ArborGen Holdings Limited (ARB) Earnings Call Transcript & Summary

Welcome to ArborGen's Annual Shareholder Meeting. I'm Dave Knott, Chairman of the Board. It's great to be back in New Zealand to meet with shareholders and talk about ArborGen's performance and outlook. Thank you for joining us today. I'm pleased to advise that a quorum is present and the meeting has been duly convened. The notice of meeting, which includes the explanatory notes, has been circulated to all shareholders, and I intend to take it as read. The audited financial statements for the year-ended March 31, 2024, were released on June '24 and included in the annual report. In attendance today are representatives from our auditors, Deloitte, and our solicitors, DLA Piper as well as members of the ArborGen team and other advisers. Welcome to you all. For those of you joining us online, if you would like to ask a question, please select the Q&A tab on the right half of your screen anytime. Type your question into the field and press send. If you require any assistance, refer to the virtual meeting guide or use the chat function and one of the Computershare team will assist. I would encourage you to submit your questions as early as possible. Please also note that your questions may be moderated or if we have multiple questions on one topic, amalgamated together. Voting today will be conducted by way of poll. I will shortly open the online voting for all resolutions. If you are eligible, you will be able to cast your vote under the vote tab. Your vote has been cast when the tick appears. You have the ability to vote at any time up until the time I declare voting closed. I now declare voting open on all items of business. Moving on to my address. I'm pleased to be joined today by our 2 New Zealand-based directors, Paul Smart and George Adams, as well as Arbor Gen's CEO, Justin Birch, who you will hear from shortly; and our CFO, Christina Green. Joining us online from the U.S. are directors, Tom Avery and Ozey Horton. Tom and Ozey as well as myself, are standing for re-election today, and you will hear from them later in the meeting. ArborGen remains a global leader in advanced genetic seedlings, with more than 2,000 customers, 24 seedling nurseries and orchards and a production capacity of almost 500 million seedlings each year. Our overall goal remains steadfast: to drive sales of our advanced genetic seedlings in our target markets, thereby delivering an increased value for forest owners and greater returns for our business and our shareholders. Our dual pathway strategy provides the framework for our actions. We're building a strong platform for our business, and Justin has done some great work over the past year to optimize our asset base, improve efficiencies and productivity, and create a strong performance culture. The U.S. South and Brazil remain our primary markets, and we have identified strong growth and commercial potential in both of these regions. Our focus on advanced genetics continues to deliver superior prices and margin. Long-term macro trends support our go-to-market story, and Justin will talk to these shortly. Fiscal year '24 was another year of improved performance and a positive upturn in our financial results. And we are pleased to report record revenue and record adjusted U.S. GAAP EBITDA results. In particular, our growth efforts in Brazil are yielding impactful contributions and record sales, pricing, and margins, supported by a solid performance in our long-standing U.S. market. The Board has determined that the optimal allocation of available cash flow at this time is to reinvest in growth opportunities rather than distribute dividends. While we recognize the importance and desire of shareholders to receive a dividend, we believe the growth initiatives will deliver long-term value creation for shareholders. The tangible and positive results now being delivered as we execute on our strategy, gives us confidence that we are on the right track and have the right team and leadership in place to realize our goals. Last year's strong result highlights the value of the strategic reset undertaken 3 years ago, which saw us divest our Australasian operation and expand in Brazil, while maintaining our strong presence in our traditional U.S. market. This has proven to be a winning formula with a significant reduction in debt and a 22% increase in gross profit over the last 4 years with record revenue and adjusted EBITDA reported in fiscal year '24. We are conscious that ArborGen's share price performance, seen in green, is not reflective of the strong underlying performance of the company and our recent record results. There are several reasons we can see for this. We have a few institutional investors, low liquidity, and there has been selling pressure over the last 24 months. We understand the similar businesses to ours in the U.S. have sold recently for multiples up to 10x EBITDA. ArborGen's current share price value as our company is just around 4.5x EBITDA, a significant value gap. As ArborGen's debt decreases and earnings increase, this gap will become even more pronounced and our company will be increasingly positioned as a value opportunity. While your board and management remain focused on sharing our story, it has been difficult to attract institutional investors to fund -- or funds to a smaller company listed in New Zealand, but with our operations offshore. We believe that ArborGen's share price does not appropriately reflect the intrinsic value of the business. And as announced this morning, we are therefore planning a share buyback of up to USD 500,000. We see the purchase of shares at current market prices as value accretive for all shareholders. We are well positioned to continue investing in the business while also opportunistically repaying debt or buying back shares depending on market conditions. The buyback reflects the Board's confidence in the long-term strategy and opportunities for our business. We are finalizing the details and we'll advise the market when it commences. We will continue to build value in fiscal year '25 and are already on to a good start, albeit this season's planting and sales in the U.S. have been hampered by recent weather events and the ongoing industry and economic conditions. The team are continuing to identify opportunities for greater efficiencies. One important initiative has been the sale of the in-vitro business and subsequent lease of the Ridgeville building ahead of a potential sale. This allows us to recycle cash into growth, including the acquisition of additional nurseries in Brazil, increasing container capacity, and investing into R&D. We are committed to driving value for shareholders as a result of strong earnings and cash flow growth. As a horticultural business, ArborGen's operations are inherently linked with climate, which provides both risks and opportunities for our business. As we operate mostly outdoors, we face risk from excessive rain, hail, freezing, hurricanes, drought, and excessive heat. We have been managing these weather events for more than 30 years and feel confident that we have already taken many steps to protect our assets from extreme weather. As such, we consider that we are well-positioned to mitigate risks and respond to opportunities arising from the transition to a low emissions climate-resilient future. These opportunities include the increasing emphasis on the role trees can play in offsetting carbon emissions through sequestration, reforestation, and afforestation projects, as well as a consumer shift towards more sustainable materials such as -- timber. Given the nature of our business, there's also the opportunity for ArborGen to utilize green bonds and sustainability-linked loans as there is for our customers. Recently, we released ArborGen's first climate-related disclosures under the New Zealand Climate standards. This was a significant piece of work taking into account climate scenarios in our 2 markets and building on our own knowledge and strategy. This report can be viewed on our website. Our company is strongly positioned for the future. The value and science behind our advanced genetics is now proven, we are a leading provider to the forestry industry, and we have strong and established footprints in our target markets. We have an experienced sales force who work directly with foresters, providing advice and education to help our customers in their sustainable forestry journey. In Brazil, we are leveraging our strong position in the pine and eucalyptus seedling market to build a sustainable, highly profitable business that is recognized as the preeminent seedling supplier. And in the U.S., we are focused on driving increased adoption of advanced genetics across the U.S. South, leveraging decades of investment in developing best-in-class proprietary products. The long-term macro trends are positive, and we have the capacity and the resources to leverage future demand. I'll now pass you over to Justin to talk to you more about our operational performance.

Thank you, Dave. It is great to be in New Zealand with our shareholders and reflect upon the last year and talk about our plans for this year and for the future. I have now been with the company for just over 14 months, having started in June of last year. It's been a busy time with a particular focus on productivity and operating strength. This has seen us streamline our organizational structure, reduce costs, and enhance operating efficiencies. We've also invested in growth, acquiring 2 nurseries and expanding container production, as well as continuing our comprehensive R&D and product development program, which allows us to create new genetics that provide our competitive advantage. If we look at the fiscal year '24 results, we reported record revenue and record adjusted U.S. GAAP EBITDA, improved our gross profit by 32%, and significantly reduced our net loss after tax. Borrowings also reduced year-on-year. Revenue was up 21% to a record $67.7 million. This was driven by a strong performance from Brazil, which provided 31% of revenue, with U.S. revenue also up on the prior year despite subdued volumes. Strong pricing and margins in both regions helped deliver year-on-year revenue increases. Adjusted U.S. GAAP EBITDA was also a record at $12.8 million, up 39% year-on-year. This was boosted by increased sales revenue and improved gross margin. During the year, as part of our strategic pillar to optimize productivity, we conducted a review of assets within our business to ensure these met the Board's investment criteria and provide value for shareholders. In line with this, we elected to exit the Taylor Nursery and subsequent to the year-end, sold the in-vitro business. Combined, this will provide around $1 million in savings per annum. We are using these proceeds to pay down debt and invest into growth initiatives with borrowings down to $20 million at year-end. Positively, over the past 4 years, our interest cover has improved to 3.2x. Our gearing has reduced from 23% to 13%, and bank debt as a percent of tangible assets has also reduced significantly down to 18%. This has substantially increased ArborGen's financial stability and flexibility, making our company more attractive to investors and providing the ability to invest and to identify growth opportunities. We continue to invest into growth in FY '24 with the expansion of container capacity at 2 nurseries and the purchase of Jasper Nursery in the U.S., which we have leased since the 2018; the acquisition of an additional eucalyptus nursery in Brazil and continued R&D in product development. If we look -- now look at each of our target markets, the U.S. market is facing economic and industry headwinds. Firstly, demand for pulp timber has reduced with several major pulp mills closing due to historically low pulp prices. In addition, due to cyclical economic conditions, the level of residential and commercial construction and renovations has declined, leading to subdued demand for saw timber with many saw mills losing money in the current environment. These conditions have led some customers to postpone harvesting, subsequently affecting their demand for seedlings. On top of this, wet weather conditions during the summer impeded ground preparation for replanting. This all had an impact on our U.S. sales volume in FY '24 year. Pleasingly, revenue was ahead of last year as we focused on selling higher-margin products. Current conditions in the U.S. are expected to continue into FY '25. Looking ahead, while we anticipate a return to a more commercial processing cycle for U.S. pulp production, the long-term trend suggests a continued decline. Meanwhile, recovery and demand for saw timber is projected by 2025. These market dynamics support ArborGen's go-to-market story. Our advanced genetic seedlings offer customers the opportunity to achieve higher yields and returns from premium grade timber meeting the growing market demand. We will continue to focus on the sale of higher-value advanced genetics products and thoughtful growth. This will be primarily organic growth such as expansion of our container offering, but we will also consider M&A if appropriate, and it meets the Board's criteria. As Dave mentioned, extreme weather events are becoming more common with climate change. This has been particularly evident in the U.S. South, most recently with Tropical Storm Debby, which brought huge rainfall in the South as well as earlier storms in the spring, including Hurricane Beryl, which dropped 30% of the annual rainfall in 1 month in some areas of Texas. We are using science-based planning and investment to build our resilience and have initiated strategic measures to both mitigate and offset the potential weather impact of such events. We are investing in containers which help protect seedlings and use agricultural products to help hold seed in the field. We are managing our planting schedules and aiming for wider planting windows. We are undertaking contour mapping of our nurseries and orchards and improving drainage. We are under -- we have also mitigated our risk through orchard diversification, both geographically and age class. By recycling older orchards, we can ensure they are younger, more resilient orchards, which are better suited to withstand tropical force winds. We're also invested in backup power systems to combat damage from storms and maintain our ability to grow crop and store our seed. Brazil has continued its positive track record and delivered another record result in FY '24, with volume growth bolstered by strong pricing and margins. Over the last 3 years, revenue has grown at 51% per year with a record $26.5 million delivered in FY '24. We see a great potential in Brazil to leverage our strong positions in the pine and eucalyptus markets and convert customers to products with superior genetics. Brazil is the world's largest producer and exporter of hardwood pulp, and ArborGen is one of the largest commercial providers of pine and eucalyptus seedlings. While the production capacity has expanded across the industry, yields have declined due to environmental and weather-related factors. The market is seeking new clones with higher yields that are able to be more resilient, and this presents our opportune landscape for ArborGen. Our superior trees offer higher yields and higher wood density than standard market clones, improved disease and insect resistance, and good drought tolerance. We are moving quickly to leverage this demand with investment into nurseries and orchard development to transform more product from the market or unprotected to protected clones. In October last year, we acquired an additional eucalyptus nursery, and our production capacity sits at now over 135 million seedlings per year through our own nurseries as well as contract growers. As we are expanding our production in Brazil, we have identified promising opportunities across broader South America region and are continuing to investigate those. We now look -- if we now look at our progress in the current fiscal year, the headwinds seen last year in the U.S. South are ongoing. Lumber demand and prices are down, saw mills are curtailing production and weather has impacted the ability for some customers to prep for planting. Taken together, this has seen some forestry owners defer harvesting and therefore planting until conditions improve. The introduction of new sales terms with stricter cancellation terms has also delayed orders with customers waiting until they have more certainty on their requirements. We are continuing to identify new and innovative ways to grow and market our superior product as well as explore further ways to streamline the business. As previously advised, cost of sales will be higher due to the freeze event in late 2022, which will reduce the amount of seed available. Momentum is continuing in Brazil and we expect another strong year in the region as we benefit from reaching an expansion of our production capacity. We are continuing to shift sales from licensed products to proprietary ArborGen genetic seedlings and will deliver superior prices and higher margins. In FY '25, we expect to see ongoing growth momentum in Brazil, while headwinds in the U.S. South will continue to impact on demand across the industry. Given this, we are expecting full-year sales volumes to be flat or slightly down to last year with adjusted U.S. GAAP EBITDA expected to be largely in line with fiscal year '24. Thank you, and I'll now pass back to Dave.

Thank you, Justin. I would now like to invite questions in relation to the annual report or today's presentations. There will be an opportunity to ask questions about the resolutions once they have been put to shareholders. [Operator Instructions] Are there any questions?

My name is Allan Best and I'm carrying the Shareholders' Association proxies today. The sale of the in-vitro business now, as I saw in the history of the company, there was a great deal made initially of genetic editing, but the company concentrated quite sensibly, I felt, on MCP, which in Darwinian terms wasn't natural selection. It's managed selection. With the sale of the in vitro business, what's your thinking about gene editing as a contributing factor in the future? Does it open more opportunities?

Yes. I think it's a good question. As we looked at the in-vitro business, we've looked at kind of the decades that have been put in as ArborGen in the previous company or as it was built up in previous years. And the headwinds of putting forward genetic editing into forest are pretty significant, at least in the U.S. with a lot of significant animosity really towards that piece. And then -- so we weren't seeing that, that was really a viable path forward, and that predated me that how far that was going. And then we weren't seeing that the use of that business was really returning our capital and that we are making good margins. And as you said, the MCP was advancing at such a rate with even the work that we've been doing, utilizing more -- trying to find markers to help our -- advance the speed of our breeding process and to build that up, that was catching up quicker than we could really do that. But to your original question on the gene genetic changing of the seedlings in the U.S., that seems especially for forests, where that's seen as kind of bashed in a really pure nature. There was a really significant resistance that we saw, like I said, that predated me, but there was significant resistance. And I think they'll continue to see that for a while, at least in that portion of that piece.

Dave, I've got a question. Just concentrate on a couple of things. In the report, it was quite clear that the admin expenses, the overhead part had increased very dramatically.

I'm sorry, I missed that first part there.

The admin or overhead expenses of the head office and others had increased quite dramatically. How is progress on controlling that bit? Just the overhead expenses of the operations.

I think a lot of those have increased, which ultimately get -- we view those as one-time because a lot of those are part of the transition, the CEO transition. So as far as like the actual, what I would say, run rate administration expenses, I'd have to look back at the exact numbers, but I think the -- we're very focused on keeping those in line. And in fact, one of the points that Dave just talked about was we are currently working to lease our Ridgeville facility. We felt there was a significant amount of overhead expense. And now that we don't have this in-vitro program, we're taking a -- I'm sorry, I'm going to use feet because I'm from the U.S., but a 66,000 square feet facility, and we're now looking to move into a 5,000 square foot facility for a head office and save on things like insurance and that we ultimately hope to sell that facility. Real estate markets can be a little bit tough, and we don't want to take it too cheap. But we have leased that facility. So we are making income from that. But to your point on overhead expenses, that was one of the areas that we identified that we really wanted to try and make some long-term cost savings was to not be carrying this large facility that was underutilized and we're paying for maintenance, electricity, insurance, all those things that were really contributing to that administrative expense.

There's also the normal inflationary pressures that we're feeling across the Board with all levels of employees.

Dave, I am not very familiar with Brazil or Southern USA. So have -- in your marketing, have you given any thought to the total market that you're addressing and your percentage market share in those 2 key markets?

Yes, sure. I mean, Justin, if you want to talk about this?

Yes. In the U.S. -- so they're very, very different markets. So in the U.S. South, right, that's primarily loblolly pine with a few other varieties of pine called longleaf and -- some what we call hard leaves -- hardwood, which would be Oak and Sweetgum and some of those other type of deciduous trees. Our marketing there has really been an educational piece because a lot of people know the trees, know the providers. And so our push has been how can we show people that it's worth the investment to actually plant this higher genetic tree. So to your point about marketing and our piece, we have a couple of other competitors. And frankly, as Dave said, we're also investigating are there opportunities or other smaller nurseries that would be open for M&A opportunities if they're competing with us because oftentimes, it's just competition on pure price, not on the actual quality of the product or the genetics of the product. In Brazil, the confusing part is we call it market or we call it protected or unprotected. Unprotected are just kind of what they call market clones, which is just genetics that are -- anybody can plant and protected, we have many licenses in some of our own products there. And so in Brazil, a very different market where we're you're approximately 80% eucalyptus, 20% pine. And so the marketing there has really been building these partnerships as there's just been a tremendous amount of investment in hardwood pulp mills that's just driving a tremendous amount of growth. And given that, that is -- it's a Loblolly pine is a 25- to 30-year harvest cycle, eucalyptus is 6. So there's a lot more churn every year to be planting those things. So our marketing there is, I think we've got a lot of trees. It's just really trying to make sure that we are -- we call it our strategic pillar is measured and opportunistic expansion. Given the market down there and that obviously, we understand it's a -- that market can be very up and down. We're trying to make sure that we don't over invest, get ahead of ourselves just because it looks good initially that we want to. And so our -- the acquisition opportunities we're looking at, we're trying to make sure that we're not just building a bunch of capacity to go into market, and then that will cause a big price drop.

Yes. I think it's also important to note in the U.S., we kind of have 2 markets, right, the MCP and the OP markets, you can kind of think of it as the luxury market versus kind of like the consumer market. And so I think with the MCP market, we're increased -- stable to increasing market share and the OP market is where we've seen some increased competition from our competitors, and that's generally a very low-margin product that we use as kind of a driver to sell advanced seedlings.

Eucalyptus, you're saying, what was it 7 years, turnaround?

Yes, 6 to 7 years harvest cycle. Yes.

So why in America that you don't have them going more for that in America?

We've tried it. Eucalyptus doesn't grow very well in the States.

The eucalyptus -- to build on that, eucalyptus needs a little bit warmer temperatures. And so years ago, and again, this predates me, but ArborGen did look at building a more freeze tolerant eucalyptus tree, but even a lot of the areas in the U.S. – they're very productive forest areas just would get down cold enough that it really caused an issue. So it really is -- it's the benefit of Brazil that they just have an average warmer temperature and so it can really speed that up.

Also do you have trouble also people wanting to go and change for different product because they're so used to using the product or the trees they've already been growing?

Are you talking more in the U.S. South or any specific geography or?

Well, South and in Brazil. Because obviously, you've moved out there stronger, haven't you… especially sales, sales would be a problem… moving in there.

Yes. I mean I think the competition we have for the -- I guess, if I might -- if I'm speaking to it correctly, would be the land, right? What's the highest and best use of the land? Obviously, you have some of these areas can be development potential as people need to build homes, right? And so people take a forest and say, hey, after I can make a ton a big turnaround if this is developed into some sort of housing unit. We've had some areas. The competition has been putting in large-scale solar. And so that's been a better return for some of the landowners. So they've kind of moved, and I know that's broader than your product, but that's kind of a competing land use. Typically, these forests typically don't go into agriculture. They're lower land, but that can also be a competing use if there's a good -- if this is good tillable ground that they could do that. But for other products, those are really the other kind of, I think, competitions for the lands. And then in Brazil, usually, the land base is pretty big there and opportunities to plan. So we've not really seen a lot of competition. It's more just kind of rightsizing the right amount grown for the capacity grown and making sure that everything has out.

The other thing is saying in Brazil is you're saying eucalyptus grow so fast. What are they using it there for pulp or for what are they using it for?

Yes, they tend to use that for hardwood pulp is the biggest point. And Brazil has really become a worldwide producer there as more other markets. I mean it was -- and it still has grown other places in the world, Indonesia and other places, but Brazil has just shown that it has a very good capacity for that. There's also some kind of -- it can be used to make charcoal for steel production. So that's another ancillary use, but the majority of it in Brazil does go for Hardwood pulp, which that country has just become the kind of worldwide leader in production there.

And one other question I want to ask is the -- how would I say, what do you call it? What do you call it the currency?