Yield10 Bioscience Inc (YTEN) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Metabolix Fourth Quarter 2008 Earnings Conference Call. Today's call is being recorded. And 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. I would now like to turn the call over to Mr. Anthony Gallo, Managing Director of Integrated Corporate Relations. Please go ahead, sir.

Thank you, Nicole. And good afternoon, everyone. Metabolix released fourth quarter financial results after the market close today. If you do not have a copy of the release, one may be found on the website at www.metabolix.com in the Investor Relations section. Making the presentation today will be Richard Eno, President and Chief Executive Officer, and Joseph Hill, Chief Financial Officer of the Company. We are joined today by Oliver Peoples, a co-founder of Metabolix and Chief Scientific Officer.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today will be forward-looking in nature. 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. I'm going to 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 it over to Rick Eno, President and CEO of Metabolix. Rick?

Thank you, Anthony. I'd like to welcome you all to the fourth quarter and year end 2008 earnings conference call for Metabolix. Today I will provide you with a review of the Metabolix vision, and a broad update of our ongoing activities. Joe will then take you through the financials. We continue to make good progress and have maintained a strong financial position.

For those of you new to these calls, Metabolix is an innovation-driven bioscience Company, which is focused on bringing environmentally-friendly solutions to the plastics, chemicals, and energy industries. We are developing and commercializing pathways and products that lessen the world's dependence on oil, reduce C02 emissions relative to traditional materials, and address critical solid waste issues. We are founded on hard science, and have exceptional capabilities in plant science, in fermentation, microbial and polymer engineering, and in market development.

We currently have three business platforms. The first, Mirel, a bio-based and biodegradable plastic currently being commercialized with our partner, Archer Daniels Midland, through a joint venture called Telles. Secondly, industrial chemicals, initially focused on C4 chemicals. And third, crop-based activities, which include our programs in switchgrass, oil seeds, and sugar cane. With that context, I will now provide you with highlights of recent activities across all three platforms.

First, let me begin with Mirel. This past quarter we continued to move towards commercialization of Mirel. I will update you on our progress on governance, the Clinton Plant, and ongoing market development activities. The joint venture relationship between agreed ADM and Metabolix outline the broad roles of the parties for the venture. In the current construction phase, ADM is responsible for designing and building the plant. And Metabolix is responsible for developing the market and technology. There are a series of governing principles and bodies, which are designed for making key decisions around the business.

It became clear that as we approached commercialization, Telles will require a more conventional governance structure in order to execute the many day-to-day decisions required to maximize the performance of a business of this type. So last year we embarked on a formal search for a General Manager of Telles. This individual will report to the Telles Board, which has equal representation from Metabolix and ADM, and have the authority to make a number of operating decisions on behalf of the joint venture. We are pleased that in January, Bob Engle joined us as the General Manager of Telles.

Bob brings extensive operating experience in the high-performance plastics business from Ticona, the Engineering Polymers division of Celanese. Bob has also served on a variety of Celanese Joint Venture Boards, so he is deeply familiar with JV structures and how to ensure their maximum effectiveness. He also has extensive international experience in Asia, and most recently in Germany where he was based. ADM and Metabolix are excited about having Bob join the team, and are pleased that we are putting the governing structure in place for an effective business start-up.

I would now like to provide an update on the Clinton Plant progress. As mentioned in our last call, ADM was conducting a detailed review of the project. This review is still ongoing with conclusions expected in late April. Our earlier guidance indicated start-up of the plant in Q2 of this year. Based on input from ADM, we are now using an October start-up production for our internal planning purposes. Let me provide you with some background on the delay.

The initial phase for the project is now in the final stages of construction, with the bulk of the remaining work being final piping assembly and detailed electrical and instrumentation installation. ADM had a construction workforce of about 500 working to complete the facility. One of the preliminary findings from the detailed review which I described was that the productivity of this workforce was beginning to decline. In essence, the pace of construction was beginning to outrun the ability of engineering to prepare detailed design packages for construction.

ADM is deeply committed to constructing the plant in the most productive way possible. To this end, they have temporarily trimmed their construction workforce by about 30%, and have supplemented their engineering team with third-party engineering support. This will allow engineering to catch up with construction, thus improving productivity. The effort will be focused on the critical equipment and systems needed for initial capacities so that we can get product to our customers as soon as possible.

About three weeks ago, I visited the site along with other Senior Management from Metabolix. Construction has moved ahead dramatically since my last visit in November. Buildings are now completed. Utility systems are near completion. And the analytical lab is operational. We met with all area superintendents and reviewed their start-up planning protocols.

ADM has assembled a very strong operational team, and has initiated an extensive operator training program consistent with running a world-class facility. We're pleased with the foundation that Clinton will provide for the growth of the Telles business. You can see some recent pictures of the site on the Telles website, www.mirelplastics.com, under Clinton Iowa Product Plant.

We're currently maintaining our guidance for the capital cost of the Clinton Plant as north of $300 million. It is important to think of this capital investment in the context of growing the Mirel business. Consistent with most process facilities of this type, about two-thirds of the Clinton 1 capital investment will be in the actual processing equipment, in our case fermentation and recovery. About one-third of the capital investment will be in supporting infrastructure and utilities, including electrical and cooling water services, control rooms, maintenance facilities, and basic site development.

As we've mentioned before, Clinton was selected and laid out with the vision of a 4X expansion. You will be able to see this potential from the pictures on the Mirel website. As such, a good portion of the supporting infrastructure investment to support future expansion is being made with Clinton 1. We expect that the economics of expansion beyond 110 million pounds per year will reap substantial benefits from this Clinton infrastructure.

We should also benefit from a more normal environment for the cost of construction materials and labor than what was experienced over the last two years while ADM was proceeding with the construction of the plant. To respond to the expected delay in the plant, we at Metabolix are ensuring that our growth in staff is aligned with the overall needs of the business, and that we are working effectively to manage our cash.

Now let me switch to our market development activities. Mirel is a superb product offering superior biodegradability, biobase sourcing, and performance levels exceeding other bioplastics. Our market development activities remain focused on six specific segments with a combination of Mirel's properties result in a unique offering.

As a reminder, these segments are packaging; compostable bags; consumer products focusing on cosmetics, gift cards, and other products you would commonly find on the retail shelf; business equipment; agriculture and horticulture; and marine and aquatic applications. These six segments represent over 2 billion pounds of addressable annual demand.

Since our last call, we have undertaken a rigorous review of our own customer base in order to understand the impact of the external business environment on the potential of Mirel. As many of you know, we have over 1,000 leads of potential Mirel applications. Over the last three months, we have had one-on-one discussions with the top 74 customers and prospects on their development programs for Mirel.

Of these, 19% actually have noted that they're even more enthused about their program with us, citing that today's environment is ideal for differentiation via innovation. 74% of our pipeline cited no change in the overall interest in the program, and will move ahead as planned. 4% have put their plans on hold, and 3% have their programs under review.

Given the difficult external environment, we are quite encouraged by the results of this analysis and believe it is due to the unique attributes of Mirel. Mirel is still a product in great demand. We continue to suggest, as you examine the business, to utilize pricing levels between $2.25 and $2.75 per pound. All of our existing contracts fall within this new range, typically about the midpoint.

Today I am pleased to announce a new customer for Mirel, Bioverse. Bioverse produces natural products, which assists bioremediation in ponds, lakes, and other water features. Their goal is to be ecologically responsible, and provide pond owners with tools and products to manage ponds easily, safely, and effectively.

Bioverse produces a water treatment system currently targeted for stagnant water systems, such as one you would find at golf courses. Historically this sphere was molded out of petroleum-based plastic and allowed for the release of bacteria for water treatment and algae control. At the end of the treatment cycle, the sphere would have to be fished out of the pond, cleaned, serviced, and reused. This was a costly effort.

Bioverse is now offering a Mirel alternative, such that at the end of its life the sphere will harmlessly biodegrade in the pond. This is a new product for Bioverse, and as a result they are projecting an increase in sales for their AquaSphere product line. As I described earlier, this illustrates how a new product made with Mirel can offer differentiation and drive growth in this difficult economic client.

This announcement is also consistent with our stated market entry strategy, in this case injection molded products for marine and aquatic applications. Mirel's biodegradability characteristics plus its ability to be processed into a variety of forms will allow for the creation of whole new product lines in the marine and aquatic space. This will be exceptionally valuable for product differentiation, as well as to address the growing issues around marine plastic waste. Moving forward, we'll continue to make customer announcements as appropriate.

Now on to our pipeline. Another way that we have measured progress towards an effective Telles business start-up is to monitor the identified potential demand for each perspective customer application for the 2010 production year. This process enables us to forecast a forward-looking estimate of potential, which is based on discussions with and analysis of our customer prospects. As a reminder, our customer prospects are not committed to purchase these amounts, nor have we received for these amounts. But it is an important exercise that helps us gauge demand.

Given the expected Clinton Plant delay, we are slightly modifying this metric in order to reflect our market potential two years out. As we've described before, new polymer market applications in general take nine to 15 months for development. [Hence] symmetric, which looks two years out, will provide a good view of those applications which we are developing, and will also be enduring beyond our initial planned start-up. The indicative 2010 demand, which we have regularly provided in earlier calls, was essentially targeted to just that, when we had originally planned for a December 2008 plant start-up.

The last time we spoke, we reported that our indicative 2010 demand pipeline relating to non food contact applications was about 95 million pounds, reflecting growth of 12% over the previous period. Without considering the change in the startup date of the plant, we are currently looking at a very similar number, specifically 96 million pounds. Let me review how this number was derived.

We began with our pipeline analysis of November 2008 of 95 million pounds. We added new accounts, gains since then representing about 5 million pounds of business. We eliminated any volume associated with any programs put on hold. This was about 4 million pounds. And we saw no major changes at the scale of our programs across the remaining accounts.

Thus, it shows that the demand from our potential customers and prospects is currently about comparable with what we saw last fall. As we have discussed in the past, we are focusing our limited pilot plant volume on converting our market demand into firm contracts, not necessarily building a dramatically larger pipeline. The portion of this pipeline, which can be converted into sales in 2010, will be highly dependent on the ultimate schedule for the Clinton Plant.

Given the expected plant delay and moving forward, we will now discuss our year two indicative demand. Based on the same customers and prospects, this is defined as the volume of material that could materialize in the calendar year two years out, in this case 2011. Currently we are looking at 135 million pounds of indicative demand for two years out. This, in effect, reflects the growth potential embedded in the accounts we are currently developing. This is all non-food contact volume. In the near term, we'll continue to focus business development efforts and utilize pilot plant material to drive this volume towards firm purchase commitments.

Now let's shift to the FDA process for food contact. The FDA process for food contact requires the submittal of a dossier, which is made up of a number of extraction studies conducted under specific guidelines. The tests vary depending on the level of food contacts [middle] chosen. Levels range from frozen food storage up to high-temperature, heat-sterilized applications. After submittal of a dossier, the FDA has 120 days to ask for additional testing or to modify the submitted approach. Once this time period has elapsed, assuming no objections from the FDA, one is free to pursue the submitted food contact segments.

Last year we submitted a pre-notification submittal to the FDA. The FDA provided us with a very constructive written response. We then submitted a series of follow-on questions, to which the FDA has favorably responded. Dossier preparation is currently ongoing. We are not projecting the timing of the overall FDA process, as we have little control over many aspects. Our entry strategy for Clinton 1 is not designed around food contact applications, and does not depend on it.

However, our interactions with the FDA, reviews by independent consultants, and our own testing give us confidence in being able to ultimately serve food contact applications. As such, we are now beginning to develop our plans to include some targeted food contact applications in the ramp-up plan for Clinton 1. We have not yet included these in our two-year indicative demand outlook, but we are beginning to investigate how food applications could integrate into out existing non-food contact pipeline.

Finally on Telles, we continue to aggressively develop our products and process technology. We've had further gains in our foam and nonwoven products, with additional successful trials since our last call. This illustrates the rapid advances which can be made at the early stage of industry development. We're also proving out advances in our technology, which will improve capital productivity and reduce operating costs as we grow the business. Our activities here include the development of new high-productivity microbial strains and next-generation recovery technology.

We continue to be very enthused about the potential for Mirel. Demand for the product remains strong in the current economic environment. And product application work is continuing to illustrate the increasing breadth of potential applications. And our Process Technology Team has a suite of ongoing advancements in development as we work through plans for long-term growth of the business.

Let me now move on to the other Metabolix platforms. These represent value creation opportunities for us beyond the Telles venture. In C4 chemicals, a key part of our industrial chemicals platform, we are continuing the execution of our ATP grant, $2 million grant aimed at producing C4 chemicals from renewable sources. There have been a number of technical milestones thus far in the program, of which we have achieved them all. We are pleased with our technical accomplishments, but wish to be sure that we are reflecting business realities.

Moving forward, we are emphasizing the specialty C4 applications, rather than the commodity C4 applications. At current crude oil prices, we believe it would be very challenging to economically penetrate the commodity C4 markets with a fermentation-based pathway. In addition to the specialty C4 family of products, we are also examining a series of new industrial alternatives. We are currently building out our intellectual property position around several alternative options, which are bio-based and could offer enhanced functionality for assusincumbant products.

Now on to the plant-based activities. In Metabolix, we have a range of ongoing plant science activities, including oil seeds, switchgrass, and sugar cane. All in all, we are excited about our plant science capabilities, as we can see this pathway ultimately replacing the capital intensive steps in the existing plastics industry, such as oil and gas exploration and production, refining in olefins by producing polymer directly in crops.

We're preparing a strategy for regulatory approvals and examining options for commercialization of our plant science activities. We aim to have commercially viable crops in field trials within two to three years. While our primary objective has been to express PHA polymers at commercially viable levels in each crop, our work has also given us insight into adding other traits into these crops, a scale which we are now examining how to exploit.

In summary, we continue to make (technical difficulty) process this quarter against our milestones. We have moved Mirel closer to commercialization and manufacturing, in market development, and in establishing an operating business infrastructure. While we're disappointed with the expected delay in the start-up of the Clinton Plant, we are very encouraged by the feedback we have been getting from our customers and prospects, as well as our product development advances. We are optimizing our long-term portfolio relative to the external environment, and we are making good progress against our internal milestones. I will now turn the call over to Joe for a review of our financial results for the quarter.

Thanks, Rick. And thank you, all, for joining us today. As Rick mentioned, we continue to deliver on our commitment to grow the Company, and are very pleased with the significant strides that we have made towards the commercialization of Mirel. Our customer wins during 2008 and in the most recent quarter speak to the demand that Mirel is already experiencing, and gives us visibility of what the future holds for the Company.

Our plant science and industrial chemicals platforms are also very important to us. And we have made significant progress during the quarter to advance their commercialization. The combination of these platforms gives us a solid and diverse growth strategy for the Company, and position us to take advantage of global environmental trends that will drive corporations to improve their environmental footprint by reducing dependence on fossil fuels, improving their CO2 footprint, and minimizing solid wastes.

Now on to the financial results for the quarter. Metabolix currently manages its finance with an emphasis on cash flow. We maintain a strong focus on cash flow and take a strict approach to managing our operating cash. We ended the fourth quarter and fiscal year 2008 with over $91 million in cash and investment balances. For the fourth quarter ending December 31, 2008, net cash used in operating activities was $3.7 million, as compared to net cash use of $3.7 million for the comparable quarter of 2007.

As we noted on our third quarter conference call, we received and recorded an ADM support payment in the first week of October 2008, whereas we usually receive and record it in the last week of the quarter. The four support payments that we receive each year do not always fall cleanly in the calendar quarters. For example, in 2007 we received two ADM support payments in the third quarter, and one in the second quarter, and one in the fourth quarter. The fourth quarter 2008 cash flow reflects $3.2 million in support payments from ADM, and (technical difficulty) 2007 reflects $1.6 million of support payments from ADM.

As we had previously discussed, we do anticipate a higher cash burn between now and the commercialization phase of the joint venture with ADM. Cash usage during Q4 2008 was below the roughly $5 million that we expected. And we expect that burn to increase modestly until we reach the commercialization phase of the alliance with ADM. Once we enter the commercialization phase, the cost that Metabolix incurs for sales and marketing and private development of Mirel will shift over to the joint venture, resulting in an expense decrease for Metabolix.

While we are fortunate to maintain a strong cash position, we think it only prudent to continue tight management of our cash during the delay in the start-up of the Clinton PHA production facility. In response to the delay, we've modified our budgeted spending for 2008 to keep our cash usage low by shifting much of our planned hiring for 2009 to the second half of 2009 and into 2010. While there is a financial impact of the expected delay in the plant opening, I expect that a few months of delays perhaps less important to the long-term success than material pricing or the future potential to expand production beyond the original target of 110 million pounds.

In the third quarter, we increased our historical guidance by $0.25 per pound to a level of $2.25 to $2.75 per pound. We continue to monitor those numbers closely, and we believe they are holding up well in this environment. While the economy has weakened since we last communicated with you, the value proposition of Mirel has not changed.

In some ways, it may have improved. Very recent studies of consumer preferences indicate that despite the recession, consumers' interest in green products has not really changed. Given the long-term nature of the business and the capital efficiencies that we expect in the future, we remain enthusiastic about the long-term value of proposition of our technology, and our competitive position.

GAAP net loss for the quarter was $8.9 million, as compared to a net loss of $7.2 million for the fourth quarter of 2007. As expected, the fourth quarter loss is greater than the cash used in operating activities. As we've discussed before, all of the payments that we receive from ADM are recorded as deferred revenue for GAAP purposes, and therefore do not appear on our income statement.

As stated previously, during the fourth quarter we did receive two support payments from ADM. We also received payments of $500,000 during the quarter for reimbursement of pre-commercial manufacturing expenses. To date, we have received support payments totaling almost $18.9 million from ADM. The deferral of recognizing payments from ADM will continue until the commercial phase of the alliance is reached. We also recognized nine cash stock-based compensation expense of $1.2 million on a GAAP basis during Q4, which also leads to a reported net loss exceeding cash used in operations.

Let me now give you some additional detail on the Company's financial results for the fourth quarter 2008 ending December 31. Revenues totaled $399,000, as compared to $887,000 for fourth quarter in the prior year. Fourth quarter 2007 revenue included $500,000 from a license agreement. Grant revenue and R&D revenue were roughly comparable to the year-ago period.

Our operating expenses during 2008 grew modestly as we continued to grow the Company. Total operating expenses for the fourth quarter of 2008 were $9.7 million, an increase of $236,000 relative to the comparable quarter in 2007. Our operating expenses for the fourth quarter of 2008 was lower than the average quarterly trend for the previous three quarters, which is about $10.3 million.

This is due to lower accounting and audit fees during our second year of Sarbanes Oxley compliance, and due to lower material production costs in Q4. For the fiscal year 2008, total operating expense was $40.1 million compared to total operating expense for 2007 of $35.5 million. The increase in 2008 operating expenses primarily reflects increased expenditures for product development and pre-commercial manufacturing.

While we do not provide financial guidance, we think it is helpful to provide some insight on certain matters that we may -- that may be useful to investors. As noted above, we presently emphasize cash flow rather than GAAP net loss in our management of the Company. The cash used in operations of $3.7 million for the quarter is indicative of our current operating profile, excluding capital expenditures when adjusted for the additional ADM support payment we received in October.

Now on the balance sheet. Our balance sheet remains strong. On December 31st, we had cash and short-term investments of $91 million. We have no debt. We expect this capital will be adequate to build our sales and marketing infrastructure, conduct pre-commercial manufacturing to expand our research and development to build the Company.

We continue to work with a roster of successful companies that are partnering with us to create alternative solutions using Mirel, and change the way they bring their products to the marketplace. We are pleased with the progress we have made during the fourth quarter, as we continue to get closer to the commercialization of Mirel. With that, we'll open the call to questions.

Thank you.

(Operator Instructions)

And we'll take our first question from Laurence Alexander with Jefferies.

Good afternoon.

Hello, Laurence.

I guess first two questions about the delay. First of all, how -- is there any penalties in the agreement with ADM so to the extent that their staffing problems have led to the delay that your share -- that the repayment from the JV to ADM will have some adjustment to it?

No. There are no penalties in that, Laurence.

And I guess secondly, is there any rough rules of thumb for how much the cost might be escalating with bringing in some extra consultants to help on the engineering side?

No. I -- no rough rules of thumb. But I would expect the cost of the engineering work will be far less than the costs associated with poorer productivity if you don't have the engineering work done. So -- but there are no rules of thumb. It depends very much on the specific situation at hand.

And I guess thirdly, just on the next-generation fermentation bugs, given the delay will you be able to shift the production to a next-generation bug and then bring down the cost structure of the facility?

We continue -- Laurence, this is Oliver Peoples. We continue to provide a series of improved organisms, and expect to do so for the considerable future. We, however, want to validate their performance at scale before we introduce them into the Clinton Plant. And therefore, we'll be expecting to be adding new ones in. I think it's on a case-by-case basis. And it depends on the performance scale, which has to be validated at another site. But yes, we expect to be introducing new organisms.

And then lastly, Ollie, if you wouldn't mind fleshing out a little bit the comment about leveraging your skill set and inserting traits as to what types of opportunities you might be looking at?

I think as we've looked at this whole -- obviously one of the big things that's happening out there is there's at least a very real expectation of considerable additional funding for biomass related programs. Metabolix has control of one of the most attractive value-added core products that could be produced in a biomass crop. That would be the PHA Bioplastics. To do that and to introduce that, we've developed a very high productivity transformation system for that crop, and the ability to introduce multiple gene systems.

Obviously, as one looks beyond the PHA trait, you look at the potential for developing multi-gene system technologies, which could encompass any number of other factors. For example, I think there's an awful lot of interest in exploiting genetic engineering to introduce hydrolytic enzymes into these crops, to modify lignin, to do a number of things. So as we are looking at our progress on the PHA plastic trait and what we've had to learn how to do to do that, we're examining where it makes sense to look at stacking additional traits to improve the overall economics of biomass based plastics and biofuels.

Thank you. I'll get back in queue.

And we will take our next question from Michael Cox with Piper Jaffray.

Good afternoon. Thanks for taking my questions. I was wondering if you could quantify the increase in the cash burn that you've set to earn the next few quarters, that you indicated in the release?

No. We haven't said how much it's going to be. We said there is a modest cash burn, that if the cash burn had been about $5 million per quarter, that if that were to increase to about $6 million per quarter, that would be an appropriate trend to look at.

Okay. And I guess it seems easy at this point to say that the pricing is holding, considering that you're not at commercial scale on the product, on the Mirel product. What level of flexibility do your customers have to adjust prices once firm commitments are made late this year now?

I guess if you're asking how contracts are written with customers, there is a wide range. But for the most part, price is established as a fixed component in those contracts.

Okay, but the contracts themselves for specific amounts, have they been signed? For the ones you've press released, are those already firm contracts? Or -- you've talked a lot about indications of sales, but not firm contracts. So I'd be curious, are the ones you press released, do you have firm contracts in the price range that you've outlined before?

Exactly. That's exactly right.

Okay.

But we're not -- we haven't talked about the volume attributed to those signed contracts, but all of the announcements we've made are based on firm contracts at the pricing level we established with committed volume.

Okay. And at this point with the delay, I guess I'm curious what are the next stages beyond this construction and engineering staffing mismatch? Where can see further delays? Or is this it? I guess I'm just trying to get a sense for where we could be on this -- in this finality of this process.

Well, I think the plan that ADM is preparing on this is due in late April. They still have a very significant workforce out moving ahead at Clinton. We were out there a couple of weeks ago with them. And they are assembling it. You walk through the plant, and it looks nearly complete. It's the issue being electrical instrumentation and final piping. So it's well along the way, but the details of that plan will become available in late April.

As we mentioned in the call, for internal planning purposes, we're using an October start. That's not to say, Michael, that something could come up that could move that. It's just what we're using to inform our customers and to do our own resource planning around. But until we see the final plan or the proposed plan from ADM in late April, that's the best information we have.

Okay. That's fair. And I believe, Joey, you had mentioned that you have adjusted some hiring due to the delay. Is there any way to quantify what some of the changes in the way you're running the business to account for a half-year delay?

Yes. I can comment a bit on that, Michael. The -- for example, when you begin moving polymer out to a series of customers, we'll need a number of highly-skilled people out there that have a great understanding of injection molding, of sheet, of film processing. And reflecting that, we expect product going to customers a bit later, we can slow the ramp-up of that resource addition, in that we don't have product going to customers now so we don't need those individuals on board yet.

Similarly, we have a plan in place to grow our staffing in Europe. And again, with the delay we don't feel the need at this point to begin putting a European infrastructure in place for a bit longer. So the two specific areas we're actually slowing down the addition of resources to nearer our expected commercialization path for Clinton.

Okay. Thank you.

And we will take our next question from Pamela Bassett with Cantor Fitzgerald.

Hi. Thanks for taking my call. Can you give us an update on progress in optimizing the various manufacturing grades that you'll need for each type of plastic? So for compostable bags, how is that formulation moving along? It seems pretty set for the sheets. And what about injection molding? Are there still different grades of plastic that you're working on?

Yes. I think we're working across a number of different processing technologies which require, in many cases, slightly different grades; film, injection molding, sheets, thermal forming non-wovens, foam are all areas we're working on. And I don't think there's a blanket answer to your question, Pamela.

But we're moving ahead on all those different grades as we learn more and continue to improve them. But I think the -- if you look at the way we've described our market entry strategy, we focused very heavily on some developmental partners, such as the announcements we've made, to really prove out and hone the grades for the given applications.

So I think as you start seeing -- if you're seeing customers across those different applications, particularly film, injection molding, and sheet, you can sense our comfort with those grades. We've not made announcements yet around non-woven and foam, which is a bit further out. And we're enthused about it, but it's going to take some time working with our developmental partners to get to the point we feel we're at a resin grade that is all set for commercialization. But we feel we're getting close.

Okay. And how much, if you look at the total workload, how would you say it's spread out over Mirel versus C4 chemicals versus plants? How much time is the organization spending, or effort and money, on each of those?

Well, we haven't obviously disclosed the specific proportion of resources across each. But I think it's clear just from the amount of time we spend on the call, that we spend a fair amount of time on the Telles activities. And I don't think that directly correlates to the amount of people in it, but it clearly is a very high priority for us.

But, Pamela, we haven't really broken those down by either headcount or resources incurred on each. But right now I'd have to say that Telles is getting the lion's share of management attention right now. But the other programs are still in the technology development stage. So there's a different group working quite effectively to move those forward.

And when I visited ADM for their business review at the beginning of October in '08, they -- management there confirmed that the plant was on track for completion. And there was still an expectation of commercial deliveries from that plant in Q2. Can you be a little bit more specific about where the disconnect might have been? I'm really still not clear.

For sure. When we had our earnings call in November, we described that ADM was conducting a study to take a look at what the final schedule and cost-to-complete were. So that entailed a very detailed look at call it a week-by-week, month-by-month schedule through the expected commissioning of the facility. In that study, it was identified that what was happening is there is -- ADM was pushing hard to finish the plant, was that the construction resources they had on site had less productivity than expected.

And that was an insight that occurred after your conversations at the ADM meeting it sounds you like attended. So based on that, the action that they're pursuing is to begin to get the balance of engineering back in line with the construction workforce by slowing it down so you don't have idle people on the worksite waiting to be given direction on what to do. So that was --

What was your actual -- ? I'm sorry. Go ahead.

That was identified towards the end of last year. And at that point, they were working on a final plan. But the intent was we can't continue on with a large construction workforce with low productivity. We have to improve that and give them credit for that because they wanted to make the plant produce -- construct the plant in the most productive manner. But at the time you're talking about was when that study was ongoing. And that insight came out in the course of that study.

So were there delays in delivery of equipment or -- ?

No.

You know, you're talking about they're still doing pipe installation and electrical, and they're still installing instruments. So were there delays there in receiving anything?

No. No. The -- all major equipment's on site. It's in place. All major piping is pretty much in place. But what happens is is a lot of very detailed work that's required. If you think about constructing a house, the roof, the frame, the foundation goes up pretty quick. But getting everything inside done takes a lot of time. And that's the stage we're in right now.

And it takes a lot of skilled manpower and a lot of good guidance by engineering to say, these are the specific things we want you to work on and this type of pipe, this type of instrument in this location, and there's a lot of detailed work required there. So there's no issue at all with equipment delivery, be it major equipment or minor equipment, but it's just making sure the details are in place so that the construction workforce can be effectively guided.

So when you talk about delivering commercial Mirel in October, is that -- is there an assumption there that some period of shakedown will have been gone through, and optimization so that the plant is actually running before then? Or is that when the switch is going to get turned on?

Well, right now for internal planning purposes, and again let me be clear that we're expecting a formal plan on this towards the end of April, but our working assumption is that's when the plant gets turned over from construction to operations. And the shakedown will occur, and product will go to customers. And we're not -- until we see the operating plan and the capital plan, we can't comment more on how they're going to be integrated, whether there's parallel processing going on, or it's going to be more in series. But that's currently being worked.

Okay. Thanks. And just one last item. If you could, talk a little bit more about the types of technologies that you might be deploying to create stacked traits.

Yes. As I said, while our primary interest is in essentially stacking multiple genes for the PHA plastics, but we are looking at all our systems that could be valuable in terms of an overall cost of producing a dedicated, as we refer to it, biorefinery pigstock crop. And we're looking at a whole range of things and trying to understand where we have a sensible play, and where we may have to talk to some other people. But we're just basically mapping all of that out. What you have is --

So might you --

You have the ability to deploy those things. So that does not necessarily mean that we have gone out looked for all these gene traits ourselves. But I think as our objective is really the value added core product, we feel we're in a reasonably good position to have discussions with folks.

So would the -- let's say you end up licensing a trait. Would the licensor be providing the tool set for actually creating that in combination with whatever technologies you might integrate along with it?

No. Basically those traits are typically -- are typically genes. And I think our capability is inputting all those genes into the system in a way that makes them work properly.

So the current technology that has been developing continues to be developed at Metabolix would be used, and that's the tool set that would be used to create the stacked traits? Do I understand?

Exactly. Exactly. We've been -- we have basically been involved in this multi-genes systems technology now for a number of years. We've developed some real interesting capabilities there. And our interest would see how we can increase the value of these biomass crops to produce the bioplastic. And if there's other traits we can add in there that make sense for our business model, then we are certainly in the position to be able to do that with our technology.

Thank you so much.

Thank you, Pamela.

Thanks.

And we'll go next to Michael Carboy with Signal Hill.

Good afternoon, ladies and gentlemen. Rick, would you describe the EPC package that was signed to build the plant as being particularly loose or nonstandard? I'm trying to understand this issue of engineering falling behind, construction -- actually, construction progress, normally everything is done, final plans, metal cuts, specs, and everything else are done when that EPC contract is signed.

Yes. In many cases that's how things are done, particularly for technologies that are run for a large number of years, whether it's ethylene, polypropylene, or whatever there's usually a standard EPC package that's put forward, bids on that, and move ahead like you're implying. You have to keep in mind that this is a really first-of-a-kind technology being built at scale. And, in effect, the EPC package that you referred to, from my understanding, was the conceptual process design as opposed to a full EPC package when we embarked or ADM embarked on constructing the plant.

So there was a fair amount of work and details that were being produced or developed in parallel with the construction, particularly around the end-detail engineering or what I would call the more standard systems, whether it's utility systems, steam traps, recovery systems, vapor lines, that type of thing. And that was going in parallel with the construction effort.

So that was the decision that was made. And a lot of it had to do with this is a first-of-a-kind technology, and there wasn't a standard EPC package where you could take a plant that's been built before and then say, please replicate this. So in effect, it was something that was done with a little bit more parallel processing than I think the case that you -- the example that gave or that you were hinting at.

So -- because I was thinking along the lines ADM has an enormous amount of building plants and facilities, some garden-variety routine processing facilities, and other more sophisticated chemical facilities. For example, the ethanol operations that they've established. So I'm just trying to figure out how this issue slipped between the cracks at ADM. And I'm hoping maybe I can get you to comment a little bit about that because it does seem like there has been some disappointment in the way that the project management has been orchestrated here. Maybe I'm just being unfair, but it just feels that way from the outside.

Yes. I think both ourselves and ADM are disappointed with the schedule slippage. And it's something that I think there was a lot of parallel processing going on, and as a result -- and also a very lean workforce. And as a result, I believe it sounds like a few things did slip through the cracks. But I really can't comment too much on the detailed project management activities within ADM. But from the view from the outside is that was a lot of parallel processing going on, and some things -- apparently there was not line of sight on the final stages of the detailed design, while the initial stages of major equipment and layout were being actually implemented.

Okay. All right. You had alluded to (technical difficulty) future expansions having, perhaps, superior expenses. I understand the utility aspect and the footprint aspect giving you some economic leverage there. But just in terms of the materials for future expansions being cheaper, do you have any idea what -- by what amount construction material costs have changed by from when the EPC contract was originally signed to where they are now?

Yes. In our last call -- Michael, you can go to the script of the last call, and we provided some details on rolled steel. But it dramatically escalated, and it's come right back down now. And during the escalation period is when much of the steel was being purchased for the plant. We're not able to put a specific percent on that because we would have to, in effect, time average the purchase of steel over the course of that run-up. But it has gone down quite a bit since the major structural scale was purchased to put into Clinton.

Okay. And shifting to a more positive topic, and that is start-up, how do you envision ramping the start-up process? I think it's probably pretty unrealistic the to assume the plant starts up at full capacity from get-go. How should we think about ramping productivity, assuming everything unfolds on an October turnover? And then we can make some assumptions with regard to shakedown period.

Yes. We've not provided specific guidance on a very detailed ramp-up month-by-month plan. I think what you can -- the input we've provided that I think is helpful for you to model that is a nine to 15 month development time for polymer applications. We talk about we've got a number of things ongoing right now with us. Some of the -- the clock, so to speak, is ticking on a number of our applications within that.

Once Clinton becomes live, we're able to move a lot more forward very quickly because we've -- our commercial team has done some nice groundwork with a series of customers, and ramp-up from that basis. We've talked about our year two indicative demand, which are the people that we're talking with and have moved forward with around formalizing development programs for Mirel.

But outside of that, Michael, we've not provided a lot of detailed guidance and don't intend to at this point of specific ramp-up plans as it relates to volume. But just to let you know that with Bob Engle, our new General Manager on board, we're spending a lot of time communicating with ADM on exactly what that first set of fermentation batches will be, what we're going to do with it, where it's going to go, and what that start-up mix is going to look like for the plant. And our commercial team is working quite hard to identify exactly which customers are going to get that mix. So there's a lot going on there. But it still really is a work in process at this point. And I feel pretty happy with how people are working on that problem.

All right. And can I get you to explain a little bit about what is a specialized C4 rather than a commodity C4?

Yes. Sure. When you think about commodity C4s, we've talked a lot about butane dial, which is a workhorse C4 chemical. And our view of the economics, butane dial at a $45 a barrel crude oil environment, and especially when butane dial currently has four different technologies than can lead to that petroleum-based technologies, the economics of a fermentation-based pathway are pretty challenging. So that would be what I would call a commodity C4 chemical.

When you think about the specialty chemicals, you think about the [porolodones], which are really a derivative of butane dial that are used in personal care, paints, adhesives, pharmaceutical intermediates, among other things. So that's the distinction we're making. We're still executing our ATP grant and moving along with that across the broad family of C4 chemicals. But we're shifting our emphasis and resourcing best we can away from the commodity side more into areas that are specialty and higher priced, and less subject to commodity cycles.

Okay. And the last question, on the customer preference front in the context of the macroeconomic issues, you'd noted 74% of those of the top prospects you'd talked to had indicated no plans on changing. Just philosophically, given the macro impact that the consumer markets, the industrial markets are going through, would you expect to see more -- wouldn't you expect to see a little bit more change?

I have to say I think, honestly, Michael, we did expect to see some change. And our commercial team went out under our direction to say, let's take a really good look at our customer base and prospects, and make sure that we have our finger on the pulse of the market. And the results that we presented today was what the team came back with.

But the interesting part was the anecdotal feedback we got, where the customers in our pipeline have been enthused about Mirel and waiting for Mirel for quite a long time. And they can see great opportunities of using the product. It's a very unique product in terms of its bio-based nature and biodegradability characteristics. And it's one -- and I think another view is that this time will pass, and these companies want to be there with a differentiated product.

And while you're looking at a whole series of applications, we're looking at -- most every customer we're looking at sees Mirel as a component of a development plan. And as a result, it fits into their -- if they're looking at their portfolio of development projects, Mirel is unique. It's differentiated, and it fits in. So in that context, it does appear that the customer base is still enthused about going forward with what they've been working on sometimes for upwards of two to three years.

Great. Thank you very much.

Thank you, Michael.

And we'll take our next question with JinMing Liu with Ardour Capital.

Good afternoon. Thanks for taking my questions.

Hi, JinMing.

Hi. My first question is about all the contracts you have announced. Can you give me more color on the structure of those contracts? All those contracts take-or-pay or not?

No. They're not take-or-pay. There's estimated volumes, fixed price, and they all have slightly different forms. They often have co-branding agreements associated with them, as we encourage and our customers are encouraged about using the Mirel logo on their products. And there are various rules around intellectual property management and development associated with them. But no, they're not take-or-pay. And take-or-pay contracts are really not common in the polymer industry.

Okay. Will the delay in the Clinton facility cost you any penalty off all those contracts or not?

No. No. We have in -- as our team was working on those contracts, we made sure that we covered eventualities and are comfortable that we're in good shape with all of our contractual commitments, assuming our October start date of the plant and even beyond then. So we wanted to be sure that we didn't get in a situation where we were not committing ourself to something we didn't feel extremely confident we could deliver on.

Okay. About the specialty C4 chemicals, tell me -- can you tell me some color about the market size for those chemicals?

Yes. It's going to be -- if you look at the total market of C4 chemicals, I've seen two, two and half billion pounds. We're probably talking a third of that, something on that range, factoring out the butane dial keepage. But we've not done a detailed actual market analysis on that. What we're doing is shifting to first of all prove out and understand our own internal economics for specialty C4 chemicals. And as we move forward, and based on our success in that area, we will clearly be getting into market structure analysis, market potential growth. But this, JinMing, is still right now at a technology development stage around that family.

Okay. You mentioned that you are working on next-generation recovery techniques. I assume those are for the PHA isolation?

That's right.

Yes. If you apply this new next-generation recovery technologies, will you have to do some changes in your Clinton facility?

Well, it depends. There's a range of things one can think of. And we have our -- ADM and ourselves are working on this where you can look at next-generation recovery technology is drop-in and requires largely controlled in-process changes. You can look at next -- the next -- you can look at technology for recovery that would require some modest change to the equipment.

And you can look at complete blank sheet of paper recovery technologies. And we have ongoing work looking at all three. Obviously what we want to do is to get Clinton up and running, and sold out as quick as possible. And we won't be making any major changes to the technology in that -- while we do that that could cause us any -- introduce any risk in terms of selling Clinton out.

But there are things that we've proven out already that we may very well apply to Clinton that we're quite comfortable in. So I can say, JinMing, that this is just as you would expect in early-stage technology development is the creative people we have working on this are coming up with lots of different ways as we go to Clinton 1, Clinton 2, Clinton 3, Clinton 4, we can put different forms of technology in that can either meet specific market requirements or drive our costs down and increase capital productivity because as we look for the long-term profitability of the business, that's going to help contribute to it.

Okay, and my last question. You're mentioning that you are reconsidering food contact applications. What kind of potential are we talking about here?

We -- what we are looking at, we were happy with the progress we're making with regards to getting dossiers submitted to the FDA. We haven't looked at detail in terms of what portion of that food contact pipeline we would include with our non-food contact pipeline. But I'll just say, JinMing, it's significant. And you can go back to some of the earlier earnings calls for Metabolix where food contact volume was reported.

I just caution you from adding it to what we have right now because we've not gone through the process of which portion of that pipeline would we integrate with our non-food contact pipeline for Clinton start-up. But I can just tell you that it's pretty significant. But we're not ready at this point to add it to our indicative two year out demand. We just wanted to let you know that we're beginning the process of thinking about it and making sure as we look at our production plant and our market opportunities, we're beginning to think about food contact, as well.

Okay. Thanks.

Thank you.

And we will go next to Jeff Osborne with Thomas Weisel Partners.

Great. I just had two quick ones. Should we expect an ADM payment in both the second and third quarter, in particular with the third quarter given the delay? I was just uncertain how to deal with that in the model.

So for modeling, Jeff, you could model receiving of payments at the end of Q1 and the end of Q2. Technically those are payments for Q2 and Q3. But we usually receive them a few days before the quarter begins.

And then following up on a prior question, I want to make sure I understood you. The nine to 15 month development time for polymer applications, that's not the same as -- we shouldn't be thinking it would take nine to 15 months to reach normalized gross margins of the plan. It should be must faster than that. Is that correct?

Yes. Anthony explained what the nine to 15 months is as a customer is testing out a new polymer material, they will run their own internal tests on it. They will develop some prototypes, perhaps some tools. They will test that material out. And by the time they are comfortable with it and it's run through all the internal hurdles, that begins to scale off. It's to help you think about the fact that we're not selling a commodity.

We're selling a performance-oriented material. So you don't turn a plant like this on and go right up to full rates initially. It's just how the business works. So that's what that nine to 15 months is intended to do. And the customers we have in our pipeline, that clock is ticking on many of them, some pretty far advanced, some not so far advanced; really based on limitations of our pilot plant volume. But it's not an indication. It's different than an expectation about when Telles will hit any type of financial performance.

I got you. So would you think in terms of if you could produce $1.25 a pound and sell it at the midpoint of the range that you provided, do you think it would take a couple of quarters to reach that then? Or -- I'm just trying -- it's taking obviously a lot longer to build this facility that you rightfully pointed out was the first of its kind. You've also never run a plant, as well. So I'm just trying to get a sense of what you're thinking on that front.

We haven't given much guidance as to what some of the margin and ramp-up information is going to be. So as you look at what the -- remember, what Telles pays for the product is cash cost for the material. So the margin is a matter of what the cash inputs are plus any overhead of running the plant. So the sales -- so as you're modeling here what your margins are, the sales cycle is before any of the sale occurs. Once a customer is signing for us, we're expecting that the margins that we're receiving from any particular customer from the first day of product we're delivering them isn't going to fluctuate significantly from margins from day 180.

Okay.

I just had -- there's just one more thing you said, Jeff, too, on running a plant of this type. I just wanted to make sure I addressed that part of your comment then. Keep in mind that we've been running our pilot facility for a couple of years right now, have experience with the fermentation under all sorts of conditions, under all sorts of different scales. And recovery clearly has -- the understanding of the recovery process has just really leaped ahead in the last year.

Certainly since I've been here, I've seen it dramatically enhanced. And ADM has sent all of their ship supervisors down to the pilot facility to actually get hands-on operation experience. So to your comment on running a facility of this type, there's a lot of work going on right now to ensure that everything we know is clearly transferred into Clinton operation protocol.

Okay. And then can you just refresh our memory then how we should think on the modeling front once the plant does go operational in terms of revenue recognition? So you addressed the cash payments from ADM for the forward-looking quarter, but how should we think about from a recognition standpoint, in particular, for the fourth quarter?

So the way the commercial alliance is working with ADM in the phases is that the joint venture Telles recognizes the revenue from the contract from the customer. The customer signs the contract with Telles. Telles pays to Metabolix a royalty on every pound of Mirel sold. So for product that comes out of the Clinton facility, Telles purchases it at a cash cost, sells that to the customer, and pays Metabolix a royalty. Telles has sales and marketing expense, has product development expense, has cost of goods sold, runs an operating profit. And then the operating profit is shared 50/50 as equity income between ADM and Metabolix, except that the first profits go back to ADM to recover the construction cost of the facility.

Right. Okay. Thanks much.

Thanks, Jeff.

And that concludes the question and answer session today. At this time, Mr. Hill, I'd like to turn the conference back over to you for any additional or closing remarks.

Rick?

Yes. Thank you all for attending the call today. As you can tell, we're very pleased with our progress. And we really have a lot of enthusiasm about Mirel and our other platforms. And we look forward to updating you on our progress across each of these platforms during our next call. So thank you very much for attending, and appreciate the interest in Metabolix.

And that does conclude today's conference. We appreciate your participation, and you may disconnect at this time.