S&W Seed Company (SANW)

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S&W Seed Company Discussion Regarding Stevia Sourcing Agreement Signed With PureCircle Conference Call Transcript
August 09, 2010 | about: SANW Font Size: PrintEmail sponsored by:
Presentation Q&A Participants Search Executives

Dodi Handy – IR & Public Relations for S&W Seed Company; CEO - Elite Financial Communications Group

Grover Wickersham – Chairman – S&W Seed Company

Analysts

Ron Tracy – Paulson Investment Company

Ian Gilson - Zacks Investment Research

Keith Gil – Paulson Investment Company

Jim Wasserman – Sacramento Bee

S&W Seed Company (SANW) Discussion Regarding Stevia Sourcing Agreement Signed With PureCircle Conference Call August 02, 2010 4:15 pm ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the S&W Seed Company conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. If you have a question, please press the star followed by the one on your touchtone phone. Please press star, zero for operator assistance at any time. For participants using speaker equipment, it may be necessary to pick up your handset before making your selection. This conference is being recorded today, August 2nd, 2010.

I would now like to turn the conference over to our host, Dodi Handy. Please go ahead.

Dodi Handy

Hello, ladies and gentlemen, and thank you very much for joining us this afternoon. The purpose of today’s call is to discuss S&W Seed Company’s recently announced stevia sourcing agreement with PureCircle Limited. In view of the fact that S&W’s Chairman has been running point on this stevia opportunity, he has kindly agreed to share his time today to help us all better understand why this is an exciting opportunity for the Company.

As Alicia, our operator, noted, my name is Dodi Handy. I am President and CEO of Elite Financial Communications Group. My firm has the privilege of managing strategic corporate communications for S&W.

Once I cover the Safe Harbor Statement, I’m going to be joined by Mr. Grover Wickersham, Chairman of S&W Seed; and then Grover and I will engage in an informal discussion related to the Company and the stevia opportunity. Then, after we cover several key points, we will have Alicia again provide you with instructions on how to queue into the question and answer period. Now, during the Q&A, I would ask that you restrict your questions to the discussion on stevia. When the Company announces its year-end results, we will be hosting a call with the entire management team, who will be on hand to cover a much broader spectrum of the Company’s operating activities at that time. But, for today, if you would, let’s just stick to stevia.

First, however, allow me to remind you that on this afternoon’s call, we may make 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.” You 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 risk 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 prospectus, which is dated May 3rd, 2010, and other filings made by the Company with the Securities and Exchange Commission.

So, with that said, I’d now like to welcome S&W Chairman, Grover Wickersham, to our call. Hi, Grover. Thanks so much for agreeing to talk with us today.

Grover Wickersham

Oh, hi, Dodi. Thanks a lot for hosting the call and thanks to everybody else who’s taken the time to listen in.

Dodi Handy

Well, Grover, let’s talk about stevia. What is it and why did S&W elect to undertake a plan to bring commercial-scale production of this plant to the United States?

Grover Wickersham

Okay. Well, just a little background first. S&W Seed’s been around for over 30 years. It’s a profitable alfalfa seed company and it historically has been a major wheat processor for the Middle East—and is based in California and the Central Valley. We have been working with the general partners of S&W and trying to transform it from a small seed company into an industry player, using it as a platform, and we knew we needed to build upon our existing base. So, a few years ago, we began investigating potential new crops that are grown elsewhere around the world that could also be grown in California—and that’s just part of our overall plan, which is to try to put additional products—agricultural products—through our Five Points facility.

Then, in December of 2008, the FDA approved the use of stevia for use as an ingredient in food and beverage products. It had been around for, well, 200 or 300 years, but until 2008, it was not GRAS—which stands for Generally Recognized As Safe—and so, it had to get that designation before it could be generally marketed. On the cusp of the Obama administration taking over, the FDA approved the use of stevia for use as an ingredient in food and beverage products. And the primary component of stevia that’s used today—you know, this is kind of a developing area; there are other components that are being considered—but the primary component is Reb A, and that’s extracted from the stevia leaf, and it’s an all-natural, zero-calorie sweetener—it’s up to about 300 times sweeter than sugar. It is similar in intensity to aspartame and Splenda, with the difference being that instead of being a chemical product, it’s actually a natural product.

So, manufacturers started introducing stevia in the States as a tabletop sugar substitute. It’s also in a broad range of food and beverages, and there’s been a very substantial amount of growth. In 2007, the entire production of stevia products was about $10 million. Mintel reported that it grew to be a $100 million industry in 2009, and they’re now forecasting that it’ll be $2 billion by the end of 2011 and beginning of 2012 timeframe.

Stevia leaf is currently grown almost exclusively in the developing world. We’ve recognized, based on studies that were done by one of our consultants when he was on the faculty at UC Davis 30 years ago, that stevia could be successfully grown in California. We coupled that with the fact that the largest consumption of stevia is the US food and beverage manufacturing industry. So, we wanted to participate in this market. We thought stevia was going to potentially take off because American consumers like all-natural products as opposed to something like aspartame that’s petrochemical-based. In looking at the industry, nobody had really engaged in the large-scale farming of stevia. So, we have chosen to come in literally at the bottom of the food chain because we see an opportunity to produce the raw material. It falls neatly into S&W’s area of expertise, which is growing agricultural products.

Dodi Handy

For clarity, Grover, stevia is not currently being grown in the United States?

Grover Wickersham

Well, I mean, on a small scale, it’s been around for a while. Dr. Clint Shock at the University of California, who is one of our key advisors, was writing papers on it regarding growing in California more than 30 years ago—but it’s not been cultivated on a meaningful commercial scale. And most of the production is in the developing—I mean, I’d say 99% of the production is in the developing world. GLG, the biggest competitor of PureCircle, stated in their prospectus that they had over 200,000 farmers in China that were growing stevia. And that’s pretty much where—I mean, the statistics vary, but 70 to 80% of stevia is grown in China. And again, it’s done by very, very small farming operations with individual farmers.

The stevia plant is also grown—it originated in Paraguay— in Paraguay, Thailand, Indonesia and Kenya. I can’t say for a fact because we haven’t monitored it, but we believe that there are probably larger organizations in those countries that are looking at growing it on a larger scale—but to the best of our knowledge, it is, by California standards, grown on a very small scale.

Dodi Handy

Okay. Let’s talk about PureCircle and your new relationship with them.

Grover Wickersham

Okay. What would you like to know?

Dodi Handy

Well, first, tell us who PureCircle is and why you have elected to partner with them.

Grover Wickersham

PureCircle is really the Rolls-Royce or the Mercedes of the stevia industry, in our view. I mean, they’ve really pioneered it. They’re the world’s leading producer and the leading marketer of high-purity stevia products and they’ve become the stevia supplier of choice for leading global food and beverage manufacturers. They also have a vertically integrated supply chain, and they’re also doing some very innovative work with Michigan State University to improve stevia. They’ve also created the Global Stevia Institute and—so I think it’s safe to say everyone agrees that they’re in a leadership position.

They are a public company—they trade on the London Stock Exchange under the symbol PURE—P-U-R-E. I checked on the capitalization this morning—it’s about a half billion dollar. Their earnings in 2009 were about $11 million on $60 million in sales. They are a significant company and they’re very well backed. Olam is one of their largest shareholders. Olam is similar to Archer Daniels Midland of Asia, if you will. It’s traded on the Singapore Stock Exchange and has $120 million invested in PureCircle.

So, PureCircle is a real quality company with very high-quality backing. And we approached them with the idea that there was strategic value to producing stevia in the United States and that California was the place to produce it. They were in the process of reaching that conclusion themselves, so the timing was excellent and we’re real happy to be teaming with them.

Dodi Handy

Can you share with us some food and beverage products that PureCircle is currently supplying the stevia-Reb A to – some companies that we may recognize?

Grover Wickersham

PureCircle has about 150 new products being launched globally in 2010 alone, and their stevia is already in a lot of products. One of the good things about stevia is you can use it to naturally sweeten a lot of different products — it can be used as a tabletop sweetener, and in yogurts, beverages, that sort of thing. But unlike other competitive sweeteners, there are not the same problems with heat so you can put it into baked goods.

As far as the actual products, there’s zero-calorie SoBe Lifewater, which is kind of like a vitamin water, and there’s Tropicana 50—or it’s Tropicana 50/50 or Tropicana 50—which is—again, it’s all-natural. Odwalla has got some products with stevia in it. I mean, it’s a way that you can get calorie reduction but still stay natural, so—.

Dodi Handy

Okay. What stevia supply sources does PureCircle currently rely on, and do you envision that S&W could become a major supply source for them in the years ahead?

Grover Wickersham

Yes, we want to be. PureCircle has direct relationships with people all over the world. I think they came out with a press release today that talked about S&W, but also talked about Paraguay and Kenya. They’re in China, Thailand, Paraguay, Kenya, Indonesia, and I believe they have direct sourcing agreements with companies in the developing world. However, I believe we’re the only one in the United States and we’re hoping we can keep it that way.

As for stevia leaf consumption, I think they’re also buying a significant amount of stevia leaf on the market in China through middlemen. And so, that gives us a lot of comfort; if we can become a large-scale producer, as planned, we would then be able to supply PureCircle with all the stevia they require.

Dodi Handy

Okay. So, let’s talk a little bit about the actual mechanics of the relationship. I mean, what is actually going to happen? S&W is going to grow the stevia leaf, dry and process it, and then deliver it to PureCircle? And then they turn around and sell it to their customers—these food and beverage manufacturers?

Grover Wickersham

Yes, that’s correct. It’s very similar to the model that we use in our alfalfa business – or our wheat, or any other agricultural product that we elect to market. We find the finest varieties that we can, we develop them internally, in lots of cases, whatever the product. And then we have a grower base of 15 different farms and we contract with those farms to grow products for us. And we process the product and then sell it back into the marketplace. In this case, we would be selling to PureCircle.

Dodi Handy

Okay. Can you share any details relating to the actual revenue that is expected to result from this five-year agreement? Because you noted in the release that you expect to deliver up to—I believe it was 1,000 metric tons of dried stevia leaf to PureCircle in just the first two years. So, can you quantify that in terms of the actual revenue?

Grover Wickersham

As you might imagine, there’s a lot of commercial sensitivity and competitive sensitivity on that information and we’re applying for a confidentiality request on some of the terms of the contract. It’s important to note that the pound figures that we reported in the release, and the ton figures that we used are minimums. There is no contractual limitation on how much we produce. We see this as a growing market. If we can commercially produce stevia on the volume basis that we think we can, then we will ramp up as quickly as possible.

I think we’re able to do that because right now we’re running trial programs with one of our big growers and we’re identifying the best varieties. When we get to the point where we can go out to our other growers on a large scale – they have a lot of real estate that’s available for farming – so we should be able to ramp up quickly. But it’s really premature for us to give any guidance as to the amount of actual pounds that we expect to be producing.

Dodi Handy

Okay. Now, I know that when you were roadshowing for your initial public offering this past spring, there was some discussion regarding entering the stevia business, but it was further out than now, wasn’t it?

Grover Wickersham

Yes. Actually, it’s a point of a lot of personal satisfaction for me because, you know, on the roadshow there’s usually someone in the audience who specializes in being a Doubting Thomas. So, one of the comments I constantly received regarding stevia was that it seemed to be more a pie in the sky opportunity. My response to that was always, yes, it’s a big pie in the sky. And there was a lot of comments about, you know, if you grow it, will they come? And so, it’s very gratifying to me that, this early in the game, we actually have the largest industry player in the world, and the most respected, that is putting advance orders in for the stevia leaf that we are growing.

So, I think that in terms of being ahead of schedule, we’ve always felt that it’s better to underpromise and exceed your promises—or underpredict. I’m very gratified that we’re able to announce this major contract as early as we are.

Dodi Handy

Okay, Grover. Well, that completes all of my questions.

Why don’t we have Alicia give our call participants the instructions again on how they can ask you some questions of their own? Alicia?