BIOX: Bioceres Crop Solutions Granted Approval by China to Import HB4 Soy for Food & Feed. HB4 Soy & HB4 Wheat expected to generate incremental EBITDA between $35 million and $45 million in fiscal 2025.

By Steven Ralston, CFA

NASDAQ:BIOX

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Bioceres Crop Solutions BIOX Granted Approval by China to Import HB4 Soy for Food & Feed. HB4 Soy & HB4 Wheat expected to generate incremental EBITDA between $35 million and $45 million in fiscal 2025.

SUMMARY OF RECENT EVENTS

• The Ministry of Agriculture of China granted approval for the importation of HB4 Soy for animal and human consumption in China. Management provided guidance that the ramifications of the approval will generate an incremental EBITDA between $20 million and $25 million for fiscal 2025.

• Update on merger with Marrone Bio Innovations; acquisition on track to close between July and September 2022. The merger is anticipated to achieve $8 million in annual cost synergies and $20 million in revenue synergies.

• Progress on approval process of HB4 Wheat in Australia and New Zealand; formal approval expected during the fourth quarter of 2022.

• Trigall Genetics, the wheat subsidiary of Bioceres Crop Solutions, entered into discussions with S&W Seed Company of Australia to create a new entity, Trigall Australia, which will develop wheat varieties for the regions of Australia.

• Management targets additional contribution of $15 million to $20 million of EBITDA from HB4 Wheat in the next 2-to-3 years.

• Collaboration agreement entered with African Agricultural Technology Foundation (AATF) for the development of drought-tolerant wheat for Sub-Saharan Africa.

• Summary of financial results of third quarter of fiscal 2022

Regulatory Approval from China for HB4 Soy

In late-April, Ministry of Agriculture of China granted approval for the importation of HB4 Soy for animal and for human consumption. Bioceres has been growing seed inventories for HB4 Soy in order to lay the foundation for a meaningful launch of HB4 soy into China. The approval was a necessary condition for the unrestricted commercial launch of HB4 Soy in Argentina and releases third-party licensees from contractual restrictions allowing expansion into the U.S. and Brazil. HB4 Soy is approved for cultivation and commercialization in the United States, Canada, Brazil, Argentina and Paraguay, which together represent about 85% of the global soybean market.

Management provided guidance that these ramifications will generate an incremental EBITDA between $20 million and $25 million for fiscal 2025.

The details behind management's guidance include projections of the number of varieties expected to be launched over the next three years and the projected number of hectares (between 100,000 and 300,000 hectares annually). The total addressable market (TAM) for HB4 Soy for the top three soybean markets (Brazil, Argentina and the U.S.) is estimated to be approximately 35 million hectares. Management believes that the company can achieve a 15% penetration rate in Argentina and 4% in Brazil, along with an initial 50,000 hectares in the U.S.

Merger with Marrone Bio Innovations - Update

On March 16, 2022, Bioceres Crop Solutions announced that the company has entered into a definitive agreement with Marrone Bio Innovations to combine both companies in an all-stock transaction. Both Boards of Directors have unanimously approved the transaction.

During the third fiscal quarter conference call, management stated that the F-4 was filed with the SEC on May 9th and the acquisition is on track to close during the company's first quarter of fiscal 2023 (between July and September 2022).

The merger will combine the biological-based solutions of Bioceres (bionutrition and seed care) with Marrone Bio's product portfolio and development pipeline of biological crop protection and plant health (bionutrition and biostimulant products) solutions. The combination will result in Bioceres operating in 46 countries with R&D facilities in both Rosario (Argentina) and Davis (California). Both companies have been striving for further global expansion. Now, Bioceres' strong position in Latin America will be combined with Marrone Bio's commercial footprint with a strong distribution network in North America and Europe, particularly in row-crop markets.

The merger will broaden the company's product offerings, especially in the area of crop protection and particularly in bio-nomadic insecticides, and expand Bioceres' R&D capabilities. The merger is anticipated to achieve $8 million in annual cost synergies (mostly from eliminating duplicative public company expenses) and $20 million in revenue synergies through cross-selling opportunities and new product combinations.

In an all-stock transaction, common stockholders of Marrone Bio MBII will receive 0.088 of a share of Bioceres Crop Solutions BIOX for each share of MBII common stock held. As management stated on the acquisition-related conference call, "This is by no means a cheap acquisition." However, given Marrone Bio's attractive fundamental attributes (strong position in of biological crop protection & plant health, R&D capabilities, fast-growing top-line growth, high gross margin and nearing adjusted EBITDA nearing breakeven), the price is reasonable for a strategic investment.

Approval Process of HB4 Wheat in Australia and New Zealand - Update

On May 6, 2022, the Food Standards Australia New Zealand (FSANZ) approved an application made by Trigall Genetics to permit food and feed derived from HB4 wheat. The Food Minister's Meeting was notified and is expected to formally approve the application during the fourth quarter of 2022.

Acquisition of S&W s Wheat Varieties

With the global wheat market being significantly affected by recent events and climate aberrations, Trigall Genetics (a Bioceres Crop Solutions- Florimond Desprez wheat JV), has entered into discussions with S&W Seed Company of Australia to create a new entity, Trigall Australia, which will develop wheat varieties for the wheat regions of Australia. Australia is positioned plant more wheat (almost 13 million hectares) than all of Latin America despite the New South Wales and Queensland being drought-prone.

Under the current terms of the discussions, Trigall Australia would acquire all the breeding assets of S&W Seed Company of Australia. Then, Trigall Australia would become the platform for development of breeding programs in Australia with Trigall Genetics being the majority owner.

Recent Financing

In connection to the merger with Marrone Bio Innovations, on April 1, 2022, Bioceres converted $39.6 million of the $49.1 million of the 4-year 9% convertible note due March 2023 (issued in 2019) into 4,617,281 ordinary shares of BIOX. The remaining part of the convertible note issue is being rolled into a new 4-year loan facility.

3Q FISCAL 2022 RESULTS - HIGHLIGHTS

Bioceres Crop Solutions generated very strong double-digit top-line growth in the third quarter of fiscal 2022, the fifth consecutive quarter that Bioceres has experienced top-line double-digit growth, despite the third fiscal quarter being historically weak due to seasonality. Comparable revenues increased 71.7% to approximately $60.1 million from $35.0 million in the third quarter of fiscal 2021. Bioceres achieved a record high level of comparable revenues for the third fiscal quarter. Top-line growth was driven by increased sales of crop protection products and micro-beaded fertilizers.

Four quarters ago, management implemented a new fertilizer pricing structure in order to stimulate sales of micro-bead fertilizer (Crop Nutrition segment) in Argentina. Lower competitive price points have driven increased volume, which has generated revenue growth and increased capacity utilization (and profitability) at the micro-bead fertilizer plant. Also, a supply shortage of nitrogen-based fertilizers and a high commodity price environment have contributed to increased demand for micro-bead fertilizer.

Adjusted EBITDA declined 30% YOY to $4.8 million in the third fiscal quarter versus $6.9 million in the third quarter of the prior fiscal year, primarily due to unusually higher freight and haulage expenses. Management proactively decided to ship high-margin products to end-markets earlier than normal as a precaution in anticipation of potential challenges related to global supply chains.

Adjusted EBITDA (excluding HB4 pre-launch costs) over the trailing 12-month period reached $53.6 million, a 15% increase from a year-ago. The baseline Rizobacter business continues to support the HB4 seed roll-outs, which is a unique attribute and a competitive advantage of Bioceres Crop Solutions compared to other Ag- Biologic companies.

Details of Third Quarter of Fiscal 2022 Financial Results

Bioceres Crop Solutions reports financial results where its Argentinean operations are subject to IAS 29, since Argentina's economy is currently classified as hyperinflationary. Under IAS-29, comparable financial information is provided so that investors can make better informed decisions. In order to adjust nominal cash flows in terms of purchasing power, prior-period accounting line items in the income statement are restated so that they are expressed on the basis of the purchasing power of the hyperinflationary functional currency at the end of the reporting period. In this manner, cash flows are adjusted for the effects of general inflationary price index changes, and investors are provided relevant and comparable information for a company's operations.

On May 12, 2022, Bioceres Crop Solutions reported financial results for the third quarter of fiscal 2022 ending March 31, 2022. For the fourth consecutive quarter, management's new fertilizer pricing structure stimulated sales of micro-bead fertilizer (along with a supply shortage of nitrogen-based fertilizers) and higher crop protection products. Consequently, total comparable revenues increased 71.7% to approximately $60.1 million from $35.0 million in the third quarter of fiscal 2021.

The Crop Protection segment was the largest contributor to top-line growth this quarter with comparable revenues increasing 118% to approximately $35.8 million versus $16.5 million in the comparable quarter last year due to increased sales from many farmers purchasing adjuvants in advance to ensure availability, which, in turn, drove up pricing. The segment's gross margin contracted 180 bps from 37.7% to 35.9%, primarily due to faster growth in sales of lower-margin seed protection and third-party products.

Comparable revenues of the Crop Nutrition segment increased 37.7% to approximately $20.8 million versus $15.1 million in the comparable quarter last year. A catalyst was micro-beaded fertilizer, where management has implemented a new commercial pricing strategy designed to utilize more of the installed operational capacity of 50,000 tonnes. The plant's utilization rate on a 12-month trailing basis was 65% (32,500 tonnes) and an increase from 30,500 tonnes in the prior sequential fiscal quarter. Inoculant sales were relatively stable year-over-year. The segment's gross margin contracted 151 bps from 53.2% to 51.6% due to faster growth in sales of micro-beaded fertilizer, which has lower margins than inoculants.

In the Seed and integrated products segment, comparable revenues were flat at 3.5 million. The segment's gross margin increased 130 bps from 50.9% to 52.2% due to a mix shift toward higher-margin seed treatment packs.

The comparable gross profit margin of total comparable revenues compressed 339 basis points from 45.6% in the third fiscal quarter last year to 42.3% in third quarter of fiscal 2022, primarily due to the top-line growth in the Crop Protection and Crop Nutrition segments was accompanied by lower gross margins in both segments.

Adjusted EBITDA declined 30% YOY to $4.8 million in the third fiscal quarter versus $6.9 million in the third quarter of the prior fiscal year, primarily due to unusually higher freight and haulage expenses. Management proactively decided to ship high-margin products to end-markets earlier than normal as a precaution in anticipation of potential challenges related to global supply chains.

For the third fiscal quarter, Bioceres Crop Solutions reported a net loss attributable to equity holders of $6,486,721 or $0.1577 per diluted share) versus a net loss of $1,180,484 million (or $0.0305 per diluted share) in the third fiscal quarter last year. Working capital decreased 54.5% to $41.8 million.

Valuation

For Bioceres Crop Solutions, a reasonable methodology is a discounted cash flow (DCF) model that estimates future cash flows and discounts them by using the cost of capital in order to attain a net present value. Our DCF model is arranged by expected revenue streams from the company's revenue generating businesses, including those of Marrone Bio Innovations. The model (which applies a 14.5% discount rate and a terminal P/S ratio of 0.50) indicates a NAV share price target of $19.98 per share on a fully diluted basis.

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