Bioceres Crop Solutions Corp (BIOX) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Bioceres Crop Solutions Fiscal Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to turn the call over to Mr. Maximo Goya, Head of Investor Relations at Bioceres. Please go ahead.

Thank you. Good day, everyone, and thank you for joining us today. Presenting during today's call will be Federico Trucco, Bioceres 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 as 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 that exclude the impact of hyperinflation accounting in Argentina. Additional information in connection with the application of rule IAS 29 can be found in our earnings report.

I would now like to turn the call over to our CEO, Federico Trucco.

Thank you, Maximo. Hello, everyone, and thanks for joining us today. We trust you are managing to stay safe during these difficult times, times that help us reflect perhaps like never before on how privileged we are as an industry.

COVID-19-related disruption to agriculture in general and to the ag-inputs sector, in particular, has been minimal, if anything, and today's earnings report is a testament to the resiliency of our business. But before we dive into the specifics of this quarter's performance, it is the sentiment of our main shareholders, our Board and executive team that with privilege comes great responsibility. The priorities that we choose during these challenging times will define our organization for years to come. In this context, safety always comes first. And to that end, we are now entering the second month of travel restrictions and stay-at-home measures company-wide, which have helped us protect our personnel, our families and our communities alike. For more information about these and other risk mitigation procedures we have implemented, please refer to today's earnings press release.

Secondly, we have been able to maintain optimal business operations and serve our customers in a timely and flexible manner, allowing us to deliver the quarterly growth that we are currently reporting.

Beginning our presentation, I will provide a brief overview of the main highlights of the quarter. Enrique will follow me with a detailed review of our third quarter financial results.

Focusing first on Bioceres' top line, solid growth across our key product lines drove comparable revenues 9% higher during the quarter despite temporary concerns among growers about the COVID-19 pandemic, which delayed sales late in the quarter. The growth we delivered was particularly gratifying as the third quarter is a seasonally slow one. Deeper penetration in international markets, such as Brazil and Europe, also drove sales higher. We expect Europe to be increasingly important as a market for our biological products in quarters to come.

The third quarter was also particularly important from a financing perspective as we were able to access the local and international debt markets to raise over $50 million during the period. The majority of this funding came in the form of a convertible note due in 3 years, which Enrique will describe in greater detail.

With this capital incorporated into our balance sheet, we have secured the financial strength required to transition our HB4 crop acreage from thousands to hundreds of thousands during the next winter and summer crop seasons, which could potentially require as much as $30 million of working capital, as detailed in Slide 4. At the same time, we will judiciously use the profits from this quarter's financing to accelerate breeding and production activities in Brazil and the United States, 2 key markets for our EcoSoy technology.

Now to Slide 5. For the second time this year, we showcased our drought tolerance technology at Expoagro in March, which is one of Latin America's largest agricultural trade shows. This year's objective was to sign up candidates for the second cycle of seed multiplication, which could involve as many as 60,000 hectares for EcoSoy depending on the performance and adaptability of the early varieties currently being harvested, their seed quality and, of course, growers' anticipated appetite for our HB4 technology. As of last week, we have harvested 30% of the current 3,000 hectares of EcoSoy, and by the end of this month, we should have all the information required to define the magnitude of the next cycle.

During the exhibition, growers signed up for almost 10x the available acreage, which is an enormous success. It is important to note that registering underlying acreage was not a minor process. It required candidate's fields to be uploaded for our digital platform and available historical data analyzed to pre-evaluate the fleet of each environment to our technology.

With regard to EcoWheat, we are in the final planning stages for our winter campaign. Our target remains 12,000 hectares. Although we are not recognizing revenues at this stage, it is important to know that every hectare under the HB4 program has, on average, approximately $100 of contributed ag-input, which will be recognized when resulting inventories are finally solved, our grain revenues are generated from this product material.

With the current harvest of EcoSoy fields, we are completing the beta test phase of the Okaratech digital platform with 24 growers, and Slide 6 provides a glimpse of the data being generated by the platform. Historical satellite data can be used to define the production environment and the stability of yields in a candidate's field. Biomass evolution, soil moisture levels and crop nutrition status can all be inferred from satellite images throughout the crop cycle. This data can be also aggregated with hyper-localized weather data and georeference yield information for a number of different applications, as we have communicated previously.

Overall, grower experience was satisfactory, and we are currently fine-tuning different aspects of the platform for a second and broader launch of testing.

This concludes my initial highlights for the quarter. I will now pass the presentation over to Enrique for a more detailed discussion of our financial performance.

Thank you, Federico. Good morning to you all. Please turn now to Slide 7. As Federico noted, top line growth this quarter was largely driven by international sales, one of the main drivers behind our expansion strategy. Higher sales of adjuvants and biological therapics in Brazil, Paraguay as well as Uruguay drove part of the 9% increase in comparable revenues during the third quarter. We are also very pleased with the outstanding performance of Seed & Integrated Products' sales, driven mainly by pack sales in Europe, but also by the continued recovery in Argentina. This segment grew nearly 2x last year's level and now represents 16% of total revenue, up from just 8%. However, weaker sales of micro-beaded fertilizers in Argentina partially offset the quarter's growth. As Federico pointed out, initial concerns about the COVID-19 epidemic led to a brief period of uncertainty in late March, softening growers' pre-seasonal purchases that are usually made ahead of the upcoming winter planting season in Argentina.

Sales in Crop Protection, our largest segment, at 64% of revenue grew 4%, while Crop Nutrition declined 10%, accounting for 20% of total revenue. Our overall sales performance was solid, considering the temporary impact of COVID-19 overlapped with our seasonally lowest quarter in the year.

Looking at revenue on a 9-month basis, sales rose almost uniformly across all 3 segments, increasing 8% to $122 million. Driving sales during this period was primarily adjuvant growth in Brazil and Paraguay, our second and third biggest markets, while strongly backed by Argentina, still our main market. Other contributors to growth in the 9-month period were higher seed treatment pack sales in the Southern Cone and Europe and our ability to ramp up production of micro-beaded fertilizer to meet growing demand.

Now let's please turn to Slide 8 for a detail on Crop Protection. We reported $16.7 million in revenues, up 4% year-over-year. This segment continued to execute well against our growth plan for Brazil, Paraguay, Uruguay and Bolivia, mostly linked to high-tech adjuvants and biological therapics. Aggregate adjuvant sales volumes in these 4 countries increased 32%. However, milder pest conditions in Argentina led to lower demand for pesticides and herbicides resulting in reduced demand for adjuvants as well, which led to an 11% sales volume drop in the country. Consequently, Argentina offset some of the quarter's growth.

Over the last 9 months, sales grew 8% to $66 million as we continue to effectively execute our adjuvant growth strategy in Brazil and Paraguay. In Brazil, we drove adjuvant volume 56% higher. While in Argentina, adjuvant volume decreased 8%. Nevertheless, adjuvant sales were stable in Argentina over the period as we continue emphasizing margins over volume while we achieved higher sales of biological therapics, base and other pest control products.

Moving to Seed & Integrated Products on Slide 9. Revenue in this segment rose 98% to just over $4 million. Our French subsidiary drove much of this growth. Strengthened commercial activities over the past quarters allowed us to capture increased demand for our soybean packs as this crop being acreage versus corn and sunflower, which faced seed supply shortages at the time of planting in Europe. Considering the raise in demand to replace chemical products with biological solutions in Europe, we are excited to ratify that our commercial work and positioning in this market has been appropriate and beared fruits. As we have already highlighted, seed treatment packs continue to recover in Argentina, where we also further penetrated the legumes market.

Segment revenues on a 9-month basis increased 7% to $22.6 million. We drove higher seed treatment pack sales in Paraguay, Uruguay, Europe and South Africa, in addition to the partial sales recovery in Argentina during the fiscal second and third quarters of 2020. These revenue gains more than offset lower sales of seeds and seed treatment packs in the first and second fiscal quarters, when Argentine growers' uncertainty about weather and macroeconomic conditions affected purchase decisions for the planting of winter and summer crops.

Before moving to the next slide, a quick reminder that sales in this segment for the 9-month period also benefited from the partial reclassification of inoculants, which had been previously reported under crop nutrition as stand-alone products.

Now moving to Crop Nutrition on Slide 10. As we noted earlier, a brief period of uncertainty arose later in the quarter when growers had been initially concerned about the potential impact of COVID-19. Lower advanced purchases of highly seasonal products such as micro-beaded fertilizers and inoculants used for winter planting in Argentina and Brazil accounted for a 10% decrease in Crop Nutrition sales. The segment's revenue decline was partially offset by a pickup in fertilizer sales in Bolivia, which has been recovering from past political unrest. We also saw good performance in inoculant sales in the U.S. and Europe, which also helped to offset the lower Crop Nutrition results in Latin America.

Even with the decline in the third fiscal quarter, year-to-date, Crop Nutrition sales rose 9% to $33.7 million as we effectively raised installed production capacity of micro-beaded fertilizers to meet growing demand in our LatAm markets. Inoculant sales in the segment decreased as a result of being partially substituted with seed screen impacts and consequently being reported within the Seed & Integrated Products segment, as I just mentioned.

If we move to the next slide, comparable gross profit rose 6% to $12 million for the quarter, while the corresponding margin contracted 133 basis points to 46.4%. As a reminder, most of our production operations are located in Argentina. Because our manufacturing costs, mainly labor, are denominated in pesos, Bioceres' margins are sensitive to the dynamics between currency movements and Argentina's inflation rate at any given time. The net effect of the depreciation of the Argentine peso and the country's inflation raised our reported manufacturing costs for the quarter, thus eroding our gross profit margin. This impact was partially offset by greater participation of high-margin seed treatment packs within our revenue mix. Year-to-date, our gross margin declined to 185 basis points to 48.8% as the sharp depreciation of the peso benefited our gross profit and margin during our fiscal 9 months in 2019, resulting in an unfavorable comparison versus the current fiscal year.

Looking now at gross margin by segment. Starting with Crop Protection, profitability was mainly impacted by the adverse effects on inflation dynamics and manufacturing costs, resulting in a margin decrease to 39%. With Seed & Integrated Products, this dynamic was more than offset by packs' share increasing to 84% of segment revenues compared to 39% last year. This led to margin expansion in the quarter from 28% to 63%.

From a margins perspective, our revenue mix also improved in Crop Nutrition, expanding gross profit margin from 52% to 58%. During the quarter, a product mix shift resulting from lower micro-beaded fertilizer sales and fewer lower inoculants more than offset the adverse effect of the FX and inflation dynamics in Argentina.

Now moving to profitability on Page 12. Reported adjusted EBITDA for the quarter was $2.6 million compared with just over $3 million last year. Although we generated healthy year-on-year growth in revenues and gross profit, these were offset by higher SG&A costs, driven primarily by 3 factors: first, as we continue executing our international growth, we have been expanding our presence in Brazil, a process that contributed to increase in SG&A compared to a year ago. We are making good progress on this front and are very excited about the future growth as we continue to raise our brand awareness and lay the ground for the launching of HB4 in this attractive market; second, corporate costs now including our financial has been previously incurred by Bioceres' holding company; and third, the previously mentioned headwinds related to the negative impact from the net effect of currency depreciation and inflation rate in Argentina compared to a positive effect last year as the majority of our selling and administrative support functions are located in Argentina, and therefore, peso denominated.

To summarize, as a significant portion of our SG&A is fixed, the effect on our EBITDA margin is pronounced in a quarter that is seasonally low. In other words, our ability to dilute these incremental costs is at its weakest during Q3. As you can see on the EBITDA bridge for the quarter, we reported higher gross profit from Crop Protection and Seed & Integrated Products, along with the higher JV contributions, which was mainly offset by higher SG&A compared to last year, resulting in an adjusted EBITDA margin of 10.2% this quarter against 17.7% in the year ago quarter.

Looking at the 9 months, adjusted EBITDA was relatively unchanged at $32 million with margins of 25.5% compared to a margin of 29.4% in the same period of the prior fiscal year. Growth in Crop Protection sales in Brazil, Uruguay and Paraguay, micro-beaded fertilizer ramp-up and higher pack sales were mainly offset by lower gross margins and higher SG&A following the same dynamics I just described for the quarter. Negative net effect of inflation and FX, incremental SG&A to support growth in Brazil and additional corporate costs.

Now let's please move on to Slide 13 to address balance sheet. Identifying significant new opportunities to extend debt maturities, support working capital, reduced financing costs and enhanced financial flexibility have been key focus areas of our financial strategy. In this regard, we made important progress in the quarter, raising a total of $50 million, as Federico described at the beginning. This includes $42.5 million raised in March with a private placement of a secured convertible note and a $7.6 million public debt issuance in February by our subsidiary, Rizobacter Argentina.

With these transactions, we have taken another step, enhancing Bioceres' debt maturity profile, increasing the share of long-term debt to 59% of total debt, up from 37% in the second quarter of the current fiscal year and 17% in the year ago quarter. Capital raised has also substantially increased our financial liquidity, with cash representing approximately 80% of the current portion of total debt. Additionally, we are lowering financing costs through a more efficient capital structure, particularly by discontinuing highly inefficient sources of working capital while also improving our leverage ratio to 2.30x this quarter from 2.37x in the same period of last year.

With regards to the convertible note, the maturities to notes are convertible into cash, ordinary shares of Bioceres or a combination of both at the option of the holders. Also at any time for a maturity, Bioceres can convert the notes into ordinary shares of the company through a mandatory conversion under certain conditions, which include a free float in excess of $100 million and stock price above the strike of $8 per share for 10 consecutive days. This conversion feature means that we also have the potential of enhancing the trading liquidity of Bioceres' shares, which remains a focus area in creating value for our shareholders. The capital raise we announced, combined with the public bond issuance by Rizobacter significantly strengthened our balance sheet as we prepare to monetize the technology and business investments that we have been making over many years. I would like to emphasize here that in light of the economic impact of COVID-19, the ultimate scope or magnitude of which are still unpredictable, we will deploy our capital prudently, seeking to strike an appropriate balance between advancing our growth strategy and maintaining a sound level of financial liquidity.

Turning to Slide 14, I'll take a moment to briefly expand on 2 factors that enhanced our free cash flow generation. First, the lowering of our financing costs. In the third quarter, our total net interest expenses and financial commissions decreased by $1.6 million or 30% versus same quarter in the prior year, which reflects the replacement of inefficient external sources of working capital, mainly with cash generated from the operations as proceeds from the capital raise came late in the quarter.

Looking at the 9-month period, our cash financial expenses declined 9% as the company continues optimizing its financing structure. On the other hand, given the strong asset base that we already have in place to execute the near- and long-term elements of our growth strategy, the cash we are generating is sufficient to fund our CapEx requirements for the foreseeable future. By way of example, third quarter CapEx was $300,000 compared with $400,000 in third quarter 2019. Looking at CapEx on a 9-month basis, year-to-date, 2020, our CapEx was $1.4 million.

Now let me turn the call back to Federico for some closing remarks.

Thanks, Enrique. Turning to the next slide and looking ahead. We will continue to focus on the execution of our HB4 program initiatives, which include the planting of up to 12,000 hectares of EcoWheat in the coming months and defining the final acreage for the next cycle of EcoSoy seed point application. At the same time, we will accelerate breeding, production and licensing initiatives directed at the U.S. and the Brazilian markets. We will also continue to execute our baseline business strongly, protecting our leading position in Argentina and further penetrating international markets with our next-generation solutions.

Finally, with a stronger balance sheet, we'll maintain an opportunistic but judicious approach towards capital allocation opportunities that can help us further accelerate our business objectives.

I will now pass the call to the operator to open up for Q&A.

(Operator Instructions) Our first question comes from Ben Klieve with National Securities.

All right. First, Enrique, a question about the capital structure. So with the convertible note now completed, is your transition away from these -- from the various inefficient debt sources now complete? Or do those remain on your balance sheet either as of the end of the fiscal quarter or as of today?

Ben, thanks for joining us, and good to have you today on the call. So yes, about the capital structure. One thing to bear in mind is that the capital raise through the convertible note came into the balance sheet late in the quarter. So everything that is related to improving financial costs from discontinuing inefficient sources of capital has been done with funds generated by the operation.

Now as we go forward, there will be a process through which we will start getting rid of these inefficient sources of capital, and that should continue to improve our financial expenses line.

Got it. Okay. Turning over to HB4. Federico, you described the low end and high end of the inventory build range for next year of of 20,000 to 60,000 hectares, which is a big range. And you described a number of considerations that go into that range, but I'm curious if you can kind of break down how much of that range is due to agronomic performance versus the -- kind of the ability to market the seed and secure growers. What kind of -- how does that range break down between those 2 kind of broad considerations?

Ben, it's great to have you in the call, as Enrique said, and thanks a lot for the questions. So let me first say that regarding the range, we had shown interest from farmers that exceeds the maximum number of hectares by almost tenfold. So if we needed to do like 0.5 million hectares, we have enough farmers sign up to do that. So from a technology's appetite perspective, this is not an issue. Now we're harvesting today 3,000 hectares that will provide the materials with which we will plant these 20,000 to 60,000 hectares. And we're doing this with a small number of varieties that come from our early efforts in the breeding program.

So having said that, the #1 consideration in terms of how fast we go or how many hectares we put into the next cycle will depend on the performance that we see in the field and making sure we're moving forward with the right materials. And some of these materials are not properly adapted. So we might not be able to cease every region with this limited number of variety. So that's creating an initial bottleneck, if you will, that we will take into consideration once all the data is collected, and that will happen in the next 2 to 3 weeks.

The second aspect is that we need to have good quality seed. And in some areas, the production might have been affected by weather events, and that can affect the quality of the seed. We anticipate that to be a lesser problem, if you will. But if these 2 things check, we could do 60,000 hectares. If these things don't check fully, we'll be somewhere in between. We wanted to provide an indication. Remember that any of the 2 scenarios in the upcoming season, which will be planted in August to November -- December, should allow us to do a very significant launch in the following season in sort of the 20 -- fiscal year 2022, which is next year for us in the next summer season of plantings.

Got it. Perfect. Yes, that was helpful. And I apologize if you mentioned that ten -- the tenfold number in your prepared remarks and I missed it. I apologize for that, but that was helpful. Just a couple of quick questions on the quarter, and then I'll jump back into queue. First, on the fertilizer business, you discussed the delayed purchases given kind of broad uncertainty around COVID-19. My question here is, were these delayed purchases that were -- that may get rolled into the fourth quarter here? Or were these delayed purchases for in advance of next growing season?

So Ben, what you have to see is that the current quarter will report the preseason purchases, so farmers that come to the market in an anticipated way to take advantage of promotions and sort of get prepared for the next plantings. So that is what got delayed. So these purchases that are often done preseason, we expect them to occur in season, which is in the current quarter. So it should be a phasing issue regarding that late quarter COVID-19 uncertainty. I don't know, Enrique, if you want to add anything to this.

No. It's absolutely like that. There's usually a preseason sales campaign that is not only us, but some competitors do it as well. And obviously, in the context of uncertain event, as Federico said, the people were not willing to sort of preinvest in the ag-inputs they need for the winter planting season. So there's a very good chance that we're going to see those sales happening in the fourth quarter.

Got it. Got it. Perfect. Last one for me. With regards to the performance of the seed segment this quarter, this segment has kind of flown under the radar, if you will. But this quarter, I mean those numbers are pretty remarkable. To what degree do you think the performance that you saw in the third quarter is kind of a one-off result? Or do you think that this segment, in advance of HB4, is kind of positioned to see this kind of growth going forward?

No. Look, what I think, Ben, is that there were some onetime factors that affected positively and negatively. So on the micro-beaded fertilizer end, we had a lower-than-expected sort of preseason sales campaign, but that was offset by the outstanding performance in Europe, in France.

Now when you look at France, the good news for us is that we've been doing commercial work over there for years now. And Europe is a market where you see that there's going to be a shift from chemical products into biological products that is increasing. And so we were positioning ourselves in that market.

Now the outstanding performance this quarter has to do with the fact that there was a seed shortage for corn and sunflower and therefore, soybeans saw increased acreage. That is a onetimer. I don't think it's going to be the new normal, if you will. But the good news for us was that we were ready to capture that opportunity. And as biologicals further penetrate that market, we're going to be there.

But -- so to summarize, there was a onetimer positive that was Europe, and there was a negative onetimer that was the low preseason sales of micro-beaded fertilizers. So to me the growth that we experienced is in line with what we think that we can do with our baseline business going forward.

Next question comes from Sally Yanchus with Brookline Capital.

I just want to confirm, you do expect the Crop Nutrition to recover some in this fourth quarter?

Sally, great to have you on the call. Thanks for the question. Yes, there's a very good chance that we could recover those sales in the quarter if things go smoothly and normally, being -- has been so far a good season for wheat and barley planting in Argentina, which is probably the main market for winter crops in Southern Cone. So we have good expectations on what can be done with the selling of micro-beaded fertilizers for winter planting.

Okay. And in terms of just the overall product line, are you still selling in North America? I mean -- or did you have any North American sales this quarter?

Yes. Yes. And actually, honestly, that business is still small, but we have as well a strong focus on the U.S. Federico can probably expand more on that. But in particular, even being a small business, we had a good performance with inoculant sales in the U.S. this quarter. It was slightly, if you will, left on a second place by what happened in Europe, but it was a good selling quarter for our U.S. subsidiary as well.

Okay. And then do you have any update -- oh go ahead. Go ahead.

Sally, this is Federico. It's great to have you in the call. I was just going to add to Enrique that, obviously, the U.S. keeps still a very important focal point for us, and we are actively trying to consolidate that market from a biologicals perspective as well as a seed opportunity perspective.

One thing that we mentioned briefly during the call was our ability now to move some of our products internationally via Syngenta, particularly our biofungicide in Europe that we believe will help us keep European performance up and not just the onetimer that we saw this quarter as we see a transition towards biological products for Crop Protection solutions, and that should also be true in the U.S.

Okay. And then do you have any update on the status of China's approval or acceptance of EcoSoy?

Well, thanks for that question as well. We have indicated in the press release that we're currently reviewing our earlier guidance on China. And that is mostly driven by the COVID-19 situation and what that might have done to the bureaucracy in countries that is required to move regulatory processes forward. We have unofficially -- we have unofficial word that things are moving as planned. So that is probably good news, but we have not been able to corroborate that officially in an official manner. So that is as much as I can tell you from China right now.

(Operator Instructions) At this time, we do not have any questions. I will turn the call over to Mr. Trucco for closing remarks.

Thanks, operator, and thank you again for joining us today. As always, we appreciate your interest in Bioceres.

Leaving numbers aside for my last comment, I would like to conclude by saying that we're now operating under a new reality, no, somewhat of a new normal in which we have the opportunity and privilege to act also as a helping hand, a helping hand for our employees and suppliers as we provide a source of stability in times of great anguish; a helping hand to our customers as we help them travel through logistical problems and avoid delays, particularly when they're harvesting their crops; a helping hand to our communities as we anticipate purchases to small businesses that have seen a total collapse in their incomes or help the local hospital procure protection equipment for health professionals standing in the front lines. And we do these not out of charity, we do these because we feel is the best use of our capital these days, an investment from which we'll profit many times over in the future. And I wanted to share these thoughts with the audience today here in the call.

With that, I would like to close and say that we wish you stay safe, and obviously, enjoy the rest of your day. Thank you very much.

This concludes today's conference call. You may now disconnect.