Syntroleum Corporation (NASDAQ:SYNM)
Q1 2009 Earnings Call
April 27, 2009; 3:00 pm ET
Karen Gallagher - Senior Vice President and Principal Financial Officer
Gary Roth - President, Chief Executive Officer
Jeff Bigger - Senior Vice President, Business Development
Ron Stinebaugh - Senior Vice President, Finance & Acquisitions
Richard Colbeck - Private Investor
Daniel Chung - CDCM
Jon Stewart - Shareholder
Michael Siegle- Private Investor
Good afternoon and ladies and gentlemen and welcome to the Syntroleum Corporation first quarter earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.
I’ll now turn the call over to Ms. Karen Gallagher. Ms. Gallagher you may begin.
Good afternoon and thank you for joining us today. Remarks for today’s call will be presented by Syntroleum’s President and Chief Executive Officer, Gary Roth; followed by Jeff Bigger, Senior Vice President of Business Development, who will provide an update on our Dynamic Fuels Geismar plant; Ron Stinebaugh, Senior Vice President of Finance and Acquisition, who will provide an update on the Geismar plant economics and Karen Gallagher, Senior Vice President and Principal Financial Officer, who will report the financial results for the first quarter of 2009.
For Mr. Stinebaugh comments on the Geismer plants economic, he’ll refer to the slides that are posted to the home page of our website at www.syntroleum.com. Before I turn the call over to Gary, I’d like to remind everyone that during this call we will make certain forward-looking statements as well as use historical information, words such as believe, estimate, expect, intend, plans, anticipate, could or should are intended to identify forward-looking statements.
Although, Syntroleum beliefs that expectations reflected in these forward-looking statements are reasonable, these statements involve risks and uncertainties. Future results may differ materially from those projected in these forward-looking statements. You are encouraged to refer to our SEC filing including our most recent annual report on Form 10-K for a full disclosure of these risks and uncertainties.
I’ll now turn the call over to Gary Roth for opening remarks.
Thank you, Karen. Beginning in late 2006 we began the process of transitioning from a research and development orientation to a commercialization focus. We determine there were four tactical executions required to implement a commercialization strategy. First in the near term, we needed to rationalize our cost structure while maintaining our engineering execution resources. In the medium term, we needed to commercialize our Bio-Synfining Technology including project ownership.
We determined it was necessary to complete the documentation of our Fischer-Tropsch technology to a system deploying these technologies in a commercial scale and finally we establish it was essentially continue our R&D efforts focused on improving our technologies in the form of research partnerships with shared or paying cost arrangements. We believe, we have successfully executed on these items.
We completed our corporate downsizing in 2008 resulting in a 70% reduction in overhead cost in 2008 versus 2006. We expect charges related to discontinuing operations to be minimal in 2009.
Our Bio-Synfining strategy has been executed according to plan. 24 months ago, we budgeted a $150 million facility cost and a 2010 startup date. The first plan under our Dynamic Fuels joint venture with Tyson Foods continues to be progress as planned, Jeff Bigger and Ron Stinebaugh will convey project details later in this call.
We completed our technology documentation program in 2008, which enabled closing the Sinopec technology agreements. Our standard for an engineering documentation allows us to convey Syntroleum technology in commercial offerings other than licensing, which is often a more attractive form of technology transfer to the clients.
Sinopec arrangement is important in a number of ways, including technology payments totaling $20 million net of Chinese tax, establishment of a 10 year technology partnership including research and development paid for by Sinopec, as well as six months CDF runtime obligation. Syntroleum retains the right to use the CDF in China for 10 years.
We have access to Sinopec’s vast network of competitive research and development and engineering services, including catalyst manufacturing. We have a 50/50 royalty sharing arrangement for licensing of technology improvements in China and finally, we believe we have path to commercialization of the Syntroleum FT technology.
We have maintained a focus to research and development program. Each program centered on improving the efficiency of our process. As such, we expect to see continued decrease in unit production cost and a more widespread application of our technologies in both the fuels and chemical markets.
Examples of our ongoing commitment to research and development include, we received seven new patents and made seven patent applications in the past 12 months. We were paid by the Department of Defense to produce 600 gallons of synthetic jet fuel made from Tyson feedstock and an additional 400 gallons of jet fuel made from Siri oil, all using our Bio-Synfining Technology.
We are currently running a paid research program, testing the technical and commercial feasibility of converting algae oil into military grade jet fuel. We expect that our technical services and leasing revenues will total $5.1 million full year 2009 with currently booked contracts.
In summary, our commercialization effort continues to progress as planned even in the current economic climate. We have executed on our plan developed in 2006 and then contracted for approximately $5 million in service revenues in 2009.
We have executed Technology Transfer Agreements with Sinopec, from which we expect to see our FT Technology utilized the large scale plant, as well as ongoing joint research and development efforts. We expect Dynamic Fuels to continue to generate cash flows in 12 to 15 months using our Bio-Synfining Technology on a commercial scale.
I’ll now turn the call over to Jeff Bigger, to update you on the status of our Dynamic Fuels joint venture with Tyson Fuels.
Thank you, Gary. The status of the Geismar facility is as follows. Total project costs remain at $150 million consisting of a $138 million in capital and $12 million in financing and working capital costs. Dynamic Fuels received $100 million in GO Zone Bond financing last year.
The parties have contributed $28 million in equity to the construction of the Geismar facility in 2008 and each party will fund $6 million by May 1, 2009. We will fund our $6 million from our existing cash balance. The remaining $10 million will be funded in 2009 if required, the $5 million coming from each party.
Today, I’ll update you on the technical status of the project related to three specific areas, including engineering, procurement and construction. The reference date for the update is March 31, 2009. All results will be reported as an estimated percentage of the physical work complete and the percentage of the approved budget spend or committed.
As related to engineering, we are 56% complete and as spend 57% of the approved budget. We expect engineering to be completed on budget. So far, we have expanded 78,000 man-hours on engineering as of March 31, 2009.
As related to procurement, we are 36% complete and as spend 33% of the budget. We have 141 out of 177 or 80% of the major procurement items under contract. The majority of outstanding procurement is related to the purchase of both commodities.
All Bio-Synfining equipment is under contract. Delivery of these major equipment items began in April and we’ll continue throughout the month of October and as related to construction, we are 19% complete and have spent 18% of the approved budget. Today we have completed site demolition works, set foundation filings, completed all tank foundations, erected 40% of the new pipe rack and refurbished the existing buildings, all in preparation for receiving major equipment.
With the major equipment deliveries, the focus of the construction effort will be on the final erection of the equipment and installation of bulk materials such as piping, electrical cabling and instrumentation.
On April 23, 2009, we installed the largest vessel on the project, a 200 ton, 130 foot long, liquefied petroleum gas bullet. You can see pictures of the installation in the current investor presentation, on our website that Ron Stinebaugh will be referencing. As of April 21, 2009, we have over a 100 people onsite. We believe we will complete the construction and commissioning phase of the project within budgeted levels.
Overall, as of March 31, 2009, we estimate engineering, procurement and construction are 31% complete and we have spent 28% of the associated budget. As of the reporting period, the EPC contingency has not been committed and the project remains on schedule for year end 2009 completion.
I’ll now turn the call over to Ron Stinebaugh, to update you on the economics of our Geismar project.
Thanks, Jeff. For my comments on Bio-Synfining economics, I’m going to refer the slides posted to our website, which is www.syntroleum.com, point is near the bottom of the homepage entitled current investor presentation. Before I refer to the slides, here are a few overall comments about the economics of the Geismar plant.
The current economic climate has resulted in crude oil prices falling, as well as $30 per barrel with recent trading in the $40 to $50 range. During this time period, the Geismar plant hypothetical economics have remained quite resilient. We believe Geismar will be the low cost producer of renewable diesel with our ability to process the lowest quality feedstocks while producing high quality fuel. This capability will help Geismar to better weather periods of economic weakness, while positioning it for robust profitability as the economy recovers.
Now, for my comments relating to selective slides from our investor presentation Please scroll to slide number 11, here you will see a summary table for the Geismar plant margins. We show margins in two ways. First, we show the margin related to selling our renewable diesel fuel at petroleum diesel price parity, where wholesale diesel posted prices plus the relevant subsidies. We show this because at a minimum, we are confident we can realize margins on this basis.
Secondly, we show margins based on reported soy biodiesel prices using data we have obtained from a third party reporting service. Margins on this basis currently reflect the premium to diesel price parity plus subsidies. We view the range between these two figures as the potential margin range, we can expect from the Geismar plant.
Now, looking at the details of the slide, in columns one and two, we show the average margins since December 2006, which ranges from $0.75 to $1.36 per gallon depending on whether it is calculated on a diesel prices parity basis plus subsidies from our soy biodiesel pricing.
Ultimately, we believe that Bio-Synfining margins should revert to the mean as feedstock and product prices are highly correlated. The diesel price parity mean of $0.75 per gallon also compares favorably to the $0.80 per gallon margin, with which we obtained board approval to proceed with this business plan in June 2007.
Columns three and four show margins as of April 21, 2009. Current margins despite oil prices in the mid 40s range from $0.23 per gallon on a diesel price parity basis to $0.72 per gallon on a soy biodiesel prices basis and column five, the margin on April 21, if we exported renewable diesel to Europe, while not collecting the U.S. subsidy was $0.36 per gallon.
Now, please scroll to slide 12, this slide is a daily margin for Geismar plant dating back to December 2006. As you can see the Geismar plant economics have shown significant resilience from the current low oil price environment. Despite oil price is falling to as low as $30 per barrel in December, margins have remain positive on a diesel price parity basis plus subsidy the blue line.
On a soy bio-diesel pricing basis, the red line, margins have remained quite healthy. Again, we view the distance between the red and blue lines on this graph is likely range where the Geismar plant margin would have fallen had it been operating during this time period.
Slide 13 shows historical feedstock pricing. The Tyson Blend is the doted red line, which compares to soybean oil, which is the blue line. At April 21, the Tyson Blend was approximately $18.03 per pound, which compared to Gulf Coast RBD Soybean Oil at $0.40 per pound.
The spread between the Tyson feedstock blend and soybean oil represents Bio-Synfining feedstock cost advantage over soy biodiesel. On April 21, the differential was $21.08 per pound or $1.65 per gallon. Since December 2006, that advantage is average $24.04 per pound or $1.83 per gallon.
Slide 14 shows, the pricing for the major components of the Tyson Blend, since the beginning of the year, which include Beef Tallow, Choice White Grease, Poultry Fat, Yellow Grease and Brown Grease. While we coat a target Tyson Blend in our presentation in reality Tyson is capable of quickly changing its feedstock sourcing to take advantage of the cheapest available materials in the market.
Finally, slide 15 and 16 show that both in the U.S. and Europe, biodiesel continues to be price at a premium to the underlying low sulfur diesel price and that higher quality biodiesels with superior cold-flow properties are worth more than lower quality biodiesels.
We believe that renewable diesel should enjoy similar or better premium pricing because it will have the following advantages over competing biodiesel. Superior cold-flow properties nearly 10% increased energy content relative to biodiesel and compatibility with existing infrastructure.
Dynamic Fuels is currently exploring the feasibility of building a second plant. As currently envisioned, this plant will be 75 million gallons per year in capacity similar to Geismar. Several competing locations are under consideration. We currently expect that a final investment decision would be made in mid 2010, with full rate operations at the end of 2012.
With respect to financing, Dynamic Fuels apply to the U.S. Department of Energy for Title XVII loan guarantees for this potential plant in February, 2009. The DoE notified Dynamic Fuels on April 8 that its application has been deemed responsive and that the Bio-Synfining Technology has been deemed to be a new or significantly improved technology as defined in the statue.
The application therefore will move to the next step in the DoE loan guarantee process. If Dynamic Fuels is ultimately selected for final due diligence and negotiations, it is targeting financial close in mid year 2010.
Now, I’ll turn the call over to Karen.
Thanks, Ron. We announced our results for the first quarter ended March, 31 2009, reporting a cash balance of $16.7 million, compared to a cash balance of $10.1 million at December 31, 2008. This increase in our cash balance is primarily due to the collection of $10 million an initial payment associated with technology agreement and collection of $1 million from continued revenues for engineering services.
We generated $7.5 million in cash flow from our operating activities for the first three months ended March 31, 2009, compared to using $1.5 million in cash flow for operations for the same period last year. The current cash flows provided by operating activities, market turning point for our company and our commercialization efforts.
Our current accounts receivable balance is $12.8 million from executed contract. Due to the generation of cash flows from operating activities, we will fund our remaining investment in Dynamic Fuels from our current and expected cash flow. We will invest $6 million by May, 1 2009 and the remaining $5 million, if needed in the fourth quarter of 2009.
For the three months ended March 31, 2009, the company reported net income of $11.2 million or $0.18 per share, compared to a net loss of $2.2 million or $0.04 per share for the same period last year. Total revenue was $20.2 million, compared to $1.6 million for the same period last year.
Our business development activities are ongoing. Operating expenses for the first quarter were $6.8 million, compared to $3.1 million for the same period last year. Of this expense, $2.4 million is non-cash stock compensation associated with our milestone based employee equity compensation plan.
At March 31, 2009, we recorded a loss of $2.2 million from our investment in Dynamic Fuels. Of that amount $700,000 results from overhead costs for site rent, project development cost and insurance during construction. The remaining $1.5 million loss is a result of the expense associated with marking the interest rate swap to market value.
When the GO Zone Bonds were issued at a floating rate of interest, a swap was put in place to protect the company from significant increases in interest rates. The swap fixes the interest rate of the bonds at 2.19% for the first five years of the project. As interest rates have move down, the market value of the swap has decreased resulting in current expense to Dynamic.
However, this prepayment of interest will be returned to Dynamic, as interest rates rise and the value of the swap increases or will be applied towards remaining interest payments in the last one to two years before maturity of the swap.
We have achieved several milestones in this first quarter. We have completed our business rationalization with regard to our cost structure. We executed our licensing for our sale as technology model. We have secured financing for our committed investment on our Dynamic Fuels plant. We are continuing to execute on an original cost budget and timeline for the construction of the Dynamic Fuels plant. We look forward to further execution of our current goals and business prospects throughout 2009.
Thank you for your attendance today. We’ll now open up the call for questions.
Your first question comes from Richard Colbeck - Private Investor.
Richard Colbeck - Private Investor
Yes, I’d like to know, if you’ve had any response from either the Air Force or Department of Energy about, coal to liquid plant in 2009 or 2010?
This is Gary Roth. The answer to that question is, no. We’ve got no response.
Your next question comes from [Daniel Chung] - CDCM.
Daniel Chung - CDCM
I was wondering on your balance sheet, there is $25 million in deferred revenues. Can you break that down into different companies? Is there like $12 million for Sinopec, how about the rest?
Well Mandy is our Controller. Burns, let Mandy answer that question for us.
We have $6 million in deferred revenue for Sinopec and the remaining of deferred revenue pertains to a license with the Commonwealth of Australia that we’ve had on our books for quite a while and that’s actually denominated in Australian dollars and that’s what causes a lot of foreign currency translation costs.
Your next question comes from Jon Stewart - Shareholder.
Jon Stewart - Shareholder
Are you giving any guidance on earnings per share for the 12 months?
This is Gary Roth. John, no we’re not.
Your next question comes from Michael Siegel - Private Investor.
Michael Siegle- Private Investor
I was wondering, if you guys could clarify some information on the exercising of the warrants by Tyson and the NOL and what affect those might have on those?
This is Gary Roth. Tyson has exercised its warrants and now owns the eight million shares. At our current level, the NOLs are not affected by the Tyson acquisition of shares. We have given notification and if anybody wishes to go above 5% shareholdings, we request that they contact the company to avoid any issues related to us losing our NOLs.
(Operator Instructions) At this time, I’m showing no future questions.
Once again, thank you for joining on us on our today’s conference call. If you have any additional questions, please contract Ron Stinebaugh at 981-764-3406. We appreciate your interest in Syntroleum.
Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may all disconnect.
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