Yield10 Bioscience Inc (YTEN) 2015 Q2 法說會逐字稿

Greetings and welcome to Metabolix's second-quarter conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Ms. Lynne Brum, VP of Marketing and Corporate Communications. Thank you, ma'am, you may begin.

Thank you LaTonya. Good afternoon everyone and welcome to Metabolix's second-quarter 2015 conference call.

Earlier this afternoon we issued our second-quarter 2015 news release which can be found in 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.

Please turn to slide 2. Please note that as part of our discussion today management will be making forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them.

Investors are also cautioned that statements that are not strictly historical constitute forward-looking statements. Such forward-looking statements are subject to a number of risks and uncertainties that could cause the actual results to differ materially from those anticipated.

These risks include risks and uncertainties detailed in Metabolix's filings with the Securities and Exchange Commission including the earnings release filed this afternoon and 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 this conference call.

Now we'll turn to the agenda for our call today. Joe Shaulson, our CEO, will talk about highlights for second quarter. Johan van Walsem, our COO, will provide an update on our commercial activities. Then Joe will review some financial items for the quarter and provide a recap of our business milestones.

For Q&A today we'll take questions from the analyst community and then we'll address a few questions submitted in advance by shareholders. Joining us when we open the call to questions will be Ollie Peoples, Co-Founder and CFO, and Chuck Haaser, our Chief Accounting Officer.

With that I'd like to turn the call over to Joe Shaulson. Joe?

Thanks, Lynne. Hello everyone and thanks for joining us today.

Let's get started on slide 3 with a quick reminder of our strategic priorities. In today's call we will focus most on financing, commercial development and biopolymer production. But before we get into the highlights for the quarter, I'd like to spend a couple of minutes putting our strategic priorities in context relative to the strategic pivot we are executing to create a successful specialties business and to position Metabolix for commercial success and growth.

Please turn to slide 4. Let's recap the three key phases we have been through in the development of our Company.

During our technology phase we developed our technology platform in PHA, built our core bioscience capability, developed methods to economically produce PHA biopolymers and captured intellectual property related to all of these things. During our initial commercialization phase, we established a joint venture with ADM to manufacture and sell our early PHA products as bio-based biodegradable replacements for conventional plastics.

This was a commodity approach and we faced challenges with that strategy and it ultimately failed. However, we did accomplish something very important during that phase and that was the successful scale up of PHA manufacturing to world scale while at the same time gaining important knowledge about our polymer products and technology. This experience was critical to the strategic decisions we made last year and will undoubtedly help us reduce risk as we look forward to commercial scale operations.

Now we have pivoted to a new business strategy focused on specialties where we are leveraging our core bioscience together with the wealth of experience gained in earlier phases to develop unique differentiated PHAs that have the potential to unlock commercial opportunities in specialty applications like PVC and PLA additives, functional biodegradation and barrier coatings for paper. In making the pivot we reshaped the Company to focus on our specialty biopolymers business. We have also been adapting our business and Company culture to position ourselves for commercial success with this new strategy.

Please turn to slide 5. We didn't just decide to sell our early generation product at higher prices and call them specialties. Instead we had to develop a new generation of PHAs with the properties needed to add value for customers in specialty applications.

We were well prepared for this because our core bioscience allows us to engineer microbes that produce specific monomers in defined concentrations and we can control polymer structure and molecular weight. This allows us to design polymers that have the functionality required for a diverse set of specialty applications and end-product performance.

Our new high molecular weight low T sub G, amorphous PHA rubber is a great example of this. And we are producing it today at our pilot plant and working with customers to commercialize this innovative material. At the same time we continue to push the envelope in PHA research and development working on even more advanced polymers that will have unique properties for higher performance applications.

At the end of the day our pivot to specialties was enabled by our core bioscience and focused biopolymer research and development. But success will require an integrated approach with execution against each of the strategic priorities we've been talking about since last year.

Please turn to slide 6 and I will highlight several areas where we have made good progress since our last call. First, let's touch on financing and our capital structure.

In June we raised $15 million in a private placement of equity securities. With this raise we strengthened our balance sheet and ended the quarter with approximately $22.7 million in cash.

In May we completed a reverse stock split at a ratio of 1 for 6 and we regained compliance with the NASDAQ capital markets listing requirements in June. There have been some significant changes to our capital structure so I will mention that as a result of the reverse stock split and the new financing we reported approximately 27 million shares outstanding at the end of the second quarter.

Now turning to biopolymer production capacity, we have been implementing a plan to significantly increase our pilot production capacity for Mirel PHA biopolymers. I am pleased to report today that we have completed the planned capital upgrades at our contracted biopolymer recovery facility in South Carolina and recently resumed biopolymer recovery operations at the plant.

In the third quarter we will ramp up production as we begin receiving larger scale shipments of fermentation broth from our new US-based supplier. Production at the pilot plant will focus on making our new amorphous PHA for both commercial and development needs.

Now turning to commercial development. As discussed in prior calls we have been transitioning to a specialty materials business model that requires a high level of customer engagement and technical service focused on solutions that create value for customers. We continue to work on projects across our target application spaces, PVC processing aids and property modifiers, PLA modification, functional biodegradation and barrier coatings for paper.

In our first-quarter call we outlined a solid portfolio of commercial activity with examples of specific projects we are working on with customers. We are starting to gain visibility on initial customer conversions and are happy to report that we have begun initial commercial sales to a few customers in the first half of 2015. Johan will provide additional details but the key point for me is that in each of these cases we are delivering solutions that cleared the challenging technical hurdles and validation testing required for our customers to move forward with market introductions.

While these customers will buy modest amounts of material to start there are opportunities for these applications to grow and we also have made progress with some larger scale applications that are moving closer to commercialization. Taken together we view the commercial progress in the first half of 2015 as an important milestone for us which I attribute to the change in our business and culture as we complete the pivot to specialties.

I will now hand the call over to Johan to take us through a more detailed review of our commercial activities.

Thank you, Joe. Please turn to slide 7.

As Joe described we have been executing a pivot to performance additives as a major differentiator in value driver for the commercialization of our PHA technology. The pivot was enabled by new technology we developed around amorphous PHA that has allowed us to establish a new standard of performance for our PHA biopolymers as specialty property modifiers and process aids. The broad range of applications addressable with our PHA materials speaks to the performance and superb versatility of our specialty biopolymers platform.

On our last call we provided an overview of our portfolio of customer projects and described the role and benefits gained in these applications by using our specialty PHAs. Today we will discuss several of these commercial opportunities in more detail.

Please turn to slide 8. PVC in flooring. We are working with a major US flooring company who is evaluating our PHA material in a floor backing application that utilizes PVC recyclate.

Our PHA is enabling the use of 100% recycled PVC in the formulation by promoting fusion during processing resulting in a high-quality flooring product. Over the last several quarters we have completed an extensive series of trials with this customer.

In the second quarter we completed an additional round of trials on the customer's pilot line and the resulting products passed a series of performance and accelerated aging tests. This project uses our amorphous PHA and we look forward to full-scale validation on the customer's commercial manufacturing line during Q3.

We think flexible, recycled PVC represents an exciting opportunity. And we believe there is an interesting role for our amorphous PHA material to play in this space.

PVC/wood polymer composite in railing systems. Integrity Composites is a company based in Maine that makes high-end decking and railing systems. Working closely with Integrity and their PVC compounder Otech we developed a new formulation based on our PHA that results in lower torque and improved processing of the wood polymer composite.

The final railing part also has significantly improved mechanical properties and surface finish. We are pleased to report that Integrity is currently launching this product to its customers. We believe that our PHA provides significant benefits in PVC/wood polymer composite systems and our work with Integrity provides a foundation for work with other customers who use these systems.

PHA-modified PLA film. At NPE in March we displayed a development grade film based on PHA-modified PLA. At the show our new film attracted significant attention from prospective customers interested in the high bio content as well as the performance of the film. Since then we have had numerous requests for samples and have successfully completed trials with a number of North American and European converters.

In addition we have had inquiries from packaging companies and brand owners interested in the differentiated films that can be produced using our amorphous PHA to modify PLA. We expect that there will be additional trialing and testing of this product but to this point we are very encouraged by the feedback we've received on the benefits of using our amorphous PHA as a performance modifier for PLA film.

PHA-modified PLA for non-wovens. We believe that PHA has the potential to expand the market for PLA in non-woven applications.

Biovation came to us looking for a solution to improve their PLA non-wovens. We worked with Biovation to develop a PHA-modified PLA product and based on the success of this work Biovation launched its BioArmour blood pressure cuff shield and its DryRight tactical boot drying sheet this past spring.

We believe the field of PLA non-wovens is a promising one for amorphous PHA additives. We're continuing to work in this space with customers interested in the development of bio-based non-wovens including compostable wet wipes.

PHA-modified injection molded parts in horticulture. The broad biodegradation profile of PHA makes it an attractive material for use in agricultural and horticultural applications.

Beemats, a company in Florida, has developed a patented wetland system to remediate nitrogen and phosphorus in wetland environments. Beemats worked with us to develop an injection molded pot made from Mirel PHA. They have completed the design of the pots, conducted field testing and are now launching the Mirel pots as an integral part of their water treatment solution.

PHA in a lubricating composite. The soil biodegradation profile of PHA was the catalyst for MPL Technology, a railway services company, to contact us a couple of years ago regarding the potential use of Mirel PHA in the development of a new biodegradable composite material to serve as a train wheel flange lubricant.

We worked with MPL during the development of the product and assisted with scale-up of the compounding step. MPL launched their new product and has placed repeat orders for Mirel.

PHA and personal care. We continue to work with Honeywell under our personal care alliance. We are developing and sampling ingredients based on our biodegradable PHA microbeads for cosmetics and personal care products.

We are also continuing to monitor the dynamic legislative environment for plastic microbeads in the US. Over the last few months additional states have enacted bans, for example Wisconsin and New Jersey. We have been engaged with the legislation progressing in California and are closely monitoring legislation progressing at the federal level.

In product development we are also working with Honeywell on additional opportunities in personal care applications and have recently launched a second project that is enabled by the unique properties of our amorphous PHA biopolymers.

I hope what I've outlined today gives you a sense of what we're doing to build the market for our Mirel specialty biopolymers. I would like to acknowledge the energy and resources our customers have committed to these projects. I look forward to sharing more progress on the commercial front in the second half of 2015.

Joe, back to you.

Thanks Johan. In our first-quarter call we described a broad range of applications where our specialty biopolymers were being evaluated by customers.

Today we were able to build on that with a review of recent progress in certain customer trials as well as some initial commercial launches by our customers. We remain highly engaged with our customers and their developing projects and will continue to focus on this area as one of our highest priorities.

Please turn to slide 9 and we'll touch on a few financial highlights. Starting with the balance sheet we finished the quarter with $22.7 million in cash. We used $5.5 million of cash in Q2 2015 and a total of $12.3 million for the first half.

Our cash position was bolstered by the $15 million private placement we completed in June. We previously estimated total 2015 cash usage of approximately $23 million and our financial results to date as well as expectations for the second half of the year are consistent with that estimate.

In continuing operations we reported a net loss of $6.1 million for second-quarter 2015 or $0.26 per share representing a $700,000 improvement from a net loss of $6.8 million in second-quarter 2014. At June 30, 2015 we had approximately 27 million shares outstanding. Product revenues from continuing operations was 113,000 in Q2 2015.

We expect to see the revenue line begin to pick up later in the year as converted customers scale up and we continue working to bring on new customers. For a more detailed review of our financial results please refer to the earnings release we made available earlier today.

Please turn to slide 10. As part of our efforts to reshape the Company, we are taking steps to spin out our crop science program. We are calling this platform Yield10.

Like our biopolymers business it leverages bioscience to achieve its mission. But here the mission is to improve global food security, so it is quite different from what we are doing in biopolymers.

Ollie and his team have assembled an impressive array of technologies and intellectual property and are working to enhance carbon capture in plants and target the additional carbon at step changes in seed, oil or biomass yield in food, feed and energy crops. The team has generated some exciting data and we will be reaching out to ag companies and potential investors about the opportunity to participate in the commercialization of these technologies through a separately funded business.

Please turn to slide 11. Reflecting on the past 18 months I think we've made excellent progress executing a pivot to a new business strategy focused on specialties. We are reshaping the Company around that strategy, continuing to advance our technology and building an exciting portfolio of commercial opportunities.

Looking forward our team is working hard to convert customers and build commercial sales. While we are making progress with initial conversions this remains a top priority. We look forward to seeing Honeywell launch products based on our Mirel PHA biopolymers.

We have completed our pilot plant expansion and are ready to ramp up pilot production. We will also keep working on plans for a commercial scale plant. We remain focused on our plan to spin out the Yield10 platform and we will keep working to secure additional funding for the business.

With that I will wrap up and open the call for questions. Operator?

(Operator Instructions) JinMing Lu, Ardour Capital.

Thanks for taking my question. Looking at your product development pipeline can you share with us what are the PHA contents in the PHA content in the two PVC application, both the PVC flooring and the PVC/wood polymer? I try to get a sense whether your current capacity can match up with potential demand from those two applications alone.

Thanks for the question. Johan here.

In these applications obviously we will not disclose the exact formulation. The PHA, amorphous PHA is acting as a classical modifier in low percentage levels, single digits would be typical.

And with that you can understand that our pilot capacity this is not selling PHA as 100% material. We get some significant leverage from that 500,000 pounds a year capacity if you multiply by a factor.

Okay, I see. And in the presentation I think you guys started to talk again about the setup of commercial production capacity.

So what is the rationale behind that? Are you guys seeing the potential to have much more demand for beyond your current contract capacity?

So I think it's just we're looking out and seeing that we've got a good pipeline of activities that we're working on. We've given some background on a pretty broad range of those and it's quite easy to envision a world where our pilot capacity is not sufficient to serve it and we want to be as prepared as we can for that eventuality. So we continue to work on the development of plans for larger scale production.

Okay. Lastly on the spinoff, potential spinoff of your crop platform, are you looking at just a simple technology sale or just a true spinoff of both personnel and technology?

Yes, so I think the least likely answer is what I would think of as the classical legal spin out to shareholders. We are using spin out in the more generic sense of getting that business set up as a separately funded entity with the structure and terms to be determined by the discussions that we will be having over the coming months with potentially interested parties. So I think it's still too early to tell what the structure is.

Okay. Got it. Thank you.

(Operator Instructions) There are no further questions in queue at this time. I would like to turn the call over to Lynne Brum for her closing presentation.

Yes, thanks LaTonya. Thank you JinMing for your questions. We will now address a few questions that were submitted by shareholders.

Before we get started we'd like to add this new component to our call today based on a request from shareholders who attended our Annual Meeting in May. Over the last few days we collected several questions.

Some of them we've addressed in our prepared remarks. The ones we'll cover now were selected from among the submissions we received.

So Joe, the first question is for you. When will Metabolix sell enough PHA to begin to generate quote, unquote real revenue to the Company? And relatedly what is the timing for producing PHA at a larger manufacturing plant? Joe?

Thanks, Lynne. I think I'd start with talking first about the word quote, unquote real. And I think about that in two contexts.

The first of which are sales that demonstrate real demand for our specialty biopolymers and the second of which is sales that are large enough to sustain the enterprise. What we're doing in commercial development is real and the fruits of those efforts will be real sales.

The second meaning is a bit more challenging because it's inherently linked to our ability to make product. Currently we have about 600,000 pounds of pilot capacity and a few million pounds of inventory to work with and this is sustaining the commercial activity we discussed earlier in the call and we're working hard to build the market for our materials.

The goal is to have a successful commercial scale biopolymer business. So I think it's worth taking a step back and asking what does world scale unit of specialty PHA production look like? Now this isn't a projection, you shouldn't take it as guidance and of course there are many variables at play that could impact things either positively or negatively.

But a world scale unit of production for specialty biopolymers like our PHAs probably looks something like 20 kilotons of capacity with the potential to produce $100 million to $150 million of revenue and generate gross margins in the neighborhood of 35%. These seem like pretty interesting numbers for a first commercial scale plant and it also seems like the economics would support adding more units as warranted by market demand.

So the next logical question is how do we get there? We realize our cost of capital is high. We also know that there are underutilized fermentation assets out there that would suit our process.

So it certainly makes sense to look at partnering options. And that's what we're talking about when we say that we're developing options for larger scale production.

A couple of points on that. First, I wouldn't be surprised to see an intermediate step between our pilot capacity and 20 kilotons and that will be a key discussion point with potential manufacturing partners. And second, we should remember that in any manufacturing partnership there will be some sharing of the economics, another key discussion point with potential partners.

Now bringing it back to our commercial development efforts, it's not a coincidence that we're focused on applications that have the potential to scale either within the initial customer or with other customers in the same vertical or both. It's tough to put a timetable on all of this but we think success looks really interesting. And we're working with urgency across commercial manufacturing and R&D to make it happen.

Great. Thank you, Joe. The next question is for Johan. What trials and projects have you been working on with potential customers, where does PHA work, where doesn't it work and how do these applications fit with current production plans?

Thanks for the question. We are getting very good data on where PHA can add value through our customers, projects and trials and finding especially PHA to be very effective as a property modifier and process aid. So for example PHA added to PVC recyclate. We talked about the progress we are making in the flooring application where PHA enables an application to use 100% recycled PVC material.

We also mentioned PHA added to PVC/wood polymer composite with a successful conversion of a railing product by Integrity Composites where PHA allows for significant process benefits and improved product performance. In PLA, PHA is a very effective modifier to improved tactility and toughness and we are getting great results in both film and on woven applications. Specifically we talked about Biovation where they used the amorphous PHA to render a softer PLA non-woven product that they launched this spring.

You also asked where PHA doesn't work. We have previously looked at amorphous PHA as a classic rubber impact modifier for rigid PVC.

Our current grades do not really work very well in that role because of its superb miscibility with PVC. It results in a loss of rigidity even though it improves the toughness.

However, during this testing we got very valuable information about the market needs and technical requirements for rigid PVC and especially the UV resistance required in outdoor rigid PVC applications. We continue to work on next-generation PHAs in our research programs that would allow us to expand into this application space and leverage the natural UV resistance of PHAs.

And our microbial platform is very well suited to allow us to develop strains that would drop into future manufacturing capacity to allow us to produce such next-generation PHAs. However, in the meantime our commercial efforts are focused on PVC recyclate, flexible PVC and PLA modifications where our current grades of amorphous PHA already show significant market potential.

Great, thank you Johan. So how do these applications align with our production plans?

So in the pilot plans we will be ramping up production and in the second half we should see this ramp-up of amorphous PHA to coincide with the conversion of more customer projects through commercial sales. So that pilot production will be very well aligned with our current stage of commercial development in addition to supporting ongoing development projects.

And as this pipeline is coming online we are also developing plans for the next tranche of capacity as Joe described just now. And the market opportunity for PHA and PVC and PLA suggests that we have the potential to develop a PHA business at commercial scale. And we will build customer demand aligned with these plans for expanded manufacturing as we move forward.

Great, thank you Johan. The next question from shareholders is for Joe. Based on the work Metabolix has done to develop amorphous PHA as a modifier for PLA does this mean NatureWorks is selling PHA containing PLA compounds? Joe?

I'll start with a little bit of background on PLA. PLA is a bio-based compostable biopolymer and it's attractively priced. But it's a very brittle polymer and has properties that limit where it can be used.

NatureWorks is the major producer of the material. Today global PLA capacity is about 180,000 tons but NatureWorks has announced plans to build a second plant and Corbion, another company, has announced intentions to forward integrate into PLA.

We are interested in PLA because our PHAs and in particular our amorphous PHA rubber help to improve the performance of PLA while maintaining the bio-base and compostability. We think this has the potential to address some of the limitations of PLA and as a result could expand the application space for this material.

We've been working mostly with NatureWorks customers. Johan talked about some specific examples earlier today but they typically come to us or might even be referred to us by NatureWorks and then we work with them to find a solution that addresses their product need.

This has been the most common model for our work with PLA to date but we remain open to working other ways as the PLA market develops because for us it's about finding the best way or ways to capitalize on the synergy between PHA and PLA as broadly as possible. Coming back to the specific question, NatureWorks do not to our knowledge sell a PLA compound that contains PHA.

Great, thank you Joe. And we have another question for you. What's the market opportunity for Metabolix's PHA?

Thanks, Lynne, it's probably best to look at that across our target application spaces.

In PVC we're focused on using our specialty biopolymers as property modifiers and process aids. There are industry reports available and we've looked at and extrapolated the data available in those reports to estimate a world market of about $6 billion for PVC process aids and property modifiers.

In paper coating we're working on barrier coatings and based on industry data think the market for these coatings is about $3 billion. For PLA modification and functional biodegradation things get a bit more difficult. Because in these application spaces we're building markets that don't yet exist.

I mentioned earlier that current world PLA capacity is around 180 kilotons with some major expansions planned by NatureWorks and Corbion. This gives you a sense of the size of the PLA market itself but remember we're focused on PHA-modified PLA and that's a market category that we're building. We think the opportunity is significant but it's tough to put a number on it.

Similarly in functional biodegradation there are many examples today where items may be less in the environment by design. There is growing awareness that better, more sustainable solutions are needed and our work with MPL and Honeywell are great examples of this.

But this application space really is in its infancy and people are just beginning to understand the art of the possible. So this is another case where specific numbers or difficulty to the opportunity feels significant.

Putting it all together we feel like the market opportunity for our specialty biopolymers is quite large and that the commercial projects we're working on have the potential to scale in a meaningful way. This informs our strategy and how we think about making the transition from our current pilot scale operation to a commercial scale business.

So coming back to a point I made earlier, we think success looks really interesting. And we're working with urgency across commercial manufacturing and R&D to make it happen.

Great, thanks, Joe. We have a final question today from shareholders and it's for Joe. What's our plan to engage new shareholders?

So we've been reinventing and reshaping the Company with our pivot to specialties. We think it's a compelling story and we look forward to telling it.

Our largest shareholders have shown tremendous support for us through the transition and we appreciate the commitment they've made to us with their recent investments. We've been using this capital to execute our business plan and we expect to bring the Metabolix story to a broader audience over the coming months as we engage with the investment community through investor conferences and on deal roadshows and one-on-one meetings.

Great, thank you, Joe. And I will turn it back over to you for your concluding remarks.

Okay, well that about wraps it up for today. I'd like to thank the Metabolix team for everything they do to help make the successes we have talked about today a reality.

I'd also like to thank our shareholders for your continuing support and for submitting thoughtful questions. It's a new process for us and we hope everyone found the extended Q&A useful.

Thanks again for joining us for the call. Good night.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a great day.