Gevo Inc (GEVO) 2015 Q3 法說會逐字稿

Welcome to the quarter three 2015 Gevo, Incorporated earnings conference call. My name is Katie 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. Mr. Willis, you may begin.

Good afternoon and thank you for joining Gevo's third quarter 2015 conference call. I'm Mike Willis, Gevo's Chief Financial Officer, and with me today is Pat Gruber, our Chief Executive Officer.

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'd 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. A 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'll 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 April 2, 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. 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 will begin with a review of our recent business developments. I will then review our financial results for the third quarter of 2015. Following the presentation, we will open the call up for questions. I will now turn the call over to Pat.

Thanks, Mike. Good afternoon. Thank you for joining us on our quarterly call. On this call I will be talking about a game-changing event this past quarter -- that is the settlement with Butamax, as well as our plans for increasing production and selling more isobutanol. I will also touch on the markets.

First, the Butamax settlement. We reached a very good settlement that ended all litigation and patent office fights and that provides Gevo access to all markets. As we discussed previously, in this settlement we have each given a license to each other to practice and to sublicense under our respective patents. We did not license the know-how, the biocatalysts themselves, or importantly our trade secrets. Butamax and we each expect to have separate technology packages to license based on our own needs and processes.

As part of the settlement agreement, we have agreed to leverage each other's skills in developing and selling into certain markets. For Gevo, it was important to us to have the royalty-free access to markets we expect to be primarily targeting for the foreseeable future -- that is jet fuel, marine, and off-road gasoline blendstocks, iso-octane, paraxylene, etc. For Butamax, it was important to have royalty-free access to gasoline blendstocks for on-road use and some other market segments. Each of us recognizes that the other was doing a lot of work on approvals and development efforts in certain market segments.

Gevo is working on jet; Butamax is working on using isobutanol as an on-road gasoline blendstock. That said, we agreed that annually we could each sell up to 30 million gallons royalty-free into any market, including the jet and on-road gasoline markets. And to put that into perspective, we estimate that these 30 million gallons could be worth more than $100 million of isobutanol sales per year.

Then for the amounts over 30 million gallons -- for example in the jet market -- Butamax would pay Gevo a royalty -- a conventional, reasonable royalty, and we would sell and distribute the isobutanol for them in this market. Likewise for amounts over the 30 million gallons, we would pay Butamax conventional, reasonable royalty for any isobutanol we wish to sell into the gasoline blendstock market, and they would sell and distribute the isobutanol for us. So overall I like the agreement. We can each have our own technology packages that we can sublicense and it will be very difficult for any other player to enter this market and compete with Gevo and Butamax.

Recall that collectively we have something on the order of 1,000 patent and patent applications between us. It is also worth noting that neither Butamax or Gevo had to pay each other anything as part of the settlement. We structured it so that we each get rewarded as the key markets develop. The emphasis is where it should be: on growing the isobutanol markets. So what does it mean to Gevo? Well, it's actually a profound impact on our business. Stopping the spending of money on lawyers is significant. At the rate we have been going, the savings translates to about $7.5 million per year. Of course, that rate of spending could've gone up at any time given the number of potential lawsuits and the activities of the lawyers.

Frankly, the lawsuits also created complications in just about every discussion with partners, strategics, customers and others. The lawsuits were also a brain drain on our team. So in this settlement then we saved money, the risk of lawsuits from each other is removed, and overnight we went from being enemies with Butamax to, in many ways, being business partners who have a common interest in developing the isobutanol business and protecting the value of our respective technologies. Overall, we are pleased with the settlement. We can get on with the business of developing isobutanol markets and production.

In this past quarter, we also announced certain improvements that we are looking to make at the plant in Luverne, Minnesota. In the past year, we have proven out many key aspects of commercial scale fermentations of isobutanol, including our ability to control infections. This in another itself is a major milestone. In 2015 we ran limited quantities of isobutanol, primarily in order to keep the markets developing. Why did we run limited production runs? Well, that's because our cost of production was high and that we'd lose significant dollars with every gallon of isobutanol made and sold.

Our production cost was high because we had limited spending of capital at the plant to install needed equipment. Frankly, we needed the money to defend ourselves in the lawsuits. Now, given that we already know that the fermentations work at commercial scale and the uncertainty of the lawsuits are gone, we are deploying the capital to bring in-house the equipment needed to make isobutanol economically at Luverne. As we outlined in a press release and on a conference call late in September, the primary equipment is the distillation system and some equipment to grow more yeast.

Once installed -- around the end of the first quarter or early second quarter of 2016, depending upon weather -- we expect to have the ability to produce isobutanol at a low enough cost that it actually contributes positive contribution margin to the plant. We expect the capacity of the isobutanol side of the plant would be about 1.5 million gallons per year at that point. The isobutanol production line would run continuously and we would have much greater quantities of isobutanol to develop the markets. At the same time, the ethanol side of the plant is expected to operate at a rate of over 15 million gallons per year.

Having the isobutanol line running consistently and contributing positively, as well as having the risk of the Butamax lawsuits removed, should accelerate licensing. Now regarding licensing, we are still pushing forward with definitive agreements with our partners. We do expect to complete one or more in the not-too-distant future. The relationships are good and we have been working through the definitive agreements in light of the settlement.

Selling isobutanol and its hydrocarbon derivatives is obviously key to us. We want the products placed into the markets where the properties and the product value shines. To this end, we launched isobutanol in gasoline for boats at Lake Pomme de Terre in Missouri in the third quarter. The properties of isobutanol make for an excellent renewable gasoline blendstock for boats. We expect the increase penetration into the marine blendstock market in 2016 as our isobutanol production ramps up at Luverne.

Last night, we announced an alliance with ValvTect to bring 16% isobutanol blended gasoline to their network of over 700 marinas, which reaches more than 50% of the marinas in the country. We are pleased to be working with them. We also will continue to focus on developing the off-road gasoline blendstock market. In this market segment, customers are interested in the gasoline that contains renewable blendstock -- that is our isobutanol -- that has excellent performance and avoids the negative issues associated with E10 gasoline in small engines.

We have been selling iso-octane that's actually a pure renewable gasoline produced at a refinery in South Hampton Resources in Texas. There appears to be strong demand for this product with good prices, especially from Europe. We expect to be focusing on further developing this segment in 2016 and announcing other customers.

Jet fuel is making progress, too. The ASTM committee focused on jet fuel from isobutanol finally got all the data in. There was a delay of publishing one of the military testing reports from a bureaucratic holdup. Finally it was put to committee vote. Once the committee passes it -- and we don't know of or expect any issues -- then it would go to the full ASTM vote. We think that the earliest that that vote could occur -- can be completed is in early 2016. Again, we don't know of any issues; this is just the process of ASTM.

From a market point of view, jet fuel is very, very interesting. It's a growing market. It's under environmental pressure. Jet fuels will continue to be a focus for us. We believe that, in time, our alcohol-to-jet will be able to compete on value given the benefit it brings.

The third quarter was possibly the most important quarter for Gevo since we've been a public company. The risks from the lawsuits are gone. Our technology has been working. The demand price of butanol is increasing. We believe that we can produce it economically, even at a 1.5 million gallon per year scale, with the equipment that we are now installing. We have partners who want to license the technology. Going forward, we are all about making and selling isobutanol and its derivative hydrocarbon products.

Focus on the markets and applications where we believe isobutanol and its derivatives, such as jet fuel and octane, have a distinct competitive advantage. We are in the midst of increasing our capability at our Luverne plant to produce more isobutanol economically. We are continuing to pursue the licensing of our isobutanol technology and thankfully we're done with litigation and all of its hassles, uncertainty, work and cost. Now I'll turn it over to Mike.

Thank you, Pat. Gevo reported revenue in the third quarter of 2015 of $8 million as compared to $10.1 million in the same period in 2014. The decrease in revenue during 2015 is primarily a result of the production and sale of approximately $7.6 million of ethanol, isobutanol, and distillery grains at the Luverne plan, as compared to $9.2 million in the third quarter of 2014. This decrease was primarily a result of lower ethanol prices experienced in the third quarter of 2015 versus the same period in 2014.

During the third quarter of 2015, hydrocarbon revenues were $0.2 million as compared to $0.8 million in the same period in 2014. This decrease was primarily a result of a temporary halt in production at Gevo's demonstration plant located in Silsbee, Texas, from June to August 2015, while we renegotiated the contract with South Hampton Resources, the operator of the plant. We restarted hydrocarbon production at the demo plant in August and are back to producing isobutanol-derived hydrocarbons at similar levels as compared to what was being produced prior to the halt in operations of the facility.

Gevo also continued to generate revenue of $0.3 million during the third quarter of 2015 primarily associated with the ongoing research agreement with the Northwest Alternative Resource Alliance, or NARA, where we expect to produce cellulosic jet fuel using Gevo's isobutanol and hydrocarbons technologies for a test flight to be ultimately flown with Alaska Airlines in 2016.

Cost of goods sold decreased to $10.6 million in the third quarter of 2015 versus $11.8 million in the same period in 2014 due to decreases in a variety of production costs at the Luverne plan, including a decrease of $0.4 million in repairs and maintenance expense. Gross loss was $2.6 million for the third quarter of 2015. After deducting depreciation expense of $1.4 million, the non-GAAP cash gross loss was $1.2 million for the third quarter of 2015.

R&D expense was $1.5 million in the third quarter of 2015 compared to $3.7 million reported in the third quarter of 2014. Recall that our R&D activities include technology development related activities at our labs here in Inglewood, Colorado, as well as production related activities at our hydrocarbons demo plant in Silsbee, Texas, where we produce our biojet, iso-octane and paraxylene products. R&D expense decreased in the third quarter of 2015 compared with the same period in 2014 due primarily to a $1.2 million decrease in employee related consultant and contract staff expenses, a $0.6 million decrease in costs related to the South Hampton facility as a result of the temporary halt in production at that facility, and a $0.3 million decrease in lab consumables.

SG&A expense for the third quarter of 2015 increased to $5.1 million, compared to $3.6 million for the comparable quarter in 2014. SG&A expense increased in the third quarter of 2015 compared with the same period in 2014, due primarily to increases of $1.3 million in legal expenses incurred as a result of all the preparation for the possible trial in August 2015 with Butamax Advanced Biofuels, as well us to assist in the finalization of the settlement and cross-license agreements entered into with Butamax in the third quarter.

We anticipate SG&A expense to decrease in future quarters as a result of the end of litigation with Butamax. And as we reported in September, we are targeting achieving an average quarterly corporate-wide EBITDA burn rate, excluding stock-based compensation, of between $3.5 million and $4.5 million per quarter in 2016. Within total operating expenses for the third quarter of 2015 we reported approximately $1.3 million for non-cash stock-based compensation.

For the third quarter of 2015 we recorded a loss from operations of $9.3 million, up slightly from a loss from operations of $8.9 million in the third quarter of 2014. Interest expense for the third quarter of 2015 was $2.1 million compared to $2.6 million for the comparable quarter in 2014. The decrease was due primarily to the recognition of debt issuance costs in 2014 associated with the convertible notes purchased by Whitebox in 2014.

During the third quarter of 2015, we incurred a non-cash gain of $0.2 million due to the courtly mark-to-market valuation of the 2017 notes. There was no change in the value of the embedded derivatives in the convertible notes issued in 2012 and there were no conversions of those notes. During the three months ended September 30, 2015, the estimated fair value of the derivative warrant liability decreased by $4.7 million, primarily associated with the decrease in the price of Gevo's common stock in the quarter.

For the third quarter of 2015, we reported a net loss of $6.5 million or a loss of $0.39 per share, based on a weighted average shares outstanding of 16,000,688,632. This compares to a loss of $0.9 million in the third quarter of 2014 or a loss of $0.01 per share. At quarter end we had approximately 16,947,088 shares outstanding. Our cash on hand at September 30, 2015, was $16.2 million.

With that, operator, we will open it up for questions.

(Operator Instructions). Colin Rusch, Oppenheimer.

Thanks so much, guys. Can you just walk us through the sequencing of improved data and analytics on the performance of the process, and how you see that coming out relative to these licensing agreements? I'm assuming that, as you collect more data on the process, you are going to be able to drive better deals on the license agreements?

So in this last year, in 2015, in our production runs we're doing -- the fermentations have been working extremely well, extremely efficiently with high yields. We are down to incremental improvements and people see that and they see how -- our licensees that we're working with already recognize that the amount of improvement we've made was done much faster than they would have believed. So that's good.

And when we're adding in the distillation column systems and adding in some fermentation to make more yeast on-site, that's just like math and engineering. There's not technology involved, per se, so they get that part too. So already it's accelerating what we're doing. And so, I think as this all gets implemented we will be standing here some time at the end of the first quarter, early second quarter of next year, when it's all -- capital is built, the thing is running. And you can just point to the plant, the economics. We can pull up the data, they can watch it run and watch it run economically rather than having to do a calculation and anticipate engineering. And that matters a lot.

Okay. Perfect. And then in terms of what you can control now on the ethanol production and stemming some of the cash burn there, what are the variables that you guys are working on near-term to kind of manage that a little bit more aggressively?

Not too much. We have things like corn oil extraction on the docket, but right now we want to focus our capital obviously on the isobutanol side rather than the ethanol side. So nothing too substantial on the ethanol side.

Okay. Perfect. And then just one final one. Obviously, Pat, you've got a long history of commercializing bio-based technology processes. Can you just talk a little bit about the talent levels in the firm right now and how you see that going forward as you turn the corner here with the litigation and start growing the organization again? What's the available talent? Where are you at from a talent pool right now internally? And how should we think about that going forward?

Yes, we are at fighting strength. So, whenever you do these kind of technologies and you have to work through the problems of scale-ups and then solving the problem. Especially when something -- or we were retrofitting a plant like we did at Luverne, and then dealing with all the litigation stuff -- that takes a heck of a lot of horsepower. It's not quite a year ago; in the first quarter of 2015, we let a large part of the team go. And I would call that a rightsizing of the team. Right now we're at a strength of our development folk is right. So, we're making great progress. Probably it's very, very fast progress.

So as we go forward and ramp up the business, we'll do some additions -- incremental additions under the business development side as we ramp up more isobutanol volumes. And then also as we get engaged in more and more licensing, we'll be adding some engineering expertise as well. But in terms of the overall capability, we have Chris Ryan who is our Chief Technology Officer/Chief Operating Officer. He is very, very good; has been through this before. And a lot of us are experienced with it, as you pointed out. So we're solid.

Okay. Great. Thanks a lot, guys.

Amit Dayal, Rodman & Renshaw.

Thank you. A lot of positives this past quarters, guys. Congratulations on all those developments. In relation to your ValvTect announcement last night, could you give us some color in terms of timing and supply, volumes, etc. related to this opportunity that we can potentially see in the form of revenues for you guys over the next one or two quarters?

Well, over the next one or two quarters -- well, yes, so putting it in perspective. So first of all, ValvTect. ValvTect is a brand name who supplies the marine industry, particularly at marinas. And the product that they serve up are additives that go into gasoline to make gasoline itself work better for boats. So we're actually a natural alliance partner for them in that we have a new blendstock that works extremely well. We each want to be associated with each other. And of course they already have a network in all contact, in the systems, to reach out to 700 plus marinas.

And of course that's actually part of the battle when you are doing a new product introduction is how do you get access to all those folk. Well, this is what we can get by working closely with ValvTect. We both win is what the anticipation would be. Over the next couple of quarters, though, our isobutanols -- we have made isobutanol; it's in inventory. We already have allocated it out. So we'll do some work distributing it. We won't be ramping up to sell more isobutanol until we get our distillation columns installed at the end of the first quarter, beginning of second quarter.

So, Mike, do you want to add comments here?

Yes, I would say -- as you recall our conference call in September, where we walked through the capital improvements and what that's going to be in terms of isobutanol volume at Luverne. I would say a big, lion's share of that ramp from the 100,000 gallons that we're talking about in 2015 versus the 750,000 to 1 million gallons in 2016 -- a big component of that ramp we expect to be from the marina market. As Pat describes, it is a fragmented market and so having a partner like ValvTect can help in distributing the product to that fragmented market.

Got it. So this is more like the second half of 2016, where we'll actually see some material revenues from this, potentially?

Depending on when the equipment is actually installed and how quickly we're ramping up off of that, then you can anticipate some marina sales obviously in Q2 as well.

Okay. Got it. And has work started for all the refurbishing it needs at Luverne?

It has.

Okay. And in relation to the ASTM related requirements from a certification point of view, you commented this was expected to happen end of 2015. Now it's pushed out to 2016, early 2016. I know you can't control a lot of this, but do you think it potential gets delayed further than that? It seems it really does not have too much of a bearing, given we are still ramping up all of the production side of things as well. But any risks with this getting delayed further out? And how you need to set it up in relation to distribution partners, etc.?

Sure. So, related to distribution partners, it's not relevant. So that doesn't matter, because it's still doing the test quantities and all the rest. As far as the time line, where we've been is that there was this Army report that got held up and it was in the OMB somewhere, and then it eventually turned up. And now that finally escaped. Once people got back from vacation in September and then they put it on the committee ballot. The committee ballot is out right now. We don't know of any issues, we don't anticipate any issues, we haven't met anybody who thinks there's any issues.

That doesn't mean that there couldn't be issues that pop up. But it will be something -- if it did, it would be extraneous and extremely unusual at this point because it's been exhaustively tested over the last five, six years, or whatever it is. So the data is all in. Once the subcommittee votes and approves it, then we'll move to before ASTM committee. That will be in December is what it's targeted for, beginning of December. Now, once that happens it's out for vote for 30 days. So that means the earliest it could be is sometime in January is when it gets final approval. That's the earliest.

If it gets hung up by -- suppose there's some concern that someone raises somewhere for some reason, then it would get delayed a bit. But we can't predict those sorts of things. It shouldn't happen. There's no reason to believe it will happen, but this is not something that we control, as you point out.

Right. Understood. And just lastly, it looks like you indicated that hydrocarbon revenues should bounce back from a modeling point of view. Should we be looking to bring revenues from that segment back in line with historical levels for the next few quarters?

Correct. There is lumpiness as it relates to that business because it's purely based off of shipments. The same thing occurred with the jet fuel. So we did have a little bit of lumpiness historically, but on an average basis you should see the revenues pop back up to similar, if not even higher levels.

Got it. Thank you. That's all I have. Thank you.

[Thomas Boyce], Cowen.

Hi, Thomas Boyce on for Jeff Osborne. I just have one question. Given the tough crush spreads for ethanol, how has this affected the ethanol and isobutanol production plans going forward? Could you see converting further fermenters to isobutanol down the line if the spread doesn't improve?

Well, so the quick answer is we will deploy this first capital first, and get the plant back up and running, end of Q1, early Q2. And then on the back of that data, depending on what ethanol margins are like, and obviously the contribution margin we're getting on the isobutanol front, that will play a big part in terms of what we do with the plant going forward.

Great. Thanks.

It looks like we have no further audio questions at this time.

Great. Thank you all for joining us on our call. Have a good evening. Bye-bye.

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