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KiOR (NASDAQ:KIOR)

Q1 2013 Earnings Call

May 09, 2013 10:00 am ET

Executives

Max Kricorian

Fred Cannon - Chief Executive Officer, President and Director

John H. Karnes - Chief Financial Officer and Principal Accounting Officer

Analysts

Edward Westlake - Crédit Suisse AG, Research Division

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Susie Min

Robert W. Stone - Cowen and Company, LLC, Research Division

Henrique M. Akaishi - Piper Jaffray Companies, Research Division

Operator

Welcome to KiOR's First Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. The telephonic replay will be available approximately 2 hours after this call has been completed and will remain available until Thursday, May 16, 2013. The number to call for the replay was included in the earnings release issued earlier this morning. This call is being webcast and will also be available on the company's website for approximately 90 days in the Investor Relations section of the site.

I would now like to turn the call over to Max Kricorian, Treasurer at KiOR.

Max Kricorian

Good morning. Thank you for joining us to discuss KiOR's financial operating results for the first quarter 2013. With me today are Fred Cannon, President and Chief Executive Officer; and John Karnes, Chief Financial Officer.

I would like to remind everyone that statements will be made during this call that are not historical facts in our forward-looking statements. These statements about the company's future expectations, plans and prospects include statements regarding the following: the predicted timing of and cost related to production from and generation of revenues at the company's Columbus facility; the company's plan to build its next commercial facility in Natchez, Mississippi; the company's plans to obtain additional debt and/or equity financing; government policy making in relation to renewable fuels; and other statements containing the words believes, anticipates, plans, expects, intends and similar expressions.

These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties. The company cautions that a number of important factors could cause our actual future results and other future circumstances to differ materially from those expressed in any such forward-looking statements. These important factors and other factors that could potentially affect the company's financial results are described in the section called Risk Factors and the company's most recent annual report on Form 10-K for the fiscal year ended December 31, 2012, and the company's other quarterly filings with the SEC, which are available through the Investor Relations section of KiOR website at www.kior.com or on the SEC's website at www.sec.gov.

The company may change its intentions, beliefs or expectations at any time and without notice based upon any changes in such factors in the company's assumptions or otherwise. The company undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after today or to reflect the occurrence of unanticipated events. Therefore, you should not rely on these forward-looking statements as representing the company's views as of any date subsequent to today, May 9, 2013.

Now, I will turn the call over to Fred Cannon.

Fred Cannon

Thanks, Max. Good morning, and thank you for joining us on our conference call. These are exciting times for KiOR and for our industry. We have a lot going on in our company, especially at Columbus. Our run time is up and production is building. And it seems that a day doesn't go by when you can't find something in the news about renewable fuels. I might add, however, it's not always accurate but I'll get to that in a few minutes.

First, let me take this opportunity to tell you what's going on at Columbus. As you know, we produced and shipped the world's first commercial volume of cellulosic diesel during the first quarter. Our core technology continues to perform at or above our expectations. We are pleased with the progress of the start-up of the facility and it is consistent with both our experience and our guidance from last quarter. Most importantly, the facility is running. As we expected, we are beginning to see everything coming together. The operational data from last quarter bears this out. During the first quarter, the conversion unit of the Columbus facility, which contains KiOR's proprietary BFCC technology, operated for a total of 441 hours, Representing an on-stream percentage of approximately 20%. This represents an improvement of approximately 500% from the on-stream percentage during the previous quarter. Through these startups and run times, our BFCC technology has consistently performed. In general, each run at the facility is longer than the previous one. And we are seeing these longer runs without any compromise in the high quality of the oil that the facility produces. These are the types of trends that we'd like to see. We want our run times to be longer and our downtimes to be shorter. While we are pleased with this overall trend of on-stream performance, I also think that it is important to discuss our downtime during the quarter as well. If we identify something that needs to be fixed or calibrated, we do so with the utmost concern for the safety of our employees and the long-term condition of the plant.

This means that a typical shutdown for Columbus right now in a start-up phase, meaning going in and making an adjustment that would not normally be considered very significant, can range from a few days to a couple of weeks in duration. That time allows us to bring the full operation down safely, make our changes, fixes or adjustments, check and test our work and then take the right amount of time to carefully bring it back up again according to our start-up and operating procedures. With that background in mind, let me give you a little bit of an idea of some of the issues that have driven the downtime during last quarter.

Approximately 70% of the downtime during the quarter has been associated with addressing typical issues in the vapor recovery unit or VRU at the facility. I call them typical because our VRU is at the back end of our conversion process. So any variability and operating conditions upstream, which happen on a frequent basis during a start-up, shows up in the form of plugging in this VRU. This is just what you would expect to see in any petrochemical or refining operation like ours. For example, you may recall from our last call that I talked about how the power outage during the fourth quarter caused significant plugging issues that we had to clean up. This was in the VRU. Understanding this cause-and-effect is important because issues in the VRU reflect the impact of typical variable start-up operations and minor problems elsewhere in the plant. As a result, we must bring the facility down, fix the minor root-cause problem, claim and restart the plant. All of which takes time. The good news is that these issues are not indicative of a major design issue or an issue with our core BFCC technology. At the end of the day, as we further stabilize our overall operations at the facility and move towards steady-state operations, we expect that the downtime cost in this area will decrease going forward.

The remaining downtime, approximately 30%, was driven by a one-time mechanical issues in utilities and wood processing systems of the plant. Once these mechanical issues were fixed, we have not seen a recurrence of these problems in subsequent startups of the facility, and we do not expect them to be an issue for the facility on a going-forward basis. It's not uncommon to encounter issues like these in a new first-of-a-kind facility. Nevertheless, we are learning a great deal. And in turn, solving problems each and every time we shutdown and restart. This will prove invaluable as we apply these lessons to future facilities. Eventually, Columbus, like every other production facility, will hit its sweet spot and get to the point where the run time is 24/7 for months on end. This is our goal, and taking the extra care now during start-up while time-consuming, is the best thing to do for our long-term operation and economics. Not to mention the safety of our employees. Every day, we are getting closer to that sweet spot as our average production run at the converter during the first quarter was just over 110 hours. Steadily increasing throughout the quarter, and a FIFO increase on a quarter-to-quarter basis. On future calls, we will continue to update you on these production metrics so that you can gauge our progress as well.

Looking now to our expectations for production in the second quarter. We are poised to build on positive momentum in the first quarter. We have already had a production run at the converter in April that nearly matched our average performance during the first quarter. We expect our on-stream percentage and our average production run to increase on a quarter-over-quarter basis from the first quarter. We expect that our upgrading unit which performed exceedingly well in making own specification gasoline and diesel during the first quarter, will upgrade the oil that we are producing today into high-quality cellulosic diesel and gasoline for shipment during the quarter.

Consistent with our previous guidance, we expect that total fuel production during the second quarter will range between 300,000 and 500,000 gallons, keeping us on track to fall within our projected production range of 3 million to 5 million gallons for 2013. With the gasoline pathway now approved by EPA and effective, we can produce, ship and sell both our cellulosic gasoline and diesel with a clear path to market under RFS2. Now having proven our technology, produced high-quality oil and upgraded to consistently high-quality diesel and gasoline, we are on our way to filling up more vehicles in America with cellulosic fuel made from nonfood sources and offering a significantly less environmental footprint when compared to conventional fuels. And this from a company which just came into existence in late 2007.

KiOR was born in the same year that the Renewable Fuel Standard was revised by Congress and signed into law as RFS2. Quite a lot has happened since then. First, and foremost, the production of cellulosic fuel which had only been a glimmer of hope in the eyes of many, the original Renewable Fuel Standard was a product of the Energy Policy Act of 2005, passed by Congress and signed by President George W. Bush. Even when Congress made RFS2 the law of the land in 2007, it has consistently had 3 core goals: reduce dependence on foreign sources of crude oil; address global climate change with sustainable renewable fuels; and promote technologies which could possibly meet these legislative requirements. Days and months and years of research, not all of which were supported by federal loan or grants, showed us innovative and practical ideas, and of course, some that were not meant to be. So in the cause of truly being up and running, this is the very industry that Congress and President Bush wanted to develop when RFS2 became the law of land in 2007, one that provides a more sustainable liquid fuel supply chain for American vehicles. Incorporating truly renewable fuels into existing fuels infrastructure. And yet, despite the successes and numerous companies that have relied upon the foundation of RFS2 to build their businesses, there are some large refiners and marketers who want to overturn this legislation and kill the innovative technologies that developed over the last few years. Not because they disagree with the overall policy objectives, but because now, they are unhappy with the choices they made when RFS2 became the law of land. Rather than taking the forward-looking approach, being innovative and investing in new technology that would better suit them for years to come, most took an easier path and opted to simply blend with ethanol. We are now seeing the impact that choice has made from a significant reliance on a single fuel. Increased corn and food prices, as well as blendwall issues.

Now, any discussion of RFS2 and the legislation that gave rise to it, focuses exclusively on ethanol, not the cellulosic and other sustainable fuels that RFS2 was really supposed to generate. Somewhere along the line, the Renewable Fuel Standard became little more than the ethanol fuel standard in the public and political narratives. Nothing could be further from the truth. Despite the choices of obligated parties, some of us were working toward an alternative with sustainability in mind. A conventional hydrocarbon fuel, for American vehicles produced by American workers in rural America. A conventional hydrocarbon fuel, that is truly sustainable because it comes from clinical renewable feedstocks that do not create a food versus fuel competition. A conventional hydrocarbon fuel with an unconventionally small environmental footprint. A conventional hydrocarbon fuel that can help make our nation truly energy independent. These were the alternatives that the Congress and the president sought to create with the legislation that created RFS2. And these are the alternatives that everyone can agree are in our nation's best interest. We at KiOR are starting to make those alternatives a reality at commercial scale in Columbus. And we appreciate your continued interest and support as we do.

I will now turn the call over to John to cover our financials.

John H. Karnes

Thanks, Fred. During the first quarter, we reported a net loss of approximately $31 million compared to a loss of $30 million sequentially for the fourth quarter of 2012 and a net loss of $17 million year-over-year from the first quarter of 2012. The Q1 2013 loss includes almost $4 million of noncash stock-based compensation expense, this level of stock compensation expenses is about $300,000 lower than the previous quarter and about $1.6 million higher year-over-year. First quarter revenues were $71,000. These revenues related to sales from our demo plant for road test purposes as well as our initial shipment in March from Columbus. With this, the world's first commercial shipment of cellulosic diesel fuel, KiOR's cellulosic diesel is actually in the U.S. fuel system today and being used in cars as we speak. The average sales price for the shipment was around $3.91 which is in line with the pricing structure we've been discussing during our previous calls.

As a result of recording our first commercial sales in Columbus, we began booking all fixed plant costs, depreciation and variable costs at Columbus to [indiscernible]. Cost of product revenue going forward will include all expenditures for repairs, maintenance, consultants, utilities, feedstock, inventory consumption, noncash depreciation and amortization at Columbus. Cost of revenue will also include additional start-up costs related to remedial work, rentals, overtime and other cause associated with lining out the plant and turning it over to operations for routine production going forward. So plant costs for January and February remain in G&A, consistent with past practices, plant costs for March are going to be reflected in COGS, cost of revenue. That being said cost of product revenue for the first quarter was $5.4 million including $750,000 of depreciation recorded in March after we put the plant in production. So apples-to-apples with the prior quarter, if you combine March product cost, net of depreciation, with a $6.6 million of start-up costs we booked to G&A for January and February, you get a comparable Q1 start up cost of $11 million which is down $1.1 million sequentially from Q4 last year. This is a significant decrease and a good trend. As important though is the absolute decrease itself, the nature of the start-up cost clearly reflects the leveling out and stabilization of the facility as it's handed over from start-up to the operations group. For example, outside contractor costs were down sequentially around $900,000 indicating a reduction in major operations as well as an increased reliance on KiOR's operators to handle the facility on a day-to-day basis. We would expect this trend to continue while Columbus stabilizes and these costs ultimately wind down as we progress to steady-state operations in the months ahead. Research and development cost for the quarter were $9.2 million, which is $300,000 lower than the prior quarter of the previous year, and $800,000 higher than a year ago. The year-over-year increase is largely a function of elevated R&D activity related to the Columbus start-up, including higher stock comp expense and higher depreciation expense, partially offset by lower operating and maintenance costs at our Pasadena demo facility.

G&A expenses for Q1 2013 were $14.7 million, which, as I mentioned earlier includes $6.6 million from Columbus start-up, covering the month of January and February. So G&A expenses decreased $5.5 million from $20.2 million recorded in Q4 of 2012 with virtually all of the decrease just shifting to cost of product revenue commencing in 2013 as I just discussed.

So year-over-year G&A expenses were $6.6 million higher than Q1 driven by a $4.7 million increase in Columbus start-up cost and $1.9 million higher payroll and related expenses from the same period in 2012.

Interest expense for the first quarter this year was $2.2 million. Moving to the balance sheet. Cash and cash equivalents at quarter end were $11 million, this is about $30 million lower than year end 2012. Major uses of cash were obviously operating losses, ongoing R&D, G&A and engineering costs related to our next plant scheduled to break ground at Natchez. As I mentioned on a previous call, during the first quarter, we took steps to ensure our continued adequate liquidity to operate. We reduced our debt service by amending our $75 million loan facility to provide for our continued right to pay peak interest, interest in kind, all the way through the maturity of the loan in February of 2016. We also provided for a bullet maturity rather than monthly principal amortization as originally scheduled. And as I mentioned, last month, we expanded the borrowing capacity under this facility by an additional $50 million with respect to which we drew down $10 million in April. We believe that expanded facility will provide us ample near-term liquidity to get Columbus to steady-state operations to continue our R&D program and to fund our overhead as we move forward to secure the financing needed to commence construction of our Natchez plant.

Switching gears now to guidance. While our limited production history makes forecasting difficult, we don't see any reason at this point to change our prior production guidance as Fred mentioned, of 3 million to 5 million gallons for the year. Without anymore operational data, for internal purposes, we're just assuming this production ramp occurs fairly linearly from 5,000 gallons in Q1 to between 300,000 and 500,000 gallons in Q2, as Fred mentioned. While we expect shipments to pick up going forward, shutdowns will continue to be par for the course until the facility fully stabilizes, so shipments can be expected to be sporadic.

Looking ahead to pricing assumptions. Until we settle into a normal delivery routine with our customers, we can expect our ASPs to reflect discounts of between $1 and $1.50 per gallon. These discounts will definitely be transient related to sporadic timing and the nature of our shipment patterns while we're stabilizing the facility. The discounts are in no sense quality related, they do not reflect the lower value or any lower value proposition for KiOR's fuels as compared to petroleum-based fuels. And they can be expected to taper off in the future as we achieve optimal delivery routines with our customers.

As far as cost of product revenue, we continue to plan on fixed cost at Columbus of around $5 million per quarter, excluding start-up costs, depreciation and amortization. Again, these represent baseline costs primarily maintenance personnel insurance taxes and other related sunk operating costs. In addition, we expect variable costs during Q2 to range between $2 million and $3 million as the plant begins to line out and stabilize. We expect these to essentially ramp up quarter-over-quarter consistent with our production outlook and in the fourth quarter range between $4 million and perhaps $5 million.

Moreover, we anticipate between $4 million and $5 million of continuing start-up costs in Q2 related to overtime, contractors and make right expenditures. As I mentioned earlier, we would look for these start-up costs to decline during the remainder of the year as Columbus lines out. Lastly, depreciation and amortization for Columbus should run around $2.2 million per quarter. R&D expenses in Q2 are expected to be in line with our Q1 level, and we would anticipate that G&A would return to around $8 million per quarter as we are no longer recording Columbus start-up expenses as part of G&A.

Moving to interest expense, since we're not capitalizing interest to the same rate we have been, we would expect interest expense going forward to range around $7 million, that's per quarter. As we continue to progress the front-end engineering and design phase of Natchez, we're also forecasting continued capital expenditures in Q2 of around $5 million for the quarter.

I think that concludes my formal comments. I'll now turn the phone back over to the operator, and Fred and I will be glad to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Ed Westlake with Credit Suisse.

Edward Westlake - Crédit Suisse AG, Research Division

Just focused firstly on the vac -- I'm sorry, vacuum, vapor recovery units that you we're talking about. I mean, is this something that you're going to have to sort of design out by getting a different unit, a different design or is this something that you can just solve operationally in terms of the plugging issue?

Fred Cannon

No, Ed. It's certainly not a design, the redesign needed. It's a lot of instrument failures, operating variability, in the front end of the plant, kind of normal start-up issues and they manifest themselves in the vapor recovery unit. But we've operated it 2 weeks, ran beautifully. So it's not a structural issue.

Edward Westlake - Crédit Suisse AG, Research Division

Okay. And then in terms of when you're actually running, are you hitting the nameplate capacity, the 1,500 -- sorry, 500 tons per day?

Fred Cannon

We've run different rates. Right now, we are focused kind of in the half rate 50% just to get everything steady. Really focused on getting the operations steady, then we'll ramp up on a structural basis the capacity.

Edward Westlake - Crédit Suisse AG, Research Division

Right. Okay. Cool to go. But you've -- you got the coke reduction down 25% which was going to allow you to process biomass at a higher rate than the 1,500-per-ton nameplates, but one of the question marks was whether you were adding -- as you got the coke reduction down whether it was adding hydrocarbons to the gasses or to the liquids, I mean, any comment in terms of the progress you've made on that particular challenge?

Fred Cannon

It's -- we're still very optimistic with our latest catalyst development in reducing the coke and getting those hydrocarbons into the liquid. So we'll give update on that next quarter or so.

Edward Westlake - Crédit Suisse AG, Research Division

Okay. And then, a very small one, sorry, John I didn't capture what you said in terms of start-up costs for Q2?

John H. Karnes

I think, to be safe, we're internally estimating between $4 million and $5 million.

Operator

Your next question comes from Pavel Molchanov with Raymond James.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Back to pricing, you mentioned the discount that you're anticipating in near term, when does this go away?

John H. Karnes

Again, Pavel, it's just a function of when we can start shipping full commercial trucks on a routine schedule as opposed to asking people to take partial deliveries and when you ship as we did in Q1, a single commercial shipment, you're actually not in a position to get your contract term. So we'll begin to see that open water close in Q2, they'll close a bit more in Q3 and I would hope by Q4 you'll see that discount go away and we're operating under our normal commercial terms.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Okay. And to be clear, your guidance for the full year 3 million to 5 million gallons, is that -- how does that break out between gasoline and diesel?

Fred Cannon

Pavel, we're seeing pretty much what we saw. We're running in a max diesel -- distillate mode which we would expect something like 60% diesel, 40% gasoline, kind of numbers. 60-40 split.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Okay. And from the standpoint of RINs, does it make any difference just in terms of profitability which you ship?

John H. Karnes

A little bit. The diesel generates 1 gallon of -- cellulosic diesel -- pure cellulosic diesel generates 1.7 RINs per gallon. The gasoline generates 1.5 RINs per gallon. It's purely based on the BTUs per gallon of the gasoline and diesel compared to ethanol.

Operator

Your next question comes from Vimal Shah with Deutsche Bank.

Susie Min

Hi, this is Susie Min on behalf of Vimal Shah. I wanted to see if there was any change on how you're thinking about Natchez, the financing equity versus debt split and maybe potential concerns of dilution? And then also as it relates to the PIK loan, if you could just kind of simply lay it out, that would be helpful.

John H. Karnes

Sure, sure. First, we have not changed our financing plan. As it relates to Natchez, we would still hope and expect to finance the project 1/3 equity, 2/3 debt, obviously, with the stock price where it's at. We're trying to come up with ways where we can minimize dilution and still move the project forward. The great thing about the loan that we'll talk about in a moment that we've got is it gives us ample liquidity to let Columbus stabilize which will hopefully will be reflected on our stock price. That's all to say that we don't feel like we're -- while we do want to start Natchez as quickly as we can, we don't feel like we're compelled to go out today and raise -- sell a bunch of equity at $4.50 or $5 a share.

So again, no change but no specific updates either in terms of financing for the project. In terms of the financing, we had a loan that we closed in January of 2012, it was a $75-million loan that allowed us to pay PIK interest through the first quarter of this year. And no amortization through this summer. What we did last quarter was go back in and arrange to have the PIK interest write extended all the way through to the loans maturity in February of 2016. So we, instead of paying cash interest, we just issue pay-in-kind notes along with the accompanying warrants. Covering that interest expense for now until February 2016. Likewise, original amortization, this is a bullet maturity now, so this was all done to just alleviate any debt service burden our company has. Longer term, our expectation is, we take this loan out and so this loan will somehow roll into the Natchez financing. So we would not expect this loan to actually Go all the way to February 2016. But if it does, we don't have an out-of-pocket cash interest obligation.

Susie Min

Okay, great. And then just a second question, it seems like the cash burn is about $30 million or so a quarter, do we have any sense of whether that could change over that is coming quarters? Any guidance would be helpful.

John H. Karnes

Yes, we would expect that to come down obviously quite a bit. Our R&D and our G&A is fairly stable. Again as I mentioned before, once you go in forward in -- for the second quarter, once you back out the Columbus start-up cost, our G&A expense here at the company is going to be about what it was a year ago, R&D is the same way. So what we're really talking about is performance at Columbus and we would expect those start-up costs at Columbus to begin to decline hopefully fairly precipitously going forward as the plant stabilizes. I do think we could have as much as, like I said, $4 million to $5 million of additional start-up costs for Q2. But again, that's just the forecast. It could be higher, it could be lower.

Operator

The next question comes from Rob Stone with Cowen and Company.

Robert W. Stone - Cowen and Company, LLC, Research Division

I wonder if you could add any more color on the work you're doing on Natchez, items on the time line, any progress on getting a clearer picture of the budget?

John H. Karnes

Yes, well, Rob. As we mentioned, I think in the last call, we're in the process now of completing our front end engineering and design on the project. So right now, we're operating under the estimate that we, basically, I field on [ph] which was the subject of a feasibility study that we had done by our management team and KBR. We continue to believe those numbers hold valid. We're working through site specific adjustments that may be required at Natchez. And as I mentioned before, we've got KBR who also did the Columbus plant, doing the front-end engineering and design. So we're a number of months away from having that feed process done and actually having an estimate assumption at the plant. All in, it's going to be around $460 million. Apples-to-apples with the IPO scenario, where the plant would entail hydrotreating capacity for 2 facilities.

Robert W. Stone - Cowen and Company, LLC, Research Division

Okay. A question on the split of product output, I think originally, there was a thought that you would have some small amount, less than 10%, that was going to be non-transportation fuel, is that the case or is it all gasoline and diesel at this point?

Fred Cannon

That's correct, Rob. Yes, I was just giving the ratio of gasoline to diesel. There is also about, it's 5% to 10% fuel, sulfur-free fuel has a lot of value but it does not generate a RIN, that will be coming out and will be marketed.

Robert W. Stone - Cowen and Company, LLC, Research Division

Okay. You mentioned that you've been pleased with the quality of output, have you gotten any feedback from customers now that you started shipping?

Fred Cannon

Yes. It's all been extremely positive.

John H. Karnes

I can tell you their date of invoices, so without any dispute, that -- which is a good thing.

Robert W. Stone - Cowen and Company, LLC, Research Division

Just a final housekeeping question, John. How much of the interest that you described going forward on a quarterly basis, is going to be noncash?

John H. Karnes

Virtually, all of it. I mean, it will be on an annual basis, it'll be less than $1 million will be cash.

Operator

Your next question comes from Henrique Akaishi with Piper Jaffray.

Henrique M. Akaishi - Piper Jaffray Companies, Research Division

Can you give us a little more detail on the types of things that are causing the downtime and if -- if and what are the small fixes that have been needed?

Fred Cannon

Yes, I think, I will just describe them -- maybe I can give one example I mentioned in the call was the mechanical utilities things where we had a tube and boiler fail, waste-to-heat boiler. So it's such kind of things we're having, as any start-up, you have a lot of instrumentation failures and those kind of things, then you just have to work through and that's the types of things that we're seeing.

Henrique M. Akaishi - Piper Jaffray Companies, Research Division

Okay. On the front-end engineering for Natchez, was it easy or difficult to incorporate design earnings from Columbus? And what would you say -- would you say there's a lot -- much more to complete than the design package?

Fred Cannon

Yes. Our team is real-time, all our learnings will certainly be incorporated into the Natchez design. And, of course, we design Columbus a long time ago, 2 to 3 years ago. So now, we're -- all that learning plus the learnings we've had in our demonstration pilot units have gone into Natchez. But you always learn.

Henrique M. Akaishi - Piper Jaffray Companies, Research Division

[indiscernible] achieved a steady state beyond Q1, I know there were some impacts to the cost of products on line this quarter, can you help to quantify what's kind of onetime items might still be lingering in Q2 and beyond?

John H. Karnes

Well, I think the way you think about just to buildup for COGS, fixed cost today are going to be around $5 million a quarter. We're expecting today, we're expecting variable cost for the quarter to run between $2 million and $3 million, again, this during start-up. Longer term as we reach our, call it, $3-million to $5-million output target for the year. Those variable costs will go in the $3 million to $5 million range. Then on top of that, we have depreciation that's going to run about $2.2 million a quarter. And then the wildcard is, what about the start-up costs, are there anymore special operations that need to be done, anymore repairs, how much overtime, what of kind of equipment rentals? To be safe, like I said, we put $4 million to $5 million for the quarter. That could be a conservative and that certainly should come down. But those are really the 4 components, as you think about it. And then those just reside over the production to get into your unit cost and that's the only way we can look at it right now until we get more production experience.

Henrique M. Akaishi - Piper Jaffray Companies, Research Division

So, John, if I just do the simple -- your COGS line will be somewhere on the order of $15 million or 3x like what you reported in Q1, is that the right way to think about the range?

John H. Karnes

Well, keep in mind, Q1 only had one month. That was only March. So, yes. I mean, again, what I'm saying is, until I get something better, I think Q2 is going to look like Q1. Hopefully it will be better. I know our guys are trying to make that happen.

Operator

You have a follow-up question from Ed Westlake with Credit Suisse.

Edward Westlake - Crédit Suisse AG, Research Division

John, just a small question around the -- I think you said $3 million to $5 million of variable costs for -- when you're up at slightly high rates down in the fourth quarter. Just a rough feel of the split of those in terms of how much is feedstock wood and natural gas and then other variable costs? I might be digging a bit too much detail.

John H. Karnes

Yes. Well, the majority have obviously between 60% and 70% of it is going to be feedstock and the remainder is just going to be allocated between the next biggest driver -- you're right, it's natural gas after that. And then other than that, just a whole mix mash of items. So about 60% is feedstock.

Operator

Thank you. At this time, there are no further questions. I will turn the conference back to Fred Cannon for any additional closing remarks.

Fred Cannon

Thank you for your continued support at KiOR. And we look forward to update you again in August. Thanks.

Operator

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation.

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Source: KiOR Management Discusses Q1 2013 Results - Earnings Call Transcript
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