S&W Seed Co (SANW) 2018 Q2 法說會逐字稿

Hello, everyone, and welcome to the S&W Seed Company Reports Second Quarter Fiscal Year 2018 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

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

Thank you, Steven, and thank you all for joining us today to discuss the financial results for S&W Seed Company for the second quarter of fiscal year 2018 ended December 31, 2017.

With us on the call representing the company today are Mark Wong, President and Chief Executive Officer; and Matthew Szot, Chief Financial Officer. At the conclusion of today's prepared remarks, we'll open the call for a question-and-answer session.

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 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, 2017 and other filings made by the company with the Securities and Exchange Commission.

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

Thank you, Robert. Good afternoon to all of you on the phone today. When I first spoke with you in September, I talked about the tremendous opportunity I thought we had at S&W to create a unique middle-market agricultural company that would leverage off our existing base of strong assets and, excuse me, expanding our key crops, integrating and developing new trait technologies and becoming more customer centric.

I also mentioned that we would take the first 6 months and further analyze our strengths and weaknesses as well as our opportunities and threats, to create an overall strategy that would maximize return while managing our risk profile.

After careful analysis of our current products, including alfalfa, sorghum, sunflower and stevia, our current operational capabilities and footprint and review of our regional markets across the globe, our management team and advisors along with our board is aligned on our way to go forward.

Without going into certain aspects that might be a hindrance to our success from a competitive standpoint, let me provide the conclusion of our analysis.

#1. We will push -- we will continue our push into trait technology. As I have mentioned on the last 2 conference calls, trait development will be a key driver for S&W going forward. I think there is a large opportunity for us to build and integrate seed biotech platform that can bring significant value to the marketplace.

There are certain classes of genes that we are currently evaluating with a high degree of interest, including digestibility, insect disease and herbicide resistance.

Over the last 6 months, we have been working on a number of pathways and collaborations to advance this initiative. Some, we have discussed in the past, such as our agreement with Calyxt, where we will be moving plant into the field this summer focused on enhancing digestibility in our alfalfas. We also have discussed in our agreement with Generics, which we are focused on off patent traits and technologies emphasizing gene editing and nonregulated technologies.

Beyond these 2 previously announced agreements, we are advancing multiple other collaborations that we are not going to discuss in any specific detail at this time.

During the last 6 months, we have focused on analyzing the markets and better understanding the traits that we believe will be most desirable to our customers. The coming 12 months will be focused on the field and lab work based on the strategic directions we have chosen. We will share more with you about our progress in the future.

Second major conclusion of our analysis. We're going to build alfalfa, sorghum and sunflower business in Australia. Beyond trait development, we are moving forward with more specific commercialization strategies for our current crops. First, we are going to look to build out our alfalfa, sorghum and sunflower programs in Australia. As many of you are aware, we have a strong presence in Australia with our alfalfa seed -- acquisition of Seed Genetics in 2013 and our sorghum and sunflower acquisition of SV Genetics in 2016.

Now that we are focused on 3 crops, we have the opportunity to build a more customer-centric approach to our product sales development. As you saw from our announcement a couple of weeks ago, we have hired David Callachor, as our Commercial Manager of Hybrid Crops. David will be based in Southeast Queensland in Australia, will oversee sales and marketing and future development of our hybrid sorghum and sunflower seed businesses. David has over 20 years experience in the agricultural industry, including extensive international experience in hybrid seeds, traits and new technology. He joined us from Limagrain and has also worked for Landmark and Agrium Company for several years in Australia.

This was an important hire for S&W, as we look to build our commercial focus within Australia. Australia is important for us as a focal point for many different reasons. First, the political and regulatory environment is stable compared with many of our global markets that we operate in. Second, much of our germplasm across the 3 crops, I mentioned, were in fact specifically developed for the Australian market and thus performed very well given the characteristics of the geography. We see this as a key commercial development point. Third, we believe the size of the market provides us with exciting opportunities to drive revenues relative to our emerging market opportunities. Fourth and perhaps most importantly, it is one of our home markets. There is no acquisition required to enter Australia with existing troops already on the ground and facilities already operating there. Again, I want to reiterate our focus is on maximizing return while minimizing risk. We believe Australia will play a key role for us going forward.

Third strategic conclusion. Build alfalfa and sorghum in the U.S. Our key focal point will be expanding our U.S.-based operations within sorghum and alfalfa. On the alfalfa side, we already have a distribution agreement in place with Pioneer, where we will provide them with our seed -- where we will provide them with seed production through 2024. We have made strides to expand distribution with others such as Wilbur-Ellis, but we believe there is still a significant opportunity to expand our share of the U.S. market. Key to the market share growth will be the development of trait technologies. The alfalfa seed market is transitioning to key traits such as herbicide disease insect and seed digestibility. As I discussed in the past, more value per pound of seed is garnered from the traits than from this actual seed itself. More specific to sorghum market in the U.S. we believe, there is an opportunity to leverage our assets to further expand in this -- in that market. But I believe it is appropriate to pursue an acquisition that might accelerate our penetration into this market. I do not want to get into too many specifics. But we will be focused on all options for maximizing return while minimizing our risk profile and while driving value.

Fourth strategic conclusion. We're going to build Stevia in the U.S. All Stevia currently grown is produced in Asia. And speaking with Stevia customers, we believe there is significant demand for Stevia produced in the United States. Our goal is to use our proprietary germplasm in Stevia and our farmer grower network to create a U.S.-based Stevia production industry of high-quality Stevia sweetener, with superior taste profiles. I'll provide more details of this plan over the next 2 or 3 quarters.

Evolving beyond recap. One of our themes for S&W since I took over as CEO has been evolving beyond recap. The 4 key items I just discussed will be keys to our strategy going forward. #1, evolve beyond our dependence on alfalfa seed operations, which have comprised of vast majority of our business since inception. #2, evolve beyond our dependence on key geographic markets, which carry higher political, regulatory and economic risks. #3, evolve beyond our classic trait development capabilities with the latest biotechnology tools to develop higher value products. And fourth, lastly, evolve beyond our historical marketing and distribution approaches to become a more customer-centric focused marketing and sales operation.

Let me now recap a little bit from the quarter. Not all of our focus obviously has been on these strategic evaluations and decisions. We are also focused on our current operations. After all, we have a day-to-day business to operate.

During the first quarter, we executed against our distribution plan with Pioneer, to whom we shipped approximately $15.3 million worth of alfalfa seed. Overall, revenue during the second quarter fiscal 2018 was $20.8 million compared with $24.2 million in the second quarter of the prior year. We continue to successfully execute on our gross profit margin initiatives, where margins improved by 130 basis points to 22.8% compared to 21.5% in the second quarter of 2000 -- fiscal '17.

The Saudi Arabia market continues to be volatile and uncertain as dairy and hay farmers determine what the new equilibrium in the market will look like. We believe that Saudi customers will continue to demand fresh milk and forges for their livestock, which we require for importation of alfalfa hay from surrounding regions in the Middle East and Northern Africa as well as countries around the world.

Ultimately, milk demand for fluid milk, cheese butter and other dairy products will continue to grow. However, producing dairy cows will relocate to geographic regions with available water. Our job at S&W is to find and service these new markets, both with alfalfa and forage sorghum.

Also as Matt will talk about in some detail, we continue to strengthen the balance sheet with a successful completed rights offering in December. When coupled with our private placement in July of 2017, we have significantly improved our balance sheet position. I want to personally thank our exiting shareholders -- existing shareholders, excuse me, for their continued support and look forward to driving value for them in the years to come.

I'm going to recap the strategy before I turn it over to Matt. Overall, I believe we have a very strong strategy in place. One that places a balance on a long-term evolution of our business into a leading middle-market agricultural company, with a near-term focus on driving cash flows to becoming more efficient across our entire business. We are focused on maximizing our opportunities, minimizing our risks, emphasizing our strengths and managing our weaknesses. Nothing in agriculture happens overnight, but I'm extremely pleased with the progress we have made in the last 7 months, since I took over as CEO.

Let me now turn the presentation over to Matt Szot for a review of our quarterly results.

Great. Thank you, Mark. And thanks to everyone on the call today. For the second quarter, revenue was $20.5 million compared to $24.2 million in the second quarter of the prior year. We experienced a $1.3 million decrease in revenue to Saudi Arabia, largely due to the regulatory uncertainty for water use restrictions. We also had a $1.1 million decrease in shipments to the domestic market, primarily driven by timing of shipments to Pioneer.

Gross margins in the second quarter were 22.8%, an improvement of 130 basis points compared to gross margins of 21.5% in the second quarter of the prior year. This increase is consistent with our expectations and our previously discussed initiatives to drive improvements in gross margins. This improvement was primarily due to product sales mix during the current period, where we had a higher concentration of dormant seed sales as a percentage of total revenue coupled with the reduction of product cost. As we look to the full year of fiscal '18, we expect gross margin to increase over the prior year. This year-over-year improvement will likely be in the 150 to 200 basis point range.

Total operating expenses for the second quarter were $4.2 million, which is flat compared to the second quarter of the prior year.

SG&A expenses were down nearly 150,000, primarily due to cost reduction initiatives and a decrease in stock-based compensation, while R&D expenses were up about 100,000 due to our continued investment in hybrid sorghum and sunflower programs.

Adjusted EBITDA for the second quarter was $1.6 million compared to $2.2 million in the second quarter of the prior year.

Now as Mark mentioned, during our second quarter, we did successfully complete a fully backstopped rights offering, raising a total of $12.25 million, and this is on the back of several other recent initiatives to strengthen the balance sheet.

In November, we completed the $12.5 million term debt refinance, which was used to repay our outstanding promissory note to DuPont Pioneer. And then in September, we also closed on a new 2-year $35 million working capital facility with KeyBank. And also on July '17, we completed $11 million private placement. All of these actions have resulted in the deleveraging of our balance sheet and have really positioned us for further flexibility in the periods to come.

Now there is one other balance sheet item I do want to point out and that's our inventory levels. You'll see that our inventory levels are up $31 million from the same time last year. As we've communicated over the last year, we increased our acreage dedicated to seed production for crop year 2017. In addition, yields were higher in North America and particularly in Canada. So our year-over-year production increase represents about 60% of the increase in inventory levels and the other increase relates to higher carryover going into the season and a decline in shipments to Saudi.

While this inventory increase does require additional working capital, and we will be carrying higher levels of inventory over the next year, it also positions us to capture as many sales opportunities as possible. Please keep in mind that our seed is not perishable and quality will not deteriorate as long as it's under proper storage conditions.

So I do want to also provide clarity that we planted very few new acres for crop year 2018. Accordingly, we do expect our production volumes from the 2018 U.S. harvest to decline, and we expect our inventory balance to decrease over the next 12 to 18 months and certainly become more in line with historical carrying levels.

From a guidance standpoint and to recap our guidance. Based on information currently available to management, we expect to be at the low end of our previous guidance. And for the third quarter of fiscal '18, we expect revenues to be approximately $19 million to $20 million. I know I went through a lot of data here. So if you have any questions, please feel free to ask.

Now let me turn it back over to Mark.

Thank you, Matt. Let me just conclude the last few minutes here by giving you all some comments on the board and some additions that we've made. I really feel we have a great team here at S&W, and I'm excited about some of the new board members that we've added to help drive trait development and new crop market strategies going forward. In particular, I believe S&W will benefit tremendously from the addition of -- on our board of several experienced ag executives like Consuelo Madere. Consuelo has experience across the diverse product and geographic set. She was a member of the 11-person Monsanto Executive Team responsible for development and implementation of the company's overall strategy -- company strategy as well as management of the day-to-day business operations.

Consuelo joins another fellow Monsanto Executive David Fischhoff, who joined our board last year. Considered by many as one of the founders of agricultural biotechnology, David's 33-year career with Monsanto Company covered a broad range of technologies, product development and business development in biotechnology, plant breeding, genomics, precision agriculture and data science.

As we look forward, we will look to expand our expertise in trait and market development. As I said at the beginning of the call, I am excited about the opportunity S&W has before it, as a unique, middle-market agricultural company. We have gone through an extensive strategic planning process and believe we have laid out a pathway that allows us to maximize our upside, while minimizing our risk profile and ultimately creating shareholder value.

Thank you for your continued support. Thank you to all our employees for their hard work over these past 7 months. I know that I have asked a lot of many of them. And I now will open the call up for your questions. Thanks again.

(Operator Instructions) And our first question comes from Sarkis Sherbetchyan with B. Riley FBR.

So just first question really revolves around the expansion for your hybrid sorghum and sunflower seed programs. You mentioned that to maximize return, you're going to go ahead and kind of focus on that. Can you maybe give us a little bit color on maybe the time line or some of the initial targets for that set of crops?

Sure. I mean, understand first, structurally, these hybrid crops are a bit different than traditional alfalfa that we have built the company on. These crops have a little bit higher margin and they're planted every year. And so we're looking forward to closer interaction with our farmer customers either directly or through distributors and dealers. That's why we're focusing on being more customer-centric as we believe we have valuable information that we need to convey to our farmer customers about the performance of our seed varieties, whether it be alfalfa, but specifically, sorghum and sunflower. So we expect margins to begin to on a percentage basis improve as our product mix shifts to a larger and larger piece of sorghum and sunflower, not that we expect alfalfa sales to go down, but we don't expect alfalfa sales because we have such a big market share to improve or grow at the same rate that we have -- that we figure sorghum and sunflower do where we obviously have a smaller market share. So that's how the math works, we all kind of know that. But we're very excited about the crops, and we're really very excited, as I mentioned in the talk about, how -- when you have 3 distinct product lines going now to many, many more different markets. Just the opportunity that gives us and it gives our sales force. We like to be a fact-based company. We want to have farmers and users of our products because sometimes we sell to an industrial user, that's not a farmer, but we want them to understand what value our products hold, and we want to demonstrate that value either through field trials or trials with the particular company if it might be, for instance, an oil company in the sunflower business. Oil quality is obviously another area that we're looking at trait development. So we're really excited. I mean, it's fun to be in these markets. It's fun to be in some new markets that we have, historically, not had strengthened and while maintaining the Stevia and alfalfa businesses, which we've, over the years, built the company on and obviously like a lot. Hopefully, that answered your question.

It helps. No, I guess just kind of following up on that, right. If we take the low end of this year's annual sales guidance, right, call it, $75 million on the low end.

Yes.

What percentage of that sales would you say this year would be attributable to the hybrid sorghum and sunflower seed program? Maybe just kind of help us understand...

Yes, Sarkis, that probably be about 2% of that annual number, it would be attributed to both of those product categories, both hybrid sorghum and sunflower combined.

Okay. And then with regards to just kind of the expected growth rate of that. I mean, any color there on how either quickly that piece can grow? Or if it's more of a linear path or a log path? Can you just kind of help frame the growth pattern there?

Yes. So just remember the basics of the seed industry. It is hard to gain momentum in these products. There is a lot of work that your technical people and your sales people have to do to demonstrate these products and field trials and have customers see in their own geography what the performance is, because depending on climate, soil type, latitude because plants are very day light sensitive. All these things can affect the performance and yield of our seed crops and of all seed company seed crops. So it is always slow going at the beginning. But, hopefully, you start to gain momentum and sales start coming at a rapidly more rising pace. Now you might want to just talk a little bit about the actual sales numbers that we have for the next couple of years looking at these crops.

Yes, I mean -- and again, Sarkis, this is -- these numbers are certainly subject to change. But last year, we did roughly $1 million and in FY '18 we'll do close to $1.5 million to $2 million. And then we think that FY '19 will be sort of closer to that $3.5 million. And then from there, we'll start seeing a more pronounced ramp from there. But over the next 2 years, it's steady progress, but the out years are really where you see the significant ramp.

Understood. That's helpful. And then if I can kind of touch on the gross margin profile. Obviously, as you start to throttle the sales in that program, gross margins should likely go upwards. Maybe switching gears, you were talking about the alfalfa business. Do you expect fiscal '19 versus fiscal '18 year-over-year improvement in alfalfa gross margins again?

Well, in '18, we're definitely expecting margin improvement, probably 150 to 200 basis points. As we look to '19, there is a lot of factors in play at this point. Certainly, over the long-term, we think we've got a clear path for how we continue to expand margins based on initiatives we previously laid out. But any -- that's not to say that we're going to consistently put up 150 or 200 basis point improvement each and every year. But I think as we look at over a longer period of time, there's a pretty clear path.

Got it. One more from me and I'll hop into queue. So looking at your quarter OpEx run rate. I think for G&A, it was posted at $2.4 million or something like that. Is that the right level to kind of think about or model going forward? And if not, what would the variances be for us to kind of think about?

Well, Sarkis, cost control is going to continue to be a focus for us. But we will -- we typically do run higher in Q3 and Q4 where we have a higher concentration of sales. So you will see an increase in our SG&A versus Q2. You're probably getting me closer to that $2.8 million number in Q3 and 4.

Our next question comes from Mike Malouf with Craig-Hallum Capital Group.

Can we get a little bit more detail on what's going on in the Saudi market? How much did it actually impact you guys? And any update on any -- with regards to the water issues over there? Or how you think this thing will play out over the next year or 2?

Sure. Great question, Mike. So as you know from the public press, Saudi is going through some significant changes whether it be trying to decide if they're going to take their basically Statoil company public to being put into the Ritz-Carlton and ask for contribution to the government offers. There is just a lot of things happening there, and agriculture is a place where they're trying to also make improvements. So we see the water reduction as a permanent reduction. It takes some years for that to make its mark on the milk production in the country. But on the seed production, it can be quickly felt as it is being felt by us. So the normal cycle for dairy cows is to basically milk them for about 3 years even though they have a much longer production cycle, they can have calves from up to 10 years. The cows get to a place where they're inefficient in their conversion of feed to milk. And so most dairies around the world in year 3 or 4, the cows are taken out of production of milk and new cows are brought in -- younger cows are brought in to replace them. So that's happening in Saudi Arabia. As you remember from previous calls, dairies there are incredibly modern and efficient. They're the biggest integrated dairies in the world. The largest dairy there is milking somewhere in the number of 135,000 cows and in the U.S. just for round numbers, 35,000, 40,000 cows is the biggest dairy. So the Saudi dairy is 3x bigger than the U.S. biggest dairy. And the Saudi second biggest dairy is milking about 100,000 cows. So it's 2x bigger then the biggest U.S. dairy. So there are very sophisticated. They buy alfalfa seeds. They raise all their own cows. They feed them. They milk them 3x a day. They take the milk to a processing plant that they own. They package it in 1- and 2-liter containers for fluid milk and they make products; butter, yogurt, cheese to the taste of the local Middle Eastern and Saudi markets out of that milk. And so they're realigning all of that. In the short run, it was probably an over inventory of seed in the country because distributors were concerned that the Saudi's would not allow any seed imports within the country. So they kind of loaded up the pipeline in sort of the expectation they would be changes and not knowing what they would be, they preferred to seed in-country and out of country. And the companies that produce hay. So there are companies who produce the alfalfa and the dairies themselves that are in production. But independent farmers are also producing alfalfa hay and selling it to the dairies or holding it in their own inventory for future sales to the dairies. So in the short run, that hay inventory have to be used up by the existing cows in Saudi Arabia. So even though you cut back on water and even though you cut back on newly seeded acres of alfalfa, may be not total acres of alfalfa yet, although, we expect that to be coming down too. Farmers are reluctant to buy seed and seed new acres. They're reluctant to invest in that incremental investment because they don't really know how long water rights are going to be maintained in Saudi Arabia. And therefore, how long they can produce hay on a local basis. So all of those things are changing, right. And everybody is trying to get used to what it's going to really mean to have a dairy industry in Saudi Arabia, where water restrictions change the kind of business structure that the company has in the dairy industry. So that's a incredibly long-winded answer to your incredibly good question. But that gives you some insight to why for us as a seed company, seed sales are pretty much cut off and very difficult to do right now. While the cows still may be existing and even the acres of alfalfa still may be in production, but no new acres are being planted, right, and for us as a seed company, that's really the key to our sales.

Got it. Okay. And then just a quick question on the Stevia side. How proprietary do you think your stevia plant is when we -- I know we have EverSweet coming out, which is really a targeted Reb-M and Reb-D fermentation product from Cargill? I'm just kind of wondering what -- how you see that market shifting over the next year or 2 if that comes out and kind of disrupts the Stevia market?

Yes. So Cargill would be one of our customers, right. So Cargill takes the raw stevia leaf and makes these new products that you described. And everyone is trying to manage the Reb profile. There's many -- I don't know how many Rebs there are together, but there is probably 10 at least. And people are trying to maintain the sweetness of their products, while cut down on that sort of funny bitter taste that sometimes you get from stevia when you use it as a sweetener. To me personally, Mike just, my personal point of view, I think you can manage that profile a little bit. But part of that bitter taste, I believe comes from the fact that it's so much sweeter than sugar that your mouth -- the taste buds in your mouth really aren't made to appreciate sweetness at that level even if you sort of mix other things and with it to dilute that sweetness and spread that stevia through more units of production. But I think it's going to be a great product. I think the fact that Cargill as a key customer in the industry. Cargill provides stevia materials to Coke and Pepsi who are obviously key users of stevia in their diet beverages. And the diet beverage market share seems to be going up every year. So we think that stevia has a hugely exciting future. What we're trying to do though is not only manage that Reb profile, but we're trying to make stevia into a crop that you can grow in America. So what that means is you're not going to be able to hand harvest it like you do in Asia, where all of the stevia is really produced today. So it's produced like a tea. You harvest it a couple of times over its life, couple of years and many times may be in that year. And you and it's done by hand. And so if the crop comes to the U.S. It's not going to be probably economic to have enough people in the field to harvest it by hand. So you're going to have -- at the time same, you develop proprietary varieties with the right Reb profile, you're going to have to have a plant that's much more resilient to weather conditions that can stand up to some of the conditions we would grow stevia here in the U.S and it's going to be machine harvestable. So we're working on those problems. We believe that we have proprietary expertise there. We've been granted 3 U.S. patents on stevia. We think that's an indication of the power and breadth of our germplasm base. We're -- we like stevia. I like stevia personally. The company like stevia. We think it's a big great opportunity for the sweetening industry and for S&W is a very small part of that industry. But important base part, right, because we go -- we grow the seeds and as the ASTA says, everything starts with the seed, that's the American Seed Trade Association, that's their motto.

Great that's helpful. And then...

I'm really excited about the crop. I love it. I mean, so all I can do is to sit here and not go out and like work on stevia.

Well, let's keep you focused in on all the other stuff too.

Well, Mike, we tried.

The last question I had is just on sorghum, you talked about acquisitions. Do you have stuff identify? What kind of size are we talking about? Do you have the balance sheet in place to do this type of thing? Just -can you give us a little bit of color around the strategy there?

Yes, good question again. So we actually have 3 candidates that we're currently looking at. And I can't really tell you any more than that because I don't want to elicit competition from other seed company. But I think the industry knows that we're in the market. And so the deals that might be out there are coming our way that's always a good place to be when people really believe that you want to stake out a position in the crop. So we're excited about the opportunities. We're looking at due diligence and trying to understand the candidates that are before us. So we're pretty far along the way. We're -- I'm not going to make any projections on timeline because we're only half of the negotiation, the other half is obviously the selling company. But we're pretty optimistic. As far as capital, we've -- our board -- management has conveyed to the board that our strategy, which I described in the comments that I made some minutes ago, that acquisition was one of our primary ways to grow our business. And they're are on board with -- if we get the right acquisition at the right price, obviously with earnings potential and growth potential, they would consider raising more capital to fund it. Obviously, it's unfair to ask people to fund things specifically until you have deal on the table. So I can't sort of say to you that there is a pool of funds that's been committed of X or Y. I think that'll have to wait until we see what kind of deals we want to do and what the price of those deals is.

(Operator Instructions) And our next question comes from Ben Klieve with NOBLE Capital Markets.

A couple of things out, one I'm curious regarding your kind of customer-centric initiatives, you've been working on here for the last couple of months. I'm wondering if your distributors have noticed any changes in the dialogue with the customers yet. Or if that's still something that is still a few quarters away?

Sure. I think it's too early for people to see the effect of that. Distribution getting closer to customers may -- through lots of different structural mechanisms, right. And while we are absolutely pleased as punch with our relationship with Pioneer and having them distribute our dormant alfalfas through their farmer dealer network. When I say getting close to the customer, I mean, I'd love to have a farmer dealer network like Monsanto has the DEKALB or Pioneer has to their farmer dealers. But you've got to be a big company in corn and soybeans to be able to afford the economics of that. But it gives you incredible reach and access to your farmer customers. So we're trying to imitate that without having a farmer dealer network because we're not a basic company in corn or soybeans nor as you can tell from our plan, do we plan to be in the sense that we've picked our 3 crops and we're going to focus on them, is that to say that, if germplasm company came along and we saw an opportunity for non-GM corn in international markets that we already have a significant share in, that -- maybe we could consider that? Yes, but I come from a household where we stick to the plan. And the plan is sorghum, sunflower, alfalfa and stevia, and we're going to try to stick to that as close as we can without leaving any opportunities pushing them off the table without at least looking at them.

Got you.

So we're trying to get closer to the farmer. We believe as farmers consolidate that there is fewer and fewer of them. And it -- and that they are smart people and they make good decisions. And that they make it based on good data. The performance of our seed varieties and other company seed varieties in their local markets. And that's the kind of thing that we want to show that -- we want to demonstrate and show that we can be a good partner with our customers.

Yes, that makes a hell of a lot of sense. Another question I have is, would the shift of hybrid operations to Australia and bringing David on board. I'm curious if your earlier estimates of kind of a 5-year target in the $30 million range are still appropriate? Or did you make those initiatives because you think the ceiling may be a bit higher than that $30 million range in the long term?

You're just trying to get me to say a number higher than $30 million. I'm not going to do it. I'm just not going to do it, Ben. You're a persuasive guy, but I'm not going to do it. I mean, we think $30 million is a gigantic target. We're going to be the happiest group of managers and sales, research people in the whole world, we get to $30 million. We're going to Australia because frankly the timelines are a bit shorter, right. The material has been chosen for Australia conditions. We're in the -- what a seed company does? They do their plant breeding and then they evaluate those hybrids in the field with farmers for a couple of years and then they decide what they're good ones are. And then they raise, what we call, foundation seeds, which are the mother seeds that we grow all the commercial seeds from, and then we have to put commercial seeds in the field and harvest those, clean those, bag those and sell them to customers. So that's why Matt said that, the process is always slower at the beginning. And then, hopefully, gain some momentum. And we think that momentum is a couple of years more advanced in Australia than it is, for instance, in the U.S. for us. But we're going to be in high cotton, so to speak, if we hit $30 million in 5 years.

Very good. Well, and you can't blame a guy for trying, but I appreciate those. Next question I have is with regards to the stevia development. I'm curious on the last call you talked about the development agreement that negotiations are ongoing for kind of the next generation. But I'm curious if you could update us the status of that?

Yes, so we haven't made an announcement yet. So there's really not anything officially I can say. And, but we're pretty close to a multiyear agreement with one of the big customers in the stevia market. And that's about, all I can say, right now. But there -- no one could be as excited as me, so there are almost as excited as me. And -- but we think we're getting there, and we're going to have to put a little bit of money into stevia. Some of our breeding programs have some places where we need some work. We do need to do some mark-assisted building there in a way that we haven't done it before. We're working on some new analysis techniques on HPLC and mass-spec to make sure that our varieties have the performance we think they have. It's a little bit more difficult. So this is one of the difficulties at stevia. So a little bit more difficult than just going after yields because, I think, as Mike asked, you have to manage this Reb profile Reb A, M, L whatever they are, K, I think, there is, you have to manage that taste profile as well as yield. So you're looking at total yield, but you're also looking at the quality of the yield. And that's why these analysis techniques are so important. And we just want to make sure that on a science basis, we're actually up to speed with everything that we can be doing there to maximize the efficiency of our breeding program.

Very good. And a question regarding Saudi that the level of uncertainty on the Saudi market seems unchanged over the past few quarters. And it seems that your customers are kind of looking at one of a dozen different things they can do in the aftermath here, but there is no -- there is no more clarity today than there was a couple of quarters ago from what I can tell in your comments. Do you have any sense that your customers are gaining any clarity? Or is it truly is uncertain today? Is the strategy is uncertain today as it was a few quarters ago?

No, I think that they're getting any clarity. I mean, just make sure that we all understand here what we're talking about structurally, right. These are huge dairies. The biggest in the world and they're vertically integrated, right. So you're in a vertically integrated business where you've got the production of the feed, the cows, the bottling plant, the distribution trucks that go to all the grocery stores. You've got at least 4 steps, you're not selling the milk directly to customers yourself, those are going through grocery stores, but you're basically doing everything else, but that. And for them we all like to understand and reap the profits of vertical integration because there are cost savings and you get to the market probably faster, you're more innovative in your understanding of what new products need to look like. But you've got an investment in that vertical stack of assets. And so when somebody basically kicks the basement window out, they tell you that, that you can't have any water to grow the crop. It's not exactly in all respect of these big companies. It's not the easiest thing to go, to think through your vertically integrated strategy and figure out which pieces at the least cost and profitability can come out of your stack -- of your vertical stack to allow you to continue to be a profitable company. So I'm not going to mention names because that would just get me in dutch with some people, but it's clear that some of the companies are doing better than others at managing this issue, when we talk to them that's kind of what we -- some companies we hear with a pretty good understanding of what their issues are and what their options to solve those issues are, and others are still frankly, a bit caught in the deafness of the hand grenade going off next to them in the sense that their basic business assumption that a vertically integrated business was the most efficient way to address the dairy markets in Saudi has been thrown on [its ear]. And it's very difficult. I might take my head off to them. I think they're all trying to do a great job, and I just don't -- if I was in their place, I don't know what I did -- what I would necessarily do. And I'm coming from not just my feed background or the CEO of S&W, but I have been in the dairy business. I am in the dairy business, my partners operate at dairy. I have some direct experience with what happens at the dairy day-to-day. And it still is incredibly difficult to figure out what there is to do when you have this vertical stack of added value that's built on getting high quality milk and milk products to a local market. And then, that's turned on its ear because water is taken away from you. I think it's daunting. I'll just add that this water problem is a problem around the world. And I think Saudi's may be brave in the sense that they've been one of the first countries to sort of take this head on and try to make a decision. And I just wonder what other countries including parts of the U.S. need to go through the same kind of hard decision-making to get to a situation where we've got an equilibrium environment in water usage for agriculture.

I could certainly see that and I certainly empathize with what the position there is. Last question from me, a quick one and I'll jump back in queue here. The $50 million Pioneer number that you discussed. Could you remind us what that was Q2 last year?

It was -- that is -- it's roughly the same number and there's a little bit of variability, but there -- year-over-year for Pioneer will be pretty much be in line with the prior year number. And year-to-date, we're roughly in line with where we're at last year.

Our next question comes from [Keith Gill] with [Carter Kerry].

My question was already answered previously. Thank you very much.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Mark Wong for any closing remarks.

Yes. I would just, again, like to thank all who are on the call today especially the analysts who follow S&W. Without your support the public would not know about us, and we value your questions, your commitment to understanding our company. And we look forward to obviously working with you all in the future. Again, I want to thank our new board members, our old board members, our employees. I hope everyone feels like I do that there is some momentum gaining in the company. We're all learning from each other. We're all learning from the different skill sets that we bring to the table for all of these problems that we're trying to address. We're not trying to -- we're doing something that is not easy. We're creating a new kind of company in these middle-market crops. And we think we have the skill set to do it. And we certainly have the support of our shareholders. But these things are never easy and you can depend on our commitment and our intelligence and our work ethic to try to get this done to have the best of the abilities of our organization. So thank you everybody. It's always great being on these calls, I obviously enjoy them. And thank you all for your following of S&W.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.