S&W Seed Co (SANW) 2013 Q4 法說會逐字稿

Good afternoon, and welcome to the S&W Seed Company fourth quarter of fiscal-year 2013 results conference call. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Mr. Robert Blum of Lytham Partners. Please go ahead, sir.

Thank you, Denise, and thank you for joining us to review the financial results of S&W Seed Company for the fourth quarter and fiscal-year 2013, which ended June 30, 2013.

As the conference call operator indicated, my name is Robert Blum. I am with Lytham Partners. We are the investor relations consulting firm for S&W.

With us on the call representing the Company today are Mark Grewal, President and Chief Executive Officer; Matthew Szot, Chief Financial Officer; Mark Harvey, Vice Chairman of the Board of Directors and formerly a director of Seed Genetics International; and Dennis Jury, Chief Operating Officer of S&W Seed Company and also a former director of Seed Genetics International.

At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today's call does not have a full text copy of the release, you can retrieve it off numerous financial websites.

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

Forward-looking statements describe future expectations, plans, results, or strategies, and are generally preceded by words such as may, future, plan or planned, will or should, expected, anticipates, draft, eventually, or projected. Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events, or results to differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those projected in the forward-looking statements as result of various factors and other risks identified in the Company's 10-K for the fiscal year ended June 30, 2012, and other filings made by the Company with the Securities and Exchange Commission.

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

Thank you, Robert, and good afternoon to all of you. As always, we thank you for taking the time to participate on today's call and we appreciate your continued interest in S&W. Just really a quick mention, Courtney Grewal, happy birthday. It's her 18th birthday, very proud of her.

As I mentioned in the press release, fiscal 2013 was an incredibly transformative year for S&W that allows us to capitalize on the emerging dynamics of the alfalfa seed industry like never before. We completed two key acquisitions -- Seed Genetics International, or SGI, based in Adelaide, Australia, and Imperial Valley Seeds, or IVS, based in the Imperial Valley of California. These two acquisitions position us to be the world's largest supplier of non-dormant alfalfa seeds.

Most importantly, these acquisitions provide us with a number of very critical strategic advantages that we previously did not have access to, including access to large, established, and seasoned alfalfa seed grower bases; a geographically diversified and year-round production cycle through Australian-based production and expanded sales channels that extends our reach and strength into several key markets, including Asia; the ability to further isolate areas for non-biotech and biotech seed production; access to a breeding program that brings some of the best minds in the world together to develop products capable of expanding our addressable market opportunities; and importantly, has brought together a group of seedsmen with years of alfalfa seed experience and the drive to take the advantage of a changing alfalfa seed industry to the next level.

All of these advantages allow us the opportunity to bring growth and efficiencies to all aspects of our operations, as well as provide a degree of risk mitigation.

I will dive into each of these opportunities in more detail momentarily; however, at this time, I would like to turn the call over to Mark Harvey. With this being the first completed quarter with SGI consolidated with S&W, I thought it would be valuable to have both Mark Harvey and Dennis Jury available to provide insights into the Australian alfalfa seed market and their overview of the alfalfa seed industry in general.

As many of you know, Mark was one of our four managing partners of Seed Genetics International and is now Vice Chairman of the Board of S&W. Mark has worked in the alfalfa seed industry for more than 30 years and is one of the real innovative thinkers in this space. I couldn't be more pleased to be working directly with Mark to help take S&W to the next level of its development. And with that said, let me turn the call over to Mark Harvey. Mark?

Thank you, Mark. Good afternoon, ladies and gentlemen. I am pleased to be teamed up with Mark Grewal and the tremendous team here at S&W Seed Company. When SGI team first contemplated the opportunity that a combined S&W and SGI could create, it was very easy to see the many benefits that working together would bring.

SGI has developed a very strong base of dedicated alfalfa seed growers across the key seed production regions of the country in southern Australia. Our average contract with our growers is approximately seven to 10 years for the field [buyers] versus about approximately three to five years in California.

We have approximately 22,000 acres of irrigated land under long-term SGI contracts and another 12,000 acres of non-irrigated land that is also contracted.

Overall, SGI currently has contracts with approximately 60% of the non-dormant alfalfa seed growers in Australia. While SGI has developed very strong varieties, the S&W varieties are well known throughout the world of leading varieties that are most coveted by alfalfa hay farmers.

The ability over time to expand the production capabilities of the leading S&W varieties through Australian -- through the Australian-based production system is a unique opportunity that benefits our grower base, the Company, and farmers of the world.

The non-dormant alfalfa seed industry is truly evolving. As populations in the countries that are served by non-dormant varieties continues to increase, and as their desire to have a Westernized diet based on high-protein foods, such as milk and beef, continues to expand, the need for alfalfa continues to grow, to supply the feed for these animals that produce those foods.

What becomes equally important across the world right now, and this really applies to all aspects of agriculture, is the ability to produce more from less land. Farmers are going to have to produce more food from marginal and saline soils. Therefore, the ability to increase yield per farmed acre is paramount. This is where a combined S&W and SGI has a real opportunity to play a major role in the future of the alfalfa seed and the fodder industry.

We have a great opportunity ahead of us, and I look forward to being part of it as a member of the Board of Directors and assisting the S&W team.

Thank you, Mark. I couldn't be more pleased to have Mark Harvey on the Board. His presence is instrumental in our efforts to drive increased value for S&W Seed Company and our shareholders going forward.

Both of us will be on the road next week. In fact, we are leaving -- Robert Blum and Mark and I are leaving this afternoon to New York and Chicago, so we look forward to speaking to those people in those areas this coming week to discuss this historic moment for us as we move forward.

As I mentioned at the onset, we have the capability to take advantage of a number of opportunities available to us in the alfalfa seed industry. The global food supply is one of the greatest challenges facing the world today. Driving these challenges is the world population's projected increase from 7 billion people today to more than 9 billion people by 2050. With 95% of that growth expected to come from developing countries, it is estimated that we will need to increase food production by between 60% and 100% by 2050 to meet a roughly 30% increase in the overall population.

All agricultural production starts with the seed, and S&W is uniquely positioned due to the hard work and dedication over the last 30 years of having developed the highest yielding, most salt tolerant, non-dormant alfalfa seed varieties in the world. With our access to land in the Imperial Valley, as well as southern Australia, we look forward to being a key contributor in addressing the challenges that face us today and into the future.

Now let me turn the call over to Matt Szot, our Chief Financial Officer, for a review of the quarter and year, and then I will ask Dennis Jury to provide some additional insights into the Australian marketplace, and finally, I will provide an overview on a few of our key strategic initiatives. Matt?

Thanks, Mark. Since everyone should have access to the statement of operations, balance sheet, and cash flow in the press release, I'm going to provide some additional details in a few areas.

For the fourth quarter, revenues totaled a record $12.7 million, compared to $800,000 a year ago. Of the $12.7 million in revenues, approximately $10.4 million came from the Company's Australian-based operations and represented approximately 82% of total fourth-quarter revenues. The Company's IVS operations contributed $1.9 million, with the remainder attributable to S&W varieties.

We made strong progress in our continued initiative to improve gross margins. Total gross margins in the fourth quarter were 20.4%, excluding stevia. This compared favorably to the first nine months of the fiscal year where gross margins, excluding stevia, were 13.5%. We expect to see continued improvements in gross margins by selling region in fiscal-year 2014.

As we look to the 2014 year, gross margins from our core S&W varieties and our proprietary SGI varieties are expected to be in the low 20% range. Our gross margins from our IVS-related varieties will likely be in the low teens.

Consolidated gross margins will likely vary quarter to quarter, based on revenue mix; however, we expect to see continued improvement compared to last year. Likewise, we expect to see reductions in the SG&A line item as a percentage of revenue as we continue to integrate all businesses. Our go-forward SG&A quarterly spend will be closer to $1.7 million to $1.8 million range per quarter.

From an EBITDA perspective, we saw improvements from 2012 to 2013. Full-year adjusted EBITDA totaled $1.2 million, an improvement of 14% from the prior year, and adjusted EBITDA for Q4 improved $1.5 million from Q4 of last year and a $1.4 million improvement from Q3 of the current year.

As Mark Grewal mentioned, we have completed the harvest of our fields in Imperial Valley and San Joaquin Valley, but are still in the process of cleaning the seed. We are maintaining our alfalfa seed production and sourcing estimates of 18 million to 19 million pounds for the calendar 2013 harvest cycle, which is up significantly from the prior-year production of 2.8 million pounds.

Production of our proprietary SGI varieties continued to come in stronger than expected, offsetting lower production contribution from S&W varieties. Of the 18 million to 19 million pounds, approximately 70% to 75% will be proprietary varieties from SGI and S&W and 25% to 30% will be public and noncertified varieties that have historically been a portion of the IVS business model.

Our balance sheet continues to be strong. We ended the quarter with $11.8 million in cash and $21.5 million in net working capital. Overall, we had total assets in excess of $85 million, including $26 million in inventories.

The only long-term debt on our balance sheet at the end of June was $5.4 million, which pertains to a long-term mortgage in the farmland we acquired in July of 2012 and promissory notes to the selling shareholders of IVS and SGI.

We are pleased with the progress that has been made over the last quarter, and we're optimistic that we will be able to continue to drive topline and bottom-line growth.

I will now turn the call back over to Mark Grewal.

Thank you, Matt.

Now I will turn the call over to Dennis Jury. Dennis is S&W's Chief Operating Officer and General Manager of our Australian operations. I would like Dennis to provide an overview of the Australian market and the key drivers going forward. Dennis?

Thanks, Mark. I'd like to echo Mark Harvey's comments from earlier. We're excited about the opportunities that a combined S&W and SGI bring to the marketplace and look forward to much success in the coming years.

The Australian market has historically been defined by quality alfalfa seed being produced in an area that is a low cost of production relative to California. As a result, the seed grain in Australia has had a price point that is at a discount to Californian production.

However, due to the quality of seed being produced, the changes that are taking place within the alfalfa seed industry, and our ability to convert over time portions of our grower base to the elite S&W varieties, the discounting that takes place should all but disappear.

This is where we see tremendous opportunities for a combined S&W and SGI going forward, as both Mark Grewal and Mark Harvey have mentioned.

One of the key advantages of Australian-based production is that our harvest time occurs in March and April. This allows us to be first to market in the Middle East and other growing regions that are looking to plant their fields over the summer. Additionally, we're ideally located to be a key gateway to the Asian markets, including China and India.

According to the USDA, the Middle East, with a relatively fast-growing population, and Asia, with high income growth rates, are both projected to be strong growing markets for beef and dairy consumption. Together, these two regions are expected to account for approximately 22% of the increase in world beef trade through to 2021. We're making strong inroads into these markets and believe that these two areas will be key drivers of growth for S&W in the coming years.

By working together, the strengths of S&W and SGI can be magnified. In Australia, we have a large and established group of tremendous growers, early-mover advantage due to our harvest schedule, and a geographic advantage to some of the key growth areas over the next several years.

We look forward to the future with great excitement. With that said, I would like to turn the call back over to Mark Grewal.

Thank you, Dennis.

I want to touch on a few strategic initiatives that we are working diligently on to drive value for our shareholders going forward. For 33 years, S&W has possessed some of the world's leading non-dormant alfalfa seed genetics, and as I mentioned earlier, what we didn't have was the production capabilities to expand our seed.

In 2012, we produced 2.8 million pounds of seed. This year, due to the acquisition of SGI and IVS, we expect to have access to approximately 18 million to 20 million -- excuse me, 18 million to 19 million pounds of seed. Getting excited there.

Of this 18 million to 19 million pounds, approximately 15% is S&W varieties. Our plan is to continue to convert production into more of our elite, proprietary varieties. While this process will take a few years of field rotations to occur, there are near-term opportunities we are working on to provide superior products to the marketplace.

We are currently working on unique optimization of our [group] seed stock to leverage lower cost of production from Australia with higher pricing of S&W's elite proprietary varieties. This optimization should allow for continuous improvements in our gross margins, both in the near term, as well as the long term.

One key to remember in any agricultural company is the importance to be geographically diversified for any number of reasons, whether it is for weather, political, resource availability, or other factors. The ability to expand into the Imperial Valley and Australia provides us with reliability that other alfalfa seed companies simply don't have, and importantly provides a reduction in risk.

It is important to point out that just within the last few weeks, there have been storms that have hit the Imperial Valley. According to reports, it is believed that approximately 20% of the expected harvest at Imperial Valley has suffered damage. Also, there have been infestations of [lydis] and aphid that affect both valleys. S&W's ability to have strong inventories already in the bank from Australia is putting us in a very strong strategic position.

Another benefit of diversification is the capability to better isolate biotech and non-biotech growing regions. As many of you are aware, the counties of the San Joaquin Valley have allowed for the growing of biotech or GMO alfalfa seed, and conversely, Imperial County, located in the far south of California, as well as southern Australia, have not allowed the production of biotech alfalfa seed.

With our licensing agreements in place with Monsanto and Forage Genetics to develop two of our leading S&W varieties with Roundup Ready, our ability to have access to multiple growing regions provides us with unique advantages over the competition.

Our ability to supply the certain countries of the world that permit GMO alfalfa with S&W's leading non-dormant self-[taught] varieties may provide us with an opportunity to capture an ever-increasing share of the overall market opportunity.

One of the keys to our growth going forward is our ability to expand our addressable market beyond the traditional non-dormant alfalfa seed market. We've tested our licensing agreements with Monsanto and SGI to develop biotech non-dormant varieties, but we're also making strong roads into the dormant marketplace as well. We recently commenced our first seed production of dormant varieties in Manitoba, Canada. And the dormant alfalfa seed market is roughly equal in size of that of the non-dormant market, so while we are very early in the process, we are beginning to make progress.

Also, we are making strides in developing the world's first alfalfa seed variety bred specifically for the tropical growing regions. Thank you, SGI. Although alfalfa has for centuries been a staple of forage production in both warm and cold geographical areas that are considered nontropical, tropical areas have historically not had local production of alfalfa due to the traits and limitations of the currently available varieties.

With the creation of large dairies in tropical regions, such as the one recently built in Vietnam, where they have to ship alfalfa from other areas, we see this as a key opportunity for S&W going forward to expand our addressable market.

It is important to note that as we look to the fiscal-year 2014, we expect the distribution of revenues to look quite different than what they were during the fiscal-year 2013. We continue to see an environment of rising seed pricing, and due to the depth and breadth of our worldwide operations, which includes year-round production, we are no longer in a position of having to sell inventory -- selling through our inventory levels early in the year. This should have a significant benefit to S&W.

And looking forward, we expect to see our revenues to be much more evenly distributed in fiscal-year 2014 during the first, second, and fourth quarters. The third quarter will continue to be a contributor of revenues, but not the extent that we expect from the other quarters to be.

Our ability to better time order shipments, especially in the environment of pricing that we currently see, should have a positive effect on our gross margins.

Fiscal 2013 was a strong building year for S&W. We see fiscal 2014 and beyond as the opportunity to take advantage of the many of our key beneficial drivers in the alfalfa seed market like never before.

We remain diligent in executing on our strategic initiatives, which include successfully integrating and maximizing the S&W, IVS, and SGI businesses to optimize the many synergies that exist between us, resulting in improved margins. This allows us to leverage the operations for both organizations and create diversification, increasing our reliability and reducing risk.

We will continue to ramp up alfalfa seed production, whether it be domestically or internationally, to meet the strong demands that are in the marketplace. We will continue to invest in research and development to keep S&W as a leader providing high-quality alfalfa seed varieties to the non-dormant market.

We also want to look to expand addressable market opportunities by introducing non-dormant biotech alfalfa seed varieties, dormant alfalfa seed varieties, as well as new market areas, such as our tropical alfalfa seed varieties. And finally, we will continue to stay focused on pursuing other opportunities in the agricultural market that will fit into our expanded platform.

We are very confident in our abilities to continue executing upon these initiatives with the goal of positioning S&W to be a leader in the alfalfa seed industry for years to come. And as always, we appreciate your support and remain dedicated to continuing to repaying your support many times over.

With that said, let's open up the call for your questions. Operator?

(Operator Instructions). Brett Wong, Piper Jaffray.

First, was hoping that you could talk to the seed pricing in the quarter and pricing expectations through the remainder of the year. And as you do that, if possible, can you talk about S&W proprietary variety pricing versus public variety pricing?

You want to start, Dennis, or do you want me to go ahead? Okay. And then, Matt, if you need to chime in, or Harvey, just chime in.

The elite S&W proprietary varieties are selling anywhere currently at the [430] to [450] plus range, Brett. So we see really strong pricing for those, and one of the reasons that pricing continues remain strong is that we just don't have enough seed. So we will continue to ramp that up.

I'm going to let Harvey tell you about the SGI Australian base, but the real goal in this, Brett, is to optimize our projected capabilities in Australia with that and create branding that's going to be in specific countries, and we are going through the registration process of those new developed varieties that are going to be an optimization of the synergies between the two areas. So you want to tell them about your base pricing in Australia?

The base -- thanks, Matt. It is Dennis Jury here. The base price that we typically sell Australian-produced seed for is and around the [230] -- sorry, Mark can --

[320].

[320], yes. Sorry, guys, we're still used to dollars per kilogram, not per pound. So in the low threes per pound, and we get it grown for around the [220] mark, which, as we talked about earlier, has been an issue. Because of the lower cost of production in Australia, the Australian profits tend to go out at much lower levels.

And what we see an opportunity going forward is combining the genetics of S&W and the higher pricing that can bring with a lower cost of production in Australia through straight production and, also, through blending between the two areas.

Did we miss anything, Brett?

No, that was great. Thanks for the color. I guess one small follow-up on that, where is CUF pricing at right now?

Over 4. The CUF market, quite possibly, and this is just my personal view, is CUF with the storms, because most of it is actually produced down in Imperial, they really got hit. All of your public and your VNS, what we will call VNS, and your non-cert seed, was some of the last that was going to be harvested, and so there won't be as much supply available and that's going to put even more pressure on it.

So when you see a high public pricing, that bodes well for proprietary, because proprietary lead varieties. Even some of the super varieties now coming out from SGI are going to be in demand at higher pricing levels.

Okay, great, thanks, Mark. And can you give us any color on volume expectations for SGI, IVS, S&W proprietary for the first and second fiscal quarter?

I can't -- okay, you've got to recognize that we have had a late harvest, so a lot of seed that we would have personally projected coming in the first quarter, quite frankly, missed it.

We're only about 40% cleaned at the mill, Brett, so we've got to look and see where that is going to lead us, but also, once the storms hit, they're going to put a clampdown on a pipeline in California that virtually had no seed in it to begin with. So we're really going to have to look at our group stock capabilities, and thank goodness that we have SGI in the fold because their production puts us in a very unique position to brand and optimize some specific products.

And so, we're going through the process of actually registrating variety names that are going to go in different countries, and that takes a few months. So we will have to look at the timing of those, and it may be better at some point to talk to our CFO about what he possibly could decide on what that -- on what happens there.

Okay. Are you guys going to release a statement when these registrations are approved?

We most certainly could, and I don't think we would have any problems going through some of those names. The marketing department has done a really good job creating some really unique branding that some of our customers are really looking forward to having.

I got to tell you this has been -- this is still a tremendous year, Brett, because SGI -- Mark Harvey might mention, if you don't mind, just what type of sales year you have had going into the Middle East.

There's been about 3,200 tons, which is (multiple speakers) once again, trying to take metric to pounds (multiple speakers) over 4 million pounds, which is probably the largest sales that Seed Genetics have had, historically.

So we are looking for a very strong year, and that's why we continue to look at increasing production. So I hope that puts you into what we think about this industry.

Yes, that helps a lot, guys. Thanks a lot and I will hop back in line.

[Andrew O'Connor], [BMO Harris Investments].

Good afternoon. Congratulations on your progress, guys. (multiple speakers). Wanted to know -- Matt, I thought I heard you suggest gross margins looking ahead, and I wanted to make sure I got that right. Low 20s for hybrid or proprietary varieties and then low teens for nonproprietary seed? Is that right?

That's correct. And then, Andy, I don't know if you caught it, but I did try to clarify that of that 18 million to 19 million pounds of production we are sourcing, about 70% of that is going to be proprietary varieties in that low 20% sort of margin profile range, and that remaining 25% to 30% will be the more public variety or noncertified range.

Okay. And then, in terms of the gross margin improvement you are anticipating, would that come more from the topline revenue growth or from the -- or from cost reductions? Is it possible to say how much from each side? Thanks again.

We're seeing opportunities for margin expansion from all regions or aspects of our business.

Okay, and the gross margin improvement, is this more from revenue growth or from cost reductions?

Let me -- if I can just chime in a second for Mr. Szot, Andy, as we shift more into southern Australia, we are definitely going to have a very strategic cost advantage over others in production areas.

That's going to drive our bottom-line costs down, and at the same time, we believe with the optimization program on creating these brandings with the elite varieties, we will also drive the high end, the ASP up also.

So we really are getting excited about where we think we can go with the margin profile, which we will go to where you want to see, the bottom-line numbers.

Thanks very much.

Philip Shen, ROTH Capital.

This is Matt on for Phil. Thanks for taking our questions. Just a quick one on the dormant side of things here. Given the recent announcement you guys had in July that you had planned your first dormant alfalfa acreage, I have a three-part question, so I will just go through each three.

Is this acreage that was contract growers or did S&W lease the land itself? Can you provide us with an estimate for how much this product line could contribute to revenues in FY14? And then, how can we think about sales channels for this variety? Can you use your existing distributors or are you guys going to have to go out and develop some new channels for these varieties?

A lot of questions there. Which one you want to start with? First of all, the acres is contracted. It is not personal inside farmed acres, so --

Okay, great.

There is growers out there and it's contracted.

Secondly, that existing amount would not be very big, but we have already planted many trials in China, and we have the ability for immediate ramp-up and we have the seed available for that ramp-up.

One of the strategic decisions that we will have to make as a group is do we want to move into, for example, the state of Washington, as well as Canada, to enhance that ramp-up, and so we will be looking at some of those key initiatives. And then, that would actually encompass the methodology of how we are going to distribute, sell, and move into different markets, but you know us quite well and you know that we're going to be looking at ways that we can ramp this thing up pretty quick.

It is Dennis Jury here again. Some of our historic SGI clients, we only operate in the mid- to non-dormant area, and a number of those -- of our key clients have got very good linkages through into areas that would only be able to take dormant varieties, so that's something we can really look at in the future, particularly Eastern Europe and through the 'Stan countries and southern -- some of the former USSR countries, like the Ukraine, for example. So we see some real opportunities there going forward.

Great, that's helpful, guys. Thank you. And one more, if I may, on China. Can you guys just provide us an update on your efforts there? How far into trials are you guys and can you update us on the efforts to establish distribution channels in China as well?

What we are hoping -- first of all, let's go to the last part. What Dennis just stated, which was very, very exceptional, is that they are the gateway to China for us, and it's a big part of having the connection into Australia for that.

I see Australia, actually, as a very large food resource in a lot of crops that are years ahead that are going to go into China. They're going to be a very critical geographic location.

China has a lot of internal issues as far as soil issues, heavy metals, water problems, and so these other areas are going to offset that, and that's why the hay operations in California and other areas have been so dynamic and expanding because China is in there shipping -- buying hay from the States and they're shipping at all the way to China, and this is driving the price of hay upward, which is then going to correlate to seed pricing.

Now, our Vice President of Genetics and Plant Breeding later on this year, we'll try to get him to you or with a press release because he believes he will have some possible data available later in the year, but we don't have that yet. But we do have five dormant alfalfa varieties in four different sites of China ongoing. They were planted in the summer, in our summer, and we will just see what those results bring.

So far, they are looking quite promising. We are getting very excited and we will see what our partnership of SGI has been able to do right away with that, because they do have connections in there. In fact, some of the guys on this call, like Mark Harvey, have sold seed, different types of seed, into China. So we are very poised to jump on that when that becomes a reality.

Great. That's helpful, guys, and that's it for me. Thank you.

(Operator Instructions). Ian Gilson, Zacks Investment Research.

I've got a few small questions. Australia, in prior years, has been producing, I believe the number was, around 12 million to 14 million pound a year?

To put it in -- this is in overall production, Ian, or just the SGI company?

The Australian operations.

The Australian operation, yes. No, that seems a little bit high. We put it into tonnes, about 3 -- in previous years, about 3,800 to 4,000 tonnes, which is -- 10 million pounds, something like that. (multiple speakers)

All right, now am I now producing considerably more than that?

That's correct. (multiple speakers)

What is the reason? And if it's weather related, what's the probability of it going back down from the high levels to where you were previously?

If you are talking about what the total Australian production is or SGI, the total production of the whole of Australia has been typically in the 10,000 to 11,000 metric tonnes on an annual basis.

SGI's share of that production has increased every year since we started off around 10 years ago, so the main gain for us has been through taking over a larger portion of the production area for lucent seed or alfalfa seed in Australia.

So if you think about market-share growth rather than -- obviously, there's climate variability from year to year, but the underlying trend is that we are taking a larger share of the surface area and that's what driving our larger tonnage.

But if I remember correctly, when the merger occurred, the estimated production from SGI was significantly lower than what you actually produced.

Yes, that's a seasonal -- but the harvest was better than we anticipated because of seasonal factors.

Okay, why was the harvest better? And was the weather better than average for growing conditions? I am trying to assess the risk of the availability of seed being reduced in Australia as it has been in parts of California over the past couple of years.

The main defense against that will be to grow our acres even further, to answer that question, because there is, obviously, variability of seasonal factors.

There is also a large exposure in Australia, not -- less for us, to non-irrigated land, which is probably the main driver of the variability, as our proportion of production on state irrigated land is much greater proportionately than any other presence in Australia. So that tends to take out some of that variability.

Okay, on the total pounds of seed sold in the fourth quarter? Do you have a number?

Ian, this is Matt here. It was approximately 3.9 million pounds. Are you referring to SGI or just to the --

Total number of pounds sold that generated 12 point whatever it was -- million dollars.

3.9 million pounds.

Okay, how many acres did we have in production at the end of the quarter?

Mark, do you want to talk about (multiple speakers)

You've heard -- I will let Mark Harvey address the acres of SGI from the last year. We're in the 10,000 -- we are in the 10,000-acre range in California, total, of which 4,500 or so are in the San Joaquin Valley and the rest are acquired through contracting and sourcing.

Does that include the acres that were used for stevia?

No, no. Stevia acreage is totally separate. And we took out almost all the acres in the stevia, Ian, and went to Total Research.

Ian, there was 22,000 acres of irrigated land on the long-term contracts at the end of June and 12,000 acres of non-irrigated land at the end of June for Seed Genetics.

Okay, okay. As we develop the dormant varieties, are they going to be varieties that you have now or varieties that would be drought- and salt-resistant?

The current start-up would be varieties that we have in place now, but our breeding program will continue in all areas to improve varietal development, and that's one of the number one key things of joining the Australian operations. They have a tremendous breeding program, coupled with our 30-year breeding program, and they are working together, and we're adding sites in other parts of the world, too, Ian.

So we're going to continually strive to enhance and improve our yielding, our salt tolerant, our heat tolerant, tropical, and different traits needed from insects, nematodes, and these types of things into our varieties constantly.

Okay, now a final question is to the -- the revenue we generated in the fourth quarter was primarily from Australia, and not from California, and therefore the gross margin number is an Australian gross margin number and not a California number. How do you see the gross margins for the California production as we work our way through 2014 fiscal year?

Ian, as I mentioned earlier, we believe the proprietary S&W varieties will have a low 20s margin profile and your public and noncertified varieties will be in the low teens.

So that is potentially a 20% improvement in gross margins -- I said percent, not percentage points. A 20% improvement in gross margins out of California?

I'm not going to quantify it, but we are certainly seeing gross margin improvement, and we continue to expect to see those improvements throughout the remainder of this fiscal year that we are in now.

Good point. Thank you very much.

Keith Gil, JHS Capital.

Congratulations, and my question is for Mark Harvey. I just want a little clarity on the 22,000 acres in Australia under irrigation, I would assume that's fully planted?

That's fully planted, and rotating through various stages.

Yes, but Keith, an important -- the important thing to bear in mind is that not all planted acres are necessarily harvested in every year. Because our growers have contracts for seven to 10 years, there are some years when they might, for various reasons, have a non-harvest year, and so it's looking at yields per acre, simply dividing the number of pounds that we produce by the number of acres under production is not going to give you a meaningful figure that can compare from year to year.

Fair enough. And how costly would it be to activate or start farming on the 12,000 non-irrigated?

That land is already farmed, Keith, with alfalfa, but it relies on natural rainfall, and the area has about a natural rainfall of 16 to 18 inches of rain a year.

So if it is a poorish rainfall year, the farmer may decide to graze it with animals, and if it's a good rainfall year, particularly in the summer, he might decide to prepare it for seed crop. (multiple speakers)

Thank you. Thank you, and congratulations again. I appreciate that.

Keith, thank you very much. The last thing I want to just say is we're trying to get away from all the acres and the pounds and all that, and we're trying to just give you -- the one thing we are trying to provide with insight is an estimated pounds per year for the whole group's seed stock. So we hope that that way, it simplifies our equation, simplifies yours, gives you the ability to do whatever modeling you want.

So what Matt Szot said is his numbers with all the team is showing an 18 million to 19 million pound forward going right now, and then we will see where that takes us. But we would prefer to just stop, sit there, and talk about how many acres are in the Valley here, how many acres are here, how many acres are there. Because if that -- like Mr. Jury stated, sometimes some people are going into hay or some other type of production and there not necessarily be a seed, but we're going to continue to enhance and expand our seed operation.

The future is bright, baby. You better wear shades.

[Rich Hens], Private Investor.

Just a quick question. On the -- down in Imperial Valley, am I correct in assuming that is going to be eventually replanted to the S&W premium brands?

Yes, Rich. Now we do have some very good branding that was purchased with the acquisition of IVC. It's La Jolla, Catalina, Sultana, these type of varieties, and some of those, quite frankly, were actually bred through the S&W breeding team.

So we own those now, so those are going to be bred. And also, you are correct, remember we just bought this thing last October and we were not able to change the rotation that the farmer has.

Also, remember when we go to certified elite proprietary varieties, they have to be certified and you can't just put a variety in another seed field; you have to take that field out, go to a different crop, rotate it, and then go through the California Crop Improvement Association's process to then get that new variety registered. Sometimes you only have to wait a year, because it may be the same dormancy, but there are processes and regulations you have to follow.

So this is a slow transition, but we hope that in time we will continue to ramp that up. That is our goal. And also, we are going to ramp it up in Australia.

So how long until the 10% margins down in Imperial Valley come up to, say, I don't know, just pick a number, 15%, let's say?

Okay, I will let Matt answer that, but we're not shooting for any 10% margins, really, per se. We are going to optimize, and that creates the registration process of bringing in the Australian elite proprietary varieties and blending them in with our other mainly IVS model. So we're going to continue to actually improve their margins, also.

Got you, okay. All right, thank you.

Ladies and gentlemen, that will conclude our question-and-answer session. I would like to turn the call back to management for any closing remarks.

Thank you, Denise. Again, we would like to thank everyone for participating on today's call. I want to give special thanks to Dennis Jury and Mark Harvey for joining us on this, but I think it's a momentous call personally, for me.

We are turning the corner. This is a very critical point in our growth stage. Like I stated earlier, we will be in New York this week presenting at the Craig-Hallum conference with Lytham Partners, and we may also have some time available to get together while we are there with anybody that wants to talk or has another question they weren't able to ask today. Just contact Robert Blum, and he will coordinate it.

We look forward to talking with you again at the conclusion of the current quarter and we hope you have a great evening. See you later.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.