Gevo, Inc. (GEVO) Q3 2015 Earnings Report, Transcript and Summary

Welcome to Q3 2015 Gevo Incorporated Earnings Conference Call. My name is Katie and I will be operator for today's call. [Operator Instructions]. I will now turn the call over to Mike Willis, Chief Financial Officer. Mr. Willis, you may begin.

Good afternoon, and thank you for joining Gevo’s third quarter 2015 conference call. I’m Mike Willis, Gevo’s Chief Financial Officer, and with me today is Pat Gruber, our Chief Executive 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 will also provide certain forward-looking statements about events and circumstances that have not yet occurred, including projections of Gevo’s operating activities for the remainder of 2015 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 April 2, 2015 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 a 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 will begin with a review of our recent business developments. I will then review our financial results for the third quarter of 2015. Following the presentation, we will open the call up for questions. I will now turn the call over to Pat.

Thanks Mike. Good afternoon. Thank you for joining us on our quarterly call. On this call I will be talking about game changing events this past quarter, that is the settlement with Butamax as well as our plans for increasing production and selling more isobutanol. I will also touch on the markets. First the Butamax settlement. We reached a very good settlement, that ended all litigation and patent office fights. And that provides Gevo to all markets. As we discussed previously, in this settlement we have each given a license to each other to practice and to sublicense under our respected patents. We did not license the knowhow, the biocatalysts themselves, or importantly our trade secrets. Butamax and we each expect to have separate technology packages to license based on our own needs and processes. As part of the settlement agreement, we have agreed to leverage each other’s skills developing and selling into certain markets. For Gevo, it was important for us to have the royalty free access to markets we expect to be primarily targeting for the foreseeable future; that is jet fuel, marine and off-road gasoline blend stocks, isooctane, paraxylene et cetera. For Butamax, it was important to have royalty free access to gasoline blend stocks for on-road use and some other market segments. Each of us recognizes that the other was doing a lot of work on approvals and development efforts in certain market segments. Gevo is working on jet, Butamax is working on using isobutanol as on-road gasoline blend stock. That said, we agreed that annually we could each sell up to 30 million gallons’ royalty free into any market, including the Jet and on-road gasoline markets. And to put that in perspective, we estimate that these 30 million gallons could be worth more than $100 million of isobutanol sales per year. Then for the amounts over 30 million gallons, for example in the jet market, Butamax would pay Gevo a conventional reasonable royalty and we would sell and distribute the isobutanol for them in this market. Likewise, from amounts over the 30 million gallons, we would pay Butamax a conventional reasonable royalty for any isobutanol we wish to sell into the gasoline blend stock market, and they would sell and distribute the isobutanol for us. So overall I like the agreement. We can each have our technology packages that we can sublicense, and it will be a very difficult for any other player to enter this market and compete with Gevo and Butamax. Recall that collectively we have something in the order of 1000 patent and patent applications between us. It is also worth noting that neither Butamax nor Gevo had to pay each other anything as part of the settlement. We structured it so that each get rewarded as the key markets develop. The emphasis is where it should be, on growing the isobutanol markets. So what does it mean to Gevo? Well, it's actually profound impact on our business. Stopping the spending of money on lawyers is significant. At the rate these are going, the savings translate to about $7.5 million per year. Of course that rate of spending could have gone up at any time, given the number of potential law suits, and the activity lawyers. Frankly the lawsuits also create a complication in just about every discussion with partners, strategics, customers and others. The lawsuits were also a brain drain on our team. To win this settlement then we saved money, the risk of lawsuits from each is removed and overnight we went for being enemies with Butamax to in many ways being business partners who have common interest in developing the isobutanol business and protecting the value of our respective technologies. Overall, we are pleased with the settlement. We can get out of the business of developing isobutanol markets and production. In this past quarter, we also announced certain improvements that we are looking to make at the plant in Luverne, Minnesota. In the past year we have proven out many key aspects of commercial scale from [indiscernible] of isobutanol, including our ability to control infections. This in and of itself is a major milestone. In 2015, we ran little quantities of isobutanol, primarily in order to the keep the market developing. Why did we run limited production runs? Well that's because our cost production was high and that we’d lose significant dollars with every gallon of isobutanol made and sold. Our production cost was high because we had limited spending of capital at the plant to install these equipments. Frankly we needed money to defend ourselves in the lawsuits. Now given that we already know that the permutations work at commercial scale, and the uncertainly of the lawsuits are gone, we are deploying the capital to bring in-house the equipment needed to make isobutanol economically at Luverne. As we outlined in a press release, and on our conference call in late September, the primary equipment is the distillation system, and some equipment to grow more yeast. Once installed around the end of the first quarter or early second quarter 2016, depending upon whether, we expect to have the ability to produce isobutanol at a low enough cost that it actually contributes positive contribution margin to the plant. We expect the capacity of the isobutanol side of the plant would be above 1.5 million gallons per year at that point. The isobutanol production line would run continuously, and we would have much greater quantities of isobutanol to develop the markets. At the same time the ethanol site of the plant is expected to operate at a rate of over 15 million gallons per year. Having the isobutanol line running consistently and contributing positively as well as having the risk of the Butamax lawsuits removed should accelerate licensing. Now regarding licensing, we still are pushing forward with definitive agreements with our partners. We do expect to complete one or more in the not too distant future. The relationships are good and we have been working through the definitive agreements in light of the settlements. Strong [ph] isobutanol and is hydrocarbon derivatives is obviously key to us. We want the products placed into the markets where the properties and the product value shines. To this end, we launched the isobutanol and gasoline for boats at Lake Pomme de Terre in Missouri in the third quarter. The properties of isobutanol make for an excellent renewable gasoline blend stock for boats. We expect increased penetration into the marine blend stock market in 2016 as our isobutanol production ramps up at Luverne. Last night we announced an alliance with Belltech [ph] to bring 16% isobutanol blended gasoline to their network of over 700 marinas, which reaches more than 50% of the marinas in the country. We’re pleased to be working with them. We also will continue to focus on developing off road gasoline blend stock market. In this market segment customers are interested in the gasoline that contains renewable blend stock that is our isobutanol, that has excellent performance and avoids the negative issues associated with E10 gasoline in small engines. We have been selling Isooctene. That's actually a pure renewable gasoline produced at a refinery in South Hampton Resources in Texas. There appears to be strong demand for this product with good prices, especially from Europe. We expect to be focusing on further developing this segment in 2016 and announcing other customers. Jet fuel is making progress too. The ASTM committee focused on jet fuel from isobutanol, finally that all the data again. There was delays polishing one of the military testing reports from our bureaucratical event. Finally, it was put to committee vote. Once the committee passes it, and we don’t know or expect any issues, then would go to the forward ASTM vote. We think at the earliest that that vote could occur and be completed is in early 2016. Again, we don’t know up any issues and this is just the practice of ASTM. From a market point of view, jet fuel is very, very interesting. It's a growing market that’s under environmental pressure. Jet fuel will continue to be a focus for us. We believe that inside, our upper halt [ph] of jet will be able to compete unvalued given the benefit it brings. The third quarter was possibly the most important quarter for Gevo since we've been a public company. The risks from the lawsuits are gone. Our technology has been working. The demand for isobutanol is increasing. We believe that we can produce it economically even at a 1.5 million gallons per year scale, with the equipment they we’re now installing. We have partners who want to license this technology. Going forward, we’re all about making a strong isobutanol in this derivative of hydrocarbon products. Focus on the markets and applications where we believe isobutanol and a derivative such as jet fuel and octane have a distinct competitive advantage. We are in the midst of increasing our capabilities at our Luverne plant to produce more isobutanol economically. We are continuing to pursue the licensing of our isobutanol technology and thankfully we are done with litigation, all the pass holes [ph] uncertainty work and cost. Now I will turn it over to Mike.

Thank you, Pat. Gevo reported revenue in the third quarter of 2015 of $8 million, as compared to $10.1 million in the same period in 2014. The decrease in revenue during 2015 is primarily a result of the production and sale of approximately $7.6 million of ethanol, isobutanol and distiller's grains at the Luverne plant, as compared to $9.2 million in the third quarter of 2014. This decrease was primarily a result of lower ethanol prices experienced in the third quarter of 2015 versus the same period in 2014. During the third quarter of 2015, hydrocarbon revenues were $0.2 million, as compared to $0.8 million in the same period in 2014. This decrease was primarily result of a temporary halt in production at Gevo's demonstration plant located in Silsbee, Texas from June to August of 2015 while we renegotiated the contract with South Hampton Resources, the operator of the plant. We restarted hydrocarbon production at the demo plant in August and are back to producing isobutanol derived hydrocarbons at similar levels as compared to what was being produced prior to the Halton operations of the facility. Gevo also continued to generate revenue of $0.3 million during the third quarter of 2015, primarily associated with the ongoing research agreement with the Northwest Alternative Resource Alliance or NARA, where we expect to see produce cellulose and jet fuel using Gevo's isobutanol and hydrocarbon's technologies for a test flight to be ultimately flown with Alaska Airlines in 2016. Cost of goods sold decreased to $10.6 million in the third quarter of 2015 versus $11.8 million in the same period in 2014, due to the decreases in a variety of production cost Luverne plant, including a decrease of $0.4 million in repairs and maintenance expense. Gross loss was $2.6 million for the third quarter of 2015. After deducting depreciation expense of $1.4 million, the non-GAAP cash gross loss was a $1.2 million for the third quarter of 2015. R&D expense was $1.5 million in the third quarter of 2015, compared to $3.7 million reported in the third quarter of 2014. Recall that our R&D activities include technology development related activities at our labs here in Englewood, Colorado, as well as production related activities at our hydrocarbons demo plant in Silsbee, Texas, where we produce our bio-jet, isooctane and paraxylene products. R&D expense decreased in the third quarter of 2015 compared with the same period in 2014, due primarily to a $1.2 million decrease in employee related consultant and contract staff expenses, a $0.6 million decrease in cost related to the South Hampton facility as a result of the temporary halt in production at that facility, and a $0.3 million decrease in lab consumables. SG&A expense for the third quarter of 2015 increased to $5.1 million, compared to $3.6 million for the comparable quarter in 2014. SG&A expense increased in the third quarter of 2015 compared with the same period in 2014, due primarily to increases of $1.3 million in legal expense incurred as a result of about the preparation for the possible trial in August 2015 with Butamax advanced biofuels as well as to assist in finalization of the settlement and cross license agreements entered into with Butamax in the third quarter. We anticipate SG&A expense to decrease in future quarters as a result of the end of litigation with Butamax, and as we report in September, we are targeting achieving an average quarterly corporate wide EBITDA burn rate excluding stock based compensation of between $3.5 million and $4.5 million per quarter in 2016. Within total operating expenses for the third quarter of 2015, we reported approximately $1.3 million for non-cash stock based compensation. For the third quarter of 2015 we reported a loss from operations of $9.3 million, up slightly from a loss from operation to the $8.9 million in the third quarter of 2014. Interest expense for the third quarter of 2015 was $2.1 million compared to $2.6 million for the comparable quarter in 2014. The decrease was due primarily to the recognition of debt issuance costs in 2014 associated with the convertible notes purchased by white box in 2014. During the third quarter of 2015, we incurred a non-cash gain of 0.2 million, due to the quarterly mark-to-market valuation of the 2017 notes. There was no change in the value of the embedded derivatives in the convertible notes issued in 2012 and there were no conversions of those notes. During the three months ended September 30, 2015, the estimated fair value of the derivative warrant liability decreased by $4.7 million primarily associated with the decrease in the price of Gevo's common stock in the quarter. For the third quarter of 2015, we reported a net loss of $6.5 million or a loss of $0.39 per share, based on weighted average shares outstanding of 16,680,632. This compares to a loss of $0.9 million in the third quarter of 2014 or a loss of $0.01 per share. At quarter end, we had approximately 16,947,088 shares outstanding. Our cash on hand at September 30, 2015 was 16.2 million. With that, operator, we will open it up for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And it looks like our first question comes from Colin Rusch from Oppenheimer. Please go ahead.

Can you just walk us through the sequencing of improved data and analytics on the performance of the process, and how you see that coming out relative to these licensing agreements? I’m assuming that as you collect more data on the process, you're going to be able to drive better deals on the license agreements?

Yes, so in this last year, in 2015 in our production runs, we're doing -- the permutations have been working extremely well, extremely efficiently, high yield. We're down to the incremental improvements and people see that and see that how our licensees that we’re working with already recognize that the amount of improvement we’ve made was done much faster than they would have believed. So that's good. And when we're adding in the distillation column systems and adding in some fermentation to make yeast on site, that’s just like math and engineering. There is no technology involved per se. So they get that part too. So already it’s accelerating what we're doing. And so I think as this all gets implemented, we'll be standing here sometime at the end of first quarter early second quarter or next year, when it’s all the capital is built, the thing is running and you can just point to the plant, the economics. We can pull up the data. They can watch it run and watch it run economically, rather than having to do a calculation and anticipate engineering. And that matters a lot.

Okay perfect. And then in terms of what you control now on the ethanol production and stemming some of the cash burn there, what are the variables that you guys are working on near-term to kind of manage that a little more aggressively?

Not too much. We have things like funnel extraction along the docket, but right now we want to focus our capital obviously on the isobutanol side rather than the ethanol side. So nothing too substantive on the ethanol side.

Okay perfect and then just one final one. Obviously Pat, you've got a long history of commercializing bio-based technology processes. Can you just talk a little bit about the talent levels in the firm right now and how you see that going forward as you kind of turn the corner here with the litigation and start growing the organization again. What's the global talent? Where you at from a talent pool right now internally and how should we think about that going forward?

Yes, we're at fighting strength. So whenever you do these kind of technologies and you have to work through the problems of scale ups and then solving the problem, especially when something where we are retrofitting a plant like we did in Luverne, and then dealing with all the litigations stuff. That takes a hack of a lot horsepower. It's not quite a year ago. In the first quarter of 2015, we let a large part of the team go, and I would call that a right sizing as the team. Right now we’re at a -- the strength of our development folk is right. And so we’re making great progress. Probably it’s very, very fast progress. So as we go forward and ramp up the business, we’ll do some additions and prime additions under the business development side as we ramp up more isobutanol volumes and also as we get engaged in more and more licensing, we’ll be adding some engineering expertise as well. But in terms of the overall capability, we have Chris Ryan who is our Chief Technology Officer and Chief Operating Officer and he is very, very good, has been through this before and lot of us are experienced with it, as you pointed out. So we’re solid.

And our next question comes from Amit Dayal from Rodman & Renshaw. Please go ahead.

Thank you. Lot of positives this past quarter guys. Congratulations on all those developments. In relation to your ValvTect announcement last night; could you give us some color in terms of timing and supply volumes, et cetera related to this opportunity that we can potentially see form around these for you guys over the next one or two quarters?

Well over the next one or two quarter -- well, yes. So putting it in perspective. So first of all, ValvTect. ValvTect is a brand name who supplies the marine industry, particularly at marinas and the product that they serve up are additives that go into gasoline to make gasoline itself work better for both. So we’re actually kind of a natural alliance partner for them in that we have a new blend factor that works extremely well. We each want to be associated with each other, and of course they already have a network and all contacts just in the systems to reach out to 700 plus marinas. And of course that's actually part of the battle when you’re doing new production introductions. It’s how you get access to all those folk. Well, this is what we can get by working closely with ValvTect. Both win, is what the anticipation would be. Over the next couple of quarters though our isobutanol is -- we have made isobutanol. $It's in inventory. We already have allocated it out. So we’ll do some more distributing. We won’t be ramping up to more isobutanol until we get our distillation comps installed at the end of first quarter, beginning of the second quarter. So Mike, you want to add comments here.

Yes, I would say, as you recall, our conference call in September where we walked through the capital improvements and what that’s going to be in terms of isobutanol volumes at Luverne, I would say a big lion’s share of that ramp from the 100,000 comp that we’re talking about in 2015 versus the 750,000 to a 1 million gallons in 2016, a big component of that ramp we expect to be from the marine market. As Pat describes, it is a fragmented market. And so having partner like ValvTect can help in distributing the product to that fragmented market.

Got it. So this is more like second half of 2016 where we will actually see material revenues from this potentially.

Depending on when the equipment is actually installed and how quickly we are ramping up off of that, then you can anticipate some marina sales obviously in Q2 as well.

Okay, got it. And has work started for all the refurbishing needs at Luverne.

It has.

Okay. And in relation to the ASTM related requirements, from a certification point of view, sorry, you commented -- this was expected to happen end of 2015. Now it's pushed out to 2016, early 2016. I know you can't control a lot of this, but do you think it potentially gets delayed further than that? It seems it really does not have too much of a bearing given we’re still ramping up on the production side of things as well, but any risks with this getting delayed further out and how you need to set it up in relation to distribution partners et cetera?

Sure. So related to distribution partners, it's not relevant. That doesn’t matter, because it's still doing best quantities in all the rest. As far as the timeline where we've been, is that there was this army report that guy held up and who is in the OMB [ph] somewhere and then he’s actually turned up and now that finally escapes. Once people got back from vacation in September and then they put it on the committee ballot, the committee ballot is not right now. We don’t know of any issues. We don’t anticipate any issues. We haven’t met anybody who thinks there is any issues. That doesn’t mean there couldn’t be issues that pop up. It will be something, if it did, it would be extraneous and extremely unusual at this point because it's getting massively tested over the last about five to six years or whatever it is. So the date is all in. Once the subcommittee votes and approves it, then we will move to the full ASTM committee. That will be in December is what it’s targeted for, beginning of December. Now once that happens, it’s out for vote for 30 days, right. So that means, the earliest it could be is sometime in January is when it gets final approval. That the earliest. Yet it gets hung up. But suppose there are some concerns someone raises somewhere for some reason, then it would get delayed a bit. But we can't predict that sorts of things. It shouldn't happen. There is no reason to believe it will happen. But this is not something that we control as you pointed out.

Understood. And just lastly, it looks like you indicated that hydrocarbon revenue should bounce back. From a modeling point of view should we looking to kind of bring revenues from that segment back in line with historical levels for the next few quarters?

Correct, there is lumpiness as it relates to that businesses because it’s purely based off of shipments. Same thing occurred with jet fuel. So we did have a little bit of lumpiness historically. But on an average basis, you should see the revenues pop back up to similar, if not even higher levels.

And our next question comes from Thomas Boise [ph] from Cowen. Please go ahead.

Hi, Thomas Boise [ph] on for Jeff Osborne. I just had one question. Given the kind of tough crush spreads for ethanol, how has this kind of effected the ethanol and isobutanol production plans going forward because you seek converting further fermenters to isobutanol down the line if the spread doesn’t improve?

Well, so the quick answer is we'll deploy this first capital first, and get the plant back up and running end of Q1, early Q2. And on the back of that data, depending on what ethanol margins are like, and obviously the contribution margin we're getting on the isobutanol front, that will play a big part and comes out what we do with the plant going forward.

Okay and it looks like we have no further audio questions at this time.

Great, thank you all for joining us on call. Have a good evening. Bye-bye.