Tyler W. Painter – Chief Financial Officer
Solazyme Inc. (SZYM) Morgan Stanley Technology, Media & Telecom Conference February 26, 2013 6:15 PM ET
All right. Welcome everybody to the Solazyme information session. I’m here with Tyler Painter, the CFO of Solazyme. Before we get started, I just wanted to read a quick disclosure. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanely.com/researchdisclosures. So Tyler, thank you very much for joining us at our conference today. Most of you – people knew the audience the story provide a quick overview of what Solazyme does?
Tyler W. Painter
Great. Nice to be here today, so thank you guys for hosting it and for having us. We are not a telecom communications company, so for those of you looking for that, we’re in the ballroom. Solazyme is a company that was founded 10 years ago. What we do is we actually make oils. And when we say we make oils, usually people say, what does that mean?
What we’ve developed as a technology to be able to very efficiently take any of the carbohydrates on the planet, so any plant-based material make sugars, and we can turn those sugars into oils to replace existing sources of petroleum, existing sources of triglyceride. So if you look at things like soy, palm kernel, coconut, they’re using oils across all of the applications that you see out there whether it’s, yes, the transportation fuel that you used probably to come to the conference, all the way to the soaks and the personal care products as you wake up and get ready for work in the morning.
And then even into nutritional applications when you look at things like better re-spreads and solid dressings and even into our baking products. And we have a technology that’s been developed proven out of commercial scale. It’s an interesting time for the technology and for the company as over the last decade; we spent quite a bit of time as an early stage startup in which we were a research and development company, developing its capability to produce these oils.
We have been doing this as a scale since 2008 in partnership with the U.S. Navy, the Department of Defense, and many other companies. Early on Chevron has been an investor, Unilever was an investor, and we’re working with some of the biggest users of oils in the world.
We just last year about three months ago announced operating at a large facility with a new partner to the table with ADM, Archer-Daniels-Midland at a Clinton, Iowa facility that they had built out for another partnership. That facility operates at the scale of the facility that we’re building in Moema in Brazil today with a partner in Bunge.
So the way we’re going to market is, we have again, kind of pointing back to the technology, we have the ability to very efficiently convert carbohydrate-based sugars. So today, those sugars are typically coming from things like sugarcane or corn. In the long run, we’ve also done a tremendous amount of work where, when they’re available economically, things like cellulosic material.
So as you take plant-based sugars coming from waste products out of agricultural and others, we can actually turn those into nutritional food applications or into other oils that can go into the end markets that we’re serving. And then the other piece of the value proposition that often gets missed and what we’re doing is we actually can tailor the oil composition.
What that means is, we can actually change the chain lengths, we can change the saturation levels, we can change the actual composition of the oil, which allows it to be used in things like a functional fluid in industrial applications like dielectric fluids or lubricants, and have better heat transfer properties, have better oxidative stability, and be able to again work in ways that current triglycerides, current vegetable-based oils or plant-based oils weren’t able to answer the challenges that our partners face.
We recognize that the markets we’re entering are huge markets. We’re not doing this alone, so we’re doing this with partners. We partnered both upstream in which we have three very active projects today that are being built out into commercial scale within the next 12 to 15 months.
The first is with a joint venture with a company named Roquette at France, that’s Solazyme Roquette Nutritionals; its focus in the nutritional market for applications of our products that can go into non-tailored, so natural-based strains to make these oils and make products into the nutritional market.
Roquette is funding all of the working capital. Our first phase facility came online in late 2011. The second phase of it is being built today by Roquette and will come online. It will be starting to commission in Q2, come online commercially producing products a few months after that.
Our first facility in the fuels and chemicals space will be with Bunge, our Solazyme Bunge Renewable Oils joint venture. Bunge has been an investor in the company back in 2010 they invested. They’ve been funding research after a joint development agreement and then they moved into a joint venture with us last year. We broke ground on that facility in June and its on track, on time, to come online in Q4 of this year. That again, has a 100,000 metric ton facility for those who don’t think in metric tons, we’re not going it to be confusing and it’s just that’s the way these oils are typically sold. That’s about 33 million gallons of oil coming out of that facility. So that’s in Brazil.
The third facility that is coming online shortly thereafter is in Iowa, I mentioned with our Archer-Daniels-Midland, that’s at Clinton, Iowa a facility that is going to start at 20,000 metric tons and are targeted to expand that up to 100,000 metric tons with Archer-Daniels-Midland.
Then when we look downstream, each one of the partners I just mentioned are all also very large distributors of triglyceride oils today that recognize the values of our ability to bring in new oils to the marketplace that are used again in the existing infrastructure in each one of the end markets, will provide an ability to make products either more efficiently, change and redirect the supply chain and the logistic challenges when people are using tropicalized oils where they are actually shipping it, for instance from Malaysia, Indonesia to the U.S and using it into the oil, chemical, or the personal care markets. They are often tying up tens of millions of dollars for many, many months as those oils are being distributed across the globe.
So we are able to actually help them on the logistics supply chain side, as well as providing oil to just don’t exist today. We, in addition are working downstream with a number of companies, I mentioned Unilever has been an investor in the company. They also have been funding joint development research for a number of years now.
We have an active program that just last year expanded into tailored crude oils as well. And other companies that have been funding joint development agreements that we are working with, I think I mentioned a few of them include companies like Chevron, Dow, and then most recently we announced a $20 million joint development agreement with Mitsui in which they are funding a suite of new oils into the marketplace.
One of those oils is a new oil that we introduced last year. For those in the room probably doesn’t mean much, but if you look at the back of kind of personal care products, you will see things that say like myristic acid or (inaudible) or one of the oils they wanted that we’ve been able to be public about it is myristic, a highly concentrated myristic oil. And why is that valuable? The fatty acid component in that oil of myristic is in nature. The highest composition is about 15% of that quality that they are looking for. That comes from palm kernel oil.
That sold last year on average for about 3,700 bucks of metric ton, so very high cost of the oil. What we’re able to already do in the last nine months of the research program is move that to where we have an oil that’s over 50% myristic. So the value of that oil to a company like Mitsui is incredibly differentiated for what they can get naturally.
So we’ve spent the last 10 years kind of bringing out the kind of technology scale up risk out of the business and we’re moving into the commercial phase. We did commercialize first in the skin and personal care business in which we have an Algenist, it’s the name of the brand, the skin care line we launched about 20 months ago, now. It’s been great reception in the marketplace. We’re selling in over 1,300 stores across Europe, the U.S. and a number of other countries with Sephora, also with QVC.
That last year was about $16.5 million of revenue and we expect that will grow another 35% or so this year in kind of that skin and personal care business. Surely, they’re after commercializing within nutritionals and then as I mentioned the Moema and Clinton facilities coming online will be a ramp in our capacity.
So we had an interesting time and flexing point as we’re moving into that commercial capacity across all of our businesses just to kind of end the comments here, as well we’re in a financially strong position. We have ending in January, it was about $260 million in cash and cash equivalents. We also in January announced that the Brazilian Development Bank which is a group really focused on innovation to support agricultural and other types of innovation within Brazil.
The Brazilian Development Bank highest program, we’ve received a $120 million award at a 4% interest rate for our Bunge and Solazyme joint venture. What that does is, it significantly reduces the equity dollars that Solazyme needs to put into that joint venture in terms of building out the facility and it funds it at again a cost lower than the cost inflation in Brazil. So something we’re really excited about. We’ve been working on with the Brazilian Development Bank for over 15 months to secure that, I guess…
Thank you very much…
Tyler W. Painter
Hopefully, I will give you a quick snapshot.
Yeah, I think that’s helpful for a lot of the people that are new in the audience, the story. I was hoping to dig in on the upstream partnerships a bit on what Solazyme is contributing to those partnerships and what the partner is contributing with Roquette, ADM and Bunge in particular? What were you kind of looking at in terms of capital infusion and technology that will be made available or maybe exclusivity around certain products, that kind of thing?
Tyler W. Painter
Great. So each one of those partnerships, I would love to say, hey, here is what they are. They’re all the same, kind of cookie cutter. They’re all very different in terms of the structure. But what we have done is we look at partners that we think bring multiple things to the table.
Typically, the first is, can they bring capital? The cost to capital for any one of these companies is obviously significantly lower than Solazyme’s. Can they bring a global supply chain logistics kind of capability that we obviously don’t want to replicate, but we want to be able to leverage?
Do they have access and visibility into the end markets or what the oils for that specific market are looking at, and every one of those cases, they have all of that. But, I’ll start with Roquette since it’s our oldest joint venture. We entered that in December of 2010. Roquette paid a $20 million license fee to enter the joint venture. We basically, the way I would kind of simplify it is, we sold half of that business to a partner and the global nutritionals non-tailored, so meaning, these are natural strains that are naturally producing the oils and the products that can be used in that joint venture.
Roquette is funding all the working capital. They funded the first phase facility that’s been operational since the end of 2011, and they’ve been building the Phase 2 facility, which is Roquette owned, but available to the JV for production. That Phase 2 5,000 metric ton facility will come online, be commissioning in Q2, and will be producing cellulose products a few months after that.
That facility is owned by Roquette, but it’s again made available to the JV. And then when we enter what we call, internally a Phase 3, which is the 50,000 metric ton facility, Roquette will provide both equity and debt contributions to build that facility, and it will be owned by the JV.
The expectation is that that is likely to be built in (inaudible) here in the U.S., but we also obviously it’s a partnership, so we’re looking at multiple locations with them. The way to think about that again is a 50/50 JV doesn’t consolidate in our financials and they are funding the growth plans, the capital plans of it, we sold half of that business to work with them. It was our first JV. They’re great partner and we’re actually very happy with kind of the way is progressing there.
The second joint venture that we entered is with Bunge. Bunge is historically and initially, it was more focused in Brazil. So I would like to have a little bit of it in terms of the kind of path that we work through with Bunge. All these relationships take a long time for company like Solazyme to develop, so you can imagine at any given time what kind of bunch we have in the pipeline.
But with Bunge, we’ve invested in 2010. They started funding research. We entered a joint venture framework agreement with them in August of 2011. And from Wall Street perspective, I can’t tell you, we’ve got a lot of people calling us and saying, “Why did you enter joint venture framework agreement? What is that actually mean?” And the reason being is we actually at that point started engineering, a site specific engineering to build the facility at the Moema mill.
And as a partner, when you look at a public company like Bunge, they say what we have billions of dollars of investments in sugarcane in Brazil, were one of the largest distributors of natural oils. And by the way the reason why we want joint venture with DOC provide a whole different diversification of our revenue stream out of sugar mills, because you actually can now get from a sugarcane, carbohydrate to a higher value triglyceride oil. But we don’t really want a JV with you.
The end capital commitment ends up being dramatically different than what you have put out that you think it is. So we ended the joint venture frame work agreement and then started the very detailed six-month process with outside firms to come up with our plus or minus 10% contingency engineering plants.
Once we actually achieve that, we move forward, entered the JV in early 2011, broke around thereafter and then after the rises. Since then we’ve also announced that we expanded with the joint venture expansion framework agreement with Bunge, that target is going to 300,000 metric tons. So Moema, it’s scheduled to come online in Q4 and then after that, we expect we’ll expand up another 200,000 metric tons.
Again, what this does is, it provides a whole different diversification for the investments that Bunge has made in Brazil. They’ve been a great partner, they have significant as any of you who know them in the room, operations here in the U.S., very significant operations in Brazil and we’re very happy to be working with them and look forward to that plan coming online in Q4.
With ADM, it was a bit different. We’ve been talking with ADM for quite a while. They had built a facility in Clinton that they had written off most of that facility. They had built it for another joint venture they entered, and they backed out of that joint venture. What that provided for us was an opportunity.
We’re using very standard industrial fermentation. So the fermentation had been built, although it wasn’t built for our process. Very readily, we could actually plug in our process at the facility there. And so we saw that as an opportunity. Again, we had already been talking with them, approach them and for us, a very capital efficient way to gain access to the marketplace and start both with a collaboration on the manufacturing side with access to feedstock, but also entered the market development agreement with them, which last week we announced some of the results of frac study that they had done which we all kind of law points of frac study, french buyers those kinds of things, which actually literally that’s what it is.
And they are one of the largest distributors of veg oils going into that marketplace. What they came back and said is versus the highest cost, highest value oils that are healthy going into these types of frac studies that are available on the market today. Ours is actually after 10 days of very high degrees of temperature, because of the oxidative stability of the oils had more fire lights left in it than the oils that it was compared against at the beginning. And so when you think of applications of kind of where does the opportunity come from that is, ADM is a great example of a company that can help us and access in that commercial market; so those…
Great. So each of these partnerships will see a new facility open next 12 months some earlier than others, each of them will go after very different end market, so we will be producing different types of oils and each one uses a very different feedstock stream. So if there are any specific technology hurdles that you need to overcome between now and successful commissioning of those facilities, or are there any major risks in terms of implementing your technology in each of those facilities?
Tyler W. Painter
You know, there is always execution risk as you bring in new plants online. The technology risks, we’ve spent 10 years actually much of that as a private company working out the technology risks. So we’ve been operating at this kind of scale, again as I mentioned with the U.S. Navy since 2008.
We have a facility in Peoria as well that’s an integrated biorefinery that we’re able to operator to provide large scale samples for companies doing field tests and other thing. So from a technology standpoint, I wouldn’t say that there is concerning, I think, there is always concern, I mean that’s one of the things I guess get paid to do. But it’s really just more about executing, getting these plans up and running and being able to deliver the quantities of oil into the marketplace.
Great. And then maybe moving to the downstream side, I mean, I’ll throw it out to the audience in a few minutes for questions as people start thinking about what they like to ask. You’ve signed several JDAs with big name partners Mitsui, Dow, Unilever, you named a few. When might we first see the first co-developed products come out of those development agreements and what are you kind of looking for, what are your partner is looking for, what are you looking for in terms of actually commercializing some of the ideas that are being generated in those partnerships?
Tyler W. Painter
So I’ll book into to it a little bit. I’ll start with kind of one of our oldest JDAs, which is with Unilever and it’s expanded into multiple JDAs and then one of the more recent ones with Mitsui. With Unilever that started out as a relationship with their procurement guys, just about how do we save money? We buy tons of palm kernel oil, how do we move into a better supply chain.
And what it moved into is on the technology side, recognizing when we can tailor the oils, they can actually go into all sorts of different products. It then expanded into the food markets and other applications that we’re working on with them.
We have oils today with Unilever that have come out of the joint development agreements, that we would be ready to commercialize as we bring the plants online. We also have ongoing funded research with Unilever in which they’re saying the next generation of oil. I want blank, blank and blank for this other part of the market. So they obviously expand a large market in terms of different oils they’re using for different applications. And that to me is the beauty of our technology as we actually can help them where we can say, this is commercially ready oil you can use today and they’re also helping to fund oils that they want for other products that we today we wouldn’t be offering them.
Mitsui, very similar. Mitsui actually approached us. We’ve been working with Mitsui for years in terms of just discussions, but hadn’t gained a lot of traction until probably six to 10 months ago. As they started to recognize our ability to tailor these oils and what that actually meant to them, it changed the relationship. And so, they identify the suite of oils that they believe have high value, high volume opportunities that they want to be part of. And so, they’re funding up to $20 million of the research over a number of years that we believe is the first part of a much broader relationship that will have with us over the coming years.
The first oil, the only oil we publicly talked about that’s part of that suite is our high-myristic oil; I mentioned that at the earlier comments. Myristic is a valuable oil particularly in the personal care products, some industrial applications, and Mitsui saw a need that they wanted to actually get into that marketplace, and they don’t have no other options to actually reset today. So Mitsui, we think is, we’re happy to welcome them to our stable partnerships.
Great. And then in terms of actual sales agreements or off-take agreements, you mentioned that as these facilities are not coming online over the next 12 months, they will probably be some sort of sales agreements in place to help – speak for the capacity that will be coming out of those facilities. Do you expect publicize those sales agreements or we’re going to know what they look like in terms of volumes, pricing, what kind of detail do you expect to provide here for agreement?
Tyler W. Painter
We do expect to publicize some of them. Volume and pricing agreements are probably going to be a mixture of what we’re able – how much detail we can provide. Clearly, from the investment community, we want to see it all, so I understand that.
From the other side of it, most of our partners have kind of we called it delicate balance that they’re actually running with us. And they have existing supply chain for managing. And so, if you think about your company like Unilever and you are buying 5% or whatever somewhere around that of the worlds palm kernel oil.
And you have the supplier relationships that have been in existence for many, many years. You’re not day one going to say, “Okay, I’m getting rid of that supply chain and moving over to this one.” You’re going to figure out how do you actually, potentially blend in our oils to then be able to ramp up as we bring capacity online to be able to be more public about the kinds of quantity and pricing. The other is we’re also going to be reluctant to get specific pricing because each company is going to be at a different stage.
So for instance, as we enter a multi-year contract that we may look at as what I would call a base load for the plant. We may say we’re willing to give up some of the value that we’re bringing for you to sign a multi-year commitment at a cost plus that locks in our margin.
But when I want to do that for everybody, because the value of the oils are significantly higher and the ability for us, the same plant remember, we can actually change the strain and produce a different oil to take advantage of it. There are issues going on whatever in a certain market that an oil is in short supply. We can actually answer the demand for those oils. One plant, same facility, same CapEx, changing the strain produces a different triglyceride oil to sell in a different market.
So we want to maintain some of that flexibility. We brought in a gentleman as our COO, late last year, Jean-Marc Rotsaert. He came from a long history across kind of R&D and big CPGE and food companies as well; most recently he was North American CEO of a company named AAK.
They were selling about $600 million a year of triglyceride oils in to the U.S. and so when look at what the capabilities in the marketplace he was answering, you can manage that supply chain really much more from a commodity basis, but understands what does it take to manage the balance off – you’ve probably started a 10% of their supply, move to 20% to 30% to 40%. You get very few companies and I completely understand that would say, I’m going to turn out the lights on my supply chain now and turn on a whole new supply chain and we think it will be continuing and he will shift over.
Great. I think we have a couple of minutes for questions, anybody?
Just on the timing on the sales agreements, is there something we should expect midyear or late 2013 or beyond or any commercial quantity?
Tyler W. Painter
Yeah. Again, we haven’t given specifics on that. I think as we get the facilities closer to coming online, you will see some of those announcements. I’ll remind you of a couple of other things as well. When I look at ADM or Bunge and Roquette frankly, Roquette has a distribution arm for Solazyme Roquette Nutritionals.
Bunge is one of the largest triglyceride oil distributors and we just expanded that joint venture to include Taylor Crude oils in Brazil. They’re also one of the largest distributors of commercial grade crude oil in the marketplace in Brazil. And they will be part of that selling and marketing of the oils and ADM is in market development agreement as well.
So these are one of the things that often gets missed is that the companies we’re partnering with are also some of the biggest users, distributors and sellers of oils that would be in the marketplace. So that’s not saying we won’t – you will see sales agreements, but that was also – I don’t want to underestimate the strength of the partnerships and that’s one of the reasons we partnered with a number of these companies.
Any other questions?
Tyler W. Painter
Yeah, normally what we do is, because it’s very much tied to capacity and how you can get these oils produced. So normally if you look at plant economics, take a 100,000 metric tons facility, so partially because this is in a partnership, so I won’t give any guidance specifically on Moema.
But if you take a 100,000 metric ton facility that we believe our average selling price at that type of facility would be north of $2,000 a metric ton. So it will take 12 to 18 months for it to ramp to full capacity to nameplate. But as it ramps to that, you would expect that facility would generate in excess of $200 million a year in revenue and we would get 50%. We would get the revenue, but we would get 50% and actually in that case as higher value oils come into it, we have an agreement where we actually get more than 50% of the profit. But we haven’t been able to give a lot more detail than that, but think of it as 50-50 plus.
In the case of the facility with ADM, they own that facility. So we’re paying basically to gain access to that facility. But we can produce any oil and we own all of the marketing and distribution rights and all the profits out of that as well.
Sure, one quick one…
Tyler W. Painter
Sorry, the one thing I haven’t mention to because we have given it historically as well is, within the food and nutritional business, Solazyme Roquette Nutritionals, as that product ramps, we expect the ever selling prices will be north of $5,000 a metric ton in that food business.
So you look at the Phase II and Phase III facility, I mentioned Phase II 5,000 metric tones as it reach name plate capacity of the higher percentage and then as you reach the Phase III facility, that facility alone should be generating approximately $250 million of revenue when it hits nameplate capacity. I’ll just caveat, that’s a joint venture and which we don’t consolidate the results, so you’d see it comes through in the bottom line.
When do you recon you’re going to be able to price competitive with industrial fuels like the stuff you’re doing with the Navy?
Tyler W. Painter
So for us, it’s a matter of being capacity constraint. So when I say that it’s a matter of where do we actually allocate that capacity, could we produce today in the right facility with the right cost structure and be able to be competitive? With certain blend stocks, yes. The answer is actually we could be doing it today.
But when we look at the value of the oils that we can make and oil going into – so for us, fuels is always has been and that’s the reason the company was founded, continues to be and always will be a part of our business and we see an incredibly and particularly longer-term, a huge market, it’s just a lower margin business. And when we have limited capacity, you’ll see us use it for kind of market development blending other types of – you’ll hear a few of those progress with us. But the majority of revenue what we’ve said for say, three plus years out will be driven by the other markets.
Great. I think we’re out of time. So Tyler, thank you very much.
Tyler W. Painter
Great. Thank you all for taking the time today.
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