Amyris Inc (AMRS) 2017 Q2 法說會逐字稿

Welcome to the Amyris Second Quarter 2017 Conference Call. This call is being webcast live on the Events page of the Investors section of Amyris' website at amyris.com. This call is the property of Amyris, and any recording, reproduction or transmission of this call without the expressed written consent of Amyris is strictly prohibited.

As a reminder, today's call is being recorded. You may listen to a webcast replay of this call by going to the Investors section of the Amyris' website.

I would now like to turn the call over to Peter Denardo, Director of Investor Relations and Corporate Communications.

Thank you, Chelsea. Good afternoon, and thank you for joining us this afternoon. With me today are John Melo, our Chief Executive Officer; and Kathy Valiasek, our Chief Financial Officer.

Please note that on this call, you will hear discussions of non-GAAP financial measures. Reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures is contained in the financial overview slides of the accompanying presentation or the news release distributed today, which is available at investors.amyris.com. The current report on Form 8-K furnished with respect to our press release is also available on our website as well as on the SEC's website at sec.gov.

During this call, we will make forward-looking statements about events and circumstances that have not yet occurred, including projections of Amyris' operating activities, anticipated transactions we are contemplating and their closing, our strategic plans regarding these potential transactions and their anticipated financial impact on our business and financial results for 2017 and beyond.

These statements are based on management's current expectations, and actual results and future events may differ materially due to risks and uncertainties, including those detailed on the company's recent SEC filings and the Risk Factors section of its quarterly report on Form 10-Q filed on May 15, 2017. Amyris disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the Amyris SEC filings for detailed discussion of the relevant risks and uncertainties.

Before we begin today, I'd like to note that included in our webcast is a slide presentation that we will refer to in today's presentation.

I'll now turn the call over to John Melo. John?

Thank you, Peter. Good afternoon, and thank you for joining our call. Today, I'll cover 3 things. First, our business results for the second quarter and first half highlights. Secondly, our short- to mid-term outlook. And then thirdly, an update on our strategy and how you can measure our progress going forward. Kathy will cover our financial results in more detail at the end of my comments. Let me start with our results for the second quarter.

Our second quarter revenue of $25.7 million includes $12.7 million of product revenue and $13 million of collaboration revenue. This result is better than our target of doubling prior year revenue -- prior year quarter product revenue and better than our 2017 plan to date and the performance of most other companies in our space. Our strategy is delivering sustainable, long-term product revenue growth, and we are significantly expanding our margin by earning a share of the value we create for our customers, true value share payments.

Our second quarter total revenue of $25.7 million was 168% greater than the second quarter of 2016. Product sales were up 159% year-over-year and 53% on a sequential basis. We expect this level of growth to continue and our industry leadership to widen, as a result of our advantaged business model, the performance of our products and our technology scale up track record. Our revenue for this year and next is underpinned by existing customer agreements, and we expect this year's product revenue to more than double last year's product revenue and believe, we will continue this pace of growth into next year.

Our gross profit, which is based on our GAAP total revenue less our non-GAAP cost of products sold, for the second quarter was about 31%. And we expect to end the year at about 50%. We expect our margins to continue to improve due to our continued focus on higher-margin products, and as we continue to execute on our strong collaboration-driven business model and receive our value share payments on the products we've already shipped.

We are significantly growing our product revenue year-on-year, while improving our EBITDA. This is another example of our sector leadership and distinctive performance. In addition to the $13 million of collaboration revenue in the second quarter, we also received nearly $3 million of product value share payments. This compares to about $800,000 for full year 2016 and a full year estimate of more than $5 million for 2017. These payments are reported as part of product revenue and are the key drivers of our gross margin expansion the next several years.

While we expect around $5 million this year, based on our current performance and current customer agreements, we are expecting $25 million to $35 million of value share payments in 2018 and over $60 million in 2019. These value share payments are based on current customer agreements and products we have in the market or scheduled for delivery to our current collaboration partners. These payments are received quarterly for products that are shipped and are triggered based on our customers' product sales and the value we've enabled. We are realizing between 60% and 70% gross margin on most of our products once you include the value share component of our business model to the direct product margin. This model of collaboration partners selecting products that are strategic to them and aligning interests with value share payments has resulted in Amyris not dealing with the product adoption issues most of our peers are facing. This also eliminates the switching cost issue new technologies face, as we are focusing on products that our partners are highly incentivized to switch to. They are our (inaudible) marketing and we are their technology and innovation pipeline. This business model and our level of success is only possible because of our advantaged technology platform and the market leadership of our partners.

All our products that are delivering major revenue growth have a value share component, except our Biossance, Aprinnova businesses. Biossance is a strong and growing margin contributor to our overall business results. Our Biossance blended gross margin was about 70% for the first half of the year, and is on track to be about that or perhaps slightly better for full year 2017. We have now engineered and scaled 6 individual molecules, where we are the world's lowest-cost producer and deliver the best-performing product. We've also become highly efficient and predictable with our technology and delivery model. Our most recent development and scale up success is a very interesting product that is a highly desired cosmetic active. We engineered the production organism to achieve our cost and product profile target in 6 months and delivered commercial scale production at the customer cost target in less than 1 year from signing the original collaboration agreement. The total development of this product cost was less than $1 million, and we are now delivering this product for significantly less cost than any other available source of this material, and we are making the most desired product profile of this product.

We believe this is the power of what we bring to industrial biotechnology. We believe most complicated chemistry is best made biologically and that we have the capability to engineer organisms that will become the producers of most chemistry that the world needs. We are making better chemistry for making products from a sustainable source that perform better in our -- at a lower cost for the customer. We are fast and predictable for our customers. We can deliver products much faster than alternative sources, and we are enabling our customers to disrupt their end markets. This is what's driving our growth and enabling us to deliver a product revenue performance profile that is significantly different than any company in our sector.

Our business is firing well on all cylinders and our results for the quarter were driven by several key contributors. Let me highlight one of these.

Biossance delivered the highest quarterly sales to date driven by unique sustainable, squalene-based products that exceed customer expectations. The brand continues to outperform both our and Sephora's expectations, and we are now accelerating plans to start the Biossance full product line and double the current number of stores. In addition to the domestic expansion, we are expanding to Sephora in over 60 locations across Canada in the first quarter of 2018, marking the beginning of international sales for Biossance.

We are on track for about $12 million in total retail sales this year and over $30 million in retail sales for 2018 based on our current sales performance, number of stores, continued expansion into stores and the expansion of our product development within the brand.

With that in mind, we believe Biossance has the potential to deliver over $100 million in retail sales by 2020. We are achieving these sales results with some of the lowest marketing costs in the industry and at gross margins of 70% or better.

Now let me provide some color on our growth over the next 18 months. We are on track to more than double our product revenue this year with an expected total of about $60 million in product revenue compared to $26 million in 2016. We expect to more than double our product revenue again in 2018. Our product revenue in 2018 is mostly driven by low volume, very high-value products or contribution that is fully supported by our current production capacity.

Let me share some detail to support this outlook for you. Our key product revenue growth components for 2018 are largely not production constrained, as they include, first, value share payments that are expected between about $25 million to $35 million and requires no additional production capacity, and is underpinned by current customer agreements and mostly from products that are shipped this year and next. Sweeteners, Biossance and 1 fragrance ingredient representing approximately $52 million in product revenue with a majority of that revenue number coming from less than 400 tons of volume. This level of volume is fully supported by our current capacity. In total, from about $77 million to $87 million of product revenue growth over total expected product revenues for 2017. This mix of product growth also delivers over 60% gross margin for our business. As a reminder, we are currently producing over 14,000 tons and generating $60 million of revenue from our Brotas facility and CMOs. In 2018, we will be producing about the same volume, but generating more than double 2017 product revenue at a targeted gross margin of over 60%. This is driven by the product mix underpinned by our collaboration partner strategy and the value share payments from our business model.

To mitigate capacity constraints, we've recently successfully produced our latest product at a contract facility in Spain, and we'll continue using this facility to introduce new products to keep our Brotas facility focused on the large cash generators. This production profile brings to life our revenue and margin optimization model. Instead of a large volume, low-volume production model, this approach supports the long-term sustainability of our business.

Our key value driver is engineering yeast to convert natural syrup into the high-value chemistry our customers need to deliver sustainable growth for their businesses. The healthier we make our customers' businesses and ultimately our consumers, the more we contribute to the healthy growth of our business and the sustainable health of our planet.

We have a very strong pipeline of additional collaborations being tracked with partners and product targets that are well aligned with our business model. Most of these are existing partners and a few with new partners that include product targets and flavors, sweetener opportunities, vitamins and a game changer in infant and animal nutrition. We are on track to close on several of these by the end of 2017. Based on our strong collaboration business performance, we expect to deliver on the upper end of our target of $50 million to $60 million of collaboration revenue this year.

Regarding collaborations, following DSM's strategic investment in Amyris, we entered our first product development and production agreement with them for a food and nutrition molecule. DSM is proving to be an excellent partner for us and has rapidly identified key product targets, where we can have a disruptive impact together. This agreement is the first of what is expected to be several of such collaboration development agreements and production projects focused on animal and human health markets. We have 2 additional collaborations and active negotiation with DSM, and we expect to close them before the end of 2017.

And finally, many of you have asked about our plans to enter the healthy sweetener market. We expect to ship our first metric ton of products before the end of this year to a large beverage company for internal testing. We believe we are on track to commercially launch this ingredient with full-scale production around the middle of next year.

We are pleased with the continued momentum in our business and to have secure growth capital in our recent financing to underpin our strategic plans, as we focus on solidifying our leadership position in industrial biotech. We have the funding, technology, customers and product portfolio that deliver continued growth and an improving financial picture over the next several years.

Let me end by providing an update on our strategy and some direction for how you should measure our progress. Our purpose is to enable a healthier planet by applying biotechnology to make chemistry better. We make chemistry better by removing the complexity of making the chemistry the world needs and wants, and designing this complexity into living factories that can use fermentation to reduce the cost and improve the quality of making these products better and at a lower cost. We are making specialty and fine chemistry biologically. And we believe most chemistry that costs more than $3 per kilo will be made through fermentation, and we are the leaders of this transformation. We believe we are leading this third industrial revolution of transitioning the world to a bio-economy.

Our business model is one of collaboration and partnership. Our partners tell us what products consumers want and what makes a real difference to their business. We then create a very low-risk investment-based offer to them that shares the benefit we create through lowering the cost and delivering better performance on the supply side of the relationship through a value share mechanism. We will continue to further focus the business and optimize our product portfolio around 3 key markets: health and nutrition, personal care and industrial performance products. These are the target markets best suited for our technology and markets where we are delivering strong, sustainable product sales growth. We are no longer a biofuels company.

We will focus our quarterly results and updates on product revenue, gross margin and on adjusted EBITDA. These simple financial measures are good indicators of our business performance. The 2 best indicators of our strategic execution are, first, annual product revenue dollars generated for every dollar of production CapEx invested. We currently have about $60 million of CapEx invested in Brotas, and we will generate about $60 million of product revenue this year. This is about $1 of product revenue for each dollar of CapEx in production capacity. For 2018, we expect this to be about $2.30 of product revenue for each dollar of CapEx invested. We expect the optimal performance for our portfolio long-term to be about $3 of annual product revenue for every dollar of production CapEx invested.

The second key indicator for us is our gross margin percentage. Long term, we expect to deliver between 60% and 70% gross margin from our portfolio, expect to achieve this range of performance from our mix, starting in 2019. We expect this year to be around 45% to 50%, and for 2018, on the high end of our 50% to 60% currently stated range. This long-term range is better than we previously guided as a result of exiting commodity products from our product mix. We are pleased to have delivered better-than-expected performance this quarter and are focused on continuing our strong performance. We are now funded to deliver our growth and can focus on the execution of our strategy.

Now let me turn to Kathy for an overview of the recent financing we completed and a more detailed review of our financial results. Kathy?

Thank you, John, and good afternoon, everyone. We are pleased to have posted our best revenue quarter to date and are thankful to the support of our strategic and other investors. As John noted, we had a great quarter in both collaborations and product sales. We also successfully took significant steps to reduce debt and fund our business for the next stage of our growth.

Now let me review our second quarter results, and then update you on the completion of our financing and its impact on our balance sheet, debts and capital structure, and review our 2017 outlook.

Second quarter revenues were $25.7 million compared to $9.6 million for the second quarter of 2016. Product sales were $12.7 million, up 159% over $4.9 million for the second quarter of 2016. This triple-digit increase was the result of vitamin E sales, farnesene shipments to Kuraray and continued growth in our Aprinnova and Biossance businesses. We continue to be on track to double or better our product revenues for 2017 over 2016. Collaboration revenues of $13 million were comprised of sizable contribution from our partnerships with DARPA, Firmenich and Givaudan as we executed on key development milestones and recognized revenue from them.

Adjusted gross profit was up sequentially by about $800,000 and margin by almost 1 basis point with most of the improvement coming from the contribution of value share revenues during the quarter. Moving forward, we expect our gross profit to greatly improve with our increasing value share payments. As John mentioned, the value share aspect of our business model has a significant impact in improving our gross profit.

For the second quarter of 2017, selling, general and administrative expenses were $15.9 million compared with $11.4 million for the same period last year. Included within SG&A was a $2.5 million exclusivity termination fee paid to Nenter as we work to allocate that product opportunity to another interested partner. Excluding that fee, the $2 million higher spend versus Q2 of 2016 was due to a 168% increase in revenue for the period, as we ramped up growth and hired additional headcount to support it.

R&D expenses were $14.2 million compared with $13.2 million for the same period last year. This was due to increased staffing levels to support the growth in our collaboration activities.

Adjusted operating expenses representing combined R&D and SG&A expenses, excluding stock-based comp and depreciation and amortization, were 12.7 -- $12.4 million and this compared to $20.8 million for the same period a year ago. This increase was primarily due to the Nenter termination fee, I mentioned earlier, and higher staffing levels for R&D and SG&A to support our growth.

Net loss attributable to common stockholders for the second quarter of 2017 was $10.3 million or a loss of $0.46 per basic and $0.46 per diluted share compares with $13.6 million or $0.91 per basic and $1.67 per diluted share for second quarter of 2016. Note that included within other income for the second quarter of 2017 was a gain of $35.8 million arising from the change in fair value of derivative liabilities recognized primarily in connection with the closing of the company's series A and B financing rounds in May 2017.

We are pleased to have completed both tranches of our financing, totaling a $103 million, which exceeded our target of $95 million. At the same time, we have now significantly retired debt with the total debt reduction excluding that discount of about $86 million. With that, our total debt net of debt discount stands at $165.3 million with $152 million of that being long-term debt. It's important to note that about $111 million of this amount is mandatorily convertible or convertible with no significant debt due until early of Q4 2018. Also important to note that about $76 million of the debt is held by board, affiliated investors and partners and is in the hands of trusted long-term holders.

Post the close of tranche 2 of our financing on a fully diluted basis, DSM now holds about an 18.4% stake in Amyris. Foris Ventures, Vivo Capital, Total and Temasek each hold approximately 13.1%, 11.2%, 10.4% and 6% stakes, respectively. As a reminder, the preferred stock sold in both tranches will be automatically converted to common stock October 7, which is 90 days following our shareholder approval, July 7.

Turning now to our outlook. Based on the strength in our business during the first half of 2017, our outlook continues to call for total revenue for the year of about $115 million to $125 million. This would be approximately double the revenue we reported for 2016, and we believe stand well above the growth rates of the other companies in our sector that don't appear to have sufficiently scaled up product. Scaling up to disrupt global market isn't easy nor it is terribly cheap upfront. We invested heavily to do so, while totally diversifying our business away from fuels and building top-notch intellectual property, tools and know-how.

Amyris is now scaled up and well funded to continue to execute on our goals and growth trajectory. We are also in a much better position to pick and choose which partnerships makes the most sense to us and our stakeholders provide better value. With this stronger position comes the opportunity to better optimize our business.

Moving forward, you can expect us to maintain our vigilance of our cost, work with our vendors on better pricing and centralize purchasing to enable volume discounts, while minimizing current fee and tax impact. We also have an initiative underway to extract more detailed cost savings across our product lines and to bring in resources so that we can optimize margin there accordingly. This is all part of our efforts to build a sustainable company with the fastest growth rate in our sector. Today, we are in a vastly different and better position than we had been in the company's history. And in many ways, we are, frankly, a new company, yet with the same mission. That mission is to leverage the disruptive power of synthetic biology to make better products for a healthier planet.

I would now like to open the line for any questions you may have.

(Operator Instructions) And our first question comes from the line of Jeff Osborne with Cowen.

I was wondering, John, can you just give us from a high level what the revenue split was between skin care, flavors and fragrances and vitamins, performance chemicals, et cetera? I think you had kind of a nice break down at the Analyst Day annually looking forward, but just -- is there something that quarterly you can give us so that we can kind of benchmark that and ground ourselves?

Yes, we will give you that quarterly. Apologies for not having that in. And for the second quarter, it was pretty evenly split between the 3.

Got it. And can you just talk about operationally what you're seeing in Brotas in terms of new yield strain introductions either in the quarter or in the second half? And then how flexible or fungible is the plant in terms of moving between strains? Are you seeing any issues or accelerating time between product cycles and campaigns?

Yes, we are using the same farnesene strain we started the year with, and we expect to use that strain throughout -- or through the reminder of the year. The strain is performing very well, and we're pleased with its performance. We have had some variability due to feedstock, but we're focused on ensuring we maintain a steady rate and steady quality feedstock to avoid any variability. Secondly, the various strains we've been operating -- we've done a few switches this year so far, have all gone very well. So switching of strains for different products has gone very well at the plant. And I think, thirdly, we are making progress on reducing the number of days that it takes to switch. I think I said in the past or definitely during the Investor Day that it's about a 5-day on each side switching time, and we're making progress. We like to get that down to 3 to 4 days from the 5 days on each side. And that is a key focus of our work this year to just get better and better at transitioning, while not taking risk and causing contamination for ourselves by cutting corners. So far we've been great at making the transition. We've been quite cautious in how we do that, and we hope to take a couple of days out of each end to get more efficient in that transition, or to have less downtime between switch overs.

That makes sense. And then on the OpEx side of the ledger. If we were to back out that Nenter payment, should the OpEx be kind of flattish through the second half of the year? How do you anticipate that going if we were to strip out that onetime item?

Yes, our expectation is, if you take out the onetime item, it should be fairly flat. Kathy, I don't know if you want to add anything else to that?

Yes. No. Definitely flat for Q3 and Q4.

Perfect. And the last one I had is just -- can you walk us through what the key performance metrics are, the indicators that you need, hurdles you need to overcome, so to speak, from when you give the samples to the large beverage company as a sweetener later this year to going into commercialization? Is there any FDA approvals that are needed, or any other items that are important for investors to watch?

Thanks, Jeff, and thanks for being on the call. I think a couple of things. There is a regulatory process that our partner is responsible for and doing a good job with. So as we get closer to the end of the year, we'll provide some more color on where they are in the process. And what we've given you for an update regarding when we expect time to market is based on their view of when they'll be ready to go-to-market. As you can imagine, regulatory is different across different geographies and different applications. So based on the volume for 2018, we actually feel pretty confident in what we have in our plan for '18, really without a lot of risk. I think the second issue that the sample is all about before the end of the year, it's all about getting the formulation right. The right taste and the right feel for the end consumer, and that's in the hands of the consumer brand company. In this particular case, a large beverage company. And we don't -- it's hard for us to predict how well that will go, and you can think of the range of outcomes, right? First of all, again, as I said regarding 2018, we're not dependent on a big decision by a beverage company. Secondly, the beverage company has a lot of flexibility depending on which country and which brand it launches based on what it gets for consumer feedback. So those are the 2 things we keep a close eye on. How is the adoption cycle going for taste and feel, mouth feel, and then how are the brands doing with that? In some applications, very sensitive, in others not very sensitive, and we have partners and demand customers that actually don't have the sensitivity to that because they blend it into bulk use of sugars/reducing sugar to use our sweetener. So not a big risk for '18, but the 2 things we watch are consumer adoption, which varies by specific end market, and then secondly, regulatory, which is also different by end market and driven by our partners.

And our next question comes from the line of Amit Dayal with Rodman & Renshaw.

Just wanted to touch on the value share component of revenues we saw this quarter. Was it spread across multiple products? Or was it coming from 1 or 2 key offerings?

It was across a couple of our sectors, around the fragrance and around the health and nutrition segment. One of the things we're going to be very cautious of and really avoid doing because of confidentiality from our customers and their end market customers is not disclosing exactly which products are contributing to value share, but I will tell you they are across those 2 segments, Amit.

Understood. And then you've provided some outlook for 2018. So where do we stand from a capacity point of view relative to that outlook?

For '18, we have all the capacity in hand we need to deliver 2018.

Okay. Got it. And -- I may have missed this, but are you sort of maintaining your revenue guidance to range between $115 million to $125 million for 2017?

That is correct. Kathy repeated that during her piece of the call, and we are reiterating $115 million to $125 million as our range of top line for this year.

Understood. And maybe last question from me. So how do we see the commercial relationship with DSM sort of growing from here? You have sort of 1 product, it looks like on the contract. I know you provided some color, but going into, say, 2018, 2019, are these -- is this relationship going to sort of become more material in terms of overall contribution to the outlook?

Yes. I mean, I would tell you that by the end of this year with the 3 collaborations completed, assuming we achieve that, it will already be a very material part of our collaboration revenue. I mean, DSM will be the equivalent if not slightly bigger than the DARPA agreement is for. It's actually bigger than that. So it will be a material part of our collaboration already coming into the end of this year. And I think as we go into the end of '18, if all works perfect, we would start to see product revenue from DSM. And then, obviously, as we get into 2019, DSM is going to be a material part of our product revenue. I'd say it wouldn't be surprising in '19 if they were not 15% to 20% of our product revenue and about the same on our collaborations.

(Operator Instructions) I'm showing no further questions at this time. I would now like to turn the call back to John Melo for concluding remarks.

Great, Chelsea. Thank you so much for facilitating the call for us. And I'd like to thank everybody for joining us. We're very pleased with our continued momentum. We're very pleased with the support of DSM and Vivo Capital and our other investors. We now have the right business foundation and capital structure to really fully realize the strength of our technology platform. The technology platform has really being leveraged across a diversified portfolio, much more predictable product sales in the pipeline and we're out of fuel. So we have a very good visibility in the pipeline, and it's a pipeline where we understand the gross margin based on something that's very different in a large commodity market. So we're now very focused on just turning all that into creating and improving shareholder value for the company and, obviously, our shareholders.

I like to note that Amyris will be presenting at the Rodman & Renshaw Conference September 10 to 12 in New York, and we also plan additional investor outreach. I think now is a good time that we're stable and have a solid foundation to really share the performance of our business model and how the model works with investors and to also demonstrate our continued leadership in industrial biotech, and the growth that's ahead for us. Again, thanks. Have a great evening or afternoon. And I look forward to our next quarterly call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.