Gevo, Inc. (GEVO) Q1 2018 Earnings Report, Transcript and Summary

Welcome to the Gevo, Incorporated First Quarter 2018 Earnings Conference Call. My name is Adrian, 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. [Operator Instructions] Please note this conference is being recorded. I’ll now turn the call over to Geoffrey Williams, General Counsel and Secretary. Please go ahead.

Good afternoon, everyone, and thank you for joining Gevo's first quarter 2018 earnings conference call. I would like to start today by introducing the participants from the Company. With us today is Pat Gruber, Gevo's Chief Executive Officer; Timothy Cesarek, Gevo’s Chief Commercial officer; and Bradford Towne, Gevo's Chief Accounting Officer. Earlier today, we issued a press release which outlines the topics that we plan to discuss. A copy of this press 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 today's call will be available on Gevo's website. On the call today, you will hear discussions of certain 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 are contained in the press release distributed today and which is posted on our website. We will also make certain forward-looking statements about events and circumstances that have not yet occurred, including, but not limited to, projections about Gevo's operating activities for the remainder of 2018 and beyond. These forward-looking statements are based on management's current beliefs, expectations and assumptions, and are subject to significant risks and uncertainties, including those disclosed in Gevo's Annual Report on Form 10-K for the year ended December 31, 2017, and in subsequent reports and other filings made with the SEC by Gevo, including our Quarterly Reports on Form 10-Q. 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 obligations to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise. On today's call, Pat will begin with an overview of Gevo's business and strategy. Tim will discuss commercial development activities. Bradford will then review Gevo's financial results for the first quarter of 2018. And following the presentation, we will open up the call for questions. I'll now turn the call over to Pat.

Thank you, Geoff. And thank you all for joining us today. While we continue to make progress on our objectives: Number one, we reduced our costs significantly by $2.2 million in the first quarter compared to last year. We also increased sales of our products by 47% compared to a year ago in the same period. We expect to continue to improve Gevo's cash flow profile as a company as we go forward. It is becoming crystal clear that the world marketplaces are being incented to achieve low greenhouse gases or carbon index, that's referred to as CI. The marketplace is starting to sharpen the focus around that carbon value, that CI, particularly in the EU and in California. We see a path to make Gevo profitable within a couple of years, but continuing to focus on low CI fuels, leveraging ethanol in this hydrocarbon markets, chemical intermediates and protein. We have a very good plant site in Luverne. It's got good corn economics, good transportation, good rail, good logistics. We see an opportunity to drive our carbon footprint down without deploying huge amounts of capital. The improvements we are contemplating making at Luverne, would be designed to benefit anything we do in ethanol, isobutanol, isooctane, jet fuel, or any other product made from our technology made at Luverne. Our plans for Luverne are designed to allow us great optionality and flexibility as we develop the markets for our advanced biofuel technologies. And they should get us to probability without being dependent on large build-outs of IBA, jet and the like. The implication of this is that our burn is expected to decrease, while our margins increase. We're in the midst of finalizing plans to get this done. It's the path for Gevo at this time as it preserves the optionality for our isobutanol, isooctane and alcohol-to-jet fuel products. All of our optionality can be preserved. One other thing that is often lost in all of this discussion, is that a plant like Luverne, it uses corn as a feedstock, and we're currently producing nearly 100 billion pounds per year of animal feed, mostly in the form of protein. The incremental value improvements for protein can meet a lot of value, that's not lost on us, that's going to be an important focus. Why? Food's important, when we talk about biofuels and agriculture, protein matters a lot. Nutrition is all about the protein content and processes that produce more protein in addition to being able to address the market requirements of low-cost carbohydrates, lower the footprint, lower the CI, those are going to be the winners, and we think we have a set of technology that can do that. Now at Gevo, we are all about the low CI fuels then, chemicals and protein. That's the right way to think of us. In addition to our ethanol capabilities, we have technology that breaks out of the ethanol paradigms, getting to the mainstream hydrocarbon fuels, such as jet and gasoline. But we have a chicken and egg dilemma. We need large production capacity to drive production cost down for these hydrocarbon products; we already know how to produce them. We need them at scale, so we can get the economies of scale right. We completed a body of work in the last several months, where we've had a consultant and other advisers look at our economics and validate our economic models. We're pretty confident of what we have in terms of the technology, what its future performance would look like. It's based on solid data, real plants at a real scale. The advantage that we have in getting to advanced low-carbon index hydrocarbon fuels is that when we use IBA as a building block, we have multiple valuable products we can make, jet and isooctane. That's a little bit different than other alcohol-to-jet routes. Both of jet and isooctane have value and potential. Currently, however, we're the only Company in the world that has the ability to make meaningful quantities of renewable isooctane. Remember, isooctane goes into renewable gasoline. There's demand for that. It's one way of putting low-carbon content into mainstream gasoline. We see the potential here to be as great as or greater than that of jet fuel. Now another highlight that occurred this quarter is that the EPA has published a rule enabling 16% isobutanol blends in gasoline for on-road use. Previously, a 16% blend could only be used for off-road use. Having the flexibility to use the 16% blend for on-road use is expected to make it much easier to get through the distribution channels like retail. There is still other logistical challenges to overcome, but this is a great step forward, good for the EPA. I hope they move quickly to finalize the rule. This is potentially a big deal and that it should make it easier to reach more pumps at retail across our larger geography. Another highlight was that the ASTM moved the Glenlivet of our jet fuel that's ATJ from 30% to 50%, that's a final rule. So now our fuel to be blended up to 50%. This is good because it creates the opportunity to take more advantage of the special performance properties of our ATJ, such as, the energy density. Our energy density is higher, means, in theory; you could fly longer out a load of fuel. They have low sulfur, there's a big push across the world to get sulfur out of these dirty fuels. And we can help that, and low particulate, in some areas particulates are going to be banned and restricted. And that's a potential benefit as well in certain geographies in the world. Of course, this is all in addition to the low greenhouse gas emissions. And finally, this quarter I'm glad that we have recently added Tim Cesarek to our team as Chief Commercial Officer and EVP. Tim brings over 20 years of knowledge and experience in strategic and commercial transactions with 15 years in the field of renewable resource-based fuels and chemicals. He's seen a lot. He saw a lot of renewable fuels and chemicals. He is familiar with the competitive technologies across our targeted markets. He knows the companies. He's got an excellent track record in getting good deals done, that's what I want from him here. We're fortunate to have him at Gevo. I'm glad his informed opinion led him to join us. I've asked him to share his thoughts on our business development activities. Tim?

Thanks, Pat. Those are kind words. I'm pleased and excited to have joined the Gevo team. I've been in the renewables industry for almost 20 years, as Pat said. I've seen many technologies come and go. I've obviously done my diligence, and I believe Gevo has a proven commercial process that produces valuable proteins that feed the world while maintaining a leading comparative advantage in the production of low-carbon renewable isobutanol, isooctane and biojet. This combination leads to the sustainable production of fuels and chemicals, using isobutanol as a foundational intermediate chemical. The low-carbon isobutanol produced at Gevo's commercial operational plant in Luverne and bio-hydrocarbons produced at South Hampton Resources leads to many product mix options. Given the breadth of these options, my objective will be to develop and execute on a set of priorities that narrow our focus to products and market segments that have demonstrated the highest degree of market pull and value-in-use that maximizes the value to the customer and the supply chain and ultimate profitability. In the coming months, we will focus on prioritizing the following markets. We will continue to develop and expand isobutanol and ethanol-free markets, where isobutanol is valued for its unique advantages, such as; one, not being ethanol; higher energy density; not miscible in water adding to a fuel quality logistical optionality. And a much lower Reid vapor pressure or RVP that – than ethanol allowing one to upgrade low-value, high-vapor pressure blending components into gasoline. We will endeavor to expand the demand for isooctane and isoctine made from our isobutanol for use in specialty and performance fuels and lubes. We have a number of customers and strategic partners who have a strong interest in this product and market. We need to leverage these relationships to get our business built out. We will look to secure biojet fuel contracts and partnerships for both business and commercial aviation. Based on what I've learned and seen, I believe, that Gevo has the potential to have a strong, long-term comparative advantage in biojet. It's scalable and appears to be economical or even advantage compared to other large scale biojet production routes. We will further leverage our capability and assets for the development of specialty products used in cosmetics, flavors and fragrances. Finally, to fund such growth, we are planning on expanding existing strategic relationships and developing new ones where partners value the need to attributes of our product and capabilities through a contractual offtake, project investment and licensing of our technology know-how. I'm out to solve the chicken and egg problem that Pat referred to earlier. Our technology is solid, we're selling product, we need to build out the business platform. It's time. Now, I will turn the call over to Bradford, who will take us through the financials. Brad?

Thank you, Tim. Gevo reported revenue in the first quarter of 2018 of $8.2 million as compared to $5.6 million in the same period in 2017. The increase in revenue during 2018 is primarily a result of the production and sale of approximately $8.2 million of ethanol, isobutanol and distillers’ grains at the Luverne plant, as compared to $5.5 million in the first quarter of 2017. This increase in revenue was mainly due to increased ethanol production and higher distiller grain prices in the first quarter of 2018 versus the same period in 2017. During the first quarter of 2018, hydrocarbon revenues were $0.1 million less than in the same period in 2017, principally as a result of differences in the timing of shipments of isooctane during the quarter. Cost of goods sold was $10.6 million in the first quarter of 2017 versus $9.4 million in the same period in 2017. Cost of goods sold included approximately $9.0 million associated with the production of ethanol, isobutanol and related products and approximately $1.6 million in depreciation expense. Gross loss was $2.3 million for the first quarter of 2018 versus $3.8 million for the first quarter of 2017. R&D expense for the first quarter of 2018 decreased to $0.8 million compared to $1.2 million for the comparable quarter in 2017, due primarily to a decrease in employee related expenses. SG&A expense for the first quarter of 2018 decreased to $1.9 million, compared to $2.2 million for the comparable quarter in 2017, also due primarily to a decrease in employee related expenses. Within total operating expenses for the first quarter of 2018, we reported approximately $0.1 million for non-cash stock-based compensation. For the first quarter of 2018, we reported a loss from operations of $5.0 million, down $2.2 million from a loss from operations of $7.2 million in the first quarter of 2017. In the first quarter of 2018, cash EBITDA loss, a non-GAAP financial measure, which is calculated by adding back depreciation and non-cash stock-based compensation to GAAP loss from operations was $3.3 million compared to $5.4 million in the same quarter of 2017. Interest expense for the first quarter of 2018 was $0.8 million, which increased to $0.1 million as compared to the same quarter last year. This increase was primarily due to higher interest rates on our 2020 notes. During the three months ended March 31, 2018, we incurred a non-cash gain of $0.5 million from a change in a fair value of the derivative warrant liability. During the first quarter of 2018, we also incurred a non-cash gain of $2.9 million due to the quarterly mark-to-market valuation of the 2020 notes embedded derivative liability. During the first quarter, we also incurred a non-cash loss of $21,000 as a result of exchanging the remaining $515,000 of principal, due on the 2022 notes for shares of our common stock in January of 2018. This action fully satisfied all remaining obligations under the 2020 notes. For the first quarter of 2018, we reported a net loss of $2.5 million or the loss of a $0.11 per share based on the weighted-average shares outstanding of 22,534,727. This compares to a loss of $5.9 million in the first quarter of 2017 or a loss of $0.51 per share. In the first quarter of 2018, Gevo recognized net non-cash gains totaling $3.3 million due to changes in the fair value of certain of our financial instruments, such as warrants, embedded derivatives, or the exchange of convertible debt. Adding back these net non-cash gains resulted in a non-GAAP adjusted net loss of $5.8 million in the first quarter of 2018 or a non-GAAP adjusted net loss per share of $0.26. This compares to a non-GAAP adjusted net loss of $7.9 million in the first quarter of 2017 or a non-GAAP adjusted net loss per share of $0.68. Pat?

Thanks. Thanks Brad. Thanks Geoff, and thanks Tim. I just wanted to reiterate a couple of things. One of them is that this – having a very clear focus for the low CI fuels is a big deal, we can see their value and that means we can start to quantify things and get down to the brass tacks of these contracts. Tim didn't talk about it here today, but he is – got some things in the work, I hate to predict when they're going to happen, because we're always wrong, but it's making progress, and I expect to have these contracts. And we will call him out and tell you about them as we get him done. I like where we're going, I like the way our team is focused on driving the cost out of the system, I like the plans as they're coming forth. I like this idea of getting to profitability sooner rather than later without having to be completely dependent upon the large build out of that isobutanol, jet, and octane plant. We have enough demand for the incremental products, the hydrocarbons, where it looks could be pretty attractive and that coupled with our plant and its location and its ability to get to low CI ethanol, and its protein products and such, that's pretty exciting. And we'll be talking about that more in the future. And so with that, I would like to thank all of our stockholders for their continued support of Gevo. We'll now open it up for questions. Operator?

Thank you. We will now begin the question-and-answer period. [Operator Instructions] : :

All right. Thanks a lot everybody for joining us on the call today. I appreciate it, and have a good afternoon.