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S&W Seed Company (NASDAQ:SANW)

Q3 2014 Results Earnings Conference Call

May 14, 2014 4:30 PM ET

Executives

Robert Blum - Lytham Partners, LLC, IR

Mark Grewal - President and CEO

Matthew Szot - Chief Financial Officer

Dennis Jury - Chief Operating Officer

Analysts

Brett Wong - Piper Jaffray

Ross Licero - Craig-Hallum

Matt Koranda - Roth Capital

Brent Rystrom - Feltl

Andrew O'Connor - BMO Asset Management

Ian Gilson - Zacks

Frank Smith - Weirton Fund

David Goldsmith - DSG Capital

Steve Postich - Steve Postich Builders

Douglas Russell - Brown Harris Stevens

Mark Weindling - JHS Capital

Nick Bales - JHS Capital

Keith Gil - JHS

Operator

Good afternoon. And welcome to S&W Seed Company’s Third Quarter Fiscal Year 2014 Financial Results Conference Call. All participants will be in listen-only mode. (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 conference over to Robert Blum. Please go ahead.

Robert Blum

Thank you, Gary. And thank you for joining us to review the financial results of S&W Seed Company for the third quarter and fiscal year 2014, which ended on March 31, 2014.

With us on the call representing the company today are Mark Grewal, President and Chief Executive Officer; Matthew Szot, Chief Financial Officer; and Dennis Jury, Chief Operating Officer.

At the conclusion of today’s prepared remarks, we will open the call for a 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 at www.swseedco.com or numerous financial websites.

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 Grewal

Thank you, Robert. Good afternoon all of you. As always, we thank you for taking the time to participate on today's call and we appreciate your continued interest in S&W. During the call today, let me spend a bit of time updating you on the results of the third quarter, updating you on our Australian and California production, discuss some updates in our dormant program and review of our R&D pipeline and provide some insight into the markets we serve, including an outlook for the fourth quarter.

As always, Matt Szot is here to provide added perspective and details on the quarter and Dennis Jury, our Chief Operation Officer will be available for questions as well.

As everyone saw in this afternoon's press release, we reported revenues of $8.1 million, which was ahead of our originally -- original expectation of approximately $7 million. The upside during the quarter was largely due to a new domestic distributor that we sold approximately $1 million worth of seed to during the quarter. We are very pleased to establish this new distribution agreement as this company is one of the leading providers of ag inputs in the various markets they serve.

The agreement provides for S&W to supply this new distributor with many of its leading non-dormant alfalfa seed varieties for sale in the Western United States. The initial setup helps S&W to further establish our presence in the U.S. where traditionally only about 20% of our sales are derived from.

We look forward to working with this distributor and their team to provide their farming customers with some of the best, the very best seed genetics that the industry has to offer, not only in the Western U.S., but hopefully in many other markets throughout the world in which the company operates as well.

This agreement is just one of many that we are working on across the globe. We have ongoing discussions with a number of leading distributors to expand our presence in areas where we are not nearly as strong as we should be and others where we can strengthen our reach. While we want to be cautious for competitive reasons which markets we're going after. We will keep you posted as significant agreements come together.

One of the clear goals we as a company have had over the last two years is to increase our production and sourcing capabilities, while continuously driving improvements in gross margins across the entire company.

Throughout last year we made great strides to drive the production and sourcing increases. In fiscal 2014, we are falling through on our execution of continually working on gross margins.

During last fiscal year, we ended with adjusted gross margins of 15.9%, which excluded our stevia operations. Throughout fiscal year 2014 we have increased our gross margins throughout the first nine months to 19.8% and during the third quarter, I am pleased to announce our gross margins were 20.3%.

While we are pleased with the progress made, we clearly are not content. Our goal is to drive gross margins to mid to high 20s over the coming years, as we further deploy our various gross margin initiatives.

I want to remind everyone that our gross margin expansion certainly will not be linear, a linear line, there are various inputs that can effect margins in any one period. But from a long run standpoint, we are pleased with the progress made to date.

Let me spend a few minutes updating everyone on the harvest in Australia. As many of you know the harvest in Australia last year came in far above our original expectations. The strength and the size of the harvest have pros and cons. The pros are that we have more seed available for sale. The cons being that others in Australia also may have higher levels of inventory, but lower cost common seed namely Siriver, that they have sold them to the market less than desirable pricing.

While the current Australia harvest is still not 100% complete. We have a fairly good idea on the crop size and the estimates are that it is below last year. The decrease in the size of the crop compared to the previous year should have a stabilizing impact on pricing in certain markets in which we compete as inventory levels of lower cost, common seed varieties decrease. We will keep you updated as we learn more.

We are making progress in terms of our ability to plan additional acres of S&W leaf varieties in Australia. After last quarter’s conference call, I spend about a week in Australia with Dennis Jury meeting with growers in the region and touring fields.

We have the opportunity to show up many of our trial S&W fields at by David Pengelly farming kit South Australia. With the harvest nearly complete for the 2014 season, growers are starting to make their decisions on what varieties they want to plant. This decision will be finalized over the coming months.

We have some good verbal commitments from certain growers and others we continue to have discussions with. While nothing has final until it is in the ground. I'm hopeful that we can attain a 1000 or so of S&W varieties in Australia this coming season. Our ability to have a greater supply of elite S&W varieties is a key to our long-term operation plans.

In California, we continue to not see any impact to our seed production capacity due to the drought and will likely have an update for you at our next conference call on the full outcome of the harvest which will commence at the end of July.

We are making progress in our dormant expansion initiatives. This is certainly a long-term goal of ours, with us taking small initial steps to become a competitor on the space and hopefully growing significantly overtime. As many of you will recall, we are focusing on our few different tracks as it pertains to the dormant market.

First, we begin production with our initial planning of acres last year. The idea is to begin establishing relationships and having small quantities of seeds available for sale. Those acres will be harvested in this year and we expect somewhere around 80,000 pounds of initial production.

Second, we are focusing on trialing the varieties in China where we believe we have the greatest market opportunity for non-GMO based dormant varieties. The trials are ongoing and there is not necessarily a start and end of the trials but an ongoing observation of harvesting in the fields. So we have planned it there to determine the yield capabilities of the varieties.

Today, we are encouraged by the results and so our various effective partners in the region. We are hopeful of possibly seeing initial orders in the fourth quarter or the first quarter of next year. As we speak, we have our head of marketing and head of breeding heading to China.

On the production side, we are continuing to make measured increases in our production capabilities of dormant germ plasm. We are in negotiations to add acreage of many of our leading dormant varieties, hoping to have around 1,000 acres of dormant if all goes well for 2015 production season, up from about 300 acres this year.

Now let me turn the call over to Matt for review of the quarter in more detail. I will then come back to review our R&D pipeline and expectations for the fourth quarter. We will then turn the call over for any of your questions. Matt?

Matt Szot

Thanks Mark. Since everyone should have access to the summary of financials in the press release, let me provide some additional details on a few areas. For the third quarter, revenues totaled $8.1 million compared to $4.2 million a year ago, an increase of 93%. As Mark mentioned, revenues exceeded our original expectation due to a new distributor relationship that was created for our domestic market.

Gross margins in the third quarter totaled 20.3%. This compared favorably to Q3 of the prior year where our adjusted gross margins were 8.8% and compared to the most recent quarter of 20.7%.

As a reminder, the prior year result included $1.8 million stevia charge which affected the prior year gross margin line. Including that stevia charge, prior year gross margins were negative 35%. There will continue to be quarterly fluctuations in gross margins based on revenue mix in any particular quarter. But we continue to be excited about the gross margin initiatives that will play out over the next number of years.

SG&A for the third quarter totaled $1.7 million which was in line with our previous guidance and compared to $1.3 million for the comparable period of the prior year. $400,000 increase in SG&A versus Q3 of the prior year was primarily due to the acquisition of SGI which was not completed until April 1, 2013 and therefore not included in the prior period results. SG&A for the fourth quarter is estimated to be approximately $1.8 million.

From an EBITDA perspective, we saw nice improvements compared to the third quarter of the prior year. Adjusted EBITDA improved $648,000 for the quarter. Now, regarding inventory, we ended the quarter with approximately $32 million of seed inventory on hand.

I want to stress this number does include approximately $10 million of work in process inventory from the ongoing Australian harvest but not included in this number is seed that we anticipate sourcing and adjust in time format which is part of our IVS business model. And likewise it does not include any seed that will be coming from the upcoming California harvest this fall.

I will now turn the call back over to Mark.

Mark Grewal

Thank you, Matt. With all the activity that we have with going on with our non-dormant, dormant varieties, we have what we believe to be a strong pipeline for growth going forward. We are still conducting field trials on performance of our GMO varieties and expect commercial production acreage while we plan it for -- in the fall of 2014 for our first commercial harvest and the fall of 2015.

Once casting results have been approved, sales could commence as early as the fall of 2015 but may not start until 2016. This is consistent with our recent communication. We are very pleased to announce that the trials of tropical look great. And we are ready to begin moving forward the test market of product in areas around the globe.

The seed yields of South Australia look really good. And I believe growers will be excited to grow this variety. In Northern Australia where there is a season of extreme rainfall, the variety held up well which bodes well for the addressable market that we plan to go after.

As is customary in our industry, we will now be trialing the variety in the markets where we believe we will be able to develop a market while simultaneously increasing our seed production of the tropical variety. Overall the alfalfa seed market remains rather dynamic, their areas of strength especially in Mexico and parts of northern Africa while there continues to be levels of uncertainty in other regions.

The supplier proprietary seed continues to remain short going into the planning season as we suspected while there is still a supply of lower cost seed that we are dealing with. This lower cost seed may have an effect on certain markets as buyers and sellers evaluate current inventory levels, especially with the pinning outcome of the new Australian harvest.

While we are optimistic that the budgeted number we had originally earmarked ship to certain countries will occur in the fourth quarter. We are taking a conservative approach in our estimates where our subsidy is less than ideal.

As we have done in the past, we will do our best going forward to provide as much insight into upcoming -- the 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 our seed inventory. And if that that happens, I mean, we ship earlier or later we will do so.

Our seed is basically nonperishable and therefore the inventory and revenue opportunity is not lost. As I mentioned, we are trying to take what we believe to be a cautious approach as it pertains to the expected timing of shipments surrounding this important selling season. Therefore based upon information currently available to management, we are estimating revenues in the fourth quarter to be a record of approximately $20 million to $22 million.

Finally, before we turn the call over to the operator for questions, let me provide an update on our stevia development program. Our development team has been working diligently to develop a variety that they believe will be one of the best tasting varieties on the market today but also provide the yield capabilities that will make it highly attractive for farmers to grow due to the profit potential that it would permit. We believe that we have a variety that meets the attributes of the desirable flavor profile coupled with strong yields.

Last, we conclude with some final steps we will continue to process of filing for patent protection for the plants germ plasm which we expect to take place some times towards the end of calendar 2014. At the end of the day, our vision to be the world’s preferred proprietary seed company would supply the range of Forage in specialty crop products that supports the growing global demand for animal proteins and healthier consumer diets.

We believe we are strongly positioned today and have the initiatives in place to be a leader for years to come. We operate in a very large markets, we have grown immensely over the last number. The markets that have grown immensely over the last number of decades and we suspect will continue to grow strongly over the next decade.

The hay market continues to remain strong. Milk prices are at recent highs. In fact, they just saw the report that approximately 75,000 tons of hay were shipped from the Western U.S. to China and March alone. That is equal to the total shipments for all of 2009 to China.

This demand is being driven by the desire for higher protein products, whether its mozzarella cheese on pizzas in China or dairy milk needs around the world, especially the Middle East and North Africa. We feel like the macro trends are in our favor and we look forward to building a great business that can capitalize on these trends for years to come. As always, we appreciate our support and remain dedicated to continue repaying your support many times over.

With that said, let’s open up the call to your questions. Gary?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Brett Wong with Piper Jaffray. Please go ahead.

Brett Wong - Piper Jaffray

Good afternoon, gentlemen. Thank you for taking my questions. I hope you guys are doing well.

Mark Grewal

All is well. Brett, it’s good to hear from you.

Matthew Szot

Yeah. Hi, Brett.

Brett Wong - Piper Jaffray

Just wanted to dig into the guidance here little bit, given your fourth quarter guidance that kind of, puts you at the lower end of the full year guidance that you previously provided. So, I just wanted to know if you can talk a little bit to that and if that is a result of kind of a standoff that took place earlier this year with out key customer in Saudi? And then guess on that, if you could talk to how inventory levels are in that region and if there is still some reluctance to buy seed there?

Mark Grewal

We will split this all of your questions up, Brett. I will try to start and then we will go around the table because we’ve got the key players here. With regard to the lower end of guidance, we want to make sure that we provide the best data that we currently have and it’s a record shipping quarter for us and we want to be realistic in how much we can push out and some of that timing wise may flip into another quarter.

With that said, we do believe that the Middle East is picking up. We have a tremendous order that we believe has worked very good. It’s like 20 containers going out in this quarter. We are trying to get that out. So, for us personally as S&W, we feel that we’ve turned the corner and it's actually picking up for us. On the inventories, I’m going to turn that over to Matt.

Matthew Szot

Brett, we are really comfortable with our inventory levels at this point. I think it put us in a good position to not only capitalize the demand that we are seeing in this quarter, but certainly puts us in a nice position as we move into Q1 and Q2 of next year. I mean in Saudi, I think we mentioned before that there was levels of inventory in Saudi. We think those are selling through and I think we are seeing that as evidence through in order that we are shipping in Q4.

Brett Wong - Piper Jaffray

Great. Thanks, guys.

Mark Grewal

Is there anything else that we missed that you were asking?

Brett Wong - Piper Jaffray

No, no. That was clear. Thank you very much. Wondering if -- in that comments, I’m seeing that that market has kind of picked up again, have you seen any or I guess, can you talk to pricing that you are seeing for your proprietary seed and kind of how that compares to cost right now?

Mark Grewal

On the high end, it’s reasonably stable. The lawn has been under pressure mainly due to -- I tried to point that out in our little conversation with what Dennis has to deal with, with this market coming off in some comp mode common types, Siriver types that are coming out of Australia. Dennis, do you want to say anything about Siriver, what you see in the crop this year?

Dennis Jury

Yeah. Thanks Mark. I mean the harvest is underway. At the moment, it’s certainly going to be larger than the last year, which last year was a really strong harvest well above our expectations as Mark mentioned. So it’s clearly the amount of low veg product that’s going to be viable going forward will be reduced and we certainly think that the static market is certainly moving towards more interesting product. They are off to a fairly delayed cause.

Brett Wong - Piper Jaffray

Okay. Apart from kind of the mixes, have you seen a lift in the proprietary pricing at all?

Mark Grewal

I would say it’s remained stable and steady to where we were, Brett, the last time we talk, especially domestically it’s quite. It is right where I think it should be. What you are going to hopefully see is because the hay price in the west is so strong. Growers that may normally change from their hay and convert that down in Imperial to seed could possibly stay in hay, which would actually reduce the lower end market availability of seed on that end, which is really going to bode well for us and our proprietary varieties and our ability to optimize. So we're actually pretty hyped on what we think is gong to happen.

Brett Wong - Piper Jaffray

Yeah. And just looking at Australia too, with this expectation of maybe having some more acres of the proprietary brand, is there -- also have you -- had an increase in your grower base there as well?

Mark Grewal

Increases, I would say is flat. What Dennis does and Dennis may want to comment on it. But he is basically slowly getting out of older genetic varieties that he had and changing them into newer genetic varieties and this transition takes a little bit of time. But he and his grower relations’ team are working very hard to make that shift because it’s one of the key strategies to optimization program and our ability to really ramp up gross margins. So everybody's on board, the teams there and we think, as we transition, it’s just going to get better and better.

Brett Wong - Piper Jaffray

Sounds good. Thank you very much for taking my questions.

Mark Grewal

Thank you, sir.

Operator

The next question comes from Mike Malouf with Craig-Hallum. Please go ahead.

Mark Grewal

Hey, Mike.

Ross Licero - Craig-Hallum

Hi. This is Ross on for Mike.

Mark Grewal

Okay.

Matthew Szot

Hey, Ross.

Ross Licero - Craig-Hallum

So could you give us a little more color on the mix of seeds that you sold during the quarter? I think you said last quarter, it was 40%, were optimized.

Matthew Szot

Yeah. We are -- for the quarter, optimized sales represented about 25% of total revenue, that’s going to fluctuate each and every quarter. But in terms of giving a breakdown on a per gram basis as we communicated last quarter, for competitive reasons, we don't want to get into that granular level of detail. We think it's counterproductive to our sales force.

Ross Licero - Craig-Hallum

Right. Okay. And with the negotiations in Australia going on to get the thousand acres of seed planted with S&W proprietary seed, could you talk about the cost side of that? How are the cost comparing to what you're seeing in California with the S&W branded seed?

Mark Grewal

Let's break it down in two things. One thing, I really don't want to get into the actual cost but in a general rule, they are at least like a dollar, a pound under the California market. I would like to switch over and let Dennis tell you his efforts on what he's doing as far as you know. What’s the length of time, Dennis for growing, when are they going to start planning, when does that planning season?

Dennis Jury

Thanks, Ross. During the call the growers just finished the harvest and now with the season opening rhymes their intention is very much focused on planting wheat cereals and canola and such like. And so over the next -- we still got a window of a couple months for them to turn their attention to their alfalfa plantings for this year, so that’s the sort of period of time they were looking at market. With that one year of trial results so far showing some SNW performance, SNW brought is relative to others and as people, as growers confidence that embraces with sort of results that’s where we can expect some additional areas to be having going forward.

Ross Licero - Craig-Hallum

Okay, great. Thanks a lot.

Mark Grewal

Thank you very much. Thanks, Ross.

Operator

(Operator Instructions) The next question comes from Philip Shen with Roth Capital. Please go ahead.

Matt Koranda - Roth Capital

Hey, guys, it’s Matt on for Phil. Thanks for taking the questions.

Mark Grewal

Hey, Matt.

Matt Koranda - Roth Capital

A couple of ours has been asked already, but wanted to cover one on geographies. You guys mentioned the new distributor in the U.S. Could you just touch on sort of how you think about your geographic sales mix going forward as we move into fiscal year ’15?

Mark Grewal

It’s still mainly not dormant, so the non-dormant geographies one climate are critical and keen that’s where our revenue comes from right now. We are transitioning as fast and rapidly as it makes sense to do and you will see slow ramps ups in the areas that we’ve discussed. We are excited about them. There could be some unique opportunities, especially as we are as our guys are in China, they are looking at different things and we actually have some more Chinese guys coming in next week end of the states.

So these things bode wells for what’s happening, I mean that’s why I broad up the -- if you get a hold of the Hoyt report and you see what’s going on with these exports, it’s out of sight. So I mean very country is coming in and they don’t have faith so they are even buying farmland in the states to grow, pay and ship back to the countries but Matt they want to have S$W varieties.

Matt Koranda - Roth Capital

Okay, great. That’s really helpful, Mark. Thank you. and then one more here on gross margins, I know you guys mentioned you are not sharing feed by sort of the blends variety or what’s in there. But could you just talk about on a consolidated basis how you see gross margins kind of shaping up for FT 4 we move into FY ’15 how do you see those trending?

Mark Grewal

Sure. Well Q4 does have some lower margin seed in the revenue mix and those margins will fluctuate quarterly due to revenue mix. So we will see probably a pullback from the recent levels, but by no means is that a trend that’s indicative of our margin profiles as we move into next fiscal year. We’ve got a number of gross margin initiatives in place and we’re really optimistic about those playing out over the next couple of years.

Matt Koranda - Roth Capital

Great. That’s it from us. Thanks guys.

Mark Grewal

Thank you, Matt.

Operator

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

Mark Grewal

Hi, Brent.

Brent Rystrom - Feltl

How are you?

Mark Grewal

Good, how are you doing?

Brent Rystrom - Feltl

Good, thanks. Just a couple of quick questions, where are you at with the performance trials in Australia, I missed the first part of the call if you talked about that I apologize?

Mark Grewal

Well they have got results after the growers and I was actually I had this opportunity prior to the harvest to be with Dennis to walk those fields. And so we are were pleased and where they don’t meet the actual results of the high-end genetics that SGI has like on the SuperSonic. We will just pay a little bit more and try to offset the yield reduction of those to try to ramp up that acres. So Dennis might want to address a little bit Brent, but [Pete Gibbs] (ph) is his manage out in the Bush trying to get as much as he can. It’s still a slow process because guys aren’t going to take out acres that they currently are farming. So I don’t know if want to touch on any of that comment Dennis about what you are doing.

Dennis Jury

You summarize it well, but I mean look the entire things has been process, the early indication, I mean, this is not a one year of results obviously. The SANW materials hasn’t been got at all in the at all past. They are shutting up to be certainly on par with other U.S. genetics that have been introduced to destroy over the year. So the pricing model that Mark referred to should gain traction and acceptance from our growers over time, but obviously it’s a matter of rotation how exactly the existing fields and it takes on.

Mark Grewal

Brian, one other thing I'll tell you is that the results to-date in most cases have been above the standard side River which is the common variety grown in Australia. So our California genetics is being that. And so they know what their prices in generally or what they would be paid for, the marketplace for side River and we can offer more than that. So we feel good about the strategy we’re using. It’s more about having the acres ready and prepared like Dennis said as a switch or cropping plans and to see how much we can get into this one given year.

We are hopeful that it’s going to be a good increase. If you look at historically speaking Brent, I think got me correct me if I am wrong, somewhere between say 2.4 million and 2.8 million of SNW elite variety varieties have been produced in the last number of years. And so if Dennis is successful, I mean it’s like a 30%, 40% ramp up in one year. So I think we’re going to continue to progress to this and it is our key strategic move in the seed especially global to sell globally and to South Africa and the Middle East.

Brent Rystrom - Feltl

Than you, and kind of using as a as a one sport . And if you hit early in the call in your prepared comments again port and again if you hit this early in the call in your prepared comments I apologize, but how then you translates on this into how fiscal year ’15 and ’16 might look?

Mark Grewal

Well the way you still competition is you have something that cost little less and is better. So if were affecting in our optimization program and we continue to ramp up the high end generics then we can offer him for little lss than the competition but at the same time given the highest. We are going to take over the market. So it’s punch in credits, how many and how fast we can ramp up? and we are trying to literally I am personally ltrying to do it is far as I can.

Brent Rystrom - Feltl

And can you qualify what that means in 2015?

Dennis Jury

I think if you gave us time by September the next call that we will have a better understanding of that and maybe we can sit down and might do a pro forma of where we think we are going to be as move forward.

Brent Rystrom - Feltl

Thank you.

Mark Grewal

Thank you very much. Good to hear from you.

Operator

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

Andrew O'Connor - BMO Asset Management

Good afternoon, guys. Congratulations on the progress.

Mark Grewal

Andy thank you very much. Good to hear from you.

Andrew O'Connor - BMO Asset Management

So, Mark, I wanted to ask or perhaps for Matt, there was comment in the press release about the synergies derived from optimizing group inventory and wanted to know is it possible to quantify the synergies from optimizing group inventory, how should we think about that?

Mark Grewal

As I mentioned I think in more than other questions, our optimization represented roughly 25% of our overall sales for the quarter. I think over time and again this is going to fluctuate I think in quarter, but over time that percentage should increase and we’re certainly making a dedicated effort to move more of the SGI material into that optimization program.

Andrew O'Connor - BMO Asset Management

Okay. All right. Fair enough.

Mark Grewal

Andy, the ultimate goal is to have your highest in genetics from all of our companies because they all have high-end genetics. So, like there is a variety that was spread by David Pengelly, it’s called SuperSonic. In the trials in California. They not yielded curve which is the baseline curve 101.

Andrew O'Connor - BMO Asset Management

All right.

Mark Grewal

The 2 tons per acre in Arizona trials, so there -- you don’t want to get rid of that one, we want to bring it in because they can produce that and we can competing as curve. At the same time, if Dennis is successful in taking say 9620, 9720 and 8421S, so these type of varieties and we get them grown right in Australia. That’s yield and because that’s the high-end premium value. It goes directly shift right to our main Saudi customers, right to our main Sudan customers where we have a large market share. And now they can compete with the Australian things but have just ultimate high-end genetics and that kills the market.

So the real long term thing is, hey, get as much as we can grow into the area where they have less cost…

Andrew O'Connor - BMO Asset Management

Right.

Mark Grewal

… right variety mix in and then get that around the world and we’ll kill everybody eventually.

Andrew O'Connor - BMO Asset Management

All right. All right. Sure. And then, secondly, are you guys able to say, what’s the current cash in total debt as it change much from March 31st?

Mark Grewal

No. That very much, very similar to the March 31st position.

Andrew O'Connor - BMO Asset Management

Okay. And then, secondly, what are the priorities for cash in the fourth quarter and is it possible to how sort of guess that, what cash might be at the end of the fourth quarter? Thanks again.

Mark Grewal

Andy, the balances to be roughly where they are at the end of March, we will make some grower payment to the Australian growers in Q4, but other than that it’s really just, it’s a period of time where almost of our working capital is in inventory and receivable.

Andrew O'Connor - BMO Asset Management

Okay. That’s all we have. Thanks again.

Mark Grewal

Thank you, Andy.

Operator

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

Ian Gilson - Zacks

Yeah. Thank you very much. And I’m got a number of short questions, I look at the accounts receivable as a percentage of the quarterly revenue and in each of the last six quarters, now that has exceeded 100%. So why is that and when can we convert some of that to cash?

Mark Grewal

Over the next three months, we expect all these receivable are turning. There has been -- it’s an orderly collection process. So there’s nothing really out of the ordinary here in. Our customers -- some of our customers pay 90 to 120 days and we extend those terms. And we don't have any sort of collection issues that we’re concerned about. And they will be collected throughout the summer and as we’re shipping more product as we move right into the busy sell season again.

Ian Gilson - Zacks

Okay. And the new distributor that was added, did he sell or was all of that sold through or did depend in inventory?

Mark Grewal

Some I’m sure is an inventory because it is domestic and in fact the majority of what their plant will be in the fall. But what they wanted to do is make sure they had some of the high leap brands that we would've been out of work. We’re basically out of 9628 right now and what’s gone until new crop comes. They wanted to make sure and secure some of that because the year before we had a commercial guys who wanted 90,000 pounds and it wasn’t there.

So the high-end side, it’s an easy sell and these are a very good domestic prices. So these are guys who want to hold and get the lead and -- because if they don’t get it, we’re moving it overseas and selling it right away.

Ian Gilson - Zacks

So you selling forward on the crop product?

Mark Grewal

Only for the fall. That’s normal thing. June, July, the guys got to get the product out because they’re going to plant by August, September.

Ian Gilson - Zacks

Okay. In California, any significant difference, I notice that you quite often talk about the bad weather in the Imperial Valley. How we're looking between the two regions?

Mark Grewal

Well, currently I mean, you are here and so you understand the environment in California. We have some very good news today. As a state the feds added water to the Valley's west side. For the very first time, federal water managers are going to tap the San Joaquin River water to meet contractual obligations to the west side land owners. So, that’s an additional like 529,000 acre feet. It’s going to come from Millican Lake and the Sacramento San Joaquin River Delta system. So that’s 40% of their allotment, when guys stopped they were going to get zero. Now Imperial Valley, we don't have a water issue there. There is very strong water right and we’re coming from the Colorado River. What’s happening there is what you tell me what El Niño is going to do.

Ian Gilson - Zacks

I ended up 2 miles away from the ocean. So I really can't tell you what the weather is going to do in land?

Mark Grewal

In my farming history since 1979, when El Niño happens, it’s going to be wet in California, its going to be a drought in Australia. So if a reverse ones occurred, La Niña and El Niño, so if that occurs then the inventory we've secured is going to be very, very valuable because somebody is going to get rained on and there’s going to be a crop loss.

And that’s our only concern and really our only weather concern in alfalfa seed at the time of harvest is rain. So we’re too early in the game in California. We just started putting bees in the field for pollination. So if it's just a normal season, everything will come out fine and if there is some climatic differences, it’s still going to bode well for S&W.

Ian Gilson - Zacks

Okay. In the Australian crop, was it above average, if you look at the past four or five years? Or was it a bad average, if you ex-out the excess last year?

Dennis Jury

Yes. Well, it is pretty early yet. It’s obviously -- a lot of it could be cleaned it and what bow and clean out can vary from midyear, depending on climate conditions as well. But certainly, given the last year was well above average. This year, we’re looking at -- let’s say, average, just slightly better.

Ian Gilson - Zacks

That’s good. That’s good. The optimization or mix change between the second and third quarter. You were what, 40% in the second and 25% in the third? What was the impact on revenue, if you had equalized tonnage?

Mark Grewal

It’s more of a margin play than the total end. So, again, the thing about the census -- is it a 50-50 land or is it -- we don’t know. There's so many -- we have like 33 different SKUs on this. So to get that into a group start portfolio, we’re going to have to like spend time with you and something and like sit down with you, when you have time and try to figure out exactly what you need to put into your model. I don't know what that currently is, but we got too many different things that different customers want.

Operator

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

Frank Smith - Weirton Fund

Congratulations on the quarter.

Mark Grewal

Thank you very much.

Frank Smith - Weirton Fund

Seems like things are executing very well over there.

Mark Grewal

And together very well as a team, the integration has gone right.

Frank Smith - Weirton Fund

Congratulations on that.

Mark Grewal

Thank you.

Frank Smith - Weirton Fund

And that’s been a lot of work. Couple of questions about the China situation with their dietary switch, you had mentioned about those, I have actually read a couple of reports about some Chinese coming and acquiring land here? Are they growing dormant or non-dormant, do you know?

Mark Grewal

China the majority is dormant. Dennis has actually sold clover and seed with SGI. So they actually had more inroads in the China than we do. We have dormant trialing ongoing. We have people coming to us asking for various things. So we’ve got to just work it out and make sure that it’s what we want to do. But we are very -- that’s going to be a major component of dormant ramp up for dormant seed production.

Dennis Jury

Yeah. So, Mark, the other things, is that, China, itself, it’s hard to imagine that they are ever going to have enough productive capacity of high to supply the growing increasing daily hood. So they are going to be continuing to increase -- kind of China import is high which obviously we get into that fleet -- we get into that as well and that’s with, that’s a lot of that comes from non-dormant production areas anyhow. So there was two part…

Frank Smith - Weirton Fund

Okay.

Dennis Jury

Dormant let say.

Mark Grewal

Correct, correct. There was 1.8 million dairy cows in California with supply is over 20% of the milk in the U.S. China has got 12 million. China has got 12 million dairy cows.

Frank Smith - Weirton Fund

Wow.

Mark Grewal

They had six California’s.

Frank Smith - Weirton Fund

Wow. Okay. Well, and then, as far as India goes, I mean, I know, it’s a vegetarian-based diet over there, but is there any opportunity in India?

Dennis Jury

Yeah. Frank, the internal market in India is huge, but it is mostly supplied internally, right. Now but the same thing we are saying everywhere is that with an increase sophistication within those markets. The -- but consumers looking for more sophisticated product such as dairy -- advanced dairy products, but also the growers, the producers are looking to get maximum returns from their viable areas.

So we see some real promise in that market as I move from their domestic land wise top varieties to improve genetics, that its, there are bureaucratic obstacles in that market, which will definitely tight on to work free.

Frank Smith - Weirton Fund

Right.

Mark Grewal

Mother Dairy in India continually increases their milk price.

Frank Smith - Weirton Fund

Yeah. I see.

Mark Grewal

Usually milk prices should fall in winter there, but in India the prices have only been heading north, so.

Frank Smith - Weirton Fund

Okay.

Mark Grewal

It’s pretty eventually, when you look at the milk prices that other people are paying outside the U.S. it’s pretty high.

Frank Smith - Weirton Fund

Yeah. Yeah. Right. And then what about Indonesia?

Dennis Jury

Well, Indonesia is another instinct, one is, look we have just literally just prices are trending some new of our lightest genetics that have shown to have some promise in those Tropical top regions to an Indonesian dairy. Now, I mean, Indonesia has a pretty wide common range that, they had some of this what we would call sub-tropical or wet and dry tropics which is where we believe the genetics have the best potential to work. So we are certainly getting opportunity there.

Frank Smith - Weirton Fund

Okay. And one last question, Mark, you were seeing there was a -- would you say 75 -- would you say 75 tons of hay exported?

Mark Grewal

It’s actually, I said approximately, it’s like 74,692 metric tons shipped from the west -- the west basically seven states in March alone to China.

Frank Smith - Weirton Fund

Okay. So my question is how long can someone sit on that, like, once they receive that, they put in storage, how long can someone sit on that?

Mark Grewal

Well, I don’t think, they are going to, they are not going sit on it very long, although, they have coverage which I don’t think they do over there, however, they talked it.

Frank Smith - Weirton Fund

Yeah.

Mark Grewal

What they are doing, buying highest and quality feed that they are going to putting in a mix throughout the year to feed cows.

Frank Smith - Weirton Fund

But is it something that can last like, one, two years in a barn?

Mark Grewal

It could last depending on moisture probably two years.

Dennis Jury

Economic.

Mark Grewal

Economic criteria, I don’t see it.

Frank Smith - Weirton Fund

Yeah. Right. Obviously, they are…

Mark Grewal

So many guys are out here that buying every year.

Frank Smith - Weirton Fund

Right. Okay. All right. Well, good job and I’ll talk to you next quarter.

Mark Grewal

Thank you, Frank.

Frank Smith - Weirton Fund

Thank you.

Operator

The next question comes from David Goldsmith with DSG Capital. Please go ahead.

David Goldsmith - DSG Capital

Hi. Good afternoon.

Mark Grewal

Hey David.

David Goldsmith - DSG Capital

I may have been somewhere in the past, but I have not heard the words stevia here. Could you bring us up to date on what’s going on there with anything?

Mark Grewal

I think that we laid it out fairly well on the call. We are still in R&D mode. We are working very hard on the development of particular plants that we feel look successful and we are beginning to pad and process. So, I think we are on track with what we are doing in that realm of our operations.

David Goldsmith - DSG Capital

When do you think you might have your first growing season?

Mark Grewal

Growing season? Well, what we are going to do though is work the seed production on and so that seed will go out to different growers within plant and then start producing with whatever contracts they have with an end user.

David Goldsmith - DSG Capital

And how long will that be?

Mark Grewal

That depends like -- we as a grower of peers -- of a contract of peer circle, you can just grow, get a contract with them, send it to China and they would start doing it. But we are not into that. We are not farming and doing the production side. We are working on seed and royalties and closed-loop systems to provide that type of data.

David Goldsmith - DSG Capital

When might you have then the first seed available?

Mark Grewal

After we get our patent, the patent comes first. We want to make sure we protect our varieties.

David Goldsmith - DSG Capital

What time it will take?

Mark Grewal

Well, that’s a long time. I’m not a patent attorney.

David Goldsmith - DSG Capital

All right. Thank you.

Mark Grewal

You’re welcome.

Operator

The next question comes from Steve Postich with Steve Postich Builders. Please go ahead.

Mark Grewal

Hey, Steve. How are you doing?

Steve Postich - Steve Postich Builders

Great, Mark. How’s it going there?

Mark Grewal

Going very good, very good.

Steve Postich - Steve Postich Builders

I would tell you it’s a really good report for the quarter. I’m really glad to hear you guys are doing a heck of a job.

Mark Grewal

Thank you very much.

Steve Postich - Steve Postich Builders

I have one question, Mark. I own a substantial amount of warrants and I was wondering, would you and the Board consider extending the warrants this year?

Mark Grewal

I don’t think I can’t comment on that. I’m just one member of the Board. I know that things have been looked at, but I would say right to be Board whatever you want and ask whatever you want, I can't really comment on that.

Steve Postich - Steve Postich Builders

Okay. I appreciate that Mark. Thanks a lot.

Mark Grewal

You are welcome, Steve.

Steve Postich - Steve Postich Builders

You take care.

Mark Grewal

Okay. Thank you.

Steve Postich - Steve Postich Builders

Bye now.

Operator

The next question comes from Douglas Russell with Brown Harris Stevens. Please go ahead.

Douglas Russell - Brown Harris Stevens

Hi, Mark. Great quarter. Congratulations.

Mark Grewal

Thank you, Doug.

Douglas Russell - Brown Harris Stevens

I have some stevia questions, but most of them just got answered. So, I will just stick here with one or two. I’m wondering, what a high level pound of stevia costs? I know what alfalfa seed costs.

Mark Grewal

Is it retail or you got on the internet? If you got on the Internet, try to buy leaf or so -- I mean, what, are you trying to buy leaf like?

Douglas Russell - Brown Harris Stevens

Well, you could tell us all of them if you have. I’m just trying to get a sense of --

Mark Grewal

I’m really going to give you what I believe, something like between $4 and $20 a pound per leaf.

Douglas Russell - Brown Harris Stevens

Okay.

Mark Grewal

Fee is going to be high if you get the right royalties and it’s worth -- and it’s of high values. We won’t be setting our own seed pricing.

Douglas Russell - Brown Harris Stevens

Is that in hundreds of dollars or it’s in, I mean…

Mark Grewal

Okay. Like -- honestly speaking when we started growing this stuff back in ‘09 and ‘10 and we were getting seed out of China and India from different people actual seed, the germination on this stuff was so low, the cost was extremely high. We had to go to transplanting. In other words, some of the seeds was only germinating at 9% to 12%.

Douglas Russell - Brown Harris Stevens

I see.

Mark Grewal

We believe some of the stuff that we’ve taken off has a very high germination. So it depends on how much seed is viable to kind of wrap up that cost. But literally plant itself, one plant could be like $0.05 to $0.10 to $0.15 a -- I mean, a plant $5 to $10 a plant. So if you need 40,000 plants per acre or 50,000 or you want to do high density planting at a 100,000 plants per acre, that’s a plant. You should look at what that would cost.

Douglas Russell - Brown Harris Stevens

Okay.

Mark Grewal

I mean, it’s a big number.

Douglas Russell - Brown Harris Stevens

Right. Okay. Well, that’s good. But you say you would not be doing that yourself. You would just want to license it out.

Mark Grewal

We’re not -- it's going to -- the amount of -- if you’re successful and you come out with a very good tasting product. For ingredients from candy bar to sodas, it’s going to take a lot of acres. We don’t have those type of acres. That’s going to be a contracted acreage space just like we do in our alfalfa seed production.

Douglas Russell - Brown Harris Stevens

Okay.

Mark Grewal

That’s going to take thousands of acres and we don’t have that type of land.

Douglas Russell - Brown Harris Stevens

And would you try and joint venture with a Coke or Pepsi that might need it for the drinks or…?

Mark Grewal

I think if they like our product, it’s going to be very successful in whatever type the relationship works out. It’s going to be good for both sides.

Douglas Russell - Brown Harris Stevens

Thank you very much.

Mark Grewal

Thank you.

Douglas Russell - Brown Harris Stevens

Great quarter.

Matthew Szot

Thank you.

Operator

The next question comes from Mark Weindling with JHS Capital. Please go ahead.

Mark Weindling - JHS Capital

Hello gentlemen.

Mark Grewal

Hey Mark, how are you doing?

Mark Weindling - JHS Capital

Okay. What are the advantages of earning towards the end is all of the questions that I have, it’s been more financial?

Mark Grewal

Great.

Mark Weindling - JHS Capital

But I do have one question left that I was wondering if you could maybe give us a little additional flavor. Obviously you wouldn’t have gone into the top variety as you thought the market was potentially huge. Can you give us some concept of what huge would mean as far as S&W is concerned, as far as the size of the overall market?

Mark Grewal

Yeah. I’m going to start with a California perspective and then let Dennis, if he wants to make some comments on a global and Australian perspective. If the trialing is successful and it can take additional water, what that means is its combating disease Phytophthora. Phytophthora is caused by too much water and it kills the alfalfa.

So this has in California on different types of ground and different types of irrigation, not even be grown in areas that are level or they don’t have leveling capabilities under different types of systems. So they would even enhance our production where we already are marketing. What Dennis is doing with trialling and what will happen, I’ll give it to him. He has gone to areas that don’t have a market.

Dennis Jury

It was dry, Mark. I mean these are -- we took that areas and regions now but presently do not have any significant use of alfalfa whatsoever. And in fact, don’t really have any very suitable legume options. If it’s protein today, if you get high protein feed line, they are just relying on the native range land or introduced grasses but they don’t have a really viable tropical -- tropical adapted legume and particularly not a perennial one.

So the thing is we’re talking about the market that doesn’t even exist but is absolutely at demand for something that would supply -- fill that role. And you would agree to that, the biggest areas of untouched productive land is in the subtropical belt like Brazil and the central belt of Africa, north and south of the tropical quieter areas. With this vast areas of untouched land there and so this market, if you get a suitable product, it could be very, very large. I mean, I used the term huge but I can’t put a number on it, half of that is peak.

Operator

The next question comes from Nick Bales with JHS Capital. Please go ahead.

Mark Grewal

Hi, Nick. Are you there, Nick?

Nick Bales - JHS Capital

Yes.

Mark Grewal

How are you doing?

Nick Bales - JHS Capital

Good, how are you doing?

Mark Grewal

Doing good. How is Portland?

Nick Bales - JHS Capital

Yes. It’s great. Sunny today. Congratulations on a great quarter and it was good to see you here recently. I have two different questions. One is, quickly, can you approximate the size of this PVM market on a global scale?

Mark Grewal

I will go to (indiscernible) that does research at all of the sweetener market and look at their numbers. They are probably the most accurate that I actually have seen. So I would go to them. I don’t have that expertise.

Nick Bales - JHS Capital

Okay. All right. Sounds good. And then on the upcoming California Harvest, about how many pounds per acre do you expect to yield and how many acres are you guys going to be doing? And in addition to that, how many different harvests are there in California versus Australia?

Mark Grewal

Well, there is only one harvest I have seen in both the northern hemisphere and southern hemisphere Nick. And so Dennis is just completing his say March, April, May. We are going to start ours basically August, September, maybe a little bit in July, and so we’ve just started bees in the field. I couldn’t even give you any type of estimate, I could give you a historical number out of California which probably an average of around 600 pounds per acre is the standard non-dormant yield, in California, our non-dormant by the CCIA, which is the California Crop Improvement Association.

As an average we expect our varieties to exceed that normally, but we are -- we have grown so large Nick, it’s not an issue any more about talking about pounds or what we get. We are at a point now with between inventories what we can source at our size that we are not worried about those numbers any more. We are going to be able to provide a reliable supply and we hope for the first the go to company, a preferred company to get because of our genetics to get your seed.

Nick Bales - JHS Capital

That’s great. Thank you very much.

Mark Grewal

Thank you, Nick.

Operator

The next question comes from Keith Gil with JHS. Please go ahead.

Keith Gil - JHS

Congratulations, Mark, on a great quarter.

Mark Grewal

Thank you, Keith.

Keith Gil - JHS

Most of my questions were answered which is what I believe but they were. But one question I have, price per ton for hay domestically and internationally, if you can comment on that from last year to this year?

Mark Grewal

Okay. Every market across the Midwest to California is different. If you want to talk about, I can give you an expertise in California, San Joaquin Valley, high end market, $325 a ton. If we were to shift that to China $495 to $515 a ton landed over there. So Dan $495, $500 a ton, very high pricing, I have never seen this in my life. You are looking at, there is not enough, hay, it’s very exciting, okay, and hay drive seed prices. So it’s just a function of how much milk people want to drink, how much beef they want to eat, and it’s a protein play. And like we said at the very last part of our talk, it bodes well as we go little forward that it bodes wells. The macro trends are very favorable.

Keith Gil - JHS

Yeah. I don’t know you saw about the interview the CEO of Whitewave Foods yesterday morning and he said that the Chinese were buying all the hay, they could possibly buy out of the Imperial Valley.

Mark Grewal

We’ve had a lot of people coming and ask, we’re looking to take a hard look at these things.

Keith Gil - JHS

And then you would be somewhat of a solution to the Chinese problem by planting your seed in China, correct?

Mark Grewal

That’s small. Dennis made a comment earlier in the talk that they've got 12 million dairy cows alone, that’s not even beef and another livestock and horses and things like this. There always going to have to bring in product for feeds and so Australia is a gateway to Asia. That could bode very well for what they want to do, if they wanted to do increase something.

At the same time, the pressures of the San Joaquin Valley and water pressures with the dairy herd size there, is going to require the Midwest and the perimeters, the Oregon’s, Washington’s, Idaho, Utah’s to pick up the slack and Mexico is becoming a strong area.

So we’re very excited about what's occurring. We don’t really care where we have to sell the seed. But it’s all going to end up going to the animals anyway. So there is companies that are actually buying land in different areas and farming and they’re farming that hay to go back to their berry. We just want to sell the seed to them

Keith Gil - JHS

Outstanding and have a great fourth quarter.

Mark Grewal

Thank you very much, Keith.

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 Grewal

Gary, thank you for that. Thanks everyone that participated on today's call. We look forward to talking with you again at the conclusion of the current quarter. We hope everybody has a great night. Good evening and see you soon. Bye.

Operator

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

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Source: S&W Seed's (SANW) CEO Mark Grewal on Q3 2014 Results - Earnings Call Transcript
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