Solazyme, Inc. (SZYM) Raymond James 34th Annual Institutional Investors Conference Call March 6, 2013 12:10 PM ET
Tyler W. Painter – Chief Financial Officer
Pavel S. Molchanov – Raymond James & Associates, Inc.
Pavel S. Molchanov – Raymond James & Associates, Inc.
I appreciate everyone coming. I know you guys are probably hungry. You can have lunch after hearing about Solazyme, really cool story, one of a kind public company at the intersection of clean tech and biotech.
Tyler Painter, the CFO will walk you through it. Tyler?
Tyler W. Painter
Great. Thanks, Pavel.
Had I recognized that I will be presenting through lunch and none of you would have food, I would have made sure I brought some of the cookies or other things made with our products, but anyway it’s great to be here today. I appreciate you taking the interest and also thanks to Raymond James for hosting us here. 34 years and I think one of the longest standing conferences that I am aware of, it’s great to be here.
So as a public company, no presentation would be complete without looking at our Safe Harbor Statement, so I welcome you all to look at this. As a reminder, any forward-looking statements or non-GAAP measures that I use today are covered by the Safe Harbor. And of course the non-GAAP measures, I would encourage you also to look at our most recent filings with the SEC, 8-K that was filed a couple of weeks ago for our year-end earnings results.
So what does Solazyme do? Solazyme makes oils. If you get nothing else from this presentation than the two key value propositions of the company are, first that we are able to convert plant-based sugars, so any carbohydrate-based plan today you think of things like sugarcane, corn but in the future as well as cellulosic any plant-based sugar, we are able to convert into high-value oils. And we are able to, the second piece of the value proposition is tailor those oils.
So we can make the oil composition meet with the end market needs or for our customers in the products that they are producing. Our tagline for fuels, for food, for life, really reflect a concentrated view of efficiently producing these oils, but the fact that these oils can actually go into any one of the end markets. Oil impacts almost every aspect of our lives, whether we are looking at the carbon fiber that I just walked in here, transportation fuels and all the way into personal care products, cleaning supplies and even nutritional products in the house.
Solazyme is just celebrating its ten-year anniversary this quarter actually. So we are incorporated in the early 2003, I’m sorry in early 1993. 2003 we’re over 200 people today, 230 people it’s where we ended last quarter, over 300 patents filed many of those published. So if you can go in and look at kind of some of the technology, the way we’ve protected what we’ve built out is this technology platform. Our corporate headquarters is in South San Francisco.
We also have an integrated biorefinery that came online in the middle of last year in Peoria, Illinois. That was built out with the DOE. And we have a facility in Campinas, Brazil that’s a laboratory and office. And we have four manufacturing facilities as I mentioned Peoria, we have three others that are in process, in the north of France with a partner Roquette, in Brazil with Bunge, and in Clinton, Illinois with ADM.
As a company, we are well positioned. So over the last 10 years, we’ve developed a disruptive technology that’s proven. We’ve been producing at scales since 2008 and we’ve recently announced that we have expanded the scale which we produced to over 500,000 leader vessel sizes with our partner ADM, we announced that in Q4. The ability to tailor our oils provides us the ability to have very broad market applications across personal care, nutrition, and industrial or chemicals applications, and all the way to the fuels market.
We have strategic partnership, so we are not doing alone. We’re very focused on where is our value proposition, we’re a biotech technology company with an ability to very efficiently convert low-cost plant-based sugars into high-value oils. So we’re working with partners both upstream and downstream. And we have an established commercial production of projects that are underway I just mentioned a few of those with a very clear commercial growth path ahead.
So looking at our technology, the first question typically is, hey, I heard you guys (inaudible) that your technology is different from others, that I’ve heard out there. We use standard industrial fermentation. So we grow in big steel tanks, we feed sugar to algae, and that algae is very efficiently able to convert those sugars into high-value oils. And we also then as I mentioned have the ability to tailor those oil profiles to change the chain links, the saturation levels, the functional groups to really have a very specific oil that meets the customer demand, whether they are making a soap, a lubricant, or even a fuel.
We’ve proven this process at scale, so as I mentioned we’ve been producing at 75,000 commercial scale since 2008. These programs have been primarily with the U.S. Navy, in which we’ve been performing and delivering against multiple programs with them for testing and certification of advanced biofuels. To our knowledge, we’ve been part of every major test that the Navy has done and creating the certification and the standards for advanced biofuels. We also now with our most recent relationship with ADM have expanded beyond our Peoria facility which is a 128,000-liter vessels, all the way up now to 500,000-liters.
The important piece here, when you look at the biological process is that the scale and can you manage contamination, can you actually have a repeatable process. And absolutely when we look at the number of runs we’ve done since 2008, we see a repeatable process. We have a strong ability to manage no contamination issues and we have the ability to have linear scalability. So when we look at what we produce in the lab at seven liter fermenters, we are able to get the same results at 500,000 liters.
And looking at the breath of the platform, again we can tailor the oil profile. So what’s very unique is the ability to change and have different oil platforms. So one facility, one fixed asset investment can actually produce a variety of different end-market oils. The four oils that we talked about in the last year publicly, are (inaudible) platform, lauric platform, myristic which is also mid-chain it is in a lot of personal care products. I’ll talk about more about myristic and what we are doing with Mitsui in that market later in the presentation. And we also recently introduced a replacement for cocoa butter which again also typically surprises people but we’re able to meet very specific melting curve and other properties that you want out of the cocoa butter kind of replacement.
These oils what we typically do is we focus our efforts on markets that have very large and market sizes, so typically over one million metric tons in the marketplace today. Where we can also come with a higher value tailored oil profile, that on the right of the slide include some of the companies that we publicly talked about that we expect to either be able to distribute or these customers actually have the end oils, and in many cases are also funding research of the company.
So an example of what does that mean to tailor oil profiles, this is one of the oils that we introduced last year, and it’s our high oleic platform and in this specific case we are focused on reducing the polyunsaturates and increasing the oleic level. And for most people in the room that probably doesn't mean much, so why would company's like DuPont, Del Agro, Monsantos spent hundreds of millions of dollars over the last decades trying to create seed crops they can do this. They do that because on the oleic level by increasing that they can increase and improve the health properties of the oils. They can also increase for industrial applications, lubricity, viscosity, poor point other types of characteristics that make that oil more valuable in the industrial applications.
And why are they look in to decrease the polyunsaturate level, well the polyunsaturate actually makes it less oxidatively stable, so there is one higher and nutritional products and then want more oxidative stability, they also want again be able to maintain that performance for the hand oil into the marketplace. So anything from a heat transfer fluid, like a dielectric fluid, all the way to nutritional applications, which I'll show you here on the next slide in frying oils.
And this is one that typically people get pretty surprise about, they call Solazyme, they say hey I want to hear about transportation fuels and then they recognize we are talking about for tailored chips and french fries and finding oils in this case. We announced in Q4 a collaboration with ADM and which were having the manufacturing relationship, at the same time we also announced a market development agreement with them. ADM is one of the largest distributors of triglyceride oils on the globe today. And when we look at some of the oils that they’re putting in the marketplace, they have very high – low linolenic, high oleic canola oils, and those often going to find applications. They did – recently did a study that others talk about here publicly and which the results were at three times improvement in the high oleic oil that Solazyme can provide.
When you look at oxidative stability index which this test is at a 110 degree Celsius for a long extended period of time. What you see here on the left is R-Oil which you don’t see the forming that you see on the oil on the right. But oil on the right is today’s best oil premium pricing oil that goes into fine applications. And what came out of the result at the end of it was, ADM actually came back and said, your oil actually has more fry life left at the end of 10 days than the best existing on the market today, had at the beginning of the fry study.
So when we look at what our oils can actually do in the end applications in the marketplace, this is just one example that again we are working on with a partner in this case ADM. The other I mentioned that I would talk a little bit more about our myristic oil. This is an oil that we introduced in the first half of 2012. At that point, we looked at the existing sources of myristic and again most in the room, myristic probably doesn’t mean much if you look at the back of the shampoo bottle, lot of personal care products, you will see that as one of the key ingredients.
The sources today where they are able to get these myristic fatty acids are typically from palm kernel oil and coconut. Naturally, that’s over about 15% is the natural occurrence that happens in those oils for myristic. What we introduced in the first half was that we had already achieved over 30% myristic and now nine months later, we increased that announced in the second half of the year that we have increased over 40% and now over 50%.
We also just last month introduced a joint development agreement partnership with Mitsui. Mitsui is funding a suite of oils into the marketplace and one of those is the myristic in which we are very interested in helping us commercialize this oil and being able to access markets that they already participate in globally. And they are excited obviously about the content and the high percentage of myristic that we are able to achieve in the oil.
If you look at from a value of the underlying oil, much of that is being driven by the fatty acid composition. To the extent you are able to increase the fatty acids of myristics last year the average selling price was over $3700 a metric ton for that oil. Put in perspective if you think about barrel petroleum today it’s about $700 to $750 a barrel – $700 to $750 a metric ton.
So our cost of value chain we’re focused on having that very efficient conversion technology having the ability to tailored the oils for the end market, I mentioned we are partnering upstream and we are partnering downstream. Our first three large partnerships upstream also happen to be with companies that participate in the end-markets that have global distribution channels, logistics and other capabilities for oils into the marketplace, so they are on actually both sides of the value chain. Walk more through the specifics of our relationships with Bunge, ADM and Roquette in a moment. And we are also working with a number of companies including, Unilever, Dow, and Mitsui and others across our end markets.
Within skin and personal care, we launched a brand about almost two years ago now, the brand’s name is Algenist in this case it’s based on an active ingredient that’s proprietary to Solazyme, we decided to go all the way to the end brand to capture the value of that new active ingredient. But we also recognized we’re not the experts in the marketing and distribution, so we partnered with Sephora, run over 1300 stores with Sephora today. We are also working with Space NK in the U.K. and QVC as a major part in here both in the U.S. as well as abroad.
So quickly, Unilever these relationships take a quite a well to develop. We started our relationship with Unilever formerly in 2010, they made an investment in the company, they started funding research. It really centered around the skin and personal care market. And then in 2011 and 2012 we extended at the JDA and also expanded it into the nutritional space and signed a contingent multi-year supply agreement with them as well. And what we see in the years ahead as we bring our capacity online, is that as supply becomes available, we expect Unilever will be one of our major partners, major customers as we scale up and commercialize these oils. Unilever is not participating upstream, so they are not interested in being part of the manufacturing of the oils. They are an example of the company that’s very much interested in a new supply chain and an availability of new oils that they can get today.
Mitsui, we just recently announced, that was a $20 million multi-year joint development agreement for a suite of different triglyceride oils. They are one of the world’s largest trading companies. I think that’s what most in the room probably know them for. In addition, they have very large businesses in joint ventures in the oil/chemical space as well as distribution of triglyceride oils. And we think that they are going to be a wonderful partner that we are adding to the group of partners that we already have. This initial work is again around a suite of tailored oils, commercial under the marketplace and we expect we will continue to expand that matured relationship over quarters and years to come.
On the fuel side very quickly, we’ve been at scale as I mentioned with the Navy since 2008. That culminated in the largest demonstration of a biofuel program to date with military applications in which 50/50 blend of biofuel with petroleum fuel was used in the RIM pack exercises last summer. This basically meant an entire green carrier strike force. So all the shifts around the carrier which is obviously nuclear, the helicopters, the help lines everything running jet or diesel fuel and we were very pleased to be part of that program. Long term, we think we provide an interesting strategic solution for the Navy and for other military applications in the DOD.
Currently, what we’ve said publicly is we actually expect 2013 that we will not enter any new government programs that would impact or benefit our revenue. Again, in the current environment, we have just said we don’t expect any 2013 revenue from government. But again, in the long run, we think that they are very important partner. We also last year approved the first commercial flight with United on a blend of our fuel with petroleum-based jet fuel as well and that was a flight from Houston to Chicago, and it was a full commercial flight that they notified passengers in advance and what was not sold out flight, it was interesting actually became a sold out flight, because people wanted to be on that flight. United we think is one of the forward leaning forward-looking aviation companies that we're happy to working with.
We also have a 12 month program that collaboration that’s happening with Volkswagen around the clean diesel TDI program, and we have vehicles that are running full-time on our fuels as part of that program. We also just this week announced the results of recent pilot program with Propel Fuels that was held in the Bay Area, the stations that they had our fuel there for month actually had a 35% plus higher sales in those stations they didn’t participate and they had greater customer response in terms of consumer benefit of being able to recognize the environmental benefits and also the benefits of sustainable renewable source like LG-based fuels.
So we are commercializing in three continents. We have multiple projects that we're working on with partners. We have our existing periodic facility I’ll walk it bit more to that with Solazyme look at nutritionals in the north of France with Solazyme Bunge renewable oils in Brazil and with our ADM/Clinton collaboration with ADM.
First, our Solazyme Peoria manufacturing facility that came online, we purchased it in the middle of 2011. I came online by the end of the year for the first fermentation and four integrated by refinery of June of last year, that's about 2 million leaders of capacity, what that derives for us is, I'll argue on a gas in some of the higher value oils we can produce commercially and the majority of what it really represents is a place for us to scale of new oils provide large quantities of market development kind of activities as partners are putting our oils into field applications in test and moving into marketplace.
Our Solazyme Roquette Nutritionals joint venture this is actually an old picture at this point, this facility is the second of three facilities in that relationship. The first facility came online at the end of 2011 it’s been providing commercial quantities of certain products into the marketplace for the majority what they have been providing is market development samples for this large food companies, consumer products goods companies. And phase 2 facility is scheduled to start commissioning in Q2 and we producing product a few months after that.
Moema we have 100,000 metric tons facility with Bunge that's been built currently, we also recently received $120 million of financing from the Brazilian development bank one that in a moment, but something we had worked on for quite a while with BNDES and with Bunge. Bunge has been a great partner, this also has been years in making our investor in the companies they have been funding research and they are obviously funding half of the equity investment in Moema. We also recently announced that we have expanded have a joint venture framework agreement to expand that joint ventures toward 300,000 metric tons of capacity and are including nutritional applications in Brazil with our relationship with Bunge.
And with ADM, this is a facility that had build out as part of a different relationship that they backed away from. We already have run successfully as I mentioned at the ADM facility and when the process of working toward an expectation of producing product for the first 20,000 metric tons of capacity in early 2014 and we have the ability and the target to expand that up to 100,000 metric tons at that facility.
So from a financial perspective, we are generating revenue today both from product and funded development. The majority of our revenue has come from funded development and we’ll be expanding as we expand capacity as when you will see products starting to have more of an impact. We are well capitalized, I will talk a little bit about that and we got a track record of approaching these projects in a very capital efficient way both with partners and outside financing.
And with Algenist, I mentioned we launched it almost two years ago now with $16.5 million of revenue, up 130% plus last year. It’s in actually 1,400 stores, Sephora, QVC, and other channels and we’ll continue to expand this brand. We gave guidance recently that we expect this brand to expand about 35% plus at the minimum for next year.
So on the product side, this is what our revenue look like last year. Again, clearly the investment in Solazyme is recognizing. We have 10 years of a track record of what we’ve built out as a disruptive technology that’s ready for commercialization. We have three projects that are coming online with large capacity. The revenue numbers will ramp from a production capacity standpoint as we ramp those manufacturing facilities. So starting in Q4 of this year and really into 2014, we think we’ve laid the foundation for turning the company into a cash flow positive company during 2014 as these facilities ramp.
This is a look at our balance sheet, we ended the year with $150 million. We also did a convertible debt offering in January which took the balance ending January to $260 million, so we are well capitalized to be able to commercialize and move our process forward.
These are two other things I mentioned, BNDES. That was a 4% interest eight year instrument. Inflation rate in Brazil is 6-ish percent, so we are very happy with the percentage rate. We are also very happy that the Brazilian development bank has a history of funding multiple projects they find successful with the same partners. So we believe this is also our first success with the Brazilian Development Bank and Bunge and expect that they may as we look at that for future expansion also participate in those future projects.
On the convertible debt side, we close $125 million convertible debt offering and this was again really money about growth capital, it wasn’t necessary for existing projects it was about having the flexibility to continue expanding, to continue looking at other ways that we’re going and commercializing the business.
From a financial perspective, these are the same metrics we put out a couple of years ago when we went public, in terms of our target economics, these are the targets as the plants reach for nameplate capacity. So they don’t turn on quite at those levels from a margin standpoint, because when we ramped up for capacity over a 12 months to 18 months period, but we are targeting average selling prices in the fuels and chemicals business starting at 2000 and up, nutrition 2500 and up, and skin and personal care it’s not really looked at on metric ton basis, but it’s a business that we’ve been generating close to 70% margin for the last two years.
So that stays on to track above the 60% in the gross margins there are kind of the plant economics of gross margins coming out of the product being sold out of the plant, at 30% on the fuels and chemicals, 40% nutritionals and reaching a total operating margin for the company in the 25% range.
So as we bring these plans on line, I think it is important to recognize that our quarter-to-quarter financials are probably less have an indication of the value that we’re creating everyday right now. And clearly we expect that these plans come on line that will be a more important indication. We’re focused on these three key areas, product development, production capacity and our commercialization, and delivering against those milestones.
So what we’ve been doing is, we believe continuously putting our milestones and targets that we expect to achieve. And I’m very proud of what we’ve been able to achieve against every one of the milestones we put out there. These are some of the ones that we’ll continue to move toward in the months, quarters, and years ahead as well.
With that, I want to open up for few questions if we have time here.
Tyler W. Painter
Great. So I think that to the extent you’re talking about fuels, that certainly comes into play when you're looking at renewable fuel standards and other types of tax benefits of that can help certain moment in industry and encourage movement in industry toward what we believe we offer in terms of better sustainable environmentally friendly solution. At the core development, none of our businesses ever been built on requiring those subsidies.
So we look at we have to be cost competitive with every product we are trying to either replace or enhance. So the way we expect fuels to roll out are really more as a blend stock where the value of our high tailored oil can provide value by blending in whether it's with petroleum or of that triglycerides oils to make a higher value composition of the end product in this case fuel. And meet renewable fuel standards help refiners that are looking at processing very heavy crudes and other things coming out of the ground that they are cutting challenges at the refineries.
Beyond that we look at rest of our business and what are the highest value applications of our oils and we are focused on those markets, as I mentioned we put into filter and what is the size of the market, what’s the competitive response going to be, what's our ability to tailor and provide real value that's going to end make a better product or change the process that our customers are able to use. None of that has any at this point we view government is not necessarily a part of it.
Tyler W. Painter
Yeah, so we didn’t give a specific but I come back into the economics pretty early. So with our Moema facility with Bunge both partners committed $72.5 million each to fund that, so you can look at that facility most look at that basically and that's what contingencies kind of would be at $145 million range to build that 100,000 metric ton facility, 100,000 metric tons is about 32 million gallons of oil production. From that $145 million approximately $120 its look like has now been funded by the Brazilian Development Bank so our equity commitment goes down significantly.
We do expect that future projects would get the benefit from the first project being built so that you could see the per metric ton of production coming down. That said, it’s important to recognize that each facility is completely different. So depending on what already existing at the site they may have different level of steam or utilities or other things that go into the process that can either lower it or increase it. But that's the right kind of ballpark to think about.
Tyler W. Painter
So I'm not sure if everybody heard the question, I think it was basically around how do our different programs work in terms of funding the programs both research and the commercial side. So each relationship is different, so I can’t tell you every one of them is the same. Some are milestone based, so it’s delivering against active targets within joint development agreements. And then after those joint development agreements it’s really about, when you think of a company like Mitsui or a company like Unilever, they want to have those oils available in commerce. And so it’s really by getting those to commercial production being sold in the marketplace.
Others are very much time based. So it may be that we’re – for instance recognizing revenue on certain programs just on a time based, where there are not specific milestones to deliver against as it relates to revenue. Again what’s happening is those new tailored oil joint development agreements will continue, so we think that’s an important part of the business. But what we are shifting toward is much more of the real financial results are going to start to be driven by product sales and commercial sales.
Tyler W. Painter
Well again, I’m very much depends on the profile of oil our customers are looking for. So in the case I gave the example of myristic, that was about nine months process that we went from 30% to over 50% myristic. We then have the process to be scaling that’s at our Peoria facility and then moving it into the commercial facilities to which again we’ll take another period of time. But it’s rather short when we look at our process it’s usually months or may be single, small single digit years for more complicated programs, versus the limited success that you’ve seen in the big seed crop kind of oil think of the Monsanto, DuPont and other processes where they have been trying to change the trades of oils coming out of the seed crops. And in many cases they are spending a decade on it and getting very limited movement. We’re able to do that typically in months.
Tyler W. Painter
And so I think the question was around with aviation, the cycle time, the feedstock that reduced and the cost it’s producing. So in the case of what we have done in these programs, we have not been producing it in our commercial facilities, and we have reached our commercial economics, so in terms of the productivities in need. The feedstocks can vary what we used in all the Navy programs was either sugar, meaning sugarcane or cellulosic materials.
And then we can also produce, we’re somewhat agnostic; it’s more about what feedstock is available. And today the two feedstocks that are available economically in the largest quantities are corn-based sugar and sugarcane-based sugars. We also do believe the cellulosic cell for instance, you take that amount of the gas after the process has pulled the sugars out at a sugar mill, and there is still core energy in that gas. And we believe over time we will able to extract the sugars from that into our process. We have made cellulosic diesel fuel, cellulosic jet fuel, it’s just not available on the quantities we need today. And we are not the cellulosic conversion share the company.
From a cost perspective, if we were operating in our commercial facility, we would be competitive today. That said it is probably when we look at where the volume of revenue will come in our product sales over the next three to five years. We’ve said the majority will not be in fuels, because it’ll be only be in very high-value blend stocks that we will be going into the fuels market. And that’s literally only because the lowest value application of our technology is going to be anything you (inaudible). We think it’s a wonderful long-term opportunity and we are still very committed to the company was founded on it. But in terms of – because we are capacity constraint we're going to be focused on higher value oil source.
(Inaudible). Thanks very much.
Tyler W. Painter
Great, thank you.
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