Yield10 Bioscience Inc (YTEN) 2013 Q3 法說會逐字稿

Good afternoon and welcome to the Metabolix Third Quarter 2013 Conference Call. Today's call is being recorded for internet replay. You may access an archived version of the call on Metabolix's website at www.metabolix.com.

At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session at the end of the conference call.

I would now like to turn the call over to Ms. Lynne Brum, Metabolix's VP of Marketing and Corporate Communications. Please go ahead, Ms. Brum.

Yes. Thank you, Brenda, and good afternoon, everyone. This is Lynne Brum. Welcome to the Metabolix Third Quarter 2013 Conference Call.

On the call with me today are Rick Eno, President and Chief Executive Officer; Johan van Walsem, Chief Operating Officer; Joe Hill, Chief Financial Officer; and Ollie Peoples, Co-Founder and Chief Scientific Officer.

If you do not have a copy of the third quarter news release which was issued earlier this afternoon, one can be found on the Investor Relations section of metabolix.com. In addition, slides accompanying the presentation are available on Metabolix's website on the Events and Presentations page in the IR section.

Now please turn to Slide 2.

Please note that as part of our discussion today management will make forward-looking statements. These statements are not guarantees of future performance and, therefore, undue reliance should not be put upon them. Investors are also cautioned that statements in the discussion today that are not strictly historical statements constitute forward-looking statements. Such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated, including the risks and uncertainties detailed in Metabolix's filings with the Securities and Exchange Commission, including the Company's most recent 10-K.

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 the conference call.

With that, I'd like to turn the call over to Rick Eno. Rick?

Thanks, Lynne. Good afternoon and thank you, everyone for joining us today.

Please turn to Slide 3.

On today's call, I'll review the key drivers of our strategy and describe the enterprise we are working to build. We'll then move on to an operational and financial review of the third quarter.

As a reminder, our business is based on innovations around a family of naturally-occurring polymers, or PHAs. This proprietary technology enables us to target the growing market for advanced biomaterials in high-valued market segments.

In our primary business, biopolymers, we have maintained our focus on three segments -- film, performance additives and functional biodegradation. We have developed and will continue to build a portfolio of products where our PHA polymers enable value-added solutions for customers. This focus on targeted market segments and customers will be key to generating attractive margins in our business model.

For Metabolix, there are four key factors for our success. First, developing strong customer relationships that can generate long-term purchasing commitments and contracts as we work towards establishing commercial production. These relationships will validate market demand and will base-load our first commercial scale plan. We're already seeing the benefits of providing ongoing supply to our targeted markets and customers. We are gaining deep insights into differentiated customer needs and accelerating our pace of innovation to address them.

Second, establishing captive PHA manufacturing capacity. This captive production will enable us to sell on an ongoing basis both neat biopolymers, as well as formulated products in which our PHA production is leveraged with other biodegradable polymers available through select suppliers.

Third, as the recognized leaders in PHA biopolymers, using our extensive IP portfolio to create commercial opportunities and competitive barriers.

And finally, maintaining a strong balance sheet and a disciplined approach to cash management and operations.

We fully and clearly recognize the need to deliver upon these success factors and can see substantial business potential when we do so.

Based on these factors, we are building a performance biomaterials company. Our products meet the needs of the rapidly-growing biodegradables market, which many analysts estimate is growing at 15% per year, as well as provide differentiated performance in large existing markets, such as the PVC market. Each quarter, we aim to demonstrate additional proof points towards this vision and believe we have made considerable progress in the 18 months since launching this biopolymers business as Metabolix.

I'll now turn the call over to Johan van Walsem, our Chief Operating Officer, to review operational highlights of the third quarter. Johan?

Thanks, Rick. I'd like to provide you with an overview of the key operational activities of the third quarter and will discuss our three strategic biopolymer market segments and the supporting manufacturing strategy. I will then touch briefly on our Chemicals and Crops programs.

Please turn to Slide 4.

In our Film segment, I will note that we saw a decline in biopolymer products shipped and (inaudible) during Q3 relative to Q2. Sales of Mvera B5008 continued at a low level during the quarter. Mvera B5008 composts rapidly, but it processes most effectively on a limited range of equipment unique to a subset of our customers. It will remain part of our Film portfolio.

This quarter, we broadened our suite of compostable film products with the launch of Mvera B5010, which we designed for compostable bag in [film] markets worldwide. Mvera B5010 was our first commercial product developed in collaboration with Samsung. Using Mvera B5010, our customers are able to easily produce film with a very good balance of strength and toughness. The B5010 film runs very well on a range of bag lines, providing exceptional seal strength and good printability, making it an ideal option for compostable shopping bags and food waste collection bags. This product delivers on Metabolix's aim to extend our product range to meet customer needs in the marketplace, offering a robust suite of products. We showcased B5010 at the recent K2013 industry trade event in Dusseldorf and saw interest in this product from film converters around the globe. We have been encouraged by initial feedback from film customers based on more than a dozen customer trials over the last several weeks. Commercial ramp-up is ongoing. We will continue to build our suite of compostable film products with optimization for different properties.

Please turn to Slide 5.

Our Performance Additives segment leverages the unique attributes of PHA technology to improve the performance of other materials. Last month, we launched I6003rp, a new bio-based polymeric performance additive for recycled PVC. With disposal of short life PVC products such as packaging, bottles and medical devices, as well as durable products, such as PVC siding and window frames which are reaching the end of their useful lives, more PVC is entering the waste stream. Although PVC is one of the largest consumed polymers by volume, the amount of discarded post-industrial scrap and post-consumer waste that is actually recycled is very low compared to the amount that goes to landfills every year. According to Vinyl Plast, out of a total 6 million tons of PVC consumed in Europe during 2012, only 360 kiloton -- or about 6% -- was recycled -- mostly window frames and also wiring cable. Our I6003rp product is designed to enable PVC converters to increase the amount of recycled PVC used without compromising performance. We shared technical data supporting this performance enhancement at the recent Vinyltec 2013 conference held two weeks ago and generated significant interest. You can find our most recent presentation on our website.

Our Functional Biodegradation segment is founded upon the inherent degradability of PHAs in soils, streams and oceans, and we have been delivering specific products into water treatment applications where PHA is an important mediator in natural (inaudible) processes and have a pipeline of innovative applications of PHA in this segment.

Now please turn to Slide 6.

Establishing commercial PHA manufacturing is critical to our commercial success. While we continue to monitor the legal process for the restructuring of Antibioticos in Spain, we are actively developing alternative manufacturing options and have our engineering team conducting technical due diligence on alternative sites to enable ongoing commercial supply. In the interim, we have alternative supply options for both PHAs and other biodegradable polymers and are making strategic use of the inventory we have in hand. We'll provide manufacturing updates as appropriate.

Please turn to Slide 7.

In our Chemicals platform, we are using our PHA microbial technology to produce biobased chemicals for applications that have typically relied on products made from petroleum feed stocks. We continue to advance our technology and achieved three technical milestones this quarter. First, we demonstrated production of ultra-high purity bio-GBL from fermentation broth. Second, we showed that our P4HB technology can be adapted to produce deuterated bio-GBL through fermentation. And thirdly, we demonstrated the robustness of our microbial strains for biobased chemicals production through very successful fermentation conversion of second-generation, or cellulosic sugars to PHA precursors for both C3, which is bio-acrylic, and C4 chemicals.

Finally, in our Crops platform, we continued to work through several active grants for our industry-leading crop research. The long-term research targets multi-gene expression and transformation of plants, as the well as the use of switch grass as a platform for making industrial chemicals. We are also seeking additional grants to fund this research and we look forward to provide further updates on that front in future quarters.

And with that, I'll turn the call over to Joe Hill, our CFO, for financial results of the quarter. Joe?

Thanks, Johan.

I'll now focus on the financial results for our third quarter ended September 30, 2013. Please turn to Slide 8.

Product orders shipped and billed during the third quarter were $200,000. Revenue recognition was deferred for the majority of these shipments. Therefore, product revenue recognized during the third quarter 2013 of $300,000 was primarily from shipments to customers completed during the second quarter of 2013. We anticipate that product revenue will increase during the next 12 months as we continue to gain market acceptance for our new formulated high-performance products that are currently entering the market, although there will be fluctuations from quarter to quarter.

Through the first 9 months of 2013 ending September 30, product orders -- including excess raw material sales -- shipped and billed were $1.3 million, as compared to $1.1 million during the first 9 months of 2012. Product revenue recognized during the first 9 months of 2013 was $1.9 million, as compared to $500,000 for the comparable period of 2012.

Please now turn to Slide 9 for a review of our financial results.

Total revenue for the third quarter was $900,000 versus $700,000 in the comparable period of 2012. The year-over-year increase in revenue of $200,000 was primarily related to an increase in biopolymer product sales recognized. Total revenue for the 9 months ending September 30, 2013, was $4.5 million versus $40.9 million for the year-ago period, and the year-over-year decrease was primarily related to $38.9 million in deferred revenue which was recognized as a result of the termination of the Telles joint venture in early 2012.

Product revenue, grant revenue and research and development revenue increased by $1.4 million, $500,000 and $600,000, respectively, during the first 9 months of 2013, compared to the first 9 months of 2012.

The cost of product revenue for the 9 months ended September 30, 2013, was $2.2 million, compared to $800,000 for the comparable period of 2012. The $1.4-million increase is primarily the cost corresponding to the increased product sales revenue recognized during the period.

R&D and SG&A expenses were relatively flat quarter over quarter. Research and development expenses were $14.4 million for the first 9 months of 2013, compared to $16 million for the same period of 2012. Selling, general and administrative expenses were $9.7 million for the first 9 months of 2013, as compared to $11 million for the comparable 9-month period in 2012. The decrease in R&D and SG&A were primarily the result of decreased employee compensation and benefit expenses, which declined by $1 million and $700,000 for R&D and SG&A, respectively.

Net loss for the third quarter 2013 was $7.3 million, or $0.21 per share, as compared to a net loss of $7.7 million, or $0.23 per share, for the third quarter of 2012. Net loss for the first 9 months of 2013 was $21.9 million, or $0.64 per share, compared to a net income of $13.1 million, or $0.38 per share, in the same period of 2012.

Now on to the balance sheet. As of September 30, 2013, we had unrestricted cash and investments of $25.7 million. This compares to $53.6 million at September 30, 2012.

Please now turn to Slide 10.

For the third quarter 2013, net cash used in operating activities was $5.9 million, which was a decrease from the $6.3 million of net cash used in the comparable quarter of 2012. Through the first 9 months of 2013, ending September 30, net cash used in operating activities was $20.2 million, as compared to net cash used of $24.4 million for the comparable period of 2012. The decrease of $4.2 million was mainly attributable to a one-time purchase of polymer inventory and restructuring expenses in 2012.

We are focused on strengthening our balance sheet and we will attempt to obtain additional funding through public or private financing, collaborative agreements with strategic partners, or through additional credit lines or other debt financing sources to increase the funds available to support operations. We believe that our cash and investments, together with expected funds to be received from existing grants and anticipated product sales, will be sufficient to meet our projected operating requirements into the third quarter of 2014.

Before we move on to Q&A, I'd like to provide an update on the shareholder class action that was filed against the company in 2012 and the related derivative lawsuit. We are pleased to note that on September 20, 2013, the court granted the defendant's motion to dismiss the class action in full. The derivative action is still pending.

With that, we'll now open the call to questions.

Thank you, and they'll be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS.) And our first question comes from the line of Laurence Alexander with Jefferies & Company. Please proceed with your question.

Hi. This is actually George D'Angelo on for Laurence. I have a question on securing production partnerships. Do you guys have any update on there? And then expected CapEx outlays or working capital needed to scale up?

Sure. Obviously manufacturing -- establishing manufacturing capacity is a key goal for the company and we are focusing on establishing that captive PHA production on a number of fronts. We continue to monitor the legal process of Antibioticos but in parallel and actively looking at alternative manufacturing options at that we're also conducting technical due diligence on to secure that commercial manufacturing supply. In the meantime, we continue to develop and launch new products to develop our customer relations based on materials that we source both on the -- on PHA and other biodegradable resins while we also make use of inventory.

And I'd just add a bit to that that one of the characteristics of sites we're looking at are really of brownfield nature, which implies existing equipment in which our technology is integrated into.

Okay. Thanks. Also, on PVC blending of PHAs, could you talk a little about what is the average price point of that relative to selling PHAs directly?

On -- as we have [evolved] our business to really a performance materials business, we offer and sell value to a range of different application areas. That's especially true in the PVC performance additive. So we do not disclose pricing there. We will continue to report revenue and (inaudible) margins. We are really securing and identifying the value by working with select customers and then obviously capturing value. It's typical in this performance material space to not to disclose price lists.

Yes. I think it is early stage in the PVC market and differences of small amounts in terms of the type of quantities of PHA required to achieve certain performance has an implication into pricing levels which we're paying very close attention to.

Okay. Thanks. And just one more. In your guys' press release, there's a statement towards the end saying that you will attempt to obtain additional funding through private or public partner -- I'm not going to read all of it. But I was just wondering if that was different than the last press release and then how much money, if that's true, were you guys looking to raise?

No. I don't think this is different than what our strategy has been and things haven't changed from the previous press release. There are a number of avenues we're pursuing for strengthening the balance sheet, but nothing material has changed from last quarter.

Okay. Alright. Thanks for the clarity. Thanks, guys.

Thank you.

Thanks, George.

And our next question comes from the line of JinMing Liu with Ardour Capital. Please proceed with your question.

Thanks for taking my questions.

Thank you, JinMing.

Yes.

Go ahead.

Yes. First question about the Q3 shipment. It looks like you only shipped about $200,000 products during the quarter and I think that's the lowest ever since you started to sell from inventory. What happened there?

JinMing, quite correct. When -- in Q3, we shipped and billed $230,000 worth of product. The product B5008, a film product, continued at a very low level and we attributed this to the product having a somewhat narrowing processing window, which means that it only really runs effectively on a narrow range of converting equipment. We do continue to provide the product because it has a very good balance of properties in the sense that it biodegrades fast, so that's its key advantage. But we have launched, as we spoke in the prepared remarks about our B5010 product, and that has been really developed to broaden that processing to run robustly on a very wide range of processing lines. And we have conducted more than a dozen initial trials and so far, the feedback has been good and we continue actually to support sales on B5010. I want to stress that we'll continue to also support 5008 in those markets where we need fast biodegradation.

Yes. And I'd add to that that it's a -- I think, as Johan describes, it's a product that is aimed very clearly at a subset of our market and it's not scalable across a large customer base. It's -- the market is still quite interesting and quite attractive, but we intend to have a suite of products. And you'll be seeing other announcements of products in the future, and B5008 has a role, as does B5010.

Okay. In terms of new product B5010, two questions. Where are those customers showing initial interest? Are they based mainly in Europe or some in other areas as well? Secondly, related to that new products, can you make the B5010 using your existing inventory or supplies from other companies like (inaudible)?

(Inaudible). So in terms of the markets, the 5010 is designed for a variety of film application, but specifically with a balance of strength and toughness, very good in the shopping bag market, which is the strongly -- the European market. But we have also interest and some sales in the US, where we see the market actually also growing for similar reasons. So it's broadly directed at the shopping and waste collection bag market where you need good strength and toughness. On to the question of the particular materials used in the manufacturing of B5010, we do not disclose our formulations for sort of obvious reasons, but it is a product that is the result of our collaboration with Samsung, as we mentioned. So there are some third-party materials in there. But we continue to use our inventory in our products and also, in some cases, customers will use multiple products in blends. So --

And we are seeing activity in both sides of the Atlantic, and 5010 is finding its way to customers on both sides of the ocean.

Okay. Switch to your capacity -- commercial production capacity. Can you give us some idea how long it will take to develop a commercial capacity if you choose to use a brownfield site? And also, on that front, I notice another US company made a claim that they will have 60 million pounds capacity by the end of next year. What do you feel about the timing of that and your own efforts?

The -- as Rick mentioned earlier, JinMing, the capacity that we really focused on is to -- we have an accelerated and capital (inaudible) strategy to get into commercial manufacturing, and that also implies shorter timeline and conventional projects that might be 2 to 3 years when you do -- start from scratch. So we're certainly at leveraging existing capacity. We're still evaluating sites and doing due diligence, and so the -- once we've identified and secured a site, we'll have more clarity on the timing. And yes, we have seen -- on your second question -- the same announcements and obviously we cannot comment on other companies' plans and projections. We are really focused on building our own business, securing additional customers and proving and validating the value of our materials, especially the high-performing PHAs.

Okay. Lastly, given your current [capitalization], do you have any plans to cut more costs or do more restructuring?

JinMing, that's a good question. We do take a disciplined approach to our cash management and our operations. If you look at our SG&A and R&D quarterly spend in 2013, you will see that it is lower than in 2012. At the same time, we do look at this carefully and we need to make sure we strike the right balance and invest in our business so we can grow the top line of revenue while still maintaining a strict focus on cash management.

Okay. Got that. Thanks a lot.

Thank you.

And our next question comes from the line of Jeff Zekauskas with JP Morgan. Please proceed with your question.

Hi. This is (inaudible) for Jeff. So I remember maybe earlier in 2012 you entered into the agreement with Antibioticos and you were expecting to ramp up the capacity, if successful, maybe at the first half of 2013. So that being said, if you were to find another partner to do the brownfield expansion, that would take roughly a year to bring on the commercial capacity? Is that reasonable?

Yes. We said we're conducting due diligence on a number of sites and part of that due diligence really is to determine the [fit] and the capital required and the timeline, frankly, and it's a function of many factors, not least of the specifics at the site. So I can't comment on specific timing.

Okay. So another question would be I would assume maybe there would be roughly 4 million pounds remaining on your -- remaining of the products that you bought from ADM. So is there any possibility that you would consider lower your average selling price so that maybe you can have a better revenue number going forward?

No. The inventory, as we mentioned -- we have a number of -- the key focus for us is to really develop high-valued applications for PHA and customers in our key segments. That's film and the -- performance additives, which include PVC and other polymers. And [no] -- the inventory is, for us, a -- one of our key [interim supply] to meet that objective. So it's really targeting at validating and proving the value and use of these materials, which is counter to trying to move it at the lowest price. So we are really using it more strategically than just selling it as fast as possible at the lowest price.

Yes. I think that ties to a typical customer development cycle in this industry. Typically, customers will start with a relatively small quantity to do some internal testings, going to a small-scale market testing, then going to commercial launches. So we're looking quite far out about the best way to use the inventory, and it hasn't -- really the best thing for us is not to cut the price and try to dump it all. It's really to look at what applications map best to the inventory we have and continue to bring customers along that development cycle, consistent with our longer-term strategy within those segments.

Okay. Thank you.

At this time, we have reached the end of the Q&A session. I would now like to turn the conference back over for any closing comments.

Thanks, everyone, for joining the call and your continued support of Metabolix. In summary, we continue to execute all phases of our strategy with a keen emphasis on market development and establishing commercial biopolymers supply. We're building our markets for PHA and biodegradable materials by development high-valued products and strong customer relationships. We aim to demonstrate to you ongoing progress towards our goal of building a robust and differentiated biomaterials business. Thanks again for joining us today and we look forward to speaking with you again on our fourth-quarter call.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.