Gevo, Inc. (GEVO) Q3 2013 Earnings Report, Transcript and Summary

Welcome to the Gevo Q3 2013 Earnings Conference Call. My name is Adriane and I’ll be your operator for today’s call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mike Willis, Chief Financial Officer. Mike Willis, you may begin.

Good afternoon and thank you for joining Gevo’s third quarter 2013 conference call. I’m Mike Willis Gevo’s CFO. With me today are Pat Gruber, our CEO and Brett Lund, our Chief Licensing Officer and General Counsel. 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 the 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 will also provide certain forward-looking statements about events and circumstances that have not yet occurred, including projections of Gevo’s operating activities for 2013 and beyond. These statements are based on management’s current beliefs, 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 was filed with the SEC on March 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 of the relevant risks and uncertainties. On today’s call, Pat Gruber, our CEO will begin with a review of our recent developments. I will then review our financial results for the third quarter of 2013. Following the presentation, we’ll open the call up for questions. Brett will also be available for the Q&A section of today’s call. I will now turn the call over to Pat Gruber, Gevo’s CEO.

Thank you, Pat. With our operations focus continuing to be on starting production at Luverne we reported revenue in the third quarter of 2013 of $1.1 million, which was made up of sales of bio-based jet fuel to the U.S. Military totaling $0.4 million and those revenue under our research agreement with Coca-Cola and revenue from other ongoing research agreements. Revenue in the third quarter of 2012 was $0.6 million, based primarily on revenue from Coca-Cola and other research agreements. R&D expense was $5.5 million in the third quarter of 2013, compared to $5.4 million reported in the third quarter of 2012. Our R&D activities in the third quarter of 2013 were directed to the startup operations at Luverne and the optimization of specific parts of our technology to further enhance isobutanol production rates, as well as our work on bio-jet and bio-paraxylene at our hydrocarbons demo plant in Texas. The increase in R&D expense in the third quarter of 2013 as compared to last year was due to costs related to the production of bio based jet fuel at our facility in Texas as well as investment in equipment for the bio-paraxylene plant at the same facility. Recall our bio-jet demo facility is indirectly funded through product revenue from the U.S. Air Force, the U.S. Army and now with our most recent contract the U.S. Navy. Also recall last year Toray Industries contributed funding for the constructing of the bio-paraxylene plant in anticipation of this project. Excluding costs associated with the Texas facility, our R&D expenditures were down $1.3 million in the third quarter of 2013 versus the same quarter last year. This was a result of our ongoing cost control measures that have been in place since the second half of 2012. SG&A expense for the third quarter…

Thank you Mike. And I think with that we should turn it to questions.

(Operator Instructions). And we have Mike Ritzenthaler from Piper Jaffray online with a question. Please go head.

Congrats on getting mash back into the plant. How are you currently thinking about the ramp in production into next year, say between now as you complete the commissioning here in 4Q and maybe six months into the year?

Well, the way to think about is this is we’re not a position where we can give real specific guidance on production volumes out of Luverne in the fourth quarter because our focus right now is completing the commissioning and the startup of the plant plan. And the balance of this quarter, we’re going to use it to learn how to operate and optimize the plant, increase the product volumes and decrease the cost and improve the product quality. Now, in the meantime, we still are going to be producing enough volume to facilitate existing contracts, first for the jet for the military as well some other isobutanol to seed other markets and we’ll be shipping stock to Sasol. And in fact, we will be using the isobutanol. We’re going to be in a position to give more granular guidance on production early in 2014. I’ll have a better view of it once we’re through the commissioning process.

Okay that makes senses. On the licensing agreement, I thought this was kind of interesting. Maybe you don’t want to comment too specifically about this particular LOI, but generally speaking, how does that work mechanistically; Gevo would deliver the design package and some operational expertise, license or would pony up the capital for either retrofit or brown field, can you just kind of walk us through the thought process there?

Sure. This is one is interesting because it’s actually a true license. This will be – we outright license the technology, the idea -- and we haven’t -- without talking about the specifics of this particular deal but the concept is upfront feed what’s been as royalties, provide the technology package and operating expertise and teach the folks how to do it.

And we have John Quealy from Canaccord on line with a question. Please go ahead.

Hey thanks folks it’s Chip for John. Back to the license agreement, can you talk about if you’re pursuing additional license agreements and what sort of pipeline of potential opportunity is there and what it takes to move forward?

No, I have been leading the charges related to a lot of these discussions. So this was the first one that we could announce. We are talking to folks globally who are interested in the technology, folks in South America, folks in Europe, folks in Asia. Actually folks in the U.S. as well although, I think we’re still figuring out what’s the blend of owning versus licensing here domestically. And I really I think obviously it all plays into the success at Luverne. So the reason why IDBC was interested in signing up with us is obviously they could take a deeper dive into the technology as it stands right now. They’re seeing the improvements at Luverne. So that to me is the key inflexion point to really kick off these discussions kind of to a high level and get them to a more detailed level.

Okay that’s helpful. And then on litigation, I think you’ve talked about, I might have missed, the 3.7 million lower year-over-year; is that sort of sustainable run rate her and just bring us up to date on the latest out of the courts?

This is Brett Lund. I think the new rate that we’re at is sustainable going forward. So going forward we have the Federal appeal in November, November 7th than the next set of cases is July 2014 and then August of 2015.

And we have Pavel Molchanov from Raymond James online with a question. Please go head.

Hi guys, this is actually Justin on for Pavel. Just real quick since we already touched on production at Luverne for 2014. Any idea on how high utilization needs to get for growth margin to turn positive there?

That’s an interesting question and you know what our focus is, is making that plant EBITDA positive as soon as possible. And I think the middle part of the year is where we’re thinking about.

Okay, middle part of the year.

I try and get away from being so specific on the volumes because there is lots of ways we can do this and actually we all care about being EBITDA positive, that’s our focus.

And then just real quick, cash is actually getting seemingly somewhat low. Do you envision raising any capital here in Q4? Can we wait until sometime next year?

So we currently project having cash to operate into the first quarter of 2014. So basically this means that we’re likely to be raising capital either in Q4 or Q1 of next year.

And we have James Medvedeff from Cowen & Company online with a question. Please go ahead. James Medvedeff - Cowen & Company: So, a couple of questions here. Most of mine have been answered actually. But I wanted to ask, were there any corn sales in the quarter or was it all pure funded R&D?

There was just very modest corn sales right at the beginning of the quarter which was basically the tail-end of the exercise that we’re doing over Q1 and Q2 of this year. Otherwise we actually built the corn inventory. James Medvedeff - Cowen & Company: Right. That was the second part of my question was….

I was going to say obviously with the view to building inventory to run on mash on integrated basis as we’ve reported. James Medvedeff - Cowen & Company: So when I look at cost of goods sold, if the revenue was mainly generated by the army or the military contracts and some of the other funded R&D programs, I’m trying to get my -- and depreciation was about $900,000. I am trying to get my arms around what the $4 million of COGS is all about?

The cost of goods sold actually represents cost of Luverne. The cost of goods sold, as we think about it for jet contracts actually appear in R&D expense because the production is deemed to be demonstration scale versus commercial scale. We defiantly, from a gas perspective place that in R&D expense versus COGS. James Medvedeff - Cowen & Company: Understood. So if you have on the order of $1 million plus or minus of funded R&D, I’m trying to understand why there is $4 million of cost in COGS associated with that?

So the cost of goods sold would be representative of most of the costs at Luverne. So we obviously have fixed cost there and charge labor. So we experience that, utilities but we did actually -- so it’s basically Luverne oriented cost. They all sit in, for the most part, sit in cost of goods sold versus some are in G&A. James Medvedeff - Cowen & Company: So the military fuel that you’ve been selling is at cost or now below cost?

It’s at cost currently. James Medvedeff - Cowen & Company: I just had one other question, the PP&E is up, some almost $5 million and I’m wondering does that have to do with the new anti-infection equipment that was installed or I noticed there wasn’t any CapEx in the cash flow statement. So could you just kind of fill me in on that?

Yes, basically we installed some sterilization equipment. It include steam-lines, cleanup place equipment. All in all, I think across this year we print about 2.5 miles -- replace and/or added for a total of 2.5 mile pipe and this is about making sure the flows are right and so we can manage the process.

And just to answer the more tactical accounting question, so on the cash flow you basically netted against net that capital of five and change against the payables that are outstanding for that PP&E.

And the next question comes from Kelly Dortmund from Simons and Company. Please go ahead.

I was hoping you could maybe discuss, do you have any additional levers that you can possibly pull on the cash flow side where are all the cuts that you could probably get on the R&D side, or SG&A side, are they really baked into the numbers that we saw in Q3?

I could only partially hear the question. Did you ask are there any more levers to reduce cash burn?

Absolutely. That’s the question, Pat.

There is.

Can you detail them any more than that?

No, I shouldn’t, especially it’s the usual list, it's the usual list of things as we make progress and we learn what we need and what we don’t. We have to adjust accordingly. It’s in half of our mind all the time.

So it’s good to hear that you've been running on corn mash. Can you give us any insight into actual volumes of isobutanol which has either been produced or shipped or far?

You know what, we’re at a point where we’ve run enough on full scale corn mash, we produced the isobutanol but it’s in crude tanks and so I don’t have specific volumes for you. But here’s a couple of things that are really good. One of the critical success factors is making mash clean and so our new salination equipment works pretty well for that appears that's good. Second thing is that you recall that we grow our own biocatalysts to get fermentation going. So we have a part of the plant which is dedicated to growing yeast and this is by the way the same yeast that we used last year. It actually works quite well and that equipment seems to work pretty good. Now we’re still learning how to do the cleaning place between batches and things like that and having to deal with all the mechanical things, but that's going well. Our bugs like to seem like corn mash and importantly our GIFT system works well in corn mash. Now we expected that to be the case because we did demo the heck out of that down at St. Joe, Missouri but it's very gratifying to see it work at full scale here on corn mash.

That's good to hear. So I guess we talked about this last quarter when you’d been running on dextrose but last year when you had some consistency issues on these initial batches, you have had using corn mashes to consistency up to where you want it?

I'm sorry I could only hear part of the question again, but you were saying last year.

And so I'm more thinking about the consistency. Is the consistency of the product that you've produced so far with corn mash up to I guess the level that you want it or is it like last year when there some batches were inconsistent and some were okay.

Oh I see, no, last year what it was is we had it was very variable, our variability isn’t the same here. Now we're going very disciplined as we go through the plant here and start up the plant and we're learning how to master each part of the production process, for instance, first master mash, master the yeast production, master the fermentation, master the separation, and so we did, we're at the point where we’re in the midst of working the fermentation and what we’ve seen so far is it looks pretty decent in terms of the product quality, the same is what we would expect, and the biocatalysts are performing as we expect and predicted. It reflects what we did on dextrose earlier this year and reflects what we do in the laboratory.

And we have no further questions.

Great thank you everybody for joining us on the call today.

Thank you ladies and gentlemen, this concludes today's conference, thank you for participating and you may now disconnect.