Bioceres Crop Solutions Corp. (NASDAQ:BIOX) Q4 2021 Earnings Conference Call September 9, 2021 8:30 AM ET
Máximo Goya - Head of Investor Relations
Federico Trucco - Chief Executive Officer
Enrique López Lecube - Chief Financial Officer
Conference Call Participants
Ben Klieve - Lake Street Capital Markets
Kemp Dolliver - Brookline Capital
Steven Ralston - Zacks Investment Research
Good day, and thank you for standing by. Welcome to the Bioceres Crop Solutions Fiscal Fourth Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised, today’s conference is being recorded. [Operator Instructions].
I would now hand the conference over to Máximo Goya. Thank you. Please go ahead.
Good day, everyone, and thank you for joining us. Presenting during today's call will be Federico Trucco, our Chief Executive Officer; and Enrique López Lecube, our Chief Financial Officer. Both will be available for the Q&A session.
Before we proceed, I would like to make the following safe harbor statement. Today's call will contain forward-looking statements, and I refer you to the forward-looking statements section of today's earnings release and presentation as well in our recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances.
Also, please note that for comparison purposes and a better understanding of our company's underlying performance, in addition to discussing as reported results during our presentation today, we will discuss comparable results, which exclude the impact of hyperinflation accounting in Argentina. Additional information in connection with the application of the rule IAS 29 can be found in our earnings report.
Finally, this conference call is being webcast. The webcast link is available in the Investor Relations section of biocerescrops.com.
At this time, I would like to turn the call over to our CEO, Federico Trucco.
Thanks, Max. And thank you all for joining us today. Please turn to Slide 3 for a brief overview of the business and financial highlights we will discuss in today's call. From a baseline business perspective, comparable revenues were up 39% to $72.4 million in the quarter, and 13% to $197.4 million for fiscal year '21, with LTM adjusted EBITDA at $48.3 million. Momentum consolidated in the fourth quarter confirming a very strong second half to fiscal year '21, driven predominantly by sustained micro-beaded fertilizer sales and the reorganization of the Crop Protection business. These revenues do not account for approximately $7.2 million of the total of $8.3 million of HB4 Program contributed goods, with an average gross margin of 43%. However, associated operating expenses were fully discounted from the adjusted wheat graph indicated above. HB4 Program revenues will be recognized once realized inventories are not longer contributed but rather sold as seed or grain.
Top line growth for the quarter allowed us to remain on track with our historical LTM double-digit growth trajectory, while at the same time supporting the HB4 Program rollout. Enrique will provide greater details around our financial performance for the quarter and full fiscal year later on his presentation.
On the HB4 front, we have scaled up 8 times compared to the previous year with a total of close to 80,000 hectares planted with over 10 difference wheat and soy HB4 varieties. As we have done in previous calls, I will provide a more detailed update on agronomic performance, farmer acceptance, inventory scaling up process, our breeding networks and collaborations across the Americas and the current regulatory status for each crop. Two relevant highlights worth noting ahead of our more in-depth discussion are, the regulatory clearance obtained in Canada for HB4 Soy and the expansion of our collaboration agreement with Grupo Don Mario to North America, especially targeting the Southern Canada, Minnesota and the Dakotas region. We will also discuss these two highlights in greater depth in the next slides.
Please turn to Slide 4 for an update on the ongoing HB4 Wheat season. HB4 Wheat was planted in 55,000 hectares with contributed goods totaling 6.4 million. As previously explained, the value of these contributed goods will be recognized as revenues once the realized inventories are sold as seed or grains, but not longer contributed. The current multiplication area represents a 7.8 times increase over last year’s effort including varieties adapted to 75% of Argentina's addressable market. The number of participating growers increased eightfold with a 100% grower repeat rate, and very importantly, with 95% of participants onboarding digitally. The crop is evolving favorably with recent grains normalizing the drought situation suffered in some of the sub regions.
In Slide 5, you will see the results of our HB4 Soy ramp up process, as we finished harvesting all 23,000 hectares planted last season. From a trait performance perspective, results were aligned with technology expectations with HB4 materials showing significant yield benefits in highly restricted environments, particularly in those with average yields below 1.5 tons per hectare. However the accumulated yield benefit was diluted as moderate to highly productive environments were aggregated, as current germplasm is still behind some of the most competitive commercial materials. This germplasm drag can be better observed as we zoom into the discrete yield intervals in the next slide, with as much as 9.1% yield reduction on average in environments between 2.5 and 3.5 tons per hectare. This phenomenon was more pronounced in our earlier varieties, which yielded on average 11% less than a selected group of top commercial performers. The germplasm drag became less concerning as we evaluated newer materials with second generation materials on -- only 3% below the same group of commercial controls and some third generation varieties marching and even beating top commercial performers.
One interesting observation illustrated in Slide 7 is that when cropped after wheat, in double cropping systems, the germplasm drag is minimized and performance greatly improved, at least in some of the second generation materials where these could be tested. And this is shown here in the current slide.
In summary, turning to the next slide, HB4 Wheat inventory ramp-up is progressing as expected, considering that we still have not received Brazil's regulatory clearance, which we will discuss in a moment. HB4 Soy inventory ramp-up is being redesigned to address germplasm drag in earlier materials, or the ramp up of first generation materials discontinued and second generation materials repositioned to double cropping systems as we accelerate multiplication of third generation materials, targeting the broadest HB4 acreage opportunity.
Now, turn to Slide 9. Predominantly with our internal efforts, we're expanding our existing collaboration with top tier soybean germplasm developer Grupo Don Mario with which we signed a new agreement during the quarter to jointly develop and commercialize HB4 Soy in North America, more specifically in the sub region including Southern Canada, Minnesota, and the Dakotas where we believe there are approximately 10 million hectares highly prone to water deficit.
As you may recall, Grupo Don Mario is an early licensee of the HB4 traits for its Latin America soybean programs. And also during the last year, we have expanded our green collaboration with TMG, one of Brazil's top providers of soybean genetics, with 173 pre-commercial HB4 Soy varieties currently being tested and approximately 100 hectares of demo plots being organized with selected farmers during the upcoming season in that country. So GDM and TMG are expected to provide materials as soon as 2023 for the HB4 program in LatAm, as well as commercialize directly in the future, using their existing got-to- market models.
Finally, turning to the next slide, I will discuss the main regulatory highlights for the quarter. We received regulatory approval for HB4 Soy from the Canadian Health Agency and the Canadian Food Inspection Agency. As you know, with approximately 2.5 million hectares farmed every year, and yields often below the 3 tons per hectare, channelized soybean production regions are well suited for HB4 value generation. So, HB4 soybean is approved today for production in the United States, Brazil, Argentina, Paraguay, and Canada representing 85% of the world's soybean hectareage.
During the quarter, our regulatory team submitted HB4 Wheat consumption approval requests in Australia, New Zealand, South Africa and Indonesia. Near the end of the quarter, Bioceres received a formal requirement from CTNBio, the Brazilian regulatory body, to provide additional gene expression information for native non-targeted genes of relevance to regulators. This information was produced and filed with CTNBio by August 18, continuing the HB4 Wheat regulatory process in that country. No additional information has been requested during the quarter by Chinese regulatory authorities regarding HB4 Soy. And we believe both regulators, Brazil and China should be able to resolve approval requests in their upcoming proceedings and look forward to communicating their findings as they are informed to us.
This concludes my prepared remarks. I will now turn the call over to our CFO, Enrique López Lecube to discuss our fiscal fourth quarter financial results. Enrique?
Enrique López Lecube
Thanks, Federico. Good day to everyone and thanks for joining us today.
Moving to the financials please turn to Slide 11 for a review of the revenue performance during the quarter and full fiscal year. As Federico outlined a few minutes ago, we had a strong fourth quarter performance with comparable revenue rising to $72.4 million from $51.9 million in the fourth quarter of fiscal year 2020, a solid 39% increase with consolidated momentum from the third quarter.
Growth during the quarter was mainly driven by a successful outcome from the reorganization initiatives taken earlier in the fiscal year to reignite growth in our Crop Protection business segment. Crop Nutrition also contributed to increasing comparable revenues as the micro-beaded fertilizer business line continued to expand, confirming the growth trend that had been displayed in the third quarter. The 48% and 46% increase in Crop Protection and Crop Nutrition comparable revenues respectively were slightly offset by an 8% drop in Seed and Integrated Products.
On a reported basis, the increase for the quarter was 71% from $48.2 million to $82.2 million. This increase in reported revenues was significantly higher than the evolution of comparable revenues, as IAS 29 adjustments decreased the basis of the reported figure in the fourth quarter of 2020, and expanded the reported metric for the fourth quarter of 2021.
For the full fiscal year period, total comparable revenues were up 13% to $197.4 million compared to a year ago period with revenue growth across all three business segments. Despite a softening performance during the second quarter, which had been negatively impacted by drought in key markets across South America, a strong second half of the fiscal year allowed the business to maintain a double-digit growth trajectory even without the inclusion of $7.2 million out of the total $8.3 million of contributed goods from the HB4 Program.
Please move onto Slide 12 now for a breakdown of fourth quarter revenues for business segments. The $20.5 million increase in comparable revenues was driven by Crop Protection and Crop Nutrition with a slight drop in Seed and Integrated Products. Crop Protection sales were up 48% from the year ago quarter reaching $42.9 million. Growth across the segment portfolio resulted from the implementation of the reorganizational strategy intended to uncouple market access channels and teams dedicated to proprietary products from lower margin third-party products. The expansion during the quarter was mainly driven by higher insecticides, fungicides and adjuvant sales in Latin America, specifically B2C sales for the latter category in Brazil. Average gross margin for the segment decreased from 39.9% to 36.2% primarily due to increased sales of lower margin seed treatment products.
The other growth contributor for the quarter’s comparable revenue expansion was the Crop Nutrition segment, which grew to $22.7 million across both product categories. Excellent performance at the micro-beaded fertilizer product line during the quarter is the outcome of the shift in the commercial strategy that was implemented two quarters ago to enhance the attractiveness of the value proposition to farmers. Following an already improved performance in the third quarter, the trading last 12 months rate of usage of installed capacity increased from 30% to 40% on a sequential basis.
Inoculant sales also had a very good performance with volumes increasing from 2.5 million doses to 4 million doses. Increased demand of high added value inoculant in Brazil which fully recovered the decline of the third quarter was the main growth driver in this category. Margins for fertilizers remained stable as volumes scaled up with the overall Crop Nutrition gross margin slightly expanding to 54.2%.
Seed and Integrated Products comparable revenues in the fourth quarter of fiscal 2021 stood at $6.8 million slightly below the year ago quarter. The $0.6 million decrease was driven by seed treatment packs despite volumes remaining flat at 1.1 million doses, as a portion of the growth that we had accomplished in South Africa in the fourth quarter of fiscal 2020 was replaced by lower priced packs in Latin America.
Lower packs contribution as well as a slight shift from B2C to B2B pack sales in Argentina led to a segment gross margin drop from 63.5% to 53% this year. Overall, we are very satisfied with growth in revenues during the quarter, which was accomplished with an average 43.4% comparable gross margin. It is worth mentioning that aside from the pricing, volume and product mix dynamics I just described, gross margins during the quarter were also affected by FX and inflation dynamics in Argentina, where we hold most of our production facilities. Inflation related price increases of raw materials and manufacturing costs denominated in local currency exceeded the benefits of the Argentine peso depreciation, which negatively affected production cost structures of some of our products. The interaction between FX and inflation rates turned into headwinds during the fourth quarter of fiscal 2021 from tailwinds in the year ago quarter, further emphasizing an unfavorable comparison.
Moving on to Slide 13, which shows the breakdown of gross profits per business segment. As a result of the revenues and margins evolution addressed in the previous slides, comparable gross profit for the quarter rose by $6.9 million from $24.5 million to $31.4 million. Comparable gross profit from Crop Protection was $15.5 million up $4 million from $11.5 during the previous fiscal year quarter. Seed and Integrated Products contributed a total of $3.6 million in comparable gross profits during the quarter, down $1.1 million from the year ago period, in line with the evolution I described in the previous slide.
Finally, Crop Nutrition delivered $12.3 million in comparable gross profit, an increase of $4 million from $8.3 million a year ago. It is to be noted that Crop Nutrition displayed highest growth within the three business segments reaching a contribution of almost 40% internal comparable gross profit. Reported gross profit rose by $9.6 million to $32.4 million, the increase in actual reported gross profit was higher than the increase in comparable gross profit following the same IAS 29 adjustments dynamics described for revenues.
Let's now please move on to Slide 14 and 15 for a review on EBITDA performance for the quarter and the last 12 months respectively. The $9.6 million increase in as reported gross profit was the main contribution to adjusted EBITDA growth for the quarter, which increased 13% and totaled $16.6 million, compared with $14.7 million in the year ago quarter. Conversely, operating expenses and other income and expenses rose by $5.6 million and $0.5 million, respectively, including an expense increase of approximately $1.3 million related to data acquisition within the HB4 Program, the rollout of the digital platform and increased support to the program as hectares scale out.
Turning the slide, HB4 related expenses. SG&A from the operation of the baseline business increased primarily due to a mix of fixed and variable operating expenses related to the expansion of the business. Employee salaries and social security expenses increased by $1.6 million, driven by growth in the Brazilian subsidiary, as well as the reorganization process to support growth in the Crop Protection segment. Also, variable sales-related tax expenses grew by $1.2 million in line with increased revenues during the quarter.
On a different note, similar to manufacturing costs and payroll inflation and FX dynamics in Argentina, where the main administrative and support functions of the company are located also had a negative impact in expenses. Despite the increase, total SG&A expenses were down 234 basis points as a percentage of revenue from 21.7% to 19.4% denoting operational leverage. R&D expenses totaled $2 million during the quarter compared to $0.8 million in the fourth quarter of fiscal 2020. Approximately two-thirds of the R&D expenses in the quarter were related to the development of seed and traits and the remaining third was related to the development of new biofungicides and biostimulants.
Finally, JV results decreased by $1.5 million compared to the fourth quarter of fiscal 2020, mainly due to IAS 29 adjustments on Synertech, the company’s micro-beaded fertilizer manufacturing JV.
In Slide 15, adjusted EBITDA for fiscal year 2021 totaled $48.3 million a 4% increase versus fiscal 2020. Sales growth spanned all business segments with as reported gross profit increasing by a total of $11.1 million composed of $9.3 million increase in comparable gross profits and a $1.8 million positive adjustment from IAS 29. The divergence between as reported and comparable metrics for the full year was lower than the fourth quarter previous, as IAS 29 adjustments tend to decrease in a scenario of convergence of inflation and FX depreciation in Argentina. Growth in gross profit was partially offset by an increase of $7.9 million in operating expenses with the fourth quarter dynamics explaining most of the increase and bolding the yearly trend.
Importantly, SG&A for fiscal year 2021 includes expenses related to the ramp up of the HB4 Program, while deferred revenues from contributed goods are yet not fully reflected in revenues and gross profits. Inflation and FX dynamics in Argentina also had a negative impact in the full year expenses compared to fiscal year 2020. Following the $48.3 million adjusted EBITDA achieved during the fiscal year, supplementary cash flow information is presented in the right hand side of the slide.
Investment activities totaled $16.7 during the full fiscal year. $4 million were invested in tangible assets, including maintenance CapEx, as well as the acquisition of land for the expansion of the adjuvant manufacturing facility in Brazil. Investment in intangible assets during the year stood at $6.4 million with roughly 35% allocated to the continuous development of the HB4 digital platform.
Finally, the acquisition of Verdeca and other assets from Arcadia Biosciences mainly explain the $6.3 million in acquisitions during the year.
From a tax perspective, income tax accrued over the period excluding deferred tax liabilities stood at $7.3 million. Additionally, $1.8 million of deferred tax liabilities from previous fiscal periods were paid during fiscal year 2021.
Finally, net cash financial expenses and commissions accrued for fiscal year 2021 totaled $14.6 million.
Let's now turn to Slide 16 to address our debt evaluation and cash position. We continued to make the good use of Rizobacter’s partnership with Argentina credit markets throughout the fourth the quarter as we completed a $26 million public offering of Series V corporate bonds in early March. 30% of the issuance had a one year maturity and an annual coupon rate of 0.98%, and the remaining 80% was issued with a maturity 36 months and an annual coupon rate of 5.5%.
The total financial debt increased by $22.5 million from the fourth quarter of fiscal 2020, first left hand side column, through the fourth quarter of the current fiscal year, while total LTM financial expenses decreased by 16% from $17.3 million to $14.6 million. Total net debt as of June 30, 2021 was $121.3 million, 2.5 turns net debt to adjusted EBITDA. The increase in the company’s debt ratio compared to the prior fiscal year was primarily due to increasing total financial debt, as the company replaced inefficient working capital sources with corporate bonds. On a sequential basis, net debt to LTM adjusted EBITDA decreased from 2.89 turns on March 31, 2021 primarily due to reduced short-term debt position and higher LTM EBITDA.
On the liquidity front, cash and cash equivalents and short-term investments represented approximately 67% of the current portion of debt.
So that concludes the financial remarks for today. So I will now turn it to Federico for concluding remarks.
Thank you, Enrique. Moving forward to the next slide, we can summarize some of the major highlights for the fiscal year ‘21, where we had double-digit top line growth across all three segments, despite softening performance in the second quarter due to the climatic situation in South America, growth mainly driven by the development of the micro-beaded fertilizer expansion plan and the fourth quarter Crop Protection reorganizational strategy. Contributed goods for HB4 Program, both HB4 Wheat and HB4 Soy increased significantly to 8.3 million, approximately $105 per hectare farmed with a gross margin of approximately 43% and the value of these contributed goods as we indicated before will be recognized as revenues once the realized inventories are sold as seed or grain but not under contributed. HB4 Wheat was commercially approved in Argentina on October of 2020 subject to Brazilian import approval for full commercial launch in Argentina. This approval represents a historical milestone for the entire global value chain being the first biotech wheat event to be equally cleared.
We acquired the remaining HB4 Soy ownership interest in Verdeca LLC aiming to accelerate breeding and go-to-market strategies. Complete ownership will enable us to capture more of the underlining economic value generated by the technology. And as part of the transaction, the company acquired Verdeca’s vetted library of gene-edited materials for developing new quality and productivity traits as well as exclusive rights to all of Arcadia technologies applicable to this crop. Bioceres has also been granted Latin American rights to Arcadia's wheat traits, and Good Wheat brand and other GLA non-core assets.
During the period, we successfully completed the offer to exchange all 24.2 million outstanding warrants in a cost effective manner, eliminating the future dilution entailed by these derivatives. There were $70 million of total financing obtained also during the last fiscal year. $43 million of funding was added through the company's main operational subsidiary Rizobacter featuring the Series IV and Series V corporate bonds and making a considerable progress towards substantially lowering financing costs, extending debt maturities and increasing financial flexibility as indicated by Enrique. $28.7 million equity financing completed through the aforementioned Verdeca’s acquisition and the warrants tender offer transaction.
Management has been focusing in unlocking value from stocks liquidity ad-hoc, accretive deal structure with strategic equity components, as the ones just described, on top of selective persistent IR efforts resulted in a 78% year-over-year improvement of the three month trailing moving average in terms of stock liquidity.
Moving to the next slide, coming up next in terms of fiscal year ‘22, you can expect from a baseline business perspective to see reignited profitable growth in the Seed and Integrated Products segment. The same way we saw in the Crop Nutrition and the Crop Protection segments over the last two quarters. Continue to move forward with our digital platform, releasing some of the developments we have generated in this front. From a product development and go-to-market perspective, accelerated ramp-up of the third generation materials for both HB4 Soy and HB4 Wheat and start ramping-up inventories for the Good Wheat materials we in-licensed from Arcadia.
On the regulatory front, we are expecting China and Brazil regulatory clearances at HB4 Soy and HB4 Wheat respectively and also continue to work on the downstream and ESG initiatives to build on the data we're accumulating and provide data-driven ESG scoring of produced inventories under the HB4 Program targeting downstream specifications.
So, this essentially concludes today's management overview. I will now open up the floor for any questions that you may have.
[Operator Instructions]. The first question comes from the line of Ben Klieve with Lake Street Capital Markets.
Thank you for taking my questions. First question on the quarter itself. Great result really congratulations on a strong end to the year. I'm curious if you can talk about the initiatives that you've taken in both the nutrition and the protection segment and talk about kind of your expectations for fiscal '22 around those initiatives. And you guys are now coming off of a really difficult comp, given how good of a second half you had. So I guess, I'm curious, how much further improvement do you expect in these two parts of your business throughout fiscal '22?
Enrique López Lecube
Ben, this is Enrique. Thanks for joining us today. Good to have you on the call. So from those two business segment standpoint, in Crop Protection, as I was saying in the previous remarks, when we try to realize the channels, the teams, the commercial teams that are focused on the proprietary and more valuable or more profitable products. From other products that are new business opportunity for the company, but that require a different level of attention, a different approach to market such as third-party products and services also that are a good opportunity for business and the company, but are not strategic, but active.
So that reorganization process already started delivering results. I think something that might continue throughout the year, for the year, incremental results, but this is more of a one-time reorganization process and not something that will continue delivering results either after a year. So that is more of a one-timer versus what we are seeing in Crop Nutrition where the new commercial strategy around micro-beaded fertilizer is working very well until now.
If you remember from previous calls, we decided to hit gas with ramping up the volumes of fertilizers -- fertilizers being a bit more aggressive on pricing to farmers, but trying to keep margins as we lead back. And to me, the third quarter and the fourth quarter were a testament to that. We were able to significantly increase the use of installed capacity. And that is something that we hope will continue delivering results over the year, fiscal year 2022. Remember that we are targeting to get to upwards of 60% sometime in the next two years with the use of installed capacity. So still, very long way to go, but the strategy is still hearing.
And in inoculants, it's obviously a very, very attractive business segment to us. In Latin America, we have already a market leader, but we are seeing that growth is still happening and taking place in that product category. And the good thing is we have diversified geographic footprint. So as you saw in this quarter, what we lost in South Africa was recuperated in Latin America. What we probably lost in Brazil last quarter was recovered this year. So still a source of growth to us. And I think that the main strategic point there is geographic distribution globally. And remember that this is the product probably by which we're viewed by the mineral and the agriculture industry, more specifically biologicals.
Pivoting over to HB4, there's a lot going on here, and I'll admit, I'm a little confused at kind of the near-term expectations, especially for soy. I understand the first, second, third-generation breakdown that you gave, but for that second-generation that you've outlined as being pretty efficient on kind of poor quality farmland, is the expectation that you're going to be revenuing second-generation seed here in fiscal '22? And if so, what kind of inventory levels do you have of that second-generation material?
Ben, this is Federico. Thank you for joining the call, and thank you for the question regarding the HB4 Soy ramp up process. So what we wanted to basically illustrate there is how as we move forward in our breeding efforts, we're improving on the general performance in moderate to highly productive environments and not just the HB4 benefit in these highly restricted environments where we know the technology can deliver 15%, 16% yield improvement, which we believe to be important for the varieties to be used broadly and to minimize any kind of user discomfort, if you will, for whatever reason, situations are good from a rainfall perspective and farmers experience a drag due to the germplasm gap. So the second-generation varieties of the 23,000 hectares we just harvested, less than 15% of those were planted with second-generation materials.
So what we wanted to tell you here is that our ability to ramp up in the coming season is probably going to be less than what we did in the last year. So last year, we did 8x what we did the year before. We think this year we'll be at 3x to 4x because of sort of the constrain generated by the performance in the first-generation varieties, which we will not continue to scale and the repositioning of all of the second-generation materials to double cropping systems for highly restricted areas. We want to make sure that farmer experience is excellent. And that is kind of what we're putting in the balance here as we design the process for the coming season.
Now we are still in ramp up mode, so you won't expect to see -- you shouldn't expect to see revenues materializing until we get the China approval. Having said this, if we discontinue some inventories and that gets to be sold as grain or sold as a grain derivative, you will see that coming to the P&L process in the coming year. And maybe, Enrique can give you more color regarding as to how that gets materialized. I'll pause here to see if your question was fully addressed, otherwise, I'll try it again.
No, I think it did, but that presents another question on your comment about basically meaning to wait here for Chinese approval. So does that imply that commercializing HB4 Soy via an identity preserved supply chain and ensuring grain customers are domestic, but that's not an initiative that's going to be undertaken here in fiscal '22 or fiscal '22 for soy is going to be purely an inventory ramp year and not a commercial year for HB4 Soy?
It's going to be an inventory ramp year for the materials we get to keep for future sales as seed. And it will become a revenue year for materials we're discontinuing and we are sending into an identity preserve industrialization pack.
And then I guess the last question on HB4, you talked about the double crop system here now with wheat and soy. Really, what does that look like? What's -- kind of what's the double crop system in Argentina from a timing perspective? When are they planting wheat and when are they following up with soybean planting?
So wheat has already been planted. It's usually June, July planting depending on the area. And then depending on the level of humidity, farmers might want to do soy after wheat in November, December. That is where we are seeing that HB4 performance is enhanced, particularly in the moderate environment and moderate to highly productive environments, where we saw the germplasm drag. And there are 6 million hectares today that are under the double cropping system in Argentina.
So this is not an insignificant opportunity, where we have not only performance in soybeans that we can point to, but also where we can leverage on the terrific performance of our wheat varieties. The HB4 wheat performance that is beyond dispute can be a terrific complement to the soy products that outperform commercial materials in double cropping systems. So while this is still a fraction of the overall opportunity we are seeking with HB4, I think it's one that we can make use of right away with the second-generation materials we're currently scaling up.
You talked about fast-tracking third-generation materials. Really, what does that mean? What initiatives are you taking to fast-track? And what does -- what's your expectation for kind of how inventory build can grow over the next year or two given this fast-track approach?
So the fast-tracking is essentially doing off-season production. So instead of having one cycle of notification every year, we will try to, particularly Allion where we are talking about hundreds of factors and not thousands do off-season in the U.S., like we have done in the past for some materials. So that's currently happening. I believe that we will probably be on a few thousand hectares with third-generation materials in the coming off-season on the aggregate. And the remaining, obviously, to achieve the 3x to 4x will be with second-generation materials. And a significant portion of that as a follower to wheat.
We believe that in the next cycle, we should not be hindered by the performance of the materials, or by the availability of inventories, but we will be dependent on Chinese approval. As I said before, moving identity to reserve beyond the 0.5 million hectare mark, it's challenging. So we think that if we do things right from a multiplication perspective, we should be able to be there. And then the Chinese clearance becomes of great relevance than what we have today.
[Operator Instruction] Your next question comes from the line of Kemp Dolliver with Brookline.
A couple of questions. First, on your presentation, you mentioned you expect regulatory approval in fiscal year 2022. Do you have increased confidence or is it based on regulatory interaction? Or is this just reflect the passage of time? I'm trying not to read too much into that piece of information in the slide.
Well, thanks, Kemp, for joining the call. I think the answer is a combination of all these different aspects that you have indicated. For instance, in terms of the Brazil process for HB4 wheat, that's an active process. We can follow what happens in every meeting. We got questions sent to us, I believe, in the June meeting, after the process was ready to be decided. Those questions asked us to generate additional data essentially to look at how HB4 may affect other genes in wheat that can potentially be of allergen-linked. And we did something that has no precedence. We basically evaluated every single gene in wheat and showed that there was no change, and we provided that data back to regulators in August 18th.
The first meeting since we provided that data was conducted the first days of September. So there was not enough time probably between our filing and that meeting for regulators to have a full view of the data package, but there's an upcoming meeting in October, where we believe enough time would have elapsed for them to come to a conclusion. And then we don't know what that conclusion will be, but there is a process that we can more or less track, and we can get an additional question or we can get an approval. So that's where we are in terms of wheat.
With the Chinese process, it's -- we have less visibility. All that we know is that we are not getting more questions and that this has been the case since last year. So we didn't get any additional question from Chinese regulators during 2021. They have not met yet. So -- and we don't know when the next meeting is going to occur. There usually is a meeting in the half -- first half of the year, but has not occurred. And this is not Bioceres-related. This is for all GMOs that they evaluate. So we don't have a meeting diary that we can sort of point you to today, but that is kind of where we are in our understanding of the process in China and from a time perspective, where within the customary timeframe, within which they've made decisions in the past for other events that they have approved.
My second question relates to your comments on Canada. And typically, we've assumed that small subsets, say, 25% of acreage in a given market would be appropriate for HB4 products. And your comments on Canada today suggested it might be more than that, given the geography. Does that reflect the increased visibility on the market opportunity there?
Yes. That's a very good point. The 25% is a rule of thumb across sort of the Americas, I would say. But when you look at the sub-region that is entailed by Southern Canada and some parts of the Northern U.S., like Minnesota, the Dakota's, there are 10 million hectares, they're all combined, where we expect penetration to be higher than 25% because these are hectares that are often prone to water deficits and where average yields tend to be below the 3 tons per hectare, sometimes even below the 2.5 tons per hectare. So the value proposition of HB4 becomes even more compelling.
That's why we were eager to secure germplasm for this region. And one thing we're effectively announcing today is the Don Mario collaboration to be able to have maturity crops to and below that are specifically suited to this part of North America and take advantage of having all the approvals in place to capture on these hectares.
And just my -- this will be my last question and it relates to the partnerships. How do the partnership economics work? And more specifically, do they have any impact relative to doing this on a standalone basis?
Well, I think there are two important aspects. Usually, the technology is priced on two different fronts, the germplasm, the hardware, if you will, and the trait, the software that goes into that hardware. So we are software providers from an HB4 perspective. We have our own hardware company. Where we are discussing our proprietary program, the data that you saw from Latin America, from Argentina comes from our hardware company where we're combining HB4 with our proprietary germplasm.
If we use someone else's hardware, that person gets to keep the $3 to $4, sometimes even $8 per bag that are usually hardware-dependent. When we jointly develop the hardware, we split that 50-50, but that doesn't do anything to the price of the software, which we get to keep ourselves for Verdeca, if you will, that we fully own today, that is the developer of the trait. We might need certain incentives when we're working with partners on the software revenue, and they can be between 15% to 30% of the trait price or trait fees, depending on how deeply involved we are and whether they need or not certain metrics.
But this is building additional economics beyond what we originally had from a germplasm perspective. Don Mario providing their germplasm capabilities, co-financing that so that we can have ownership into those additional economics and keeping everything else from the trait side, the way it is for our traditional licensee.
So to be clear, the net effect for you is minimal based on what you had previously indicated to us?
Yes, I wouldn't -- I mean, we're not having a leakage on our HB4 value in general. There will be some germplasm royalties coming to us due to the investment we will be making jointly with Don Mario. But the important thing here is the ability to capture in a geography, we would not be able to capture in the absence of Don Mario because we do not have varieties adapted to this region of North America from our proprietary efforts.
Your next question comes from the line of Steven Ralston with Zacks.
Congratulations on the great top-line. Seems to be that the strategies that you're putting into the Crop Protection and the Crop Nutrition segments is gaining traction. This will be kind of a long-winded question. Just looking at it, overall, it appears that the seed business, it's a geographic expansion story and with Argentina, of course, bit of lightning good strike here in Brazil and China. The Nutrition area is a capacity utilization story, and you have plenty of room to ramp up the utilization, and you're on track there.
But looking at the Crop Protection area, with this reorganizational strategy, it's -- with bringing on these dedicated teams, it seems like there's a structural increase in the SG&A. And could you talk about that? Because the SG&A jumped up substantially during the fourth quarter. But as you say, it's still a lower percentage of sales because this top-line grew so much. But could you talk about what structural implications there are in the SG&A line concerning the reorganizational strategy?
Enrique López Lecube
Steven, this is Enrique. Thanks for joining us. Pleasure to have you on the call. So I think that your overview of the different initiatives is accurate. On your specific question on SG&A, bear in mind that SG&A, we are today accounting for expenses related to the launch of the independent platform, the rollout of HB4, and that is yet what's having an impact here on the top-line, not on profitability. So to me, that is an important point on SG&A.
And then on your question --on your specific question about the Crop Protection reorganization process, that is something that didn't take much of the increasing SG&A that you see. It might be out 20% to 30%, no more than -- not more than that. And that also takes into consideration Brazil, the ramp-up of SG&A, right? If you look at where we were, year after year, we are seeing good levels of growth. But in order for that growth to be captured, we need to put in place the support functions to allow that growth afterwards. So we keep track of the SG&A expenses in Brazil that we put in place in one specific period materialize in sales growth on the following period. So that's the way we think about Brazil. So the SG&A increase is a combination of those three things, not specifically attributable to the reorganization process in Crop Protection.
Also, I noticed the R&D line increased substantially. Is that because of the second and third-generation HB4 soy?
Enrique López Lecube
Well, that is a combination of things. Part of the expenses in R&D that you see there have to do with further regulatory request approvals -- approval requests that we made and that you saw in the slide that Frederico presented has to do with developing and obtaining registrations for product in our geographies, biologicals, mainly. So it's a split between regulatory expenses for the seed business and for the registration, for adjuvants and biologicals in our geographies.
You have a follow-up from the line of Kemp Dolliver with Brookline.
Quickly, you had refinancing with Rizobacter several weeks ago. What range of interest savings do you expect from that?
Enrique López Lecube
Thanks, Kemp, for the question. I think we've now reached a point at which our average cost of debt is stable. So we don't expect further savings from future issuances, but those issuances is to allow to refinance our existing debt, maintain our leverage ratio. So we are now stabilized. And I think that opportunities within that space will have to do more with expense maturities than lowering our average cost of debt.
And this is my last question. You've made a few comments about Argentinian inflation in this period. And the CPI numbers are -- the last couple of months have been, I think, as high as 50%. How are you thinking -- if nothing else changed and inflation stayed at this level, how are you thinking about the margin impact over the course of the next year? Is this something that will taper off? Or do you expect that the magnitude of impact on margins could continue?
Enrique López Lecube
It's a great question, Kemp. We don't look at FX and inflation on a standalone basis. In Argentina, you need to look at those two variables together. So what we've seen in the past, actually decades, is that inflation and valuation or depreciation of the local currency converge in the long run or in the mid-term. It might be that in the short term, there is a diversion, like it happened in this last two or three quarters in the fiscal year 2021 and that turned into headwinds for our cost structure -- manufacturing costs, and that impacted the gross margins but also some of our SG&A costs. But in the last two or three quarters, depreciation of local currency in Argentina lagged inflation. So that should catch up at some point. So it's something the effect of Don Mario should be minimized.
And at this time, there are no further questions. I'll turn the call back over to Federico Trucco for closing comments.
Okay. So thanks, everyone, for joining us. I know this is a lot of information in today's call. So I hope that you can feel free to reach us back if you need further detail or further explanations, we stand fully available. We're happy with the performance that was obtained in fiscal year '21, particularly after what we saw in the second quarter. So second half, that was very strong and allows us to show the results we're showing today. So thanks again. I hope everyone has a great week, and we are fully available, should you have any follow-ups. Thank you.
Thank you, ladies and gentlemen. That concludes the call for today. You may now disconnect.