.

Operator

Then next question comes from Brent Rystrom with Feltl. Please go ahead.

Mark S. Grewal

Hey, Brent [indiscernible] Farm Show.

Brent R. Rystrom – Feltl & Co.

Yeah, I had a kind of little tour that [indiscernible], so I missed it myself.

Mark S. Grewal

Oh, somewhat I was looking for you.

Brent R. Rystrom – Feltl & Co.

Couple of quick questions, on Argentina, do you know obviously and one of the things that we run the target in a lot of farmers down there would be a export taxes on soya beans. The market in Argentina would that be for export of hay or would that be for domestic consumption of hay or both?

Mark S. Grewal

It’s both, but let’s go into that. If you are – Brent if you are a – from Saudi what these guys have been doing recently is actually buying ground or leasing long-term lease ground in these countries and then shipping back, that hay back to their country areas, back to the Middle East and North Africa.

Asia since so much about soybeans, the China really impacts that Argentina, Brazil, Uruguay a soybeans market, but what’s really happening is there is internal hay that’s going to ramp up over there because their taking the dairy cows now that use to pasture on grasses, and clover, and they’re freezed on like in California. So now they’re going to – their feed costs are going to go up, and they’re not going to be feeding more pasture, because that pasture is going to soybeans.

And so you’re going to see a lot more demand in hay varieties in alfalfa seed varieties going into Argentina. The question is what’s the political ramification are there and what type of the seed they want now, no that SGI, our Australian operations been selling in there for all the 12 years. That’s a big component of where they want to go with their type of seed and it’s the reason why some of the competition in Australia to begin with us because that’s where they would ship from, they would ship seed from Australia and Argentina. So we think long-term we’re going to have a very big focus on that country.

Brent R. Rystrom – Feltl & Co.

From a simplistic perspective, can you tell us in broad terms was this is a single-digit percentage of SG&A sales historically at Argentina, and then long run how bigger market could it be if the deal develop ideally?

Matthew K. Szot

Brent, this is Matt, it’s represented a pretty small percentage of historical sales, but it’s a pretty large market and then we think in the coming years, it represents a significant opportunity. And we’re going to make good sorted effort to penetrate that market.

Mark S. Grewal

I would add that the Brent that historically speaking, there has been as much as £16 million a year used in that market of seed.

Brent R. Rystrom – Feltl & Co.

And from a simplistic perspectives maybe a different way of tackling it, when you look at the combined company now and when you look at markets globally around the world, could you give us a dollar amount $5 million into this market will be a lot sales or $2 million or $10 million, what would to find a big geographic national type market for S&W now.

Mark S. Grewal

Well, I would say that I think we would over the longer term, we would be targeting that to be £5 million to £7 million market, so that would translate into anywhere from $15 million to $25 million worth of potential revenue.

Brent R. Rystrom – Feltl & Co.

It’s very helpful. Thank you.

Matthew Szot

We are attacking.

Brent R. Rystrom – Feltl & Co.

All right. Can you give us a little overview you had mentioned competitively price seed coming from Australia, and Saudi Arabia. Can you give us a sense at this point, what market share you think you have on seed production for the forward year in Australia by acre?

Mark S. Grewal

Okay, I believe we have 60% of the production in Southern Australia, which represents the majority of seed, certified seed production. We do have a little bit of seed coming out of Victoria and more of the side river common types. But as far as certified seed, we have at least a 60% of production of that. And that’s what you want to be like you do in Saudi they only take certified seed. Now if you go to Mexico they take whatever you’ve got. Mark do you want to talk about?

Brent R. Rystrom – Feltl & Co.

And then the final quick question. If you’re in the early stages of our significant herd liquidation, so if you’ve been watching a lot of that the bred efforts, the replacement efforts right now are being oxidized California pretty heavily in the dairy. So, to need it in place, when you think of getting a [indiscernible] and then taking the cap off. You’re talking maybe a year where you could have kind of a cycle of declining production just no production in general in California. Any particular thoughts you have any visibility for herd reduction because we’re seeing a lot of options notifications coming out of there?

Mark S. Grewal

I think you’re spot on the herd comments and on what’s going on? This – the real killer is really not the dairy is there, it’s the beef on the big range and the lack of rain and where they are trying to bring, they are actually if you guess the latest ag alert that was dated January 29, 2014, to French cover those guys that are out on their Pasteurs dumping hay, bales out, because they don’t have any grass to feed them.

So, at some time you’re right they’re going to call some of that herd out. They don’t want to beef prices are really good right now, especially in our area. But if they don’t have beef, they’re going to have to say well what’s the cost of the feed versus keeping the animal alive and make that determination.

Brent R. Rystrom – Feltl & Co.

Those colors are all going to tax itself. Thanks guys.

Mark S. Grewal

Thank you, Brent.

Operator

The next question comes from Andrew O'Connor with BMO Asset Management. Please go ahead.

Andrew J. O'Connor – BMO Asset Management Corp.

Good afternoon Mark and Matt. Do you get hear for me?

Unidentified Company Representative

Hi, Andy.

Andrew J. O'Connor – BMO Asset Management Corp.

Guys, you know I may have missed this, did you dissect full year 2014 sales guidance. which is it incorporate for volumes and seed pricing the $52 million to $58 million? Thanks.

Mark S. Grewal

Yes, Andy what we’ve been discussing it internally and for obvious competitive reasons we’ve made the decision do not involves that level of detail, we’re going to be on a go forward basis just talking consolidated margins.

Andrew J. O'Connor – BMO Asset Management Corp.

All right

Matthew K. Szot

Look at these business and sales.

Andrew J. O'Connor – BMO Asset Management Corp.

Okay, got it. And then, how has a strengthening U.S. dollar impacted the market ability of S&W alfalfa seeds outside the United States are, what are you assuming about the dollar in your sales guidance?

Matthew K. Szot

I mean, the dollar in comparison to the Aussie dollar where I think many analysts are projecting the Australian dollar continue to weaken. So I think that bodes well for our business were contracting in US dollars with our growers in Australia and we enter into sales contracts in US dollar. So it should go well for us overall.

Andrew J. O'Connor – BMO Asset Management Corp.

Okay that’s all we have. Thanks very much.

Mark S. Grewal

Thank you Andy

Operator

The next question comes from Frank Smith with Weirton Fund. Please go ahead.

Frank Smith – Weirton Fund LLC

Hey congratulations Mark and Matt on the quarter.

Mark S. Grewal

Thanks Frank.

Frank Smith – Weirton Fund LLC

Yeah I am trying to just get a handle around the Chinese situation they say that they built up their herds with 12 million dairy cows, and I’m just wondering if you could give us an idea of how much alfalfa would be needed to see that many cows?

Mark S. Grewal

Well I would say if they want to have California quality milk it’s going to take a minimum of eight pounds somewhere between 8 and 10 pounds per cow per day. So this take just as an estimate go 10 pounds times 12 million. And then you can figure out how much hay they need. I can just tell you that at some point there is a balancing act between shipping hay end at the high prices that it is in California to these countries versus trying to grow at yourself. So if you take some areas and just think that if they grew it themselves they might have a $150 a ton hay that was right there direct market, versus buying hay $250 to $300 and then shipping it with freight and landing it.

But if they can’t make the quality and they don’t have the varieties and they want to make that the cheese and the butter and the milk protein you need they are going to have to do that, I just see a strong there is just a lot of pressure on US, hay production going to Korea, Japan and China.

Frank Smith – Weirton Fund LLC

Okay, I just want to make sure I am right with this figure you are saying 120 million pound of alfalfa a day?

Mark S. Grewal

No, 10 pounds per day, so that will be 1.8 pound to take 10 pound of hay per day per cow against 365 day out of the year, 3650 pounds divided by 2000 pound would be 1.8 tons per year per cow, times the 12 million cows appear heard number is right. And that gives you the amount hay they need in here.

Frank Smith – Weirton Fund LLC

Okay.

Mark S. Grewal

They are lot of hay.

Frank Smith – Weirton Fund LLC

Yes, it seems like a lot of hay.

Mark S. Grewal

That’s why we have the Wall Street sit out there, what’s the deal exporting water, the calumniated export of water…

Frank Smith – Weirton Fund LLC

Great

Mark S. Grewal

We are taking our water resource and providing them the same things Middle East, North America they are moving on much hay they can in there, but if that only costs you half of the amount to grow it in your own country or should we try to maximize growing in your own country first and then supplement.

Frank Smith – Weirton Fund LLC

Yes you would think so.

Mark S. Grewal

Because it okay now takes it a step further you know the milk guy. So now you want to have your milk costs for your feed rations doubled for feed costs, because when your margins are slim you want to get us much local supplies as you can first and then you go and buy on the outside.

Frank Smith – Weirton Fund LLC

I am sorry are you kind me showing any seed directly into China tour their…

Mark S. Grewal

We are on the trial process – we are in the trial process and we have to get the dormant seed produced. I’m there – I’m highly convinces we are going to have a lot of sales there, but we first had to get the right varieties and then still now. SGI have some clover into China and that clover is also big demand in India. So you might see some more shifts into types that are similar to alfalfa better and less our lower costs of feed, but we’re not there yet in china with a develop market. We are working on going up there.

Frank Smith – Weirton Fund LLC

Okay. All right I will drop off somebody ask another question.

Mark S. Grewal

Thank you.

Operator

The next question comes from Ian Gilson with Zacks Investment Research. Please go ahead

Ian Gilson – Zacks Investment Research

Thank you very much. Regarding Saudi Arabia, I felt that the extra seed problem have been solved last year. Did you give us a little more color on that and secondly, how do you define the North Africa, because I'm noting at the map and the rainfall and the desert areas. I don’t see much green that this North of Chad, the Sudan, Marly.

Mark S. Grewal

Egypt, Libya

Ian Gilson – Zacks Investment Research

All right

Mark S. Grewal

Sudan those are very those are big were in Morocco as you know, but these are very big alfalfa areas anything along the Nile, were Sudan and Egypt is going to be big and Egypt has very high demand and hay. So I mean that’s really Norway from where we actually go into all the way backup in the – the touching all the way to Turkey. So that’s not Africa, but I mean literally those are big areas to grow up out there.

Ian Gilson – Zacks Investment Research

Okay. So let’s go back to Saudi Arabia. Did you restrict sales like you did two years ago?

Mark S. Grewal

I’ll just say that we’re really going to focus on our margin development and we’re convinced that we have the right varieties for those areas. We are getting a lot of calls right now and for sales in that area.

Ian Gilson – Zacks Investment Research

All right, is that margin based on the blended product or margins based on the Australian production rates?

Mark S. Grewal

It’s based on our overall consolidated business incorporating all of the assets.

Ian Gilson – Zacks Investment Research

Okay fine, thank you very much.

Mark S. Grewal

You bet.

Operator

The last question comes from Frank Smith with Weirton Fund. Please go ahead

Frank Smith – Weirton Fund LLC

Yeah, just have one more question here. Did you guys state what the cash balance was at the end of the quarter?

Matthew K. Szot

Yes, Frank we did, we ended with $2.6 million in cash and or at coincidentally, but pleased to announce that we just received commitment for Wells Fargo whether they are providing us with a new working capital facility for $14 million. So it’s a really attractive deal and its not only going to be sufficient for our working capital needs, but its going to enable us to reduce our interest cost in Australia and we’re only a few days away from signing definitive paper work.

Frank Smith – Weirton Fund LLC

Great. Okay. Okay, all right thanks a lot. Appreciated.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mark Grewal for any closing remarks.

Mark S. Grewal

Again, my thanks to everyone for participating on today’s call. We look forward to talking with you again at the conclusion of the current quarter. I’m off to Australia tomorrow. So I’d hope to see some of you at the ROTH, when we get back and I hope everybody has a great day. Goodbye.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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