Ceres' CEO Discusses F3Q 2013 Results - Earnings Call Transcript

| About: Ceres, Inc. (CERE)

Ceres, Inc. (NASDAQ:CERE)

F3Q 2013 Earnings Conference Call

July 11, 2013 16:30 ET


Gary Koppenjan - Director, IR and Communications

Richard Hamilton - President & CEO

Paul Kuc - CFO


Duffy Fischer - Barclays Capital

Brett Wong – Piper Jaffray

Brian Lee – Goldman Sachs

Pavel Molchanov – Raymond James

Caleb Dorfman – Simmons & Company


Good day everyone and welcome to Ceres, Inc. Fiscal Third Quarter Earnings Conference Call. (Operator Instructions) You can access the webcast in the investor events section of Ceres.net. The replay will be available for the next 30 days at this address as well.

At this time I’d like to turn the call over to Gary Koppenjan, Director, Investor Relations. Please go ahead, sir.

Gary Koppenjan

Thanks, Dan, and good afternoon to everybody. Thank you for joining us today to discuss our third quarter results. I’m joined by Richard Hamilton, our President and CEO and by Paul Kuc, our Chief Financial Officer.

Today after market close we announced our results for the three months ended May 31, 2013. The press release we issued is available on our website at ceres.net. Details of our results can also be found in our Form 8-K filed with the SEC.

Before we get started, please be reminded that this presentation contains forward-looking statements. You should not place undue reliance on these forward-looking statements because they involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. Factors that can materially affect actual results can be found in our reports filed with the SEC.

Ceres undertakes no intention or obligation to update or revise any forward-looking statements. I will now turn the call over to Richard.

Richard Hamilton

Thanks Gary. Good afternoon, thanks for joining us. On our call today I’ll focus primarily on our sweet sorghum opportunity in Brazil. We have our yield results in hand and I’ll provide you with our analysis behind these numbers as well as share with you some customer feedback and our expectations for the coming season. Following my comments Paul will discuss our financial highlights and we will end today’s call with some Q&A.

As a remainder our primary goal this season in Brazil was to demonstrate that economically attractive yield could be achieved with our sweet sorghum products. You may recall that we proved out the industrial processing of sweet sorghum during the previous season but we’re not able to get a good look at the agronomic performance of our product in the field due to the extreme drought conditions. This year plantings comprised over 3000 hectares across 30 mills with our major growers who collectively represent about 30% or more of the sugarcane crush capacity in Brazil.

As we reported in our earnings release today we made substantial gains in yields this season. For the mills that reported results, yields of fermentable sugars were up approximately 50% per hectare over the previous season. This was the average across locations. We also recorded a peak yield of greater than 3600 liters per hectare which frankly exceeded our expectations for this current generation of products.

In addition a number of mills took a closer look at the combustion properties of sorghum biomass for electricity generation. These biomass customers indicated that our sorghum biomass performed well in their industrial boilers and they are generally pleased with the results.

From a competitive standpoint for the second year now our portfolio of products outperformed products from other seed companies. This is according to feedback from mill customers where comparable or side by side trials were available.

The yield advantage we reported early on in the season continued through the harvest. In one case our products recovered well from the severe dry spell while our competitors’ products did not and were plowed under by [the bill] [ph]. Of course we do not expect our competition to stand still but we’re pleased nonetheless with the yield advantage that we demonstrated again this season.

We believe the primary reason we had these higher yields is quite simply that we have better products, courtesy of the latest [churn] [ph] of our product development [flywheel] [ph] and the focused application of our integrated technology platforms. Our second generation hybrids have higher yield potential overall, so more wet biomass per hectare as well as better biomass quality in terms of juice volumes and the amount of fermentable sugars per ton of biomass.

Part of this gain was due to improved standability. The stalks of our new hybrids were stronger and less likely to lean or fall over. In our breeding program we observed that greater standability translates into more biomass, greater juiciness, higher accumulation of fermentable sugars and it appears to be true for commercial planting as well this season.

At the same time there was continued progress in crop management, although there is certainly room for improvement which I’ll describe in a moment. Mills that represented about 20% of yields and which generally followed our established crop management practices achieved average yields ranging from 2100 to 3300 liters per hectare.

Overall ethanol yields showed greater variability than expected ranging from 450 to 3600 liters per hectare according to calculations by our mill customers and ourselves. A third party fermentation technology laboratory is in the process of confirming the yields of fermentable sugars which are used to calculate ethanol yields. [The assay is] [ph] commonly utilize the mills are designed for testing sucrose the predominant sugar in sugarcane they can sometimes underreport the mix of sugars and (inaudible).

We’re encouraged by the best of these results which clearly demonstrate that economically compelling yields can be achieved with our products within their area of adaptation provided the crop management protocols are followed and plantings experience favorable growing condition. There was however more variability than we expected due to some inconsistent execution and what we would describe as G/E in the seed industry, that is how well the genetics of individual hybrid products respond to certain environments.

From an execution and crop management perspective the challenge was typically timing. Sweet sorghum grows more quickly than sugarcane and needs to be treated like other row crops. This season there was a greater need for earlier field preparation of planting, the timely application of inputs like fertilizer and on-time harvesting for instance. The difference in results could be significant as we saw in one case with two neighboring mills planting the same product were getting quite different yields due primarily to how closely they followed our crop management protocols. In fact in this case the difference was almost 1500 liters her hectare.

This season we also had the opportunity to see how well our genetics performed under various environmental conditions. While we saw generally good adaptation there were some notable exceptions. We did experience high yield losses due to severe disease pressure at several plantings very late in the season. In retrospect we believe we can link these outbreaks to specific environmental conditions thus we believe we can avoid areas prone to these conditions for the time being while we develop new products that are suited for those environments.

Disease resistance is a product feature that plant creators routinely incorporate into the development so we believe we can make rapid progress in this area.

Overall reaction from the mills has been positive about the progress we have made year-over-year, however, due to the variability in the results this season we believe the mills will require more time to gain greater confidence in their ability to consistently produce high yield before moving to large area production of sweet sorghum.

Several of our customers both large and small have indicated their interest in moving forward with continued evaluation of our sweet sorghum hybrids this year. At the same time they have not indicated to us at this point the number of hectares that they intend to plant next season but we believe the size of individual evaluations will continue to be in the range of what we have seen over the past two seasons.

In addition to better (inaudible) the execution we expect to make ongoing advances in our breeding program. By raising the yield potential of our products we can provide our mill customers with a larger buffer when growing conditions or executions fall short. We also want to extend the industrial utilization window of our products which can be accomplished through plant breeding.

A wider window where peak sugars are maintained in the plant will provide more flexibility in the timing for harvest and processing. Working in collaboration with the mills we also plan to explore certain types of field preparation techniques and equipment that we believe could reduce a mill's field production cost based on our experiences this season. That season we continue to - we expect to continue to optimize our product line up as seed companies do every year, adding new hybrids with higher potential and replacing the others that have not performed as well.

As we announced today we have completed registration trials from more than 10 new hybrids and following some administrative filings we expect to begin commercial evaluation of these products. We will also evaluate 100s of precommercial and experimental hybrids in Brazil this season with dozens of hybrids included in field evaluations at multiple locations. These are our third and fourth generation hybrids which have demonstrated significantly higher yields, better adaption to certain environmental conditions and other performance improvements over our existing products.

Based on results this season and the hybrids in our pipeline, we believe we are maintaining or extending our germplasm lead over competitors both large and small and are well positioned to maintain this lead. Our sorghum product pipeline was very compelling at this point and in the next one to two years we expect to see a continued differentiation.

At the same time we’re building our commercial team in Brazil. In the past three months we have added a General Manager with more than 20 years or leadership in the seed industry. His name is Andre Franco and he left a well-known, well-established international seed and trades company to join us.

We continue to build our sales, marketing and agronomy teams and add an additional plant breeder in Brazil. As we reported in June the former President of Pioneer Hi-Bred in Brazil, Daniel Glat has joined our Board of Directors and he brings a wealth of experience in the Brazilian seed industry to Ceres.

We continue to find synergies working with Syngenta to develop the sweet sorghum market and determine the best mix of our hybrids their crop protection products. As you recall Syngenta already markets a portfolio of crop protection products to our mutual customers at the sugarcane mills. They see sweet sorghum as a natural extension of their crop protection business and we’re pleased to be working with them in the ongoing evaluation and deployment of sweet sorghum.

So summing up the results from Brazil this season, we have once again demonstrated the competitive superiority of our sweet sorghum products and have demonstrated that when mills execute our agronomic protocols well and get favorable growing condition they can achieve economically attractive yields. Due to the variability we saw in results we believe the mills next season will continue to work with us to build the confidence and competency they need to reach greater scale.

To support this growth opportunity we intend to take the following steps. First, we plan to move forward with leading mills groups who are executing while continuing to provide other mill customers with an opportunity to gain firsthand experience with our products.

Secondly, we expect the agricultural teams at the mills continue to improve on their execution. There are several straightforward optimizations that can be implemented immediately that our agronomy teams are already working with our mill customers to implement them.

Third we expect to better target geographies and environments where our current generation of products are performing at their best. And finally we will continue to execute on plant breeding and product development. We have literally doubled our yields of fermentable sugar since our first industrial scale channels in Brazil in 2010 – 2011 and we expect to continue to develop and launch new and improved seed products going forward. Since our start in Brazil our breeders and agronomist have demonstrated the ability to solve the challenges we’re encountering as we move from small scale evaluations to commercial production.

Early on in 2010 we identified certain customers’ potential problem; we solved this through better crop management practices. Last year we identified standability as an option and we solved it through better genetics and breeding. This year we saw some execution issues as well as deficiencies in the adaptation of the current generation of our products for some environment and we feel confident of our ability to make adjustments here as well. The sales process is just getting started and we look forward to sharing our progress with you on future calls.

I like to now provide you with an update from our trade development pipeline and technology platforms. As a remainder we’re developing biotech traits for use in our energy crops including sorghum. For other markets we out-license our traits and genetic technologies to companies working in other crops such as rice, corn and others. These traits include drought tolerance, high sugar content, nitrogen use efficiency and increased biomass yield among others.

We believe we have a very robust trait pipeline and over the past year we have been rapidly transforming these traits into sorghum. We’re seeing excellent results in the greenhouse and in several cases have advanced product candidates to field evaluation.

While the exact timing for commercialization is dependent on regulatory approval we believe that similar to what has been demonstrated in the corn seed industry, the combination of biotechnology traits and improvements made to germplasm through plant breeding will provide us with a competitive advantage over companies that rely solely on conventional breeding.

I would like to now turn to our opportunity in biomass crops. For the biopower market in Europe we have advanced new experimental seeded varieties of the biomass crop called miscanthus and are conducting initial field evaluations with two leading power companies in the UK and Europe via our germplasm partner in the UK and an industry consortium.

This market opportunity is largely driven by policy and Europe continues to be further along than the U.S. There also continues to be positive signs of activity in the biomass to biofuels industry. Cellulosic bio-refineries have been successfully built and operated in the U.S. and Europe and the first companies are showing that their conversion technology can work at commercial scale. Last month Chemtex announced the first commercial shipment of cellulosic bio-fuels from their facility in Italy. They have indicated that their growth strategy is based in part on using energy crops as a feedstock.

The macroeconomics as well as the political environmental concerns around petroleum remain in place and we look forward to participating in the development and growth of (inaudible) the biofuels industry. We believe we have a strong competitive position in biomass crops and we continue to work with downstream participants to develop this market opportunity.

I now like to turn the call over to our CFO, Paul Kuc for an update on our financials.

Paul Kuc

Thank you, Richard. I would like to go over a few highlights of our third quarter financial results. Total revenues for the quarter ended May 31, 2013 were 1.4 million compared to 1.1 million for the same period last year. The increase was due to higher product sales of 0.4 million, the sales consisted primarily of biomass sales as well as recognition of deferred revenue related to certain sales, programs and promotional programs in Brazil. The increase was partially offset by reduced billings of 0.1 million under our various grants and collaborations.

Turning now to operating expenses, our cost of product sales was 2.1 million for the quarter ended May 31, 2013 compared to 0.6 million for the same period last year. The increase was due to
$1 million in expenses related to our sales incentive and promotional programs in Brazil. As we recall we provided crop management services as a means of demonstrating and encouraging best crop management practices. These services were covered in part by biomass sales and reimbursements and we made the decision in certain cases to provide a higher level of service at our own expense to support markets development. The change in cost of product sales was also due to expenses of $0.5 million for obsolete seed inventory relating to our sweet sorghum product.

As we reported on our last call the significant progress we have made from product generation to generation has expedited the process of phasing out under-performing products. As a routine matter we also reserved for seed loss that may fall below our quality standards.

Turning to research and development, our expenses decreased by $1.2 million to $4.1 million for the quarter ended May 31, 2013. The decrease was primarily due to reduced personnel and related expenses as well as reduced external R&D expenses.

We’re continuing to shift our focus from discovery work to our product development and commercialization of product from our pipeline and these lower expenses reflect this progression.

Our selling, general and administrative expenses were $4.5 million for the quarter ended May 31, 2013 compared to $3.3 million for the same period last year. The increase was primarily due to higher expenses related to expanded business operations and market development support in Brazil, which was partially offset by reduced professional fees in the U.S.

For the quarter ended May 31, 2013, our net loss was $9.3 million, or $0.38 per share, compared to a net loss of $8.4 million, or $0.34 per share, for the same period last year.

At the end of the fiscal third quarter our cash and cash equivalents and marketable securities totaled $37.4 million. Assuming our historical net burn rate this represents more than a year of working capital and as we move forward we intend to maintain the strength of our balance sheet. For a more detailed presentation of our financial results please refer to today’s press release or our forthcoming 10-Q. That concludes my prepared comments. I’ll now turn the call back over to Richard.

Richard Hamilton

Thanks Paul, and thanks everybody for your attention. We now like to take your questions.

Question-and-Answer Session


(Operator Instructions). Our first question comes from Duffy Fischer of Barclays. Your line is now open.

Duffy Fischer - Barclays Capital

Paul, I was hoping first question you could flesh out a little bit, you talked about $37 million in cash left kind of a $30 million cash burn rate is what you’ve had, but then the comment around we intend to keep the balance sheet as strong as it is. But if you just walk through that you will be burning through some of that cash this year so, can you flush it out what you guys were thinking about cash, how you would think about maybe raising some more cash and just how we should think about that over the next year.

Paul Kuc

So as you well pointed out with this amount of cash we have enough resources to go for more than 12 months but we do need to maintain strong balance sheet. So we have not made a decision about the timing and how the finances will be done. At this stage we don’t have to make such decision at this moment. Again we need to maintain strong balance sheet.

Duffy Fischer - Barclays Capital

Okay, and then on the product performance itself I mean if I just, simplistically we had roughly 30 mills that we’re trialing this on, 1/3rd didn’t report in so basically we’re working with the data from 20 million and then when you talk about the top 20% of yields, 20% or 20 is kind of four. I mean is that numerically how you should think about that 2100 to 3300 leaders happened in a range of 4 mills, is that the right way to think about that?

Richard Hamilton

That is approximately correct Duffy.

Duffy Fischer - Barclays Capital

Okay, and then just one last one on that, well you talk about 20% of the mills and then 1/3rd, 2/3rd between reporting and not reporting. If you did that on a hectares basis, would those numbers be roughly the same or would there be a big difference in those percentages if you change that to a hectares basis?

Richard Hamilton

I don’t have that calculation at hand so I really can’t answer it. I think that quality of results was largely independent of size of planting and it had more to do with execution on agronomy protocols, favorable weather conditions and really the thing that jumped up at us at the last minute here was the disease outbreak that we saw in several locations really right towards the end of April. But net of those things people who planted the product as we said some of them did very, very well.

Duffy Fischer - Barclays Capital

Okay, and then I had one last one, on the 1/3rd that didn’t report in obviously you have got agronomers running around looking at this stuff. Your estimation roughly the same results is the 2/3rd reported in or would that have been worse or better just based on kind of triangulating that visually.

Richard Hamilton

It's tough to make those visual estimates; I don’t think that those mills to my knowledge were any better or any worse than anybody else. Again quality of results seems to correlate most highly with adherence to the agronomy protocols.


Thank you. Our next question comes from Brett Wong of Piper Jaffray. Your line is now open.

Brett Wong - Piper Jaffray

Just going back to the cash burn, instead of maybe keeping current cash burn and looking to raise money do you – have you considered adjusting your cash burn as opposed to raising money?

Richard Hamilton

We already have and I think Paul alluded to that and also I think he alluded to the fact that we’re transitioning away from early stage research and development to more solely product development and commercialization. So I think we have a lot of opportunities to continue to reduce our burn rate relative to what it has been historically. Paul, would you like to add on to that?

Paul Kuc

Yeah. So we’re a capital light company. We can always adjust our expenses to the requirements, our working capital is flexible and our cash burn, as calculated now by you and previously Duffy pointed out is not cast in stone; we can always adjust that easily.

Brett Wong - Piper Jaffray

And looking at seed pricing have you assessed different seed pricing models to perhaps per adoption?

Richard Hamilton

I don’t think pricing is really a barrier, we don’t have very much push back on price. Seed companies typically compete on performance not on price and so really I think the thing that we need to do here is really have the mill groups gain more confidence in their own abilities to cultivate the crop.

Brett Wong - Piper Jaffray

Okay, how do you expect to do that here in this next season?

Richard Hamilton

I think I alluded to that as I talked through those bullets Where I said first we’re going to move forward with leading mill groups who are executing well. So people who have come up the learning curve and who are executing well, we’re going to focus in on those guys while providing other mill customers with an opportunity to gain firsthand experience with our products.

Second we’re already working with the agricultural and agronomy teams at several mills and sharing with them how they can improve on their execution and as I mentioned there are several straightforward optimizations that can be implemented immediately and so we’re already doing that.

Third we can better target certain geographies and environments where we know that this current generation of hybrids is able or performing well. So those are the kinds of things that we’re doing right now.


Thank you. Our next question comes from Brian Lee of Goldman Sachs. Your line is now open.

Brian Lee - Goldman Sachs

I know you said in the past that you would expect to be able to raise pricing somewhat as yields improve and given the positive results you saw this season. Any updated thoughts of the pricing strategy for the upcoming season?

Richard Hamilton

I think our pricing will remain stable. As I think I just articulated I think mill customers are making their buying decision based on product performance not necessarily on price and again as we’ve talked many times when we look at the seed pricing as a function of their total cultivation cost I don’t think it's really a driving decision for them at this point. If I had to point out one thing it's increasing the mills confidence and variability to grow the crop well and therefore expand it on to large scale hectares.

Brian Lee - Goldman Sachs

Okay, fair enough. For Paul, can you again going back to your comment around maintaining the strength of the balance sheet and some follow-ups around the cash burn is there any help you can provide us in terms of quantifying what you think with respect to maintaining the strength of your balance sheet; is there an average cash level that you would like to target or anything that you can provide in terms of what that right level is would be helpful.

Paul Kuc

Well, as you know we’re a public company so health of balance sheet means exactly that. So we need to maintain that going forward and there are two sides of this equation, one side is raising more - actually three, on one side you would have raising capital or revenue and on the other one is expenses which we can adjust depending on the need. So that’s the amount of color I can provide at this time.

Brian Lee - Goldman Sachs

Okay, last one for me just on that since you bring it up on the cost side, is there a way you can help us think about what portion of your cost are fixed versus variable? I know you made the comment earlier that you can kind of flex up and down the cash burn to some degree, any sense you can provide in terms of what that fixed versus variable component is?

Paul Kuc

If you look at our cost structure, if you look at it from the traditional point of view I tend to be variable, our cost that can be treated as fixed related to existing infrastructure, offices and so on and even that can be streamlined if needs be, so I don’t think that trying to split them in a very traditional way between what is cost of products and production versus remaining cost would be appropriate for this kind of decision. I think we’re very flexible in our cost overall in our spectrum.


Thank you. Our next question comes from Pavel Molchanov of Raymond James. Your line is now open.

Pavel Molchanov - Raymond James

You mentioned that the mills are not currently deciding yet what the amount of plantings would be for next year but obviously your outlook seems pretty subdued so if our base case is 3000 hectares this year are we looking at a double or a 3X, what kind of scale up can we expect?

Richard Hamilton

At this point Pavel we’re not going to make those estimates, we’re just now out there talking to customers about how large the hectare planting they want to do. So we will give you those numbers in November when we have them in hand and I just don’t want to get out ahead of ourselves and out of our knowledge and speculate.

Pavel Molchanov - Raymond James

Okay, I mean do you think plantings will be up at all?

Richard Hamilton

At this point I don’t want to speculate.

Pavel Molchanov - Raymond James

Okay. Let me also ask about what you mentioned in relation to Europe, policy certainly drove that market you mentioned that, is there any let’s say realistic prospect of revenue from Europe in fiscal ’14?

Richard Hamilton

I don’t think it's going to be a meaningful amount of revenue in fiscal ’14, I think what you have is a situation where there is clearly not enough wood or enough woody biomass to meet demand at current prices and so there is a clear need for energy crops. What you don’t have is an energy crop value chain in place where people can simply place contracts for delivered biomass the way they can with wood pellets and so I think what you’re going to see is continued progress in building and improving out those value chain.


Thank you. (Operator Instructions) Our next question comes from Caleb Dorfman of Simmons & Company. Your line is now open.

Caleb Dorfman - Simmons & Company

I guess first off delving into the yields a little bit more. I know last year you talked about profitability at the mill level being somewhere in the 1500 to 2000 leader ranged around the [Cogen] [ph] assets. Is that sort of where it came out this year and what percentage of the mills actually were profitable this season?

Richard Hamilton

So the mills don’t share with us their internal economics, so those are all our estimates based on the financial modeling and discussions that we have had with mills. I think those numbers are still approximately correct but you have to - I would have to delve back into the prices of diesel, and land rentals et cetera in Brazil. Things may have picked up a little bit. I think when you look at people who have had positive experience I think you’re looking at those top 20% mills who had 2100 to 3600 liters per hectare who followed the planting protocols and had good weather. Those are the guys we’re going to have, had economically compelling results.

Caleb Dorfman - Simmons & Company

So obviously I think what you got into how the top 20% is a pretty small [throughput] [ph] mills, when we actually look at the median mill how did their yields come in?

Richard Hamilton

I don’t have a median number in front of me. I think what we’re seeing and hearing is there was variability obviously between mills. There is even variability within a particular mill group from sort of from field to field and from product to product. So I think what we’re hearing is how do I want to articulate it - is a lot of interest from the mills at how variable the results can be and how they need to improve their own practices and their own cultivation practices to get higher yields. We’re also seeing maybe a little bit of competition between mill groups that when they hear that their neighbors down the road got nearly 1500 liters per hectare more than they did with the same products that that can inspire them to follow best practices a little bit better.

Caleb Dorfman - Simmons & Company

I guess one last question on the yield side, obviously a big driver was the issues with agronomical practices in certain mills. How did the mills which had serious assistance actually do? Could you draw a bright line and say that if they had agronomical assistance they would have been a profitable mill?

Richard Hamilton

Yes, we can. Net of the disease issues that we ran into, the people who followed our protocols I think did very well.


Thank you. And at this time I’m not showing any further questions. I would like to turn the call back to management for any closing comments.

Richard Hamilton

All right. Thanks operator, thanks everybody for your time and questions today. We look forward to our next scheduled call in November when we will have the results of our full fiscal year, at that time we also expect to have the total number of hectares under consideration for the 2013-14 growing season in Brazil with the final sales numbers expected by our January call. That concludes my remarks, have a good afternoon and evening. Thanks.


Ladies and gentlemen thank you for participating in today’s conference. This does conclude today’s program and you may all disconnect. Everyone have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!