Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

[Laurie Shupe] - Investor Relations

Richard P. Eno - President, Chief Executive Officer, Director

Joseph D. Hill - Chief Financial Officer, Treasurer

Oliver Peoples - Co-founder and Chief Scientific Officer

Analysts

Michael Cox - Piper Jaffray

Laurence Alexander - Jefferies & Company, Inc.

Jeff Osborne - Thomas Weisel Partners

Pamela Bassett - Cantor Fitzgerald

JinMing Liu - Ardour Capital

Metabolix, Inc., (MBLX) Q3 2009 Earnings Call October 29, 2009 4:30 PM ET

Operator

Good afternoon ladies and gentlemen my name is and I will be your conference operator today. At this time I would like to welcome everyone to the Metabolix Incorporated Third Quarter 2009 Earnings Conference Call. (Operator Instructions). At this time I would like to turn the conference over to Miss Laurie Shupe. Please go ahead.

Laurie Shupe

Thank you, and good afternoon everyone. Metabolix released third quarter 2009 financial results after the market closed today. If you do not have a copy one may be found on the website at www.metabolix.com, in the Investor Relations section.

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

Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be put upon them. The Company undertakes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this conference call. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial condition.

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

Rick Eno

Thank you, Laurie. I’d like to welcome all of you to the third quarter 2009 earnings conference call for Metabolix. Today, I will provide you with the review of the Metabolix vision and a broad update of our ongoing activities. Joe will then take you through the financials.

We continue to make good progress on our commercialization and development activities and have maintained a strong financial position. For those of you new to these calls Metabolix is an innovation driven bioscience company which is focused on bringing environmentally friendly solutions to the plastics, chemicals, and energy industries. We are developing and commercializing pathways in products that are intended to lessen the world’s dependence on oil, reduce the 02 emissions relative to traditional materials, and address critical solid waste issues. We are founded on hard science and have exceptional capabilities in plant science, in fermentation microbial and polymer engineering, and in product and market development.

We currently have three business platforms, first Mirel, a biobased and biodegradable plastic currently being commercialized with our partner Archer Daniels Midland through a joint venture called Telles; secondly industrial chemicals initially focused on C4 chemicals and third our crop based activities which include our programs in switchgrass, oilseeds, and sugarcane.

Let me begin with the Telles business. We have made substantial progress since our last call. I would first like to update you on the progress of the Clinton plant, the production source for our first commercial product Mirel. I visited the plant last week and was very pleased with progress. ADM is well into the start up process. There are numerous systems already in operation and the plant is looking more and more like an operating site than a construction project. The schedule for the plant remains consistent with the timing outlined in our last call. Construction of the initial phase of the plant is planned to be completed in November at which point the entire facility will be in the hands of the ADM operations team. The plant will then move into production with initial fermentations conducted in December and recovery operations to immediately follow.

Over the last two months the ADM operations team has been commissioning a range of systems primarily in utilities, fermentation, and polymer offloading. In general, the commissioning process is going quite well.

Well start up plans and initial production sites are being finalized with a great deal of detail, we must point out that a new production process of this type and scale will always possess initial start up risks which could affect the schedule. We of course are working closely with ADM to minimize these risks and as issues are identified we will work together to revolve them.

The highest priorities for the ADM operations team are to execute a very safe start up and to produce high quality a product for Telles customers. ADM has operational staff working around the clock on commissioning activities. It is difficult to provide the precise date of actual on spec production from the site as there will be hundreds of operational decisions to be made over the coming weeks with safety and quality being the primary drivers. We will be providing a detailed update on the Clinton plant operations during our next earnings call.

We are currently maintaining our guidance for the capital costs of the Clinton plant as north of $300 million. It is important to think of this capital investment in the context of growing the Mirel business. Consistent with most process facilities of this type about 2/3 of the Clinton 1 capital investment will be in the actual processing equipment, in our case fermentation and recovery. About 1/3 of the capital investment will be in supporting infrastructure and utilities including electrical, cooling water services, control rooms, maintenance facilities, and basic site development. As we have mentioned before Clinton was selected and laid out with the vision of a 4x expansion. As such a good portion of the supporting infrastructure investment to support future expansion is being made with Clinton 1. We expect that the economics of expansion beyond 110 million pounds per year will reach substantial benefits in this Clinton infrastructure.

We should also benefit from a more normal environment for the cost of construction materials and labor than what was experienced while ADM was proceeding with construction of the majority of the plant in 2007 and 2008, as well as the application of next generation technology which is currently being developed.

Let me now switch to our market development activities. Mirel is a superb product offering superior biodegradability, biobased sourcing, and performance levels exceeding other available bioplastics. Our market development activities remain focused on fixed specific segments with a combination of Mirel’s property resulting in a unique offering. As a reminder these segments are packaging; compostable bags; consumer products focusing on cosmetics, gift cards and other products you would commonly find on the retail shelves; business equipment; agriculture and horticulture and marine and aquatic applications. These six segments represent over two billion pounds of initial addressable annual demand.

This quarter Newell Rubbermaid, the customer we disclosed during our last earnings call, launched its Paper Mate green writing set, biobased, biodegradable pens and pencils based on Mirel. The initial launch is taking place in Canada. The website www.papermategreen.com is a very good example of the co-branding approach we are pursuing. We aim to create and then capture the brand value for Mirel, a unique biodegradable material. This strategy is similar to that which built other industrial brands such as Kevlar and Teflon. We are excited to have Newell Rubbermaid, a leading brand owner, as a customer for Mirel. We look forward to broadening Mirel’s use into other Newell Rubbermaid product lines.

This quarter we also announced a new customer for Mirel. Pharmafilter BV a bioenergy technology company base based in Amsterdam has signed an agreement to purchase Mirel to produce a suite of disposable products for hospital use. Pharmafilter is currently commercializing its patented pharmafilter system as a cleaner, more efficient way for hospitals in the health care industry to reduce the volume of contaminated solid waste, food, and wastewater as well as to create bioenergy through anaerobic digestion. The pharmafilter process reduces solid waste first through a series of grinding stations located in each board and then through a series of purification steps including anaerobic digestion, outputs of biogas for fuel or power generation, biomass for energy conversion, and clean water.

The initial products to be made from Mirel include a range of single use applications including service wear items, bedpans, and trash bags. Use of disposable service wear products made from Mirel can create a safer work environment by converting reusable items to single use items, thus reducing human contact with contaminated service wear. Mirel products will be disposed of with the hospital waste and fed to the pharmafilter system. The initial pilot project is scheduled to begin operation in March 2010 at Delft hospital in Amsterdam.

While Pharmafilter’s system is specifically designed for hospital applications Mirel products could be integrate into bioenergy production in many anaerobic digestion applications including those utilized in institutions, municipalities, and at large public facilities such as stadiums and convention halls. We are excited about our relationship with Pharmafilter and the potential this could offer for the broad based use of Mirel in anaerobic digestion systems.

This quarter we were also pleased to announce that Metabolix received a grant from the US Department of Agriculture to advance the development of biobased, biodegradable, blow molding resins. This is a subsequent grant to one received by Metabolix in 2008 to develop blow molding resins at a laboratory scale. This new grant is aimed at scaling up the resin development from laboratory to commercial scale. Commercial grade blow molding resins are used in a variety of bottles including shampoos, oil and juices. According to the American Plastics Council, in the US over four billion pounds of high-density polyethylene plastic per year is used for blow molded bottles, containers, and other products and are major components of the traditional petroleum plastics manufacturing industry. The grant is for $350,000.00 and will be executed over the next 12 months.

Now onto our pipeline: Another way we have measured progress towards an effective Telles business start up is to monitor the identified potential demand for each perspective customer application for the calendar year two years out, currently 2011. This process enables us to forecast a forward-looking estimate of potential which is based on discussion with and analysis of our customer prospects. As a reminder, our customer prospects are not committed to purchase these amounts, nor have we received orders for these amounts, but it is an important exercise that helps us gauge demand. This in effect is our pipeline of development activities, some of which will be realized, some of which may not. As we have described before new polymer market applications in general take 9 to 15 months for development, hence a metric which looks two years out will provide a good view of those applications which we are developing and which will also be enduring beyond our initial plant start up.

Currently we are looking at 145 million pounds of indicative demand for two years out versus 142 million pounds shared in our last call. This is all non-food contact volume. As we are focused primarily on our existing customer base and prospects this slight growth in indicative demand is due to greater opportunity seen at some of our existing accounts. With the Clinton plant production we will be able to begin our transition to world scale commercial operations. This will include meeting the growing production requirements of our existing customers as well as providing product to accelerate the commercialization process for the high impact potential customers to whom we have not had sufficient resin to supply.

In terms of product pricing guidance we are maintaining our $2.25 to $2.75 per pound guidance. All of our contracts fall within this range. Fundamentally Mirel’s unique combination of biodegradability, biobased sourcing, and performance properties results in premium pricing relative to most petroleum based plastics.

In our target consumer applications the cost of plastic is small relative to the value that it brings to the brand. In our targeted industrial applications the economics of a biobased, biodegradable plastic adds value to that created by incumbent plastics. In both consumer and industrial applications customers are seeking to use Mirel to create products and product lines that were not possible with incumbent products. Mirel is a premium product.

Let’s now shift to the FDA process the food contact. The FDA process for food contact requires the submittal of a dossier, known as a food contact notification, FCN which is made up of the results of a number of extraction studies conducted under specific guidelines as well as a thorough review of the range of polymer characteristics. After submittal of a dossier the FDA has up to 120 days to ask for clarification of information included in the dossier, additional testing, or to modify the submitted approach. Once this time period has elapsed, assuming no objections from the FDA or required additional analyses one is free to pursue the submitted food contact segments.

In early October we submitted our dossier to the FDA for food contact notification. Our dossier addressed applications for all food types and conditions ranging from frozen up to contact with boiling water. Based on the 120-day process we should have an update during the first quarter of 2010.

We have not yet included food contact applications into our two-year indicative demand outlook, but we are currently investigating how food applications could integrate into our existing non-food contact pipeline and have activities ongoing with potential food contact customers. Keep in mind, as stated in previous calls that our entry strategy for Clinton is not designed around food contact applications and does not depend upon it, as we do not have control over many factors that impact the overall timing of the FDA process.

During our last earnings call we were asked several questions on the process for expanding the business. Let me address those here. The initial Clinton capacity at start up is expected to be sufficient to meet our current customer and development needs. Together with ADM we will be finalizing the plans to complete the incremental work required to stay ahead of market demand up to Clintons 110 million pound per year design capacity. We expect that this incremental expansion effort is relatively minor compared to the scope of the construction completed to date.

While the vast majority of our time and ADM’s time is clearly focused on the start up of the Telles business and the initial phase of the Clinton plant, there is some long lead time work going on relating to expanding the business. This primarily relates to the development and testing of next generation Mirel technology which may be deployed in one of the next phases. This work will continue for the foreseeable future as we look to continually expand the business and improve margins.

Next year, after plant start up, we will validate the technology as implemented in Clinton 1 as well as the market potential for Mirel. That information, plus the long-term technology work being pursued will be key inputs into a plant expansion decision.

We continue to be very enthused about the potential for Mirel. Demand for the product remains strong in the current economic environment and product application work is continuing to illustrate the increasing breadth of potential applications for Mirel.

Let me now move on to the other Metabolix platforms. These represent meaningful value creation opportunities for us beyond the Telles venture. During the third quarter we hired an executive who will be responsible for the development of our business strategy and commercial relationship activities for the non-Telles portion of our portfolio. Johan van Welsam has rejoined the Metabolix team as Vice President of Commercial Development. Many of you know Johan. He was a key member of the team responsible for bringing our Telles platform to market and we look forward to his leadership as we do the same with our industrial chemicals and crop platforms. The Metabolix team is very excited about having him back on board and the prospects it brings as we accelerate the commercialization of our long-term technology portfolio.

Next the industrial chemicals platform: In C4 chemicals, a key part of our industrial chemicals platform, we completed all work under our ATP grant, a $2 million grant aimed at producing C4 chemicals from renewable sources. C4 chemicals are a large family of chemicals enabling a wide range of end use applications including engineering resins, urethanes, solvents, and personal care products. There were a number of technical milestones outlined in the ATP program and we achieved them all. Based on the accomplishments of this work, we believe we have the technical foundation for an attractive C4 chemicals business. The initial entry is planned around a series of specialty C4 products including the [pareladones] offering an addressable market of about $800 million.

Our analysis shows that our pathways to these targeted C4 chemicals are robust in the range of $60 to $70 per barrel crude oil and of course at higher levels. Economics will vary somewhat based on the chosen site location, whether we utilize existing capital one facilities, as well as the pricing of sugar raw material. We are pleased with our technical accomplishments and we are continuing work to advance this important technology in our commercialization strategy. We have ongoing discussions with various potential partners as we examine commercialization options.

We are also beginning to frame out our next set of industrial chemicals targets and plan to outline these in greater detail in 2010.

Our third Metabolix platform is our crop-based activity including our programs in oil feeds, switchgrass and sugarcane. All in all we are excited about the platform as we can see that pathways we are developing ultimately replacing capital intensive operations such as oil and gas exploration and production, refining, olefins and climerization by producing polymer directly in crops. Our crop programs offer numerous options to produce low cost chemicals, plastic and fuels in a very sustainable manner.

During this last quarter we announce the execution of and results from a field trial which we conducted with tobacco. Tobacco is essentially a test crop for our plant science activities and is currently not a long-term commercial target for us. However, tobacco is well understood from both a science and regulatory perspective and learning smart tobacco experiences are readily translated to our commercial targets, oil seeds, switchgrass and sugarcane.

Metabolix obtained the necessary permits from the US Department of Agriculture Animal Plant Health Inspection Service, or APHIS, to perform an open-air field trial in March of 2009 and field trial experiments were completed in early October. The trial was performed on 8/10 of an acre of land and provided valuable data and information relating to polymer production with the best plants producing 3% to 5% PHA polymer: this further development of Metabolix crop technologies with the co-production of bioplastics in non-food bioenergy crops.

The field trial is a substantial milestone for Metabolix. The experience and knowledge we have gained during the process is expediting the planning and permitting activities for further field trials for our commercial targets, non-food, oil seed and biomass crops producing PHA. Our crop programs offer a number of commercialization options and hold significant potential as a low cost pathway to produce polymers.

We are excited to continue to push this technology forward and believe it will ultimately support a diverse array of bioengineered, environmentally conscious, and economically viable alternatives to petroleum based products.

In terms of overall timing for the commercialization of our crop programs, we are comfortable with our previous estimates of having commercially viable crops in field trials within two to three years. We are pleased with our technical progress on our crop programs and will communicate important milestones to you when reached.

In summary, we continue to make steady progress this quarter against our milestones. We are moving rapidly towards the start up of the Clinton plant and are making good progress against our internal milestones for other platforms. We are very enthused about the potential for both Mirel and our longer-term platforms.

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

Joe Hill

Thanks Rick, and thank you all for joining us today. As Rick mentioned we are very pleased with the progress that we have made towards the commercialization of Mirel this quarter and excited to be working with our newest customer Pharmafilter. Our partner, ADM, is on track to complete the Clinton manufacturing facility in November and we continue to see substantial interest from potential customers. Our plant science and industrial chemicals platforms have also made some exciting progress during the quarter and we continue to view the commercialization of these as important goals of the Company.

I will now focus on the financial results for the third fiscal quarter ending September 30, 2009.

As mentioned previously Metabolix currently manages its finances with an emphasis on cash flow. We have maintained this focus and taken a strict approach to managing our operating cash. We ended the third quarter of 2009 with over $70 million in cash. For the third quarter net cash used in operating activities was $7.3 million which represents a planned increase in cash usage from $4 million used during the second quarter of 2009 and an increase over the $6.4 million used during the comparable period of 2008. This is consistent with our intent to continue to invest in additional operational capabilities in connection with the planned production start up of the Clinton manufacturing facility.

Cash usage was also affected by the timing of pre-commercial cautionary payments received from Archer Daniels Midland and by reduced investment income driven by lower investment yields and investable cash balances in 2009. Through the first nine months of 2009 ending September 30 net cash used in operating activities was $19.9 million as compared to net cash used of $14.7 million for the comparable period of 2008. The increase in cash usage for the first nine months of 2009 is attributable to the increased operational needs of the business as detailed before and to the decreased cash receipts in 2009 versus 2008. The decrease in cash receipts for the first nine months of 2009 is the result of lower pre-commercial cost sharing payments received from ADM, the decrease in funds received from investment income, the decrease in proceeds received from the exercise of stock options and lower grant revenue from the Strategic Environmental Research Development Program grant that expired in February of this year.

I will now give some additional detail on the Company’s financial results for the third quarter of 2009 ending September 30.

Total revenue was $611,000.00 versus $351,000.00 for the three months ended September 30, 2009 and 2008 respectively. This revenue resulted from revenue recognized from our delivery of Mirel sample product, license fees and royalties, and government research grants. However, the increase in quarterly revenue was primarily attributed to a significant increase in grant revenue related to the integrated bioengineered chemicals program that is now being completed in November 2009.

Total operating expenses in the third quarter of 2009 were $10.1 million, a decrease of $500,000.00 relative to the comparable quarter in 2008. This year-over-year decrease is primarily attributable to the lower research and development costs which at $6.2 million were $400,000.00 lower than Q3 2008. This is partially offset by an increase associated with the hiring of additional personnel needed to support the Company’s planned launch of the commercial manufacturing process for Mirel bioplastic in December of this year.

Selling general and administrative costs in the third quarter of 2009 remain consistent with the third quarter of 2008 at $4 million.

Net loss for the quarter was $9.4 million as compared to a net loss of $9.7 million for the third quarter of 2008. As we have previously discussed, modestly higher research and development expenses this year is being offset by lower selling SG&A costs. As a results, through the first nine months of this year total operating expenses of approximately $30.1 million are running pretty much in line with the first nine months of 2008 at $30.7 million; however the aforementioned year-over-year decrease in grant revenue and lower interest income for the first nine months of 2009 is contributing to a slightly higher year-over-year net loss.

Net loss for the nine months ending September 30, 2009 was $28.2 million compared to $27.1 million in the same period in 2008. As seen last quarter, the third quarter loss is greater than the cash used in operating activities. As we have discussed before, all of the payments we received from ADM are recorded as deferred revenue for GAAP purposes and therefore do not yet appear on our income statement.

Net loss per share was $0.41 compared to a net loss per share of $0.42 in the year ago period. Through the first nine months of 2009 the net loss per share was $1.23 compared to $1.19 net loss per share in the same period of 2008.

Now a few words about our balance sheet, which we are glad to say remains strong. On September 30, 2009 we had cash and short-term investments of over $70 million. We have no debt. We still expect this capital will be adequate to build our sales and marketing infrastructure, deduct pre-commercial manufacturing, and to expand our research and development to build the Company.

We continue to work with a roster of successful companies that are partnering with us to create alternative solutions and change the way they bring their products to the marketplace. We are pleased with the progress we have made during the third quarter as we continue to get closer to the commercialization of Mirel.

With that we will open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Cox from Piper Jaffray.

Michael Cox - Piper Jaffray

In terms of looking past the completion of the facility I was hoping to ask a couple of questions about the production ramp. I understand it is difficult to provide specific guidance around which day you will begin production, but as we look at 2010 as a whole is it possible at this point to begin to talk about volume expectations or at least the number of different customers that will receive product next year?

Joe Hill

I think it is a little premature to talk about volume expectations and we have been pretty consistent with that through out just in the fact that we would like to begin to get the product to market and in the hands of customers and then at that point we’ll be able to be much clearer and more precise on our projections.

We have been saying in terms of number of customers we have been doing a fair amount of work on prioritizing our lead stream. As many of you know we have probably 3,000 plus leads right now of people interested in using Mirel and over the last few quarters we have really focused on about 100 or so that we will give priority product to, at least initially on Clinton start up.

The vision right now and we will certainly update you as we go into commercialization is to have some 40 or 50 base customers for Clinton 1 that would provide a nice diverse mix of end use applications and processing technologies with enough growth embedded in that customer base to see us through for a foundation for expanding the business. That is how we’re thinking about it right now and I’m sure as we get up and running and get some experience we will be able to give some of the guidance on ramp up rate.

Michael Cox - Piper Jaffray

On the cash burn could you maybe provide a little bit of color on once commercialization begins, considering you will shift those expenses over should we expect cash flow break even say in 2010, is that a realistic expectation?

Joe Hill

We aren’t giving specific guidance as to what the net cash flow will be for 2010, but we have been saying that after production starts up and we get through a transition period with the manufacturing facility in 2010 there will be a shift of expenses for the sales and marketing expense on the product, development expense of about $5 million per quarter and will shift from the Metabolix cash flow into the Telles cash flow.

Michael Cox - Piper Jaffray

I understand that there will be a shift, but will there be incremental cost as you’re building out your other programs that will offset that? Should we expect that or?

Joe Hill

There would not be a full offset. There will be an increase in some of the R&D spending we’re doing on our other science that will somewhat offset that, but it won’t be complete offset.

Rick Eno

Yes it is quite modest increases planned right now for the other programs in terms of growth for next year.

Operator

Your next question comes from Laurence Alexander from Jefferies & Company, Inc.

Laurence Alexander - Jefferies & Company, Inc.

First do you have an updated ADM ledger balance?

Rick Eno

It will be filed in the 10-Q so when the 10-Q is filed, which will be early next week, that ledger balance will be disclosed.

Laurence Alexander - Jefferies & Company, Inc.

Do you have a rough ballpark?

Rick Eno

When we file the Q is when we’ll be releasing that number.

Laurence Alexander - Jefferies & Company, Inc.

Okay, fair enough. Then I understand that precise forecasts for 2010 are difficult, but if we can focus on the objective rather than the trajectory; if you don’t build any additional plants and you don’t expand Clinton 1 how long would it take for Clinton 1, how long would it take for Clinton I1 to pay off what you think is a reasonable range for the ledger balance. That is do you think that you would switch to having a fully operating JV by say 2015 or any sort of rough deadline that you would be willing to set?

Rick Eno

Let’s just quickly go through how the joint venture structure works. Once we get through this transition period and Mirel is selling commercial product, all revenue goes through Telles, Telles purchases the raw material from ADM which ADM is producing from the plant, Telles pays Metabolix a royalty, Telles has other operating expenses and then operating profit. We have not given any guidance yet on two things: One is when we are expecting Telles will be at full capacity, but as we have discussed that is a product constraint of getting our prospects through the sales cycle which Rick explained is a 9 to 15 month process. The other is what would be appropriate operating margins at which to model the Telles operations and until we really have the facility operating and have good visibility over what those gross margins are going to be, we haven’t given an indication as to what the gross margins or operating margin would be.

I am sure you could run some models. We wouldn’t expect the operating margins to be much different than other type facilities like this that if you were to take 110 million pounds saying you weren’t going to do any more expansion, if you took 110 million pounds at $2.50 a pound and made an assumption as to what the appropriate operating margin would be it is pretty easy to get to a back of the envelope calculation there.

t is important to remember that the Telles operating entity is pretty much following a cash operating entity, they don’t have any depreciation or amortization expenses associated with the facility. ADM builds the facility, runs the facility and always owns that facility.

Laurence Alexander - Jefferies & Company, Inc.

Okay that is fairly helpful. That leads to a comment from another angle, if you assume that you are not going to significantly change your R&D expense in the new platforms what do you see as a rough swag to the nearest say $10 million on your cumulative free cash flow burn before you could get to free cash flow positive?

Rick Eno

That is a good question and we have all sorts of models internally, but we haven’t disclosed any financial models yet for Metabolix, but what we have said is if we were not investing in our other platforms and all we were doing was commercializing Mirel we would be cash flow positive very quickly; so pretty much all of our spending is discretionary on all of the other sciences.

Laurence Alexander - Jefferies & Company, Inc.

Have you discussed with ADM any proposal to report Telles financials on a pro forma basis?

Rick Eno

No, we have not discussed with ADM how they are going to be presenting their financial statements. We do understand though, going forward, there are certain things that people want to see. As we are presenting our financial statements after the plant is open and there is information about what royalties we’re receiving, there is information about what the ledger balance is, then of course there is going to be visibility into what is the volume of the product that we’re selling and what is the cash flow of the Telles entity.

Operator

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

Jeff Osborne - Thomas Weisel Partners

At what point do you think you will be able to provide some color on the volume and operating margin guidance? Would that be in conjunction with the fourth quarter call or at some other point?

Rick Eno

What we are saying is we would like to be able to get some good gross margin experience under out belt, give some information with that; so at a minimum of course we would be giving some information as to what is happening with the ledger balance and we will be giving some information as to what is happening with the royalties, but I’m not sure it’s going to be at the year end financial statements that we are going to be giving much information on operating expenses of the business.

Joe Hill

This is a first of a kind process at this scale and we would really like to make sure we are very comfortable in our projections of costs and operating expenses and such and that is the internal work we are going through. As soon as this starts up we’ll be sure we test the performance relative to our models and at that point we’ll feel much, much more comfortable talking about projections and giving appropriate guidance, but we understand the concern and the desire from you folks.

Jeff Osborne - Thomas Weisel Partners

Okay so it sounds like maybe a couple of quarters after it is fully up and running and this may be a more reasonable projection in 2010, is that fair?

Rick Eno

Yes, I think that is fair.

Jeff Osborne - Thomas Weisel Partners

Okay and then Joe you mentioned that fermentation and it sounds like that is up and fully handed over. Could you just talk about the recovery? Is that going to be in late November or will that be done this month?

Joe Hill

I will go through the schedule and a couple of things to keep in mind about the schedule of the handover and the start up of the Clinton plant. First of all there are two things to keep in mind: One is there is a handover from construction to operations and then it’s a modular facility as we have talked about in earlier calls, different parts of the plant are handed over to operations at specific times. So, throughout the course of probably from just after July through now various things, systems have been wrapped up and have started to shift from construction over to operations.

The current target within the plant is to have everything basically out of construction into operations hands in November, in which case all of the facilities will be in the final start up process. So, we expect to have initial fermentation batches in mid-December and recovery will go just after that. So, it is getting very close. It is very exciting out there watching the energy of the ADM team as they are getting ready and working through the start up process. The only variable we tried to note in our prepared remarks is that in a big facility like this, it is on a 30-acre site, that this is now, there are hundreds of decisions being made out there around making sure that product quality is just where we want it to be and above all safety.

When it gets into what’s happening as it is in the hands of the operations they are going to make sure that they maintain a safe site and it gets a little hard to know exactly what happens day to day, but the plant is looking great and there is a lot of energy out there.

Jeff Osborne - Thomas Weisel Partners

It would be helpful if you could post any pictures of the exterior of the plant on your website just so that people could track the final phases of the construction and get a sense of the 30-acre facility. That would be something to consider perhaps for the next call.

Then you mentioned around the FDA dossier that you were talking with initial food contact customers in the pipeline. Could you quantify the size of that food contact market relative to your non-food contact market that you’re going after with the six initial markets that you are focused on?

Rick Eno

We have taken a fairly conservative approach; we believe, of defining what an addressable non-food contact market is for Mirel in our pricing range of $225 to $275 and as you are leading to of over 2 billion pounds. Early examination of food contact using a similar methodology probably would roughly double that. We are going to be sharpening that over the coming months. We have as of early/late 2007 had a number of conversations going on with food contact customers and we are in the process of reinvigorating those and that will help us further sharpen that addressable market demand, but there are a variety of things in the food contact realm such as coffee cup lids, cutlery, bags for sandwiches, foam plates, there is a range of things that our commercial team is looking at. We are starting to dig into more details about the addressable market at our price point and selectively starting to talk to customers about their continued interest in Mirel.

Operator

Your next question comes from Pamela Bassett from Cantor Fitzgerald.

Pamela Bassett - Cantor Fitzgerald

I want to ask what the focus is for next generation technology. I assume you are talking about optimization of the upstream of the fermentation process as well as downstream recovery. Can you talk in a little more detail about what the focus is and what the timing might be?

Rick Eno

I think one thing, to those of you familiar with these type of processing industries, the early years of commercialization typically show great gains and over the long haul there is tremendous pay off to continually focus on improving process technology. I think Exxon is one of the best examples of companies that are very good at this. What we are working on now and with ADM and certainly the people that helped develop the initial technology is just as you hinted Pamela, we are focused, if you think about fermentation we are working on next generation microbes that can help increase the productivity of a fermenter so that we can continually get more pounds of plastic resin out for fermentation batch. We are also looking at next generation microbes that can help us alter the polymer properties and help simplify operations so that it continues to allow the process to be robust and help us to expand the market. All of the things you can think about with regards to next generation microbes are ongoing right now.

The back half of the plant is recovery by which the polymer is recovered from the fermentation broth and that is a series of [inaudible] required to recover the product and there we are looking at ways that we can increase through put of that back end of the plant. We are looking at ways we can continually drive down energy consumption and cost and we are looking at ways we can modify and improve product quality. All of the things you would think of and we believe and ADM believes that we should continue to keep focus on next generation, second, and third generation technology, so we have a clear view of the technology roadmap for this business, all with the intent of expanding market adoption of material and enhancing margins.

Pamela Bassett - Cantor Fitzgerald

To what extent do these activities factor into the C4 program? I am assuming here that initially the C4 program would use fermentation, is that a correct assumption?

Rick Eno

That’s right, it is a fermentation-based process, and given certainly our firms experience in developing fermentation systems, our firms experience in scaling up those systems as proven due to the Telles operations, we are applying those skills to the C4 chemicals market. So, I think it is a different bugs and everything, but it is clearly building on the skills that we have which give us confidence in being able to project where we can take that to. The early data we have, as we indicated in the prepared remarks is pretty encouraging.

Pamela Bassett - Cantor Fitzgerald

C4 falls outside of Telles or because of fermentation within Telles?

Rick Eno

No, it is outside of Telles.

Pamela Bassett - Cantor Fitzgerald

Then can you talk a little bit about timing with partners there?

Rick Eno

We have finished our ATP grant which was largely core technology development for industrial chemicals and as a result of that we managed to define appropriate pathways and be able to get to the point that we’ve got good proof of concept for what we would like to do. 2010 is aimed at largely scaling that, beginning to operate at larger scales so we can get comfortable with the scale up and continually refine the technology.

Parallel to that we will be pursuing traditional commercial development activities, looking at potential partners in the C4 chemicals area. These partners could be either producers of these chemicals, they could be consumers of these chemicals, or they could be a company with a fermentation capacity wishing to access these markets. After that the timing is really dictated a lot on our success in defining that commercial relationship and the nature of it. By that I mean if we end up working with a company that has fermentation capacity perhaps it would be a shorter time frame to commercialization because we would save some of the capital cycle. We are looking at industry structure and we are looking at how that would evolve as we start to screen through what an ideal partner would be.

Pamela Bassett - Cantor Fitzgerald

So for that kind of existing infrastructure an you use a plant that may be repurposed from a biotherapeutics?

Rick Eno

No, I don’t think so.

Pamela Bassett - Cantor Fitzgerald

It would have to be an industrial site?

Rick Eno

Yes, I think that is right. We are still working on recovery processes and that type of thing as well which would, depending on exactly what we come up with, we would obviously like to find a way to use Brownfield recovery facilities, but there may be some capital, I would expect, required for recovery and upgrading, but it would be more of an industrial site and given the scale of these industrial chemicals that would make sense.

Pamela Bassett - Cantor Fitzgerald

So most of the [inaudible] from a processing standpoint, if you used Brownfield would be on the downstream you think?

Rick Eno

Brownfield fermentation.

Pamela Bassett - Cantor Fitzgerald

Is that Brown stream process on distillation, on filtration, or a combination of something else?

Rick Eno

We are not at the point to talk about that. I mean we have a series of options we are looking at and as we define it we will be able to perhaps talk a bit more about it.

Pamela Bassett - Cantor Fitzgerald

The C4 program then sounds like its on deck with the partnership to later in the timeline?

Rick Eno

Yes. We’ve had our milestones for crop-based businesses of commercially viable crops in field trials in two to three years which we feel good about. WE haven’t given the complexities around Brownfield versus Greenfield in scale and we have not yet put out a timeframe for C4 chemicals, but I would expect that if it was a Brownfield solution for C4 chemicals it would potentially be ahead of the crop programs for commercial viability.

Pamela Bassett - Cantor Fitzgerald

From a partnering standpoint do you expect to partner the crop based programs after the C4 program?

Rick Eno

We don’t know. We are working that series of things in parallel and our primary focus in the crop programs is bringing the technology forward and the field trial was just a great milestone for the Company because we are starting to now build internally the capabilities to execute on these field trials and we know over the coming years we will be spending a lot of time in field trials.

Pamela Bassett - Cantor Fitzgerald

Do you expect to somehow segment the fermentation technology that you are using in Telles and somehow leverage older technology as well as new technology in your strategic options, as you think about expansion? Would you ever consider out licensing technology to large players that want their own plant?

Rick Eno

We have not talked about that and I think with our relationship with ADM we would have to all be aligned on that and that has not even come up.

Operator

Your next question comes from JinMing Liu with Ardour Capital.

JinMing Liu - Ardour Capital

I would like some clarification on the planned expansion. There is the possibility you will come up with some capacity, not 100% and you were talking about that you will leverage your next generation technology sometime next year to the full capacity. Should we expect that you will from part of the facility you will be using your next generation technology next year?

Rick Eno

I think that is a little premature. I think we said could be used. One benefit of the modular approach of the Clinton facility is that as we bring up additional fermenters and additional capacity in advance of customer demand we are going to learn things upon the initial start up and we could potentially apply those to the modules as we bring them on.

There is the chance some of the things we’re testing could be deployed in Clinton, but right now we haven’t gotten to the point with a detailed process design and so on for putting those in the plant. It is possible, we are just not at the point to say that it could actually happen, but it is possible.

JinMing Liu - Ardour Capital

Is it a reasonable thought to expect that the 100% of nameplate increments will be there in Clinton by the end next year?

Rick Eno

The facility is laid out and the major equipment is all there, but we’re not saying when the plant would get to 100% of nameplate; that is going to depend on a number of things.

JinMing Liu - Ardour Capital

You mentioned that the initial fermentation was starting mid-December. Is it possible for you guys to make any commercial sales right after the first fermentation or will there not be any commercial sales in 2009?

Rick Eno

We don’t really know exactly when the on spec recovered product will come out of the facility, but the hard-set date we have right now is we have to make fermentation broth first and that is going to happen in mid-December. We are trying to get across the point that this is an operating facility and for first time processing they are going to be working around the clock, they are going to make the right decisions and we will be producing product very soon.

JinMing Liu - Ardour Capital

Once the plant starts operations then some of your costs will be shipped over to [inaudible] in December.

Rick Eno

No, that is not true. What we have been saying is that there is a transition period from the time when the plant starts producing, to the time that we ship product, to the time that we enter, according to the contract, the commercialization phase of the joint venture. So, we are not exactly sure what that timing is. We will give some more indication of how it will be, but there will not be an expense shift in 2009, it will occur in 2010.

JinMing Liu - Ardour Capital

Okay, basically you have to meet some milestones before the $% million cost shifting happens?

Rick Eno

There is some definition in the agreement as to exactly what point that shift over occurs.

Operator

Your last question comes from Laurence Alexander from Jefferies & Company, Inc.

Laurence Alexander - Jefferies & Company, Inc.

I just wanted to follow up on a couple of technical questions. Do you have any feedback on the performance characteristics of THA versus D- or PLA?

Rick Eno

Do we have any feedback on the performance characteristics of PT versus the?

Laurence Alexander - Jefferies & Company, Inc.

D- because some of the producers of D-, PLA are claiming that they’ve solved much of the instability issues that have characterized normal PLA.

Oliver Peoples

When you say D-, do you mean, there are two types of DLA, there is LPLT, LLA, PDLAA.

Laurence Alexander - Jefferies & Company, Inc.

That is it exactly the second one.

Oliver Peoples

I suspect what you are talking about is the blend of the pure PLLA with the pure TDLA I believe.

Laurence Alexander - Jefferies & Company, Inc.

Yes.

Oliver Peoples

Basically the idea is that those continued improvements come on in PLA by modifying DLA. We don’t believe that is going to have much of an impact on the Mirel business.

Laurence Alexander - Jefferies & Company, Inc.

Okay so it is not encroaching in your areas of performance?

Oliver Peoples

You are going to see this continuous evolution of technologies including Mirel as we all seek to expand the performance windows and prove on the basic properties, just as we truly expect to continue to expand the Mirel applications certainly folks are going to continue to expand the PLE applications, whereas the PLA or DLA are reflective of the two.

Rick Eno

Ollie is addressing technical sites and the market sites as we go through our indicative demand pipeline I have not gotten any indication from our commercial team that that is finding its way into any of the applications we’re nurturing for Clinton start up.

Laurence Alexander - Jefferies & Company, Inc.

Ollie also, as you look at the pathway to commercializing C4 are there any technical hurdles that you think your partners, or your potential partners, or your downstream customers would face that Metabolix can also address directly?

Oliver Peoples

Yes, so I think as regards that we haven’t really described the details of the C4 technology platform, it is a proprietary platform. I think what we have done is actually since we got [inaudible] back is gotten a very severe challenging of these potential economics and we are now comfortable that we can deliver a technology that will be cost competitive. We don’t see any major technical hurdles that would require a partner to solve, but the market is really there is a whole lot of internal selling and therefore it is a purely captured market, it is not a merchant market in a big sense for the end of the business we’re looking at. So, the real issue is what is the right type of relationship to get into business.

Laurence Alexander - Jefferies & Company, Inc.

Are there any technical issues?

Rick Eno

No there are not technical issues at this point.

Laurence Alexander - Jefferies & Company, Inc.

Okay good and just one more philosophical question around the gross margin question we have all been asking. The fermentation economics are probably fairly well known from your pilot facility and you probably have some sense of the scale of economics, is the reluctance to put out a gross margin number, say give or take 1,000 basis points, an issue that has to do with as you run it through your models the gross margins are more volatile and so you aren’t comfortable putting out a number until you actually see how the plant actually works, or is it a problem with sort of how you and your partner evaluate your path to market, or is there some other issue that is an underlying philosophical issue?

Joe Hill

It is not an indication of a problem or an issue. It is really an indication of how we do manage is that running it in large scale there certainly are models to it, but we certainly don’t want to be giving any guidance or direction on something that we just don’t really know about yet. Rick and I do not want to put out information that we are going to have to retract because we didn’t have the right level of information when we put it out. So, when we know what is going on and we have visibility we absolutely will be giving that information, but we are very reluctant to give swags, because invariably people always have to change their swag and we don’t want to have to change what we say.

Other than that there is no indication.

Operator

That concludes today’s conference. I would like to turn the conference over to our presenters for any closing remarks.

Rick Eno

That is great. Thank you. I would like to thank all of you for attending the call today. As you can tell we are very pleased with the progress we have made over this last quarter. You can have a lot of enthusiasm for the long-term potential for each of our platforms. We look forward to updating you on the progress across each of these during the next earnings call. Thanks for joining us and thanks again for your interest in Metabolix. Have a good evening.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation.

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.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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

Source: Metabolix, Inc., Q3 2009 Earnings Call Transcript
This Transcript
All Transcripts