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Bioceres Crop Solutions Corp. (BIOX)

Q4 2017 Earnings Call· Fri, Mar 30, 2018

$0.49

-5.58%

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Transcript

Operator

Operator

Please standby. Good day. And welcome to the Marrone Bio Innovations’ Fourth Quarter 2017 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Linda Moore, General Counsel. Please go ahead.

Linda Moore

Management

Good afternoon, everyone, and thank you for joining our call. Before beginning, I would like to remind you that this conference call may contain statements regarding management’s expectations, hopes, beliefs, intentions, or strategies regarding the future, as well as projections, forecasts, or other characterizations of future events or circumstances. Such statements are based on management’s current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those that management has anticipated. Such statements involve a number of risks and uncertainties, some of which are beyond management’s control or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these statements. Important factors that could cause differences are contained in reports filed by the company with the Securities and Exchange Commission, including under the heading Risk Factors and elsewhere in the company’s Annual Report on Form 10-K for the 2017 fiscal year and in our earnings release posted on the company’s website. Should one or more of these risks or uncertainties materialize or should any of management’s assumptions prove incorrect, actual results may vary in material respects from those discussed today. Additionally, the company will be making reference to certain non-GAAP financial measures on this call. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company’s earnings press release published today, which is posted on the company’s Investor Relations website. Any guidance that management may offer on this conference call represents a point-in-time estimate. The company expressly disclaims any obligation to revise or update any guidance or other forward-looking statements or to reflect events or circumstances that may arise after the date of this call. After our remarks, we will hold a question-and-answer session. I will now turn the call over to our Founder and Chief Executive Officer, Pam Marrone. Pam?

Pam Marrone

Management

Thank you, Linda. Good afternoon and thank you to everyone for joining us. With me today is Jim Boyd, our President and Chief Financial Officer; and as you just heard Linda Moore, our General Counsel. 2017 was a transformative year and one of continued execution. Today I am pleased to announce that the company is in healthier position than ever before. First, from a capital standpoint, we raise new equity and have eliminated the vast majority of our debt and deferred much of the remaining interest into maturity, which provides us with the resources to execute upon our business plan. Second, from a longevity standpoint, with the stronger balance sheet, customers, distributors and growers now have the confidence that we will be around tomorrow, the next day and years to come. As a result, our customers know that MBI’s product will always be available for use in their crop production program, which we expect to translate into more meaningful sale. Third, our customer base is growing and our relationships with distributors are stronger. We believe we are well-positioned in the marketplace and have made steady progress in penetrating target market in both the U.S. and abroad through our partnership. Some that we signed in 2017 or with Agri-Star in Mexico, DISAGRO in Central America, ÉLÉPHANT VERT in North Africa and Kenya Biologics in Kenya and Tanzania. Fourth, from a product standpoint, we launched two new products in 2017, Haven in March and Stargus in December. We now have six EPA approved biopesticide products and one biostimulant product on the market. MBI has commercialized seven products in only 11 years and unprecedented accomplishment in the ag industry. We expect more to follow. And finally from the data standpoint, global field trials which are required for registration have come back very promising…

Jim Boyd

Management

Thank you, Pam. As noted, I would like to walk you through our fourth quarter and full year 2017 results. Our GAAP revenues for 2017 totaled $18.2 million, up 29.4%, compared to $14 million in 2016. We reported product shipments in 2017 of $19 million, up 16.2%, compared to 16.4%, up $1 million in the prior year. GAAP revenues for the fourth quarter of 2017 increased 23.3% to $3.3 million, compared to $2.7 million in the fourth quarter of 2016. Product shipments for the fourth quarter were $3.8 million, compared to $5.2 million in the fourth quarter of last year. The fourth quarter shipment decline was due to several factors including hurricanes in the southeast in Puerto Rico, continued drought in parts of the southwest, as well as hesitations in buying decisions from our customers prior to our comprehensive financing and debt restructuring. We believe we are now on firm financial footing which we expect will help sales moving forward. As a reminder, our GAAP revenue recognition policy requires us to defer some revenues to certain customers on the sell-through revenue recognition method. We do not grant any return rights to these customers and deferred revenues are recognized over time. Cash is collected on normal terms, exactly the same as with our sell-in customers and is not affected by this revenue recognition methodology. As a result of this, we believe that our product shipments are helpful measure for investors to understand operating results and track product adoption. However, starting January 1, 2018, we will be subject to the implementation of a new revenue accounting standard, commonly referred to as ASC 606. That’s our GAAP revenues on an on -- on a go-forward basis will essentially be the same as the old sell-in method, allowing us to recognize revenue upon product…

Pam Marrone

Management

Thank you, Jim. We thank our debt holders and our new and existing investors for their confidence they have placed in us. We recognized the tremendous responsibility we have to realize MBI’s potential as a significant force in ag biological and global crop production. We have made great progress in key strategic goals in operation. I want to now highlight where our focus will remain in 2018 and beyond. We continue to focus on those products in our pipeline with the best near-term commercial opportunities. And our R&D expenses continue to reflect a lean, the capable organizational structure and a highly targeted R&D approach that is focused on supporting sales and manufacturing, and increasing gross margins through process improvement, and also a small percentage on new product development. Our R&D, supply chain and manufacturing, margin enhancement efforts have been achieved through, potency improvement, achieving the same protection with less product, yield increases, which reduces our cost of goods sold, greater scale, which reduces overhead and improved operating efficiencies, and finally, continued focus on strain improvement technologies, such as the next generation processes of Venerate, Grandevo and Majestene. We will continue to also move forward with our selected pipeline product MBI-601 Ennoble biofumigant, as well as MBI-014 bioherbicide. Since late 2015 we had a goal to introduce four new products to the market in the next three years and have substantially accomplished this goal. We introduced Majestene in early 2016, Haven and Stargus in 2017 and our Majestene counterpart brand Zelto in 2018. We have done this all while keeping R&D flat, for our little company, it is truly impressive to have a portfolio of seven highly effective products in 11 years. We now focus on continued market penetration of our existing products. These include additional specialty crops, such as carrots,…

Operator

Operator

Thank you. [Operator Instructions] And we’ll go first to Amit Dayal with H.C. Wainwright.

Amit Dayal

Analyst

Thank you. Hi, everyone. Congratulations on all the progress.

Pam Marrone

Management

Hi.

Amit Dayal

Analyst

Just my first question, Pam, if you will on the gross margin side, as we saw substantially higher gross margins on slightly weaker revenues, what is the driver behind this, so was it certain products or certain customers that were not part of the sales this time that drove margins higher. Any color on clarifying what this delta was.

Jim Boyd

Management

Well, it really wasn’t what I mentioned in my script. It was mainly product mix. I’ll followed to a lesser extent with some capitalization of variances, and yes, we have some true-up of our rebates that we took earlier in the year.

Amit Dayal

Analyst

Got it. And then, I may have missed this, I apologize if am asking for information if you had already provided. The gross margin trends, are we looking at these fourth quarter levels in the future, are we looking at the levels prior to the fourth quarter?

Pam Marrone

Management

Well, we have a long-term gross margin target of around 50% and we have been very closely executing on towards that by upticking our margins through what I mentioned in the script, which was yields and potency, and strain improvements, and scale.

Amit Dayal

Analyst

Got it. Then in regards to your sort of sales and marketing efforts going forward or at least for the next few quarters, it looks like we don’t really have any new product launches planned for 2018. But we are focusing more on trying to just execute against products you already have in the market. So how will your sales and marketing department sort of evolved to facilitate that and in line with that, how should we look at expenses around these efforts to sort of scale up as we go through the year?

Pam Marrone

Management

Yes. Star -- we did launch Stargus in the fourth quarter, but it was -- we just gotten registration so it was really where we had gotten state registrations in a couple of state. So, really Stargus is new across the country in 2018, as well as we haven’t launched Amplitude yet. That will be launched soon as we get the product finished, the label on the job and into the bean segment, which I mentioned on the call, and so those will be in the focus. Yeah, you’re right, we don’t have any new active ingredients other than those for 2018, which because we had targeted four new and then launched two of those. We still have Ennoble and MBI-014 to go. We’d like to have a targeted placement of Ennoble in 2018, but we haven’t forecast a lot for that, because we are still scaling up the manufacturing on that. Now on the sales and marketing, they really -- we really are focusing on executing on increasing grower demand through a very tightly controlled demo program, as well as a focused on creating a crop focus, so it’s a key target -- a set of key target crops, as I mentioned. And then really getting the top growers to become aware of us and educate them, and have them try the product. Number one is product aware -- is product and company awareness. We are still -- we are small company and still have a lot of work to do on increasing the awareness of just who we are in this category, biological. And then educating on how you use these products and that’s really where we are focusing. Jim, do you have anything to add?

Jim Boyd

Management

Yeah. And we are going to really focus all the efforts of the company on ramping our current commercialized products.

Pam Marrone

Management

Right.

Jim Boyd

Management

Including those four new that we have had in the last couple years, we really need to ramp those up in volume.

Pam Marrone

Management

Now, the MBI-014 product, which we still are very have think got a lot of potential, the herbicide, because we’ll have a minimum of an 18-month once we submit approval timeline unless we can get some emergency uses for that, but we won’t know about that. There will be work to do on really defining, as I mentioned, the art of use of this first generation product and top -- there’s a lot to do on that art of use and there is a lot of chemical combinations with the product, as it synergizes glyphosate for a resistant weeds, getting adjuvant that are best use it and all the things that to do to really target into powerful commercial product when we launch version one.

Jim Boyd

Management

And we were -- we are really, as I said earlier, focusing on ramping the commercial -- our current commercial products.

Pam Marrone

Management

Yes.

Jim Boyd

Management

We have added one salesperson this year already in 2018, one sales position in the Southeast, one in the Pacific Northwest and one in California.

Pam Marrone

Management

Right.

Jim Boyd

Management

To really…

Pam Marrone

Management

Additionally.

Jim Boyd

Management

… really concentrate on ramping those products.

Pam Marrone

Management

Yeah.

Amit Dayal

Analyst

And then as you ramp the sales efforts, how does that equate to the existing capacity levels that we are running at versus what is available. Will you need to have more capacity? Will you need to do work on that front this year?

Jim Boyd

Management

Yeah. We actually added a fair amount to it…

Pam Marrone

Management

The manufacturing do you mean?

Jim Boyd

Management

… the manufacturing this year in that. We did spent about a $1 million in capital expenditures over the last 12 months, adding WDG and just improving the production and…

Pam Marrone

Management

Packaging line.

Jim Boyd

Management

Yeah. We are adding the packaging line now.

Pam Marrone

Management

Adding that, yeah.

Jim Boyd

Management

But that plan MMM can probably take us through the next year. We are also right now started an expansion of the plant. I think we could possibly get through 2018 and ‘19 with the existing capacity.

Pam Marrone

Management

Yeah.

Jim Boyd

Management

That will start building for 2020 soon.

Pam Marrone

Management

And when continue to maintain a select group of contract manufacturers to make sure that we have the flexibility and always continue -- not worry about product supply.

Jim Boyd

Management

Yeah. We keep back up vendors to be able to produce in case there is any downtime at MMM, but also to handle any peak demands.

Amit Dayal

Analyst

Got it. Just one last one for me, the revenue mix, international versus U.S., I don’t know if you provided any breakdown in commentary, but how do you see that sort of evolving over the next few years. Is international going to be as strong as the U.S. or do you expect sort of the U.S., North America, et cetera to dominate?

Pam Marrone

Management

So as you know the international business is gated by field trials, for efficacy trials first, official trials and then registration in each country. And we are -- as I mentioned as a number -- ticking those down using exclusive this regional or national distributors to do those for us and as those come in that drives growth. So we do see the growth outside the U.S. to be higher actually -- the highest, because it starts from a small base. So also as you tick down those countries to drive growth. And so we do in five years expect international to be a significant part of the business. And that’s by design, because our products fit in these markets where all the drivers are there, residue resistance, higher yields and quality, and so forth, and also the U.S. is a much more mature biologic -- biopesticide market whereas the markets outside the U.S. are not. The adoption of biologicals is early. So the growth is higher.

Amit Dayal

Analyst

Got it. That’s all I have. Thank you so much.

Pam Marrone

Management

Thank you.

Operator

Operator

We’ll go next to Laurence Alexander with Jefferies.

Nick Cecero

Analyst

Hi. This is Nick Cecero on for Lawrence. How are you doing?

Pam Marrone

Management

Hi.

Nick Cecero

Analyst

So just a few quick questions, I was wondering, longer term, how do you think about your targets for the balance sheet and free cash flow generation?

Jim Boyd

Management

Well, I think -- we are making good progress on the sales front. We have several high value opportunities in the pipeline. We are increasing our gross margins. And although, we are a conservative management team, we are pretty comfortable with our cash position and balance sheet.

Nick Cecero

Analyst

Got you. And then maybe as products start ramping, will you sort of dialing up your R&D spend over the next few years or do you expect to just kind of keep it flat where is that right now?

Pam Marrone

Management

We have not planned on substantial R&D increases, because we are -- we as a management team want to get a breakeven in a reasonable period of time. So I should mention that in previous question -- previous questioner, Amit, asked about, we don’t have any new product launches this year. That doesn’t mean that R&D isn’t doing anything on new products. So we have actually got some interesting combo products that they are working on with the amount of the small amount that we have allocated for new product development. And we are looking at the pipeline of the next-generation of products. Now that we pretty much developed or closely developing that once we said, three years ago, it’s now time to refresh that R&D pipeline and we are in the strategic planning process to do just that. And we have a lot of assets. We have screened 18,000 microbes. We have got a lot of new microbes. We have got a lot of other companies, entrepreneurs and other small companies that have come to us with their products for development. So we are going to sort through those and pick the next four to five product in the -- for the pipeline for the future growth.

Jim Boyd

Management

But, in addition, I’d add that our current R&D team keeps impressing us…

Pam Marrone

Management

Yes.

Jim Boyd

Management

… with how much they can put out and every time we challenge them they rise to the occasion and when we think they will continue that going forward.

Pam Marrone

Management

Yeah.

Nick Cecero

Analyst

Great. Thank you very much.

Operator

Operator

We’ll go next to Robert Smith with Center for Performance Investing.

Robert Smith

Analyst

Good afternoon and thanks for taking my question.

Pam Marrone

Management

Hi, Robert.

Robert Smith

Analyst

Hi, Pam and Jim. Pam can you discuss the potential market for the development of the chlorine substitute and what are the steps to that end?

Pam Marrone

Management

Good question. So you might recall since you have been following us a while Robert that at the end of, let’s say, was 2015, we had a 60% reduction in the cost of goods Zequanox, which allowed us to attract a partner like Solenis. And we are -- on a line item -- if you look at the total cost of treatment of Zequanox versus the total cost of chlorine, corrosion of the pipes and all that with chlorine, we are competitive. But if you just look at a line item on a plants budget with the chlorine cost versus the Zequanox costs and we are a lot higher. But we are still in generation one process of Zequanox in terms of the yield. So we could have a 10x fold -- 10-fold increase in yield. So we still -- we think we are over time really able to compete even on that line item cost of chlorine over time, which would really drive the growth of this product and checkout chlorine in the plant. We haven’t allocated any R&D time to do that right now. But as our partnership evolves with Solenis we hope that can be a goal and we have talked about that being a goal in the longer-term.

Robert Smith

Analyst

Is there anything within the product or ancillary products that might finally use is in general water treatment on the consumption?

Pam Marrone

Management

Of other products or Zequanox or other products we have?

Robert Smith

Analyst

Well, I am just looking as far down the road is I might want to or you might want to ask, in other words is there the possibility for developing a chlorine substitute to general public in the water supply?

Pam Marrone

Management

Okay. So we haven’t actually looked at that. But I would mention that we have screened about 5,000 microbes if I recall correctly, maybe it’s more against algae. And the Great Lakes and like area there is a crisis right now in algae caused, algae bloom caused by both carp and dreissenid mussel, and we do have two companies testing some of those candidates for algae. We haven’t -- we don’t know what those would be a disinfectant or replaced chlorine, it’s certainly possible, we haven’t tested. The other thing is we have our tested -- a whole -- almost a whole collection against bacteria for plant diseases -- for plant disease causing bacteria. So it makes sense that we could then try them against other types of bacteria outside of the agriculture arena. So, certainly possible and we would -- if that was an interest we would certainly with somebody find a partner for that. Solenis could be, if they want to expand their partnership in the future, yeah.

Robert Smith

Analyst

An interesting composition. Thanks so much.

Pam Marrone

Management

Yeah. Yeah.

Operator

Operator

At this time, I would like to hand the call back over to Dr. Pam Marrone for any additional or closing remarks.

Pam Marrone

Management

Thank you, Operator. In closing I want to thank each of you for joining us today. We continue to conduct road shows and attend conferences on both coasts. So if you’re interested in a meeting, please contact management or our IR firm, MZ Group to arrange. We look forward to updating you on our progress as we move forward with a number of key initiatives to build shareholder value over the longer term. Thank you very much.

Operator

Operator

That does conclude today’s conference. We thank you for your participation.