Marrone Bio Innovations, Inc. (MBII) 2018 Q4 法說會逐字稿

Good day, and welcome to the Marrone Bio Innovations Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Linda Moore, General Counsel. Please go ahead, ma'am.

Good afternoon, everyone, and thank you for joining our call. Welcome to the 2018 Fourth Quarter and Full Year Earnings Conference Call for Marrone Bio Innovations.

On the call today are Chief Executive Officer, Pam Marrone; President and Chief Financial Officer, Jim Boyd; and Kevin Hammill, Chief Commercial Officer.

If you would please refer to Slide 2. I would like to remind you that this conference call may contain statements regarding management's expectations, hopes, beliefs, intentions or strategies regarding the future as well as projections, forecasts or other characterizations of future events or circumstances. Such statements are based on management's current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those that management has anticipated. Such statements involve a number of risks and uncertainties, some of which are beyond management's control, or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these statements. Important factors that could cause differences are contained in the reports filed by the company with the Securities and Exchange Commission, including under the heading Risk Factors, and elsewhere in the company's quarterly report on Form 10-Q for the third quarter of 2018, the company's annual report on Form 10-K for the year ended 2018 when it is filed and in our earnings release posted on the company's website. Should one or more of these risks or uncertainties materialize or should any of management's assumptions prove incorrect, actual results may vary in material respects from those discussed today.

Any guidance that management may offer in this conference call represents a point-in-time estimate. The company expressly disclaims any obligation to revise or update any guidance or other forward-looking statements to reflect events or circumstances that may arise after the date of this call.

After our remarks, we will hold a question-and-answer session.

I will now turn the call over to our President and CFO, Jim Boyd. Jim?

Thank you, Linda, and thank you, everyone, on the line for joining us today.

Coming out of a difficult environment in 2017, 2018 was a year of stabilization, both commercially and financially. We did the heavy lifting to refinance the company and to rebuild our customer relations. We continue to invest in manufacturing improvements designed to enhance gross margins and strategic R&D projects that will drive future growth.

2018 set the stage for the growth we anticipate going forward with accelerating revenues, strong margins and adequate cash for our near-term needs.

If you would turn to Slide 3, I will first discuss the full year 2018 results. Revenues grew 17% to $21.2 million by leveraging our existing portfolio and selectively expanding into new crops and geographies. While this growth rate was lower than our 29%-plus gain in 2017, it was achieved while building the new sales team and strengthening relationships with key customers. However, please note that year-over-year revenues are not strictly an apples-to-apples comparison because of the adoption of ASC 606, the new revenue recognition standard.

We expect to build on the investments we made in our commercial function in 2019. With 5 active ingredients in hand to address the $60 billion agrichemical market, our rejuvenated sales team has a core portfolio that can deliver significant revenue growth in 2019 and beyond.

Gross margins expanded to 48.6% as we saw a very favorable mix on a higher percentage of sales of the Venerate product family, which includes seed treatments for row crops. This is particularly notable in the fourth quarter given the seasonality of our Venerate sales.

One of the most significant levers we can pull to enhance gross margins is to continue to optimize our manufacturing operations through both process improvements and capacity utilization. We are in the design phase and an expansion of our Michigan manufacturing facility to support expanding sales in 2020 and beyond.

Operating expenses for the year were down modestly. Both SG&A and R&D on a full year basis were lower by single-digit percentages.

Net loss improved by $10.7 million to a loss of $20.7 million (sic) [$20.2 million] or $0.20 per share. We obviously benefited from the double-digit revenue growth and higher margins, but I would like to bring your attention to some items in the other income line.

Interest expense was reduced 68% as roughly 3/4 of our historic debt was converted to equity. Cash payments and interests were reduced by $4.4 million or 73% as a result of the restructured debt payments that are pushed out until the end of 2022.

Net loss in 2018 was also affected by a revision to other income and expense associated with the onetime change in the fair value of financial instruments and a gain and loss on extinguishment of debt. These onetime items will not be repeated in 2019.

As noted in our press release this afternoon, the change to the fair value of financial instruments and to both gain and loss on extinguishment of debt, include a revision to the original accounting assessment of the company's February 2008 (sic) [2018] financing transactions.

The net effect is a decrease in other income and expense of 2.7 -- of $2.3 million and an increase in net loss by the same amount. This noncash charge change does not affect operating results.

Finally, as I mentioned previously, the heavy lifting was done in terms of refinancing the company, and cash flow is adequate for our near-term needs. Cash used in operations was $19.6 million, down from $21.1 million in 2017.

If you would please turn to Slide 4, you will see that the fourth quarter trended as we expected and set the stage for a successful start to 2019. Revenues grew by 72% year-over-year, primarily because of higher sales of the Venerate family of products. Increased Venerate sales also raised gross margins to 50.5%, our highest margin quarter ever. As a reminder, our margins historically fluctuate quarter to quarter, and the Venerate family tends to have its strongest effect on margins in the second half of the year.

Operating expenses in the fourth quarter increased by $1.7 million, reflecting our strategy to ramp certain commercial and R&D programs to accelerate growth in 2019 and beyond.

The majority of the SG&A increase was a function of our revamped sales and marketing team when compared to the fourth quarter of 2017.

Operating loss in Q4 increased by $317,000 or 6%, benefiting from increased revenue and improved margins but offset by our investment in acceleration -- accelerating product development and strengthening commercial operations.

Cash used in operations in the quarter was $2.8 million, down from $6.6 million in Q4 of 2017. With the groundwork from 2018 complete, we have set the stage to leverage Marrone Bio's leadership in bio-based solutions with significant opportunities to accelerate our growth by leveraging our existing portfolio, expanding our market reach in crops and geographies, adding to our roster of distributors and strategically capitalizing on our R&D portfolio.

I would now like to turn the call over to Pam to provide you with commercial signposts that will signal our ability to substantially grow and expand the current commercial portfolio and take advantage of the near-term pipeline opportunities.

Thank you, Jim.

We, at Marrone Bio, have leveraged our industry-leading R&D pipeline to develop 5 families of proven products that have generated 5 years of revenue at a 19% compound annual growth rate with current blended margins greater than 45%.

Our bio-based natural products are flexible across farming practices and add significant value to our growers. Our products are uniquely positioned to address unmet market needs, serve as an alternative to an existing technology or be used in tandem with existing products to boost the effectiveness of the combined program. As Jim noted, we not only stabilized our commercial operations and financial footprint in 2018, we did so as we grew revenues and expanded gross margins.

Now we are more than 2 months into 2019, a pivotal year for us. We have put a solid foundation in place technically, commercially and financially, to drive revenue growth this year and set the stage for growth in 2020 and beyond.

We are focused on 3 key deliverables in 2019: one, portfolio optimization; two, market expansion; and three, accelerated innovation.

If you would turn to Slide 5, let's look at an example of portfolio optimization. We are focused on optimizing our portfolio by addressing unmet market needs in an expanded set of crops and geographies with programs that are flexible across farm size and practices. As you may know, the discovery of Majestene as a treatment for nematodes came from our internal R&D program. Our team looked at the initial bacterial fermentation that led to Venerate, an insecticide, and found that it had properties that also make it an effective nematode treatment. This is a great example of how we maximize our R&D productivity and leverage invested capital through portfolio optimization.

The Venerate family of products is now the backbone of our soil- and seed-applied offerings, which we expect to be used on millions of acres of row crops in the United States this year, including corn, soybeans and cotton.

As we move forward, we are looking to expand our reach, not only in the United States, but internationally with seed treatments and soil-applied products, [driving] our plans for Asia, Europe and South America and include expansion into specialty crops as well.

This geographic expansion includes work underway to expand our distribution network outside the United States. We are taking our portfolio optimization one step further this year with our investment in super formulation of Majestene nematocide. We are developing an improved fermentation manufacturing process with lower cost that has the potential to significantly reduce the application rate of the product at the grower level. Therefore, optimization of the Majestene franchise is a key focus for us this year as soil and seed-applied products have the potential to be a significant percentage of the portfolio going forward. The market opportunity is growing as farmers look for new options in their production practices.

Our second opportunity is market expansion. Slide 6 highlights an example of how we will expand our market share through our offerings to the almond industry. Roughly 1.3 million bearing acres of almonds are grown globally with 80% grown here in California. It is a high-value crop, generating California growers $2.50 to $4 per pound, with an average yield of more than 2,000 pounds per acre. Almond production historically has used conventional chemical products, and our biological offerings add significant value in an Integrated Pest Management program.

We first entered the almond market with Regalia to treat some of the common fungus problems that growers face. It became quickly apparent that we have the opportunity to expand our footprint with new bio-based solutions that could be integrated into their current crop production systems to enhance yield [efficacy] and end product quality.

We are now expanding our market reach with the introductions of Venerate for insect control and Haven to manage heat stress. With multiple applications of Haven and Venerate in a given growing season, we have multiple sales and margin opportunities on the same acre.

The almond growing season is coming into full-bore here in California, and we're working with growers in their orchards to demonstrate that our products can give them increased marketable yield. We expect that we'll be expanding the sales of our full suite of our products into this market as we move into 2020. Selling multiple products on the same acre is one example of our market expansion opportunities.

Finally, if you would turn to Slide 7, I'd like to give you an example of how we are accelerating innovation through the additional investments we are making this year in our MBI-014 herbicide program. I mentioned previously how we leveraged Venerate into Majestene, but our drive to optimize our pipeline didn't stop there. And in fact, we have developed 3 products from 1 base microbe. By taking the bacterial fermentation one step further, we found an application that has herbicidal properties. This pipeline product, which we call MBI-014, is unique in the library of available broadleaf herbicides. And we are testing it for use in both pre- and post-emergent applications and in combination with other weed treatments. MBI-014 has the potential to be a disruptive technology as the first bio-based herbicide in the broad row crop market as well as a unique offering for the expanding organic market. The key target market is broadly weed control in soybeans and cotton globally, markets that number approximately 300 million and 80 million acres, respectively.

At a time when growers are increasingly challenged by weed resistance, the introduction of a product like MBI-014 could be a breakthrough solution. We have been granted both composition and method-of-use patent for this unique product with additional patents filed. Our first EPA regulatory submission was made in August of 2018.

Given the size of this opportunity, as Jim mentioned, we are budgeting an additional investment in MBI-014 in 2019 to accelerate the testing and compiling of the data necessary for commercialization and an accelerated ramp.

While this will increase operating expenses in 2019, we believe we have a unique opportunity with this product that is worth the additional prudent investment.

In closing, if you would turn to Slide 8, I'd like to reiterate the points that Jim emphasized. With the groundwork from 2018 in place, we have set the stage to leverage Marrone Bio's leadership in bio-based solutions for agriculture with significant opportunities to accelerate our growth. We expect substantial year-over-year growth in revenues by portfolio optimization, market expansion and accelerated innovation by strategically investing in the R&D portfolio.

In summary, Marrone Bio's technical successes are complemented by a disciplined approach to capitalizing our product pipeline and launching our commercial products. We are focused on improving manufacturing efficiencies and investing our cash strategically and judiciously. Coupled with last year's refinancing of the company, we are well positioned as the commercial leader in bio-based agricultural solutions.

At this point, we'd like to open up the call to your questions.

(Operator Instructions) We will take our first question from Ben Klieve from National Securities Corporation.

The first question I have for you is with regards to that performance in Q4, especially in the top line. How solid was -- do you feel like you're still looking at a pretty kind of healthy sequential jump from Q4 into Q1 of next year? Or does any revenue get pulled in from Q1 into Q4 that may mute that kind of traditional sequential jump to start the year?

Ben, it's Jim. First I'd say there's no pull in. But I'd like to add that I think with regard to sort of our revenue outlook, I think that we laid a very solid foundation in 2017 and '18 for solid growth in 2019 and beyond. In 2018, we averaged 17% growth, but we did exit that fourth quarter with really solid advancement in 72 -- at 72%. And I think that's -- it's a very positive reflection of the changes we've made here. And I think it establishes critical momentum that I'd expect to be carried over into 2019.

Okay, perfect. And regarding a couple of the line items in OpEx. First of all, Pam, you noted the increased investment for getting 014 in the market. Can you guys comment on the scale of that increased investment for next year? And is that going to be kind of a onetime investment? Or do you think that's going to be kind of spread throughout all 4 quarters?

It's going to be spread throughout the 4 quarters. I think the fourth quarter is kind of representative of our strategy going forward and the magnitude of our thoughts in that area.

Okay, perfect. And regarding the last comment on kind of the scale of that number in Q4, would you argue that the SG&A number that you guys posted in Q4 is a good baseline for us looking out in '19 as well?

Yes. I think the SG&A number and increase largely reflects the investment we made in our commercial function and adequately reflects our go-forward view.

Okay, perfect. And I guess turning to some kind of big-picture questions here. One question regarding the state of the market right now in California as it pertains to just the incredible amount of rain and snow you guys have gotten over the last couple of months. Have you guys -- have you seen delays in harvesting at all that may impact your business here in the near term? Or any other -- how does this impact your customers here as they're making decisions in advance of spring planting? Any kind of broad macro comments would be appreciated.

Yes. We're just finishing up on the seed treatment season and starting the fungicide application in tree nuts. With all the rain in California that you noted this year, growers had, had to aerial apply their fungicides. And applications started actively in February and continued here in March. Initial feedback indicates increased usage intentions of our Regalia fungicides in the tree nuts. The final seed treatment applications are being completed for spring planting. So overall, we had a good start to 2019 as we wrap up seed treatments and start applications in trees, fruits, nuts, vines and vegetables.

Ben, they said, today we got the notice that California has declared the drought over for the first time in many years. So that's great for Ag.

Wow. Yes, I didn't hear that. Very good. Well, congratulations. Perfect. I guess, a couple other quick questions. One with Venerate's approval for cannabis use in California, I guess, last month now, can you just comment on the potential here for that product? Do you think that, that has potential revenue opportunity in 2019? Or do you think kind of the demo, educational work that's going to need to be done is going to make that -- first hit the income statement in 2020 and beyond?

Yes. We see there's an opportunity this year in 2019 for a revenue increase. And we have included this in our bigger cultivated garden portfolio, or our CG portfolio. That includes greenhouse crops, ornamentals and consumables such as herbs, vegetables and, most recently, hemp. And so interesting enough, pivoting to hemp, with the passing of the farm bill that legalizes the production of hemp, the hemp industry has an estimated worth of $20 billion in 2022. And approximately 80,000 acres of hemp was grown in 2018. And we see a key use for hemp going forward in the medicinal CBD use. We believe Marrone Bio products have a strong fit because the market is looking for low residue, high-performing and low-impact products such as -- as we have in our portfolio.

Okay, perfect. And one last one for me. The opportunities in almonds is really, really intriguing for a number of reasons. And I guess I'm curious kind of how that market is going to unfold? What kind of visibility the investor community would -- is going to have regarding that opportunity translating into revenue? Are you expecting maybe some -- a relationship kind of like what you have with Albaugh in that there's a distribution agreement that could be in place that would specifically target almonds that would give us visibility of that converting to revenue? Or do you think this is going to be kind of lumped into your overall business overall?

This is going to be in our base specialty business that we described as our trees, fruits, vines and vegetable market where we sell to a traditional distribution such as Nutrien, Helena, Simplot, Wilbur-Ellis. And what we'll see is the business and revenue in almonds, our cadence will be throughout the year. We're starting right now with our Regalia business, and also we'll be applying our first application of Haven -- first of 3 applications. And then throughout the Q2 and Q3, we'll be applying our Venerate as part of a grower's insecticide program to increase navel orange worm control in that time period. So it will be a cadence throughout the year in almonds as we go forward.

We'll take our next question from Robert Smith from Center for Performance Investing.

So you referenced the 2018 as opposed to 2019, the 17% and 29%. Do you foresee a move towards the 29% in 2019?

Well, I'd say that we went out of the fourth quarter and ended the year with very solid growth. And we expect the foundation that we laid in 2017 to provide accelerated growth for '19 and beyond. And we think we've got a very solid operating plan for '19 that we're going to execute on.

So you're saying that high 20s is a target?

I'm not going to name a number.

Okay. With respect to 014, this seems to be a first short at a -- hitting the big time. Can you give us a -- sort of a time line? How do you think this is going to develop as far as time frame?

So we submitted in August of 2018. However, we do not try to predict the regulatory approval. We'll update you when we have some additional information. But as you indicated, we believe that is a great opportunity for Marrone Bio. But we're not going to predict the sales potential for MBI-014 because we believe it's a little bit too early right now. But the potential is in 2 markets. In the organic market, there's very limited herbicide options. In the conventional market, MBI-014 controls key leads such as palmer amaranth. Today I was reading an article that the first confirmed case of resistance to dicamba and 2,4-D in palmer amaranth, further magnifying the challenge to manage this weed in conservation tillage systems. And as Pam mentioned in her note, the herbicide market, especially in corn and -- sorry, in cotton and soybeans is, in cotton, it's 300 million acres -- I'm sorry, in soybeans, it's 300 million acres; and in cotton, it's 80 million acres for a total great fit in this $23 billion global herbicide market.

Could you give us an update on Zequanox, how that's developing?

Sure. So we are treating a number of powered industrial plants this year. And we're going in with a plan that we hope will drive revenue growth in the future. At the same time, the government bodies like the U.S. Geological Survey and other great -- other bodies around the Great Lakes, are still very keen on using Zequanox to reduce the mussel populations that have harmed the shores of the Great Lakes. And so we will be doing some treatments along the shoreline of -- I believe it's Lake Michigan, but one of the lakes this year.

Okay. And, Pamela, Arcadian just announced recently an effort to launch a cannabis venture. I was wondering if you had any working arrangements with Arcadian or might be developing one?

They're our friends and neighbors right down the street from us, and we cheer them for -- just like every little biotech and the few of us that are public, we cheer them in any future success in that arena.

But we don't have any...

We don't have a formal -- any formal collaborations at this time.

I would like to turn the conference back to the management for additional remarks.

Thank you again for joining us for our year-end earnings call. I must give full credit to our Marrone Bio Innovations team for pivoting from the challenges we faced in 2017, revitalizing our customer relationships, achieving 17% sales growth in 2018, further accelerating growth in the fourth quarter to 72% while substantially improving margins, controlling costs and focused cash management. The first quarter of 2019 is well underway, and we have a clear path forward to optimize our existing portfolio, expand our market reach and accelerate the potential of our R&D pipeline. We'll do so with an eye towards using our resources judiciously and making strategic investments for growth while conserving our cash. Again, our thanks, and we look forward to speaking with you further about the potential of Marrone Bio Innovations. Thank you.

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