Gevo Inc (GEVO) 2016 Q2 法說會逐字稿

Welcome to the Gevo, Incorporated, Q2 2016 earnings conference call. My name is Adrian and I will be your operator for today's call. (Operator Instructions) Please note this conference is being recorded.

I'll now turn the call over to Geoff Williams. Geoff Williams, you may begin.

Good afternoon, everyone, and thank you for joining Gevo's second-quarter 2016 conference call. I would like to start by introducing today's participants from the Company. With us today as Pat Gruber, Gevo's Chief Executive Officer, and Mike Willis, Gevo's Chief Financial Officer.

Earlier today, we issued a press release which outlines the topics that we plan to discuss today. A copy of this press 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 today's call will be available on Gevo's website.

On the call today and on this webcast you will hear discussions of certain 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 and which is posted on our website.

We will also make certain forward-looking statements about events and circumstances that have not yet occurred including, but not limited to, projections about Gevo's operating activities for the remainder of 2016 and beyond. These forward-looking statements are based on management's current beliefs, expectations, and assumptions and are subject to significant risks and uncertainties, including those disclosed in Gevo's Form 10-K which was filed with the US Securities and Exchange Commission, or SEC, on March 30, 2016, and in subsequent reports and other filings made with the SEC by Gevo, including Gevo's quarterly reports on Form 10-Q.

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's disclaims any obligation to update information in these forward-looking statements whether as a result of new information, future events, or otherwise.

On today's call, Pat will begin with a review of Gevo's recent business developments. Mike will then review Gevo's financial results for the second quarter of 2016. Following the presentation, we will open up the call for questions. I'll now turn the call over to Pat.

Thank you, Geoff. I would like to start by giving you a brief update on Luverne and our operational production status and progress, after which I'll provide you with an update on our efforts in the jet fuel market, followed by an update on the specialty fuels market, and then add some comments about our new partner, Clariant. Mike will then provide a detailed financial review of the quarter and we'll open it up for Q&A.

So first, Luverne. The distillation system is now complete at Luverne and the entire production process is operating. The technology is working across the whole process.

The fermentation process at Luverne is going well, and we are particularly pleased with that progress. In fact, we've seen one of our batches exceed the upper end of our production range of 20,000 gallons, and that's a great result. On the cost side, we remain on track to hit all of our targets.

Now the distillation system, as I mentioned last quarter -- we were just in the midst of starting it up and working with it, optimizing it -- it did give us some trouble. It's now working and producing product on spec.

After starting up that distillation system in March, as we integrated the process streams from the whole plant, we found that some impurities didn't go where we thought they would, or at least in the quantities that we thought they would, and instead some of them went into our product. In order to make the isobutanol in-spec we had to reprocess, using our distillation system.

It slowed us down because we had to use the fermenter as the hold tank for the reprocessing, as we didn't have another tank to use. I guess we penny-pinched a bit too much in that case.

This meant that we were unable to start a new batch while we reprocessed the prior batch. To fix the issues, we had to move some pipes, add some other equipment. However, there were delays in the delivery of some of that new equipment, a certain pump in particular; and that slowed us down.

The good news is that we are no longer reprocessing. We can make product in in-spec in a single pass with no reprocessing, the way the system was designed to work. It's important to note that we've only been running this completed system for a short time; and at a very practical level, we are still learning to run it well.

We still have work to do to ramp up production. We believe it to be mostly learning curve type issues, though, to work through.

For example, we want to reduce the cycle times between batches. That's a straightforward learning curve thing and takes practice.

Or, another example: learning to start and stop the distillation system. Well, that takes practice.

Each month we expect to improve, leading us to higher run rates. It's worth noting that in the last 70 days or so we produced about 70,000 gallons of isobutanol, whereas in the 30 days prior to that we produced about 30,000 gallons. So we're learning.

All of that said, we can already tell from the testing, the unit operations at the plant, from the unit operations at the plant they should be able to achieve the design capacities of 1.5 million gallons per year run rate. But we haven't -- we still have to do a lot of work to become truly excellent at running these unit operations and do them all together.

The work around the Luverne process is, of course, focused on optimization. Now, as we work through optimizations, we are looking at what works well for the scale we are at and, in particular, we are looking at what works well with a view to greatly expanding Luverne. We're starting to turn our attention to expanding Luverne.

We also plan on occasionally testing equipment at Luverne that will aid us in the design of the expanded Luverne, or a second plant. And as we do that work, we might occasionally skip batches. And when we skip batches, of course, we're running fewer gallons of isobutanol.

Because of the market interest in hydrocarbons, jet and isooctane, we see that there are opportunities to more closely integrate the hydrocarbon process and the isobutanol process. Doing so could reduce costs from a CapEx and OpEx perspective in a full-scale hydrocarbon operation.

We want to make sure that we understand this whole process as best we can. Therefore, we are planning on optimizing an isobutanol production specification and grade specifically for isooctane and jet fuel. If and when we work on a grade of isobutanol for hydrocarbon production, we may occasionally have to skip batches of isobutanol; and that, of course, would cause us to produce fewer gallons in a given month.

Because the installation and startup of the modified distillation system was delayed by about six weeks, and because we plan on occasionally skipping batch cycles while we work on the hydrocarbon grade or because we're doing testing on equipment aimed at reducing capital costs and operating costs for an expanded Luverne operation, we are adjusting our guidance for overall gallons produced in 2016 to a range of 500,000 to 650,000 gallons.

Moving forward, we continue to stay focused on optimizing the production systems to increase the isobutanol production volume, while simultaneously working towards decreasing our production costs and improving robustness and consistency of the production process. Again, we have a strong view to much larger capacity for isobutanol and hydrocarbons built at Luverne.

For the third quarter, we want to turn around more batches in a given amount of time, with the ultimate goal of producing a full batch of isobutanol every five to six days. We have seen enough from the operation of the new equipment that we expect to hit our revised production goals. At the end of the day, we expect to have the most efficient and lowest cost commercial source of isobutanol in production.

I would now like to move on and speak a bit about a couple of key corporate highlights for this quarter. Next is the jet fuel market. Now, I know many of you have questions about the commercial flights with our partner, Alaska Airlines. First off, remember, this wasn't a test flight. The testing had been done with ASTM over a period of about the previous six years.

I had the pleasure of being at the airport for the joint press conference. I met the passengers and joined them on the first commercial flight using our ATJ; that's the alcohol-to-jet fuel. As a reminder, the first flight departed from Seattle and flew to San Francisco.

It was extremely pleasing to see the responses from other passengers on that flight. When it was announced by the gate that the flight was using renewable fuels, people actually applauded and cheered.

While on the flight I was approached by many passengers who had questions and wanted to shake my hand. It was really a lot of fun.

Because it took so many years to get to this point in designing a viable technology with the economics and potential to make it mainstream, actually flying on it was very gratifying and humbling. It was a very fun achievement.

As you know, on that same day Alaska Airlines also flew from Seattle to Washington, DC, with our ATJ. The first commercial flights were certainly a high-profile milestone in Gevo's history, and we are thrilled that we have reached this important strategic point in our Company's history.

We believe that the airline industry is rapidly moving to self-regulate their emotions, and renewable jet fuel is expected to be a major part of that initiative. The greenhouse gases from airlines have not yet been regulated.

Now, because airlines across so many geographies, it would be a regulatory disaster for airlines if each geography set its own greenhouse gas requirements and forced the airlines to comply. The airline industry has wisely decided to take on themselves to self-regulate greenhouse gas emissions with the intent of avoiding a patchwork quilt of regulation.

Even though the airline industry is pursuing self-regulation, it is also likely to feel more regulatory pressure despite its efforts. For example, near the end of July the EPA finally publicly announced that aircraft emissions contribute to climate change and endanger public health and the environment. These guys are under pressure.

So we see a significant interest in our jet fuel, and we're having several constructive discussions with multiple potential partners in the aviation industry. These discussions with potential customers and partners are focused on: How do we get from our 1.5 billion gallon plant scale for isobutanol to a very large-scale plant that produces isobutanol and that converts that isobutanol into jet fuel?

We continue to believe we have the most scalable and economic technology to produce jet fuel, and I think our customers see that. We are working on gaining offtake customers to support a larger plant and we have begun planning for that plant at Luverne.

Next I'll turn my attention to specialty fuel markets. These are gasoline blendstock markets.

I'll give you an update on marine and off-road. Now, we continue to see an increased interest in our products as they become more established in the market.

As you all know, the National Marine Manufacturers Association has endorsed the use of Gevo's isobutanol in the marine fuel market and the off-road market because of its many superior properties. Not only does our isobutanol product prevent moisture absorption and phase separation, it also reduces engine corrosion while providing a higher energy content with a high octane rating.

This basically means that there is less wear and tear of marine engines and small engines from isobutanol-containing gasoline when compared to ethanol. Less wear and tear on the small high-performance engines means that they last longer and require less maintenance. That's something the customer values.

It will be interesting to see future developments as customers get used to our products and the experience and the many benefits hands-on. It's an interesting market for Gevo. Isobutanol's properties are valued, and we look forward to seeing what this market has to offer short-term as we continue to work on ramping up production at Luverne.

During this quarter, we signed a supply agreement with a national fuel distributor, Musket Corporation, in mid-July. The supply agreement is for isobutanol-blended gasoline for marine and off-road markets, and we are very excited to have Musket as a partner to further expand the use of isobutanol and get our blended gasoline directly available at the pumps.

The initial targets for Musket are retail pumps at Lake Havasu in Arizona, followed by other large marine markets such as Lake Powell and Lake Mead. And there will be other targets, too, that we'll announce in the future.

It is important to have our products available directly at the pumps -- makes it easier for customers to buy. And this is more than the pumps just at marinas. Customers are looking for a bio-based product with high octane but don't want the problems associated with ethanol-blended gasoline.

Musket and the others are focused on having our isobutanol available directly at the pumps, and it's gratifying to see that customers actually want the product. It's in demand.

So we're pleased with our collaboration with Musket, and I'm happy to share that Musket is an excellent partner and we're moving along rather quickly. We shipped our first railcar to them, and they are moving it through their distribution channels.

We are also hopeful that Musket will take more and more product as production at Luverne ramps up. We expect them to take more and isobutanol gasoline becomes more established in the marketplace. Musket is very active with our product, and I hope to be able to tell you a lot more about what they are doing in the near future; it's exciting.

Next I would like to speak to you about our new partner for this quarter, Clariant. In May we announced an agreement with Clariant Corporation, one of the world's leading specialty chemical companies, to team up to further develop catalysts for a technology that converts ethanol-to-olefins, things like propylene. We've mentioned this on previous calls.

As a reminder, Gevo's ETO technology, that's the ethanol-to-olefin technology, uses ethanol as a feedstock to produce tailored mixes of propylene or isobutylene along with fully renewable hydrogen. These things are valuable as standalone molecules or as feedstocks to produce other products such as diesel fuel or commodity plastics -- maybe exact drop-in replacements for their fossil-based equivalents, except for these would have renewable content instead.

Clariant is the catalyst company and they have the capability and knowhow to scale up our developmental program and customize the catalysts to better enable commercialization. They're going to make the catalyst work -- they're going to take our catalyst and develop it into a commercial catalyst.

We're pleased that they stepped up for this and are putting their resources behind it. We believe it to be a validation of the potential of the technology, since they did commit their resource to make it happen. It also means that this technology can continue to scale up, while we focus our efforts here at Gevo on our core business of producing isobutanol and the hydrocarbon products like jet fuel and isooctane.

Now, on May 31, 2016, we announced that we commenced the review of strategic alternatives. The Board of Directors and its advisors have established a process for outreach and engagement with current creditors and interested strategic and financial parties. The process is ongoing, and we expect to update the market with our progress in the near future.

Although we were able to raise a significant amount of cash in this quarter through warrant exercises and the common stock offering, we still need to solve for the nearly $50 million of debt outstanding represented by the 2017 and 2022 notes before March of 2017.

In summary, we are very pleased with the progress we've made this quarter across all of our key markets. Even though we lowered our 2016 production guidance for isobutanol at Luverne, we feel that we are still on track with the new systems. We're slightly delayed for the reasons I already mentioned.

2016 is an incredibly important inflection point for Gevo, and I want to thank all of our stockholders for their continued support. With the progress we hope to make at Luverne by year-end, the specialty fuel markets providing short-term commercial opportunities, and the increased traction we are seeing in jet fuel market, I believe that we are well on our way to executing our strategic plan and enhancing shareholder value.

With that I would like to turn it over to Mike. Mike?

Thank you, Pat. Gevo reported revenue in the second quarter of 2016 of $8.1 million as compared to $8.9 million in the same period in 2015. The decrease in revenue during 2016 is primarily a result of the production and the sale of approximately $7.2 million of ethanol, isobutanol, and distillers grains at the Luverne plant as compared to $8 million in the second quarter of 2015. This change was principally a result of lower ethanol production, ethanol prices, and distillers grain prices in the second quarter of 2016 versus the same period in 2015.

During the second quarter of 2016, hydrocarbon revenues were $0.7 million, basically flat as compared to the same period in 2015. Gevo also generated grant revenue of $0.2 million during the second quarter of 2016, which was also flat as compared to the same period in 2015.

Cost of goods sold was $10 million in the second quarter of 2016 versus $9.9 million in the same period in 2015. Cost of goods sold included approximately $8.5 million associated with production of ethanol, isobutanol, and related products and approximately $1.5 million in depreciation expense.

Gross loss was $1.9 million for the second quarter of 2016 versus $1 million for the second quarter of 2015.

R&D expense was $1.5 million in the second quarter of 2016 compared to $1.8 million reported in the second quarter of 2015. R&D expense decreased in the second quarter of 2016 compared with the same period in 2015 due primarily to a reduction in employee-related expenses.

SG&A expense for the second quarter of 2016 decreased to $2.1 million compared to $3.8 million for the comparable quarter in 2015. SG&A expense decreased in the second quarter of 2016 compared with the same period in 2015 due primarily to a decrease of $1.3 million in litigation legal expenses.

Within total operating expenses for the second quarter of 2016, we reported approximately $0.2 million for noncash stock-based compensation. For the second quarter of 2016, we reported a loss from operations of $5.5 million, down $1 million from a loss from operations of $6.5 million in the second quarter of 2015.

In the second quarter of 2016 cash EBITDA loss, a non-GAAP measure which is calculated by adding back depreciation and noncash stock-based compensation to GAAP loss from operations, was $3.6 million compared with $4.6 million in the same quarter of 2015, representing a decrease of $1 million from the same period last year. Recall that last September we reported that we were targeting an average quarterly cash EBITDA loss of $3.5 million to $4.5 million per quarter in 2016, and we were in the bottom half of this range in the second quarter of 2016.

Interest expense for the second quarter of 2016 was $2.2 million, which was an increase of $0.2 million over the same quarter last year. During the three months ended June 30, 2016, we incurred a loss of $10.6 million from a change in the fair value of the derivative warrant liability. We also recognized a $0.9 million loss as a result of changing the exercise prices of certain of our warrants during the period.

During the second quarter of 2016 we incurred a noncash loss of $0.9 million due to the quarterly mark-to-market valuation of the 2017 notes. There was no change in the value of the embedded derivatives in the 2022 notes, as derivatives have had no meaningful value since the third quarter of 2014. No holders of Gevo's debt converted or exchanged any notes during the quarter.

During the three months ended June 30, 2016, we reported a $1.5 million loss associated with the April equity issuance, primarily as a result of the estimated fair value of the common stock and warrants issued being greater than the consideration received in exchange. For the second quarter of 2016 we reported a net loss of $21.5 million or a loss of $0.44 per share, based on a weighted average shares outstanding of 49,085,638. This compares to a loss of $14.4 million in the second quarter of 2015 or a loss of $1.10 per share.

In the second quarter of 2016, Gevo recognized noncash losses totaling $14 million due to changes in the fair value of certain of our financial instruments such as warrants, convertible debt, and embedded derivatives.

Adding back these noncash losses resulted in a non-GAAP adjusted net loss of $7.5 million in the second quarter of 2016, or a non-GAAP adjusted net loss per share of $0.15. This compares to a non-GAAP adjusted net loss of $8.6 million in the second quarter of 2015, or a non-GAAP adjusted net loss per share of $0.66.

Over the quarter, we raised gross proceeds totaling approximately $23.8 million through public offerings of common stock and warrants as well as through the exercise of warrants. In June, we closed a best efforts public offering of 21,080,456 shares of common stock at $0.45 per share. We received gross proceeds from this offering of approximately $9.5 million.

In April, we completed the sale of 3,721,429 Series C units and 6,571,429 Series D units pursuant to an underwritten public offering. Gevo received gross proceeds of approximately $3.5 million.

Also, during the quarter, Gevo received proceeds of approximately $10.8 million through the exercise of warrants. Approximately 36.3 million shares were issued through these exercises.

As a result, at quarter end our cash on hand was $22.6 million and we had 89,234,771 shares outstanding.

Lastly, on July 26, 2016, the NASDAQ Stock Market granted Gevo an additional 180 calendar days, or until January 23, 2017, to regain compliance with the $1.00 per share minimum required for continued listing on the NASDAQ capital market. The NASDAQ determination to grant the second compliance period was based on Gevo meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on the NASDAQ capital market, with the exception of the bid price requirement, and our written notice of our intention to cure the deficiency during the second compliance period by effecting a reverse stock split if necessary.

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

Thanks, Mike. I would like to thank you all for your continued interest and support in Gevo. Let's open up the call for questions.

(Operator Instructions) Jeff Osborne.

Good afternoon, guys; thanks for taking the questions. I might have missed this, but did you give us what the total gallons produced of ethanol as well as isobutanol in the quarter?

On the ethanol side, we sold just under 4 million gallons.

Okay.

In the quarter; and then on the isobutanol side, we sold or produced 80,000 gallons.

80,000? Okay. Then how do we think about the ramp? You gave some metrics of runs and a gradual ramp-up there, Pat, in the prepared remarks, which is very helpful.

But how do we think about gallons expectations for the third quarter versus the fourth quarter? I assume it's a pretty back-end-loaded year with the revised guidance.

Well, as an example, since the end of -- or the beginning of Q3, we've already produced 70,000 gallons.

Okay.

So over the first month and a few days here in August. So, yes, there will be a ramp where we would anticipate Q4 having more gallons than Q3.

One of the things I mentioned on the call is the -- or in the prepared remarks was that we already can see that the unit operations themselves have the capacities that we intended. So that's all good.

We just have to get -- it will be short -- right now we're at about a seven-day cycle time between batches, working our way downward. And we'll run it -- the plant does run better when we run closer batches.

^ Got it.

We don't have to start and stop the distillation system then.

^ Right. Then you mentioned that you were using the fermentation tank as a holding pattern. Can you just give a sense of scope of, A, how long the plant was underutilized; and then the duration of period waiting for the pumps and equipment to show up?

It was about a six-week delay. And what happened was that -- yes, we started up, it was running, and we were intermittently in-spec. But when you have a -- we have one big finished product tank. And as soon as we saw that our product was not in-spec, we had to divert it, because you don't want to contaminate the whole big tank.

^ Got it.

So then what we did, the only tanks that are big enough in the and are our fermentation tanks, so we pumped it back to a fermentation tank, and then used that and then redistilled. So we just used the same distillation equipment.

It was just that -- and then confirmed that it was in-spec before we put it in the final product tank. Ideally we would have had a separate intermediate tank; we just didn't have the money to spend on it at the time.

Understand. The last two questions I had is just can you give us an update on Praj? Then I appreciated the comments in the prepared remarks on Clariant, but maybe just a sense of expectations or realistic process of when something could potentially be tested and commercialized there?

They already are able to do the fermentation and run a GIFT system at their site. So they continue to make progress, and they are learning how to run it on sugar and molasses.

So, they've taken our bug, taken our process, able to replicate our results. That's the first big step, right?

Excellent. Then anything on the Praj side?

That was Praj.

Oh, that was? I thought you were -- I was asking about Clariant, sorry. I was mixing up the two. I had asked about both, so I wasn't sure -- you gave the (multiple speakers) on the Clariant side.

Yes, yes, yes. Okay, so, first that was -- so I just said about Praj, that they've been able to take it on their spec.

Yes, Clariant has been able to scale up the catalyst and they are working through it. That's an iterative process. We'll go back and forth with them. But yes, we're already making progress with it and have some things that are interesting.

And what's cool about this is that in this kind of a commercialization of this kind of technology it takes very few resources on our part, because we already did the fundamental stuff. So what we need is this commercial catalyst.

So catalysts, they are a particular formulation of chemistries; in other words, the chemicals that form the catalyst. But it also has to be put into the right form, and I'm talking about shape and particle, for it to work on a commercial basis. So that's what Clariant is working on.

So we continue to make progress there. And that technology is interesting because it's one of the few ways that we've seen from anyone that has the ability to make a, for instance, propylene plus hydrogen [produced] and be economical to do it.

Makes sense. Good to hear. I appreciate all the comments.

Amit Dayal.

Thank you. In terms of the isobutanol shipment, are we shipping everything we are producing? Are we holding any in inventory?

When we get it certified it gets in the railcars, generally.

Yes, so we've been shipping out products either to customers or down to, obviously, South Hampton where we continue to produce our isooctane and jet fuel.

Understood. In regards to -- and I'm sorry if I missed this; I've been on multiple calls. On the ATJ front, what are the next steps in maybe moving this to slightly higher volumes? Any color on that would be helpful.

Yes, I'm glad you asked that. Because I mentioned it a couple times in the prepared remarks, and it's good to amplify it in case it didn't come across. That a lot of the work that we're doing at Luverne is looking to -- we'll be looking to make sure we understand it well so we can expand Luverne significantly with the intent of ultimately producing alcohol-to-jet at that site. That's what we'd like to be able to do.

We see enough commercial interest on the alcohol-to-jet front, so we're working on the customer agreements to make sure that we get those buttoned down in order to make it happen. So yes, we see that there's a lot of interest and we're working on it.

We think that the right place to produce that in large scale is at Luverne. So when we talk about reducing even our run rates for isobutanol, there will be times when we are doing particular pieces of work specifically to make sure that we understand what a big upscaled Luverne plant would look like.

Now, to get to be a good breakeven or profitable company, we want to see Luverne ultimately switched over to produce isobutanol and then to bring that isobutanol to jet fuel. That's what the future looks like and how we think about it.

Understood. In regards to these bigger distributors you had signed up over the last few months, like Musket, etc., what's the feedback from them in terms of the product you are putting out in the market? Any insight from their side in terms of how they think demand for this product will shape up over the next few quarters? Any color on that would be helpful. Thank you.

Yes. What I expect to see is a ramp up. We see interest, and so we'll be able to talk more about it in the future.

Musket is a private company. They are one of the Love's; I don't know if people are familiar with that Love's retail, but Musket is owned by Love's, and I think they're one of the largest companies in the country. But they are private, so they like to do the things first and then tell people about it afterwards rather than indicating what they are doing.

But I can tell you this: they are interested and it's growing.

Thank you. That's all I had.

And we have no further questions. I will now turn the call over to Geoff Williams for final comments.

Okay, and then Pat Gruber steps in. But yes, thanks, everybody, for joining us; I appreciate it. Thanks for your interest in Gevo. Have a good afternoon and evening. Bye.

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