S&W Seed Co (SANW) 2020 Q3 法說會逐字稿

Good morning. Welcome to S&W Seed Company's Third Quarter Fiscal Year 2020 Financial Results. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Robert Blum from Lytham Partners. Go ahead.

Thank you so much, operator, and thank all of you for joining us today to discuss the financial results for S&W Seed Company for the third quarter of fiscal 2020 ended March 31, 2020. With us on the call representing the company today are Mr. Mark Wong, President and Chief Executive Officer; and 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, 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, 2019, 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, Robert, and good morning to everyone on the call this morning. I'm going to divide my talk this morning into 3 pieces. I'm going to, obviously, address COVID-19 and sort of the pandemic world that we are all operating in today. I'm going to then talk a little bit about how COVID-19 affects some of the ag markets that we're in and how we sort of view those effects. And lastly, obviously, I'm going to focus those thoughts and logics on S&W and tell you a little bit about what we're doing to deal with that and what we see as the near-term future of the company within what we're calling a pandemic world.

So COVID-19. Obviously, it's in the news all the time, maybe more than we even want to hear anymore. And in the U.S., we're opening up the country after flattening the curve and giving the health care professionals in the country a chance to deal with all of the sick people that have caught the disease -- caught the virus, and that seems to be working. But now, we're in the opening up the country phase.

So first, I think what needs to be said is that first and foremost, S&W is a science-based company. We use DNA techniques, RNA techniques in our product development. We can build our own markers, genetic markers to look at different traits that we're searching for within the crops that we operate in.

We have big programs, obviously, in our 2 key crops, alfalfa and sorghum, but also programs in wheat and other crops like that. So we realized that though as a science-based company, we're also operating in a market of national politics. And I'm not going to go into, obviously, too many of the national politics in the U.S. But it should be said that you can't just be a science-based company, you have to think about how science is going to be applied in the countries of major operations and how you're going to be successful in those mixtures of science-based products and political sort of influences that are making decisions for the population of your operating countries.

So a little bit on the virus itself. You've probably all heard this term herd immunity. It means that approximately 60% or 70% of the population have come in contact with the COVID-19 and now have antibodies. We're going to -- as that happens, we're going to learn how much protection those antibodies give us. The bad news would be maybe 3 to 6 months protection against COVID-19. The good news would be a couple 2 years, 3 years or longer against COVID-19.

There's 2 ways to get antibodies. Basically, you can get the disease. And so that's what we're trying to control. How many people get the disease and how quickly they get it? We also can develop vaccines. There's basically 3 or 4 processes that are used traditionally to invent or find vaccines. You can use heat, you can use formalin, or you can attenuate the virus, basically, weaken it so that you can put a live virus in a person.

And then so you get a couple of different products. You get inactivated vaccines, like for polio, for hepatitis A, for influenza, for rabies. And you can also put part of the virus in these traditional methods into the actual vaccine. And so vaccines for diseases, viral diseases like hepatitis B and shingles and human papillomavirus, all have that as kind of the product strategy.

We believe, though, that in COVID-19, these traditional methods are not going to be very successful. The virus is a very difficult one to use with these methods. And so when you hear that there's 100 vaccines being tried and, hopefully, we have 10 that go through trials rapidly, these are all genetic DNA or RNA viruses. And they are mainly focused on the binding sites in the spike protein that you see in all the cartoons of the COVID-19 where it's a kind of circular virus, a sphere with all these like mushroom like things poking out of the top.

And it's pretty clear that COVID-19 is kind of a cousin of viruses that have come before. There's huge homology between COVID-19 and other viruses, and the binding sites, as I mentioned, that the RNA and DNA, new vaccines are targeting. But there has not been -- this is all new technology, and there has not been an existing vaccine made from DNA or RNA technology.

And so we are hopeful that there will be a successful vaccine, but we're also trying to plan for a situation where that vaccine may be off in the future or may, in fact, never come. Because there are viral diseases where a vaccine has been worked on for many, many years, and there has been no success on finding a vaccine. And the biggest example there is the AIDS virus. We've been working on that for 15, 20 years, and there's still no vaccine for that.

So we're thinking of a world really where COVID-19, this pandemic that we're all in, hopefully, there's a vaccine. But the sort of worst-case is that the virus is in the market now. We continue to control it at different levels in different countries around the world. The world population gets exposed to it, and different percentages in different countries of the population of those countries get antibodies because they've actually had the disease. But to get to the 60% or 70% population, we think -- exposed to the COVID-19, we think that it's going to take a couple more rounds, unfortunately, of infection before a vaccine is available.

So we're sort of saying in our assumptions, the vaccine is available in the summer of 2022. And maybe the COVID-19 comes back in the fall of 2021 and in the spring of 2022. So we're planning for a situation where next planting season in the Northern Hemisphere and the spring crops -- winter crops in the Southern Hemisphere, excuse me, we have to deal with COVID-19, and we're operating S&W with that assumption.

Hopefully, that's not going to be the case. Hopefully, there'll be a vaccine sooner. There may be a miracle and COVID-19 sort of disappears like some other viruses. But I don't think we can bet on that as a strategy. But we are operating S&W as if we have to deal through another major market sales season with COVID-19 in the background. And it's affecting everything that we do, and I'll get into some of that here in a few minutes.

So that's enough about viruses. I'm not a virologist. So this is a common man sort of description of a pandemic world based on COVID-19. But I've been around biotech implants, DNA, RNA for -- since it was invented in plants in the early '80s, and I have a lot of pharma friends. And so my view of COVID-19 and its potential different effects on our world really come from that history of long association with RNA and DNA technologies.

So the ag markets. The second piece of my presentation today. So the ag markets are, we believe, going to be in some turmoil. There's a lot of reasons for that. First, I should say, you've heard me 3 years ago when I came on as CEO, talk about getting closer to the farmer. I think we're doing that. We purchased Pasture Genetics in Australia. and in the U.S., we've spent a lot of additional money building our sales and marketing team, building the pharma dealer network that we purchased when we purchased Chromatin, and building our distributor network and getting information through social media out to all of our customers. We spent a lot of money doing that. But I should back up a step, though, and just say to you, when we look at ag markets, we look at a -- we want to have a very balanced position around the world.

So if you look at the big ag producer countries. So these are countries that have the soil and weather and water to produce large amounts of agricultural commodities, and they have relatively small populations. So that they don't consume all of that, right? They have a huge surplus that they can sell, ship to other countries around the world with big populations that can't provide all their own food.

So when we think about those countries, obviously, the big producers are the U.S., Canada, Brazil, Argentina, Australia. These are the countries that have huge surpluses of animal products or grains and proteins and oilseeds. And we see up and coming areas like the Ukraine and some parts of Russia for sunflower and some of the wheat varieties and things like that that are grown in those areas. So those are the focus places where we want to be to sell seed because that's where most of the farmers that are being successful around the world are.

And a lot of these markets have different crops, like I just mentioned, sunflower and wheat. But the world markets are mainly driven by corn and soybeans. They are incredibly productive crops in grains and carbohydrates, that's corn and soybeans and oil, and they drive the economics of the farmer. So what I mean by that is the farmer's saying to his or herself, hey, how much can I make in my market, whether it's the U.S., Canada, Brazil, Argentina, Australia, how much can I make on corn and soybeans for the most part? And what can I -- else can I plant to give myself some diversity? And how much per acre am I going to make on that crop? So in our case, alfalfa and sorghum versus corn and soybeans.

So that's the economic yardstick that S&W sells against because we don't sell corn and soybean. We sell the crops that compete in some of the markets with corn and soybeans like sorghum and alfalfa, and compete for the acres. And so we're always measuring our economics against those crops.

We are in a situation in the U.S., which is a major driver of both those crops, where we're going to plant a lot of acres in 2020, and we're having pretty good weather. So the planting timeline that farmers -- how fast they can plant the crops is pretty good this year. We're actually planting faster than the 5-year average in the U.S.

So we're probably -- that means we're probably going to have pretty good yields. If we have good weather during the season, and we don't have an early frost, so we're going to have a lot of product. And in that background, a lot of commodity corn and soybeans. And in that background, we have an ethanol industry, which consumes 40% to 45% of all the corn in the U.S. that's produced every year. That is about 30% to 35% shutdown because of low gasoline prices.

So ethanol is a proxy for gasoline on a per price per gallon. And when gasoline is low priced, ethanol has to match that. It actually has lower amount of energy per pound per gallon than gasoline. And so ethanol industry shut down about 1/3 of its production currently.

We also have this unknown, what's going to happen with the trade wars between China and the U.S. And so right now, we have fairly low commodity prices. Our expectation is we're going to have a very, very tough year in terms of farmer profitability in 2020, and we're trying to operate S&W with that expectation.

So we're trying to tell our farmer customers, this is what we think you can make on soybeans. This is what we think you can make on corn on a per acre basis. This is what you can make on sorghum or alfalfa. And depending on which part of the country you're in, alfalfa's obviously the more northern customers in the U.S. and sorghum's the more western Corn Belt customers.

So for S&W, the third part of my discussion here today. It really means that we're trying to figure out how we balance our production across the northern and Southern Hemisphere. So it's more now than reaching out to farmers more directly, closing the distance between us and them in terms of information, not having too many people between us and the farmers. So we don't like 2-step distribution. We like either a distributor or a farmer dealer between us and our eventual farmer customer who actually is planting the seed on his rented or owned acres.

So the acquisition now focusing on S&W a bit, the acquisition of Pasture Genetics is balancing our sales picture. We basically have approximately half our sales in the international division, and we have about half our sales in the Americas division. And so that's kind of a good thing. It allows us to have some more flexibility, we think. It gives us, I think, some protection against the trade war going bad between the U.S. and Canada as, hopefully, we'll still be able to have Australian companies sell agricultural commodities and meat to China and the rest of Asia. And it allows us to begin a more sophisticated process to manage our business, right?

So we are having the opportunity every year to plant in the spring in the northern hemisphere of the U.S. So that's alfalfa and sorghum right now are our 2 main crops. And we're trying to match that to have off-season production at low production cost per pound of seed also in Australia, and we're pushing our 2 -- that would be for alfalfa mainly, and we're pushing our 2 JVs in South Africa for sorghum.

So in a couple of years, you're going to hear us more talk about a balanced approach, a balanced worldwide approach to production and marketing. Our sales are split equally approximately between our 2 divisions. And our production is going to be sort of Northern, Southern Hemisphere, so that we get 2 chances every year at having production in alfalfa and sorghum at reasonable costs.

So this geographic balance, I think, is very useful in a company like ours trying to operate in this pandemic world. So we're very happy to welcome Pasture Genetics into the family of companies that make up S&W. Rob Damin and his -- the founder and his family have been doing a great job for us. We really enjoy working with them, and they have a great reputation in the Australian market.

I should take a little bit of time here and just say I was in Australia in the month of March for about 10 days. Had a chance to meet all of the new Pasture Genetics employees and welcome them to S&W at a couple of functions that we had for everybody. Had a chance to meet Rob and spend some time with him and his son and daughter just talking about the business and where we were going. And that was hugely beneficial for me and, hopefully, for them, just to get to know a little bit about what they were really doing and where our opportunities were and to have them hear from me sort of the strategic view of what the company was trying to do. So that was a great, great trip. Thanks, Rob, and your family for hosting all of the S&W people at these functions. And thanks to David Callachor and all his people for organizing the whole thing.

As I said, I had quite a bit of time in Australia on purpose, and that can also meet with our other regional managers around the world for Europe and for the Middle East and for Asia and for Africa. And so that was really useful, too, because I -- we're building all these markets. Obviously, we're not doing production in too many of those markets yet, but we are building sales in all of those markets, and it was great to spend some time with all of our people to understand what exactly it is that we're doing there.

So it was a great trip. I managed to get back on Friday the 13th and escape by, I think, a week the shutdown of all the international airfares coming -- air flights coming from Asia back to the U.S. But unfortunately, now we know COVID-19 landed before I did, and infected at least L.A. and then Washington and Oregon a bit and then came back to New York through Europe. And so here we sit today with, obviously, a very, very tragic situation in terms of all the people who have died in the U.S. because of this really dangerous virus.

So when I say a company that can operate in a pandemic world, sometimes, you get lucky in these things, and lucky based on good planning is always a good thing to have. And so we had spent, as maybe I had mentioned in previous calls, about the budget this year in 2020. We spent a couple of million bucks on IT upgrades, on better computers, on security for our information. But we also were one of the few customers before the pandemic that were both a voice and data customer of Zoom. And so that's where the lucky part comes in.

We made that commitment before the pandemic hit. And we have been able to operate our facilities from home in a lot of cases. Obviously, there are people who can't do that. So in our plants, the people who organize our seed for next year's research planning, our plant readers, the people who clean up all our seed in our 6 production plants, 3 in Australia and 3 in the U.S., they have to go to work every day, and we were concerned about their health. But we've been pretty careful to encourage people to social distance, use masks. We've sort of organized rest rooms and break rooms and stuff like that so that sort of people-to-people contact would be minimalized.

And the Australians have done a great job controlling as a country, COVID-19. So they have less than 100 deaths in the whole of Australia. And so that has not been a worry. But the U.S. certainly was a concern given all the infected cases there are in the U.S. But we, fortunately, have only had one COVID-19 case at our -- and it was in our research facility down in Texas in our sorghum research business, which is super, super, obviously, important to us. But we sent the person home. This was now about a month ago, and they had a fairly mild case, and they did not pass on COVID-19 to any of our other employees. And so we've only had one case in all our 100 and sort of 75 people.

And I've been using Zoom to communicate with all of our people. It is a fantastic tool. We just had a call to all the Americas employees last week. And a few weeks ago, a month ago, we had a call with all of our 175 employees around the world. And it's just -- and we can take questions online and stuff. And it was just a fantastic communication tool, just to give everybody some background on what S&W is doing and how we were performing in the market and what our worries and concerns were. And I think everybody certainly, I appreciated it, and I think everybody appreciated being able to have that communication.

So we were off to a very, very good start this year. You're going to hear from Matt next. And our third quarter, January through March, was an excellent quarter, but then COVID-19 hit us. And sort of April was pretty tough. May and June are tougher. And what I mean by tougher is we are still concerned about problems with the supply chain. You're obviously seeing on the news, all -- some of these supply chain problems with agriculture just because either produce or potatoes or onions or whatever, tomatoes, grown in Florida, California, Idaho, have a tough time making it to market. And people are waiting in -- for assistance, food assistance.

And so getting those products to people is obviously a difficult task. And we're slowly figuring out how to do that. But we were also, and we are also still concerned about getting our seed to our farmers, basically filling the order book that we had.

We're not sure whether we were more worried at the beginning of this process, but we're continually worried about truck drivers getting COVID-19 and capacity of distribution not being there when we need it.

As you all know, the third quarter is a big quarter for us. Matt is going to talk about that, but the fourth quarter is always our biggest quarter. And so we're in that now. And I, unfortunately, have to say it's not totally clear how the fourth quarter is going to turn out. We're working hard at it. Because of COVID-19, we're not going to provide any revenue guidance for the quarter. We don't really do that anyway. But it's -- we were -- it was unfortunate because we have, as you'll hear from Matt, a very good third quarter and fourth quarter. We're working hard to make sure that turns out okay, but we're really still not sure with half the quarter over.

So that's what my comments are today. I wanted to talk a little bit about COVID-19 and its effects and what our expectation should be. In our case, we are believing that we have to go through not just this year, but the 2021 selling season under sort of pressure from this terrible virus. And we're making, obviously, plans to do that. But clearly, when you can't call on some potential customer face-to-face, and this is one of the problems we're having now, not just the supply chain. But people don't want to see us, and our -- and we don't want our people to travel on planes. Our people are traveling in cars.

Remember, we reorganized our sales force to put them closer to our customers. So most of our customers are within car distance. But people are leery of having a face-to-face meeting, and it is definitely affecting our ability to convert leads to actual sales orders. And so we're just going to wait and see what happens in the fourth quarter because this is a new situation for everyone, and we just have to sort of see.

So we're planning that our next selling season, in addition to the 2021 -- 2020 season is going to be under a cloud of COVID-19 still being in the environment. We hope that there's a vaccine in numbers so that we can treat the millions of people who are going to need it and we can build this herd immunity. But we are planning for the worst, and the worst is that we have to go through another spring selling season in '21 with this hanging over everybody's head in agriculture and, obviously, ours also.

So with that, I will end my comments for the call today and turn the whole discussion over now to Matt, who will give you the financial details. Matt, please.

Thank you, Mark, and thanks to everyone joining us on the call today. Let me add that I hope everyone on this call and their families are safe and healthy during this very unique and unfortunate time.

So now, if I start jumping into the results. Core revenue, which excludes revenue to Pioneer, was $17.9 million for the third quarter, an increase of 74% compared to $10.3 million in the third quarter of the prior year. As mentioned in the press release, we recognized $5.5 million in revenue from our partial period contribution from Pasture Genetics, which we acquired on February 24 of this year.

Pasture Genetics will be included in core revenue going forward. Now if you exclude Pasture Genetics revenue, core revenue for Q3 was up 20% versus the third quarter of the prior year. For the first 9 months of the current year, core revenue, and that's including Pasture Genetics, was up 40% versus the prior year. And if we exclude Pasture Genetics' partial period contribution, core revenue for the first 9 months was still up 18% versus the prior year.

Total revenue, which includes revenue to Pioneer, was $29.1 million for the third quarter compared to $18.2 million for the prior year. And for the 9-month period, total revenue was $53.7 million versus $62.9 million in the prior year. As a reminder, we entered into a termination agreement and an alfalfa license agreement with Pioneer in May of last year.

Today, Pioneer has paid us 40 -- well, Pioneer paid us $45 million in May of 2019 as well as $16.8 million over the last couple of quarters, and we are entitled to receive an additional $8.4 million over the next 9 months.

At a high level, I can say that we were tracking strongly during the third quarter. However, as COVID-19 hit and continues to play out, we have less visibility to what the fourth quarter will look like. And as a reminder, our fourth quarter is the height of our key selling seasons in both the U.S. and the Australian domestic markets. So given the uncertainty, we believe it is prudent to temporarily suspend our previous 2020 revenue guidance.

One area we do have further visibility on is that we see a shift of approximately $4 million of revenue to Pioneer that we previously expected to be recognized in the current year, and this is now going to shift into fiscal 2021.

Gross profit margins were 22.1% for the third quarter compared to 26.3% for the third quarter of the prior year. The decrease was primarily due to a change in sales mix, an inventory write-down charge of approximately $600,000 and certain low-margin sales to clear excess dormant alfalfa seed.

Our operating expenses for Q3 increased approximately $1 million from the second quarter of the current year. And this is largely due to the inclusion of Pasture Genetics for a portion of the quarter as well as additional spend at the R&D level. This is in line with our expectations. As previously mentioned, over the last several quarters, we have made several investments in sales and marketing and product development functions. Now given the current environment, we've implemented a hiring freeze, and we're going to, of course, continue to closely manage our expenses.

Now we discussed this during our last call, but I would like to clarify our operating expenses, including Pasture Genetics. We project full year fiscal 2020 operating expenses as follows. SG&A to be approximately $21 million in fiscal 2020, which includes Pasture Genetics for the stub period as well as stock-based compensation. R&D to be approximately $7.5 million in 2020, including Pasture Genetics, and depreciation and amortization expense will be approximately $5 million.

At the EBITDA level, we had a loss of $900,000 for the quarter compared to a loss of $1.2 million in the third quarter of the prior year. As we leverage our infrastructure and drive growth in core revenue, our goal continues to be to drive towards positive EBITDA contribution over the coming year.

Now moving to the balance sheet. I just want to point out that we continue to make progress in reducing our inventory levels and freeing up working capital. And as I mentioned over the last 2 quarters, we planted very minimal acres of alfalfa production as we continue to work through these existing inventory levels. But when you look at our inventory levels from March of 2020 versus March of 2019, our balances are down nearly $17 million or 19%. And this is even after taking into account the increase in inventory from the Pasture Genetics acquisition, which was nearly $6 million at the end of March.

This decrease in inventory is a reflection of our ongoing efforts to continue to reduce alfalfa balances and convert this inventory to cash in the coming quarters. We certainly have more work ahead of us, but we are on track, and we've made significant progress to reduce our balances to more optimal levels.

So to summarize, we are executing on the various initiatives we set out. We are also very excited about our recent acquisition and how well the integration is going. And while we are concerned to continue to focus on the challenges presented by COVID-19, including the potential disruptions to logistics, foreign currency fluctuations and the various stay-at-home measures, we are hopeful that the impact and challenges can be resolved quickly and that the progress we've achieved over the last couple of quarters -- number of quarters, I should say, will continue into fiscal '21 and beyond.

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

Thank you, Matt. Just a couple of comments in summary here. We were having a really great year. We were very convinced that our strategy of focusing on more crops than just alfalfa, but maintaining alfalfa as one of our main focus crops, was working. Our trait development is coming along. And we expect this herbicide trait in sorghum to be very, very good for the market and lucrative for S&W in the next short term, few years.

And it was unfortunate that COVID-19 sort of landed on U.S. shores, but we're fighting hard to convert interest in our products to firm orders and shipments of actual seed. And as Matt mentioned, so far, we are doing okay with our shipments both to foreign countries and foreign ports and in the U.S. to U.S. customers. But there are clearly disallocations in the trucking and the shipping industries overseas, and we're having to work very, very hard to get containers and trucks and get the seed on time to our many customers all around the world.

So the fourth quarter is a battle. And you'll hear, obviously, how that battle turned out on our next call. And as Matt said, our -- thanks to all of our employees for their handling of COVID-19, both mentally not being able to sometimes work in the same office, working from home, taking care of their kids and still paying attention to our business. We're always going to be thankful for the effort they put in. And as Matt said, we hope all of you on the call and your families are healthy and that you're making it through this new pandemic world with as much ease as possible.

So good health to everybody. And I'll turn the call back to the operator, and we'll be happy to take questions.

(Operator Instructions) Our first question is from Sarkis Sherbetchyan from B. Riley.

You guys clearly mentioned the logistics impact here. Any kind of color you can provide on the order book year-over-year? And also, are you shipping product today?

Yes. So I'd say, Sarkis, in general, the order book is even stronger than the third quarter results. And we're trying to make sure that we have an early assessment of when the customer actually wants his or her seed. Because it does take a lot more effort and a lot more lead time to arrange a container, put it on a ship, get it overseas through a port. Not too many foreign ports are closed. A few, but we've been able to work around that.

And in the U.S., we opened a distribution center in the Midwest this year. And so we've stocked that. And so that makes it a little bit easier for us to sort of within a 24 hour, 48-hour time frame, make sure that we can get seed to our farmer customers in the U.S., either directly from our plants or from that new Midwest distribution center.

So things are going okay. And hopefully, as things open up here, the scenario we're afraid of is that we've really kind of opened up, in my mind, at least a bit too soon. And the case load is -- the disease cases are rising still in many states. And our worry is that it is going to have some short-term effects on trucking and stuff like that, and that's going to affect us. But so far, with some good planning and much harder work and longer lead times by 2 or 3 or 4 weeks, we've managed to stay ahead of that problem.

Got it. And I know you've essentially not provided guidance this time around, but we did have a little bit of commentary on how things were going on the last call, which was towards the late end of February. I guess, any help on where you may land in relation to that guide relative to your core sales?

Matt, do you want to answer that?

Sure. Sarkis, as we communicated in our press release, our core revenues year-to-date are up approximately 20% year-over-year. And the previous revenue guidance that we provided back in February, I believe, was a range of core revenue growth of maybe 9% to 16%. So year-to-date, we're on track of being ahead of that on a core revenue standpoint. And as Mark said, the order book is feeling strong for Q4, but we've just got this logistical uncertainty as to where sales are going to exactly fall. So we'll know a lot more here in the next 4 to 6 weeks.

Understood. So assuming that this pattern continues, if you don't, let's say, ship it here in this quarter, is there a chance you ship it maybe with a little bit of a delay or deferral?

Yes. I think that that's probably, hopefully, the worst outcome, is that it ends up in the 2021 year for us because it missed the push date to get it out in June. And that's always a problem for us, as you know, Sarkis. I mean, we've, within the company, talked about maybe having a different fiscal year, a little bit later. But because our business is worldwide now, there's just not a good date. So we're just going to stay with the date that historically we've had. And some sales always leak over into the next fiscal year, and that may happen this year in a bigger number, but just because of COVID-19.

Got it. And kind of going to the gross margin level here, talk a little bit about the sales mix change. You had an inventory write-down, and it seems like you sold some excess seed for maybe a lower margin than typical. Can you maybe bifurcate, like, where the delta would have been if you didn't have an inventory write-down and didn't sell the excess seed for a lower price?

Yes. I'll make one comment and then turn it over to Matt. I mean, seed has a shelf life, as everyone knows on the call. And so we're always managing that shelf life against the market movements. We did sell some alfalfa seed that was getting a bit old in the tooth at a price so that we could move it. But I'll let Matt answer your question specifically.

Yes. Sarkis, we did take an inventory write-down in Q3, as we mentioned in our remarks. That write -- excluding the effects of that write-down, our margins would have been closer to 24% for the quarter. And I guess as a reminder, just as we -- the fourth quarter is a quarter where we should be -- we are fully expecting the margin profile to improve versus the previous quarters this year, and that's really based on sales mix.

As a reminder, Q4 is our -- is the quarter where we have our highest concentration of sorghum sales, and those sorghum sales carry the highest -- by far, the highest margin profile in our business. So margins in Q4, even with the uncertainty that we're dealing with COVID-19, I'm fairly confident in saying that we will see a nice improvement in margin in Q4.

Our next question is from Ben Klieve from National Securities Corporation.

Just a couple quick ones for me. Mark, you commented towards the end of your prepared remarks on the R&D portfolio and the herbicide-resistant sorghum. But I'm wondering if you can elaborate a bit more on kind of the status of that product in the context of the COVID-19 era. Are there delays that you're expecting, either with field trials or the launch of commercialization? What -- really, how does the current era impact that product specifically?

Yes. So there were definitely some operational problems caused by not being able to fly because of COVID-19. So we were obviously and are very excited about herbicide resistance in sorghum ACCAs. And so we did do a winter production in -- down in the Caribbean. And we were supposed to -- we had people down there for planting. And there's this thing you have to match the nick. You have to plant your male line, so they have pollen when the female line is ready to receive it, and that's the only way you get seed, obviously.

So we had people down there to do that. And then we were supposed to have our own people down there to harvest, which is almost finished now. And they couldn't go because they had to be in 14-day away from anybody else. And so we had a very well-supervised local crew, but we did not have an S&W person on-site.

So we don't think any problems arose from that, and the seed will be coming back by airplane to our Texas facility for cleaning here shortly, and we'll be putting that out in trials. So at this point, there was a few more difficult steps, but no -- nothing that would knock us off of our timeline expectation for introduction of that trait.

And as you know, we're moving down the line with our partner ADAMA, who's our chemical partner and working through just how and what the best education process is to our now joint farmer customers. And so all that seems to be going according to plan. And you never know how good the product's going to be until you see it in trial. That trial's for our farmers, but also for us. And we'll be getting that planted in the spring on schedule. And hopefully, we'll have a good result here after we see the season over in September, October. So all on schedule. That's about it.

Okay. Got it. And so, I guess, as a follow-up to that, I mean, it sounds like there's obviously some logistical challenges that have risen with the crop. But do you anticipate being able to provide more detail around the progress of this crop? And as that -- as the Caribbean harvest gets analyzed this summer? Or do you think kind of updates on the commercialization timeline are going to be -- not able to really be provided until maybe your Q4 call in September.

Yes. I think September probably would be the best time to do it. There's a lot always going on, but it's a slow timeline for product development. It takes many, many years. And we'll have some seeds for early sales in '22-ish, but -- and we'll have to do another off-season production cycle. But the real question is seeing what the herbicide resistance really looks like in the field in large numbers and what kind of yields we get for hybrids that have the trait versus hybrids that don't have the trait. So we always plant those kind of trials to measure against standard lines without the trait.

So that's really the big question, is how will the herbicide resistance really hold up in mother nature's conditions in the field in large acres. And that's what the purpose of these trials are in 2021, is to have a real view of that -- excuse me, 2020 this year. I get my years mixed up. And I did make that mistake in the call. So it's 2020 calendar year, 2021 S&W fiscal year. So that's this planting season.

Got it. Got it. Okay. Very good. Well, I think that does it for me, I'll get back in queue. Best of luck navigating here the balance of this fiscal year and staying safe out there.

Thank you. Appreciate your kind thoughts.

(Operator Instructions) Our next question is from Gerry Sweeney from ROTH Capital.

A couple different questions maybe on different parts of the field. But I wanted to talk about maybe the international markets. Obviously, in years past, alfalfa has had some issues with Saudi Arabia and things like that. Does this COVID situation change that market for some of the demand in planting alfalfa in Saudi Arabia or changed any demand positively or negatively across the board?

Yes. I think -- that's a great question. I think it's a little too early to give you an answer to that. I mean, in the short run, it probably doesn't change everything very much. The Saudis are still -- got a water ban on to use water for large acres of alfalfa production in-country, but the Saudi customers prefer fresh milk. They don't like long shelf life milk as the Europeans drink or dry powdered milk. They like fresh milk. So I don't think in the short run, that demand curve is going to change much. And so I wouldn't expect COVID-19 has too much effect.

In the longer term, the government of Saudi has a financial issue with the low oil prices. And what you read is that they need low $70 oil price to breakeven cash flow wise in their economy to be able to afford all the subsidy programs that they have for Saudi citizens. And obviously, we're nowhere near that price. So what that means in the longer term for consumer demand for fresh milk and, therefore, alfalfa, in the region, it's a good question, but I really don't have a view of what the answer to that question might be. So there are some longer-term effects. But in the short term, in the next year or 2, there won't be much.

Okay. Got it. And then obviously, the supply chain has more friction, right? Longer lead times, a little bit more effort. You did give us a little bit of a view in margins in the fourth quarter. But does that friction impact margins to any degree in the fourth quarter or going forward?

Yes. I'll make one comment, and then turn it over to Matt for the actual statement on margin expectation. But world trade is different, right? You're going to see a lot more production in the U.S. The sort of global economy where the cheapest mask or the cheapest bag of seed was the goal, is not going to be the goal for all products now because we all realize that there's almost like an insurance payment that needs to be made so that you can make masks in the U.S. And so if that mask costs you $0.15 in China, you might be willing to pay $0.20 in the U.S. just to have your own social supply that's under your own control. And the public will see higher prices, but I think the public's willing to accept that. So there's going to be some changes like that.

And because of that, there used to be a lot of containers that came from China with products, cell phones and other things to the U.S. The trade deficit was in China's favor, and those containers would pile up on the West Coast. And from our Five Points plant and from our Idaho plants, a lot of times, it was pretty cheap and easy to get containers going back to Asia. That is more difficult now.

And our business has changed, too, right? As I said in my remarks, we're doing more seed shipments directly from Australia to some of those customers. And so now, we don't need containers, cheap containers piled up on the West Coast of the U.S. In fact, they're of no value to us. So things are changing, and it's our job to keep up with those changes and try to stay ahead of them a little bit and match our business to the best economics of how the world order of trade is changing.

And Matt, I'll let you answer the question on margin for Gerry.

Yes. I mean, Gerry, it's real -- I mean given the uncertainty of this pandemic, it really is hard to put an exact set of fence posts around the impact to margins. But I will say, in the short term, we're still feeling good based on our sales mix that Q4 is a higher concentration of sorghum sales, which carry a much higher margin profile.

And then more broadly speaking, as we look to next year, as the global excess supply of alfalfa seed continues to work its way through, and our inventory balance has come much more in line with optimal levels, we should be seeing improvements in margins there in future periods, coupled with the fact that sorghum should represent a larger portion of our business in the future. So at this stage, we're not seeing discounting due to COVID, but certainly that could change at any time.

Speaking of inventory, I'm not sure if you have broken that out or can or desire to. But how much of the inventory is alfalfa? And what would be the sort of ideal carrying amount, like, at the end of the day?

Yes. So Gerry, so we ended the March quarter with just over $70 million of inventory. And of that amount, $56 million was alfalfa. And I think that as we look at that $56 million of alfalfa that will come down probably another $10 million just in Q4 alone. And as we look to what our inventory balances will most likely be 12 to 15 months from now, sort of in June of next year, those alfalfa balances will be down another $20 million approximately based on our rough estimates of projected demand and what we know is placed from a production standpoint.

So we are -- we've made a lot of progress. We've got a long way to go. But there's a pretty clear path for these probably $20 million moving off the -- moving out of inventory and into operating cash flows here over the next 12 to 15 months.

That's a big chunk of change. No, that's great to know. So, okay. Guys, I appreciate it.

At this time, we have no more questions. This concludes the question-and-answer session. I would now like to turn the conference back over to Mark Wong for closing remarks.

Thank you, operator. And thanks for all of you who are on the call today. Obviously, it's a difficult operating environment with COVID-19, but we are expecting good results for the fourth quarter and our third quarter results, in our view, were very, very strong.

So I'll just end with wishing everyone good health, good fortune. Take care of yourselves. Take care of your families. Take care of all your coworkers. And we'll look forward to giving you an update really on our most important call of the year, which is our fourth quarter call where we'll go through our 2020 financial results and talk to you a little bit about the next 3 years and what the future looks like going forward because that's when we do our 3-year budgeting cycle also.

So thanks again, everybody. We look forward to talking to you on the next call. Bye-bye.

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