Yield10 Bioscience Inc (YTEN) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Metabolix second quarter 2007 earnings conference call.

Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session, and instructions will be provided at that time for you to queue up for questions.

At this time, I'd like to turn the conference over to Ms. [Bethany Alquist] of Integrated Corporate Relations. Please go ahead, ma'am.

Thank you. Good afternoon, everyone. The Company released its second quarter financial results after the market closed today. If you do not have a copy, one may be found on the website at metabolix.com in the Investor Relations section.

Making presentations during the call will be Jay Kouba, Chairman and Chief Executive Officer of Metabolix, 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, CEO and President of Metabolix. Jay?

Thank you, Bethany. I would like to welcome you all to the second quarter earnings conference call for Metabolix.

After my review of the business strategy and accomplishments for the quarter, Tom Auchincloss, our CFO, will then review our financial results.

We are pleased with the considerable strides that were made in the second quarter. Customer development activity grew and advanced. The expansion at our pre-commercial manufacturing facility increased from 17,000 to 50,000 pounds per month. It is moving forward and is nearly complete. Construction on our Clinton facility continued to progress.

On the market front, our customer pipeline was further strengthened during the period, reaching 80 potential customer applications in development. Importantly, we introduced the Mirel brand in April, which has allowed us to begin advancing co-branding discussions with our customer prospects.

We are pleased that so soon after the brand launch, one of our customer prospects, Target stores, embraced the co-branding of Mirel in a test market product. We think this bodes well for the future.

During the second quarter, we also announced the introduction of three new grades of Mirel resins. Our product development team is making great progress in developing new grades and advancing new formulations for our prospective customers. We are in an exciting phase of this project right now, where all our key functions are tracking towards the commercial launch of Mirel late next year. I feel very strongly that we must remain focused in order to execute Mirel to its fullest potential.

Now let me provide some more details about our more recent developments. As many of you know, our pre-commercial manufacturing facility, which is used for our marketing activities, has been undergoing a major expansion to increase production capacity. At the time of our last call, our progress on that initiative had allowed us to increase our capacity from 17,000 pounds per month to 25,000 pounds per month. This expansion has allowed us to dramatically increase the number of customers testing product, which was a critical achievement for us.

Final expansion of our pre-commercial manufacturing facilities to a rated capacity of 50,000 pounds per month is finishing up now, and commissioning will start later this month. We do not expect any material interruption in production with the startup of the expansion. Consequently, material supplies should be adequate to serve our market and product development needs until our commercial facility at Clinton comes online.

I'd also like to provide you with an update on construction of the Clinton plant on which we broke ground at the end of 2006. Construction continues to progress well. Foundations for a few of the buildings are now done, and others are underway.

Structural steel for the fermentation building is being erected. Most major equipment is now on order, and assembly of the fermenters has started. Based upon the current status and plans, ADM estimates that commercial operations will start in December 2008, in line with our previous indication for completion in the back half of the year.

And the second quarter, which we talked about on our last earnings call, was our brand launch of Mirel. The launch was truly a milestone for our Company, and commercialization of Mirel remains our number-one goal.

With the launch behind us, we focused our efforts on advancing co-branding discussions with our customer prospects during the second quarter, and we are pleased to report that the initial response has been very encouraging. New reception has further evidenced significant consumer interest in having a choice for renewable-based, biodegradable plastics in the marketplace.

During the quarter, we also announced the introduction of three new grades of Mirel resins through our Telles joint venture with ADM. For injection molding applications, we introduced Mirel P1001, which is designed to replace styrenics, and Mirel P1002, which is engineered to replace polyolefins.

Mirel P2001, alternative to petroleum-based paper coatings, enables the production of fully degradable paper-coated cups and food packaging that offer high heat resistance for hot cups and microwavable packages. Development efforts are continuing, and we look forward to introducing additional grades later in the year.

The pipeline of customer prospects continues to grow and advance. Currently, we have 80 different potential customer product applications. Of these, over 40 are in various stages of prototype product testing and qualification. This represents substantial growth from our first quarter earnings call, at which point we had approximately 70 product applications in the pipeline, of which about 25 were in qualification trials.

This progress is a direct result of increased production from our pre-commercial manufacturing, as well as solid results from our recently established sales and marketing team.

While only a handful of our 40-plus customer application prospects have reached late stage testing, where we are working toward final specs, a few customers have advanced to the point of undertaking limited test market trials in consumer sales. Notably, Target has launched, in 129 stores, a gift card made with Mirel and marked with the Mirel logo on the back of the card.

All in all, we are quite pleased with how our pipeline is progressing, particularly given the fact that material supply has only recently begun to flow at higher volumes.

With these prospective customer applications in the pipeline, we are well on track to meet the goal of 100 that we set out at the time of our IPO last year. As we are increasingly comfortable with this particular achievement, we are now starting to focus management time less on the size of the pipeline in terms of prospects, but more on the maturity of it. The real key for us is to have customers who are ready to buy at startup and to have the plant as fully loaded as possible by the time we get to a second full year of operation.

Furthermore, we have now advanced a significant number of customers to a point where we have some understanding of what their potential demand may be for their specific applications and can manage our activities around that.

So one of the ways we are now measuring pipeline progress is to modify -- is to monitor the identified potential demand per product for each prospective customer application in 2010. We would like to share this with you now, as many of you have asked for additional information to assess our progress towards commercialization.

Before I do that, I want to be very clear that we are providing a forward-looking estimate of potential, which is used for internal purposes and is based upon discussions with and analysis of our customer prospects. This is not to be construed as an estimate of future sales or guidance on our expectations.

Customer prospects are not committed to purchase these amounts nor have we received orders for these amounts. In fact, we expect this estimate to change as certain prospects fail to advance towards commercialization, which will reduce our estimate, and others provide progressive information on their potential demand, which may increase the estimate.

The goal is to achieve a level of indicative potential that is several times greater than the 110 million pound capacity of our commercial manufacturing facility in order to facilitate achieving full production in an orderly fashion.

As of July 2007, our total identified estimated potential demand for 2010 stood at a volume of 108 million pounds or about one times coverage of the capacity of the plant. Though in the coming quarters we will be working to increase this substantially, again, we expect this estimate to fluctuate widely over time, as certain prospects progress towards commercialization and others fail to do so. This leaves a lot of work to do to achieve a plant running at capacity, but it is a good place to be, with well over two years to go until the 2000 production year starts.

In summary, as we have discussed in the past, the demand (inaudible) energy and bio-based products is rapidly accelerating, and with that, so is the need for biotech solutions to meet that demand. Metabolix is uniquely positioned at the forefront in the field of industrial biotechnology, based upon our promising scientific and engineering achievements, and we believe that we are well positioned to benefit from the increasing demand that we just spoke about.

In addition to our attractive near-term commercial opportunity to produce alternative plastics through our Telles joint venture with ADM, we have an extraordinary collection of earlier stage opportunities for new plant-based products and chemicals that have significant potential value.

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

Thank you, Jay. 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 June 30th, we experienced a net cash used in operating activities or cash burn of $2.9 million, which compares to a net cash used of $1 million for the comparable quarter in 2006.

Of the $2.9 million of cash use this quarter, approximately $4 million related to our operating activities for the quarter, but this was offset, in part, by approximately $1.1 million of net working capital changes in our favor.

Our cash burn rate associated with operating activities continues to grow and to track in line with plan. We expect that our cash utilization will continue to increase quarter-over-quarter as we expand our pre-commercial production, expand our sales and marketing infrastructure, as well as expand our research and development activities.

Our GAAP net loss for the quarter was $7.7 million, which compares to a loss of $4 million for the second three months of 2006. As expected, our second quarter loss is greater than the cash used in operating activities for the same period.

As we have discussed before, all of the payments we receive from ADM are recorded as deferred revenue for GAAP purposes and, therefore, do not appear in our income statement. The deferral of recognizing payments from ADM will continue until commercial sales from the Clinton plant commence, which we anticipate in December of 2008.

We also recognize non-cash stock compensation expense on a GAAP basis, which also leads to reported net loss exceeding cash used.

Now, let me give you some additional detail on the Company's financial results for the second quarter.

For the three months ended June 30th, revenues totaled $0.2 million, which compares to $0.7 million in revenue for the second quarter of 2006. The decrease was due to a reduction in government grant revenue, which resulted from the completion of the USDA program for our plant project, which occurred in the first quarter of 2006.

As we grow the business, our expenses continue to ramp up. Total operating expenses increased from $5 million during the second quarter last year to $9.4 million this year. The increase reflects new hires across the board in research and development, sales and marketing, and administration to support growing the business. In addition, we grew our expenditures for product development and pre-commercial manufacturing.

Lastly, we experienced increase costs associated with being a public company, as well as FAS 123R stock compensation expenses.

Our balance sheet remains strong. On June 30, 2007, we had cash and short-term investments totaling $115 million. This capital should be adequate to build our sales and marketing infrastructure, undertake our pre-commercial manufacturing activities, make the necessary commercial formulation investments we have to make and expand our research and development to build the Company.

While we do not provide financial guidance, we think it would be helpful to provide some insight on certain matters that could be useful to investors. As noted above, we presently emphasize cash flow rather than GAAP net loss in the management of our Company. Thus, the cash used in operations of $2.9 million for Q2 and particularly the portion not associated with working capital changes, which was $4 million, is indicative of our current operating profile, excluding our capital expenditures.

As we have discussed before, we have plans to continue expanding our headcount and our other operating activities over the remaining two quarters of the year and, thus, the operating cash flows associated with those activities should increase in the coming quarters.

With that, we will open the call to questions. Operator?

(OPERATOR INSTRUCTIONS)

We'll take our first question from Eric Larson with Piper Jaffray.

Good afternoon, everyone.

Hi, Eric.

Just a couple questions. Obviously, you're expanding your customer applications quite rapidly. In your R&D spending in the quarter of $5 million, how does that roughly break down for sort of formulation-type activities versus supporting your other platform, switch grass?

Why don't you go ahead with that, Tom?

The portions associated with R&D activities related to formulation and, if you will, the ADM program versus our switch grass program, the portions did not change too much over the quarters or the change in R&D wasn't a function of changes relative to the activities for each program. It was more a function of increased headcount in both programs, as well as some other items, for example, the non-cash stock compensation expense.

If you like, Eric, after the call, I can give you a little more specificity on that.

That would be great. And then you obviously made some very good progress in terms of customers moving into sort of the prototype type application, which is kind of a second phase of your R&D program and your sales program.

This kind of comes in lumps. Is this kind of an increase in terms of the numbers, not percentage-wise, but in the numbers, something that would be indicative of future quarters as well? Or again, it's lumpy. So can you kind of give me a feel for how that might play out?

Yes. I think that we have to actually be a bit cautious that we don't take on too many different applications because that will dilute our resources, and it will prevent us from actually making the progress that we need to make to actually drive a relatively modest number of potential customers to being real customers.

So we gave the guidance that we were anticipating working in about 100 different applications, and I think that what you can anticipate over the following quarters is that our customers will progress from doing early stage prototyping to doing late stage prototyping to doing test marketing.

And what we hope to do is to give you an indication of the maturity of our application development portfolio, and so we would expect the number of products to be in those more developed categories to increase over time.

Okay. That makes sense. And I know it's very early stage with Target but -- and I have visited some stores that have -- the product is really -- there's not a lot there yet. So I don't think it's all in full swing.

Do you have any idea of how Target is going to do their marketing program toward the Mirel products?

Well, obviously, what was just announced is really a relatively small volume test market program, and Target is going to evaluate the efficacy of that. Unfortunately, we are actually still covered under our confidentiality agreement with Target. So I'm not really free to disclose to you what their future marketing plans are.

Sure, okay, that's understandable. I've got a whole bunch of questions, but I'll pass it over. And if there's time, I'll queue back on. Thanks, guys.

And we'll go next to Paul Knight with Thomas Weisel Partners.

Hi. As you ramp up the 50,000 capacity facility or production, will that change your outlook for profitability, meaning will that facility actually be positive to cash flow?

No. Our production of pre-commercial material is not a [profit-entering] enterprise.

And you had mentioned in the press release that you had introduced three different compounds, like P1001, et cetera.

Correct:

Will you be announcing further compounds in the future releases?

Yes. We're working on a variety of different applications. And when you develop a product, that's really reflected towards a particular application technology, and these products that we did announce, the 1000 series products, are injection molding products. So we continue to develop different injection molding products that will increase the market potential within injection molded part markets.

And then, lastly, you had mentioned also that you have 80 different potential product applications.

Correct.

How will you prioritize the allocation of production material? Will it be effectively a first-come-first-provided or will it be your goal to have a toehold in many different compound applications?

We prioritize our -- obviously, even to get to the 80, we have prioritized what companies that we devote resources to working with, and there's a limited number of companies that we have the resources to actually work with and develop products. Further, beyond that, we look at what we believe the market potential is of those individual accounts and the difficulty of achieving their technical objectives, our ability to offer them a product that works now versus the challenge of developing a product that will work in their fabrication technology, and we also look at how good of a brand fit is it for that brand owner with the Mirel value proposition.

One of the things that is in the interest of Metabolix is to get as many Mirel logos in the marketplace per pound of product that we actually sell. So there are products which are advantageous for us. For example, the Target application is a very good application for us because a modest amount of product creates a lot of eyes on the Mirel brand's logo.

Do you foresee a limit on the number of product applications, such as you have 80 as of the June quarter? Do you see that you'll top it out at 100 or some other number?

I don't think we're going to go too much higher. I think, as I said in my comments, our interest is actually in driving the maturity of this, of customers and actually driving them closer to commercial commitment.

Okay. Thank you.

(OPERATOR INSTRUCTIONS)

We'll go to Michael Carboy with Signal Hill Capital.

Good afternoon, ladies and gentlemen. A couple of questions for you.

As you've been going through the prototyping exercise, have you run into any -- have your partners run into any particular fabrication surprises, sort of "gee whiz" type epiphanies as they've been working with the Mirel product?

And on the other side, have they run into any particular bottlenecks that you can talk about having successfully addressed?

I can't give too many specific results because, again, these are all covered under confidentiality. But I think that we're going through scaling exercises, what the customer qualifications are about.

So early on in the process, the prospective customer will take small volumes of material, do laboratory tests. That might be indicative of how that particular material might process on a piece of fabrication equipment. And then they'll sale it up to a larger piece of equipment, and then they'll scale it up to a larger piece of equipment, then an even larger piece of equipment.

And at each one of those, there are adjustments that have to be made. And I think that there are cases where we've had challenges in the scale-up and have gone back and reformulated products, and I think that that there are other circumstances where we have been pleasantly surprised at how well our material processed on existing capital equipment.

And I do want to emphasize that what we are doing is not requiring prospective customers to make new investments in capital equipment, that our materials are processable on standard commercial fabrication equipment.

Jay, is there a consistent theme, is there a consistent learning theme that comes out of that scaling exercise? That's what I'm trying to get at here.

Well, I don't think that there's -- I think it's consistent with my experience in developing petrochemical plastic products, is there's a learning process that goes through, that things don't work exactly the way you do and you start to essentially hone in on the recipe of the plastic product that actually works in a particular application.

So a plastic product, like we have reported, announced, like P1001, is the combination of the base resin -- or actually a mixture of base resins in our case -- plus a number of different polymer additives, which give particular properties to that particular product. So what we're actually providing to a customer for an application is a multi-component recipe that gives certain performance attributes.

And so, yes, there's a learning that goes through where you learn and you hone in on what's going to work for that particular application -- how do you get the machine to speed up, how do you make sure it doesn't stick to the roller, how do you make sure that it doesn't stick to the [shelf]. And those are learning things that are really pretty standard polymer processing, and I think we're sort of experiencing normal kinds of learning curves here.

Okay. And shifting to the Clinton facility, can you talk at all about the mechanics of the timetable for turnover? There will be a construction completion date. Then I guess there will probably be an inspection process. When will you actually have the plant available for commercial operation rather than when construction is completed? Can you draw the distinction between those two dates? That would be helpful.

Yes. Actually, the December date is reflective of when we actually anticipate having commercial material out of the plant.

Okay. And do you have any idea on when construction will actually be complete then?

We have estimates of that. We're not being specific about those dates right now.

Is there anything unusual about the period of the shakedown process that you envision at this point?

We're not expecting anything particularly different. The timeframe of a plant like this is often defined by delivery of major pieces of equipment, which tend to be large processing pieces of equipment or large electrical pieces of equipment that are fabricated offsite and delivered over time.

And so our timetable is similar to that. It's more defined by delivery of major pieces of equipment than actual construction schedule.

Okay. That's helpful. Then lastly, for you, Tom, could you give us some numerical detail on the headcount increases in R&D and sales and marketing that you had alluded to in one of the answers to a prior question?

Yes. I think the guidance we've provided on that before is that we thought we would be up near 100 employees by the end of the year. As of Q2, we were about just shy of 80 employees.

Okay. Thank you.

And we'll go next to Pamela Bassett with Cantor Fitzgerald.

Thank you.

Hi, Pamela.

Hi. Congratulations.

Thanks.

I wonder if you could talk a little bit more about what the strategy is for pursuing some of the other opportunities in the specialty chemicals and other chemical bio business.

We've been a little quiet on those areas, and I think it's reflective of a bit of a change of our applying our resources to those, which is not indicative that we reduced our technical investment in either the crop-based production platform or in the chemicals platform.

What we are doing is taking some time and actually getting very clear about what our strategy and business plans are around those particular enterprises and it's been -- we're not ready to talk about those strategies yet, but it's been a very fruitful exercise because it helps us to actually understand the interconnectedness between all three of our platforms and how they actually build upon each other. And it also gives us clarity as to the most efficient, effective and rapid way in which we can bring those projects to fruition.

So we are spending significantly more time now on actually developing our business plan as we continue to progress our technical effort.

Okay. So even though I think you said at the beginning of the call the focus is clearly on advancing the commercialization of Mirel, is it fair to say that in parallel, we can probably -- during that time period, you'll be focusing also on leveraging your technology platforms into some other significant opportunities in the chemical industry?

That's absolutely correct, Pamela. I think when I came on board in May, I stated that I really had three objectives. One was to be really focused about the execution of Mirel and to make Mirel really happen, and I hope you can see from the reports today that we're making real progress in the execution of Mirel.

The second thing I said that we needed to do was that we needed to develop real business commercial plans for our other platforms, and we have initiated that effort in parallel. Again, it's a question of focus about deploying the resources in the Company, which are, by definition, limited, to the few things that are going to really make a difference. So we have redeployed resources to begin to drive business and commercialization strategies around our other two platforms.

The third thing that I said that I was going to do is to build really the institutional capabilities of the firm, and we continue to build the capability and our ability to execute around and to be efficient around our financial systems, our IT infrastructure, our human resource policies. And again, we've redeployed resources to be focused in that area and to drive outcomes.

So I'm continuing exactly on the program that I stated I would in May.

Great. Thank you.

(OPERATOR INSTRUCTIONS)

We'll go to Darryl Ah Now with Fred Alger Management.

Hi. Could you just clarify for me the 108 million that you talked about in terms of your, I guess, capacity pipeline? How does that relate to the 80 product applications and the 40 advanced stage applications?

I'm just trying to understand how that would -- how that number would go up. Is it a product that moves to the advanced stage, and they get visibility and they're able to communicate that to you? I'm just trying to understand what exactly that number is.

Yes, the 108 is reflective of a (inaudible) potential of the 40, around the 40 applications.

Okay.

So as we develop with certain customers, [they're] going to come to the conclusion that our material has broader application than the particular that we're currently working on and they may expand their vision of how they might want to use that product.

In addition, some of the 80 applications, which are not currently included in that 108 million pound number, will move into a more advanced stage of maturity, and we will begin to (inaudible). Did that answer your question, Darryl?

Yes. Yes, thanks very much.

Darryl, I might add a little bit to that just to be clear. There are a number of customers in that 40 for whom we don't yet have a 2010 estimate for. And so, one of the ways in which this number will go up is as our discussions with those customers progress, we will actually have more visibility on more customers.

So the number will go up as a result of more of the people from the 80 moving into the 40 category, if you will, and then also getting more information on the people in the 40 category.

Great. Thank you.

And it appears we have no further questions at this time. Mr. Kouba, I'd like to turn it back to you for any additional or closing remarks.

Thank you. I thank you all for joining us today. We continue to set and meet our milestones. We have substantial momentum in the marketplace for our products and our services. Our technology continues to extend itself.

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

And ladies and gentlemen, that concludes today's call. Thank you for your participation. You may now disconnect.