Yield10 Bioscience Inc (YTEN) 2007 Q1 法說會逐字稿

And welcome to the Metabolix Incorporated First Quarter 2007 Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

Now I'd like to turn the conference over to Kathleen Heaney, Managing Director of Integrated Corporate Relations. Miss Heaney, please go ahead.

Thank you and good afternoon. By now everyone should have received or seen a copy of our first quarter 2007 earnings press release. If you do not have a copy, one can be found at our website at metabolix.com in the investor relations section.

Making presentations during the call will be Jay Kouba, Chairman, Chief Executive Officer and President of Metabolix, Oliver Peoples, Metabolix's Co-Founder and Chief Scientific Officer and Tom Auchincloss, Chief Financial Officer.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be put upon them. The company undertakes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this conference call. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial condition.

With that, I'd like to turn the call over to Jay Kouba, Chairman, Chief Executive Officer and President of Metabolix. Jay?

Thank you, Kathleen. I'd like to welcome you all to the First Quarter Earnings Conference Call for Metabolix. After my review of the business strategy and accomplishments for the quarter, Oliver Peoples, our Chief Scientific Officer, will update you on an exciting new program in sugar cane. Tom Auchincloss, our CFO will then review our financial results. Chief Financial Officer.

Before we begin our formal remarks though, I'd like to review our recent management change. As most of you are aware, on May 3, I became Chairman and CEO of Metabolix. My past experience in education, in work and more recently my knowledge of Metabolix as a Board member will allow me to lead Metabolix through its next phase of development. I'm really honored and excited to be presented with this opportunity and challenge.

The demand for sources of alternative energy and bio-based products is rapidly accelerating. The growing need for biotech solutions to meet the world's needs for plastics, fuels and chemicals together with our promising scientific and engineering achievements have catapulted Metabolix into the forefront of the field of industrial biotechnology. We are now in a unique position. We have an attractive near term commercial opportunity through our Telles joint venture with ADM to produce Mirel natural plastics. We also have an extraordinary collection of earlier stage opportunities for new biobased fuel and chemicals that have very significant potential value. Our switchgrass program and our newly announced collaboration to develop natural plastics, producing natural plastics from sugarcane are two examples of these.

It is clear that changes are unfolding in the marketplace more rapidly than anyone could have imagined a few years ago. We believe that issues concerning the environment and energy have already begun to shape and influence our economy and may do so in profound ways in the years ahead.

Metabolix is technically very well aligned to play an important role in providing valuable solutions to address these changes as they unfold. My objective as Chairman and CEO is to position the company to capitalize on the dynamics of this rapidly changing environment and to take advantage of the numerous opportunities being presented to the company.

My first and foremost objective of my tenure is to ensure the successful commercialization of Mirel. As our lead-off product opportunity, its success can be the foundation upon which we can build the company longer term. We are in an exciting phase of the project right now and I feel very strongly that we must remain focused to execute on Mirel to its fullest potential.

That said, we must also develop an organization and leadership within Metabolix to support an operation capable of producing value beyond Mirel. The world will not wait. We have opportunities, which are emerging now. We want to exploit our technical leadership within the emerging industrial biotech industry and build a lot of value in the process.

Now let me discuss some of our more recent newsworthy events. Let me begin by updating you on the construction of the Clinton plant. As most of you know, the Clinton natural plastics facility is adjacent to one of ADM's world scale corn wet mills, which ensures us a secure source of corn sugar. We broke ground at the end of 2006. Construction is progressing well and we continue to anticipate a start-up date for the facility in the second half of 2008.

Next, our precommercial manufacturing facility, which is used for our marketing activities, including customer sampling, product development, and customer testing is undergoing an expansion to increase its production capacity from 17,000 pounds per month to 50,000 pounds per month. We have experienced some minor construction delays, which have pushed the completion date of this project out a few weeks into early Q3. This is not particularly troublesome and in fact we have been able to implement some innovative process improvements that have increased our production capacity to a current rate of 25,000 pounds per month. Consequently, we do not see this new timing as having a noticeable impact on our commercialization of Mirel.

With regard to the market, I am particularly pleased to report that our customer pipeline continues to grow and advance. We have aggressively directed our marketing efforts to a sophisticated and environmentally friendly customer base and we are seeing results. During our last earnings call, we indicated that our pipeline stood at approximately 40 customer prospects, addressing more than 60 product applications of which about 20 were in qualification trials. I am now pleased to report that we have increased the pipeline to approximately 50 customers covering over 70 products with about 25 applications in qualification trials. This is well on track to meet our goal of having 100 prospective customer applications in the pipeline by year-end.

Not all of these prospects will turn into commercially viable products. But we are seeing a lot of interest in Mirel and feel quite confident that the pipeline will continue to grow and that customers will continue to move through qualification trials to the point of sale.

Our brand launch of Mirel took place on April 27, during Earth Week at the MIT Museum in Cambridge. It was accompanied by an extensive marketing event with press conferences, newsprint articles, and other media events. The reception was terrific and it further reinforced our view that there is significant consumer interest in having a choice for renewable-based biodegradable plastics in the marketplace.

Now that the brand launch -- that the brand name is launched, we would be advancing cobranding discussions with our customer prospects. If it achieves its full potential, Mirel will become recognized by consumers and business customers as the premium, best-in-class, environmentally responsible plastic and will become well known like other great material brands such as Teflon or GORE-TEX.

We are excited about the initial response we have received during our brand launch. It was truly a milestone for the company. I should also note that at the same time we launched Mirel, we also introduced Telles as the name for our joint venture with ADM. Although commercialization of Mirel is the company's number one goal, we have other potentially exciting technology opportunities that can generate significant value. Most of you are familiar with our switchgrass program as well as our interest in using our technology to produce chemical intermediates. Earlier this week we enhanced this portfolio with the signing of a collaborative agreement with the Cooperative Research Center for the Sugar Industry Innovation through Biotechnology of Queensland, Australia. The objective of this collaboration is to research and develop technology to produce natural plastics directly in sugar cane.

I will now turn over the call to Oliver Peoples, the company's Chief Scientific Officer, to discuss this exciting new collaboration. Ollie?

Thanks Jay. As Jay mentioned, earlier this week, we announced our collaboration with the Cooperative Research Center for the Sugar Industry Innovataion through Biotechnology. That's a long title, but basically it's called the CRC. It's a cooperative alliance with Australia's top sugarcane biotechnology research organizations, including four universities, sugar industry companies and research groups and the federal and Queensland government, which has been established to add new value to Australia sugarcane.

Sugarcane is a major cash crop in Australia and the province of Queensland in particular. As part of their value added strategy, the CRC has been working on introducing core products into sugarcane, including our natural plastics. We have achieved encouraging results and I have in hand strains of sugarcane that are natural plastic producing. Given their intellectual property, know-how and commercial position in the field, it makes great sense for us to work together in advancing the technology and exploring the commercial opportunity for this crop.

It's still early days, we still have a lot of work to do before we can get to commercial-ready crop, but this collaboration is a great place to start. Sugarcane is already established as a major biomass energy crop, and given established acreage, markets and infrastructure, it is virtually certain to be one of the big energy players down the road. Natural plastic producing sugarcane offers the potential for an economic edge as it could generate more value in an acre of land than regular sugarcane. Consequently, we believe this technology has an exciting role to play in the evolution of this overall field.

Part of this arrangement with CRC, our scientists will be collaborating directly with theirs toward the goal of developing a commercially attractive natural plastic producing sugarcane. Though financial terms were not disclosed, Metabolix will be providing financial scope to the CRC for its work. As part of the arrangement, Metabolix has the option to license worldwide rights to the CRC program technologies with some provisions to encourage economic development of this technology in Australia. This is an exciting program that complements our switchgrass efforts very, very well. Whereas switchgrass is well suited for the North American climate, sugarcane will be the crop of choice for more tropical areas, such as Queensland. We will look forward to keeping you abreast of this program as it develops.

I will now turn the call over to Tom to review our financial highlights. Tom?

Thank you, Ollie and thank you all for joining us today. As most of you know, Metabolix currently manages its finances with an emphasis on cash flow. For the three months ended March 31, we reported net cash used in operating activities of $3.5 million. This compares to net cash used in operating activities of $2.5 million for the comparable quarter last year.

As we've previously indicated, our cash utilization is growing and will continue to grow as we expand our precommercial material production, expand our sales and marketing infrastructure as well as grow our research and development ahead of commercial sales of Mirel.

Now our GAAP loss for the quarter is $4.7 million and this compared to a loss of $300,000 in the first quarter of last year. The first quarter loss was greater than our cash used and as we have discussed before, all of the payments we received from ADM are recorded as preferred revenue for GAAP purposes and therefore do not appear on our income statement. The deferral of recognizing payments from ADM will continue until commercial sales from the Clinton plant commence, which we expect in the second half of 2008.

We also recognized noncash compensation expense on a GAAP basis during the quarter and this also leads to us recording net losses greater than our net cash used in operations. I should note that in the first quarter of 2006, we had the opposite effect occur, where reported cash used actually exceeded the net loss. In that particular quarter, our loss was reduced significantly by a lump sum recognition of revenue that had been previously deferred during our program with BP. Looking ahead though, we expect that on an ongoing basis, quarter-to-quarter, our operating cash utilization will be less than the losses we report on a GAAP basis.

So let me now provide you a little bit more detail on the financial results. For the three months ended March 31, our revenues totaled $0.4 million and they were primarily derived from government grants and license and royalty fees. This compares to the $3 million in revenue we recognized in the first quarter of last year, when we recognized the $2.5 million in deferred revenue associated with the BP alliance. Excluding that deferred revenue recognition, our revenues were essentially flat year-over-year.

On the expense side, our total operating expenses continued to increase from $3.5 million during the first quarter of last year to $6.7 million this year. The increase reflects new hires across the board in R&D, sales and marketing and administration. In addition, we have grown our expenditures for product development and precommercial manufacturing. Lastly, we have also increased costs associated with being a public company and as noted earlier, we are now recognizing FAS 123(R) stock-based compensation expense.

Now our balance sheet remains strong and on March 31, we had cash and short-term investments totaling $118 million. This capital should be adequate to build our sales and marketing infrastructure, undertake our precommercial manufacturing and expand our research and development as we build the company in advance of commercial sales of Mirel.

Now with that, we'll open the call up to questions. Thank you.

Operator?

Very good.

[OPERATOR INSTRUCTIONS]

And our first question will come from Laurence Alexander of Jefferies & Company.

Hi, this is actually Martha Shelton on behalf of Laurence Alexander. Just concerning the sugarcane project in Australia, I know you all aren't disclosing financial terms, but just wanted to know, get an idea of what they're contributing in terms of capital or in terms of intellectual property? And also recognizing that it's early still, how long do you think it would take to bring a sugarcane project up to the level you've reached in switchgrass?

Yes, so as regards financial details, the Australian government is supporting this program in addition to the cash support from Metabolix. I think, however, the more important aspect of it is by working together, Metabolix gains access to an outstanding team of researchers who are really driven to make this happen in sugarcane. But it's a tremendous complementary program to the efforts we have ongoing in switchgrass. We are delighted with that.

I think in terms of how long it will take, it is still early days in sugarcane. We hope to be seeing some real progress over the next year or so, but I think they're already impressed with the levels they've achieved and I expect to see them getting to the sorts of levels that we've seen switchgrass sometime over the next 18 to 24 months.

Okay. And then shifting gears a little, as you look at various -- generally at various markets and applications, which are the most appealing to you?

Well as you know, we are currently developing a number of applications for Mirel. [technical difficulty] include, in no particular order, paper coatings, injection moldings, cast sheet and film and blown film. As we develop our pipeline of customer prospects, we will be applying more or less effort to those various product areas as we move our larger customers along. But right now, those are our principle focus areas.

Okay. And are those markets where you'll have to compete with Plantic, Novamont, NatureWorks?

Well I think that the markets for biosourced and biodegradable plastics are actually the coincident with the markets for all plastics. And if you look at sort of markets for plastics, what you find is, is that the major plastics categories actually hardly compete with each other because the attributes of those plastics actually are quite different from each other. So for example, PET is very strong in rigid containers because of its strength and its clarity, whereas high-density polyethylene is used for pipe applications, for water pipes because of the strength and the ease of extrusion.

I think we're going to find exactly the same situation to occur in bioplastics. We're going to find that while we believe that Mirel has a very broad range of applications that the different polymers in this space will find different natural markets where they excel. And in that case, actually, all of these plastics are very complementary to each other because they actually demonstrate the value and capability of bioplastics for essentially all consumer types of products.

Okay. And then shifting gears once again, what -- can you talk a little bit about the process for expanding the capacity of the PHA plants? Like was it ADM's decision? And how long do you think it would take to complete the capacity expansion once a decision is made?

So we -- when we were discussing the expansion, it related to our precommercial manufacturing facility. We have announced previously our plans to expand that.

The extension in time to complete that work is largely a function of some mid-course decisions to bring into the operation some operations that we had been subcontracting out previously. And so this will allow us to reduce the cost of producing that material as well as improve our quality control.

So at the cost of a few weeks of extension time to completing the project, we actually think we're much better off this way. So it was our decision, it relates to the precommercial manufacturing facility, not the Clinton plant. It should be done early in the -- Q3.

Got it. And then last question, just as you are looking at other biochemical and bioplastic research platforms, maybe you could give us some guidelines or what your guidelines are for cash burn? How much are you willing to let cash burn increase in the near term if opportunities appear compelling?

So we haven't provided formal guidance on what our cash burn will be for the year other than to say that our cash burn will be increasing quarter-over-quarter over the next few quarters and year-over-year this year compared to last year.

I think also on our last conference call, we indicated that we would be taking our headcount up to potentially as high as 100 people by the end of the year, up from about 60 at the end of last year. And the cash flow or burn rate would be affected accordingly.

As far as looking at other opportunities, we obviously will look at those on a case-by-case basis and if there was a compelling opportunity that provided an attractive financial return, we could make a decision to alter our cash burn rate. But as of right now, we are pretty much on track, including the roll in of our program with the CRC.

Got it. Thank you.

I guess I should add to that that consistent with what I said earlier, the successful execution of Mirel is absolutely fundamental to the -- where we go in the future of the company. The -- to the extent that Mirel exceeds expectations and we create cash flow more aggressively from Mirel, then that just opens up a whole range of possibilities for this company. So there's a balance of objectives to the firm between really making sure that Mirel is a dazzling success and also looking at the other opportunities that potentially get cash funded by that.

Our next question is from Eric Larson with Piper Jaffray.

Yes, good afternoon everyone.

Hi, Eric.

A couple of questions. First, when a customer moves into the phase of, I guess all you guys term it is prototype testing and qualification, how much more demand does that put for raw material product, i.e. that comes out of your pilot plant for them to accomplish those needs? Have you got enough capacity now to satisfy those 25 customers or will you need more capacity out of your pilot plants to do that?

Well I think that there's no question that we will not have enough material to provide any potential customer who desires material to have material. So we do have to be selective in choosing those customers that we will supply with material. We will make sure that the portfolio of customers that we commit to in terms of development, we will have sufficient material to make sure that they can complete their developmental trials and be ready to introduce materials on a large scale when our full scale plant comes up.

Those different applications have a variety of different requirements because they depend upon the machine line, the size of the machine that they are using to fabricate the plastic. So a paper coating line would have a different volume requirement than an injection molding machine.

So -- but we are being very selective about who we partner with and making sure that in -- to get together actually, we have the resources and the material necessary to make those applications a success.

Okay. Then the second question relates to the increase in your capacity rate at the plant and it sounds like you've technically found some further improvements to increase yield and production. Are these processes new and can these processes be applied to the Clinton facility?

Again, what I'd -- yes. I want to reinforce that the capacity expansion is about the precommercial production facility and no, actually, the opportunities that we found are actually unique to that particular facility. They had to do with a, essentially, an infrastructure bottleneck on the plant that we found a way to circumvent and it isn't actually directly applicable to the facility at Clinton.

Okay. Okay. That's -- that was my -- that was my real question. And then a question for Ollie. And this is one where, Ollie, the Department of Energy has recently awarded its 8 or $900 million to 5 sort of cellulose production companies to further their technology of development of converting a number of different types of cellulostic products into, I believe, it's primarily for biofuels. And obviously your switchgrass program would be the combination of converting both the plastics into biofuels, but does the US government recognize your contribution, obviously, to plastics, which isn't a fuel, but it's obviously a very good biodegradable product that solves a lot of other issues? Is there chances that either you or ADM or the Telles joint venture can possibly get some funding boost from any of these projects that are going at the Department of Energy?

Yes, I think it's fair to say that the, I think it's about $150 million that went to those five different cellulosic ethanol technologies. And just to be clear about Metabolix's view of that, that's really consistent with our position from several years that in fact cellulosic ethanol was going to be very important and that crops like switchgrass would be pretty key to the future of that. So that's the vision that we started the plastics production in plants in switchgrass too, is essentially piggyback on what we thought was going to be a very important technological development for the United States. So we're very pleased that the Department of Energy is really beginning to actually put some real money behind the talk that's been going on for a long time.

With regard to the view of the Department of Energy of biobased products, at the end of the day our view is that we also reduce the consumption of oil, I think roughly 20% of the oil that's imported, the petroleum that's imported, ends up in materials. And so we also reduce the importation of oil and we should be essentially subject to the same benefits of that strategic [Inaudible] of the United States. So we are working in that area. I don't think we get -- have great clarification around how they're going to go in that, but we believe there's certainly substantial opportunities there. But they're not defined yet.

Okay. Thanks guys. I appreciate it.

Our next question is from Pamela Bassett with Cantor Fitzgerald.

Hi everybody, thanks for taking my call. I'd like to hear a little bit more about the financing strategy for future plants for Mirel and what the various possibilities might be. What are your options and how will they be incorporated into the strategy?

Pamela, its early days to be [Inaudible].

I can't help it.

Strategy about those future plants. But --.

Okay. Maybe just options then?

Yes. But let me comment on it in that. It is the long-term vision for Telles that it will become a freestanding entity with its own assets and operations. And so while we might do some expansion of the Clinton facility with ADM, as the product rolls out and enters other markets around the globe, it is contemplated that plants would be constructed within the Telles entity and that Telles would access financing, perhaps project financing to fund those. And then, with the support of equity from the partners, that being ADM and ourselves, to underpin that.

So with that sort of overview, as far as we're concerned, a lot will depend on the cash flow from Mirel, how robust it is and how fast the growth rate will be in terms of requiring us to add capacity. Because obviously we'll have to make fairly sizeable investments in physical capital to grow the business.

I don't know if that answer your questions specifically, but I think it gives you a picture of what we're looking at.

Yes, that's excellent. Thank you. And I got interrupted when you were talking. Did you talk anymore about guidance for the year?

No, ma'am.

Okay. So I didn't miss that. Great. Thanks very much.

[OPERATOR INSTRUCTIONS]

We'll next go to Paul Knight with Thomas Weisel.

Hi, good afternoon. This is [Steven Willy] in for Paul Knight. Just a couple of questions.

I know that you aren't expecting the Clinton facility to be completed until the second half of '08. Could you give any indication as to when you may expect an announcement of some firm customer orders?

We have not provided guidance on that either. What you should expect is that when either there is a customer in the marketplace with a product or we sign a customer contract that is material to Metabolix, which would probably involve a larger and longer term supply commitment of one sort or another, that we would have to file with the SEC. Those would be the conditions under which we would make a customer disclosure.

As you may know, virtually all of our interactions with customers today are done under a confidentiality agreement. And virtually all of our customers are intent on going public or releasing their new product or packaging for their new product that includes Mirel when they're ready to do it for their end customers. So we haven't set any specific dates or provided any guidance on when those will occur. They'll occur when they occur. But we do have ongoing discussions around commitments and we do have customers that are moving through the pipeline and as they mature, we may see some test marketing of products out there prior to the actual commercial plant coming online.

And I guess I just wanted to add that as I said in my previous comments that we are working with customers to co-brand so that their products will also be branded with the Mirel label. They're -- I think you can anticipate that if one of our customers is using Mirel and it's co-branded that they will be absolutely transparent that the product is made from Mirel. So I would actually anticipate that as these applications become transparent and disclosed to the marketplace that it will be absolutely evident where our product is going.

Great, thank you. And just one more quick question. I know you mentioned that you're not going to give any guidance relating to expenses for the upcoming quarter and year, but could you just maybe comment just in terms of the magnitude of order and what you might anticipate in terms of SG&A and R&D moving forward through the quarter and through subsequent years?

Yes, I think perhaps some analysis you could do that, would provide you some directional help there if you lay out the last few quarters. Which I think we now have a couple of quarters of financial disclosure and then lay -- you'll see how our expenses are tracking so far and then when you lay on top of that the guidance that we have provided that is where we're moving from about 60 employees to about 100 employees by year end. You ought to be able to get a pretty good handle on directionally where our P&L is going.

Thank you for taking my questions.

[OPERATOR INSTRUCTIONS]

We'll go to [Brian Milberg] with Piper Jaffray.

Yes, I had a quick question on the switchgrass, but more specifically on the sugarcane. Technically I don't quite understand, if the sugarcane is growing and its taking its energy and converting it into plastic, what's going to happen to the sugar production?

Well it's a little too early to tell. I think the bottom line however is that if you look at sugarcane, what it's very effective as, is before grass, is taking carbon dioxide out of the air and actually converting it into sucrose, which it stores in abundance way beyond its actual needs. And so -- and it's been evolved over many generations to do exactly that. So we don't know, but we don't think there's any limitation to sugarcane's ability to store and fix -- and store and fix carbon.

I think at the end of the day, if we substitute some natural plastic for sugar, I think you'll find that natural plastic is such a much higher value than the sugar that it'll be well compensated in terms of any economic modeling we'll do for the future.

And in addition to that, the dominant product that sugarcane makes as it does photosynthesis is cellulose. And so really sugarcane, the sugar itself is actually a fairly modest outcome from the photosynthetic process. So I think what Ollie's saying is depending upon how ethical work goes, we could well find that there's no impact on sugar, that there's impact on the amount of cellulose that's produced and that there is no yield differential. Or we might find that there is. It's just too early to tell at this point.

Okay. Thank you.

And with that, there are no further questions. I'd like to turn the call to Jay Kouba for any additional or closing remarks.

Thank you for joining us today.

In summary, we continue to set and meet our milestones. We have substantial momentum in the marketplace for our products and services. Our technology continues to extend itself.

We intend to continue to build brand awareness for Mirel through our aggressive marketing programs. We will keep you updated of our progress on all of these fronts and look forward to speaking again with you at the end of next quarter. Thank you.