Gevo Inc (GEVO) 2015 Q1 法說會逐字稿

Welcome to the first-quarter 2015 Gevo Incorporated earnings conference call. My name is Hilda, and I will be your operator for today. (Operator Instructions) Please note that this conference is being recorded. I would now like to turn the call over to Mr. Brett Lund. Mr. Lund, you may begin.

Good afternoon, and thank you for joining Gevo's first-quarter 2015 conference call. I am Brett Lund, Gevo's Chief Legal Officer and General Counsel. With me today are Pat Gruber, our CEO, and Mike Willis, our CFO.

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 and on this webcast, you'll 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 the remainder of 2015 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 as amended, which was filed with the SEC on March 30, 2015 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 as 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 a detailed discussion of the relevant risks and uncertainties.

On today's call, Pat will begin with a review of our recent business development. Mike will then review our financial results for the first quarter of 2015. Following the presentation, we will open up the call for questions.

I will now turn the call over to Pat.

Thank you for joining us on our call today. It has been a short six weeks since our last call. We will talk to the progress we've made, where we are going, and our financials. First, the Luverne plant.

In the first quarter, we operated in side-by-side mode. We produced ethanol. It also ran isobutanol as we needed to. In the isobutanol runs, we proved out the performance of an improved yeast file catalyst. We also ran the support due diligence efforts being conducted by different parties. The isobutanol process ran well. We are pleased that the diligence showed that our projections of full-scale costs to produce isobutanol look good, meaning that the isobutanol process should give margins of $0.50 to $1 per gallon.

Our yeast file catalyst has achieved commercial raising yields, with batch times meeting our commercial goal. Several of our key patented technologies enable these yields in rates. In fact, I should mention that the patents for these technologies survived challenge at the US patent office. To our knowledge, these patents are required to achieve commercial isobutanol performance of yeast, and we all know that they have been upheld, which is very good.

Now, all of this together, the progress on the commercial process, the performance of the technology makes our technology even more attractive to licensee partners.

Now, the ethanol margins in the first quarter were soft; soft enough that we decided to take down the plant for maintenance. We worked on tanks, pipes, pumps, evaporators; cleaned things. Now, ethanol margins are making a comeback now, and that's great. Going forward, we will continue to run the plant to maximize cash flow. We will run isobutanol as needed to keep our customer supplied so they could continue to develop the markets. We also plan on running isobutanol to prove out continued improvements in the biocatalysts and the process as well as support licensing activity as needed.

We have learned a lot about the optimization of the isobutanol fermentation process, optimized the ingredients and run strategies. We believe that we are down to the short strokes of improvements. As we run more isobutanol, it will be fun to see the results of full-scale.

Now turning to licenses and licensees, our goal for isobutanol is to secure definitive licensing agreements for our technology this year. We should be able to do this based on the feedback we have received. We have been plugging along on the definitive contracts with Praj and others. Recall that Praj and we have agreed in principle to a license for up to 250 million gallons per year of isobutanol outside of the US using molasses as a feedstock. This is a good strategy for both Praj and Gevo, adding diversity to feedstock and geography.

We also are making progress with Highland, IGPC, and Portland. We are seeing increased interest in licenses from additional South American companies who use corn and/or cane feed stocks. I expect that we'll be able to talk about these companies and their countries in the near future. I really like that we are developing geographical diversification for our isobutanol technology. And, by the way, the litigation issues we have only apply here in the US.

Now, as we've discussed before, isobutanol can serve as a raw material for the chemical conversion to jet fuel, iso-octane, paraxylene, or polyester plastics -- auto plastics. We ship isobutanol produced at Luverne to our hydrocarbon plant down at Southhampton Resources in Sylvie, Texas. There, the isobutanol is converted via chemical process in these products. We have been running and testing jet fuel and octane since 2011. The conversion technology to make these fuel products is ready for primetime legally.

The jet fuel made from isobutanol is a kerosene. That's the stuff of standard jet fuels. Of course, ours is renewable, with a smaller CO2 footprint, and, according to studies like at NASA, makes for a cleaner fuel when it burns. Jet fuel from isobutanol also, we are told by customers, is one of the lowest potential cost bio-based kerosenic fuels, if not the lowest-cost fuel.

Many of you probably saw the recent press release for Alaska Airlines, who is planning (technical difficulty) our alcohol to jet fuel on flights to DC -- Washington, DC. Alaska Airlines is a forward-thinking company, and I look forward to working with them. Partners such as these are fun to work with. They know they need a strategic alternative to petro-jet, and they are willing to step up. They know they just can't sit back and wait.

Now, it's worth noting that our projections show that our alcohol-to-jet could have much, much less volatility month-to-month compared to a petro-jet. Also, it isn't lost on airlines that they, at some point, are going to have to deal with some kind of a carbon tax. Isobutanol converted to jet fuel looks like a good alternative.

We are also seeing an uptick in interest for our iso-octane. Iso-octane is a key ingredient to make high-performance gasoline fuels. It's made by the chemical processing converting iso-octane -- converting the isobutanol into iso-octane. The value proposition is a high-performance renewable fuel but doesn't have the limitations of oxygenated renewable fuels. It seems companies are formulating new high-performance fuel mixtures. This will be interesting to see how it unfolds.

On the last call, I introduced you to the advances we have made in converting ethanol into propylene and hydrogen. This catalytic process, meaning there's no biology involved, converts fuel-grade ethanol into high yields of propylene and hydrogen. Other technologies that we can see in the public domain don't use fuel-grade ethanol, give the same high yields of a small number products or produce hydrogen. We have filed a number of patents on the process and the catalysts.

Both renewable propylene and renewable hydrogen are interesting. The propylene can be used in plastics, fibers, things like diapers, car parts, packaging or as an intermediate to make other chemicals. The renewable hydrogen has potential to solve an issue for those companies interested in fuel cells or for chemical conversions. Instead of shipping hydrogen, ethanol could be shipped as it is now, and the hydrogen can be generated locally. This breaks away from a natural gas pipeline. The economic models we have show that both propylene and the hydrogen could be cost competitive with their petrochemical-derived counterparts.

The technology to convert isobutanol and ethanol into olefins and building blocks are interesting to ethanol producers, chemical companies, fuel-cell companies, car companies, gas producers, consumer products companies, airlines, catalyst companies, and the military. We are receiving a lot of interest from strategic partners across these areas. We are very focused on establishing a viable business to convert alcohols into chemical products and fuels.

I look forward to landing deals with strategic partners. Not only will these opportunities create new applications for isobutanol, but they'll create new markets for ethanol.

On the market front, we still hold the same view for isobutanol: it's attractive. Renewable isobutanol can substitute for petro-based isobutanol and is preferable to some customers when competitively priced for chemical market uses. These are things like solvents or uses in oilfield.

Additionally, isobutanol can serve as a value-added fuel oxygen and blend stock. In this latter market segment, the fuel properties of isobutanol shine. Its compatibility with engines and infrastructure solve a bunch of issues for certain niche markets like the marine, boat, and off-road segments. I expect that we will hear more about the benefits of isobutanol from the marketplace in the near future.

I would now like to turn the call over to Mike who will talk through the financials.

Thank you, Pat. First, I would like to note that unless otherwise specified, all share and per-share numbers in my prepared remarks are being expressed on a post-reverse-led basis. Gevo reported revenue in the first quarter of 2015 of $5.9 million as compared to $0.9 million in the same period in 2014. The increase in revenue during 2014 is primarily a result of the production and sale of ethanol and distilleries grains of $5.1 million following the transition of the Luverne plant to side-by-side.

As Pat noted, revenues at the plant were down for the first quarter of 2015 as compared to the first quarter of 2014 due to a combination of, one, lower ethanol prices, and two, lower overall isobutanol and ethanol production. On the second point, we took advantage of the weaker ethanol margin environment in the quarter, take the plant down for various maintenance initiatives, which resulted in an overall decrease in alcohol gallons produced in the quarter.

During the first quarter of 2015, hydrocarbon revenues were $0.5 million, primarily related to the shipment of bio jet fuels to the US military during the quarter. Gevo also continued to generate revenue of $0.3 million during the first quarter of 2015 associated with ongoing research agreements. Cost of goods sold increased to $9.2 million in the first quarter of 2015 versus $4.7 million in the same period of 2014 due to the increased production activity at the Luverne plant under side-by-side. Gross loss was $3.3 million for the three months ended March 31, 2015 versus a gross loss of $3.8 million in the same period in 2014. After deducting depreciation expense of $1.5 million, the non-GAAP cash gross margin was a negative $1.9 million for the first quarter of 2015 as compared to a negative $3.2 million in the same quarter in 2014.

R&D expense was $1.7 million in the first quarter of 2015, compared to $4.1 million reported in the first quarter of 2014. Our R&D activities in the first quarter of 2015 continue to be focused on the optimization of our isobutanol technology as well as production-related activities at our hydrocarbons demo plant in Silsbee, Texas, where we produce our bio-jet, paraxylene, and iso-octane products.

R&D expense decreased in the first quarter of 2015 compared with the same period in 2014 due primarily to a $1.4 million reduction in employee-related expenses, a $0.4 million decrease in consultant and lab-related expenses, and a $0.5 million decrease in expenses incurred at the hydrocarbons demo facility located in Silsbee.

SG&A expense for the first quarter of 2015 decreased to $4.5 million compared to $5 million for the comparable quarter in 2014. SG&A expense decreased in the first quarter of 2015 compared with the same period in 2014 due primarily to a decrease of $0.4 million in miscellaneous SG&A expense items.

Within total operating expenses for the first quarter of 2015, we reported approximately $0.4 million for non-cash stock-based compensation. For the first quarter of 2015, we reported a loss from operations of $9.5 million, down from a loss from operations of $12.9 million in the first quarter of 2014.

Interest expense for the first quarter of 2015 was $2 million, compared to $1.6 million for the comparable quarter in 2014. The increase was due primarily to interests associated with the white box convertible notes issued in June of 2014.

We reported a non-cash gain of $0.2 million during the first quarter of 2015 related to changes in the fair value of our derivative warrant liabilities and embedded derivatives contained in the convertible notes issued in 2012. The Company also reported non-cash gains of $3.8 million during the first quarter of 2015 related to a change in the fair value of the white box convertible notes.

$2 million of the 2022 notes were converted during the three months ended March 31, 2015. As a result, the Company recognized a $0.3 million gain upon the conversion of this debt.

For the first quarter of 2015 we reported a net loss of $7.3 million, or a loss of $0.88 per share based on weighted average shares outstanding of $8,312,398. This compares to a loss of $12 million in the first quarter 2014, or a loss of $2.65 per share.

During the first quarter, $2 million of the 2022 notes were converted into 170,041 of Gevo common stock, and outstanding warrants were to exercise it to approximately 725,226 shares of common stock.

At quarter end, we had approximately 9,751,500 shares outstanding. Our cash on hand at March 31, 2014 was $4.4 million.

Subsequent to our last earnings call on March 26, we had -- we've had additional outstanding warrants exercise which are expected to result in net proceeds to Gevo of approximately $6.2 million. Also to note, on May 5 we received a notice from the NASDAQ that Gevo had regained compliance under listing rule 5450A1 given the fact that closing bid price of our stock had been $1 per share or greater for over 10 consecutive trading days. So this matter is now closed.

With that, I'll turn the call back to Pat.

Thanks, Mike. So going forward, then, we need to complete one or more of our license deals. Ideally, we would have the Praj deal completed as well as one other deal. We need to land a strategic investment in what we call our alcohol hydrocarbons business. In the near term, we plan to continue to run isobutanol as needed at Luverne and continue to develop the marketplace to support customers. We also will be developing a more detailed plan to build out Luverne into a profitable isobutanol plant as well as a strategy to finance it.

And with that, we turn to questions. Thanks.

(Operator Instructions) Craig Irwin, ROTH Capital Partners.

So first thing I should say is congratulations on the $5 million in ethanol revenue. That's pretty nice production considering the suspension and turnarounds in the quarter. So in the context of that, I wanted to dig into the cash gross margin improvement. As you said in your script and your release, you improved to a loss of $1.9 million in the first quarter versus a loss of $3.2 million last year. Most of the ethanol plants out there were printing money last year but lost money in the first quarter of this year, and your margins actually went the other way. Was ethanol a headwind inside of this improvement? Can you talk about how this was achieved?

Craig, it's Mike Willis here. The key rationale was in the first quarter of 2014, we weren't actually running in side-by-side yet. We were still just running matches just on isobutanol. We started up on side-by-side in the March/April time frame, so it's less of a like-for-like comparison as a result of that.

Okay. But is it fair to say that if we had normalized ethanol market conditions, we would expect a different result for the first quarter?

Definitely.

Okay. That's what I was getting at. And then as far as running isobutanol, I know it's very difficult to separate the side-by-side, but can you share what the components are that contribute to cost of running isobutanol versus ethanol and how we might be able to think holistically about the different contributions in the plant?

Sure. So the -- some of the costs are more difficult to separate than others so there's certain batch costs that it doesn't show up as a line item here. It's all in cost of goods but certain batch costs like corn, like nutrient packages, enzymes, et cetera, that are very much batch related or very much -- or easily identifiable isobutanol versus ethanol.

When you start getting into things like utilities, there are certain costs that we can contribute to isobutanol versus ethanol. Others are more difficult. And then when you obviously get into things like direct labor and the like, then it becomes very, very challenging. So a mix of costs across ball. Some are very, very identifiable, isobutanol versus ethanol. Others, it's more kind of fungible.

Thanks for that. So the next thing I wanted to ask about was alcohol-to-jet. Your Alaska Airlines announcement this quarter was pretty exciting. Do you have a timeline for potential flights with Alaska Airlines? I know Pat mentioned one other deal. Is this also likely to be in the alcohol-to-jet arena? And then how should we think about pricing for your product here? Do you think you can get a nice premium versus ethanol or isobutanol given that jet already trades there and that there is a green premium that conceivably the airlines will be willing to pay?

Okay, so the first part -- this is Pat. So the first part of the question is regarding the time for Alaska Air. That will depend in part on the timing for the final ASTM certification. We expect that sometime in the next couple months. The final voting is going on right now -- or the final preparations for the vote are going on right now. And that's been the culmination of a four-year process, so I'm glad it's coming to an end. And there is no issues because this is a kerosene-type fuel, so it's right square in the normal in this category.

In terms of -- Alaska Air is -- it's fun to have them doing this flight. That's cool. And I expect that we would see other people working on this as well. Recall that we have been selling our jet fuel to the military and the military has been working through the qualification of all their air platforms. And so we expect mil-spec certification sometime this year as well.

Regarding the pricing, the feedback we hear in the marketplace is that our renewable resource-based alcohol-to-jet fuel is the lowest-cost [parapenic]-type jet fuel that people are hearing about. That isn't to say there could be some other thing or other way to go about it, but it looks like we're in a good cost position.

Of course, the benefit for airlines -- the potential is something -- it goes like this is that everybody anticipates that sometime they're going to be a real live carbon tax. We could provide a benefit for that. We are anticipated to be less volatile in terms of price and cost than, say, oil, and that's because of the renewable resource-based content and the contributions of fixed cost and all the rest. So we're attractive from that standpoint.

And of course it works well, and it does appear to burn clean; there are some reports being published that indicate that. So there's benefits on that side; we just have to work through and play them out.

And the last part of your question was do I anticipate other deals. I do. Working towards it, and they are going to -- there's several of them that are possible. There is more jet deals. Iso-octane is extremely interesting, so we're getting increase from mostly Europe and South America about iso-octane. The reason people seem to want iso-octane is because it has no oxygen in it. It is a very good quality of iso-octane that we can supply. And people can formulate their specialty fuels around it and have renewable content.

And then there's also -- this alcohol -- this ethanol to propylene and hydrogen is interesting, and that's one -- as that unfolds, that's going to be quite -- I think that will open people's eyes as to what's possible in these kinds of chemistries.

Thank you for that, Pat. My last question is related to the comments in the release. The third-party study that you had completed that estimates achievable EBITDA margins of $0.50 to $1 a gallon for isobutanol. I don't know if you can name the group that did the study, but maybe was this a customer study? Someone that's putting money to work here already, maybe an academic group? And could you describe the scenario that you would need to achieve these kinds of costs?

Sure. So I'm looking at my guys here. I think we can just say it was Praj. Praj did the work or their diligence -- they did extensive work here. They crawled all over our plant and went over all the data and came up with the same kind of cost structures that we do. And of course then we match it up to selling prices that we see. That's how you get to the $.50- to $1-a-gallon margins. And it's good.

Now, to get that at a place like Luverne, we need to build out the capacity a bit, add some equipment to the fermentation train and add some distillation columns. I think people who have been following us know that we don't have the final distillation columns and we're missing some of the front-end fermentation equipment that we've now learned that we need.

So you could do that at -- we could do that at Luverne without much difficulty, actually. It's a matter of having the capital. And of course any of our retrofit partners or our side-by-side partners or licensees, they'll get it. They get to learn on the back of what we have just done.

And so one of the things that's quite interesting is that our yeast works quite well. Fermentation performance is quite good. We are incrementally improving it all the time. And the gift separation systems work extremely well. And so it is interesting.

Now, Luverne is not fully integrated from an energy standpoint. But you know what? As you do the cost projections with a modern plant and have built it deliberately for side-by-side, you do those sorts of things and then that lowers even the energy costs further. So it's pretty interesting from that standpoint. And I like that Praj came in skeptical and critical, and now they want to move forward licensing it.

That's great news. Congratulations on the progress.

Thank you.

Thanks, Craig.

Thanks for taking my questions.

Jeff Osborne, Cowen and Company.

Just had a couple questions on my end. I was wondering if you could talk about the Alaska Airlines deal, Pat, and what the anatomy of that deal is. When did you first have negotiations with them and sampling, and how long did it take to convert that over to a contract?

You know, we've been -- Mike -- (inaudible) Glen Johnstone who some of you probably have met. Glen has been working on this alcohol-to-jet for years, and he knows everybody pretty well. And it's just one of these things; it's the culmination of we're getting closer and closer to the ASTM certification. So Alaska has been aware of it; they understand it. We are being more clear with people about what we believe the cost structures to be and why it would make sense. There's more data and the studies have been done as a result of the certification process. So it's just a culmination of things coming together. And Alaska Airlines is -- they are a leader. They like to be seen as a leader, so I think that's great.

I would expect -- remember, we have -- we've constantly been working with our product as well. I think that that has gone well. And I expect other people to be interested in our fuel products as well.

This alcohol-to-jet -- this idea of taking the isobutanol to burning it to jet fuel -- is nice. It's a very simple process. Chemistry -- it's a chemistry process. No biology involved. And so chemical companies get it. They can wrap their heads around it and understand it, and it makes sense. And it's a great way to simplify all the hard parts of the bio-based business. Because you've got a bio-based business, and it's like the raw materials are mixed with all kinds of crap -- fats, oils, lipids, dirt, whatever. We do a fermentation; we're making clean chemical, isobutanol, do clean chemistry to make it into the jet fuel or other chemical products.

Thanks. Appreciate the comments. Is that 100% Gevo product, or are you blending met with traditional aviation fuel?

By the time it gets in -- I think the ASTM certification is going to land on something that says up to 50%. I didn't hear the final yet.

Okay. So when should we think about volumes ramping for that particular customer just in general for jet for Gevo?

My guys, we are all looking in (inaudible) we're not 100% sure yet because what we need to do is build up capacity for the butanol and the jet fuel. And so that is something to be worked through with our partners. I need the right off-takers and the right time before I can project that with any confidence. I think that the isobutanol could be built out; that's a capital limitation. Jet fuel can be built out; that's the technologies there.

But the beauty of getting both the ASTM and mil-spec certifications allow us obviously to be positioning ourselves to be selling commercial volumes and ultimately really about getting offtake from potential customers that drive the capacity additions on the isobutanol front.

I understand. Just two questions for you, Mike. I was wondering, do you have a rough idea of how much cash you would expect from the warrants in 2Q? I know you mentioned quarter-to-date numbers, but do you have any forecasts you are willing to share as it relates to cash inflows there? And then the second question was also around cash as it relates to the licensing deals that you talked about signing in 2015. Do you expect, as you are negotiating those, any upfront cash payments, or would those be longer tailed in nature?

So on the first question, we're only comfortable at this stage based off the visibility we have on discussions with warrant holders at the $6.2 million level. Although, considering where our stock is at, I wouldn't be surprised if additional warrants were exercised well. But hard for me to forecast beyond that.

On the licensing side, we definitely expect some kind of a contribution from the first licensee when you sign a binding agreement. Different parties -- the structures are different depending on the party that we are talking to. So depending on who the first group is will dictate what the upfront payment will be. Ultimately, these licensing arrangements -- I liken it to a software SaaS model, where really what you are generating is a long-term, ongoing recurring revenue stream. So that's really the holy grail in all of this.

Makes sense. Last question I had -- just given the improvement in the ethanol margin outlook and also the maintenance that you've done in the first quarter, how should we think about the cadence of ethanol revenue in the second through the fourth quarter through year-end? Is there any changes to the plant that you forecasted between now and then, or are you just kind of going to run out -- run flat out assuming that the current environment around the crush margins stays the same in terms of ethanol production?

Yes, it's definitely improved. We've already seen a significant improvement in Q2 to date. To be honest, our revenues could be much closer to Q4 revenues than obviously Q1 and, say, Q2. And yes, no, I think we will run the plant like we've discussed over the last couple of quarters, which is we're going to run it to maximize cash flows. But by the same token, we're not in any way -- our isobutanol, we will make sure that we are producing isobutanol for our customers. We are producing isobutanol to prove out aspects of our technology, in particular kind of more step-change evolutions of the technology.

And definitely, as Pat described in his opening statements, is licensees, as they are trying to diligence us out obviously want to see data from the plant as well. So that would be another reason why we would be running isobutanol going forward. But considering where ethanol margins are at, we like making money, too.

I understand that. Thanks very much. Appreciate comments.

We have reached the time allotted for questions. I would like to turn the call over to Dr. Gruber for closing remarks.

Well, thank you all for joining us. Going forward, we are going to focus on getting these license deals completed, moving forward on the alcohol-to-hydrocarbons, and getting -- moving it towards the jet or to the ethanol for the propylene and hydrogen. I want to see how this unfolds. It's exciting. And I like the progress that we're making with our technology and on the intellectual property front. So thank you for joining us. Thanks, everyone. Bye-bye.

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