Bioceres Crop Solutions Corp (BIOX) 2020 Q2 法說會逐字稿

Good morning, and welcome to the Bioceres Crop Solutions Fiscal Second Quarter 2020. A slide presentation will accompany today's webcast, which is available in the Investors section of Bioceres Crop Solutions Investor Relations website, https://investors.biocerescrops.com. (Operator Instructions) Today's conference call is being recorded. At this time, I would like to turn the call over to Maximo Goya, Investor Relations leader. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us today. Speaking 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 our earnings release and 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 note that for comparison purposes and a better understanding of the underlying performance in our presentation today, in addition to discussing as reported results, we'll be discussing comparative results, which excludes the impact of hyperinflation accounting in Argentina, which became effective July 2018. Additional information in connection with the application of the 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, and hello, everyone, and thank you for joining us today. To begin, I will ask you to move to Slide 3. And I will provide some high-level remarks with emphasis on progress made in our HB4 program. I will then turn the call over to Enrique, who will discuss our second quarter financial results in greater detail.

Subsequently, I will come back and review our growth opportunities ahead.

From an operational viewpoint and as shown in the current slide, we have achieved an adjusted EBITDA of $21.1 million for the quarter. This operating result was achieved by partially recovering prior quarter sales in Argentina, while actively managing overall costs.

It is important to note that we continue to increase capacity utilization at our micro-beaded fertilizer facility, now 22.5% above year-over-year. Also, a distribution agreement with Brett Young was recently announced that will enable the commercialization of Rizobacter-branded biologicals in the attractive markets of Western Canada and U.S. Northern Plains, further expanding our international footprint.

Moving now to the next slide. We can see that our HB4 program is advancing as projected. From a big picture perspective, the most important milestone for the quarter was the validation of the EcoWheat performance at hundreds of hectares for the first time, with a total of 395 hectares harvested. These inventories are now in place to meet the 12,000 hectors planting objective as of the fourth quarter of the current fiscal year. Off-season multiplication of EcoSoy materials in the United States allowed us to move close to 3,000 hectares planted during the quarter, keeping us on track with inventory ramp-up projections for this crop as well.

Also, an important achievement for the period was the execution of strategic agreements with Okaratech Ltd, enabling the beta launch of our digital platform, providing a valuable field-to-cloud data interface for the HB4 program, as we will discuss later in this presentation.

If you move to the next slide, you will see results from our EcoWheat fields. We have multiplied 3 EcoWheat materials and have obtained enough seed to plant in excess of our 12,000 hectors objective for the next crop cycle. Yield benefits in harvested fields ranged from 8% in the highest yielding environment to as much as 22.4% and were consistent with those estimated in our product development trials, testifying to the robustness of our R&D process.

Regarding EcoSoy, now in the next slide, 2,905 hectares were planted during the quarter in 18 different fields across 3 production regions. Key production from these sites is expected to enable planting of up to approximately 9,000 hectares during the next summer's crop season in the Southern hemisphere, moving the company closer to broad commercialization in this particular crop.

In the next slide, also an important achievement for the period was the beta launch of our digital platform in partnership with Uruguay-based Okaratech Ltd, a GeneXus' ThalesLab venture dedicated to digital farming solutions. Initially, the platform will provide data useful to fast-track and improve our product development efforts, provide traceability for consumers as well as for technology stewardship and IP protection purposes and to support our growers with farming decisions and in the technology validation process. Due to the strategic nature of this collaboration, the company has reserved an optional path to equity with this critical partner. I will now pass the presentation over to Enrique, who'll discuss key aspects of the second quarter's financial performance.

Thank you, Federico. Good morning to everyone, and thank you for joining us. Overall, we are pleased with the company's performance, which reflects continuous progress on the strategic initiatives we began rolling out about 2 years ago. During the quarter, we continued to drive international sales, ramping up capacity utilization and saw a partial recovery in delayed pack sales. Importantly, we delivered EBITDA margin expansion even on a slightly slower revenue growth.

Now for a discussion of our financial results. Beginning with revenues. As a reminder, we will discuss comparable revenue, which excludes the impact of IAS 29. Our press release shows as reported, including the impact from IAS 29 and then the comparable figure excluding it in both quarters.

While we are very excited about the potential for HB4, we have a core business that delivered top line growth in the quarter, with comparable revenues up 6% year-over-year. Top line growth was slower than our expectations as we only saw a partial recovery of the prior quarter's delayed pack sales in Argentina. Our farmers faced uncertain macroeconomic and weather conditions in the country throughout the planting season.

However, we did see good growth in micro-beaded fertilizer and adjuvants as well as higher pack sales in Brazil and Paraguay. We are on track with a planned steady increase in capacity utilization and sales growth in markets outside of Argentina.

Brazil continues to be a key market for us alongside Uruguay and Paraguay, which had good performance throughout the quarter and the semester. Comparable revenue growth was driven by high single-digit growth in the Crop Protection and Seed segments, while Crop Nutrition delivered low single-digit growth. It is important to point out that during the quarter, there was a shift in product presentation as Brazil and Paraguay partially replaced stand-alone inoculant doses previously accounted for in Crop Nutrition with full seed treatment pack sales reported under Seed & Integrated Products. I will next discuss each segment in more detail.

Moving on to Slide 9. As a reminder, we have 3 business segments. Starting with Crop Protection, which is our largest revenue-generating business today, accounting for 52% of total revenues in fiscal Q2, and it was also our fastest-growing business in the quarter. Overall, comparable Crop Protection revenues for the quarter were up 8% to approximately $30 million, led by adjuvant sales in Argentina and Brazil, increasing at a double-digit pace. High-tech adjuvants are our key product line in this segment. We are market leaders in Argentina, and much of our growth is now coming from increasing our share in markets such as Brazil and Paraguay.

In terms of volumes in Argentina, we continue shifting from high volume, low-margin products into high-margin adjuvants with a 6% volume increase in the quarter. While in Brazil, benefiting from increased capacity, direct sales volume was up 37% year-over-year. In other markets, excluding Argentina and Brazil, we saw an 18% sales volume increase for high-tech adjuvants.

In addition to higher sales of adjuvants, seed treatment insecticides and fungicides also increased in the quarter. This was partially offset by lower base sales, which are particularly susceptible to climate conditions.

Moving to Slide 10, Seed & Integrated Products, which accounts for 23% of total revenue in the quarter. Crops sold include soybean and wheat seeds as well as a full range of ready-to-use seed treatment packs that combine our biological products with top-quality seed treatments to provide an integrated solution to the farmer.

Comparable Seed & Integrated Product sales increased 7% year-on-year. This quarter saw a partial recovery in sales of summer crops seed treatment packs in Argentina, following the prior quarter's delayed purchasing decisions for these products due to the drought conditions in the country. Now persistent drought conditions in some key agricultural areas during the second planting window for soybeans as well as some favorable macroeconomic conditions in the country were the main obstacle to fully recovering delayed sales from Q1.

On the positive side, the segment benefited from higher pack sales in Brazil and Paraguay, where we began to increasingly sell full seed treatment packs that replaced stand-alone inoculant doses previously accounted for under the Crop Nutrition segment.

Now moving on to Slide 11. Crop Nutrition, which is our second largest revenue generator at 25% of total sales in the recent quarter. Comparable Crop Nutrition revenues increased 2% in the quarter as we continue to benefit from the steady ramp-up of micro-beaded fertilizers installed capacity. Sustained growth of fertilizer sales in Argentina and neighboring countries was partially offset by the shift in product presentation in Brazil and Paraguay, where inoculants are now being sold along with seed packs and thus, are accounted for in the Seed & Integrated Product segment.

If we move to the next slide, comparable group's profit increased 5% to $29.8 million compared to $28.4 million in the same period a year ago. As we have explained in the past, the majority of our production takes place in Argentina. In turn, the portion of our cost structure that is denominated in local currency is impacted from inflation and FX dynamics when converting our financial results into U.S. dollars. The net effect between depreciation and inflation rate had a neutral impact year-on-year on Q2 gross margins.

The gross margin during the quarter was steady for the Crop Protection segment. Crop Nutrition gross margin was down compared to the year-ago quarter, mainly explained by higher participation of micro-beaded fertilizers in the product mix, which have lower margins than inoculants. The product mix in the Crop Nutrition segment was also impacted by the shift of stand-alone inoculants into seed treatment packs reported under the Seed % Integrated Product segment for Brazil and Paraguay.

Finally, the Seed & Integrated Products segment saw an increase in gross margin during the quarter caused by increased higher-margin seed royalties and seed treatment packs compared to the same quarter of the prior fiscal year. As a result of these dynamics, the comparable gross margin in the quarter was 49 basis points lower than the same period of the prior year. As you can see, different than the steady margin we saw for the quarter, our solid top line growth for the first half did not flow through to gross profit.

Gross margin for the 6 months was temporarily impacted by FX and inflation dynamics in Argentina, where we manufacture a significant portion of goods sold. The sharp depreciation of the currency that occurred in the first half of fiscal 2019 was not replicated in the first half of 2020 [except] the overall 6-month gross margin.

Moving next to a discussion of EBITDA on Page 13. Reported adjusted EBITDA for the quarter was $21 million, an increase of 4.1% year-over-year, with EBITDA margin increasing 103 basis points in the quarter to 33.5%. This margin expansion was primarily driven by higher adjuvant sales in Brazil and Argentina, increased capacity utilization at the micro-beaded fertilizer facility and also operating efficiencies. The limited recovery in seed pack sales partially offset these positive factors. As you can see on this page, we have provided a bridge from Q2 '19 to Q2 '20 for adjusted EBITDA.

During the most recent quarter, we recognized benefits primarily from higher gross profit from the Crop Protection and Seed & Integrated Products segments as well as higher JV contributions. We also implemented cost controls during the quarter while we slightly increased R&D expenses. The net effect between depreciation and inflation rate had a neutral impact year-on-year on quarterly margins.

Now moving on to a discussion of the balance sheet on Slide 14. As we discussed during our most recent call, the instruments to ensure further growth have been made over the past few years with limited investments going forward. We have been able to finance our growth requirement largely with internally generated funds. Enhancing our debt profile remains a key focus of our strategy. Reflecting actions we have taken over the past few quarters, combined with solid results, the LTM EBITDA ratio was 2.23x compared to 2.89x in the same period of last year. A slight sequential increase in the debt ratio from September into December reflects seasonally higher working capital needs in the quarter to support high planting season in the southern cone. Further strengthening our balance sheet as well as providing more financial flexibility is a priority to us.

While we have been able to slightly increase long-term debt participation in our total financial debt over the quarter, identifying more significant and new opportunities that extend maturities, support working capital and reduce financial expenses remains a key focus area of our financial strategy.

We'll turn the call back to Federico now for some closing remarks.

Thank you, Enrique. Now to wrap up, we can turn to Slide 15. During the second quarter, we made significant progress with our HB4 deployment and are getting closer to commercialization. As we do so, we are planning to increase our presence in targeted events aimed at consolidating demand generation for this technology. Also, we expect to fine-tune and upgrade our digital farming platform to be ready for the next level of demand as acreage expands in both crops. Growing sales internationally is also a strategic priority for us, and we will continue to focus on execution of our Brazil and Paraguay expansion plans as well as source initiatives to further expand our North American footprint just like we did with the Brett Young agreement.

We have invested heavily, as Enrique indicated, in installed capacity, and we will continue to focus on ramping up utilization of our micro-beaded fertilizer facility as we have over the last period. Lastly, we continue to look for opportunities to further strengthen our balance sheet through working capital initiatives as well as terming out our debt.

In sum, we are very focused on creating value for our shareholders, customers and employees alike. This ends our prepared remarks. We are now ready to take questions. Operator, please open the line for questions.

(Operator Instructions)

Your first question is from Ben Klieve with National Securities.

First, I have a couple of questions on the relationship with Brett Young, which is an exciting one here. I guess, first, can you comment on kind of how this agreement materialized and then the degree to which you believe that the growers within the Brett Young community have exposure to your products and have knowledge of your products? Or are they going to be -- do they need to be educated? Or is that something that's already been done or Brett Young is handling that? Can you comment on that?

Ben, this is Federico. Good morning to you. Look, this is an important milestone for us because it's addressing a region of the North American opportunity, in which we have had limited presence, particularly, because today, we don't have within our portfolio granular inoculants, which are particularly useful for pulses and other crops that are very relevant in Western Canada and the U.S. Northern plains.

So with this relationship in place, we would obviously initiate sale of liquid inoculant products and quickly shift or try to shift our portfolio to some of the granulated forms that are useful in this particular area of the world, which has been, from our portfolio perspective, something we try to do for quite some time now.

Got it. And then, I guess, in terms of the timing of this business ramping. Is this something that you think you'll have kind of meaningful acreage this calendar year? Or do you think kind of for the next 12 months, you are going to be focused on kind of limited trials with growers? And do you expect a more dramatic commercial ramp in 2021 and beyond?

Look, we have already been doing some trialing and positioning the product. So we expect to be seeing sales.

Obviously, this is a geography where we, today, operate at a few million dollars. So it's not something that will double our sales from 1 day to another, but where we hope to -- we expect to be booking sales from day 1.

Perfect. That's great. On the Crop Nutrition side, I understand kind of the shift in the accounting structure from Nutrition over to the Seed segment, but can you kind of help us flush out really the degree to which that really impacted the relative performance in each of those 2 segments? Was it a significant shift? Or was it really a minor one?

So let me first then give you sort of the strategic concept that underlines the shifts, and then Enrique will give you the sort of more visibility on the numbers. But what you will see in the way we perform is that as we expand internationally, we do so with our most important elements in the portfolio and the stand-alone inoculants tend to be sort of the leading products when we enter new markets.

The way we sell inoculants in Argentina, it has a fully -- in the form of fully integrated seed treatment solution that obviously integrate insecticides and fungicides in the form of packs. So once we gain critical mass in each new geography, that is a shift you can expect from the company in moving sort of the stand-alone inoculants that we report in the Crop Nutrition segment to a more integrated product that drives additional revenues for the company in the form of seed treatment packs, which we report in the Seed & Integrated Products segment.

Now from a magnitude perspective, I don't know if Enrique can give you some high-level numbers.

Ben, good talking to you. Thanks for being on the call, and good morning.

So I mean, yes, as Federico mentioned, this is not an accounting shift, but it's rather repositioning from the commercial side, so selling higher value packs versus selling stand-alone inoculants so that's the first thing. And what I would tell you, Ben is that if -- from an order of magnitude perspective, if we would have not had this change, the trend in the growth of the Crop Nutrition segment would have remained as it was in Q1.

So basically, this is a fully offset factor in the growth trend that we were showing in Q1. So it was something that, in some way, changes the perspective of how we think about the evolution of Crop Nutrition. Now, to be honest, I think this is not going to be something that continues to happen throughout the future quarters significantly because the ramp-up of the micro-beaded fertilizers is much higher than the order of magnitude that we will have in the change or the shift from inoculants in Brazil and Paraguay to seed treatment packs. So it's more the -- one -- it's more a thing of a onetime.

Got it. Okay. That's -- I appreciate that from both of you. That's helpful. On the noncore items, it was good to see that cash interest come down a little bit. Can you just kind of update us a bit on the kind of the ongoing restructuring you have of your debt, the -- and kind of how much progress has been made in the last quarter? And then how much progress you look for over the next quarter or 2 to move the debt from the higher rate that's more kind of traditional bank loans and that come with a lower rate?

Yes, that's a great question. So look, we have been working and we will continue working on detaching the company from whatever happens with the financial market in Argentina, so that's something that we have been doing throughout the quarters, and we intend to keep doing in the future. So that's stopping basically on cross-border debt or financing our subsidiaries outside of Argentina directly from Bioceres Crop Solutions so there are multiple levers that we can pull in sort of optimizing our financial -- financing structure.

Having said that, we do expect that as we are able to materialize some opportunities that we have been exploring, the interest expense line should continue to go down as we discontinue the use of certain tools in Argentina that were probably very useful in the past but are very expensive as of today. So as we are able -- as you guys see that we are able to structure further deals further down the road, that should help us in converging our financial expense towards the average interest rate times our total financial debt or our net financial debt.

Got it. Perfect. And then last 1 for me. Can you just kind of provide us with kind of a state of the market in Argentina and Brazil? You talked on the last call and today about kind of the relative uncertainty that some of your growers faced in the planting season. Can you talk about kind of the -- really, the overall state of the market and then in the context of how you think the first half of the year is going to differ from the second half for your business?

Look, that is a tough one, Ben. Obviously, Brazil and Argentina have different situations. Overall, in agriculture, obviously, we -- there's a consensus that farmer income is on the weak side today globally, not just in the southern hemisphere. But what you will see in Argentina is that the election that we had last year had a particular effect on farmers sentiment, if you will, as a new government came into place that increased taxation in certain crops.

And even though the increased taxation can be offset with a 2-day rally in the commodity markets, from an emotional perspective, that is something that we believe affected us, particularly towards the end of the first quarter and early in the second quarter. Now if we see commodity prices stabilizing or moving or trending upwards, that will quickly, if you will, improve sentiment, and that is an important element mainly for businesses that operate at the high end of the agri value chain.

The technologies we sell are sort of high-value technologies. And if farmers feel they will have a valuable crop, they tend to invest more. We believe that most of that storm has passed. Obviously, the third quarter won't be a huge indicator, whether that is the case because it's our weakest quarter, but the fourth quarter should allow us to recapture part of the growth that maybe we fail to acquire or have in the -- during the first half of the year.

In Brazil, that has not been the case. You will see that we have doubled sales compared to last year more or less in the first half, even though December was a very slow month. So adjuvants and now seed treatment packs and some sales of micro-beaded fertilizers eventually will help us capturing that market from the opportunity that we have from a portfolio perspective. I don't know if, Enrique, you want to add something to that as well?

Yes. I mean I think that there is 1 factor that will not replicate at least in the next couple of years, which is the uncertainty, and that's what probably bothers farmers the most. So having a drought planting season, coupled with elections in Argentina that is sort of a scenario that will not happen until the further elections in Argentina, so I think that farmers are ready to deal with tough scenarios. The only thing which they sort of struggle is uncertainty. And having said that, it's not that we are optimistic in Argentina, but I do agree with what Federico said that we've probably seen the worse.

Your next question is from the line of Steve Byrne from Bank of America.

I wanted to ask you what your view was on the outlook for a new seed law in Argentina, where some mechanism by which you would be able to protect your intellectual property on these HB4 transgenic crops. And if that doesn't look likely, do you have a mechanism to commercialize these crops and to assure that you can get paid for its -- on Safe Seed?

Steve, this is Federico. Thank you for joining the call. It's great to hear from you. Look, that question is, in a way, the mother of all questions. If you're in the seed industry in Argentina, as you may know, a change in the seed law has been a historical ask of -- of the industry in general, so that we can fix some of the things that today don't work well, particularly with the brown bag issues in self-pollinated crops.

What I would argue is that even though the new administration will probably put together a proposal to improve upon the existing legislation, we are not counting on that or we are not today anticipating a radical change in that situation. Having said that, what we do recognize is that patented technologies like HB4 and biotech events create the opportunity to shift away from seed legislation into patent law, where some of the gray areas that exist in the seed law don't exist. For instance, farmer Safe Seed. It's not contemplated under patent law. And that is something that other companies have played around, for instance, in the case of Monsanto, now Bayer, in structuring a point of delivery detection system that help them enforce IP right maybe on what the seed legislation currently allows for.

So that is the system that's in place, is an expensive system. We could use that to detect infringement of IP rights in HB4. Having said all of these, our business model is one where we are operating initially under an identity preserve scheme. So farmers that have access to the technology and not purchasing seed and acquiring rights to the underlying genetics and traits, but they're operating a service providers to the company under the HB4 program. And an important element of that is the digital platform component that we have announced in this call so that we can minimize opportunities for IP infringement and have all fields monitor through satellite systems. That will require us to structure take-off agreements with processors, which is something we're doing as we speak. We will be announcing once we have volumes that will not revert to seed.

So as of today, everything we produce needs to go into seed inventories. Eventually, once offloading becomes necessity, we should have this take-off agreements in place to keep on operating under this identity preserve system, and a big portion of that has to do with IP preservation, intellectual property preservation. I don't know if that was clear. If not, I'll try the answer again.

No, that was clear, Federico. I also wanted -- I wanted to ask you if you had conducted any field trials in the U.S. with your soybean varieties, what regions are they competitive? What conditions? And is the EcoSoy product in the regulatory queue in the U.S.?

Yes. So we have been testing soybean materials in the U.S. for quite a few years now under the JV agreement we have in place with -- under the Verdeca name, and that information has been used for the selection of the final events. We have already achieved USDA and FDA clearance so we could launch any time in the U.S. HB4 materials. And what's sort of keeping us away as we speak from the U.S. market is our ability to introgress technology to the right germplasm for the areas where we believe the technology to be the most beneficial.

Now that is probably not the Midwest, where we have done some trialing. We believe the technology to be of greater value in the U.S. South and areas that are more drought-prone and not well irrigated or with enough water from rainfall during the crop season.

So we think there's a big opportunity in the southern part of the U.S. soybean region and in some areas of the north where water is quite limited.

Understood. And just 1 more for you. I was curious if you'd ever conducted any trials or research with your nitrogen-fixing bacteria in any of the green crops, particularly corn.

No. We would love our bacteria to work in cereals. That is something we keep on asking our R&D team, but become -- it's kind of the holy grail of microbial research. So we are actively looking at new signs that is emerging on that front. If you know anything, let us know. But that would be terrific. What we have today won't help corn.

(Operator Instructions)

Your next question comes from the line of Sally Yanchus with Brookline Capital.

A couple of questions. First, I just want to be clear, the revenue growth this quarter, you said it was slower-than-expected due to a slow recovery in the seed packs due to the economic concerns and conditions. Do you expect to see some of that recovery made up in the third and fourth quarters, the rest of this year?

Sally, this is Enrique. Thanks for joining the call. Great to have you. To answer to your question, no, unfortunately not. When we say was lower than expected, I mean, there was a Q1 delayed sales in seed treatment packs following some broad conditions in the first window to plant soybeans in Argentina. We expected that to fully recover in Q2.

We had a great comeback. The commercial teams did a great job that was not enough to fully recover what we believe was going to be the full potential of seed treatment packs in Argentina. I mean, we have been able to grow compared to last year. Probably, we were very aggressive on what we thought we could do. The uncertain scenario in Argentina prevented us from accomplishing what we wanted. But no, I mean, the planting season is done. And so Q3 is a low revenue quarter. And Q4 is a winter crops quarter so that's a new planting season and mainly exports to the Northern hemisphere.

Okay. A question on this new digital farming platform that you were talking about, what are the costs associated with that? And how exactly do you, I mean, do you receive revenues from the farmers? How is that going to be accounted for and viewed?

That's a great question, Sally. So what we are doing today is incorporating this solution as a cost of goods. So it's not something that we plan on charging HB4 participants or farmers that are doing production for us. This is something that we have to have better data on fields so that we can fine-tune the technology, understand performance under different weather conditions and environments and also monitor what's happening to the crops and providing traceability for the underlying seeds so that we minimize opportunity for any of these to go into a parallel channel and protect our intellectual property.

So in the agreement that we have with Okaratech, we're paying a fixed rate for all the hectares under the program. After a certain number of hectares, we might start paying a variable rate that will be incorporated in our cost of goods. And we have the possibility of becoming owners of this particular company, if things progress the way we anticipate and this becomes a key strategic element of our value proposition.

Okay. So you're the only one who sees the information coming from the fields?

We are seeing the aggregated information of all fields. The farmers can see the information from their own farms, and they can also compare with the county data of other farms that are identified by the satellites but in which larger practices may have been -- are for sure different from what they are doing with the HB4 technologies in the farm. And that can provide for a compare and contrast opportunity that will further help us validate the HB4 value proposition.

There are no further questions at this time. I now turn the call back to Mr. Federico Trucco for closing remarks.

Thank you very much for joining us today. We appreciate your interest in our company. We look forward to meeting more of you over the coming months and providing financial and business updates when they become available and in the next quarter. In the meantime, the team remains available to answer any questions that you may have.

Thank you again, and enjoy the rest of your day.

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