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Solazyme (NASDAQ:SZYM)

Q2 2013 Earnings Call

August 07, 2013 4:30 pm ET

Executives

Mike Smargiassi

Jonathan S. Wolfson - Co-Founder, Chief Executive Officer and Director

Tyler W. Painter - Chief Financial Officer and Principal Accounting Officer

Analysts

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Charles A. Dan - Morgan Stanley, Research Division

Brian K. Lee - Goldman Sachs Group Inc., Research Division

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

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

Patrick Jobin - Crédit Suisse AG, Research Division

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

Weston Twigg - Pacific Crest Securities, Inc., Research Division

Laurence Alexander - Jefferies LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Solazyme Inc. Fiscal Second Quarter 2013 Earnings Conference Call. [Operator Instructions] And as a reminder, this call is being recorded. I would now like to turn the conference over to Mike Smargiassi. Please go ahead.

Mike Smargiassi

Thank you, Pablo. Good afternoon, and thank you for joining us in today's conference call to discuss Solazyme's second quarter 2013 results. Leading today's call are Jonathan Wolfson, Solazyme's Chief Executive Officer; and Tyler Painter, Chief Financial Officer.

This call is being broadcast live over the web, and we have prepared a PowerPoint presentation to accompany this call. The release and presentation can be accessed at the Investor Relations portion of our website at solazyme.com.

I would like to direct you to Slide 2. It says, among other things, that some of the comments constitute forward-looking statements that reflect management's current views and estimates of future events and economic circumstances, industry conditions, company performance and financial results. Statements are based on many assumptions and factors, including availability and pricing of raw materials and equipment, market conditions, bringing facilities online and manufacturing products, product development, operating efficiencies, access to capital and actions of government, partners and customers. Any change in such assumptions or factors can produce significantly different results. To the extent permitted under applicable law, the company assumes no obligation to update any forward-looking statements as a result of new information or future events. Solazyme has provided additional information in its reports on file with the SEC concerning factors that could cause actual results to differ materially from those contained in this presentation and encourages you to review these factors.

Also, please note that certain financial measures we use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in today's release.

With that, I will now turn the call over to Jonathan.

Jonathan S. Wolfson

Thanks, everybody, for joining us today. I'm happy to report that we continue to perform according to plan across our 3 focus areas: product development; getting production up and running; and commercialization of our products. We have a lot to update you on, so I'll get right to it. Next slide.

Our second quarter performance was strong and on track. With respect to production, we're making great progress on our major capacity projects set to come online in Brazil and the U.S. in coming quarters. In July, our management team and I spent time at Moema with our Solazyme Bunge Renewable Oils team and executives from Bunge. We're on schedule with the 100,000-metric-ton production facility, and I'm very pleased with how it's coming along.

We're also making great progress at Clinton with our partner, ADM. And I can report that we're now planning to start commissioning ahead of schedule. The ADM facility is fully permitted for the initial targeted volume up to 20,000 metric tons, and we're moving forward with our start-up production activity. I'll provide more details in a few moments.

We're also announcing today our work on a new family of tailored oils. This includes the second tailored oil in our joint development work with Mitsui, a high erucic oil. And we're particularly excited to introduce a new partner, Sasol, with whom we reached agreement on commercial supply terms for this oil. Sasol is a global integrated energy and chemical company, and they see strong application potential for our tailored oils. They're particularly interested in an oil high in erucic acid because of its value in surfactants, lubricants, paper, water treatment and the oil and gas industry. In addition to the agreement on commercial supply terms, Sasol and Solazyme have also signed a letter of intent to develop oils beyond the initial erucic family. Like many of our other partnerships, we expect that this will be the initial foundation for a much larger and growing relationship with Sasol in the future.

As we announced back in June, Solazyme and Roquette agreed to dissolve our algal food ingredients joint venture. Although we never like to see partnerships end without reaching their full potential, we continue to think that development opens up exciting opportunities for Solazyme that will enhance both shareholder returns and our virgin leadership position in the algae-based food ingredients business. On the heels of the dissolution, we've mobilized extremely quickly to commercialize the products and technology that have returned to us, and we now expect to produce our high-lipid and high-protein ingredients, whole algal flour and whole algal protein at scale in Peoria this year.

And I'm happy to add that yesterday, we announced jointly with Twinlab, one of the world's leading manufacturers and marketers of high-quality, science-based nutritional supplements, that our whole algal protein has been incorporated into their award-winning CleanSeries Veggie Protein Powder.

Our skin and personal care business also continues to progress well. We successfully launched our new Algenist microalgae oil product with QVC in the second quarter, and we'll be expanding the launch into Sephora stores this month.

On the technology side, we continue to leverage our disruptive biotechnology platform to develop new tailored oil profiles and evaluate potential new applications for our products. Today, I'm going to talk about a couple of developments, including more detail on the new high erucic acid oil.

And last, but certainly not least, we remain vigilant in our financial discipline and the management of our cash investments. With $217 million in cash, our strong balance sheet, combined with external financing commitments, position us well as we continue to march forward on our commercialization plans. I'll now go into a little more depth on the progress in our 3 main execution areas. Next slide.

In July, we held a series of meetings in Brazil with colleagues from Bunge, our Solazyme Bunge Renewable Oils JV, the Brazilian Development Bank and key potential customers. I'm happy to report that the Moema facility is moving towards completion. The project is nearly 80% complete and on track with our engineering timelines, construction plans and budget. We will have additional Solazyme engineers on the ground at Moema throughout the remainder of the year. The engineering team will support commissioning and start-up efforts as we transition from construction to the production phase.

In addition, a significant number of the engineers and operations staff that will be permanently running the facility in Moema continued to spend time training at our Peoria facility. We expect the team on the ground in Brazil will be well-prepared to begin initial commercial scale operations of the facility in the fourth quarter, consistent with our plan. I'll now move on to some more detail around Clinton. Next slide.

As I mentioned a moment ago, we're accelerating commissioning at the 20,000-metric-ton Clinton, Iowa facility. We now target commissioning the facility within the next few months, and we're expanding the initial production scope to meet sampling and market development needs for 2013. This early start helps to de-risk our operations and prepares us for a strong commercial start in early 2014.

There are several reasons we've been able to accelerate our commissioning at Clinton. First, our partnership with ADM has gone well, both on the manufacturing and market development sides. In particular, ADM's Clinton manufacturing team is very strong and is doing a great job in supporting the commercialization of Solazyme's technology. Second, the permitting process has gone quicker than expected. Third, we've decided to leverage an existing partnership to augment our downstream processing capabilities.

American Natural Processors or ANP has been a partner of Solazyme since 2009, and much of the oil produced for our work with the U.S. Navy was extracted at ANP facilities. ANP operates a downstream oil extraction and finishing facility in Galva, Iowa. For the first 20,000-metric-ton phase of production, biomass made at Clinton will be extracted to oil and finished at Galva where our commercial production lines are scheduled to commission at the same time as Clinton. This results in significantly lower capital costs and reduced risk as ANP has already clearly demonstrated its ability to run our downstream processes at scale.

Altogether, this puts us ahead of our plans announced last November. While we're not planning to report material revenue out of Clinton in 2013, the ability to accelerate the commissioning and start-up of Clinton is great news for Solazyme that de-risks commercial start-up and sales plan for early 2014. I'll now turn to another source of excitement here at Solazyme, our algal food ingredients. Next slide.

Since the announcement of the JV dissolution in late June, we've regained control of our technology and processes for production of our whole algal flour and whole algal protein products. We've moved rapidly to prepare for the production and commercialization of these products, which, as you know, address valuable applications in the nutritional market and carry very attractive average selling prices. Throughout our 10-year history, we've consistently demonstrated an ability to not only react but to take advantage of changing environments. I'm proud of what our team has again demonstrated in recent months, particularly in the algal food ingredient business.

Since our last call in June, we've progressed on 3 important fronts: first, dissolving the JV, which is the step that results in our technology and process retroverting back to Solazyme; second, bringing the vast majority of the former JV employees into Solazyme. Every single offer we extended was accepted. Our combined tailored food oils and food ingredients team is now well-positioned to address the market opportunities comprehensively and effectively. Although still early, Solazyme customer engagement on these ingredients has been quite positive; and third, establishing the capability to produce the algal food ingredient ourselves this year. We now believe that we're well-positioned to quickly transfer production to our Peoria facility.

We have begun adding the necessary downstream equipment at Peoria. We expect to begin producing whole algal flour and whole algal protein this year at Peoria in large-scale equipment. We will initially produce commercial development size quantities and then look to ramp production into 2014.

Peoria is a very good solution for addressing immediate production requirements. And by early 2014, we should be able to service the same customer demands as was contemplated by the SRN JV Phase 2 facility.

Beyond this, we're also focusing on medium- and long-term commercial production capacity requirements for the food ingredients market. As we mentioned in June, with Clinton and Peoria production imminent, we're now in a much better position to accelerate the larger commercial scale production for this business, and we're confident we'll able to realize significant revenues and profits from our algal food ingredients business faster than would have been possible within the JV. I want to turn now to new developments with our tailored oils platform. Next slide.

As you know, from previous calls, we've been working with our partner, Mitsui, on developing a suite of tailored oils. We mentioned work on myristic acid on our last earnings call. This development work has progressed ahead of schedule, which has allowed us to move forward with Mitsui on the next project in our agreement, a high erucic acid tailored oil profile. I'd like to tell you more about this new oil today.

In the past, we've discussed our ability to engineer specific chain lengths, control saturation, meaning the number of double bonds in the oil, and develop structured oils by well-defined placement of specific fatty acids on the glycerol backbone. Next slide.

Today, we're pleased to tell you that we can now engineer a new class of oils, oils containing very long chain fatty acids, which contain greater than 18 carbon molecules. To date, we've demonstrated that we can produce multiple very long chain fatty acids. One of the oils we're developing targets high levels of erucic acid. Erucic acid is a C22:1 fatty acid, meaning 22 carbon molecules and 1 double bond that is traditionally sourced from specialized high erucic rapeseed. Derivatives of erucic acid are used broadly and include applications such as emulsifiers and cosmetics and additives to plastics derived from ethylene, which, by the way, we anticipate will grow significantly with the abundance of shale gas in the U.S.

Since erucic acid is not tolerable in any real volumes in food oils, high erucic rapeseed oil, known by the acronym HERO, requires segregation and identity preservation, which adds significantly to supply chain costs and to its ultimate average selling price. In fact, due to these specialized farming dynamics, HERO consistently maintains an attractive average selling price. Pricing for erucic acid is consistently over $2,500 a metric ton and often approaches $4,000 per metric ton depending on market factors and shipment quantities. The highest concentration of erucic acid available in substantial commercial volumes that we're aware of is a bit over 50%.

As we've already demonstrated with other tailored oils, most notably our myristic and oleic oils, we believe Solazyme can use its technology platform to develop a product with significantly higher levels of erucic acid, and that's what we're developing today. Next slide.

When we embark on research and development projects, such as the erucic acid profile with Mitsui, our end goal is, of course, to offer unique value proposition to attract customers that want to purchase the tailored oils. Today, in addition to the new high erucic acid development with Mitsui, we announced that we've agreed to commercial supply terms for the same oil with Sasol, a global surfactants leader. The commercial supply terms with Sasol target the supply of oil high in erucic acid to serve a number of markets. The terms cover multiple years, with defined minimums and increasing supply quantities of oil rich in erucic acid. And very importantly, the pricing mechanism is tied to our raw material costs, which provides excellent risk management.

In addition, we signed a letter of intent with Sasol to form a much larger relationship that couples Solazyme's tailored oil platform with Sasol's highly diverse line of products for sales into the alcohols and surfactants markets. We look forward to keeping you posted on our progress in this area. Next slide.

Before wrapping up, I'd also like to update everyone on the continued progress with our Algenist product lines. During the quarter, we successfully launched our new Algenist microalgal oil on QVC. Oils in the beauty space are rapidly growing, and this new launch is, to our knowledge, the first-ever cosmetic product to be based on microalgae oil. Our oil provides unique in vitro demonstrated benefits to skin and is positioned and timed well to meet this consumer market opportunity.

During the quarter, we also introduced our retinol Firming & Lifting serum on QVC and sold over 15,000 units during the 2-week initial launch. We're now planning to roll out these products in Sephora stores in the third quarter.

Looking forward, both Solazyme and our partners anticipate the continued strong growth of Algenist. Next slide.

In summary, Solazyme is making substantial progress on each of its focused execution areas. We're on schedule and on budget in bringing the Moema facility online, and we're accelerating commissioning and initial production at ADM's Clinton facility ahead of schedule. We're moving rapidly to commercialize our algal food ingredients, which came back to us from the SRN JV. We have a sales force on the ground that is engaged with customers, and that team is already selling these products to customers like Twinlab as demonstrated in our joint announcement yesterday. Further, we expect to have large-scale production capability ready at Peoria within a matter of months. The steps we've taken recently in this area open very exciting opportunities for Solazyme that we think will improve shareholder returns.

We also continued to demonstrate new high-potential capabilities for our disruptive biotechnology platform as evidenced by the work on very long chain oils and, specifically, the high erucic oil that I discussed today. And we're progressing on the commercialization end as we work with partners like Mitsui to develop the high erucic oil and with customers to develop initial supply agreements, in tandem with bringing our production facilities online. Our new partnership with Sasol is just 1 example of the types of agreements we're working on. We look forward to keeping you posted on our continued progress in the coming months.

Now here's Tyler to go through the quarterly results and our outlook.

Tyler W. Painter

Thanks, Jonathan, and thanks, everyone, for joining the call today. As Jonathan pointed out, we continue to make great strides with steady execution against production, commercial and technology targets. I'll review our financial results for the second quarter and give a brief update on the year. As a reminder, I will discuss non-GAAP numbers that exclude noncash charges for stock-based compensation, unrealized gains or losses related to warrants, mark-to-market expenses associated with the embedded derivative feature in our convertible notes and onetime charges associated with the dissolution of the SRN JV.

During the quarter, we booked onetime GAAP charges of $1.3 million associated with the dissolution of the SRN JV. Most of these expenses were noncash. Although the process of winding up the dissolved entity is not fully complete, at this point, we do not expect further material charges associated with the dissolution. A full reconciliation of the non-GAAP to GAAP results can be found in our earnings release issued earlier today.

As shown on this slide, total revenues in Q2 were $11.2 million. Taking a closer look at revenue, the chart shows a comparison of second quarter 2013 in orange versus second quarter 2012 in blue for each source of revenue: government revenue, revenue from development with commercial partners and Algenist sales.

We are pleased with the continued progress of Algenist. Q2 product revenues for Algenist were $4.9 million, up 21% versus Q2 last year. We expect to continue accelerating the momentum of our Algenist brand with the planned product extensions, new distribution channels and new geographies. This, combined with other initiatives we have in development, puts us on track to deliver strong year-over-year growth for this business.

On the partner side, which is largely comprised of funded programs revenue from commercial partners, revenue was $6.2 million, up 33% versus Q2 last year, reflecting our continued ability to deliver against development commitments on or ahead of schedule. As we guided previously, government-related program revenue declined $4.7 million or 99% versus Q2 last year. We continue to see the Department of Defense and the Department of Energy as valuable long-term strategic opportunities, but we do not expect any new government program revenue in 2013. Our revenue guidance remains unchanged for the year, and although we don't provide quarterly guidance, I will note we expect the second half of the year to be heavily weighted toward the fourth quarter.

Turning to the full P&L. Operating expenses were $26.6 million in Q2 compared to $29.6 million in the second quarter of last year. Breaking these expenses down further, Q2 R&D expenses were $13.4 million versus $17.4 million last year. The decrease versus last year reflected reduced government program-related expenses that were not replicated this year, which were partially offset by increased costs related to our scaleup of our industrial fermentation process at the ADM Clinton facility. SG&A expenses were $11.7 million in Q2 versus $10.9 million last year. We are closely managing all of our expenses as we commercialize our business. As we've discussed previously, we have made the decision to absorb expenses in the back half of the year associated with the Solazyme food ingredients business and the acceleration of activities at Clinton. Despite these additional investments, we expect our full year operating expenses to come in within the range we guided entering the year. Next slide.

As we've done throughout our history, we continue to prudently manage every dollar. CapEx was $1.3 million in the quarter. We also contributed $1.8 million to the Solazyme Bunge Renewable Oils joint venture in the quarter. At this point, we expect our capital expenditures for the year to come in slightly below the range we provided entering the year. Our Moema project is nearing completion and is on budget. Capital expenditures of this facility are not currently reflected in our financials as we are not consolidating the results of SB oils during the construction phase of the project. When considering our financial position, it is important to remind you that in Q1, our Solazyme Bunge Renewable Oils JV was awarded approximately $120 million in project financing at an average interest rate of approximately 4%. This project financing from BNDES, the Brazilian Development Bank, reduces the financial commitment required from Solazyme and further underscores our capital-efficient strategy. We ended the quarter with over $217 million in cash and cash equivalents, and we believe we are in an excellent position to commercialize our business and pursue additional growth opportunities. Next slide.

In conclusion, we remain keenly focused on executing against our production, commercial and technology targets to broadly commercialize our oils. We continue to develop new tailored oils for attractive new market applications. Our capacity expansion projects are on budget and on time, and our commercial teams continue to gain momentum as capacity is coming online, making this an exciting time at Solazyme.

We appreciate your interest, and we'd now like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Sanjay Shrestha of Lazard Capital Markets.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

A few questions I had. I've asked you this once before, too, but as we sort of think about progress you guys are making with your capacity's ramp but even sort of accelerating the Clinton facility, right, how much would you say of that capacity you have sort of already committed given all the relationships you guys have on a global basis? And how do you sort of think about that?

Jonathan S. Wolfson

So I think that the way we think about that is that we have a variety of partners that we've signed supply agreements with that have terms around pricing and specs. And what we're doing right now is we're continuing that process with announcements like the one we made today with Sasol. And I think the process from my perspective is about determining what is going to be -- we're developing the exact ramp of that plant, which, as we turn it on, is going to tell us what the ramp rate is. I think you understand that. We want to tell it, but there's going to be some elements of that plant telling us. And we're working with potential customers for that plant to make sure that we can match their needs with our ability to actually produce product. I'm not in a position to give you a lot more color about agreements other than, I think, what we've said up to this point. What I will remind you is that we make triglycerides, which are used in many, many markets around the world today. It is my strong view that we'll ultimately be capacity-constrained and not demand-constrained. And look, it's clear that there's a strong desire to gain visibility into the timing and pricing of agreements. But one thing that we've learned, and this has been a learning process for us, and I've mentioned this before, but it's certainly been a real learning for us, is that as you get to know the purchasing functions of a lot of the companies that we're working with better, you realize how much sophistication there is in these supply chains and how much sensitivity there is around publicizing any commitments before there's a clear steady supply of oils. And so that's -- I mean, we're trying to balance those 2 things now with making sure that we can continue to provide some clarity. And we'll do that as quickly as we can with the needs of the -- quite a few companies that we're working with now, both as partners, potential customers, folks who are sampling and the rest, to lay out capacity coming out of these plants.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

That's fair. So 2 quick follow-ups then on that, Jonathan, right? So in terms of further capacity expansion, given some of these things are all one [ph] on target and if anything -- sort of like in case of this ADM facility or the Clinton facility, you're doing it, commissioning even earlier than expected, right, so at what point, given all the things you have on a global basis from a portfolio sort of supply and sort of capacity, when you balance that, too, at what point do you say, "You know what, other than the existing expansion plan, maybe we need to sort of start thinking about another one like the one in Brazil, and it's time to go from 100 to 250k?" At what point do you make that decision?

Jonathan S. Wolfson

I guess, the point I would make is they're -- we have an upstream team here who's dedicated to doing that work full-time and has been for years. And I would say that there's a host of projects that are in different development stages. There's nothing that we're ready to announce or nothing that we've put all the pieces together, including financing around. But you should assume that it's not a point where all of a sudden, we say, "Oh wow, we need more capacity. Let's turn on the ability to close another arrangement." I think you know that we laid out -- even in both the Bunge and ADM arrangements, we laid out a path to significantly larger capacity with ADM, a path to 100,000 from the initial 20. And with Bunge joint venture framework expansion agreement that lays out up to 300,000. So these are things that we're thinking about, and we obviously have relationships with a number of other potential upstream partners.

Operator

Our next question in queue is from Charles Dan of Morgan Stanley.

Charles A. Dan - Morgan Stanley, Research Division

I guess, a follow-up question actually on the sort of capacity ramp. Can you talk a little bit about the exact same products that you have the ability to sort of drop into existing demand channels? And where are we in thinking about -- as you ramp up capacity, are you guys in a position to produce full out? And if your production capabilities exceed the current supply arrangements that you've executed, do you anticipate being able to sort of run at maximum capacity and fill the excess into those sort of exact same channels?

Jonathan S. Wolfson

Charles, that's certainly the strategy here, which has been to basically -- it's basically to create what you call kind of a baseload on plants. And the baseload isn't necessarily going to be the highest value applications at some of the larger volumes. But, I guess, the first thing I would say is our ultimate belief is that production won't exceed what market demand is for the products. But as a practical matter, I think that we have lots of -- you can imagine either -- whether they're lauric oils or whether they're oleic oils, I mean, we've laid out pretty clearly some areas where we've done development where we have oils that are going to be commercial oils in 2014 that can basically slipstream right into certain product markets. Now, as you know, obviously, what we're interested in doing is we're interested in a product mix that enhances margin potential. So, I mean, these are the kinds of things that we're managing right now, how much the kind of higher volume oils that can basically drop right into certain applications, should we be looking to commit versus higher value oils where we're generating higher margins. And that's a process that we're in the middle of right now.

Charles A. Dan - Morgan Stanley, Research Division

And just a follow-up on the newly announced Sasol agreement. Do you anticipate that being supplied from the Bunge JV or from ADM or both? And when we think about the sort of pricing strategy there, is it possible to structure those types of agreements where you have the ability to supply from either a joint venture or one of the wholly-owned facilities?

Jonathan S. Wolfson

It is possible. I think you understand that with respect to a joint venture, there are certain rights that are inside the joint venture that doesn't mean that there can't be opportunities where oils that are outside those JV rights can't be produced in those facilities. I mean, ultimately, if we own the rights and we are a 50% owner of the JV, you can understand that there's lots of opportunities to produce things that might not be already in the rights to the joint venture. But one thing I'll say, particularly since you're asking about pricing with respect to that partnership with Sasol, is that pricing is actually linked to feedstock. That's -- so there's different ways that we can go here. And on that one, the thought process was this is an area where even though we believe there's a ton of upside, we also want to mitigate downside risk. And there's also potential for other oils going to Sasol. So we want to make sure that we look at framework for sales there. I don't know if that was completely responsive to the question.

Charles A. Dan - Morgan Stanley, Research Division

Well, I mean, my understanding was that within the Bunge JV, the feedstock cost itself is part of the sort of -- part of the JV agreement. So that could be potentially -- or, I guess, the question is, could that be complicated by pricing off of a raw material cost that is in itself is subject to another contract?

Jonathan S. Wolfson

No, I don't think so at all. Actually, I think -- remember, although you're right that there's -- as part of the JV, it includes an arrangement in pricing. Ultimately, there is a transfer pricing mechanism between the joint venture and Bunge, and the joint venture has an actual cost. And we can easily link feedstock pricing to the actual cost to the JV. Now you're right if you think that, that cost was a negotiated point between the 2 companies. And so what does that mean if we choose to provide it out of Moema versus Clinton? Look, I mean, these are kind of -- these are going to be ultimate margin questions for us that we're going to have to work our way through.

Tyler W. Painter

And Charles, this is Tyler. I'll just add to that. In terms of the agreement you're referring to, there is a formulaic way in which the pricing of that feedstock is determined. So you can apply that formula as it relates to the end contract that goes to a customer as well.

Operator

Our next question in queue is from Brian Lee of Goldman Sachs.

Brian K. Lee - Goldman Sachs Group Inc., Research Division

I got 2. I guess, first on Sasol, can you give us some sense of what the milestones are from here to have the LOI agreement turn into commercial manufacturing and what the time frame might be? Also, what other tailored oils we'd be targeting longer term?

Jonathan S. Wolfson

I think with respect to the LOI going to -- turning into a manufacturing agreement, I don't know that I would define it as milestones. I would say it's a process between the companies. I would also say though that you can assume that these kinds of relationships take time to build into something like a manufacturing partnership. And I would say that you can imagine if you're sitting on the other side of the table, you're going to be watching our progress on a high erucic oil as part of the supply terms agreement. So I don't know that there's any formal milestones that I would point to there, Brian. But I would say that our performance, as we get closer to an erucic oil that would be commercially available, is going to be one thing that our partners are going to be watching. And then it's just -- as you know, I think, from many of our relationships, they start sometimes with 1 or 2 areas of focus, and then as the companies get to know each other, they can grow and expand a lot. I think that was the answer to your first question. Maybe you could enlighten me on the second one again?

Brian K. Lee - Goldman Sachs Group Inc., Research Division

Yes. I was wondering what other tailored oils might be targeted over the longer term.

Jonathan S. Wolfson

Well, I don't think there's anything that we're going to disclose on that right now. Sorry about that.

Brian K. Lee - Goldman Sachs Group Inc., Research Division

Okay. Fair enough. Second question and then I'll hop off.

Jonathan S. Wolfson

It sounds like 3 to me, buddy.

Brian K. Lee - Goldman Sachs Group Inc., Research Division

Yes, actually, you count this as #3. On the acceleration at ADM, wondering just what the implications might be, number one, for expanding the 20k capacity to something larger, maybe even in the 2014 time frame. And then number two, given -- it sounds like production volume will be coming in a little bit sooner than even the Bunge facility. Any implications that, that might have for your ability to do more, I guess, pricing discovery, if you will, on the tailored oils coming out of ADM and what that might mean for Bunge?

Jonathan S. Wolfson

So, I guess, the first thing I would say is that if I presented a clear note that, that means that we're going to be producing much more oil much more quickly in Clinton, then I might as well take this opportunity to make sure that I clarify that, that is not our expectation. Moving up the commissioning timeline, what it does with respect to Clinton, from our perspective, is it does 2 things. One, it de-risks that kind of -- what we call that commercial start-up in early, which is still scheduled for early 2014. And two, what it does is it gives us some volumes that we're able to work with around market development. It gives us some larger volumes that we had initially anticipated. Those larger volumes are the answer to your fourth or fifth question, Brian, which are, does that provide opportunity for pricing discovery? And I think it does. So that's something that we do think is a potential benefit of bringing the commissioning timeline in earlier. But I wouldn't draw the conclusion that, that means that we're going to be ramping that facility a lot faster. What I would tell you is, from our perspective, it just de-risks it and it makes us feel a lot more comfortable about doing it. Mike?

Operator

Our next question in queue is from Mike Ritzenthaler of Piper Jaffray.

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

Two questions from me on the volume-ramping guidance. So if we assume something like $17 million from Algenist, which things have kind of stalled out at $4 million or $5 million a quarter, depending on what we assume for the funded R&D revenues, Moema would need to produce something like $25 million or $27 million worth of revenues in Q4. So if we make a few assumptions on ASPs, things like that, it would imply something like 9,000 metric tons of sales from Moema, assuming nothing from Clinton. Is that -- how reasonable do you think with that kind of asset utilization, assuming that production is going to be higher than sales? That 9,000 number seems way too high to me. And, I guess, the second question on Roquette. It seems like they'll have flour and other elbow products available for commercial sale at roughly the same time that Solazyme will have something like 5x the capacity. I was wondering, what part of the JV breakup is really benefiting Solazyme, either from a commercial standpoint, having those supply chain relationships, or from a timing standpoint?

Jonathan S. Wolfson

Yes, okay. So first of all, Mike, let me respond to the first question. I have a somewhat different perspective on what you laid out. This quarter, we did about -- we did close to $5 million in revenue in Algenist, and that is more than 20% higher than we've done any other quarter. And I would say that -- I wouldn't define that as stalling out. So I guess that's the first thing I would say. And I would say that we feel pretty comfortable that we're going to have significant growth in Algenist for the year. And you use the $17 million number for, I'm assuming, for revenues, and I wouldn't think that, that was a good assumption either based on guidance that we'd given earlier in the year. And, I guess, probably, most importantly, that all of that leads to an assumption you're making about volumes from Moema. And I think you need to understand that there are a number of different places that revenue can come from, and I wouldn't make the assumption. And we haven't provided any guidance on volumes out of Moema. I certainly wouldn't make the assumption that we're projecting making 9,000 tons out of Moema at any particular ASP. I would think that, that would be dramatically high from what we would actually, in fact, be able to produce in Moema. And that's -- when I say dramatically high, I think dramatically high. So I would say that we're comfortable that we're on track to do the things that we need to do, but I wouldn't make the conclusions about Moema that you laid out. I think the second one, with respect to your questions about Roquette, what I would say there is I'll kind of get into something that we said when we talked about the dissolution, which is that if you -- and it's available publicly. If you guys want refer to the joint venture agreement, which was filed along with one of the amendments to our S-1 when we went public, it's pretty clear that the technology that was put into the JV by Solazyme, plus improvements to that technology come back to Solazyme. And I'm not going to comment on what products or plans Roquette has. That would be a pretty inappropriate thing for me to do. But what I do think is that the products that were part of the JV are based on that technology, both the original technology, what that went in, and to the improvements that were made on top of that original technology. And therefore, we will be the ones who have rights to produce those products. I'm comfortable telling you that, that's what we believe. And as far as what are the advantages that come to Solazyme, again, look, I don't want to pretend that a partnership that doesn't end up where you hope it could end up is a good thing. But I think we've been pretty clear that we believe that it presents really good opportunities for us, for our shareholders and for our customers on quite a few levels. One is that we will be able to, in our opinion, move to the much larger volumes where the real returns begin substantially more rapidly than we would have were we still inside the JV. Two, the benefits will not be split 50-50 as they would in a JV. And three, these products are actually very complementary to a lot of our oils and tailored oils products, and we've actually ended up hiring just about everybody on the SRN team. Everybody we made an offer to accept it. And that team here is now passed with a broad sales responsibility that includes our oils. And I think it gives us more reasons to go in and talk to customers sooner and more comprehensively. So I view that as a big advantage. So I think that, that would be an answer to that question.

Operator

Our next question in queue is from Rob Stone of Cowen and Company.

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

First question, Jonathan, you mentioned that you had had some meetings with your partners at Moema and some customers as well. Do you have a sense of how many roughly active customers you expect to have serviced out at Moema next year?

Jonathan S. Wolfson

I really don't have the answer to that, Rob. I can tell you that I know -- what I can tell you -- I can't give you the numbers that are specific Brazil numbers, but I can tell you that we've shipped, in the last 12 months, hundreds of samples out to dozens of different potential customers. And I think the answer to how many it's going to be is going to depend a little bit on volumes to some of the folks that may be taking higher volumes at higher ASPs. And some of those arrangements are work in progress right now.

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

Okay. My second question is kind of a strategic one, along those same lines. I mean, I guess, everybody's trying to figure out, is the capacity there? Is the demand there? What does it depend on? At what price? I'm struck by the fact that you seem to be developing multiple products and multiple programs within a number of strategic customers. So it feels to me like your platform proceeds along a path of greater depth and closer collaboration as opposed to just trying to have a sale of one thing to a bunch of people. Am I on the right path there?

Jonathan S. Wolfson

Yes, yes, absolutely. And it doesn't take a world-class economist, for instance, to recognize that while the price of sugar and corn has come down quite substantially, for instance, the price of certain lauric oils has come down more. And from our perspective, the point there is you have to have an ability to produce lots of different valuable shots on goal. This is -- I mean, in this technology, we make triglycerides. We can control fatty acids. We can control placement. And if we didn't use the ability to do that in a way that would give us lots of optionality in the market, I think we'd be presenting bigger problems for ourselves, ultimately. Now that doesn't mean, Rob, that there aren't going to be some, let's call them, logistical and programming challenges and figuring out how to run the plants, making multiple products. But as a practical matter, you can understand that the strategy has definitely been to broaden the product mix by using the technology and to figure out which potential customers get the greatest value out of the products so that we can have stable relationships where we're generating positive margins long into the future, which then gives us the comfort to build lots more capacity.

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

Okay. And if I could squeeze in one follow-up. With respect to the downstream processing that you're going to do for the moment out of Clinton with ANP, what is their ability to service that as you eventually move towards 100,000 metric tons vis-à-vis going to an in-house back-end setup?

Jonathan S. Wolfson

I don't think -- at least it's a facility that we're in. I don't think that, that's an option going to the significantly larger volumes. And it's not necessarily because you couldn't locate equipment and people there. There are some logistical considerations that are non-issues at 20,000 metric tons that would potentially become issues as you start to really increase volume. So I would say that while it's possible that we could do some expansion at ANP, if we really went to the very large sizes, we would be likely to kind of have all of the downstream located in a single site.

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

Okay. So it at least covers you for Phase 1, and then you have time to figure out the subsequent phases?

Jonathan S. Wolfson

Yes.

Operator

Our next question is from Patrick Jobin of Crédit Suisse.

Patrick Jobin - Crédit Suisse AG, Research Division

First question, just on -- going back to kind of ASPs and margins. I know in the past, you've laid out some targets for your gross margin, depending on market. And Jonathan, you mentioned kind of the strategy of mixing baseload versus some higher value and, obviously, all the fluctuations in some of the oil pricing that we're seeing. I guess, is it possible at this stage to look out and say in '14, this type of range for ASP or margins is appropriate? And then I have a quick follow-up.

Jonathan S. Wolfson

I think we're still -- we would still look forward to saying that our target ASPs would be north of $2,000 a metric ton. And we've laid out a set of target margins by product, with, obviously, fuels and chemicals kind being at the lower end in the 30-plus percent range and then nutrition being significantly above that and then kind of personal care north of 60%. And I think that those margin targets aren't changed. Obviously, you got to get closer to run rate before you start to get to those kinds of margins. So that's something that we're really going to be working hard toward doing.

Patrick Jobin - Crédit Suisse AG, Research Division

And that's my follow-up. So if we look at what the utilization or at least your base expectations are for ramping production, I'm just trying to understand, you mentioned you don't want to proceed with contracting capacity before you know what your production is going to be, but I guess, what is your baseline today? And how could we expect that ramp to continue? And then within that question, when will be the first quarter we'd see meaningful revenue from the plant?

Jonathan S. Wolfson

Patrick, I think to be clear, and I alluded to this earlier, we're very confident in the technology. We think the projects are both coming along very well. We think they're at least on schedule, if not, in some respects, at least in Clinton, with commissioning ahead of schedule. It would be very dangerous for me to go out and start making projections about volumes. It's something that I think we're not comfortable doing because the plants are going to tell us, and that may sound cute. It's not cute. This is a process. Even though everything is off the shelf, even though we've demonstrated that we can do this in Peoria and elsewhere, even though we're comfortable that ultimately there isn't technology risk, these are really still starting -- particularly in Moema, still starting a first of its kind plant. And we're going to have to be thoughtful about doing our best to get those volumes running. Now I think what we've said consistently is that our goal is to be tipping into positive cash flow by the end of the year. And Tyler, I don't know if you want to elaborate on that, but that's been a target for us.

Tyler W. Painter

Yes, Patrick, the only thing I'd add to that is, clearly, that's tied to the capacity ramp at the facilities. And as we mentioned, I think in the call today, as well as in previous calls, that each of these plants we expect will ramp toward nameplate capacity over 12 to 18 months. And so then you look at that kind of meaningful revenue in the back half of the year, which would obviously benefit us. Jonathan just mentioned reaching our target to tipping the cash flow positive in Q4 of next year.

Operator

Our next question is from Pavel Molchanov of Raymond James.

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

I appreciate you guys just reaffirmed the cash flow-neutral guidance for year-end 2014. And I remember you had that same target, while the Roquette JV was still intact. So is there some sort of upside in your other operations that is going to enable you to get there without Roquette?

Tyler W. Painter

Well, one thing I've mentioned, Pavel, is Jonathan, in an answer to your question, earlier talked about the JV with Roquette was not consolidated and that the profitability out of that JV was always tied toward getting additional capacity in the tens of thousands of metric tons into the marketplace. And when we look at kind of what the pace would have been, it was probably unlikely that it was going to have a significant impact to any of the numbers you saw in our consolidated basis in '14 when it was within the JV structure.

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

Okay. That's helpful. Follow-up on Sasol, maybe a little bit more broadly. You have probably upwards of 10 industry partners now in various parts of the value chain across chemicals and so forth. Is there any risk that you start seriously running into conflicts between your work with partner x and partner y since, inevitably, you're going to have some close collaboration with 1 party that's competitor to another?

Jonathan S. Wolfson

The quick answer is yes. And I think that, that's part of our job is to try to manage it so that we're very open with our partners about market opportunities and about products. And we don't try to slice the baloney too thin or try to be cute with people. I think that, that's part of management's job here. But obviously, there are times when companies that we know well might identify the same opportunity at roughly the same time, and -- plus some of those opportunities are near other ones. And so the answer to that question is yes.

Operator

Our next question in queue is from Weston Twigg of Pacific Crest Securities.

Weston Twigg - Pacific Crest Securities, Inc., Research Division

Just real quickly. On the Peoria plant and the conversion to use it for commercial production for flour and protein, I think you said that, that production capability be roughly equivalent to the Phase 2 of the Roquette joint venture, which I think was 5,000 metric tons per year. But isn't Peoria around 1,800 metric ton Peoria plant. I'm just wondering how to -- how that translates into the flour and protein production.

Jonathan S. Wolfson

Yes. No. That's a good question I should have clarified this earlier. What I meant was that the volumes that we can provide to customers, the kinds of volumes that customers need in order to base product, project launches or scale up our -- the kinds of volumes that start with 20 kg sacks and move upward into 10- and 100-ton deliverables, and those are the kinds of deliverables for the same kinds of customers that we would have been able to service out of the Phase 2 Roquette facility, so ultimately, we're able to service the same kinds of customers for the same kinds of qualification. I was not intending to imply that we were going to be able to produce 5,000 tons of product. You're right. That is in the vicinity of a couple thousand tons. Although there are certainly things that we could do, these are different products than oil, and they're certainly potentially things that we could do to increase that volume.

Weston Twigg - Pacific Crest Securities, Inc., Research Division

Okay. But that would be a good -- a rough ballpark figure to use for modeling purposes [indiscernible] metric?

Jonathan S. Wolfson

I mean -- well, I don't know what -- remember that, that facility is still used for other things. But we obviously are very interested in putting very significant percentage of the capacity there toward these products. Now what I'll also say is to the extent that the situation warrants it, we're going to be moving very quickly to look at the much larger volumes where you really start to generate the strong returns.

Weston Twigg - Pacific Crest Securities, Inc., Research Division

Okay. And we could also assume that the product coming out of this plant then, when you get to those volumes, would be at that 40% or greater level, you said it earlier, gross margin, sorry?

Jonathan S. Wolfson

Coming out of Peoria, I don't know. I wouldn't comment on that at this point. I don't think we're ready to comment on that at this point.

Weston Twigg - Pacific Crest Securities, Inc., Research Division

Okay. And then finally back to the Sasol deal, since you said there was -- since you have gross margin base deal-type index to the feedstock price, can we assume that, that is exactly in line with that low 30% gross margin range? Or can you comment whether it's higher or lower than that number?

Jonathan S. Wolfson

You can assume that we're careful about what we say and that Sasol is concerned about how we present things as well. But the overall margins that we believe are attainable in these markets would be those. I'm not going to comment specifically on Sasol. I've learned many times the hard way that these partners, they don't like that very much, and it's certainly not a good way to move in early in a relationship. But we're very optimistic.

Operator

And we have time for one more question in queue from Laurence Alexander of Jefferies.

Laurence Alexander - Jefferies LLC, Research Division

Well, I'm going to trust your patience, and I'm going to talk to a few ones that might have already been covered. You mentioned earlier the -- having several pots of money that -- besides the ones that were laid out in one of the prior questions. What are they? You've already rolled out grants. Is it milestone payments? Or is there something else that we should be keeping on the radar? Second, is there anything about your products so far that would change downstream conversion costs compared to the products that you're substituting? Third, on the Roquette side of the JV, can you give 1 tangible example of a functionality that customers care about that Roquette cannot deliver because they no longer have access to your IP? And then lastly, just a convoluted one, if you announce a capacity addition in Asia, what is the key question that is answered that needs to be answered or that will have been answered by the time you announce a partnership in Asia, that isn't already answered by the fact that you have the Bunge and ADM partnerships and those 10 commercial agreements and all of the different platforms that you've already announced? What's the bottleneck there?

Jonathan S. Wolfson

So, Laurence, can you just humor me? And nobody will cut you off. But can we slow down? And can you just break that up into a couple of questions. I can take one at a time, and Tyler can take one at a time --

Laurence Alexander - Jefferies LLC, Research Division

Sure. I guess the first 2 were just clarifications. You talked about having some additional pots of money in response to one of the -- or pots of potential revenue. What are those if they are not sort of grant revenue? Is it milestone payments? Or is there something else that could shake loose?

Jonathan S. Wolfson

There's partnering revenue. There's potential additional product revenue. I just wasn't -- I was referring to the kinds of volumes coming out of Moema as not being required to make revenue growth that we are targeting inside Solazyme. There's partnering revenue. There's milestones. There's additional product revenue. There's market development revenue. There's a whole bucket of things that additional revenue can come from. I just -- I think that, that's the way I would put it, Laurence.

Laurence Alexander - Jefferies LLC, Research Division

Okay. And then the second one was also just a clarification. As far as you can tell now with the amount of customer testing you've done, is there any change in downstream conversion costs compared to the products you're substituting?

Jonathan S. Wolfson

Nothing substantive. I mean, there's a couple of applications where we don't have to go through certain steps that you would have to with certain vegetable oil processing because the oils that come in are cleaner. So -- and then there are certain areas where we might have to do a little bit. There may be 1 or 2 products where we didn't originally envision having to do some kind of filtering of the oils, and we have to do filtering of the oils, but nothing that I would call truly material from an overall processing cost standpoint. I mean, it really depends on the specs in the market. And as you know, they're different by product and application area. But ultimately, just to remind everybody, we're making triglycerides. They're fatty acids and glycerol. And if you break them into fatty acids, they behave just like other fatty acids. And if you use them as triglycerides, they behave like other triglycerides that have the same fatty acid profiles. So nothing really specific there, Laurence.

Laurence Alexander - Jefferies LLC, Research Division

Okay. And then on the Roquette, it was just -- there's a lot of questions floating around in terms of the IP split. And I was wondering if you could help people by giving a specific example of a functionality, which your IP enables, that matters to customers so that it makes a difference in the competitive arena between what you will be launching and whatever Roquette might be able to launch with their technology, excluding the IP that was in the JV.

Jonathan S. Wolfson

Laurence, I think the best way for me to answer that isn't to answer it with respect to Roquette. Again, I'm not going to speculate about what Roquette could do. What I will tell you, and this may seem very unsatisfying, although to us, it's actually a very, very good position to be in, we believe, the products that were being commercialized by the joint venture, we had a high-lipid product called out with flour and a high-protein algal powder as well. And those were based on, we believe, technology and intellectual property and know-how that was originally developed at Solazyme and put into the joint venture. There were some improvements made inside the joint venture to that base technology, but those improvements to the base technology come back to Solazyme at dissolution. And therefore, those products are going to be products that Solazyme is going to be the party that's able to sell.

Laurence Alexander - Jefferies LLC, Research Division

Okay. And then the last one was just, if and when you announce a plant in China with a partnership, assuming that it's a partner not doing it on your own, what is the item that the potential partners in Asia need to know that hasn't already been satisfied by the ADM and Bunge partnerships and by your long list of development partners and your different product launches?

Jonathan S. Wolfson

I wouldn't -- Laurence, I guess, what I would say is I don't think that the appropriate conclusion would be that the reason we haven't announced expansion into Asia is because partners need to see something to expand to Asia. I think that it's part of an overall strategic set of decisions Solazyme needs to make with respect to how to manage our resources. I think you can assume that if you think about our technology organization, our engineering organization, our process development organization, our commercial organization, they are working extremely hard right now to bring up facilities in the U.S. and in Brazil right now, at the same time, managing the introduction of these new ingredients into the Peoria plant. What we're trying to do is to be both leaning forward and as aggressive as we've been in our history without being stupid by taking on way too much. And so while I'm not going to say that we have a whole deal completely put together with financing and everything else waiting for our yes to build in Japan or in Malaysia or Thailand or whatever, I will say that announcing as a fully financed partnership for manufacturing in Asia, while it's on our list of things of real interest, is not something that, at this point, has been something that we believe is required to pull the trigger, given everything else on the plate.

Laurence Alexander - Jefferies LLC, Research Division

So it's fair to describe that it's controlling the cash burn, the reputational risk and the management bandwidth that taking on another project would entail?

Jonathan S. Wolfson

Yes.

Operator

Thank you. And with that, I will turn it back to Jonathan Wolfson for closing remarks.

Jonathan S. Wolfson

So I just -- I want to thank everybody for joining the call today. We continue to make what I believe is strong progress toward commercializing this technology broadly. And we look forward to and appreciate your continuing to follow us. And thanks again.

Operator

Thank you. Again, thank you, ladies and gentlemen, for joining today's conference. You may now disconnect. Have a great day.

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