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Metabolix, Inc. (NASDAQ:MBLX)

Q4 2008 Earnings Call

March 11, 2009; 4:30 pm ET

Executives

Richard Eno - President & Chief Executive Officer

Joseph Hill - Chief Financial Officer

Oliver Peoples - Chief Scientific Officer and VP of Research

Anthony Gallo - Managing Director of Integrated Corporate Relations

Analysts

Laurence Alexander - Jefferies

Michael Cox - Piper Jaffray

Pamela Bassett - Cantor Fitzgerald

Michael Carboy - Signal Hill

Jinming Liu - Ardour Capital

Jeff Osborne - Thomas Weisel Partners

Operator

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Mextabolix fourth quarter 2008 earnings conference call. Today’s call is being recorded and at this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time for you to queue up for questions.

I would now like to turn the call over to Mr. Anthony Gallo, Managing Director of Integrated Corporate Relations; please go ahead sir.

Anthony Gallo

Thank you Nicole and good afternoon everyone. Metabolix released fourth quarter financial results after the market closed today. If you do not have a copy of the release, one may be found on the website at www.metabolix.com, in the Investor Relations section.

Making the presentation today will be Richard Eno, President and Chief Executive Officer; Joseph Hill, Chief Financial Officer of the company. We are joining today by Oliver Peoples, Co-founder of Metabolix and Chief Scientific Officer.

Before we begin our formal remarks, I need to remind everyone that a part of our discussions today will forward-looking in nature. These statements are not guarantees of future performance and therefore undue reliance should not be put upon them.

The company undertakes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this conference call. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial condition.

With that I’d like to turn it over to Rick Eno, President and CEO of Metabolix. Rick.

Richard Eno

Thank you, Anthony. I’d like to welcome all of you to the fourth quarter and year end 2008 earnings conference call for Metabolix. Today I will provide you with a review of the Metabolix vision and a broad update of our ongoing activities. Joe will then take you through the financials.

We continue to make good progress and have maintained a strong financial position. For those of you new to these calls, Metabolix is an innovation driven Bioscience Company, which is focused on bringing environmentally friendly solutions to the plastics, chemicals and energy industries.

We are developing and commercializing pathways and products that lessen the world’s dependence on oil, reduce CO2 emissions relative to traditional materials, and address critical solid waste issues. We are founded on hard science and have had exceptional capabilities in plant science, in fermentation, Microbial and Polymer Engineering, and in market development.

We currently have three business platforms. The first Mirel of bio-based and biodegradable plastic currently being commercialized with our partner, Archer Daniels Midland through a joint venture called Telles.

Secondly, industrial chemicals initially focused on C4 chemicals and third, crop-based activities, which include our programs in switchgrass, oil seeds and sugarcane. With that context, I will now provide you with highlights of recent activities across all three platforms.

First, let me begin with Mirel. This past quarter we continued to move towards commercialization of Mirel. I will update you on our progress on governance, the Clinton plant and ongoing market development activities.

The joint venture relationship agreed between ADM and Metabolix outlined the broad roles of the parties for the venture. In the current construction Phase, ADM is responsible for designing and building the plant and Metabolix is responsible for developing the market and technology.

There are a series of governance, principals and bodies which are designed for making key decisions around the business. It became clear that as we approached commercialization, Telles will acquire a more conventional governance structure in order to execute the many day-to-day decision required to maximize the performance of a business of this type.

So, last year we embarked on a formal search for a General Manager of Telles. This individual will report to the Telles Board, which has equal representation for Metabolix and ADM and have the authority to make a number of operating decisions on behalf of the joint venture.

We are pleased that in January, Bob Engle joined us as the General Manager of Telles. Bob brings extensive operating experience in the high performance plastics business from Ticona, the engineering polymers division of Celanese. Bob has also served in a variety Celanese joint venture Boards, so he is deeply familiar with JV structures and how to ensure the maximum effectiveness.

He also has extensive international experience in Asia and most recently in Germany where he was based. ADM and Metabolix are excited about having Bob joined the team and are pleased that we’re putting governance structure in place for an effective business startup.

I would now like to provide an update on the Clinton plant progress. As mentioned in our last call, ADM was conducting a detailed review of the project. This review is still ongoing with conclusions expected in late April. Our earlier guidance indicated startup of the plant in Q2 of this year. Based on input from ADM, we are now using in October startup production for our internal planning purposes.

Let me provide you with some back ground under the like. The initial Phase of the project is now in the final stages of construction with the bulk of the remaining work being final piping assembly and detailed electrical and instrumentation installation. ADM had a construction work force of about 500 working to complete the facility.

One of the preliminary findings from the detailed review which I described was that the productivity of this work force was begin to decline. In essence, the pace of construction was beginning to out run the ability of engineering to prepare detailed design packages for construction.

ADM is deeply committed to constructing the plant in the most productive way possible. To this end, they have temporarily trimmed their construction workforce by about 30% and has supplemented their engineering team with third party engineering support. This will allow engineering to catch up with construction, thus improving productivity. The effort will be focused on the critical equipment and systems needed for initial capacity, so we can get product to our customer as soon as possible.

About three week ago, I visited the site along with other senior management from Metabolix. Construction has moved ahead dramatically since my last visit in November. Buildings are now completed, utility systems are near completion and the analytical lab is operational. We met with all areas superintends and reviewed their startup planning protocols.

ADM has assembled a very strong operational team that has initiated an extensive operated training program, consistent with running a world class facility. We’re pleased with the foundation that Clinton will provide for the growth of the Telles business. You can see some recent pictures of the site on the Telles website www.mirelplastics.com under Clinton, Iowa production plant.

We’re currently maintaining our guidance for the capital cost of the Clinton plant as north of $300 million. It is important to think of this capital investment in the context of growing the Mirel business, consistent with most process facilities of this type, about two thirds of the Clinton 1 capital investment will be in the actual processing equipment; in our case fermentation and recovery.

About one third of the capital investment will be in supporting infrastructure and utilities, including electrical and cooling water services, control rooms, maintenance facilities and basic site development. As we’ve mentioned before, Clinton was selected and laid out with the vision of a 4x expansion. You’ll be able to see this potential from the pictures on the Mirel website.

As such, a good portion of the supporting infrastructure investment to support future expansion has been made with Clinton 1. We expect that the economics of expansion beyond 110 million pounds per year, what we substantial benefits from this Clinton infrastructure.

We could also benefit from a more normal environment for the cost of construction materials and labor than what was experienced over the last two year, while ADM was proceeding with the construction of the plant. To respond to the expected delay in the plant, we at Metabolix are ensuring that our growth in staff is aligned with the overall needs of the business and that we’re working effectively to manage our cash.

Now, let me switch to our market development activities. Mirel is a superb product, offerings superior biodegradability, biobased sourcing and performance levels exceeding other bioplastics. Our market development activities remain focused on six specific segments, with a combination of Mirel’s properties result in a unique offering.

As a reminder, these segments are packaging, compostable bags, consumer products focusing on cosmetics, gift cards and other products you would commonly find on the retail shop, business equipment, agriculture and horticulture and marine and aquatic applications, these six segments represents over 2 billion pounds of addressable annual demand.

Since our last call, we have undertaken a rigorous review of our own customer base in order to understand the impact of the external business environment on the potential of Mirel. As many of you know, we have over 1,000 leads of potential Mirel applications.

Over the last three months, we’ve had one-on-one discussions with the top 74 customers in prospects on the development programs for Mirel, of these 19% actually have noted that there even more there is about the program with us, so I think that phase environment is ideal for differentiation for your innovation. 74% of our pipelines decided no change, and the overall interest in the program, it will move ahead as planned. 4% have put their plans on hold and 3% have their program under review.

Given the difficult external environment, we are quite encouraged by the results of this analysis and believe that it’s due to unique attributes of Mirel. Mirel is still a product in great demand. We continue to suggest as you examining the business, to utilize pricing levels between 225 and 275 per pound. All of our existing contracts fall within this new range typically about the midpoint.

Today, I’m pleased to announce our new customer from Mirel, Bioverse. Bioverse produces natural products, which assist bioremediation in ponds, lakes and other water features. Their goal is to be ecologically responsible and provide pond owners with tools and products to manage ponds easily, safely and effectively. Bioverse produces a water treatment system, currently targeted for stagnant water systems, such as one with by new golf course.

Historically, this sphere was molded out of petroleum-based plastic and allowed for the release of bacteria for water treatment and the algae couple. At the end of the treatment cycle, this sphere would have to be fished out of the pond, cleaned, serviced and reused. This was a costly effort. Bioverse is now offering the Mirel alternative, such that the ends of its life, the sphere will harmoniously biodegrade in the pond. This is a new product for Bioverse and as a result, they’re projecting an increased in sales for AquaSphere product line.

As I described earlier, this illustrates our new product made with Mirel, can also differentiate and drive growth in this difficult economic climate. This announcement is also consistent with our statement market interest strategy. In this case, injection molded products from marine and aquatic applications.

Mirel’s biodegradability characteristics, plus its ability to be processed into a variety of forms will allow for the creation of all new product lines in the marine marine and aquatic space. This will be exceptionally valuable for product differentiation, as well as to address the growing issues around marine, plastic waste. Moving forward, we’ll continue to make customer announcement as appropriate.

Now on to our pipeline, another way that we have measured progress towards an effective Telles business startup is to monitor the identified potential demand for each prospective customer application for the 2010 production year.

This process enables us to forecast to forward-looking estimate of potential, which is based on discussions with an analysis of our customer prospects. As a reminder, our customer prospects are not committed to purchase these amounts, nor have we received orders for these amounts, but it is an important exercise that helps us stage demand.

Given the expected Clinton plant delay, we are slightly modifying this metric in order to reflect our market potential two year out. As we’ve described before new polymer market applications in general take nine to 15 months for development and for metric, which looks two years out, will provide a good view of those applications which we’re developing and will also begin during beyond our initial plant startup.

The indicative 2010 demand, which we have regularly provided in earlier calls, was essentially targeted just back, when we had original planned for December 2008 plan startup. The last time we spoke, we reported, that our indicative 2010 demand pipeline, relating to non-food contact applications was about 95 million pounds, reflecting growth of 12% over the previous period. Without considering the change in the startup date of the plant, we are current looking at a very similar number, specifically 96 million pounds. Let me review how this number was derived.

We began with our pipeline analysis at November 2008 of 95 million pounds. We added new account gains, since that representing about 5 million pounds of business. We eliminated any volume associated with any programs put on hold this was by 4 million pounds and we’ve had no major changes to put scale of our programs across the remaining accounts. Thus that show that demand from our potential customers and prospects is currently about comparable before we saw last fall.

As we have discussed in the past, we’re focusing our limited pilot plant volume on converting our market demand into firm contracts, not necessarily building at dramatically larger pipeline. The portion of this pipeline, which can be converted into sales in 2010, will be highly depended on the ultimate schedule for the Clinton plant.

Given the expected plant delay and moving forward, we will now discuss our year two indicative demand. Based on the same customers and prospects, this is defined as the volume of material that could materialize in the calendar year two years out, in this case 2011. Currently, we are look at 135 million pounds of indicative demand for two years out.

This in effect reflects the growth potential embedded in the accounts we’re currently felting. This is all non-food contact volume. In the near term we’ll continue to focus business development efforts and utilize pilot plant material to drive this volume towards firm purchase commitments.

Now let’s shift to the FDA process for food contact. The FDA process for food contact requires the submittal of a dossier, which is made up of a number of extraction studies conducted under specific guidelines. The tests vary depending on the level of food contact submittal chosen. Levels range from frozen food storage up to high temperature heat sterilized applications.

After the submittal of the dossier, the FDA has 120 days to ask for additional testing or to modify the submitted approach. Once this time period has elapsed, assuming no objections from the FDA, one is free to pursue the submitted food contact segments. Last year, we submitted a pre-notification submittal to the FDA. The FDA provided us with a detailed, very constructive written response. We then submitted a series of follow-up questions towards the FDA as favorably responded. Dossier preparation is currently ongoing.

We are not projecting the timing of the overall FDA process, as we have little control over many aspects. Our entry strategy for Clinton 1 is not designed around food contact applications and does not depend on it. However, our interactions with the FDA reviews by independent consultants that our own testing gives us confidence in being able to ultimately serve food contact applications.

As such we are now beginning to develop our plants to include some targeted food contact applications in the ramp up plant for Clinton 1. We have not yet included these in our two year indicative demand outlook, but we are beginning to investigate how food applications could integrate into our existing non-food contact pipeline.

Finally on Telles, we continue to aggressively develop our products and process technology. We’ve had further gains in our firm and non woven products, with additional successful trials into last call. This illustrates the rapid advance this which can be made at the early stage of industry development.

We are also proving out advances in our technology, which will improve capital productive and reduce operating costs as we grow the business. Our activities here include the development of new high productivity microbial strains and next generation recovery technology.

We continue to be very enthused about the potential for Mirel. Demand for the product remains strong in the current economic environment; product application work is continuing to illustrate the increasing breath of potential applications that our process technology team has a suite of ongoing investments in development as we work through plans for long term growth of the business.

Let me now move on to the other Metabolix platforms. These represent value creation opportunities for us beyond the Telles venture. In C4 chemicals, a key part of our industrial chemicals platform we are continuing the execution of our ATP grant, a $2 million grant aimed at producing C4 chemicals from renewable sources. There have been a number of technical milestones thus far in programs of which we have achieved them all. We are pleased with our technical accomplishments, but wish to be sure that we are reflecting business realities.

Moving forward we are emphasizing the specialty C4 applications rather than the commodity C4 applications. Our current crude oil prices, we believe it would be very challenging to economically penetrate the commodity C4 markets with the fermentation-based pathway.

In addition to the specialty C4 family of products, we are also examining a series of new industrial alternatives. We are currently building out our intellectual property position around several alternative options which are biobased; include offer enhanced functionality versus incumbent products.

Now onto the plant based activities. In Metabolix, we have a range of ongoing plant science activities, including oilseeds, switchgrass and sugarcane. All-in-all we are excited about our plant science capabilities as we can see this pathway ultimately replacing the capital intensive steps in the existing plastics industry such as oil and gas exploration and production refining in olefins by producing polymer directly in crops.

We are preparing a strategy for regulatory approvals and examining options for commercialization of our plant science activities. We aim to have commercially viable crops and field trials within two to three years. While our primary objective has been to express PHA polymers at commercially viable levels in each crop, our work has also given us insight into adding other traits into these crops, a skill which we are now examining how to explain.

In summary, we continue to make good progress this quarter against our milestones. We have moved Mirel closer to commercialization and manufacturing and market development and in establishing and operating business infrastructure.

While we are disappointed with the expected delay in the startup of the Clinton plant, we are very encouraged by the feedback we’ve been getting from our customers and prospects, as well as our product development advances. We’re optimizing our long term portfolio relative to the external environment and we’re making good progress against our internal milestones.

I will now turn the call over to Joe for a review of our financial results for the quarter.

Joseph Hill

Thanks Rick and thank you for all joining us today. As Rick mentioned we continue to deliver on our commitment to grow the company and are very pleased with the significant strides that we have made towards the commercialization of Mirel.

Our customer wins during 2008 and in the most recent quarter, speak to the demand that Mirel was already experiencing and gives us visibility the both of the future holds for the company. Our plant science and industrial chemicals platforms are also very important to listen and we’ve made significant progress during the quarter to advance their commercialization.

The combination of these platforms gives us solid a diversified growth strategy for the company and position us to take advantage to global environmental trends that will drive corporations to improve their environmental footprint by reducing dependence on fossil fuels, improving their CO2 footprint and minimizing solid waste.

Now on to the financial results for this quarter; Metabolix currently manages its finances and emphasis on cash flow. We maintained a strong focus on cash flow and take a strict approach to managing our operating cash. We ended the fourth quarter and fiscal year 2008 with over $91 million in cash and investment balances.

For the fourth quarter ending December 31, 2008, net cash used in operating activities was $3.7 million, as compared to net cash used of $3.7 for the comparable quarter of 2007. As we noted on our third quarter conference call, we received an ADM support payment in the first week of October 2008, whereas we usually receive from our quarter in the last week of the quarter.

The four support payments that we’re receiving each year, do not always folk cleanly in the calendar quarters. For example, in 2007 we received two ADM support payments in the third quarter and one in the second quarter and one in the fourth quarter. The fourth quarter 2008 cash flow, affects $3.2 million in support payments from ADM and Q4 2007 reflects $1.6 million of support payments from ADM.

As we’ve previously discussed, we do anticipate a higher cash from with we and the commercialization of phase of the joint venture of ADM. Cash usage during 2008 was below the roughly $5 million that expected and we expect that run to increase modestly until we reach the commercialization phase of the alliance for the ADM. Fortunately, end of the commercialization phase, the cost that Metabolix encourage, the sales and marketing and product development of Mirel will shift over to the joint venture, resulting in an expense, decrease for Metabolix.

Well we are fortunate this growing a cash position. We think it’s only prudent to continue incentive management of our cash during the delaying in the start of our current PHA for that facility. In response to the delay, we’ve modified our budgeted spending for 2008 to keep our cash usage low; by shipping much of our plant hiring for 2009 in the second half 2009 and in to 2010.

Well there is a financial impact of the expected delay in the plant opening. I expect that a few months of delays, perhaps less important to the long term success, that material pricing for the future potential to expand production beyond the original target of 110 million pounds.

In the third quarter we increased our historical guidance by $0.25 per pound to a level of $2.25 to $2.75 per pound. We continue to monitor those numbers closely and we believe they are holding up well in this environment. While the economy has weakened since we last communicated with you, the value proposition of Mirel has not changed; in some ways they may have improved.

There are recent studies that consumer preferences indicate that despite the recession, consumers’ interest in green products has not really changed. Given the long term nature of the business and the capital efficiencies that we expect in the future, we remain enthusiastic about the long term value proposition of our technology and our competitive position.

GAAP net loss for the quarter was $8.9 million, as compared to a net loss of $7.2 million for the fourth quarter of 2007. As expected, the fourth quarter loss is greater than the cash used in operating activities. As we’ve discussed before, all of the payments we received from ADM are recorded as deferred revenue for GAAP purposes and therefore do not appear on our income statement.

As stated previously, during the fourth quarter we did receive two support payments from ADM. We also received payments of $500,000 during the quarter for reimbursement of pre-commercial manufacturing expenses. To-date we have received support payments totaling almost $18.9 million from ADM.

The deferral of recognizing payments from ADM will continue until the commercial phase of the alliances reached. We also recognized non-cash stock-based compensation expense of $1.2 million on a GAAP basis during Q4, which also leads to a reported net loss exceeding cash used in operations.

Let me now give you some additional detail on the company’s financial results for the fourth quarter 2008 ending December 31. Revenues totaled $399,000 as compared to $887,000 in the fourth quarter of the prior year. Fourth quarter 2007 revenue included $500,000 from our license agreements. Grant revenue and R&D revenue were roughly comparable to the year ago period.

Our operating expenses during 2008 grew modestly as we continue to grow the company. Total operating expenses for the fourth quarter of 2008 were $9.7 million, an increase of $236,000 relative to the comparable quarter in 2007. Our operating expenses for the fourth quarter of 2008 were lower than the average quarterly trend for the previous three quarters, which is about $10.3 million. This is due to lower accounting and audit fees during our second year of serving proxy compliance and due to lower material production costs in Q4.

For the fiscal year 2008, total operating expense was $40.1 million, compared to a total operating expense for 2007 of $35.5 million. The increase in 2008 operating expenses primarily reflects increased expenditures, product development and pre-commercial manufacturing.

While we do not provide financial guidance, we can get as hopeful to provide some insight on certain matters that maybe useful for investors. As noted in the call, we presently emphasize cash flow rather than GAAP net loss in our management of the company. The cash used in operations of $3.7 million for the quarter is indicative of our current operating profile excluding capital expenditures, when adjusted for the additional ADM support payment we received in our book.

Now on the balance sheet; our balance sheet remains strong. On December 31 we have cash and short term investments of $91 million and we have no debt. We expect this capital will be adequate to build our sales and marketing infrastructure, conduct free commercial manufacturing to expand our research and development to build the company.

We continue to work with a lot of successful companies that are partnering with us to create alternative solution using Mirel and change the way they bring our products to the markets right now. We are pleased with the progress we’ve made during the fourth quarter as we continue to get closer to commercialization of Mirel.

With that we will open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Laurence Alexander - Jefferies.

Laurence Alexander - Jefferies

I guess first I have two questions about the delay. First of all, I don’t seen any agreement with ADM such as to the extent that their staffing problems have led to the delay that the repayment from the JV to ADM will have some adjustment to it?

Richard Eno

There are no penalties in that part.

Laurence Alexander - Jefferies

I guess secondly, is there sort of any rough rules of thumb for how much the cost might be escalating with brining in some extra consultants to help on the engineering side?

Richard Eno

No, there are no rough rules of thumb, but I would expect the cost of the engineering work will be far less than the cost associated with poor productivity if you don’t have the engineering work done, but there are no rules of thumb. It depends very much on a specific situation at hand.

Laurence Alexander - Jefferies

I guess; thirdly just on the next-generation fermentation, given the delay will you be able to shift the production to the next-generation bug and then bring down the cost structure to whatever it takes?

Joseph Hill

Laurence this is Joseph. We continue to provide a series of our improved organisms and expect to do so for the considerable future. Although we want validate their performance of scale before we introduce them into the Clinton plants and therefore although we expect to be adding new ones there, I think it’s on a case-by-case basis and it depends on the performance scale which has to be validated at the site. Yes, we expect to be introducing the organism.

Laurence Alexander – Jefferies

Lastly Oly, if you wouldn’t mind flashing out a little bit to comment about leveraging your skill set and then searching trades as to what types of opportunities you might be looking at?

Oliver Peoples

Obviously one of the big things happening out there is at least a very real expectation of considerable additional funding for biomass related program. Metabolix has control of one of the most attractive bioenergy core products that can be produced in the biomass crop that would be the future bioplastics.

To do that, it’s just that we’ve developed a very high productivity transformation system for that cost, and they are about to introduce multiple gene systems. Obviously as one looks beyond the PHA trade it’s a potential for developing multi-gene system technologies, which could encompass any number of other factors. For example, I think there’s and awful lot of interest in explaining genetic engineering to produce hydrolytic enzymes to these crops to modify ligament to do a number things.

So, as we are looking at our progress on the PHA plastics trade, while we had to learn how to do that examining where it make sense to look at stacking additional trades, improves the overall economics of the biomass based plastics and biofuels.

Operator

Your next question comes from Michael Cox - Piper Jaffray.

Michael Cox - Piper Jaffray

I was wondering if you could quantify the increase in the cash burn that you set over the next few quarters that you indicated in the release.

Joseph Hill

No, we haven’t said how much it’s going to be; we said there is a modest cash burn; that is the cash burn has been about $5 million per quarter, but if that were to increase to $6 million per quarter that would be an appropriate time to look at.

Michael Cox - Piper Jaffray

I guess it seems easy at this point to say that the pricing is holding considering that you’re not at a commercial scale on the Mirel product. What level of flexibility do your customers have to adjust prices, once firm commitments are made late this year now?

Richard Eno

If your asking how contracts are written with customers there is a wide range, but for the most part price is established as a fixed component in those contracts.

Michael Cox - Piper Jaffray

Okay, but the contract themselves for specific amounts, have they been signed for ones you press released. Are those already firm contracts or you’ve talked a lot about indication of those sales, but not firm contracts, because I’ll be curious, the ones you press released, do you have firm contracts in the price range you’ve outlined before?

Joseph Hill

Yes, that’s exactly right. We haven’t talked about the volume attributed to those signed contracts, but all of the announcements we’ve made are based on firm contracts and the pricing level we established with committed volume.

Michael Cox - Piper Jaffray

Okay and at this point with the delay, I guess I’m curious that what are the next stages where beyond this construction engineering, staffing miss match, where could we see further delays? I guess I’m just trying to get a sense for where we could be in this penalty of this process.

Richard Eno

Well, I think the plan that ADM is preparing on this is due in late April. They still have a very significant workforce. Moving ahead at Clinton, we are out there a couple weeks ago with them and they are assembling. If you walk through the plant it looks nearly completes; the issue being the electrical instrumentation and final piping. So, its well along the way, but the details of that plant will become available in late April.

As we mentioned in the call, for internal planning purposes we’re using an October start. That’s not to say Michael that something could up that could move that; it’s just what we’re using to inform our customers and to do our own resource planning a lot, but until we see the final plan or proposed plan for late April, that’s the best information we have.

Michael Cox - Piper Jaffray

I believe Joe you had mentioned that you have adjusted some hiring due to the delays. Is there anyway to quantify what some of changes in the way you’re running the business to account for I guess half the year delay.

Joseph Hill

Yes, I can comment a bit on that Michael. For example when you begin moving polymer to a series of customers, there will be a number of highly skilled people out there that have a great understanding of injection molding, of sheet, of some processing and reflecting that we expect product going to customers a bit later, we can slow the ramp up of that resource addition and that we don’t have product going to customers now as we don’t need those individuals on board yet.

Similarly, we have a plan in place to grow our staffing in Europe and again with the delay, we don’t see a need at this point to begin putting a European infrastructure in place for a bit longer. So there are two specific areas we’re actually slowing down the addition of resources to narrow our expected commercialization path to Clinton.

Operator

Your next question comes from Pamela Bassett - Cantor Fitzgerald

Pamela Bassett - Cantor Fitzgerald

Can you give us an update on progress in optimizing the various manufacturing grades that you’ll need for each type of plastics? So for compostable bags, how is that formulation moving along? It seems pretty set for the sheets, and what about injection molding; are there still different grades of plastic that you’re working on?

Richard Eno

Yes, I think we are working across a number of different processing technologies, which require in many cases slightly different grades; film, injection molding sheet, thermoforming, non-woven or foam are all areas we’re working on and I don’t think there is blanket answer to your question Pamela.

We’re moving ahead on all those different grades as we learn more and continue to improve them, but I think if you look at the way we described the market entry strategy, we’re focused very heavily on some development partners such as the amount since we’ve made, to really prove that and own the grades for the given applications.

So I think if you’re seeing customers across those different applications, particularly film injection molding and sheet, you can sense our comfort with those grades. We’ve not made announcements yet around non-woven and foam, which is a bit further out and we’re enthused about it, but it’s going to take some time working with our development for partners to get to the point we feel we are at a resin great that is all set for commercialization, but we feel we’re getting close.

Pamela Bassett - Cantor Fitzgerald

Okay and if you look at the total workload, how would you say it’s spread out over Mirel versus C4 chemicals versus plants? How much time you see organization spending effort and money on each of those?

Richard Eno

We had obviously disclosed the specific portion of resource across each, but I think it’s clear just from the amount of time we spend on the call, that we spend a fair amount of time on the Telles activities and I don’t think that directly correlates to the amount of people on it, but it clearly is a very high priority for us.

But then we haven’t really broken those down by either headcount or resources incurred on each, but right now I’d have to say that Telles is getting the lion’s share of management attention right now, but the other programs are still in the technology development stage. So, there’s a different group working quite effectively to move those forward.

Pamela Bassett - Cantor Fitzgerald

When I visited ADM for their business review at the beginning of October in ’08, management, they confirmed that the plant was on track for completion and there was still an expectation of commercial deliveries from that plant in Q2. Can you be a little bit more specific about where the disconnect might have been; I’m really still not clear?

Joseph Hill

Sure, when we had our earnings call in November, we described that ADM was conducting a study to take a look at what the final schedule and cost to complete work. So that imperial is a very detailed look at, call it a week-by-week, month-by-month schedule, through the expected commissioning of the facility.

In that study, it was identified that what was happening is ADM was pushing hard to finish the plant, was at the construction resources they had on site had less productivity than expected and that was an insight that occurred after your conversations to the media meetings it sounds like you attended. So based on that, the action that they’re pursuing is to begin to get the balance of engineering back and running with their construction work force by slowing it down, so you don’t have idle people on the work site, waiting to be given direction of what’s due.

So, that was identified towards the end of last year and at that point they’re working on a final plan, but the intent was we can’t continue on with a large construction workforce with low productivity. We have to improve that and give them credit for that, because they want to construct the plant in the most productive manner. The time you’re talking about was when that study was ongoing and that insight came out in the course of that study.

Pamela Bassett - Cantor Fitzgerald

So, were there delays in delivery of equipment and you talked about, they’re still doing pipe installation and electrical and they’re still installing instrument so, where there delays there and you see anything?

Joseph Hill

No, the have all major equipments on site, it’s in place, all major piping is pretty much in place. What happens is a lot of very detailed work that’s required. If you think about constructing a house, the roof, the frame, the foundation goes up pretty quick, but getting everything in site done takes a lot of time and that’s the stage we’re in right now and it takes a lot of skilled man power and a lot of guidance good guidance by engineering to say ‘these are the specific things we want you to work on; and this type of pipe, this type of instrument in this location’ and there’s a lot of detailed work require there.

So, there is no issue at all with equipment deliver, be it major equipment or minor equipment, but its just making sure that details are in place, so that the construction workforce can be effectively guided.

Pamela Bassett - Cantor Fitzgerald

So, when you talk about delivering commercial Mirel in October, is there an assumption though that comparative Mirel have gone through an optimization, so that the plant is actually running before them or is that when the switch is going to get turned on?

Richard Eno

Well, right now it’s for internal planning purposes and again maybe clearly we’re expecting a formal plan on this towards the end of April, but our working assumption is, that’s when the plant gets turned over from construction to operations and the shakedown will occur and product will go to customers.

Until we see the operating plan and the capital plan, we can’t comment more on how they’re going to be intergraded, whether there’s parallel processing going on or it’s going to be more in series, but that’s currently being worked.

Pamela Bassett - Cantor Fitzgerald

And then just one last item; if you could talk a little bit more about the types of technologies that you might be deploying to create stacked trades?

Richard Eno

Yes, as I said, while they can be interested in essentially extracting multiples used for the PHA plastics; while we are looking at all our systems that could be valuable in terms of the overall cost of reducing the debt equity; as we refer to it, biorefinery costs and we are looking at a whole range of things, I’m trying to understand where we have a sensible play and where we need to talk to some other people, but we’re just basically not going to let that out.

We have the ability to deploy those things, so that does not necessarily mean that we have gone over and looked for all these gene trace ourselves. I think as our objective is really the value added co-product we feel a reasonably good position to have discussions with folks.

Pamela Bassett - Cantor Fitzgerald

So, let’s say you end up licensing a trade, would the licensor be providing the toolset for actually creating that in combination with whatever technologies you might integrate it, along with it.

Richard Eno

No, I mean that remain basically those trades specifically see those genes and I think our capability is to put all those genes into the system, in a way that they can work properly.

Pamela Bassett - Cantor Fitzgerald

So the current technology that has been developing, continues to be developed at Metabolix, would be used and that’s the toolset that would be used to create the stack trade, so I understand?

Richard Eno

Exactly. We have basically been involved in those multi-gene systems technology now for a number of years. We have developed some real interesting capabilities there. Our interest would be to see how we can increase the value the biomass for bioplastic; like those other trades we can add in there, so it make sense for our business model that we are still in a position to be able to do that with our technology.

Operator

Your next question comes from Michael Carboy - Signal Hill

Michael Carboy - Signal Hill

Good afternoon ladies and gentlemen. Rick would you describe the EPC package that was signed to build the plant as being particularly loosened on standards. I’m trying to understand this issue of engineering falling behind actual construction progress. Normally everything is done, final plans, metal cut, specs, I mean also done when that EPC contract is signed.

Richard Eno

Yes, in many cases that’s I think are done, particularly for technologies that are around for a large number of years, whether its ethylene, polypropylene or whatever, there is usually a standard EPC package that’s put forward bids on that and move ahead like you’re implying.

You have to keep in mind that this is a really first of a kind technology being built at scale and in effect the EPC package that you refer to, from my understanding was the conceptual process design as opposed to a full EPC package when ADM embarked on constructing the plant.

So, there was a fair amount of work and details that were being produced or developed in parallel with the construction, particularly around the detailed engineering what I would call the more standard systems; weather it’s a utility systems, stream traps, recovery systems, vapor lines, that type of thing; and that was going in parallel with the construction effort.

So, that is the decision that was made. A lot of it had to do with this first of a kind technology and they’re working to standard EPC package where you could take a plant that’s been built before and then say ‘please replicate this.’ So, in effect it was something that was done with a little bit more parallel processing then I think an example that you gave.

Michael Carboy - Signal Hill

So, I was sort of thinking, while ADM has an enormous amount of experience in building plant ability, some garden variety routine, processing facilities and a little bit more sophisticated chemical facilities; for example the ethanol operation that they’ve established.

So I’m just trying to figure out how this issues sort of splits between the plants at ADM and I’m hoping that you can comment a little bit about that, because it does seem like there has been some disappointment in the way that the project management has illustrated here. Maybe I’m just being unfair, but it just feels that way from outside.

Richard Eno

Yes, I think both sales and ADM are disappointed with those schedules. I mean it’s something that I think there is a lot of parallel processing going on and as a result, and also very lean workforce, and as a result I believe it sounds like a few things did slip through the cracks, but I really can’t comment too much on that the detailed project management activities within ADM, but the view from the outside is that there was a lot of parallel processing going on and some things apparently there was not line of site on the final stages of the detailed design, while the initial stages that made your equipment and layout were being actually implemented.

Michael Carboy - Signal Hill

Okay, right. You had alluded to future expenses having perhaps to prior expenses. I understanding the utility aspect and that footprint aspect, giving some economic leverage there, but just in terms of materials for future expenses as being cheaper, do you have any idea by what amount construction material costs have change by; from when the EPC contract was originally signed to sort of where they are now?

Richard Eno

Yes, in our last calls Michael, you could go to the script of the last call and we’ve provided some details on old steel, but it dramatically escalated and it’s come right back down now and during the escalation period is when much of the steel was being purchased for the plant.

We’re not able to put a specific percent on that, because we would have to in effect, time average the purchase of steel over the course of that run up, but it has gone down quite a bit since the major structural steel was purchased to put into Clinton.

Michael Carboy - Signal Hill

Okay and shifting to a more positive topic and that is start up, how do you envision ramping to start up process? I think probably today am realistic to assume the plant start up at full capacity, how should we think about ramping productivity assuming everything sort of unfolds on an October turnover and then we can make some assumptions with regard to shake down period?

Joseph Hill

Yes, we’ve not provided specific guidance on a very detailed ramp up, month-by-month plan. I think the input that we provided that I think is helpful for you to model that is, say a 9 to 15 month development time for polymer applications.

We’ve got a number of things ongoing right now with some of the clock sort to speak is ticking on a number of our applications within that. Once Clinton becomes live we’re able to move a lot more forward very quickly, because our commercial team has done some nice ground work with a series of customers and ramp up from that basis.

We’ve talked about our year two indicative demand, which are the people that we’re talking with and have moved forward with around formalizing development programs for Mirel, but outside of that Michael we’ve not provided a lot of detailed guidance and though intent to at this point of you know specific ramp up plans as it relates to volume.

But just to let you know, Bob Engle, our new General Manager on Board where you’re spending a lot of time communicating with ADM on exactly what that first set of fermentation batches will be, what we’re going to do with it, where it’s going to go and what that start up mix is going to look like for the plant and our commercial team is working quite hard to identify exactly which customers are going to get that mix.

So there is a lot going on there, but it still is really a work in process at this point and I’d feel pretty happy with how people are working on that problem.

Michael Carboy - Signal Hill

Okay and can I get you to explain a little about what is a specialized C4 rather than commodity C4?

Joseph Hill

Yes, sure. When you think about commodity C4, as we’ve talked about, our butanediol, which is a work course of C4 chemical. Our view of the economics butanediol, $45 a barrel, crude oil environment, especially when butanediol currently has I think four different technologies that can lead to that petroleum based technologies. The economics of fermentation based pathway are pretty challenging.

So that would be what I would call a commodity C4 chemical. When you think about the specialty chemicals, you think about the pyrrolidone which are really a derivative of butanediol that are used in personal care, pains adhesives, pharmaceutical and to mediate some other things. So that’s the distinction we’re making.

We are still executing our ATP grant and moving along with that across the broad family of C4 chemicals, but we’re shifting our emphasis and resourcing best we can away from the commodity side, more into areas that are specialty, higher priced and are less subject to commodity cycles.

Michael Carboy - Signal Hill

The last question on the customer preference front; in the context of macroeconomic issues, you’ve noted that 74% of those of the top prospects also had indicated no plans on changing. You just philosophically, given the macro impact that the consumer market and industrial markets are going through, when do you expect to see a little more change?

Richard Eno

I think honestly Michael; we did expect to see some change and our commercial team went out under our direction. Let’s take a really good look at our customer base and prospects and make sure that we have our finger on the pulse of the market and the results we presented today is what the team came back with.

The interesting part was the anecdotal feedback we got, where the customers in our pipeline have been enthused about Mirel and waiting for Mirel for quite a long time. They can see great opportunities of using the products; it’s a very unique product in term its biobased nature and biodegradable characteristics, and I think another view is that this time will past and these companies want to be there with the differentiated product.

While you’re looking at a whole series of operations that they are looking at, most every customer we’re looking at sees Mirel as a component of the development plan and as a result, if they’re looking at their portfolio of development projects, Mirel’s unique, it’s differentiated in its fits in. So in that context it does appear that the customer base is still enthused about going forward with what they’ve been working on sometimes for two or three years.

Operator

Your next question comes from Jinming Liu - Ardour Capital.

Jinming Liu - Ardour Capital

My first question is about all the contracts you have announced. Can you give me more color on the structure of those contracts? Are those contract take-and-pay or else..?

Joseph Hill

No, they are not take-or-pay, there is estimated volume, fixed price and they all have slightly different forms. They often have branding agreements associated with them as our customers are encouraged about using the Mirel logo on their products and there are various rules on intellectual property management and development associated with them, but no, they are not take-or-pay. Take-or-pay contracts are really not common in the polymer industry.

Jinming Liu - Ardour Capital

Well the delay in the Clinton facility caused you any penalty or follows contracts or not?

Joseph Hill

No, as our team was working on those contracts, we made sure that we covered eventualities and are comfortable that we are in good shape with all of our contractual commitments, assuming our October start taking the plant and even beyond that. So, we wanted to be sure that we didn’t get into a situation where we were not committing ourselves to something we didn’t feel extremely confident we can deliver.

Jinming Liu - Ardour Capital

About the specialty C4 chemicals, can you give some color about the market size for those chemicals?

Joseph Hill

Yes, if you look at the total market of C4 chemicals, I’ve seen 2 billion pound, 2.5 billion pounds, probably talking a third of that, something in that range, factoring out the butanediol, but we’ve not done a detailed actual market analysis on that.

What we’re doing is shifting to first of all prove out and understand our own internal economic for specialty C4 chemicals and as we move forward and based on our success in that area we will clearly be getting into market structure analysis, market potential growth. Just that Jinming I think we’re still right now at a technology development stage around that family.

Jinming Liu - Ardour Capital

Okay, you mentioned that you are working on next generation recovery techniques. I assume both are for the TAG acquisition?

Joseph Hill

That’s right.

Jinming Liu - Ardour Capital

If you apply this new next-generation recover technology, will you have to do some changes in your Clinton facility?

Joseph Hill

Well, it depends. There’s a range of things one can think of and ADM and ourselves are working this, where you can look at next generation recovery technology that is dropping and requires largely control and process changes. You can look at technology for recovery that would require some modest change to the equipment and you can look at a complete plain sheet of paper recovery technologies and we have ongoing work looking at all three.

Obviously what we want to do is to get Clinton up and running and sold out as quick as possible and we won’t be making any major changes to the technology in that period and while we do that, that could causes any intruding risks in terms of selling Clinton out, but things that we’ve proven out already that we may very well apply to Clinton that we are quite comfortable in.

So I can say Jinming, that this is just as you would expect an early stage technology development is, the creative people we have working on this are coming up with lots of different ways as we go to Clinton two, Clinton three, Clinton four we can put different forms of technology and that either meets specific market requirements or drive our cost down in increased capital productivity, because as we look for the long term profitability of the business that’s going to help contributory.

Jinming Liu - Ardour Capital

My last question, you’re mentioning that you are reconsidering food contact applications, what kind of opportunity are we talking about here?

Joseph Hill

We are happy with the progress we are making with regards to getting Dosia submitted to the FDA. We haven’t looked at detail in terms of what portion of that food contact pipeline we would include with our non-food contact pipeline, but as you said it’s significant and you can go back to some of the earlier earnings calls of Metabolix where food contact volume was recorded.

I just caution you cum adding it to what we have right now, because we’ve not gone through the process of which portion of that pipeline could we integrate with our non-food contact pipeline for Clinton start up, but I can just tell you that it’s pretty significant, but we’re not ready at this point to add to our indicative two year out demand. We just want to let you know that we are beginning the process of thinking about and making sure as we look at our production plan and our market opportunities. We are beginning to think about food contact as well.

Operator

Your next question comes from Jeff Osborne - Thomas Weisel Partners.

Jeff Osborne - Thomas Weisel Partners

I just had two quick ones. Should we expect that ADM payment in both the second and third quarter and in particularly the third quarter, given the delay the delay I was just uncertain how to do with that model?

Joseph Hill

So, for modeling Jeff you could model, receiving of payments at the end of Q1 and the end of Q2. Technically those were payments for Q2 and Q3, but we usually receive them a few days before the quarter begins.

Jeff Osborne - Thomas Weisel Partners

Just following up on our prior question, I want to make sure I understood the 9 to 15 month development time for polymer applications, that’s not the same as we shouldn’t be thinking, we always take 9 to 15 months to reach a normalized gross margins as we planed, it should be much faster than that is that correct?

Oliver Peoples

The 9 to 15 months is, as a customer is testing out a new polymer material, they will run their own internal test on it, they will develop some prototypes perhaps some tools, they will test that material out and by the time they comfortable with its run though all the internal hurdles that begins to scale up. It’s to help you think about the factor we are not selling a commodity, we are selling a performance oriented material. So, you don’t turn plant like this sign and go right up to full rates initially, it’s just not the way business works.

So that took that 9 to 15 months is intend to do and the customers we have in our pipeline that clock is ticking on many of them, some pretty far advanced some not so far advanced, really based on limitations of our pilot plant volume, but it’s not an indication, it’s different than expectation about when Telles will hit any type of financial performance.

Jeff Osborne - Thomas Weisel Partners

Would you think in terms off, if you could produce say $1.25 a pound and so it at the midpoint of the range that you provided, do you think it would take a couple of quarters to reach that then, taking obviously a lot more to built the facility that you likely pointed out was the first of this game. We’ve also never run a plant as well. So I’m just trying to get a sense of what you’re thinking on that front?

Joseph Hill

We haven’t given much guidance as to what some of those the margin and ramp up information is going to be. So, as you look at what the, remember what Telles pays for the product is cash cost for the material. So, the margin is a matter of what the cash inputs are plus any overhead of running the plant.

So, the sales, so as you are modeling here what your margins are the sales cycle is before any of the sale occurs. Once the customers is signing for us, we’re expecting at the margin that we’re receiving for any particular customer from the first day of product we’re delivering them isn’t going to fluctuate significantly from margins from, say 180.

Just one more, on running the plant of this type, I just want to make sure that I address that part your comment. Keep in mind that we’ve running our pilot facility for a couple of years right now, have experienced with the fermentation under all sorts of conditions, under all sorts of different scales and recovery clearly has the understanding of the recovery process. Is just really leaped ahead in the last years, certainly since I’ve been here I’ve see in dramatically enhanced, and ADM have sent I think all of their ship supervisors gone to the pilot facility, to actually get hands on operational experience.

So, to your comment on running a facility of this type, there is a lot of work going on right now to ensure that everything we know is clearly transferred into Clinton operation protocol.

Jeff Osborne - Thomas Weisel Partners

Okay, can you just refresh our memory then how we should think on the modeling front once the plant does their operational in terms of revenue recognition? So you address that the cash payments from ADM for the forward-looking quarter, but how should we think about from a recognition standpoint in particular for the fourth quarter?

Richard Eno

So, the way their commercial lines is working with ADM and the phases is that the joint venture Telles recognizes the revenue from the contract from the customer. The customer signs contract with Telles. Telles face to Metabolix a royalty on every pound of Mirel sold. So from product that comes out of the Clinton facility, Telles purchases at cash cost felt that to the customer and pays Metabolix a royalty.

Telles has sales and marketing expense, as part if development expense, as cost of goods sold, runs in operating profit and then the operating profit is shared 50/50 as equity income between ADM and Metabolix, its days that the first profits go back to ADM to recover the construction cost of the facility.

Operator

That concludes the question-and-answer session today. At this time, Mr. Hill, I’d like to turn the conference back over to you for any additional or closing remarks.

Joseph Hill

Well that you all for attending the call today. As you can tell, we are very pleased with our progress and we’re really have a lot of enthusiasm and moral in our other platforms and we look forward to updating you on our progress across each of these platforms during our next call. So, thank your for attending and appreciate the interest in Mextabolix.

Operator

That does conclude today’s conference. We appreciate you participation you may disconnect at this time.

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Source: Metabolix Inc. Q4 2008 Earnings Call Transcript
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