Gevo Inc (GEVO) 2017 Q4 法說會逐字稿

Welcome to the Gevo, Inc. Fourth Quarter 2017 Earnings Conference Call. My name is Brandon, and I'll be your operator for today. (Operator Instructions) Please note, this conference is being recorded.

And I will now turn it over to Geoffrey T. Williams, Jr. Sir, you may begin.

Good afternoon, everyone, and thank you for joining Gevo's Fourth Quarter 2017 Earnings Conference Call.

I would like to start by introducing today's participants from the company. With us today is Pat Gruber, Gevo's Chief Executive Officer; and Bradford Towne, Gevo's Chief Accounting Officer.

Earlier today, we issued a press release that outlines the topics 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 in 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 2018 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 for the year ended December 31, 2017, which will be filed with the U.S. Securities and Exchange Commission on or about March 28, 2018, and in subsequent reports and other filings made with the SEC by Gevo, including our 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 disclaims any obligations to update information contained 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 discussion of Gevo's business developments. Bradford will then review Gevo's financial results for the fourth quarter of 2017. Following the presentation, we will open up the call for questions.

I'll now turn the call over to Pat.

Thank you, Geoff.

I'll now talk about some of the highlights of the quarter and the year. I'll start by mentioning at the beginning of the year of 2017, we saw just a few ethanol free gasoline pumps at retail locations, but by the end of the year, this number had grown to almost 200 different pumps. This gave us all confidence to expand our relationship with Musket.

Now, along the way, we did a market study for the niche market where our product might be particularly valued. A company called Stillwater and Associates, they're pretty well-known in the space, did the work. They found that the total ethanol free market is estimated at about 7 billion gallons in the U.S. alone. That's not a bad-sized niche. About 2 billion gallons of that estimated market is in RFG areas. Those are the areas that require oxygen at -- in gasoline. As you all know, those RFG areas, they are our current focus. This specialty, this large niche market does have the hassles of a specialty market in setting up distribution, but we think the payoff would be worth it in the end.

Second, we have been developing the EU market for isooctane. Isooctane is used for renewable gasoline, among other things. Isooctane really is the octane of gasoline, the major component in gasoline. We've been able to sell the entire volume produced at our demo plant. Of course, you know that we have Haltermann Carless as a customer, both from the demo plant and they also made a commitment to purchase from our expanded plant once we build out Luverne. We also have BP, Total, BCD Chemie as customers.

Based on the interest and the prices customers are willing to pay for isooctane, we believe that there is a strong market for the products. The prices are encouraging and show that there really is demand. We are told that our products currently are being sold for gasoline, in part for F1 racecars, that requirement of having a renewable component in their gasoline.

We think there's an opportunity to expand the isooctane capacity in sales for this niche from the demo plant in 2018. We will also be working to pin down how big that market can be and at what price, with an eye towards large volume and then secure more offtake agreements.

As a third highlight, I'd like to speak about Fly Green Day at Chicago O'Hare Airport on November 8. During the Fly Green Day, Gevo's alcohol-to-jet fuel was used across the airport with multiple different commercial airlines.

The purpose of this day was to show that logistics and costs would be similar to petro-based fuel. A key question on customers' minds had been how much would it cost to get alternative jet fuel into the system? And we were told by customers that getting an alternative fuel into the airport and into planes could cost as much as $1 a gallon and upwards, maybe even several dollars a gallon, depending upon how much handling and segregation is required. The Fly Green Day was a project to figure out those details of logistics and costs and also to get companies to fly on our jet fuel.

Now, in order to get the fuel into the system, it had to be delivered to a tank farm and blended. After the fuel was blended, it needed to go through a certification process then piped to tanks and on port -- on-airport storage. Once it's on the airport site in the tanks, then we pumped out the hydrogen to fuel trucks then take it to the planes.

Now, a key point in understanding this is that once our fuel is blended with a petro product, it is indistinguishable from petro jet. Yes, our carbon is renewable, but in fact, as far as the performance goes and certifications go, it's -- once it's blended, it's all the same, completely fungible.

In order to get this project done, I have to point out that it took full cooperation of all the parties involved. This included the refiners, pipeline companies, tank farm owners, all the airlines who bought fuel at O'Hare Airport and others. All parties involved had to agree to cooperate, and I would like to mention that any one of these parties involved could have vetoed it anytime. They didn't. Many people believed that it wouldn't be possible to get alignment and cooperation from all the various parties in the supply chain, but we managed to prove them all wrong.

In total, it took a cooperation of 20-plus companies to get our fuel into O'Hare Airport. Air BP, Kinder Morgan, ASIG all helped with the infrastructure, blending and testing. Lufthansa played a key role -- leadership role in making it all happen. Lufthansa, United, Cathay Pacific, JAL, Etihad, Korean Air, Atlas Air and FedEx all bought our fuel for commercial flights. While 9 companies paid for the fuel that day, the potentially -- the fuel potentially went to all the flights that took off at O'Hare that day. Once our ATJ is blended with conventional jet fuel, it is 100% fungible with pure conventional jet fuel as I already mentioned. Now, the 9 companies that paid for our fuel, they received a public credit for it.

We believe that this was the first time that an alternative jet fuel like ATJ have been put through the whole system, including the on-airport tanks, the hydrogen systems, the off-airport tanks' pipelines. It was a milestone that matters to everyone involved in the supply system since we learned that it is possible to transfer our specialty fuel through the current distribution channel. We are pleased to note this can be done if all the parties cooperate to make it happen. Most importantly, we showed that the cost to blend and certify the fuel is only a small fraction of $1, not the $1 to $3 per gallon that people talked about.

I'm happy to announce that we are working on a similar project with Virgin Australia at the Brisbane Airport. Since Fly Green Day, we have been in discussion with additional potential off-takers and we are working through negotiations.

Next, I would like to provide you with an update about Praj Industries. In July, Praj announced they are ready with the process design package to take out the licensees. They successfully adapted our technology so that it can be used in sugar mills. In the fourth quarter of 2017, we refined the engineering details, Praj has identified a couple of initial licensees, we've been in discussion with them, we finished the negotiations and commercial license agreements, and we're making progress plugging along. We expect to get the license done in 2018, but we just don't know exactly when.

We're also excited about the continued improvements we're making in our isobutanol process. We're glad to share that we achieved our cost goals for the variable cost of isobutanol and our plant ran well on isobutanol. In fact, we made enough improvements so that we can cut back on development resources, which brings me to the next point.

As you all know, we've been working on extending our runway. We shifted gears last year when it became clear that the contracts for hydrocarbon products, particularly jet fuel, are taking longer than expected to complete. Even though we had been making progress with several different customers, the contracts just aren't done yet. Since we depend upon their time lines, I'm loathe to make productions as to when they will happen even though we expect that they will happen in the future.

Now, in summary then, we accomplished our cost goals for isobutanol production. We produced the quantities of isobutanol we wanted for inventory, which means that we already have accomplished most of the development work around IBA and our yeast. In addition then, Gevo doesn't need as many development employees so we decided to let them go. By running up an inventory of isobutanol in 2017, we expect the inventory will be sufficient to carry us through the majority of 2018, if not all. Since we no longer need to run IBA in the year 2018, the Luverne plant can be used more optimally. It also means we could focus on the production of ethanol and in improving the general process improvements that add value and will benefit both ethanol and isobutanol at that site.

Overall, we expect to reduce our burn in 2018 by 30% or more compared to 2017. If you compare the fourth quarter of 2016 to the fourth quarter of 2017, you see that we cut our loss from operations by $1.7 million. Across the year of 2018 with the improvements we hope to make at the plant, we would expect our monthly burn rate to further improve and hopefully be reduced each quarter. I don't have a clear enough view yet to give any specific guidance.

Also, as you all know, we are subject due to fluctuations of commodity prices like corn, RINs and ethanol price for example. In addition, we have the opportunity to sell more hydrocarbon products out of the plant in Silsbee. Considering our cost reductions across the company and what we expect to occur at Luverne short-term, together with some revenue and margin pickups out of Silsbee, we believe that our cash flow situation will significantly improve compared to where it's been in the past.

I hope to be able to talk in more detail within the near future about what we are doing at Luverne. I'm excited that we can now see a way to bring our company to profitability in the not too distant future without having to build out isobutanol and hydrocarbons at large scale, although that does remain our ultimate goal. We are leaving no stone unturned, and we still have work to do in front of us to make it all happen.

Some of you have heard various reports of renegotiation of the RFS brokered by the Trump administration. I've gotten questions about this. While there was one meeting at the White House and some discussions, there were additional meetings planned, but they were canceled. We are told that the issue has been sent back to Congress to work out its normal course through legislation. I don't expect anything material to happen this year.

Now, of course, as we work to extend our runway and improve profitability at Luverne, we need to keep pushing the market and commercial development of isobutanol, jet fuel, renewable gasoline, isooctane, isobutylene and other products made with our technology. We're also keen on getting additional strategic deals done.

So in conclusion, we believe that we've made progress on extending our runway. We continue the work to extend it further. We plan on getting our hydrocarbon deals done. I just believe it is a question of timing. We plan continuing the -- to expand our distribution regions for isobutanol outside of the Houston region. We plan on optimizing our plant in Luverne to further improve its cash flow and we inspect -- we expect to improve our balance sheet as well.

Now, I'll turn the call over to Bradford, who will take us through the financials. Bradford?

Thank you, Pat.

Gevo reported revenue in the fourth quarter of 2017 of $6.7 million as compared to $5.8 million in the same period in 2016. The increase in revenue during 2017 is primarily a result of the production and sales of approximately $6.6 million of ethanol, isobutanol and distillers' grains at the Luverne plant as compared to $5.3 million in the fourth quarter of 2016. This increase in revenue was mainly due to higher ethanol production and distiller grain prices in the fourth quarter of 2017 versus the same period in 2016. During the fourth quarter of 2017, hydrocarbon revenues were approximately $50,000, which is $0.4 million lower than in the same period in 2016, principally as a result of the shipment of less isooctane this quarter.

Cost of goods sold was $9.3 million in the fourth quarter of 2017 versus $8.2 million in the same period in 2016. Cost of goods sold included approximately $7.8 million associated with the production of ethanol, isobutanol and related products and approximately $1.5 million in depreciation expense.

Gross loss was $2.3 million for the fourth quarter of 2017 versus $2.3 million for the fourth quarter of 2016.

R&D expense for the fourth quarter of 2017 decreased to $0.9 million compared to $1.5 million reported for the comparable quarter in 2016. This was due primarily to a $0.4 million decrease in salary and related expenses.

SG&A expenses for the fourth quarter of 2017 decreased to $1.3 million compared to $2.6 million for the comparable quarter in 2016. This was due primarily to a $1.1 million decrease in salary and related expenses.

Within total operating expenses for the fourth quarter of 2017, we reported approximately $0.1 million for noncash stock-based compensation. For the fourth quarter of 2017, we reported a loss from operations of $4.8 million, down $1.7 million from a loss from operations of $6.5 million in the fourth quarter of 2016.

In the fourth quarter of 2017, 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 $3.1 million compared to $4.7 million in the same quarter of 2016. Recall that we reported that we were targeting an average quarterly cash EBITDA loss of between $4.5 million to $5.0 million per quarter in 2017 and we ended up averaging just over $4.0 million per quarter for 2017.

Interest expense for the fourth quarter of 2017 was $0.8 million, which was down $0.5 million as compared to the same quarter last year. The decrease was primarily due to the lower principal balance on our debt obligations in 2017. As a result of the 2022 notes, $8.9 million of debt for equity exchanges we completed in 2017, combined with our paydown of approximately $9.6 million of our senior secured debt during the first quarter of 2017.

It's important to remember the significant progress we made during 2017 to improve our balance sheet. At the beginning of 2017, Gevo held approximately $35.7 million of debt due or puttable during the 2017 fiscal year. During 2017, we paid down approximately $9.8 million of outstanding debt, exchanged approximately $8.9 million for equity, refinanced $16.5 million and let a put option of approximately $0.5 million expire such that at the end of 2017, there was no outstanding debt due until at least 2020.

During the fourth quarter of 2017, we incurred a noncash gain of $1.2 million due to the quarterly mark-to-market valuation of the 2020 notes' embedded derivative liability. There was no change in the value of the embedded derivatives in the 2022 notes as the derivatives have had no meaningful value since the third quarter of 2014.

For the fourth quarter of 2017, we reported a net loss of $4.4 million or a loss of $0.20 per share based on a weighted average shares outstanding of 21,606,051. This compares to a loss of $2.3 million in the fourth quarter of 2016 or a loss of $0.33 per share.

In the fourth quarter of 2017, Gevo recognized a net noncash gain totaling $1.2 million due to changes in the fair value of certain of our financial instruments such as warrants and embedded derivatives. Adding back these noncash gains resulted in a non-GAAP adjusted net loss of $5.6 million in the fourth quarter of 2017 or a non-GAAP adjusted net loss per share of $0.26. This compares to a non-GAAP adjusted net loss of $7.8 million in the fourth quarter of 2016 or a non-GAAP adjusted net loss per share of $1.14.

On February 13, 2018, we entered into an at-the-market offering agreement to sell up to $5 million of our common stock as part of our continued efforts to fund operations and improve our balance sheet.

With that, I would like to thank all of our shareholders for their continued interest and support in Gevo. Let's open up the call for questions. Operator?

(Operator Instructions) And from H.C. Wainwright, we have Amit online. Amit Dayal, please go ahead.

So in terms of the burn and lowering cost, et cetera, like how should we look at what you guys are doing to continue extending the runway until some of these options materialize here?

Well, I think what the -- what we put out there was 30% less at least than compared to 2017. And we'll -- as we make improvements or adjust from there, we'll update in the future. There's things we're doing, both in terms of -- I mentioned on the call in my remarks that we have the opportunity to sell more isooctane out of Silsbee. We got to go make that happen. That will help add cash. We have opportunities to sell more isobutanol. As we expand regions, we could -- that will add value because those are taken out of inventory. And in the meantime -- and there's some improvements that we plan on making, that we desire to make and we're working to make happen up at Luverne to just improve the profitability of the plant potentially quite dramatically, but it's just not baked in stone yet. So I'm not commenting on it publicly.

And on the licensing front with partners like Praj, et cetera, is there any sort of realistic progress towards something materializing in 2018 (inaudible)?

Well, from the standpoint of -- we made progress all the way along. It takes -- because -- these agreements are kind of complicated to negotiate because we're doing -- we have to do a license deal with Praj and we have one with Praj to help develop technology to adapt this to the molasses. They've done that successfully. The stuff works for molasses. Then, having to recruit the partners to figure out how to do those details specifically and who is paying for what exactly.

I mean, obviously I'm not putting up capital or to help anything like that. I just want to be paid a license fee. So how much license fee? What are the details exactly? Where is this stuff going to be sold exactly? All of that stuff matters to us and has to be pinned down.

And so it's in India. The target companies are in India. They're relatively small plants because Praj wants to prove a point about how this works, plus molasses plants are generally small any -- inside of India anyway. So it's making progress.

There's other opportunities that have popped up in other places in the world. They're just premature to talk about. We'll have to see what happens, but it's the first time we're doing these license agreements and between -- we're just doing it very deliberately, very carefully. Recall that we had a Butamax settlement and so the 2 of us own the tech, Butamax and we own the technology for (inaudible). And we cross-license to each other, so we have to take that into consideration too as how to handle it. So it's just time-consuming, that's all.

Great. One question on maybe catalyst around the GE side. What should we expect over the next few quarters? Like, what needs to materialize for some of these things to continue progressing? If you could outline some of these things for us.

Yes. What I think they would be is customer contracts. There's a couple that we're still negotiating. The ones that you should know about are already out there being discussed. It's a question of their time lines, not mine and -- but we continue to make progress on them, I mean, to the point that I know we're trading contracts in some cases. So I know that that's progress. People don't spend money on lawyers otherwise. I just don't know when this stuff will finally get done.

And then, I think this isooctane thing that I talked about, we've never really talked about that in detail on one of these calls, but it's worth noting we're the only ones in the world who can make fully renewable isooctane. That turns out that it matters. People are paying pretty big bucks for it per gallon out of the plant in Silsbee. It's all going to Europe. No RINs involved, nothing like that all. People forget that. That's important. And I think that's going to be a long-term market for us, too. There's a question of how many millions of gallons it ultimately leads to and at what price. But from what we can tell, it's definitely an attractive niche and I think we're the only ones in the world in a position to deal with who can serve that market. So that's the one the whole team is focused on. Some of the other companies have played in that space, too. So that's pretty darn interesting.

So how can that potentially be sort of scaled up? If you're getting a lot of traction, it looks like, on that front, are you adding any resources to build out that further? Or is that literally [burned off and then the plant] (inaudible)?

What I would hope to do is there's some process changes that we can make down at the plant at Silsbee. That gets us more immediate capacity so we could start selling more of the stuff. Then, it's a question of what are the next steps? Is the demand big enough and firm enough where we can support the build-out of Luverne? Maybe. We're going to try and see if that's the case. How long will it take? Don't know. We've had pretty big requests in the next couple of years for isooctane, but in that intermediate size, we'd have to decide how to serve it because obviously I'm not keen -- sure, if they want to put up the money, I'm all for it, but I'm not real keen at just raising money and taking the risk ourselves. We have to have it pretty firm. So those are the kind of discussions that we think about as we're doing this.

And I would add to this that remember what we do is we started with isobutanol and make butylene. Butylene is the building block. We've had several requests for butylene. We just haven't put -- we got to pin down more of what those economics are. In the long run, it makes perfect sense, but I'll tell you, we get paid so much more for making isooctane that it's hard to justify butylene at this point.

All right. And just one maybe final one for me. In terms of the overhead reduction and the cost cutting, et cetera, is that all done now? And should you -- should we start seeing some of those benefits?

You have seen benefits already. Yes, you've already some of them in the fourth quarter. And so you've seen -- yes, you should -- we will continue to realize some of those benefits. I will -- I can say that I'll be adding back certain resources, too, that help us as a company. And I'll be announcing those at the right time.

All right then. Appreciate all you guys' support. Thank you for joining us on the call today. Bye-bye.

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