S&W Seed Co (SANW) 2014 Q1 法說會逐字稿

Good afternoon and welcome to the S&W Seed Company first quarter of fiscal year 2014 financial results conference call. (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 first quarter of fiscal year 2014, which ended September 30, 2013.

With us on the call representing the Company today are Mr. Mark Grewal, President and Chief Executive Officer, and Mr. Matthew Szot, Chief Financial Officer.

At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. Anyone participating on today's call who does not have a full-text copy of the release, you can retrieve it from the Company's website at swseedco.com or numerous financial websites.

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

Forward-looking statements describe future expectations, plans, results, or strategies and are generally preceded by words such as may, future, plan or planned, will or should, expected, anticipates, draft, eventually, or projected. Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events or results to differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those projected in the forward-looking statements as a result of various factors and other risks identified in the Company's 10-K for the fiscal year ended June 30, 2013 and other filings made by the Company with the Securities and Exchange Commission.

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

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.

Over the past two years, our goal at S&W Seed Company has been to build an organization that can become the premiere alfalfa seed company in the world and to leverage off the agricultural platform we are creating. In order to become the premiere alfalfa seed company, we need to accomplish a few goals.

First, we need to deleverage the core assets of the Company, which included the successful breeding of the most salt-tolerant non-dormant alfalfa seed genetics in the world by expanding our production capabilities. Currently we needed to diversify our production from a geographical standpoint for a number reasons, including weather, trade isolation, political, to name a few.

Our acquisitions of IVS and SGI helped us move toward these goals. They brought with them access to large contracted acres and seed-sourcing capabilities. Additionally, they add large networks of dealers and distributors across the globe and, in the case of SGI, a world-class team of breeders as well.

As we have discussed, the goal continues to be maximizing or the term we like to use is optimizing the assets that we have, which now include access to increase levels of contracted acres to drive increased margins and profitability. Some of this will occur over the long term such as the conversion of protection fields to the S&W elite varieties, and some of this will occur in the near term such as with the blending or optimization of certain varieties. Our goal is simple -- obtain the greatest return we can on the assets of the organization.

Next, we need to be looking to the future to expand our product offerings. We have signed agreements with Monsanto and FGI, Forage Genetics International, to develop biotech or GMO-based non-dormant alfalfa seed varieties based on a couple of our leading salt-tolerant varieties. While not all regions of the world allow for the use of GMO seed, we want to make sure we can meet the needs of those customers that want and demand our varieties with Roundup Ready traits.

We also need to expand our product offering into the dormant alfalfa seed market or areas of the world where it snows and the seed goes dormant over the winter. This is a huge marketplace, and with the acquisition of certain high quality germplasm, we have positioned ourselves to enter this space. We're still early in the process, but believe that there is room to expand this side of the business in the future. Also, our breeders in Australia have done an excellent job of developing a variety for the tropics that allow for alfalfa to grow in certain regions of the world that previously have been unable to do so. These regions, such as Vietnam, where the world-largest dairy has recently been built, are currently shipping in hay from other countries to feed their animals. We believe the ability to meet the needs of these customers can be a significant opportunity for S&W going forward.

In my opinion, we have made a ton of progress in the last year and a half. we have a number of great assets at the disposal of S&W right now. We have world-class varieties; some of the best breeders in the business; unparalleled access to diversify production that ranges from California to Australia; a wide-ranging network of dealers and distributors and a team that is committed to making it all come together. We're putting the pieces in place, and while there are always ebbs and flows to any plan, we believe we are positioning the Company for great success in the future.

Now let me turn the call over to Matt Szot, our Chief Financial Officer, for a review of the quarter, and I will go into more details on the near-term outlook for the industry and answer any questions you may have. Matt?

Thanks, Mark. Since everyone should have access to the summary financials and the press release, let me provide some additional details in a few areas. For the first quarter, revenues totaled $12.4 million compared to $6.7 million a year ago. Revenue is broken down as follows -- IVS contributed $4.8 million in revenues or 39% of total revenues; SGI contributed $4.6 million or 37% of total revenues; and SNW varieties contributed $3 million or 24% of overall revenues.

Please recall that IVS was acquired on October 1, 2012, and SGI was acquired on April 1, 2013 and, therefore, not included in last year's first quarter. As discussed in our press release, S&W proprietary revenues decreased primarily as a result of not having shipments ready for Saudi Arabia. Overall, revenues into Saudi Arabia represented 34% of total revenues for the quarter versus 72% in the prior year.

Total gross profit margins in the first quarter were 18.6%. This compared favorably to the prior year where gross margins were 16% and compared to the 20.4% in the sequential fourth quarter.

The change in gross profit margins from the fourth quarter was simply due to a change in revenue mix, whereby Q4 revenues consisted of 84% of proprietary varieties versus 61% proprietary in the current quarter. Overall, margins from our proprietary product lines were in the low 20% range during the quarter, while nonproprietary margins were approximately 15%.

As we look to the remainder of the fiscal year, gross margins from our proprietary varieties are expected to be in the low 20% range. Our margins from our non-proprietary varieties will likely be in the low to mid-teens. Consolidated gross margins will likely vary quarter to quarter based on revenue mix; however, as we have been communicating, we expect to see continued improvement compared to last year.

SG&A for the first quarter totaled $1.6 million compared to $750,000 for the comparable period of the prior year. The increase in SG&A versus Q1 of the prior year was primarily due to the acquisition of SGI and IVS.

In addition, noncash stock-based compensation totaled $215,000 in the current quarter versus $91,000 in the comparable period of the prior year. Stock-based comp represents a portion of options, restricted stock, and RSUs which divested during the quarter. In particular, I would like to point out that $145,000 of this expense related to RSUs granted in March 2013. These grants were valued for accounting purposes based on the stock price on the day's grant and are being amortized over the requisite service period, a 4.5-year schedule.

SG&A expenses decreased considerably from the $2.4 million, excluding acquisition costs, incurred in the most recent fourth quarter of fiscal 2013. As a percentage of revenue, SG&A expenses were 13% of revenues in the current quarter compared to 11% in Q1 and compared to 19% in the most recent fourth quarter.

As communicated on our last call, our go-forward SG&A spend is estimated to be in the $1.7 million to $1.8 million range per quarter.

From an EBITDA perspective, we saw improvements from Q1 compared to the prior year. Adjusted EBITDA totaled $695,000, an improvement of 120% from the first quarter of last year.

From an inventory perspective, we are maintaining our estimates of being able to produce and source between 18 million and 19 million pounds of seed for the calendar year 2013 harvest cycle. Of the 18 million to 19 million pounds, approximately 70% to 75% will be proprietary varieties, and 25% to 30% will be public and noncertified varieties that have historically been part of the IVS business model.

As we reported last quarter, we had production from Australia of approximately 10.6 million pounds from the spring 2013 harvest and approximately 2.7 million from our S&W proprietary varieties in the fall 2013 harvest. The remainder comes from a combination of our production and sourcing from IV Milling.

We ended the quarter with net working capital of $21 million.

I will now turn the call back over to Mark.

Thank you, Matt. It is sometimes difficult for many to understand the nuances of agriculture. I have been involved in this sector my whole life, and sometimes I take things for granted. Let me do the best to go into some details of what we currently see taking place in the alfalfa seed industry and provide you with a view of how we tend to look at our inventory and the value that it has.

As we discussed previously, our production at the Company's Australian operations came in stronger than expected, offsetting lower production contribution from California proprietary varieties.

Additionally there was severe weather that impacted the Imperial Valley region in California, estimating to have damaged more than 20% of the supply in that region. S&W was fortunate to have already had a strong harvest from Australia in the bag, as well as having completed the harvest of its internally farmed operations that are based in Imperial Valley prior to the storm's hitting. However, the weather impacted in the Imperial Valley is placing a strain on already-low global inventory levels for non-dormant alfalfa seed.

Weather can certainly have an impact on any agricultural operation, and it is one of the key reasons why we have made the decisions to become geographically diversified. As many of you saw from the article in Hay & Forage Grower, the market is currently anticipated to be very tied heading into the spring 2014 planting season. This is not just a non-dormant issue either. This ranges across the spectrum as there was weather that impacted many of the dormant varieties, as well. Overriding all of the weather issues is that the supply chain saw low inventories to begin with according to reports, which had been our belief all along.

It is interesting because when Australia came out with a good crop this year following two poor years, many seed buyers in the industry weren't sure of what direction pricing would trend. This onset of uncertainty was quick and had some level of impact on the SGI distribution channels during the first quarter. It was our belief all along that regardless of the impact of the California harvest that the supply chain was low in the near term and that pricing would continue to be strong good. As it turned out, the California harvest was weaker than expected, and it is having an added effect to this supply-and-demand equation. While we're focused on operating our business with long-term focus, there are always items that tend to dictate how you need to operate in the near-term whether it is weather issues or political issues.

At the end of the day, it is our goal to obtain the most value for our seed inventory that we have. The reason we think this is that our inventory each year is in essence set. We cannot go back and obtain more seed from Australia this year, nor can we go back and obtain more seed from California this year. We know what our inventories are for the most part, and therefore, we know what the revenue possibilities from that seed are and the variable being what price we obtain for the seed.

It is my opinion, based on over 33 years of experience and that of my management team, that we are going to see continued strength in pricing going forward. No, we will not hold seed forever, and we will continue to meet the needs of key customers on a timely basis. But we do not want to leave money on the table. As many of you are aware, alfalfa seed holds its effectiveness for many years, and therefore, the value of our inventory does not become obsolete.

So I hope you can see in any agricultural company it is very difficult to pinpoint exactly where revenues and pricing will be. There are always a number of moving targets and external factors at play. We are doing our best to deliver solid year-over-year performance while maximizing the value of the assets that we have. Again, our focus is on maximizing the value of our seed inventories.

We will do our best going forward to provide as much insight into year and quarter as we possibly can. We understand that seed companies are unique, but it is important for those on the Street to have an added level of understanding as we see it. In the past, we thought that we provided many of the guideposts to understand the business such as the pounds of seed in inventory and where we see pricing, but we realize that perhaps we need to be a bit more specific. At the same time, we hope that investors realize that there are circumstances that can change any assumptions, both positive or negative.

We currently estimate that revenues for the year will be a range between $50 million and $65 million. We come to this estimate based on our current seed inventory on hand, estimated new production and seed sourcing inventory expectations prior to the Company's fiscal year end from Australia and the IVS business; our current outlook of market demand; the ability to obtain seed pricing within our expected ranges and will largely depend on how much inventory we may or may not hold over the next fiscal year. We understand that this range is large, but our goal is to maximize our inventory, and if that means we carry over seed to the next year to obtain value, we may do so. Or if that means selling out inventory prior to the end of the year, we may do that, as well.

As we look at the second quarter, we believe that revenues will be between $11 million and $13 million and expect strength in the back half of this year. We strive to avoid timing the market with respect to pricing, but there are selected times where factors at play dictate it is the best thing to do.

Overriding all of the near-term items, one thing that I want to continue to stress to those of you on the call is that we believe we are positioning the Company to benefit from a huge macro need in the world right now, and that is the need to feed an ever-expanding population with increasing consumption habits, with less arable land at the disposal of farmers.

There will always continue to be movements up or down at any given time, but it is our strong belief that the tide will rise strongly over the long term. With a tremendous set of alfalfa seed assets and a plan in place to expand upon that in the future, we are positioning S&W to be a leader for years to come. As always, we appreciate your support, and we remain dedicated to continue repaying your support many times over.

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

(Operator Instructions). Michael Cox, Piper Jaffray.

This is Amanda representing Mike here on the call this afternoon. A couple of questions that we had is, how should we think about the sales mix in 2014 in terms of geography? Is it still skewed toward Saudi Arabia, or does the SGI change the geographic mix?

You want me to start, or do you want to start, Matt?

The sales mix is a very unique and dynamic moving geographically area right now in that I am seeing a very strong potential in actually domestic, and at the same time, the Saudi market is going to come in and get prepared for the spring planting. So our customers will actually be at the big alfalfa symposium in December, and they will start putting in some solid orders. We have verbal, and we will have to start shipping for that springtime. So the Middle East and Africa are always going to be a component.

We have our plant breeder now in Argentina. We're looking at slowly ramping that area up, and Mexico is going to become stronger and stronger.

So I'm very optimistic about the domestic market, especially with the forage export market getting larger. And so there's going to be more need for hay operations in the United States, and we see that as a big plus as they move hay over to areas that don't have it in the world.

I don't know if that answered it much. Matt, do you want to add anything to that? Amanda, did I get you, or did we miss something?

No, you are good. I was going to expand on that. Just in terms of future seed production, as you were mentioning the Argentina and Mexico markets and across the globe, are you intending on building upon that 18 million to 19 million pound inventory you have this season as we look into next year?

Yes, organically we'd have, we hope, at least, a 10% increase. We do want to stress that we are going to ramp up and move more and more into the Australian southern hemisphere market because that is the gateway to Asia, but also because we need more of our elite proprietary S&W varieties now starting to be breed. So by March of this year, we're going have a lot to more acreage of S&W in the southern hemisphere to help bring up the need that we need for some inventory in that aspect.

Matt, do you want to add --?

And then Amanda, this is Matt. I will add to that that Australian production is really critical to us because it's such a lower cost of production for us, and we do see the greatest opportunity to expand production in that region.

And then in terms of how Australia drives that margin, as we think about gross margins over the next couple of quarters as sales volumes ramp up, are they going to improve as we reach at the end of next year?

Amanda, we are sticking by a minimum of our 20% margin overall for the year. We do believe that we're going to continue to enhance that margin, especially through our optimization program. We have only moved about 7% of the product in the first-quarter sales with optimization, but by doing that with an Australian blended California product, our margin enhancement will be greatly enhanced.

As a larger portion of our production is produced in Australia, our margins should continue to improve.

Thanks so much for taking my call, guys.

(Operator Instructions). Brent Rystrom, Fetl & Company.

This is Shannon Richter on for Brent Rystrom. In regards to acquisitions, you've indicated that you are interested in them, and I was just wondering if you could update us on your thought process for making acquisitions.

And then a follow-up to that, for future acquisitions, will most of them be in alfalfa, or will you go into other areas?

Okay. You've got a lot there, so let's -- we're always constantly looking at acquisitions. If you look at the history of what we've done, they're going to have to be very accretive. Of course, the first place that we're always going to look is leveraging our strengths, which are in the alfalfa business. There is a number of different avenues of those strengths. You want to look at distribution; you want to look at production; you want to look at the sales regions; and you want to look at branding. And if you have routes into geographic areas that you do not sell into currently, that is just adding and taking market share.

So we're going to continually look at ramping and building this Company upwards; increasing our production numbers; and taking over market share through our branding, breathing, and market-driven operation.

Matt, do you want to add anything into that part of the question?

I think that covers it.

And what was your -- did you have yet another component of that that you had?

The second part was in future acquisitions, will you be staying with mostly alfalfa, or will you be going into other areas as well?

We're going to leverage our strengths. So that doesn't mean that we wouldn't look at something that is in the forage and fodder region that is compatible to what we're doing. But we are a seed company, so we're looking at seed. We're looking at really focusing on seed, our genetics breeding and what that brings.

Of course, we still are on stevia. So if there's something that looks like it's going to help that opportunity or to do something in that avenue of that food business, we're going to be looking at it also. But we're very strong in where we are. We know we are the leaders. In three years, we have become the largest non-dormant seed company in the world, and we're going to continue to grow that.

Perfect. Thank you for taking my question.

Philip Shen, ROTH Capital.

I want to make sure I heard something right. I think you were talking about a potential 10% increase in production next year as a minimum. Is that what you're looking for?

I would say in organically we are looking at least that. And if we do something else, we will ramp that up. So we're looking at enhancing our elite proprietary varieties, moving as much of that production as warrants southern, and southern means not just Imperial Valley but to the southern hemisphere of Australia. And that requires more acreage ramp up. And we aren't getting more acres, and we're out contracting with growers, Philip. So we're looking for more production.

Great. Let's talk about pricing for a moment. In this upside pricing environment, where is pricing today, and how much higher do you see pricing going?

Well, I don't know how high it will go. I've been in this business since 1979, and it has gone up continuously. So where is it going to go, I don't know.

But what we'd like to do, Philip, and you may want to spend some time looking at this yourself when you have -- we look at the benchmark of CUF 101. CUF is the California University Foundation variety. And it is the public domain 9 dormant that everything is based off of.

Well, currently in the spot market, if you're out trying to buy from a grower, that price of that CUF now it's between $4.00 and $4.10 a pound. So to have a base of a common certified variety at that level means that the proprietary varieties -- and by the way, some new research just came out and we will be getting it out soon from Arizona, but we have varieties that went over 2.5 tons per acre per year over CUF. So these are going to command premiums, and we have to decide where we think that premium can be depending on who the customer is, his relationship with us and where we think that marketplace is going to go.

At the same time, Philip, the better component to get a handle on and it is probably harder is actually our optimization where we blend. And the blending is so different because what Matt Szot was bringing up is we have got an opportunity now to really lower our production costs as we move south. And as we do that, the amount of that seed that is SGI driven versus ours in those components of the branded blends will really enhance the margin.

So we see the long term as a very, very positive bottom-line number going into the S&W year-end results.

Great, Mark. As a follow-up there, I've always generally thought about your, let's say, comps at $4; your seed is at maybe $4.50 or so. As we go into this period of, again, expanding prices, do you see opportunities to expand your price premium relative to CUF? Is that something that you guys think about doing? What are your thoughts there?

Yes, we are constantly looking at that ratio. The other thing that you've got to look at, Philip, is there is a market component. And let's just say it is a -- let's use the term, a Walmart type of market where price is a very important component. And those people tend to buy those public varieties, but all of a sudden quite a bit of that production has been wiped out or very minimized, and they are not going to be able to get it.

So it's actually going to have -- if they want a product and they want to grow and they've got to feed at cow, they are going to have to buy something, and they are going to have to pay more for it. Our marketing guys constantly, day by day, are really looking at this market. And it's getting so exciting to me personally that we had to go down to just a week price quote. So when me give a price out, it's only good for seven days, Philip, because we might have to up the ante.

I don't know, Matt. Do you want to add anything to that?

I think longer term one of our other strategies is ensuring we're getting paid for our superior genetics, and that should in itself because we out yield CUF so significantly, it should translate into improved pricing and margins longer term. That is certainly a long term goal of the entire management team.

Great. On the last conference call, I think you guys talked about pricing being at around $4 for CUF, and I'm surprised to hear that it's still around $4. What am I missing there?

You and I will have to actually look at that because I think you could have contracted a certified field for $3.75 or somewhere around there. So there could be some $4 numbers, but in one month we are seeing a pretty big ramp-up, and we are having to determine what that ramp-up means.

Bottom line is there is not going to be enough product.

Right. And I think that one week price quote is telling.

Changing gears here, can you give us an update on the mill utilization? How do you expect utilization to ramp up over the next year?

It's really a strategic movement on our part on who we want to partner with and how much time do we want to dedicate to their market brands. So, as an example, we have actually gotten pretty big with RSI right now than Syngenta's seed company, and they are really taking over the triticale market. I think Dan Karsten will have to check these numbers, so don't -- somewhere between 5 million and 7 million pounds of triticale has just been claimed at our mill. When you couple that with the product we're actually bringing up from Imperial Valley, we're 2.5 million to 3 million pounds of seed alfalfa. So we are slowly trying to look at co-packing, what that means, how we're going to put it into our product line, and who we want to align ourselves with. It's going to become more critical if GMO becomes bigger.

I would say that the utilization percentage is pretty consistent with historical periods.

Okay.

It hasn't seen a meaningful move up or down.

Okay. Got it. One last question and I will jump back in queue. Matt, I think you were talking about the shift of production to the south, and Mark, you were talking about this as well. Can you quantify that for us a bit? How much of the production might be shifting there in the 2014 growing season?

Well, I think our production levels in the San Joaquin Valley we would ideally target for them to be the same or, as Mark is saying, we're certainly targeting to grow that at least 10%, ideally. But the incremental acreage we add onto that will more likely be coming from the southern region of either Imperial Valley and Australia.

There is a strong climate right now. I'm not going to go into the pros and cons or anything, but there is a strong movement right now on this non-GMO area, and that bodes well for the Imperial Valley and for the southern hemisphere. So you're going to see us continually move more acres of production in those areas.

Great. Thanks, Mark, and everyone else as well. I will jump back in queue.

Riley McCormack, Tracer Capital.

So, a couple of questions. First, on your revenue guidance for the year, if I back -- the high end of revenue guidance, does that assume not holding back any inventory?

Yes.

Depending on margins.

Assuming our current inventories and our expected sourcing through the remainder of the year, that would get us to the high end of the range that we provided. And if we elect to hold back any portion of that, then obviously there would be less than that number.

Can you help me get to that? Because if I look at the high end, that is implying about $3.50 per pound. So with CUF at $4, with S&W proprietary at call it $4.40 and with Australia at $3.20, the only way you get even near $3.50 is assuming proprietary S&W is 10% of the total mix. Is it going to be that low a percentage?

S&W proprietary is probably going to be about 15% of the total mix.

Okay. And then so for my next question, last quarter you guys talked about IVS margins being low to mid teens -- I'm sorry, just low teens. Now you are saying low to mid teens. Is this just semantics, or are you guys increasing IVS?

Our IVS margins in Q1 were in the 15% range, and we think that they will be in a similar range for the remainder of this year with an opportunity to over the sequential quarters to make progress each and every quarter as we roll out the optimization program further.

So I am correct there is a slight uptick on the IVS margins versus what you said?

Yes, that is correct.

And then the third question on blending. You talked about proprietary gross margins being in the low 20s. Why wouldn't blending start to raise? Is it a function of purely timing? It is not going to happen until the back half? You don't have enough S&W seed? Do you -- (inaudible)?

It's more tactical than that, Riley, because we have to actually with the breeders we want to make sure that we give out the finest product. And so when we put a blend together and say it's going to be a percentage of Catalina, a percentage of La Jolla, a percentage of a SGI supersonic, we have to get that brand approved and registered in the country we're going to sell it in.

So some of that takes 3 to 6 months to actually develop that and then have that broker or grower base accept the information that we're giving them to move it into the marketplace.

So you are going to see that enhancement really do something. In the first quarter, only about 7% of our sales were optimization. As we move forward, we hope that that becomes a bigger and bigger play which will continually enhance that margin number and get those -- just say a price not as important overall as the netback to S&W.

Great. That makes sense.

Riley, this is Matt. Just to clarify, our groove stock or, in other words, the Australian material, it's hard to bucket it into one particular category because we can use it in blends of non-served product, as well as blending it with our other proprietary varieties. But certainly that optimization is part of the IVS margin uptick that we just talked about, and we think that over time that is going to should translate into margin improvement throughout the entire organization.

Right. And that was my question, obviously so Mark and Matt, it sounds like it is a matter of timing just as it takes time to get these things done. Can you guys help us understand what 2015 proprietary gross margin is? Because it is obviously a big part of the story here, right, and I think it would be helpful if you could let people, let us know where that low 20s gets once you have a full year of all this registration, et cetera, behind you and you are ready to go?

I can only really give you Mark Grewal's personal opinion on that, and I'm always happy to do that. I think 2015 also brings in our first sales into GMO, Riley, domestically so. So I think as we ramp up further and we get into some of these specific lands, you are going to see that in a 30%-plus range. And I think that is a realistic number, personally.

I don't know, Matt, do you want to comment?

It depends on obviously a number of factors. Certainly production costs are going to come into play there. We certainly are targeting improvements from the 20% range that we are in in the current fiscal year, that is for sure.

Right. Because you are growing production in Australia and Imperial Valley, I can't imagine production costs being the headwind they are in the San Joaquin Valley, right?

Well, right.

What I will say is that we do have some specific contracts that are like first-year contracts. There are two things to remember about first-year contracts this year that went out. Normally your first year is your lowest yield year. And then if they didn't grow a crop in that year for seed, we do have contracts where, okay, the first year is going to be hay and the second year it becomes seed, and our second year contracting in some of those contracts is at a lower price than we are currently at right now.

Right. But taking everything you said, Mark, plus the beginning shipments of dormant, which should have higher gross margins as well, right, it's not unreasonable to think the proprietary of a non-IVS could have either high 20s or the 3 handle you talked about.

Absolutely. (multiple speakers). That is true.

And then last, not really a question, but a comment, somebody already asked the question I was going to ask, but as a shareholder, I urge you guys to focus on alfalfa. You guys have genetics. You guys have the products. You have a market that is right for growing your very impressive share. I think focusing on anything else outside of alfalfa or maybe some other forge, including stevia, is a mistake right now. I think maybe that is a great goal for us five years from now, but I would just love you guys to focus on what your strengths are right now, and that is consolidating the alfalfa markets.

We hear you loud and clear, Riley. We thank you for that comment.

Great. Thanks, guys.

Ian Gilson, Zacks Investment Research.

Matt, could you give us the pounds of seed sold in the quarter and pounds of seed currently in inventory?

Sure, Ian. And I do want to point out before I do this, these are different price points of seeds, but we sold about 3.5 million pounds of seed during the quarter, and we ended the September quarter with just under 11 million pounds of seed on hand.

Okay. Looking at -- on a standalone basis, what was the prior-year period revenue compared to the $4.8 million which you quoted earlier?

IVS did $4.5 million in Q1 of the prior year.

And looking at the weather during the same periods, where they roughly equivalent, or was last year's weather worse? I seem to remember last year had a couple of really bad storms.

It did. It had some -- almost every weekend it was raining. But I have to dig that information out to put it in perspective because I do think the acres this year are larger than last year. And so the impact may not be as severe last year as it has been this year. So I need to look at those numbers and actually get back to you or have somebody get that information to you ASAP, but I can't answer your specific question at this time.

Thanks very much.

[Frank Smith], [Witenzym].

A question for you on Saudi Arabia. I noticed you saying the percentage of sales to Saudi Arabia were down. Is that just because of the mix or they planted less there, or did somebody else plant they are? Can you just give a little idea on that?

Well, in n our specific instance, we didn't -- we couldn't meet the shipment at the time because of our harvest and where we were on cleaning. So there was a potential for a lot more seed going out then, but we haven't lost that acreage yes, Frank, because it could be planted in the spring, and our main distributor is really exclusive with us in that market. So it's going to be -- in fact, if you come to our shareholder meeting, he will probably be there, and we can sit there and talk to him about it.

But the bottom line is is they will come back in December and start purchasing seed and get it landed on the ship so they can plant in the spring. It is more of a shift and just when we put that seed out more than not get it planted.

So when would they do it? They would import the hay?

Well, I think hay import -- yes, they're seeing an increase in hay in the export market of forage. It's getting larger all the time. So the latest numbers or the total USA exports are over $1.3 billion. That just bodes well with what is going on in the alfalfa market in that this market is getting larger. It's getting more important. The Asian countries, not just China, but Korea, Japan, these countries -- and not just the Middle East -- but these countries need hay. So it is a function of, can you do it there? Do you do it here better? What is the price of shipping? What is the freight cost of hauling it internally on their road and their infrastructure?

And these are things that we are looking at constantly, even in South America, on how to place ourselves and how we're going to address those markets.

Okay. And then as far as the storm went there down in the Imperial Valley, is it really a function of it delayed the harvest, or did it actually affect the yield?

No, we -- okay. Storms -- there was an affect -- not the weather that happened in Imperial, but this was not a typical total California year. It is a low average harvest year in the whole state.

Okay.

So there's a lot of things that come to play in that. But, Frank, if you came out to the San Joaquin Valley, right now they are picking cotton. And usually cotton is done. And so we are just now getting orders in domestically in California for planting alfalfa seed that normally would have been planted in September. They are just now starting to plant in November and December. You've got an area of the San Joaquin Valley that doesn't know what their water supply is going to be until in the spring. They are not going to plant until the spring.

So what is happening is where I grew up as a kid and everything was really those first two quarters and as a rule of thumb, where do you plant alfalfa? Any month that ends in er -- September, October, November, December. Those were the historical months.

Now this thing is shifting into spring plantings, and in some cases it is a combination of spring plantings that are only for forage the first year. Then they get converted back to seed production, and that is a lot of what is happening in the Imperial Valley area where almost 40% of the hay production is made in the whole state.

Okay. And then one last question. The GMO trials, I assume you've got some type of trials. Do you have any idea as far as how that's going as far as yield and that sort of thing?

Our first variety is resistant to the Roundup. So that's not an issue. It has been over sprayed at least twice. It survived quite well. And so next year is more of the seed production year for building it. And then we take that seed out that fall, put it out, and then by 2015 of the fall, we will be selling the Roundup Ready seed.

Okay, great. I'm going to back out here and let anyone else ask a question.

Keith Gill, JSH Capital Advisors.

In general terms, how many proprietary varieties do you have? How long does it generally take to develop these varieties, and how much does it cost to develop like, for instance, your 9628 or your 9720 variety?

Okay. You've got a lot of questions there, Keith, but --

I've got a big mouth.

Basically, I could be wrong on this, but I'm close. We have at least 18 varieties that we own right now that are non-GMO, and we have two GMO varieties.

Now, the GMO varieties, if you did that on your own and you bioteched them and you had a biotech company like a Monsanto, it has been stated in a lot of articles that to bring on one trait is $136 million.

So we actually have two varieties that have that access into them. And then we have another 18 that have taken approximately 9 years to breed. When you take that type of IP and you have breeders, agronomists, field foremen, the land, the water, the cost to grow the crop and then to actually ramp it up for seed production, you are anywhere at a minimum of $18 million to $20 million over the 9-year period in costs to get that into a commercialized seed production and selling platform.

So our IP is worth everything, but that's the reason why seed companies sell on revenues. And so that's just something that is part of the game in a seed company. That is your IP.

Thank you. And one other follow-up, if I may. I know you guys aren't looking to be bought, but if you were going to be bought out by Monsanto, by DuPont, Dow, what have you, how would you value the Company?

I don't know, Matt, do you want to -- anything on that?

At this point, Keith, we see a lot of low-hanging fruit in front of us, and we are keeping our heads down and focusing on creating as much shareholder value. So we are not really thinking in those regards as to what we could sell the business for. We're just trying to create leverage off of the assets that we have in hand.

Right. But if I may, when Dairyland was bought by -- who were they bought by? DuPont or Dow? Excuse me, Dow or FGI -- what were they valued at, do you know?

Well, okay. FGI is a co-op that is owned by Land O' Lakes. That is a $4 billion co-op. I don't know what that price tag was to developing all of that Company because they've also bought out (inaudible) in the Americas.

Dairyland is owned by Dow. DuPont owns Pioneer. So Dow also bought Cal/West Seeds. And I don't know what they paid for Cal/West Seeds, Keith. So we'd have to look at that or maybe you can talk to some of the analysts, and they can come up with some numbers for you.

Okay. Thanks.

Bill Smith, Wm Smith & Co.

If we were to value your inventory at 11 million pounds, how do you think about that, or how should we think about that? Is that a mix of Australian and your proprietary in Imperial Valley? Is that what that is comprised of, and how should we think about valuing that inventory?

Well, it is primarily comprised of proprietary varieties, the 10.7 million pounds that I mentioned as a cost basis at the end of September of $28 million, and you can back into based on a 20% margin, what that would have in current environment fair market value.

So when you talk about the seed prices of maybe $4.5 million, that's all proprietary that doesn't -- you're not talking about Australia or Imperial Valley?

Well, let me go ahead and start this. Let's take, there are proprietary varieties that are very premiere in Australia. Australia has tended to be a less expensive market to buy in because their costs have been lower, and they have been happy with 21% margins.

What we are trying to do is take and enhance that opportunity by landing some of that seed component that they have into California and getting it branded into a California product that maybe is going down to Mexico or into Arizona and is actually competing more with the CUF market. So it can become a very big margin component. Even though you may be selling the seed for under $4, their actual margins could be higher than 30%, Bill.

Okay. And then the demand, is it across the board strong, or are there just selected varieties that are stronger than others for the demand --?

In the non-dormant market, the demand is really big right now. So it is a question of, do you have the actual variety that that region wants to plant? So there is a constant -- most farmers will put in one or two varieties, and they will actually trial them to see which one that they think in the long run fits their growing area, and then they will go with that as they move forward and then they become very loyal into that variety placement.

So if we took -- if you came out and visited me and we went down to the lake bottom at [Delarey] and we headed south at [Corkran] down Highway 43, most of those guys will be growing all of our salt-tolerant varieties. [Mackranoff] is pulling off almost 11 tons per acre already off of the (inaudible) ground where we are farming some hay and using that as a marketing tool for domestic sales.

So these are tremendous yields on very tough ground and extreme salt-tolerance, and we really have an elite product.

So I think as we move forward and we get our breeders to breathe more, different types of dormancies and this type of opportunity, you're just going to see more and more of a margin play, and hopefully at some point, maybe Matt can model that in a way that is more specific to what you are looking at or that you can understand better than I'm trying to convey.

Okay. Thanks.

And ladies and gentlemen, that will conclude our question-and-answer session. I would like to turn the conference over to Mark Grewal for his closing remarks.

Thank you, Denise. Again, my thanks to everyone for participating on today's call. We look forward to talking with you again at the conclusion of the current quarter, and I hope everybody has a great afternoon, and keep in touch, and we will try to keep you informed as best as we can.

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