Gevo, Inc. (GEVO) Q1 2013 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Quarter One 2013 Gevo, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, the call is being recorded for replay purposes. And now, I would like to turn the call over to Mr. Mark Smith, he is Gevo’s CFO. Please go ahead, Mark.

Good afternoon, and thank you for joining Gevo’s first quarter 2013 conference call. I am Mark Smith, Gevo’s CFO. With me is Pat Gruber, our Chief Executive Officer; Brett Lund, our EVP and General Counsel; and Chris Ryan, our President, COO and Chief Technology Officer. Earlier this afternoon, we issued a press release, which outlines the topics that we plan to discuss today. A copy of this release is available on our website at www.gevo.com. I would like to remind our listeners that this conference call is open to the media, and we are providing a simultaneous webcast of this call to the public. A replay of our discussion will be available on our website later today. On the call today, and on this webcast you will hear discussions of non-GAAP financial measures, non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in accordance with GAAP. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is contained in the press release distributed today, which is posted on our website. We’ll also provide certain forward-looking statements about events and circumstances not yet occurred, including projections of Gevo’s operating activities for 2013 and beyond. These statements are based on management’s current belief, expectations and assumptions and are subject to significant risks and uncertainty, including those disclosed in Gevo’s most recent annual report on Form 10-K as amended, which is filed with the SEC on Morch 26, 2013; and in subsequent reports and other filings made with the SEC by Gevo. Investors are cautioned not to place undue reliance on any such forward looking statements; such forward-looking statements speak only as of today’s date and Gevo disclaims any obligation to update information contained in these forward-looking statements, whether as result of new information, future events or otherwise. Please refer to Gevo’s SEC filings for detailed discussions and of the relevant risks and uncertainties. In today’s call, Pat Gruber, our CEO will begin with a review of our recent developments; Brett Lund will provide an update on legal proceedings and recent progress on the IT front. I will then review our financial results for the first quarter of 2013. Following the presentation, we’ll open the call up for questions. Chris will also be available for the question-and-answer section of today’s call. I will now turn the call over to Pat Gruber, Gevo’s CEO.

Thank you, Mark, and thanks everyone for taking the time to listen to our quarterly call. There are six topics that we will address on this call. First I will update everyone on the progress that we’ve earned. Second, I will make a few remarks about our victory over Butamax in the patent litigation. Third, I’ll comment on our recent shelf or S-3 filing. Fourth, I’ll tell you about a new supply agreement we signed with U.S Army, under which they will purchase our renewable jet fuel. Then I’ll update you on our supply agreements with U.S Air Force and U.S Navy. Finally, I’ll tell you about the bio-para-xylene plant we are building to supply Coca-Cola and Toray. Let’s start with Luverne. Now that the lawsuit with Butamax is over, I want to give you a little more color about what we are doing at Luverne. As most of you know, we started the commissioning of Luverne last summer, and made approximately 150,000 gallons of crude isobutanol. We validated that our plant was making isobutanol commercial-scale scale. However, we’ve also seen contamination from other organisms in the plant. Organisms that came in from the environment, we were able to overcome the infections that we had expected from our experience running our yeast at the St. Joe demonstration plant. And from testing from Luverne, with the longer we ran, the more we saw the need to address equipment improvements, that is best done without the plant fully running. Contamination in new plants is completely normal and expected. In the fermentation technology deployments that I’ve been involved with is always something to overcome, it was a variability of contamination of the fermentation combined with the very high cost of corn last summer involved that caused us to close our production of isobutanol,…

Thanks Pat. It was an outstanding quarter from an IPM litigation perspective. As Pat mentioned we won the litigation covering Butamax’s 180 and 89 Pound, their self described foundational pathway pack. Not only did we win the case, but we won it the best way possible without even having to go to trial. There are two types of patent infringement; literal infringement, where you actually do what is claimed in the patent and doctrine of equivalents infringement, where you do something that is equivalent to what is claimed in the patent. The court granted us summary judgment for non-infringement under the doctrine of equivalents, and Butamax subsequently admitted that we don’t literally infringe their patent. This is really an important concept that I want to highlight. Summary judgment is an extraordinary remedy that is not often granted by the court. However, in our case the court felt that the issue of infringement under the doctrine of equivalents was so clear cut that it didn’t need to go to the Jury and the court found it in our favor on that issue before the trial. The next day, Butamax admitted that we don’t literally infringe their pattern and concede with the case. In addition to winning the case, the court also invalidated key claims in Butamax’s patent that purportedly covers the deletion of PCD of pyruvate decarboxylase. PDC is the enzyme responsible for production ethanol. You need to delete PDC in order to produce commercially viably yields of isabutanol. Gevo discovered and patented this concept before anyone else including Butamax. In recognition of Gevo’s efforts the USPTO granted GEVO U.S. patent number 8017375 or a 375 patent, which covers the deletion of PDC for the enhanced production of isabutanol. We are assuming Butamax for infringing this patent and trial a schedule…

Thank you, Brett. Operations in the first quarter of 2013 remained focused on to optimize our isabutanol technology and anticipation of resuming isobutanol production at Luverne in 2013. While we are focused on operations, we’re also focused on being efficient in delivering on our objectives. Through direct actions taken over the past several months we have systematically reduced our cash plan. In fact, for the first quarter of 2013, we reduced cash therein to $12.6 million compared to a cash burn of $25.3 million in the fourth quarter of 2012. With our current operation status, we reported revenue in the first quarter of 2013 of $3.5 million, which included revenue onto our research agreement with Coca Cola, sales of bio based jet fuel to the U.S Air force. Revenue from ongoing research agreements in pursuit to $ 2.4 million from the reduction of excess corn inventory on hand. Our reduction of excess corn inventory is essentially a good work in capital management between the remaining corn on hand and locally available corns that’s purchased. We’ve sufficient access to corn feedstock for our future plant isobutanol production. Revenue in the first quarter of 2012 was $14.9 million primarily consisting of ethanol and related products. Research and development expenses $5 million in the first quarter of 2013, essentially the same level supported in the first quarter of 2012. The practice of our development activities in the first quarter of 2013 was on start up operations at Luverne and optimization of specific parts of that technology, the isobutanol production rights. We also want to talk establish bio-para-xylene processing and expand the capacity of our bio jet product plant at the South Hampton Resources Facility. Recall that bio-para-xylene processing equipment is funded under our agreement with Toray Industries to provide us with the funds…

Thanks, Mark. Here the takeaway – we contribute to condition of plant. We expect to start up isobutanol single train mode relatively soon where we will learn how to run our GIFT technology at full scale without the complicity of running all the other fermentation units in the systems. Once we have the single train under control, we plan on bringing all four fermenters up with all three GIFT systems. We plan on having everything online in the second half of this year along the way as we operate and learning how to run the plant will be supplying our customers. We are very conscious of our cash burn rate cutting it from $25 million in the fourth quarter of last year to $12.6 million in this quarter. We will continue to be prudent in our spending, our focus is getting the technology deployed at full-scale. Now regarding Butamax, we won they lost, and our business development is going well. We can now open it up for questions, operator?

(Operator Instructions) Your first question comes from the line of [Michael Ritzenthaler] from Piper Jaffray. Please go ahead your line is open, Mike.

Just to make sure that we can understand the timing in as much details, it sounds like phase 1 is complete, loading and testing is done and phase 2 is due to start very shortly and that’s the window, I just want to make sure I understood. That’s the window that you consider to take – that will take as long as commissioning a regular plant. Did I understand that right?

No, let me go through it again. So we just complete the vibrant testing, it is going well. We have got a couple more things to button up here and then we will start doing the single train mode and the first. And the first – when e do the single train mode, it’s going to take us several weeks to learn how to do it. So those are second quarter activities. As we move into the third quarter, we’ll be starting to – we’ll be ramping up the single train mode making any changes that are required and starting to spread it to other production trains. What I mentioned the – then later in the year, we’ll run it all together in a normal kind of a plant mode.

Okay.

Yeah. And that’s actually – so it’s still basically a year is what I’m saying. Year to year and a half that normally takes, we’ll still be within that window even counting backwards from last year.

As so these initial volumes of isobutanol, they’ll be used to seed – I’m assuming that they’re not going to meet those types of a larger volume penetration you have. But they’ll be used to seize other markets, is that a fair assumption?

I think it should be general purpose since we can do any market and the reason is that, we learned 150,000 gallons made last year, we learned how to make sure we can clean it up to make it meet all those specifications for any market.

Okay. And just one last one real quick on the cash burn; is this quarter representative of a run-rate or is there further reductions from the legal expenses. That can be quickest.

Yeah, sure. Thanks Mike. I think that what we’re really talking about here is again there will still be some period to period fluctuations. But with the $54.1 million that we started off with – started 2 off with. We’re still projecting, we still have enough cash to get well into 2014. So this run rate is indicative – the actions we’ve taken – we’re certainly going to be running at lower rates than we did last year. That will still be period to period movements. And that will be a little bit illegal, a little bit when we did the start up activities at Luverne and also when we do work at the facility down in Texas.

All right, thank you very much.

Thank you. The next question comes from the line of Ben Kallo from Robert W. Baird. Please go ahead. Ben, your line is open. Ben Kallo – Robert W. Baird: Hi, guys. Just jumping on Mike’s question there, Mark, can you just characterize it looks like $13 million reduction in cash burn, maybe if you can give us that percentages of how – cost reduction?

Well, I mean, pretty much all the reduction – all the significant portion of reduction came from our cash flow from operations and it reflects a couple of things. It reflects, firstly, that we have made the genuine changes that talked about in the call here about how we reduced our operating cash burn and those are long-term changes to our organizational structure to the way in which we deploy outside services. And then as we’ve talked about a couple of times, we made some substantial controlling decisions around our legal expense. And we’re also helped out with the way in which the legal expenses and the legal case unfolded as well and we talked about this in the call we made (inaudible) according the quarter and that’s going to be part of the continuing effort on our part to manage our working capital. When I say there will be some period to period fluctuations around starting up the plant, for instance, if we have to buy feedstock to the plant, we will see some increase in working capital in those particular quarter. As we make operations decisions, Ben, then there will be changes in where cash flows are spent or generated. But we will be seeing a lower level of cash burn that we saw in 2012.

I want to add something to this if I can. One of the reasons for doing a single train mode is that we can better control how much feedstock we use in any of the other ingredients fermentation and while we’re learning how to do it. It’s a much more effective way to keep things completely in a control, because we have to go through a period where we do learn the details here order on the GIFT system. And this is a much, much cheaper way to start the plant and learn how to do it, a little much more limited exposure. That you might ask yourself, “Gosh, the single train bounce off, brilliant idea, why didn’t you do it last year?” And the answer would be that we could have. Then we would know about the inspections, because inspections were actual results of interaction across the bigger system and across fermentation systems. So we wouldn’t have our remade the plant modifications. We still are facing that. Ben Kallo – Robert W. Baird: Okay, fair enough. Can you give us a timeline, I know you don’t want to talk about your commercial production, but when you can actually start running on a single train?

We’ll actually start to run a single train, we’ll be doing it. We’ll be doing that very soon. So that for second quarter type activity will begin. Now it’s going to take us a little while for what we’re doing, a little while is a period of a month or two or something like that is that kind of timeframe. Ben Kallo – Robert W. Baird: Okay, Brett, on the new patent, can you talk about how that impacts any kind of litigation against Butamax, I know you’ve heard this, do you expect a little loss against them, and if can you give us on that and I’ll jump back to you.

Sure, so as I mentioned the patent covers the commercial tighter productivity in yield needed to produce isobutanol in a commercially viable manner. And we have decided not to assert that patent against Butamax at this time because we haven’t seen any information that they are achieving those levels of tighter productivity and yield yet and they don’t have a commercial plant yet either. So we’re not asserting at this time, but obviously that pattern remains available to us if they achieve those levels.

Thank you. The next question comes from the line of James Medvedeff from Cowen & Company. Please go ahead. Your line is open. James Medvedeff – Cowen & Co. LLC: Good evening, folks.

Hey, Jim.

Hi, Jim. James Medvedeff – Cowen & Co. LLC: People have been asking most of the things I had in mind, but how should we think about this interest expense run rate going forward? Is this the combination of the actual interest expense and the amortization of the discount, is that $3.3 million sort of the run rate we should think of or not?

No. It will come down somewhat. It will come down for two reasons. Got a little bit of disjoint to this quarter because we had some of the earlier retirements that took place during the quarter as well with lower balance we’ll have a lower cash interest rate. So, but the non-cash portion and the non-cash portion will come down from the Q1 amount and then the cash interest more importantly will also come down as a consequence of the lower outstanding debt balance. James Medvedeff – Cowen & Co. LLC: Okay. Maybe I can follow-up later and get up a more sort of specific, is it half as much or can you give any sort of guidance as to how much it comes down?

Sure. The cash interest will be 7.5% [times] $35 million and we can elect through sort of the math on the non-cash interest, but that will be more akin to, call it $600,000 to $700,000 on a going forward run rate. James Medvedeff – Cowen & Co. LLC: Okay, thanks.

Rather two together for the cash and non-cash interest rate. James Medvedeff – Cowen & Co. LLC: Okay, good. The other questions I have was to follow up a little bit on the corn question. If I’ve heard you right, we sold $2.4 million of corn inventory, is that right?

Correct. James Medvedeff – Cowen & Co. LLC: And so when I look at that cost of goods sold, $4.5 million, is there a loss on that corn?

The corn is essentially – we actually made a slight profit on the corn may continues to be some direct operating cost at the Luverne facility, because we continue what Pat has described to do commissioning work at the facility. We are going to make a lot of profit as a corn reseller, but we did make some profit when you net out the cost of acquiring the corn and the – of unwinding of the corn future. James Medvedeff – Cowen & Co. LLC: So help me on the cost of goods sold then. What does that relate to normally grants and collaboration type revenue would carry 100% gross margin, and any sort of production costs would show up somewhere else?

The majority of the red – the cost in the – cost of goods sold are the normal things associated with running the plant that include just, yeah, on a non-cash basis they include the depreciation, they also include cost of the direct labor if working at the plant and then you domestically repairs, maintenance, supplies and other, which are really the cost that Pat described as ongoing commissioning of the people directly working on the facility, they don’t go into capital, because they’re not construction type costs and they don’t go into SG&A, because those folks are directly assigned to the facility. James Medvedeff – Cowen & Co. LLC: Okay. And then finally on the resigning plant. What’s the timing and economics of that, I know Toray is paying the bill that how did the economics work out and when do it looks the timing?

Well, we’ve already got received money last year from Toray, which we disclosed is being $1 million and that’s more than enough to cover the cost of building the paraxylene, the bio-paraxylene assets, pilot plant down in [Clichy]. In addition to that we will supplied the bio-paraxylene material made from the isobutanol at the facility that will generate incremental revenue and we will, the plan is we intend to shift the initial product there before the end of 2013, before the end of this year. Remember we also use that facility to produce the bio-jets for the military, military being the government entity don’t repay you, they don’t give you up front money like the Toray done, but there we generally are reimburse to a $59 of a gallon price of the jet fuel and that cost is meant to cover the cost of producing the material and then indirectly that also covers the cost of constructing the bio-jet facility down at (inaudible).

As Pat described we’ve got a couple of contract in this quarter, we previously announced that we got a 45,000 gallon contract with the Air Force and we ship them about 6.5000 gallons in this first quarter. We also have an additional contract with the Army, which he have started shipping on to yet net up to $12.5000 galloon, we would expect to meet those shipments basically in this 2013 year. James Medvedeff – Cowen & Co. LLC: Okay, great. Thanks a lot.

Thank you. The next question comes from the line of John Quealy from Canaccord Genuity. Please go ahead, your line is open. John Quealy – Canaccord Genuity: Good afternoon, guys. Hey Mark, just back to the revenue line, if you don’t mind, what do you think about projecting forward or what things we should consider in 2013 splitting corn, splitting some DoD type business. How should we look at it, is this corn number, it sounds like you’re going to go out and buy corn and resell it rather than take out inventory you don’t have that much. So how should we think about the constituent pieces of corn versus DoD and other revenues this year?

We haven’t given specific revenue guidance, but clearly we’re not – what we’ve been doing here is managing our working capital obviously with higher price corn that was expected to carry that and we’ve reduced that inventory. We will see – we might see some additional small sales of corn just to further balance out the inventory but you’re not going to see significant quantities, we have essentially got the corn inventory down to where we’re comfortable as we move forward with the production plan that Pat outlined. I will call it generally R&D revenue that will continue with – and we will continue with certain grant revenue at levels very similar to what we have seen through the first quarter. The DoD revenue which is the selling of the Jet Fuel, we haven’t given a quarter-by-quarter guidance but just in the swinging to Jim I mentioned that there’s approximately 39,000 gallons of materials yet to ship to the airport and up to 125,000 gallons material shipped to the army under agreements we had in place, whether they all get done by the end of 2013, or dribble into 2014 as a matter of how rapidly the air force and the army can take the product. Those are the revenues that is sort of we can direct the comment to we haven’t given any guidance and on revenues we might generate from direct sales of isobutanol those that could clearly going to follow the path of production that Pat outlined in his remarks. And then lastly in terms of new strategic relationships or expansions of existing ones obviously in the next couple of months and quarters, it sounds like it’s an operational focus of what you have. But can you talk a little bit more about your outreach efforts and…

Thank you. The next question comes from the line of Michael Klein from Sidoti & Company. Please go ahead. Michael Klein – Sidoti & Company, LLC: Hey, good afternoon.

Hey, Michael. Michael Klein – Sidoti & Company, LLC: Just to sort of follow-up on that last question a bit, in terms of partner financing, is there something specific that these potential partners are looking for, whether that be actually producing, selling or to what extent can you comment on may be what a trigger point could be for potential investor?

We – so far, that’s not anything specific. They don’t have, they want to – their simple point of view is they want to make money on it. We had people propose things all the way from, they want to finance the plans to they would like to take equity position, to become a strategic investor or do a regional business. So those are the kind of things we’re sorting out. And we’re just getting after it in earnest because now we have time to do it, now we are not dealing with these trials anymore. Michael Klein – Sidoti & Company, LLC: Right, okay. (Inaudible) in Texas, can you just talk about which costs are recoverable either you’ve already received payment for or through sales price and which cost you don’t get around?

Mark, take this one.

Sure, as I mentioned, we got a $1 million in Toray, those costs – that cost goes towards the build out of the facility. The rest of the cost we get, we recover it if you would, through sale of the product, so that’s the sale of the (inaudible) via jet fuel that we make down there, and we recovered that at $59 a gallon when we sell it to the military. And then when we produce (inaudible) material down there and sell that to Toray before the end of this year, we will recover that as revenue as well. Michael Klein – Sidoti & Company, LLC: Okay, is that all cost that you would be laying out at that plant or are there other cost that fall under again those buckets.

No, that essentially cut us all of that cost, the capital equipment cost we recover that as we deploy the capital equipment and when we make jet fuel we recover the jet, we recover the isobutanol – cost of the isobutanol to produce and the cost of using the facility down in (inaudible), we recover that as cost of the jet fuel, likewise using the same path we will recover the cost of actually producing the para-xylene material when we shift that to Toray or any other mine. Michael Klein – Sidoti & Company, LLC: Okay, in fact just follow up on and your comments on I guess selling product as you bring based the plant on line, I guess in terms of timing am I correct to assume that, so you will bring the plant online in a single train mode first and you will actually start to book some sales before kind of bringing the rest of the plant online and integrating it. Is that correct or not?

That will be the correct assumption. Although in the first month or two it’s going to be very variable that single train, because we’re going to be up and down and we’ll be testing parameters to make sure that we understand, what’s going on. But, that train we would expect to continue to run and we can run it even while we bring up the other ones, the other trains and we’ll bring them up. We don’t have to bring all the other parameters all of at the same time. We can do with single train, add a train, add the next train et cetera. And actually we will run them altogether and integrate them. So we’ll be generating – and we have to sell it, so that’s for sure. Klein – Sidoti & Company, LLC: Okay. Thank you.

Thank you the next question comes from the line of (inaudible) from Raymond James. Please go ahead your line is open.

On the facility going back to the prior question, so again I realize you’re not giving volume guidance, but should we assume that any commercial sales from Luverne that will be second half of the year event rather than Q2?

That’s a safe assumption, I mean, that’s a practical assumption.

Okay.

It could be that we’re going to get percent, we’ll, by the time the stuff gets, may book our shift on the current affairs probably practical.

Okay. And I will go back to a comment you made that the rate of production ramp up will depend at least partly on the interplay of isobutanol pricing versus corn pricing. Given the fixed margin structure of your off-take agreements, how should we kind of reconcile that?

The way that view is that it’s true that there are fixed margin contract particularly selling the Sasol. Now we have several other markets that we’ve been seeding and putting. We will continue to seed. There is a practical consideration. So what will happen with Sasol is that they have to pass it through in some way to the customers, and they’ve been a good friend of ours and we’re good friend of theirs, and so we’re going to work with them, and not give them too much isobutanol, we don’t want to give them too much isobutanol at ridiculous price. We give them enough and then we could place it. In other words, there will be niches I think in place higher price stuff line, but we don’t want to do is make the assumption just blindly push it forward they’re going to eat all cost. That’s not a particular consideration. It isn’t the way to treat a partner. So in other words, this only matters to us if we’re at really high corn prices again.

Right. I guess how high, so we’re in…

750.

So at today’s corn would there be any kind of capital limit on how much you can shift to FFO?

From a – what’s to be a smart question by the way?

Mid 6s.

Yeah, mid 6s is still kind of high, but the way that’s worked for the business development is that we have to give more qualities, then they have to place it on the customers then we’ll continue to ramp it up. We can’t run full blast instantly and hand it to them. But it will be – there is business there at that kind of level of corn price. I just don’t know the ramp rates because I don’t know how everyone, the whole system has agreed to skip that all the way through.

Okay. Last question from my end is, you mentioned that there are various venues to raise capital, not just necessarily straight equity. From a project finance standpoint, as you talk to potential lenders, what sort of validation do they want to see from Luverne for a project financing to be a viable option, I guess, vis-à-vis Redfield.

I'm not so sure, I mean, regarding – independent of Redfield, I can answer it. I’ve seen a range of people who are all the way from single train mode, seen it operate because it basically proves the technology, right, because you got the full scale system. The rest are duplicates really. So there are some people who are in that mindset and there are others who are like (inaudible) and so it’s great for you to come talk to us.

All right. I appreciate it, guys.

Yeah.

Thank you. I would now like turn the call over to Mark Smith for closing remarks.

Thank you very much for participating in our first quarter conference call. We look forward to updating you on our progress as we move forward and particularly at the end of the second quarter and for our second quarter conference call. Thank you very much and we will update you as events unfold. Good afternoon.

Thank you joining today’s conference. This concludes the presentation. You may now disconnect. Good day.