Gevo Inc (GEVO) 2013 Q3 法說會逐字稿

Welcome to the Gevo Q3 2013 earnings conference call. My name is Adrian and I will be your operator for today's call. (Operator Instructions). I will now turn the call over to Mike Willis, Chief Financial Officer. Mike Willis, you may begin.

Good afternoon and thank you for joining Gevo's third-quarter 2013 conference call. I am Mike Willis, Gevo's CFO. With me today are Pat Gruber, our CEO, and Brett Lund, our Chief Licensing Officer and General Counsel.

Earlier this afternoon we issued a press release which outlines the topics that we plan to discuss today. A copy of this release is available on our website at www.Gevo.com.

I would like to remind our listeners that this conference call is open to the media and we are providing a simultaneous webcast of this call to the public. A replay of our discussion will be available on our website later today.

On the call today and on this webcast you will hear discussions of non-GAAP financial measures. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in accordance with GAAP.

Reconciliation of these non-gap financial measures to the most directly comparable GAAP financial measures is contained in the press release distributed today which is posted on our website.

We will also provide certain forward-looking statements about events and circumstances that have not yet occurred including projections of Gevo's operating activities for 2013 and beyond.

These statements are based on management's current beliefs, expectations and assumptions and are subject to significant risk and uncertainty, including those disclosed in Gevo's most recent annual report on Form 10-K as amended, which was filed with the SEC on March 26, 2013 and in subsequent reports and other filings made with the SEC by Gevo.

Investors are cautioned not to place undue reliance on any such forward-looking statements. Such forward-looking statements speak only as of today's date and Gevo 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 Gevo's SEC filings for detailed discussions of the relevant risk and uncertainties.

On today's call, Pat Gruber, our CEO, will begin with a review of our recent developments. I will then review our financial results for the third quarter of 2013. Following the presentation, we will open the call up for questions. Brett will also be available for the Q&A section of today's call.

I will now turn the call over to Pat Gruber, Gevo's CEO.

Thank you, Mike, and thanks everyone for taking the time to listen to our quarterly call. I'm excited about the progress we have made both at Luverne and across our business. We have had a good quarter. I will start with Luverne first and then I will talk more broadly about the business.

Now you may recall that last year we paused isobutanol production because we were faced with infections that we haven't seen be. Now in order to eliminate the issues we had last year, we spent a lot of time and effort modifying our equipment, our fermentation conditions and our operating procedures at Luverne. This last quarter we proved that we can run the plant, produce isobutanol and control infections.

We did this using dextrose as a feedstock in what we called single train and dual train mode. The purpose was to learn about our equipment and the technology. In each of these, we proved our biocatalyst works well at full scale as well as our GIFT system. The technology works well and we learned that we can manage infection.

Encouraged by what we learned, we moved on to our commercial feedstock at Luverne, that is corn mash. We installed new equipment to help us manage infections that come with corn mash and we are in the midst of commissioning that but we are already seeing the results in our ability to control infections and in fact in the last few weeks, we have proven that we can make clean corn mash that meets the sterility requirements needed for isobutanol production.

Our yeast grows and produces isobutanol using corn mash feedstock at full scale. Our GIFT system (technical difficulty) and that is a great result that reflects what we had learned previously at our St. Joe demonstration plant.

My team is doing an excellent job of safely working through the mechanical and operational issues as we commission the new equipment and operate, integrate the entire plant using the corn mash feedstock. It is exciting to see that the Gevo proprietary yeast biocatalyst and the GIFT systems perform in line with our expectations. Our technology is working.

Now we will continue to work through the commissioning of Luverne in the fourth quarter and learn how to run this plant. As we produce isobutanol, we will use it to seed our supply chain and markets. Our focus will be on selling into the specialty fuels markets as well as the specialty chemical markets.

In specialty fuels, we will target isobutanol as a specialty blend stock into gasoline and we will also convert our isobutanol into hydrocarbon fuels and chemicals. To make hydrocarbons, we are sending our isobutanol to Southampton Resources. They are a great partner. That is where our hydrocarbon demonstration plant is located. There we will make more jet and aviation fuels for the Air Force, Army and Navy.

Now in this last quarter, we also started up a paraxylene demonstration plant; it too is at South Hampton Resources. Recall that paraxylene is a building block for making (technical difficulty). I am pleased to report that we already have achieved our goal of 92% selectivity for paraxylene in a single pass. This is a great result. It is in contrast to traditional paraxylene production routes which gives a mixture with many other chemicals.

I thank the Coca-Cola Company, Toray and South Hampton Resources for supporting the work to transform isobutanol into polyester.

We have signed a supply agreement to the US Coast Guard for up to 18,000 plus gallons of finished 16% renewable isobutanol blended gasoline. The Coast Guard is using our fuel as part of a 12-month long durability study on marine engines and the study is being performed under a creative between the US Coast Guard, Honda and Mercury.

The Coast Guard and the marine industry are interested in isobutanol because it isn't very soluble in water. Isobutanol leads to a fuel with more consistent properties and performance.

[ASCM] International, that's the agency that sets out standards, has certified isobutanol for automobile engines. This is important because it sets the standard for isobutanol plants in gasoline and creates a global framework for the use of isobutanol as a gasoline blend stock. Gevo led this ASCM certification effort and chaired the ASCM butanol task force which is made up of representatives from the petroleum refining industry, ethanol industry, major automobile OEMs and other industry experts from around the world.

We have also begun selling fully renewable iso-octane or octane made from our isobutanol. This is another hydrocarbon and this one is going into racing fuel applications. This will be fun to see as it develops.

Alcohol to jet, otherwise known as ATJ, continues to make progress. Isobutanol, our alcohol, is readily converted into standard jet fuels via chemistry. We are producing ATJ at South Hampton Resources. This past quarter we signed a supply agreement with the U.S. Navy to supply them with up to 90,000 gallons of ATJ by jet fuel.

We also have contracts with the US Air Force for up to 56,000 gallons and U.S. Army with 16,000 plus gallons of ATJ fuel.

We have begun to work on our licensing business. I'm pleased that our technology is at the point where we can credibly do this. We have signed our first letter of intent to commercially license our GIFT technology. This LOI is with IGPC Ethanol. IGPC is a farmer owned co-op that owns a 150 million liter plant in Ontario, Canada and has been producing ethanol since 2008.

So summarizing then, we have made great progress. Our technology both with the biocatalyst and GIFT, it works well in mash and our team is doing a great job of bringing our new equipment up and working out the production procedures. Our markets look good. Our overall plans remain unchanged. We will supply to the chemical and specialty fuels markets.

I will now turn the call over to Mike Willis to review the numbers.

Thank you, Pat. With our operations focus continuing to be on starting production at Luverne, we reported revenue in the third quarter of 2013 of $1.1 million which was made up of sales of bio-based jet fuel to the US military totaling $0.4 million as well as revenue under our research agreement with Coca-Cola and revenue from other ongoing research agreements.

Revenue in the third quarter of 2012 was $0.6 million based primarily on revenue from Coca-Cola and other research agreements.

R&D expense was $5.5 million in the third quarter of 2013 compared to $5.4 million reported in the third quarter of 2012. Our R&D activities in the third quarter of 2013 were directed to the start-up operations at Luverne and the optimization of specific parts of our technology to further enhance isobutanol production rates as well as our work on bio jet and bio paraxylene at our hydrocarbons demo plant in Texas.

The increase in R&D expense in the third quarter of 2013 as compared to last year was due to cost related to the production of bio-based jet fuel at our facility in Texas as well as investment in equipment for the bio paraxylene plant at the same facility. Recall our bio jet demo facility is indirectly funded through product revenue from the U.S. Air Force, the U.S. Army and now with our most recent contract, the U.S. Navy.

Also recall that last year, Toray Industries contributed funding for the construction of the bio paraxylene plant in anticipation of this project. Excluding costs associated with the Texas facility, our R&D expenditures were down $1.3 million in the third quarter of 2013 versus the same quarter last year. This is a result of our ongoing cost control measures that have been in place since the second half of 2012.

SG&A expense for the third quarter of 2013 decreased to $6.7 million compared to $13.5 million for the comparable quarter in 2012. Our third-quarter 2013 results continued to show the benefit from cost savings actions taken in the second half of 2012 to reduce ongoing litigation and legal costs, compensation cost and outside services expenses.

The reduction in SG&A expense primarily resulted from decreases of $3.7 million in legal related expenses including expenses in support of our ongoing litigation with Butamax; $1.7 million in salary and compensation related expenses; and $1.3 million in other G&A costs including travel, consulting and public company related expenses.

Within total operating expenses for the third quarter of 2013, we reported approximately $1 million for non-cash stock-based compensation. Interest expense for the third quarter of 2013 was $1.7 million compared to $2.6 million in the third quarter of 2012. The reduction was primarily a result of decreases associated with the decline in the outstanding principal balance of our convertible notes and the decline in the outstanding principal balance of our debt with TriplePoint Capital given scheduled payments on those notes.

We also reported a non-cash gain of $1.6 million related to changes in the fair value of embedded derivatives contained in the convertible notes. These derivatives result from the rights that holders of the convertible notes have upon conversion and as we commented previously, will result in non-cash amounts being recorded in our statement of operations for changes in fair value in each reporting period while the convertible notes remain outstanding.

During the third quarter, there were no conversions of the convertible notes and we had 47,184,896 shares outstanding as at September 30, 2014.

For the third quarter of 2013, we reported a net loss of $15.9 million or a loss of $0.34 per share based on the weighted average shares outstanding of 46,052,867. This compared to a net loss of $12.1 million in the third quarter of 2012 or a loss of $0.31 per share.

Cash on hand at quarter end was $25.7 million. With this level of cash and the actions we have taken to manage our operating cash burn, we continue to be positioned to pursue our business strategies into next year. To support future growth, we will work to enhance our balance sheet including working to restructure our secured debt on the plant and with the shelf in place, we are positioned to act opportunistically on financing.

We believe that through continued progress at Luverne to advance the commercialization of renewable isobutanol, we better position Gevo for future funding.

I will now turn the call back to Pat Gruber.

Thank you, Mike, and I think with that, we should turn it to questions.

(Operator Instructions). Mike Ritzenthaler, Piper Jaffray.

Good afternoon. Congrats on getting mash back into the plant. How are you currently thinking about the ramp in production into next year say between now as you complete the commissioning here in 4Q and maybe six months into the year?

Well, the way to think about this is we are not in a position where we can give real specific guidance on production volumes out of Laverne in the fourth quarter because our focus right now is completing the commissioning and the start up of the plant. In the balance of this quarter, we are going to use it to learn how to operate and optimize the plant to increase the product volumes and decrease the cost and improve the product quality.

Now in the meantime, we still are going to be producing enough volume to fulfill the existing contracts. For instance, the jet for the military as well as some other isobutanol to seed other markets and we will be shipping stuff to Sasol. In fact, we will be using the isobutanol.

We are going to be in a position to give more granular guidance on production early in 2014. I will have a better view of it once we are through the commissioning process.

Okay, that makes sense. On the licensing agreement, I thought this was kind of interesting. Maybe you don't want to comment too specifically about this particular LOI but generally speaking, how does it work mechanistically? Gevo would deliver the design package and some operational expertise, the licensor would pony up the capital for either retrofit or brownfield. Can you just walk us through the thought process there?

Sure. This one is interesting because it is actually a true license. This would be a -- outright license to the technology -- we have a -- without talking about specifics of this particular deal but the concept is an upfront fee with vendor's royalties provide a technology package and our operating expertise to teach the folk how to do it.

Okay, fair enough. Thank you.

John Quealy, Canaccord.

It is Chip for John. Back to the license agreement, can you talk about if you are pursuing additional license agreements and what sort of a pipeline of potential opportunity is there and what it takes to move forward?

I have been leading the charge as it relates to a lot of these discussions. So this was the first one that we could announce. We are talking to folks globally who are interested in the technology, folks in South America, folks in Europe, folks in Asia, actually folks in the US as well although I think we are still figuring out what is the blend of owning versus licensing here domestically. And really I think obviously it all plays into the success at Luverne.

The reason why IGPC was interested in signing up with us is obviously they could take a deeper dive into the technology as it stands right now. They are seeing the improvements at Luverne so that to me is the key inflection point to really kick off these discussions to eye level and get them to a more detailed level.

Okay, that is helpful. And then on litigation, I think you talked about -- I might have missed it but $3.7 million lower year-over-year. Is that sort of sustainable run rate here and just bring us up to date on the latest out of the courts? Thanks.

Sure. So this is Brett Lund. I think the new rate that we are at is sustainable going forward and so we have going forward, we have the federal appeal in November on November 7 and then the next set of cases is July 2014 and then August of 2015.

Okay, thanks.

Pavel Molchanov, Raymond James.

This is actually Justin on for Pavel. Just real quick since we already touched on production at Luverne for 2014, any idea on how high utilization needs to get for gross margin to turn positive there?

That is an interesting question and you know what our focus is on making that plant EBITDA positive as soon as possible. I think the middle part of the year is what we are thinking about.

Middle part of the year.

I am trying to get away from being so specific on the volumes because there is lots of ways we can do this and we all care about being EBITDA positive at the plant. That is our focus.

And then just real quick, cash is actually getting seemingly somewhat low. Do you envision raising any a capital here in Q4 or can we wait until sometime next year?

So we currently project having cash to operate into the first quarter of 2014 so basically this means that we are likely to be raising capital either in Q4 or Q1 of next year.

Okay, appreciate it. Thanks, guys.

James Medvedeff, Cowen and Company.

Good evening, guys. So a couple of questions here. Most of mine have been answered actually but I wanted to ask, were there any corn sales in the quarter or was it all pure funded R&D?

There was just some very modest corn sales right at the beginning of the quarter which was basically the tail end of the exercise that we were doing over Q1 and Q2 of this year. Otherwise we actually built the corn inventory.

Right, that was the second half of my question.

I was going to say obviously with a view to building inventory to run on mash on an integrated basis as we reported.

So when I look at cost of goods sold if the revenue was mainly generated by the military contracts and some of the other funded R&D programs, I'm trying to get -- and depreciation was about $900,000 -- I'm trying to get my arms around what the $4 million of COGS is all about?

The cost of goods sold actually represents cost at Luverne. The cost of goods sold as we think about it, actually appear -- for the jet contracts actually appear in R&D expense because the production is deemed to be demonstration scale versus commercial scale. We actually -- from a GAAP perspective, place that into R&D expense versus COGS.

Understood. So if you have on the order of $1 million plus or minus of funded R&D, I am just trying to understand why there is $4 million of cost in COGS associated with that.

Yes, so the cost of goods sold would be representative of most of the cost at Luverne so we obviously have fixed cost there in terms of labor so whether we are running the plant or not. (multiple speakers) utilities. But we did actually --.

I see.

So it is basically Luverne oriented costs. They all sit in for the most part sit in cost of goods sold versus somewhere in G&A.

So the military fuel that you have been selling is at cost or now below cost?

It is at cost currently.

Okay. I just had one other question. The PP&E is up almost $5 million and I am wondering does that have to do with the new anti-infection equipment that was installed? Or I noticed there wasn't any CapEx in the cash flow statement so could you just kind of fill me in on that?

Yes, basically we installed some sterilization equipment includes steam lines, clean and place equipment. All in all I think across this year we put in about -- replaced and/or added for a total of 2.5 miles of pipe and this is about making sure the flows are right so we can manage the process.

Okay. Great.

Just to answer the more technical accounting question, so on the cash flow, you basically net that capital of 5 and change against the payables that are outstanding for that PP&E.

I see. So I got it. Okay. Congratulations on getting the plant going again. We look forward to seeing some volume numbers come up here pretty soon and we will talk to you soon. Thanks.

Caleb Dorfman, Simmons & Co.

Good afternoon, gentlemen. I was hoping you could maybe discuss -- do you have any additional levers that you can possibly pull on the cash flow side or are all of the cuts that you could possibly get on the R&D side or SG&A side already really baked into the numbers that we saw in Q3?

I could only partially hear the question. Did you ask are there any more levers to reduce cash burn?

Absolutely. That is the question, Pat.

There is. There is.

Can you detail them any more than that?

No, I shouldn't. No. But you know, it is the usual list. It is the usual list of things as we make progress and we learn what we need and what we don't, we have to adjust accordingly. And it's top of our mind all of the time.

It is good to hear that you have been running on corn mash. Can you give us any insight into actual volumes of isobutanol which has either been produced or ship so far?

You know what, we are at a point where we have run enough on full-scale corn mash where we have produced isobutanol but it is in crude tanks and so I don't have specific volumes for you. But there is a couple of things that are really good.

One of the critical success factors is making mash clean and so our new sterilization equipment works pretty well for that it appears. That is good. The second thing is that you recall that we grow our own biocatalysts to get the fermentation going. So we have a part of the plant which is dedicated to growing yeast and this is by the way the same yeast that we used last year. It actually works quite well and that equipment seems to work pretty good.

Now we are still learning how to do the clean and place between batches and things like that having to do with the mechanical things. But that is going well.

Our bugs seem to like corn mash and importantly, our GIFT system works well on corn mash. Now we expected that to be the case because we did demo the heck out of that down in St. Joe, Missouri but it is very gratifying to see it work at full scale in corn mash.

That is good to hear. So I guess we talked about this last quarter when you have been running on dextrose, the last year when you had the consistency issues on these initial batches you have had using corn mash, is the consistency up to where you want it?

I'm sorry I could only hear part of the question again but you are saying last year?

So I'm more thinking about the consistency. Is the consistency of the product that you've produced so far with corn mash up to I guess the level that you want it or is it like last year where there were some batches were inconsistent and some are okay?

I see. Last year what it was is we had, it was very variable. Our variability isn't the same here. Now we're going very disciplined as we go through the plant here and start up the plant and we are learning how to master each part of the production process.

For instance, first master mash, master the yeast production, master the fermentation, master the separation and so we are at the point where we are in the midst of working on the fermentation. What we have seen so far is it looks pretty decent in terms of the product quality, the same as what we would expect.

The biocatalyst is performing as we expected and predicted. It reflects what we did on dextrose earlier this year and reflects what we do in the laboratory.

Good to hear. Thanks, Pat.

We have no further questions.

Great. Thank you, everybody who joined us on the call today.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.