S&W Seed Co (SANW) 2021 Q2 法說會逐字稿

Good day, and welcome to the S&W Seed Company Second Quarter of the Fiscal Year 2021 Financial Results Conference Call. (Operator Instructions) Please note that this event is being recorded.

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

All right. Thank you so much, and good morning, everyone. Thank you for joining us today to discuss the financial results for S&W Seed Company for the second quarter of fiscal 2021 for the period ended December 31, 2020. With us on the call representing the company today are Mr. Mark Wong, President and Chief Executive Officer; 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.

Before we begin with prepared remarks, please note that 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, 2020, 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, please proceed.

Thank you so much, Robert, and hello to everyone on the call today. It's always exciting to be able to speak to everybody. The management team, Matt and myself included, are obviously very excited about what's happening at S&W, and it's always our privilege to continue that story with all of you.

So just a reminder of a couple of things that are important when understanding what we're doing at S&W as a management team. We continue with the strategy of moving from our history of being a single-crop company in alfalfa to now, obviously, focusing on alfalfa but also sorghum, sunflower, wheat, stevia and the pasture products that we acquired in our acquisition of Pasture Genetics early in the calendar year last year.

And I haven't said much about the pasture products, and so I wanted to just spend a minute speaking about those. They're mainly, right now, our product line focused in Australia, although we're moving those products to the U.S. also. In Australia, we believe that there is a huge opportunity to improve both the pasture and animal yields per acre in Australia, and we see some very innovative things happening on the pasture side.

So on the animal side, we see people trying to manage the cattle on a much more renewable, regenerative basis. So there's this term regenerative agriculture where animals really are part of the process to generate uptake of carbon into the pastures. And so we see the first deal in Australia, Wilmot Cattle Company, in New South Wales, Australia just announced a sale of $500,000 of carbon credits to Microsoft. We think that's the kind of deal that you're going to see more of, and we think our position in pasture products allows us to work with those cattle companies like Wilmot and create these kind of opportunities.

Also, I'm not sure in my background but -- that people know this, but I was CEO of Pacific Fruit Company in the U.S., which was, 20 years ago, when I did this, one of the biggest apple companies in the U.S., up in the Wenatchee, Yakima, Washington area. We had about 15,000 acres of apples and cherries. So I have a big background in permanent tree crops. And as you all know, lots of people are looking at these pasture and cover crops for almonds, avocados, apples, cherries, the crops I was in before. And we just think that there's a real opportunity to basically improve soil management, improve water conservation in those acres. And so I haven't spoken much about pasture products, but we're really excited about the opportunities that we think those products will give us in the future.

So continuing on, though, again, we are the only company that has an integrated technology. And that means, in our definition, traits and also germplasm, elite germplasm, that we develop ourselves. So that combination of putting those traits into our elite products for farmers is what we do. And we're focused, as you've heard before, on those crops that are the next largest in acreage after kind of corn, soybeans and cotton, the big crops that the big 4 are mostly concentrated on.

So we continue to develop those crops. We're excited about our trait programs that we announced in December. Our first trait introduction is happening as we speak in the Northern Hemisphere's spring planting season. So we're gearing up to introduce our Double Team sorghum, which is a broad spectrum grass herbicide that we -- gene, that we have embedded in our elite sorghum products. And then in the fall, we're going to be concentrating on introducing our first alfalfa trait, and that's our improved quality trait where we basically down-regulated the lignin pathway. And we've created a more digestible alfalfa for dairy and beef cows.

So we're pretty excited about all those. As you know, traits take a long time to develop, somewhere around 6 to 8 years. So when a company like ours has these traits to put into the market finally, it's been a long process and a long wait and a lot of hard work on the part of our technical and research people. And it's a great opportunity to show the market what kind of new and innovative products we can develop.

So we're really excited about those traits coming. We're really excited about the 5 -- 6 crops that we're in. And as I said, we're looking always as in the pasture products for new, innovative ways to use the traditional products in new ways that the ag markets are calling for. So all exciting things at S&W.

We also find ourselves in a very excellent ag market. And so the commodity prices continue to be strong. Corn is up about 45%. The commodity price for #2 yellow corn is up about 45% over last year. At the same time, and sorghum is about up 30% over last year's commodity price. So farmers are excited to see what planting decisions based on whether they're going to -- and economics they're going to make this year. And we're coming up to that season, right, where in the Northern Hemisphere, especially in the U.S., we start seeing planting.

In the southern part of the country in March and marching North as the weather warms and soil temperatures increase. So it's an exciting time for all seed companies. It's -- and it's a great time for the seed industry and for other input industries because commodity prices are high and farmers can make money.

So the net improvement to us -- we're pretty, as I said, optimistic about this year. You're going to hear some details from Matt about our sales forecast this year, but I want to tell you all that for 2021, the full fiscal year, we think core revenues -- we're going to increase our guidance. We think core revenues are going to be in the sort of $78 million to $81 million range for our core business. That means not counting our Pioneer business. That's about 30% to 35% above last year.

The growth's mainly coming in the U.S. and Australia, our 2 key markets, the 2 markets that are the sort of linchpins of our strategy. And as we integrate our acquisitions, so the Chromatin acquisition in the U.S. where we acquired sorghum and we frankly acquired the Double Team trait, and the Pasture Genetics acquisition about a year ago in Australia. Those have really strengthened our operations and our understanding of the market and our ability to deliver products to the market. And so we'd like to tell the market -- tell all of you that we're going to be increasing our guidance.

So for the full year, counting Pioneer, we're saying sales will be $92.5 million to $95.5 million for the full 2021 year. So that's really exciting for us. All of our management and employees are working hard to make that happen. And Matt will give you some more details on kind of the financial picture for the company.

But it's looking like one of those years that we all are in the ag business for: good commodity prices, exciting introductions of new products from our breeding programs and our first traits into the market. So all good things for this year. So that's -- and then that's obviously translating to increasing our guidance for the year.

So with that, I think I'll turn it over to Matt, and he'll give you some of the details on what's going on from the financial side of the company. Matt, please, up to you.

Thank you, Mark, and thanks to everyone joining us on the call this morning. So now just jumping into the second quarter results. Core revenue, which excludes revenue to Pioneer, was $11 million for the second quarter, an increase of 20% compared to $9.2 million in the second quarter of the prior year. Keep in mind that we also delivered core revenue growth of 59% during our fiscal 2020 period. Total revenue, which includes revenue to Pioneer, was $15.1 million for the second quarter compared to $12.4 million in the second quarter of the prior year.

Now, as we look to the remainder of the year, we are increasing our guidance for core revenue and total revenue. We now expect core revenue to be within a range of $78 million to $81 million for fiscal 2021, representing core revenue growth of 30% to 35%. This rapid growth is expected to come primarily from our 2 key home markets that Mark touched on, the United States and Australia. And as a reminder, we've previously provided guidance that core revenue growth would increase 22% to 32% year-over-year. So we are pleased with how the second half of the year is looking based on our latest sales forecast progress. Also, we expect total revenue, which includes contributions from Pioneer, for the current year to be within a range of $92.5 million to $95.5 million.

Now, quickly turning to gross margins. GAAP gross margins were 13.5% in the second quarter of 2021 compared to GAAP gross margins of 17.7% in the second quarter of the prior year. The decrease in gross margins for the quarter was primarily driven by strategic lower-margin alfalfa sales into certain regions in order for us to gain market share and also targeted low-margin sales to clear excess inventory. This was also -- and that excess inventory is specific to alfalfa, I'll add.

This was coupled with the absence of certain higher-margin product sales, which shifted from the second quarter of this year to the third quarter of 2021. And as discussed last quarter, we are expecting gross margins in 2021 to show meaningful improvement over 2020, and this improvement is expected to come primarily from the growth of our higher-margin sorghum products and overall sales mix in the second half of the year.

Our adjusted operating expenses for the second quarter of 2021 were $9.4 million compared to $8 million in 2020. The increase in operating expenses for the second quarter can be attributed to additional expenses from the acquisition of Pasture Genetics, which occurred in February of 2020, and additional investments in our sales and marketing and R&D functions. We expect that operating leverage will continue to improve in the second half of the year as we enter the primary selling season. And as previously mentioned, over the last several quarters, we have made several investments in purposeful spend in sales and marketing and product development functions.

Now, we've discussed this during the last 2 quarterly calls, but I'd like to clarify our guidance for operating expenses, including Pasture Genetics, for the full year. We expect full year fiscal 2021 operating expenses as follows: SG&A to be approximately $22 million, which excludes noncash stock-based compensation of approximately $1.5 million; research and development expenses to be approximately $8 million in fiscal 2021; and depreciation and amortization to be approximately $6 million.

Now, at the adjusted EBITDA line, we had negative EBITDA of $5.5 million for the second quarter. This compared to negative EBITDA of $4.2 million in the prior year. The second quarter of this year was impacted by a timing shift of product revenues to Pioneer. So please note that we'll recognize the remaining $9 million of Pioneer revenue during the third quarter of this fiscal year. The second quarter was also impacted by lower-margin alfalfa sales as well as our purposeful investment in both sales and marketing and R&D functions.

So based on the improved seasonality throughout the remainder of the year, which includes a trend towards higher-margin products, we believe you'll see significant improvements in adjusted EBITDA in the quarters to come. As we leverage our infrastructure and deliver core revenue growth, our goal continues to be driving towards positive EBITDA contribution over the coming periods.

Now quickly moving to the balance sheet, I do want to point out that we continue to make progress in reducing our inventory levels and freeing up working capital. We've talked about this for several quarters now, but I'd like to stress that our alfalfa inventory balances have decreased approximately $18 million or 28% over the last 12 months, and we expect this trend to continue during the remainder of this year and into 2022. And when you look at our total inventory levels for December 2020 versus the same time last year, our balances are down approximately 5%, but this is even after taking into account an $8 million increase in inventory from the Pasture Genetics acquisition as well as strategically increasing production of our projected increase in sorghum sales. This progress is a reflection of the ongoing efforts to continue to reduce alfalfa inventory balances and convert this inventory to cash. So more work is ahead of us, but we believe we're on track, and we've made significant progress.

So to summarize, we're continuing to execute against our plan. The year-to-date results through December represent our seasonally lower volume and lower-margin business. This will act as a pivot to what the remainder of this year will look like with improvements in core revenue, gross margins and, of course, further leveraging our infrastructure.

So with that, I will turn the call back over to Mark.

Thank you, Matt. And so I just want to conclude by reminding everybody we are extremely excited about our improved sales outlook. We think that our strategy of expanding our offerings to our 6 crops and including traits is starting to show real progress. And that, given also the buoyant ag commodity pricing and the expectations of farmers for a good year that 2021 and, frankly, 2022 are going to be really good years for the ag industry in general and for S&W in particular.

So thanks all for being on the call today, and we're going to open it up for questions. So operator, please.

(Operator Instructions) The first question comes from Sarkis Sherbetchyan with B. Riley Securities.

So just want to touch on the increase in the guide. Clearly, a positive step as we head to the back half of the year. Just want to understand the cadence of sales and margins for the back half of the year, kind of given what we've seen so far year-to-date. Matt, I think last call, you mentioned on the year 23% to 24% gross margin levels. Is that still the target that you plan to achieve? Or should we think about that differently?

Yes. Sarkis, I think for the back half of the year -- well, for the full year, Sarkis, we're still -- excluding the inventory write-down we took in Q1, we are still expecting gross margins to be in that 23% to 24% range for the full year. And so as we look to the back half of the year, that's -- we're looking at margins in the mid-20s, say, 25% to 27% for both Q3 and Q4.

And then from a revenue cadence, Sarkis, if we're looking at the midpoint of the new guidance we guided to, which is -- would be about $94 million, of that amount, I would say, about 45% of that second half of the year is going to be recorded in Q3, and the rest would happen in Q4, obviously. That's obviously subject to timing issues, potential timing delays. But overall, we're feeling good about those -- the guidance we've given.

Got it. And in this guide up, have you contemplated the Double Team sorghum trait that's essentially being commercialized kind of as we speak? Are there any potential license opportunities that are being factored in there? Just kind of trying to understand what the trait introductions mean to the business for the second half of the year.

Yes. So Sarkis, the -- as I've said before, the whole product development cycle is a 6- to 8-year cycle, so relatively slow compared to maybe some other industries. But in the first years of a new product introduction, you usually are limited on your seed supply just because the parent seed that we have can't be multiplied quick enough to satisfy all of the demand in the marketplace.

So the first year, which is this year, the spring we're coming into, we're really going to -- we know we're going to be sold out. We're going to obviously establish the -- what we think the value is for the trait. So we're going to put a price on it. We haven't announced that price yet, but we will as we get closer to the sorghum season in the U.S. And it's a U.S. introduction, so all the seeds this year will be planted in the U.S.

And in a situation like this where we're in a situation where there's more demand than supply, we're very careful which farmers we're selling to. We want what we call bell cow farmers, the guys who really are the professional best farmers in their counties who know how to plant the seed and have a problem with grassy weeds, which is the target for the herbicide. And it's most important to us, frankly, not to have the sales dollars but to have the following of key customers in the market, so that next year, which will be significant in terms of sales, the 2022 year, we're off to a really good start.

So from '22 to '23, demand and supply will come more in balance. And by '23, I'd say, there will be a significant contribution from the Double Team trait to our sales but more importantly, because of the margins to our profitability.

In terms of licensees, we're starting that process now. We're talking to the major shareholders of sorghum share in the U.S. And as we've said before, think of us as following a lot of the strategies we learned at Monsanto, and we're in the process of vetting the technical performance of our gene and our germplasm with those potential licensees. So more on that as they and we see the performance of the product in the field this year.

Great. And just one more for me and I'll hop back in the queue. I'm trying to reconcile essentially when the business begins to generate operating leverage. And certainly, the back half of the fiscal year seems to be when we'll see more of that relative to the OpEx line, right? So Mark or Matt, just help me understand, when would we expect sustainable profitability? If you can maybe just give us a milestone to expect there from a time line perspective.

Yes. I mean I've said in past calls that given the kind of growth rate we have in sales and our improving margins, both because of mix in the short term -- and what I mean by that is on a relative-weighted basis more grain sorghum sales versus forage sorghum and alfalfa sales -- I still expect that 2022 is going to be a breakeven EBITDA year. A lot can happen, good and bad, between now and then. But obviously, in 6 months when we prepare the budgets and we -- and our Board reviews that and we have the opportunity to convey that information to the investing public, we'll be optimistic that the breakeven is definitely a possibility.

So as Matt said many, many times on many, many calls, we've spent the money on sales and marketing and R&D to give us the position that we have in products and in traits. That can -- that spend will continue because we want this to be a continuous process and for our germplasm to continue to evolve to better products and our traits to continue to be discovered and marketed through our proprietary germplasm and through our licensees. And so we think that we're going to start seeing in '22 real contribution to earnings based on the traits and the efficiencies of basically having invested in the business for the first 3, 4 years of my being here and finally, seeing the financial rewards for that.

So we're already seeing the product rewards for that, right? But it just takes a while to convince our customer base and win new customers. And so we're optimistic that that's now the point of inflection that we're at, and that's why we're increasing our guidance. Sales are going well in our 2 home markets, our 2 strongest markets, and we expect that to continue into future years.

(Operator Instructions) The next question comes from Ben Klieve with National Securities Corporation.

First, Matt, I just have a quick clarification question for something you said around Pioneer revenue. Did you say that you expect the remaining $9 million of Pioneer revenue to all be recognized in the third quarter? Did I hear that right?

That's right, Ben. And that would bring our full year revenues for Pioneer to just under $15 million.

Okay. Got it. Perfect. Then, Mark, I have a question on your comments at the very beginning of the call when you talked about the -- your perspective on pasture products and grower adoption in the U.S. given sustainability benefits. Do you also think there's any real potential for you to leverage your breeding capabilities within these crops, integrate more technology into them? Or given that they are relatively small acre on an individual basis, does it just not make sense for you to invest too heavily in R&D there?

Yes. So in the short term -- that's a great question, Ben, and one we wrestle with all the time because, obviously, there's near-term costs because of the long development times of some of these products, but also there's long-term benefit. And we're such an interesting company, and I'm glad that the public is starting to appreciate that. We're -- we have technology. We're not as technology-focused as some of the smaller companies in the ag industry, but we do have technology.

And -- but what we also have is, we got -- based on our guidance here, we've got $100 million in sales. And you've got to look long and far to find a company that has both technology and the ability to distribute it in real products, right? Other technology companies are really dependent on doing deals with companies like us or the big guys to introduce their traits in the market. They really don't have the basic seed position and breeding programs to have the products to put in the market.

So we're always wrestling with this question about what technologies should we be investing in. Because, frankly, the technology toolbox is getting easier to use and cheaper to use, therefore, than when I first got in the market, obviously now, a long, long time ago, 40 years ago. And we were doing GMO products with bacteria vectors, and now you can just use CRISPR.

So we're looking at it all the time. I can say, though, that in the near term, we think it's really important to cross over into profitability. And that is our focus now: to take advantage of those scale opportunities that Matt has talked about before, where we're really building sales based on our investments that we've made in sales and marketing and R&D in the last 4 years. And we want to see that come to fruition, right? We want to be in a position where we are cash flow breakeven or generating cash, and we get the benefit of that in terms of longevity and the ability to raise new capital for acquisitions and all the things that come with that.

So it's a great question. It's one that we wrestle with all the time. There's not a clear answer, but hopefully, I've given you a little bit of sort of the plus and the minus and how we're walking the balance beam of technology to both have proprietary products in the market, real sales and the ability to generate our own technology-based products.

Yes. No, that is helpful. I appreciate those comments. I think last one for me around the ramp of the inventory levels in your Double Team sorghum. Can you just kind of talk about how that inventory ramp has developed over the last year and kind of what your approach is going to be over the next couple of years from the perspective of -- are you looking to build inventory off-season in South America? Are you -- and kind of what are the limiting factors that are keeping that inventory build to the level that you expect? Is there a reason to believe that there could be a dramatic increase in inventory levels in the next couple of years beyond what you are kind of internally targeting?

Sure. So as I said, the traits are fairly long term to develop, 6 to 8 years. So the original work was done by Chromatin. So when we purchased the company, they had done many years of work, and we were in the position to evaluate basically the gene that they had. Nobody knew at that time whether the gene was really functional, right? And you need to have a herbicide-resistant gene that's basically 100% functional. The farmer does not want to spray over the top of his sorghum field for his grass weeds -- and remember, sorghum is also a grass -- and have some of the sorghum plants die, right? Even if you control the weeds, he doesn't like it when his -- the target crop, sorghum, is also -- has a few plants that die.

And so even a couple of percent of plants in your bag of seed that do not have the gene can be problematic. And so we had to evaluate the performance of the product for 2 years in the field, and we made the decision this year that it was really -- the gene was really functioning well. And remember, we developed this gene in our own technology through our tissue culture process that we have. And we always are working on other herbicide genes using that tissue culture process also. But we decided that the gene was ready to go, basically, and that it would perform well in the farmers' field and farmers would be happy with it.

So we went to off-season production in Puerto Rico. Remember that sorghum -- grain sorghum, so the genes in grain sorghum, that's our first product launch. The grain sorghum is a 3 -- is a hybrid, and it's a 3-line system, so it has a male, a female and a restorer gene. So we have to sort of increase the seed of all the parents. And then we can produce the seed that we sell to farmers by planting the male and female seed in a contract farmer's field that we -- and that's how we grow our seed.

So we went to Puerto Rico. We had some problems, frankly, with COVID. We couldn't get our people into Puerto Rico. It was just sort of one nightmare against another. So when we're -- say we're excited about the product, we do have a smile on our faces because a lot of our employees did some really hard work to sort of get these productions off-season that you mentioned to be successful. A lot more work than we normally would have to do if COVID was not a problem and international travel was not a problem.

We also did some seed increase in Mexico, and so that was another place where we felt there was an opportunity to get basically 2 crops in 1 calendar year. And we'll -- we're still thinking about what our plan is going to be for 2021 to '22, that sort of off-season year. We'll probably do some off-season production, but we also have technical improvements in the hybrids and the gene that we're working on. And so it's always an improved product that -- for the farmer that we're trying to produce. And there's always continued work doing that in the first couple of years of any product launch.

So we've done this before. We've introduced herbicide resistance in other crops, cotton being the main one in previous iterations of a management team and me as a CEO. And in my last company, when we sold that to Monsanto, there was about $75 million of embedded profits -- Monsanto gene profits in the products. And that's why they obviously bought the company, they wanted those embedded gene profits. And so we've been there before. That doesn't mean it's any easier, but it does mean we've made our share of mistakes in the past. And we've learned from that, and we're not going to do that again. So there is some benefit to experience.

So it's an exciting time. And as you say, we will have to go to do some off-season production to keep the amount of seed available to farmers, the supply and demand equation that I sort of talked about previously for '22 and '23. We're keeping a sharp eye on that.

The next question comes from Gerry Sweeney with ROTH Capital.

Mark, you kind of touched upon this a little bit. And this was a question I did want to ask you prior was, obviously, you're building out your trait, trait development, all the technology around that. You do have some distribution here in U.S., Australia, Pasture Genetics. At what point does S&W become an attractive company for other of these technology companies that you mentioned to sell to you? I'm not looking for you to sell, but may -- at some point, do companies start coming to you and say, "Hey, you got a lot of attributes, middle market, a lot of distribution." Is that an opportunity in the midterm?

Sure, Gerry. Great question also. Yes, definitely, it's an opportunity. And definitely, we're in those kind of discussions with companies all the time. We are always focused on our 6 crops, right? So how these discussions are usually generated is we know all the technology companies. They know us. I've been in the business 40 years. I know all these guys. And it's always a good discussion because with that sort of common history comes the ability to just kind of get to the point and talk about what the opportunities really are.

We're under CA with most of those companies continuously, so it allows us to interact with them. And basically, they and we are focused on our 6 crops, right? So they're -- when they have a trait that -- or a product improvement that they think has a market opportunity in 1 of our 6 crops, they usually -- or we usually call them once they make an announcement, but they usually call us because we -- that's our specialty. The big guys are focused on -- the big 4 are focused on corn and soybeans and cotton. Yes, some of them sell sorghum. Yes, some of them sell sunflower.

But it's different for a big company, as efficient as they are and profitable as they are. It's different for them because they know where they make their money, and it's in corn, soybeans and cotton. And if a small technology company wants to introduce something new, sometimes it's better to be partners with us because they know we're going to pay attention because it's important to us also.

So we tend to get opportunities and discussions in our 6 crops, and that suits us just fine because it goes along with our own internal technology capabilities, and it allows us to sort of see what other people think of the opportunities in our 6 crops. And so it's a great opportunity for us to have some pretty interesting discussions about where the 6 crops are going and what industry improvements are sort of coming. And people are talking about how to use these crops in biofuels, how to use these crops in renewable plastics. These are all discussions that we have many times a month with different technology partners.

So it's a really fun time to be a seed -- integrated seed company with the ability to carry traits through distribution and have your own production. It's a great time to be in these 6 crops, and we think there's only going to be more interesting news in the future because the people are starting to focus on the crops that we focus on. And we think it's a natural evolution of both technology and the seed industry in general.

Got it. And the question is probably inverted -- or these 2 questions are probably inverted, but the first one was sort of a natural progression. But -- and I may have been asked this in the past. But middle markets may be under-invested by the big guys just from a maybe pure business or economic reason. Is there anything you would like to have improve, invest in, acquire to sort of broaden out or better position the market? I know it's a pretty wide-open question, but...

Yes, I'm smiling, only because you're such a smart guy, and I'm trying to figure out what -- how much I want to say about that, right, because...

That's why I ask questions. I just ask broad questions. [I don't know if you'll] take it in.

Do I -- yes. So do I really want to sort of stake out ground here? Or do I want to sort of keep some things a little bit under the vest.

You can defer it (multiple speakers) I'll just ask it. (multiple speakers)

No, no, no. You're a smart guy. All the analysts that follow us are really smart guys, and we appreciate that you pay attention to us and are interested enough in ag and in the seed industry to put the time into understanding S&W.

I'll just say, we really like the pasture area. Obviously, we're moving those products from Australia to the U.S. And so a U.S. acquisition to bolster our product line in pastures, sort of North American acquisition, that would be something we would consider.

We have built up our distribution in the U.S. and Australia through Chromatin and through the Pasture Genetics acquisitions. So we're pretty comfortable that we can reach farmers, that we can reach bigger customers that we haven't sold before like distributors and co-ops and people like that. So that's kind of all I want to say.

Obviously, there's some other things that we're working on all the time. But sometimes, it takes -- it's like a fine scotch, right? It takes a few years for these ideas to kind of blossom and age a little bit, so that they really look like an opportunity and are worth putting time and money into. Because nothing in this industry is free. As I said, there are pretty long product time lines. And so once your research and product development pipeline is full, like ours is now, that's when management is happy. That's when you're spending all the money and all the years to develop these things. So that's why we're so excited, and that's why it's such a fun thing to be a part of the management team at S&W right now.

The next question comes from Sarkis Sherbetchyan with B. Riley Securities.

Just a quick one on the recent announcement for the Five Points California facility sale. Maybe help me understand if the $1 million in annualized cost synergies from consolidating the plant ops from California to -- I believe it was Nampa in the New Deal, Texas facility. Is that contemplated in the go-forward gross margins? Or is there a potential benefit there to think about?

Yes. Yes, sure, Sarkis. So those costs, basically, the reduction in those operating expenses are in effect now. But keep in mind that those reduction in plant production costs are, in essence, reducing our cost of inventory. So for the next 6 months, it's really just going to be reducing the cost, the carrying cost of our inventory on our balance sheet. And as that production sold through in the next fiscal year, that's when we'll see that flowing through the gross margin and obviously, EBITDA line item. So it's really more of an upside to next year as opposed to a P&L contributor for the next 6 months.

Right. And that's predominantly alfalfa, right? That's the way to think about it?

That's right. The Five Points facility was all a nondormant alfalfa region. So by consolidating those operations into Nampa, we're really increasing our throughput and reducing our overall cost per unit in alfalfa production.

Okay. And so as we kind of go back and think about the inventory write-downs in alfalfa, the strategic selling into perhaps lower-margin regions to gain share, I guess -- and your inventory reduction in alfalfa, like do you think next fiscal year is shaping up to be better for your alfalfa line as well? I know we spent a lot of time clearly on sorghum in growth and the nice margins you'd expect there. But I just want to also touch on alfalfa and what you think the business is shaping up for next year and whether there's an opportunity for potentially realizing improved margins and pricing in that crop.

Yes. I mean sure. So I guess, one, just to clarify. So we've -- the U.S. is the most expensive place to produce nondormant alfalfa. So we've made a concerted effort to reduce production in the U.S. and move that production to lower-cost regions, particularly Australia. The cost of goods in Australia is significantly less than doing that in California. So taking that step as well as working through our existing inventory levels is certainly lining up for a nice year-over-year improvement in alfalfa margins.

We still have a bit of work to do. But with that being said, the market is turning for us. I will say that in the San Joaquin Valley and Imperial Valleys of California, which are the 2 primary regions where you could produce nondormant alfalfa in the United States, those production levels, not for us, but just the overall industry, is down to 10-year lows. So this is all lining up for some positive price movements here in the coming periods.

Does that answer your question, Sarkis?

Yes.

This concludes our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

So this is Mark Wong, and thanks to everybody for being on the call today. As I and Matt have said, we're very excited about the current situation at S&W, the remainder of this fiscal year and then looking to '22. And we have increased our guidance because we think that our sales are really starting to go pretty well, and the investment that we've made in sales and marketing and new sales teams, sales training, all of those kind of things are starting to pay off. So as I said, it's a great time with the commodity prices being what they are to be in the seed industry and to be part of S&W, and we're very thankful for that opportunity.

So thanks again to everybody who's on the call today. Appreciate your interest in S&W.

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