Denali Therapeutics Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 14, 2023

There are 8 speakers on the call.

Operator

Hello, everyone, and welcome to today's call titled BioSears Corp Solutions Fiscal First Quarter 20 24 Financial and Operational Results. My name is Ellen, and I'll be the call operator today. All participant lines will be muted throughout the presentation, but at the end of the presentation, there'll be an opportunity to ask a question. If you'd like to ask a question at this time, please press star followed by 1 on your telephone keypad. If at any point your question has been answered or you change your mind and would like to revoke your question, I would now like to turn the call over to Paola Savanti, Head of Investor Relations to begin.

Operator

Paola, please go ahead whenever you're ready.

Speaker 1

Thank you and good morning to everyone joining us for today's call. The presentation today will be led by our Chief Executive Officer, Federico Truco and our Chief Financial Officer, Enrique Lopez Lecube. Both of them will be available for the Q and A session following the presentation. Before we proceed, I would like to make the following safe harbor statement. Today's call will contain forward looking statements And I refer you to the forward looking statements section of the earnings release and presentation as well as the recent filings with the We assume no obligation to update or revise any forward looking statements to reflect nor change circumstances.

Speaker 1

This conference call is being webcast and the webcast link is available at Biocerus Crop Solutions Investor Relations website. At this time, I will turn the call over to our CEO, Federico Truco. Thank you.

Speaker 2

Thank you, Paula, and good morning, everyone. Thanks for joining us today in our Q1 of fiscal 2024 earnings call. Please turn to Slide 3 for the main business Financial highlights for this period. Our Q1 of last year was a record setting quarter in which we nearly doubled Our revenues when compared to the year before period, that is the Q1 of fiscal 'twenty two. Part of last year's growth resulted from anticipated second quarter sales as weather conditions were quickly deteriorating in our main LatAm market.

Speaker 2

In retrospect, this early move allowed us to mitigate part of the effects of what turned out to be a historical drought extending through the next three quarters. We are now happy to say that rains have finally normalized and that planting in our main markets are progressing at full force. Our first quarter's financial performance is starting to reflect this regained momentum with total revenues at $116,600,000 with most segments exhibiting post drought recovery and the international business continuing to expand. Adjusted EBITDA for the quarter was 16,300,000 Enrique will explain our financial performance in greater detail in his analysis. On the HB4 front, Weed harvest has started in Northern Argentina with very favorable results for HP4 Materials in an otherwise poor season for the crop.

Speaker 2

Soy plantings are advancing well with good moisture conditions in our targeted regions. Our Generation HV4 program is currently running at 150% of prior season acreage with an important 6x increase in Brazil. An important milestone in this quarter was the granting of our first patent covering our ultra high concentrate or UHC technology by the USPTO. This technology sets the new gold standard in biological nitrogen fixation for legumes, consolidating our leadership position in this important We'll provide an overview of this milestone and other groundbreaking improvements in Seed of Light Technologies that clearly position us as the technology leaders within this segment of biological ag inputs. And finally, we have completed the construction of our new state of the art adjuvant production plant in Londrina, Brazil, strategically positioned to expand our footprint in the high growth Brazilian market as of this year.

Speaker 2

Let's turn now to the next slide to put our current quarter into historical perspective. As I indicated before, we're comparing to a record high quarter the year before and also achieving our 2nd highest historical revenue mark as we do so, While continuing on the upward momentum exhibited in our last quarter of fiscal 2023, I don't think there's much more to add to these slides. So I'll pass it on to Enrique so that he can give you a more complete overview of our financial performance. Kike?

Speaker 3

Thank you, Fe, and good morning to everyone on the call today. Thanks for joining us. Let's start with I think it's Slide 5 and take a look at the quarterly revenues. So revenues in this Q1 were marked by the recovery of our Argentine business after 3 consecutive quarters That were heavily affected by drought. Pre campaign sales in Argentina during the Q4 had already signaled Somewhat of a normalization of weather conditions.

Speaker 3

And the Q1 of this fiscal year confirmed that trend As we're getting into the high season of summer crops planting in Argentina. So let's take a look at each segment. So in Crop Protection, we saw a strong recovery of our Agilent's business from previous quarters, particularly in Argentina. And this country showed a 30% improvement in sales year over year for that particular Product category, which is good to see as these are high margin products. In some way, I think that spring at this time of the year signals An organization of weather conditions and the farmers' willingness to spend on preparing fields for planting, both good signs to get as we're heading into the high season.

Speaker 3

On the flip side, in this segment, In this quarter, we got rid of some lower margin sales of 3rd party crop protection products, which is aligned with our efforts to reduce our working capital position. Overall, the segment sales declined by 11%, but importantly gross profit increased as we will see in the next slide. So SINA Integrated Products, which is the segment that grew, grew it by 61%, which was explained by downstream sales of HB4 wheat grain. As you might recall, under the identity preserved generation HB4 program, We purchased from farmers, enrolled in the program all of their production. Although the program was originally Put in place to comply with regulatory requirements, also to fine tune varieties on which to deploy HB4 and finally to multiply seed.

Speaker 3

Over the last three seasons, our interest in exploring adjacent monetization opportunities grew as we see value in really understanding with a high level of detail what happens in the field and being able to exchange that information with our players of the supply chain. That might take the form of fully traced information or agronomic management to obtain certain industrial attributes that are important to processors. Federico will expand on this in a coming slide. But what it tends to slide in this quarter in particular, Although at a modest margin, we were able to commercialize upwards of $10,000,000 of inventories that won't be used as seed, which is particularly important to keep working capital under control as we continue making headways with HB4. And finally, in Crop Nutrition, pro farm bio stimulant sales continued to deliver growth, particularly in Europe, which is good to see.

Speaker 3

And same time in Crop Protection, Argentina confirmed good prospects for the summer crop planting season. I think it is Worth to double click on the dynamics of this segment as the cold comparison to last year might not be a fully accurate indicator of this year's performance. Particularly in the case of microgrid fertilizers, last year's Q1 was extraordinary As a result of price and volumes, in terms of price, you might recall that last year we were seeing record high MAP and DAP prices, The 2 commodities that our product replaces, which allowed for favorable pricing on our end. And in terms of volumes, We decided to press forward and be aggressive as we anticipated we would have a soft second quarter in Argentina because of drought. This season though has gone back to normal with a good preseason sale in the Q4 of last year, which continued with sustained demand during this first So as comforting as it might have been at the time to have an agile sales force that allowed us to be aggressive when we needed to, For the type of technologies that we commercialize, we would much rather have a normal market environment like the one we are seeing this summer crop season.

Speaker 3

And so I think that prospects for the first half of this fiscal year remain good for the time being and we are optimistic about what we can accomplish compared to last year if you take a look at the first half. Let's now turn to Slide 6 to briefly discuss margins. So margin wise, in Crop Nutrition, gross profit contribution dropped, mainly driven by the dynamics I just described for revenues. So lower fertilizer sales were coupled with lower gross margins on lower prices mainly. On a different note, we saw higher bio stimulant sales bringing in gross margin expansion for the category, which helped us to partially offset the drop from fertilizers.

Speaker 3

Sealy Integrated Products It was practically flat, if you look at gross profit. In the quarter, we saw some profits from seed treatment pack sales migrating to Syngenta. You might recall that those were compensated for in the Q1 of the calendar year and that was the 3rd Quarter of our last fiscal year, the previous fiscal year. And as I was mentioning before, as modest as they might have been, Downstream sales of HP4 allowed us to compensate for that decline in margins from seed treatment packs and the segment remained practically flat. And finally, in crop protection, gross profit increased by 10% Despite the decline in sales, as I was mentioning before.

Speaker 3

So the increase is mainly due to the fact that we strategically exited Low margin third party product sales and most of those were replaced by higher adjuvant sales. This was also coupled by a gross margin expansion of the bioprotection sales coming from Proform. Let's please turn to the next slide to take a look at the evolution of adjusted EBITDA. So adjusted EBITDA for this quarter was $16,300,000 compared to a bit more than $24,000,000 last year. I think we can break that down in 2 buckets.

Speaker 3

Half of that decline is explained by $4,000,000 of less Contribution to EBITDA from operations, if you couple the drop in $6,400,000 of gross profits And the improvement of $2,300,000 from SG and A savings and JVs. The other half of the $8,000,000 decline is essentially explained by R and D expenses, higher R and D expenses, A change in the net realized value of grain and other income and expenses. Importantly, R and D expenses that were higher are mainly explained by the registration of commercially available pro form products in South American markets and regulatory and registration efforts related to the launch of the Rhinotec platform that Federico will address in his slides. All of this strategically important for our near and long term plans. Finally, let's please turn to Slide 8 To take a look at the balance sheet and cash position, our debt position has remained stable from 1 year to the next at $225,000,000 a little bit more than that, with a reduction in the leverage ratio from 2.78 times to 2.5 turns of leverage.

Speaker 3

We remain at the healthy run rate of interest expenses with an annualized Cost of debt of approximately 7.5 percent and our cash remains strong at $43,500,000 leading to a net financial debt of $183,000,000 on September 30, 2023. Let me wrap up by saying that we are very encouraged by the results of this quarter despite The uneven comparison to a record high quarter last year and we are enthused by the expectations for the remainder of the year. With that, I will hand the floor over to Federico to give you some more color on the rest of the strategy.

Speaker 2

Thanks, Enrique. As I indicated at the beginning, we have experienced good rains in the last part of October early part of November indicating that El Nino weather cycle is finally here. This is allowing us to progress well with soybean plantings where we decided to increase acreage under the generation HP4 program by close to 50%, Not only to initiate the inventory ramp up and variety optimization process in Brazil, where we are doing 6x what we did last year, But also taking advantage of the recently announced agreement with Bullec Science, which is allowing us and our participating farmers to monetize on the ESG attributes of this identity preserved scheme. We will review some of the features of this value chain integration in a minute, continuing with what Enrique indicated in his part of the presentation. After a very dry winter season, wheat harvest has started in Northern Argentina and preliminary results show particularly good performance for HP4 Materials.

Speaker 2

We expect to be able to report full season results in our February earnings call. An important milestone in the case of HB4 wheat was the recent approval for cultivation in Paraguay, Being this the 3rd market after Brazil and Argentina, where the technology can be used for production purposes and making Latin America 95% available for the application of this technology. Similarly, the recent feed and food approval from Indonesia for HB4 soy allows us to reach Jointly with other approvals obtained until today, 86% of the soy export markets of Argentina And 75% of the Brazilian export destinations. Please turn to Slide 10. As Enrique indicated, when we launched our Generation HB4 Identity Preserve Program, We had 3 main objectives.

Speaker 2

1st, to move forward with the development of HP4 technology in the field while we were still procuring regulatory approvals, minimizing opportunities for cross channel contamination or premature technology leakage. 2nd, learn from farmers with a collaborative arrangement, Identify what works, what doesn't work, where and when the technology performs, fine tune varieties and breeding program objectives, measure, measure and continue to measure what we do and how that affects the ecosystem. And finally, ramp up inventories. In doing this over several seasons, we learn a lot. We planted HB4 in 100 of 1000 of hectares in most Agricultural regions under an array of management practices and with hundreds of different farmers.

Speaker 2

The WID materials that we finally launched with seat multipliers in this season resulted from these learnings. But this scheme also forced us to have conversations downstream so that we could offload inventories that we could not retain for future seat sales. We are today operating with more than 40 different processors and starting to monetize the benefits of these downstream relationships. From 5% to 10% benefits associated with agronomic management to higher premiums such as those recognized by MULAC when we provide ESG reports meeting minimum carbon, water and ecotoxicology thresholds or even higher value from functionalized grain such as good wheat. In our last two quarters, we have started to monetize some of these benefits or contractualized arrangements that will allow us to do so more significantly into the future, while we recover part of the working capital that was tied up in the program.

Speaker 2

And especially important milestone achieved during this What was the granting by the U. S. PTO of the first patent for our latest generation of inoculants, which are ultra high concentrate. Please switch to Slide 11 to see some of the features of this innovation. UHC inoculants have an order of magnitude higher Rhizobia concentration when compared to our LLI formulations using professional seed treatments or that of our leading competitors.

Speaker 2

This increased concentration enables rate reduction while retaining pre inoculation periods, Further facilitating the replacement of chemical seed treatment solutions since some biological substitutes require greater loading. We can see this better when we turn to the next slide and see how the UHC Seed technology matches other groundbreaking improvements we have delivered through other biological platforms. On the pest control front, our 2nd generation Risoderma biofangi site, which achieves chemical parity at a 6th of the rate of our earlier version and our Renatec platform formerly known as MBI-three zero six, which provides both nematode and insect control at a fourth of the rate for which only one of these is achieved with our previous system. As application rates are lowered, we can now include bio stimulation solutions such as those from our UBP platform, which significantly improved early crop establishment and subsequent yield, while we leave more than 50% City of the seed and utilized, making room for new seed treatment innovations or increased seed nourishment. Combined, these platforms represent the new gold standard for biological seed treatments, full stop.

Speaker 2

On a final note, please turn to Slide 13 for an overview of our newly constructed adjuvant facility in Londrina. This facility will allow us to expand our in country manufacturing by ForEx, Enabling sales for $60,000,000 of our current portfolio of adjuvants at installed capacity. This equates to less than 4% market share for the Brazilian market, a goal that we expect to achieve within the next 2 years. I think that we can now open up the floor for the Q and A session. So operator?

Operator

Thank you. We will now enter our Q and A session. Our first question today comes from Ben Klieve from Lake Street Capital Markets. Ben, your line is open. Please go ahead.

Speaker 4

All right. Thanks for taking my questions. Good start to the year guys. Congratulations on a good quarter and great to hear The weather update especially. A few questions from me.

Speaker 4

First of all, on the contributions In the quarter from grain from HB4 grain, I'm wondering what the kind of balance of grain inventory Tore, you continue to have that you expect to monetize here throughout the balance of this fiscal year.

Speaker 3

Hi, Ben. This is Enrique. Thanks for joining us. Good to have you on the call. So look, I think that this is mostly coming from a wheat that was harvested in December, January, so December 2022, January 2023.

Speaker 3

So there's going to be probably some more of that that is offloaded in the second Quarter and then we're done with it. So that's mostly I wouldn't expect something in a different order of magnitude And what you're seeing now in this quarter.

Speaker 4

And sorry that I want to make sure I heard you right at the end. You said I should not be expecting something of this order of magnitude that we saw in the Q1 going forward. Is that what I heard?

Speaker 3

No, that you should not expect something in a different order of magnitude. If something is going to be around this number or smaller, But what we're doing is essentially wrapping up the cashing out of the grain that was not used as seed That was harvested in the last crop season. Remember that in South America, particularly in Argentina, wheat is harvested in December January. So we're getting heading now into the new harvest and expecting to cash out all of the inventories that are not used as seed in this Q2 of the fiscal year.

Speaker 4

Got it. Okay. Very good. And then you also talked about Stepping away from some lower margin third party revenue in the quarter, can you characterize How significant this revenue base was, say, in fiscal 2023? I'm just trying to understand kind of what overall revenue headwinds you're going to have in 2024, is that Low margin business is tentatively exited.

Speaker 3

Yes, that's a good question. Look, that was probably in the tune of $15,000,000 to $20,000,000 last year. Remember that, I mean, we are now getting into a position where we want to Carefully managed working capital, it was different when we were selling this type of low margin products under a lower scenario of interest rates. As we see cost of capital increasing, we want to be a little bit more careful on what we commercialize and most than anything, what is the cash cycle On those products, that's why this year we decided to let go of some business opportunities that might seem attractive Sort of like in the surface, but when you do the full cash cycle of the products, maybe it's not worth having them.

Speaker 4

Got it. Okay. Very good. Then one more for me and then I'll jump back in queue around this new product, The nitrogen fixation, I think UHD, I believe, is the brand name. Wondering if you can talk about kind of the efficacy of the product in terms of the overall levels of nitrogen fixation that this product Enabled versus prior generations or competitive technologies?

Speaker 4

And then also your expectations on The degree to which this new product will be additive to your inoculant business or if you expect any kind of cannibalization from your legacy business?

Speaker 2

Thanks, Ben. This is Federico. It's great to have you on the call and that is a great question. In terms of nitrogen fixation, Rhizovia is Rhizovia. So what you will see is that You can expect the same level of fixation throughout the portfolio.

Speaker 2

So the difference It's not so much on how much nitrogen is fixed. The difference is mostly around how Much time before you can do the application on the seed without losing the bacteria and that is very important In some markets like in Brazil and the United States where seed is sold pretreated. So if you had applications that were lost In less than 60 days, that's a no go for that part of the business. You need to have more than 60 days of viability In the seed and what you're seeing here in this particular solution is that we can get up to 2 70 days. Now, That is a function of bacterial decay.

Speaker 2

So the more bacteria you have loaded in the seed, the longer That nitrogen fixation capabilities retained. So the ultra high concentration allows you to have either More days of pre inoculation or achieve a similar number of days of pre inoculation to the sort of competing technologies, but at a much reduced rate. And the reduced rate is important because at the end of the day, what you can put in a soybean seed is limited In volume. So you cannot load more than 8 milliliters of product on a kilo of Seed or 800 on 100 kilos of seed. So and inoculants were not insignificant in that loading capacity because If you look at some of the prior versions, we were talking about products that were applied at more than 2 50 milliliters.

Speaker 2

So This is allowing us to reduce the rate while we preserve sort of the pretreatment period that is required for Professional seed treatments and open up space for additional technologies that might be utilized at the seed treatment level. This is a huge enabler for the American market. Remember our presence in the inoculum business in the U. S. Was Fairly small until now, in part because we didn't sell to the on farm solution, our inoculants, Liquid inoculants, so we were selling mostly to the upstream customers.

Speaker 2

And in the upstream business, you needed to load A number of different things and we were limited by the loading capacity of our LLI products and prior generation. So the UHC version is a huge enabler for the upstream business in the U. S. And I think in Brazil, What it will do is allow us to expand our profitability because basically we can reduce rates And by doing that, obviously, we can improve gross margins as we deliver something that is can be used both on and off farm in that particular market. So maybe a little bit of cannibalization in Brazil with the LLI business, But a significant expansion in the U.

Speaker 2

S. In a market that we had very little penetration.

Speaker 4

Very helpful, Federico. Thank you for that. Very good. Well, more to talk about, but I think I'll leave it there. Thanks for taking my questions and I'll get back in queue.

Operator

Thank you, Ben. Our next question today comes from Bobby Powelson from Canaccord. Bobby, your line is open. Please go ahead.

Speaker 5

Yes. Thanks for taking my questions. So I guess the first one is just maybe going So the topic of the farmers pausing in Argentina ahead of the elections, what kind of impact Do you see there in terms of maybe pent up demand, pent up activity? And how does that translate into the way we should think about seasonality for you guys this year versus previous years?

Speaker 2

Thanks, Bobby. That's a very good I think the election situation in Argentina creates room for speculation, particularly in terms of What might happen to sort of commodity prices under a new administration, whether the export taxation will be removed, mitigated to some extent or not. We have had an extended electoral process because, as you know, we are going into a runoff with 2 candidates that will occur in this upcoming weekend. So I think that level of uncertainty and potential speculation from farmers Probably waiting to make decisions until a final outcome is achieved will soon be over because we will have Final results by December. At the end of the day, Planting or not planting, there's not too much optionality there In the face of farmers, regardless of how much they might realize at the end because of how commodities get priced, I think Farmers tend to plan because that's the only way they can retain hope for future income.

Speaker 2

Whether they do that Making anticipated payments because they feel there is a peso devaluation coming around the corner Or whether they sort of keep the standard financial terms because they feel that is less likely is what's kind of dictated By the political scenario. The good news is that one way or another we'll have that uncertainty finalized as of this coming Sunday. I don't know, Kike, if you want to add anything to that.

Speaker 3

Hi, Bobby. Good having you on the call. Yes, look, I think that what Federico just described is accurate. Throughout the season, what we saw were some Factors that played into farmers wanting to rush into buying and then being deterred from that by other factors. So when you put all of that in, I think that we're seeing the season that is unfolding pretty normal, I would say, Without much anticipated purchasing from farmers and without a delay in the purchasing either because we're seeing good rains.

Speaker 3

And remember that there's an emotional aspect in farmers' minds when you're coming out of a drought like the one we had last year. So they see good moisture on the soil and they want to plant. So they have been purchasing what they need here to sort of like get fields ready. Like I was saying on the adjuvant side, there was a lot of spraying done To get fields in shape for planting. And then obviously, as the planting season evolves, Then buying seeds and fertilizers and whatever is needed for planting.

Speaker 3

So again, when you factor all of that in, I think that we're seeing from a seasonality perspective, a rather normal season in Argentina.

Speaker 5

Great. And then maybe just on the topic of weather, can you help us understand Across different geographies, how you anticipate at this early stage, El Nino's impact, including maybe the impact potentially in California as well as South America and anywhere else where you think that there's going to be an impact in terms of pest pressures, unusual moisture levels and timing around planting, whatever else you think is important regarding El Nino? Thanks.

Speaker 3

So I'll comment on that, Bobby. Obviously, every time we get the question on where we try to avoid it because we don't have sort of like The ability of really forecasting what's going to happen. What I can tell you is what we're seeing now in the markets where we operate. And what we're seeing is In Argentina, sort of like normal weather conditions. In Brazil, we're seeing good planting conditions.

Speaker 3

There might be some areas where you're seeing an excess of water, But nothing that is so far concerning. And I think it's probably too early to know in California how that's going to unfold. For the time being, I would say that in the Americas, we are seeing normal markets all around, normal weather conditions in the markets where we operate, Which is good to have. I mean, after all of the complexity that La Nina created last year and not getting sort of like Any kind of news that are disturbing to our business is good to have. So I would say that no news, good news so far.

Speaker 2

Yes, I agree. Not much to add. Go ahead, Bobby.

Speaker 5

Thanks. And then just one last one on the nitrogen fixing Patents that you received and opening up additional opportunities in North America for your steed treatment Opportunity there. Is there a way to kind of help us understand the size of that particular market that opens to you? Because it sounds like it's additive to what you're doing and it sounds like a pretty substantial market, maybe help characterize The size of the incremental opportunity in North America from

Speaker 2

the Yes. Look, I think We have historically done probably less than $5,000,000 of inoculant sales in the U. S. Market and that probably was inclusive of Canada. This technology on the upstream It should allow us to do at least 5 times that on inoculants alone.

Speaker 2

And I think it does have a synergistic effect with the rest of our seed treatment portfolio, because When you engage with upstream partners and remember that the Syngenta agreement in the U. S. Is nonexclusive for upstream, so we can go to Other participants as well and this is not negating the value of Syngenta that is a market leader and probably can do much better than what we used to do ourselves alone. But this is also allowing us to explore other relationships where we might be today also selling the bio insecticides Aforesee treatments and then we can go with the combined offering. So then You can become a more attractive provider of seed treatment solutions, co formulated seed treatment solutions for that part of the industry.

Speaker 2

So I think it's very meaningful in terms of where we were And our ability to sort of make this 5 times what it used to be, it's not just us Pushing things forward, but we have the Syntenta relationship now and potentially other upstream partners with whom we can partner with this new technology as kind of generating the opportunity for the reengagement in our conversations.

Speaker 5

Great, understood. Thank you.

Operator

Thank you, Bobby. Our next question today comes from Kristen Owen from Oppenheimer. Kristen, your line is open. Please go ahead.

Speaker 6

Hi there. This is Andre Adams on for Kristen. I was Hoping you could offer some commentary on the competitive landscape given what we have heard from other crop protection companies. We're trying to understand if there's some bifurcation in purchase activities between the biologicals and conventional or generic products.

Speaker 2

Hi, Andrea. That's a great question. I think The good part of being in biologicals is that sometimes you cannot Keep inventories forever like you do with some of the most generic crop protection products Our BEST Biologicals have shelf lives of maybe 18 months to 2 years, where that sort of implies Some logistical complications and manufacturing expertise. It also prevents Some of the inventory situations that you might be seeing today in the more generic crop protection industry where We are hearing other companies being significantly affected by the destocking that is occurring at different levels, particularly in the Brazil and The U. S.

Speaker 2

Market. So we have not seen that in the biologicals front. Also to add Many of the products we're bringing to market are unique within their categories. So there's kind of a high level of protection from the IP and the novelty of the product That prevents sort of the commodity inter exchange that you see with the crop protection Business in general. So, I think we're fortunate because of participating in the biological space And we're not as exposed to the process that you're seeing across the crop protection industry in some of the major geographies.

Speaker 2

And this has been well communicated by other companies in their recent earnings calls.

Speaker 6

Got it. Thank you so much. And for the next question, Just to help us understand the impact of the mix shift in the seasoned integrated products and how We should think about that improving as you progress to the next generation. And any Guidance on cadence for gross margin in the segment throughout the year.

Speaker 3

Hi, Andres. This is Enrique. Thanks for joining on the Oppenheimer side. Good to have you on the call. So look, I think What you should expect in CI Integrated Products is what we have been communicating so far on the seat side.

Speaker 3

That is that we expect to make margins that range from 45% to 55% on the sales of HP4 Seed when we sell the full bag of the seed ourselves, Margins of upwards of 80% when we are just collecting on a royalty and that is something that we expect to happen probably in the next 24 months as We get the multipliers that we enrolled with to get seed out in the market And we just invoiced the royalty. So that's the type of profitability that we're expecting on the HB4 side. What you're seeing this particular quarter It's something that is more linked to the commercialization of grain that is produced under the HB4 program that Federico just described. And on that part, we expect to see lower margins. I mean, we are not talking about this type of 45% to 55% or 80% and upwards When you get royalties, we're probably talking of margins of up to 10% when we are engaging certain industrial processors with whom We do a supply agreement with certain industrial attributes.

Speaker 3

So we're talking about managing agronomic Features in the field working together with a farmer in the case of wheat, for example, to obtain certain levels of protein that might be attractive for millers. And in the case of soybeans, the same when you go to sort of soybean concentrates. Then when you talk about deploying Other technologies that we have in the pipeline like GoodWheat, that is a technology for which we have a license in Latin America, we're probably talking about higher margins, Margins can go to 20% and higher. And also when you talk about ESG attributes Like the announcement we made on the agreement with Mulek, where we will also probably be collecting margins that are upwards of 20%. All of this on the grain commercialization is something that will be kept capped, if you will.

Speaker 3

Remember that we've announced that we are Maintaining the acreage of the generation HB4 program for wheat at the tune of 50,000 hectares and we will be monitoring Sort of like the effectiveness that we have in monetizing these premiums. And if we are not able to monetize these premiums, we will probably Downsize the program. If we are able to monetize on this, we will sort of like we already have enough of an acreage to ramp this up. But for the time being in the short term, I would say that this should not be something that is sizable in terms of gross profit Compared to what we believe we can accomplish on the seat sales themselves. I don't know if Eddy

Speaker 2

could No. What I would add to that is that The quarters that usually reflect seed sales are the 2nd quarter of our Fiscal year when we report the soybean season seed sales and the Q4 of our fiscal year where we tend to report the wheat season Seed sales. So those should be quarters where gross profit tends to be closer to the 50% mark. Not to say that in those quarters, there might be some inventory sales that are not seat related and that might be realizing different type of Premiums, but which are usually much lower, no, below the 20% range as Enrique alluded. So in terms of our guidance for Incremental EBITDA for this current year coming from HP4 Wheat, which was around $15,000,000 That will be derived mostly from this CCL side of the business And probably heavier towards the Q4 when we do recognize those sales.

Operator

Thank you. Our next question today comes from Kent Oliver from Brookline Capital Markets. Your line is open, Ken. Please go ahead.

Speaker 7

All right. Thank you and good morning. The results included an inventory valuation adjustment that was broken out, which I think is the first time you reported this. So how should we think about it in terms of ongoing effect and whether this is something that results from discrete transactions or if it's continuous revaluation of assets on the balance sheet. So that's the first topic.

Speaker 3

So I assume that you're referring to the adjusted EBITDA reach camp?

Speaker 7

Yes.

Speaker 3

All right.

Speaker 7

Also in the income statement.

Speaker 3

Yes. Yes, yes, yes. That's all right. So thanks for the question. I think it is worth sort of like taking a look at that.

Speaker 3

So what we're seeing here is that Because now we are recognizing revenues of these type of sales that allow us to sort of Capture these lower margin opportunities with the prospect of higher margins if we are able to do what we believe we can do with inventories generated under this closed loop system. That means that we need to revalue inventories every quarter close. This is done at sort of like average valuations Taking as a reference market prices, which doesn't mean necessarily that that is the value that we will be getting for our inventories. So this is just evaluation of the remaining inventories and whether that's adjusted or not compared to the beginning of the quarter, Assuming no premiums. No.

Speaker 3

Assuming no premiums, exactly right. And the other thing is, Kem, bear in mind that Particularly in the case of soybeans, we have so we have as a policy, no price risk. So we hedge for all of our inventories. In the case of soybeans, that is easier to do because we have a very liquid market In Argentina, in Brazil, and you have a high correlation with CBOT, so very easy to sort of like completely erase any type of price risk. And bear in mind that we think of ourselves as a technology company.

Speaker 3

We're not in the business of trading. In the case of That is a little bit more complex because we don't have a liquid asset market to fully hedge. So that I would say that that one $400,000 change in net realized sold value is not strictly linked to what we believe is going to be The value at which we commercialize with inventories. It is harder to get the full hedge, but That is strict price not recognizing the premiums that we are seeing in the commercialization of those inventories.

Speaker 7

Great. Thank you for the explanation. The second question relates to The UHC patent. And how should we think about the timeframe for the benefits? And I'm thinking of this in a couple of components.

Speaker 7

One is, you mentioned this opening of the U. S. Market and then potentially other geographies, but then also there is this benefit with regard to What I'm assuming is your ability to then sell more products for the same seed. And How should we think about the timeframes for these benefits to play out?

Speaker 2

Hi, Ken. Thanks for joining. This is Federico. So some of these benefits will play out immediately. For instance, we already have registration in Brazil.

Speaker 2

We are already producing, manufacturing this product, selling part of this in Argentina I'm starting to export to Brazil under the Syngenta agreement. In the U. S, we're planning to also Sell this product in the current fiscal year and probably make this our go to market sort of approach with the different upstream partners. So I think obviously we're not going to fully realize the 5x Opportunity that this will generate in the U. S.

Speaker 2

On the inoculant side alone, but I think we can be somewhere in between For the current fiscal year. So it's a product that's already registered where we We are already doing manufacturing and we are already exporting. So it's not too far away.

Speaker 7

Great. And just the other concept of being able to sell more products to the same seat, I mean, first of all, is that even feasible for you at this point? Or will that take a longer time to develop?

Speaker 2

No, I think it's feasible. I think it does Synergized very well with the Rinopec platform, which we expect to launch this year in the U. S. It might be a product that we can sell with a prior system, the MBI-two zero six platform that includes Well, we today sell through all buffer instance in seed treatments, but that will not come with sort of the type of We'll not free up as much of the seed as I think it will once we have the renal tech solution, no? Because The other bioinsecticide the bioinsecticide that we currently sell in the U.

Speaker 2

S. Requires a load that is between 300 to 400 milliliters Per 100 kilo of weight where we can reduce that by 4x to 5x and have Nemati Site Control as well with a new platform. But that platform is due to be approved for commercialization in the current fiscal year in the United States. And we are hoping for approval in a later stage in Europe as well. The Risoderma part of our portfolio is one That will be relevant in Europe, for instance, where we are planning for 2025 approval of the newer version.

Speaker 2

So that might come maybe after 12 to 18 months. But I think this is very important for the U. S. Market In our

Speaker 6

view.

Speaker 7

Great. Thank you.

Operator

Thank you. There are currently no further questions on this time on the line. So I'd like to hand back to Federico for any closing remarks.

Speaker 2

Well, thanks again, everyone, for joining. I think we had a good start to fiscal 'twenty four. It's good to see the weather not longer being a significant issue, at least in the one market where we still have a very meaningful Present. So we look forward to a great year, regaining momentum. We have created opportunities In multiple areas of the IV input space, we have developed relationships that are ready to be scaled.

Speaker 2

We have invested in capacity like what you So for the Londrina facility for adjuvants in Brazil. So we are ready to go. We're excited, energized and hopefully We can continue to deliver growth for our shareholders in the quarters to come. Have a great rest of the week and please feel free to follow-up with us as needed. Thank you.

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Earnings Conference Call
Denali Therapeutics Q1 2024
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