Gevo Inc (GEVO) 2014 Q1 法說會逐字稿

Welcome to the first-quarter 2014 Gevo, Inc. earnings conference call. My name is Jeanette and I will be your operator for today's call. (Operator Instructions). Please note that this conference is being recorded. I will now turn the call over to Mike Willis, Chief Financial Officer. You may begin.

Good afternoon and thank you for joining Gevo's first-quarter 2014 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 headlines 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-GAAP 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 2014 and beyond. These statements are based on management's current beliefs, expectations and assumptions and are subject to significant risks and uncertainty, including those disclosed in Gevo's most recent annual report on Form 10-K which was filed with the SEC on April 14, 2014, 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 risks and uncertainties.

On today's call, Pat Gruber our CEO, will begin with a review of recent business developments. I will then review our financial results for the first quarter of 2014. Following the presentation we will open the call up for questions. I will now turn the call over to Pat Gruber.

Thanks, Mike. Good afternoon, thank you for joining our quarterly call. It has been about six weeks since our last call. Since then we have begun ethanol production and continue to optimize the isobutanol process, made progress on the commercial front and of course did financing, which Mike Willis will talk about in a few minutes. Well, let's jump into it then.

I have to say I like very much what we are doing at Luverne with our side-by-side strategy, producing isobutanol and ethanol. I wish we had set ourselves up to do it several years ago, I believe it would've saved us a lot of heartburn and pain. Of course we didn't know at the time we could manage two different yeasts in the plant on shared equipment, but we know now. So let me talk more about Side-by-Side.

The purpose of Side-by-Side is to use ethanol production as a flywheel to drive the plant flow while we work through the isobutanol learning curve. Our plant is a commodity scale plant, meaning it is really big equipment and designed to be low cost. The plant grinds corn, ferments sugars and produces animal feed. The plant also recycles nearly all of the water used in the process.

In the Side-by-Side operation we are using the ethanol to keep the grind going, water recycling consistently and producing animal feed rather than having to deal with lots of starts and stops to the process flow, which that introduces unnecessary variables. We expect Side-by-Side to help eliminate extraneous variables.

Our equipment at the plant, typical of big dry mills, is designed to run continuously with large volumes of material flowing. The Side-by-Side really does help us enable to keep things flowing and we can still optimize the isobutanol process concurrently while producing ethanol, moving ourselves down the isobutanol learning curve.

The other benefit of Side-by-Side is that it contributes cash to our business by utilizing assets that would have been unused at the time. That is, we are using three of our four fermenters for ethanol, one for isobutanol.

Since our last conference call we have completed mechanical work needed to run ethanol Side-by-Side. In the nine days since we began the ethanol production we are up to 30,000 gallons per day and expect to exceed 40,000 plus gallons per day next week. And that is our production goal. That overall translates to a run rate of about 15 million gallons per year on an annualized basis.

We also have been making progress on running the isobutanol side of the plant. In our isobutanol production the first step is to produce the quantities of yeast that we need to conduct the fermentation. We have been working on procedures to more effectively produce the yeast. These procedures include the techniques for cleaning, sterilization and the adding of the nutrient packages.

We have also verified that the recycle streams from ethanol are what we expect. Our team did a nice piece of work to determine a set of fermentation conditions that favors our yeast at the expense of potentially infecting organisms. This should help us in the robustness of the process.

Now regarding isobutanol fermentations, we have already achieved 70% of our target gallon per batch. We are focused on achieving 100% of the goal and in making sure that we can minimize batch-to-batch variation. While we are working the learning curve the costs tend to be a higher per gallon than we would have once we are fully optimized. So we plan on making relatively modest quantities over the next several months, I expect in the multiple tens of thousands of gallons per month.

Once we are far enough down the learning curve we will have to decide how much of the plant to use for isobutanol and how much for ethanol. I mean, we could switch some or all of our fermenters back to isobutanol. To be clear, we are running isobutanol in the plant alongside of ethanol.

I like very much production facilities that are flexible and can adjust to changing margins, this is much better than being stuck with a one trick pony. I just want to get on with isobutanol and get it completely worked out. I like being able use ethanol production to make the plant run better overall and of course to generate cash while we are on the isobutanol learning curve.

Now changing topics, our paraxylene production has gone well, our jet fuel production, isooctane production, those are all things that have worked very well. We are pleased to be working with Lufthansa to further prove out our renewable jet fuel product. Our process to make renewable jet fuel is exciting, simple, cost-effective, makes jet fuel with desirable properties. We see a lot of interest in renewable jet fuel.

Mike Willis, our CFO, is up next. He will take you through the numbers, the deal with Whitebox and how we are thinking looking forward. Mike?

Thank you, Pat. Gevo reported revenue in the first quarter of 2014 of $0.9 million as compared to $3.5 million in the same period in 2013. Revenues in the first quarter included proceeds from sales from Gevo's hydrocarbons demo facility of $0.6 million including sales of bio-based jet fuel to the US Air Force and the US Army and sales of isooctane for specialty fuel applications.

We also recognized revenue from ongoing research agreements. In 2013 first-quarter revenues benefited from the sale of excess corn inventory of approximately $2.4 million.

R&D expense was $4.1 million in the first quarter of 2014 compared to $5 million reported in the first quarter of 2013. Our R&D activities in the first quarter 2014 continue to be focused on the optimization of our technology to further enhance isobutanol production rates at Luverne, as well as production-related activities at our hydrocarbons demo plant in Texas where we produce our bio-jet, paraxylene and isooctane products.

R&D expense decreased in the fourth quarter of 2014 compared with the same period in 2013 due to ongoing cost-cutting measures within the R&D group as well as lower operating costs at the hydrocarbons demo facility.

SG&A expense for the first quarter of 2014 decreased to $5 million compared to $7 million for the comparable quarter in 2013. Our first-quarter 2014 results continue to show the benefit of cost savings actions including decreases of $1.1 million in salary and compensation-related expenses and $0.7 million in legal-related expenses.

Within total operating expenses for the first quarter of 2014 we reported approximately $0.9 million for non-cash stock-based compensation. Interest expense for the first quarter of 2014 was $1.6 million compared to $3.3 million in the first quarter of 2013.

The reduction was primarily a result of declines in the outstanding principal balances of both our convertible notes as well as our secured debt with TriplePoint Capital. We also reported a non-cash gain of $2.5 million related to changes in the fair value of embedded derivatives contained in the convertible notes and our warrants.

As we have commented previously, these changes result in non-cash amounts being recorded in our statement of operations for changes in fair value in each reporting period.

For the first quarter of 2014 we reported a net loss of $12 million or a loss of $0.18 per share based on weighted average shares outstanding of 67,760,721. This compares to a loss of $18.4 million in the first quarter of 2013 or a loss of $0.45 per share.

During the first quarter there were no conversions of the convertible notes and at quarter end we had 68,858,219 shares outstanding. Cash on hand at March 31 was $8.4 million.

To bolster the Company's liquidity we announced a financing last week with Whitebox Advisors that could result in additional funding of up to $63 million assuming certain options are exercised. The initial investment that closed on May 9 resulted in gross proceeds of $25.9 million. The investment was made by a term loan that is exchangeable into convertible debentures.

The term loan includes a first priority lien on all of the Company's assets and carries a 15% coupon of which 5% is payable in cash and 10% is payable in kind and capitalized to the principal amount of the term loan. The term loan is exchangeable into convertible debentures within 90 days of the closing of the financing subject to certain ownership limitations.

The convertible debentures can be converted into common stock of the Company at a price equal to the lesser of $1.49 per share or a 15% premium to the five-day forward-looking volume weighted average price following closing of the financing. The convertible debentures carry a 10% coupon of which 5% is payable in cash and 5% is payable in kind. Under certain conditions the 10% coupon is payable entirely in cash at the election of Whitebox.

In conjunction with the Whitebox financing, we also restructured our debt with TriplePoint Capital. We used $9.3 million of the proceeds from the Whitebox financing to pay down TriplePoint's debt leaving a balance with TriplePoint of $1 million and which will now be subordinated to the Whitebox debt. TriplePoint's remaining debt will amortize over 36 months and carry a coupon of 9%.

Given the fact that we've just restarted the plant in Side-by-Side mode we are not ready to give very specific guidance on the Luverne operations. We expect to be in a much better position to provide more detailed projections on next quarter's call.

That said, for those modeling us out, good assumptions to use for Luverne would be ethanol production run rate should reach approximately 1.25 million gallons per month or 15 million gallons per year; isobutanol production rates to be in the tens of thousands of gallons per month while we are first starting up in Side-by-Side mode.

We expect these volumes to ramp once we become more consistent and confident with our isobutanol fermentations. One of the key drivers for this increase in volumes will be economics. As we have said before, we are trying to maximize our learning per dollar as we commercialize isobutanol production. And this should translate roughly into cash flow breakeven at the plant as a whole on a monthly basis.

In terms of cash burn, we expect this to continue to decrease over the coming quarters in particular due to our decision to transition Luverne to the Side-by-Side configuration. As we've previously discussed, this model better utilizes all of Luverne's assets and dramatically improves the cash flow of the plant while still enabling us to commercialize our isobutanol technology.

As a result of this improved cash flow profile of Luverne, and our ongoing corporate expense control measures, we expect Gevo's quarterly cash burn to decline into the single-digit millions in the second half of the year. As always we will look for ways to enhance our overall cash position.

We continue to receive meaningful interest from third parties to license various aspects of our technology, not only our core isobutanol-related IP, but also for our technology related to our hydrocarbons patents. And our global shelf remains in place, so we may act opportunistically in the future to raise capital through various forms of underwritten financings. With that I will now turn the call back to Pat.

Thanks, Mike. Overall we are continuing to see strong interest in renewable isobutanol for the specialty chemical markets as a blend stock for gasoline and as a building block for renewable jet fuel plastics and high-performance automobile fuels like isooctane.

Our overall view of the economics of production and selling price hasn't changed and remain attractive. And yes, yes, we have reviewed it several times. Going forward our focus is to keep the plant running while we optimize isobutanol production, moving down the learning curve as fast as possible and doing it responsibly without wasting money.

We will also use ethanol production to generate cash to keep a steady flow at the plant. I expect to use our renewable isobutanol in the marketplace for jet fuels, isooctane, paraxylene, and various specialty chemical uses, as well as gasoline blend stocks. With that let's turn to questions.

(Operator Instructions), Mike Ritzenthaler, Piper Jaffray.

Hi, good afternoon, it is actually Mike Klein filling in for Mike Ritzenthaler. Just a question on balancing Luverne right now. How do you balance generating positive cash flow from ethanol with ramping isobutanol? I guess is it a matter of ethanol economics throughout the rest of the year or more about what isobutanol is and how that is ramping?

It is actually a combination of the two. Because when we are doing smaller amounts and working and still doing some experiments on the fermentation, those cost more. But we generate enough cash at the plant producing ethanol to offset the cost. And so that is actually a pretty contributor for us on cash.

So overall, yes, it depends on our volumes of ethanol that we produce, the margins of ethanol. But it also then depends upon how we ramp up the isobutanol and produce.

Okay. And how many batches per week are you running right now of just isobutanol?

It depends, I mean it depends on exactly what we are doing. One to two -- we have been doing one to two at times, sometimes we took a break while we are making sure we understand what it was. We just started the Side-by-Side operations, we will have to settle into a pattern.

Okay. And if I could just squeeze one more in. I believe there are milestones or determinants for Whitebox to invest an additional $37 million. So I guess what are some of those milestones that you have to achieve and what is the potential timing of when you could receive those payments?

Yes, so, in terms of timing everything will be said and done within call it 90 days of closing. There are two options, one is an option in our favor for $5.2 million and the test is related to just how our stock price reacts to the news of the financing over the course of the next call it 20 to 30 trading days. The balance, the $32 million is an option and Whitebox's favor and it is purely just that, it is an option in their favor and not milestone driven.

Okay, great. Thanks a lot.

Caleb Dorfman, Simmons & Company.

It is nice to see the progress on starting out Side-by-Side. I guess what I am curious about the actual yields. I know that you were around 71% yield back in March for isobutanol when we talked. What is the issue in improving yields? And what kind of timeline do you think we need to be looking at to get (inaudible) to 80% or 90% yields?

I think what -- okay, so, yes, that is where we are. We kind of stalled out at that level and that was a result of -- remember in the last quarterly call we talked about the recycles and we had been up to 95% recycle and we achieved those yields. And as we went we are optimizing and as we went from 95% to 100% recycle with trace impurities we stalled out, we were running into trouble.

That last 5% of stuff to recycle was both variable and it hurt the fermentation. So we had to improve some of the processes around the recycle, but that is also one of the primary drivers of why we like the Side-by-Side in that that whole recycle stream now is steady because of the ethanol production rather than being variable from the stopping and starting. So I would expect us to make progress on it straight away.

Have you had a batch of our isobutanol since you have had the Side-by-Side up on May 5?

There is one going on right now.

Okay. So we don't have any results while we have actually had Side-by-Side operating?

No, just started it (multiple speakers). So back to this recycle point. We started on the fifth to get the fermentations going to get the full -- the plant full of water and recycle with all of its crap and then steadied out, that took until yesterday.

Okay, that is helpful. And then I know obviously, because you haven't gotten the isobutanol production up to full scale, it sort of makes economic sense to run ethanol. What type of margins are you seeing in the forward outlook for the Luverne facility specifically? Because I know corn base sort of makes it different than what we look at generalizes.

Are you asking about the margins for isobutanol?

For ethanol, sorry.

Or ahead, Mike.

Currently ethanol margins in Luverne are approximately $0.35 to $0.40 spot.

And what -- let's say that you got to 85% or 90% yield for isobutanol, at what time of margin (inaudible) would you consider switching over to more isobutanol production?

That is an interesting question. And the way that we will think about it is along these lines, and Mike, you might have additional perspective. But the way I think about it is there is a fundamental question of how much cash can we generate, because that is what plants are supposed to do.

We have a strategic objective too though is to produce -- grow the market of isobutanol and we'll be balancing those two things. On a straight up economic basis we'd favor isobutanol I would imagine. If it is overwhelming towards ethanol, then we are going to continue to favor ethanol. If it is overwhelming towards isobutanol well then obviously we are going to favor isobutanol.

That is helpful. I guess finally --.

(Technical difficulty) the right answer. Ultimately economics are going to reign here and cash is always king to this Company. So that enters into the equation. The other part of the equation is just the technology itself.

So if we do see the technology obviously at a place like I just talked about where we are consistent, confident in our fermentations, we still believe in the long-term economics of isobutanol over ethanol. However, if the short-term blips like we just saw recently where ethanol margins were over $1, you can't ignore those types of margins and operating for those types of margins.

Yes, and I would say nice to we emphasize. We look at our view of the $0.50 to $1.00 EBITDA margins for isobutanol, that still looks to be achievable and realistic, that is a more direct answer to your question.

And final question for me is to, Mike. You have the LOI in Argentina, you have the LOI in Canada. Any chance that we could get an update on just general LOIs, when we might be seeing some progress on that front?

We are seeing progress on that front in particular. Pat and I were down in Argentina only just recently. Those guys are really excited by the opportunity to work with us, really excited about isobutanol as an opportunity. And while there is, as you can imagine, a lot of details that need to be ironed out as it relates to these types of deals, we would be helpful to provide progress, significant progress on that as early as next quarter.

Thank you.

And I am showing no further questions at this time.

All right. And with that I think we will end. Thank you very much, everybody, for joining us. Bye-bye.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.