Metabolix's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 5.13 | About: Metabolix, Inc. (MBLX)

Metabolix, Inc. (NASDAQ:MBLX)

Q3 2013 Earnings Conference Call

November 5, 2013 04:30 p.m. ET

Executives

Lynne H. Brum – VP of Marketing and Corporate Communications

Richard P. Eno - President & CEO

Johan van Walsem – COO

Joseph Hill – CFO

Oliver P. Peoples – Co-founder and Chief Scientific Officer

Analysts

George Stengel – Jefferies & Company Inc.

JinMing Liu – Ardour Capital

Yoyo Chen – J.P. Morgan

Operator

Good afternoon, and welcome to the Metabolix’s Third Quarter 2013 conference call. Today’s call is being recorded for internet replay. You may access an archived version of the call on Metabolix’s website at www.metabolix.com. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session at the end of the conference call.

I would now like to turn the call over to Ms. Lynne Brum, Metabolix’s VP of Marketing and Corporate Communications. Please go ahead, Ms. Brum.

Lynne Brum

Yes, thank you, Brenn, and good afternoon everyone. This is Lynne Brum, welcome to Metabolix’s third quarter 2013 conference call. On the call with me today are Rick Eno, President and Chief Executive Officer; Johan van Walsem, Chief Operating Officer; Joe Hill, Chief Financial Officer and Oli Peoples, Co-founder and Chief Scientific Officer.

If you do not have a copy of the third quarter news release, which was issued earlier this afternoon, one can be found on the Investor Relations section of metabolix.com. In addition, slides accompanying the presentation are available on Metabolix website on the Events and Presentation page in the IR section.

Now please turn to slide two. Please note, this part of our discussion today, management will make forward-looking statements. These statements are not guarantees of future performance and therefore, undue reliance should not be put upon them. Investors are also cautioned that statements in discussion today that are not strictly historical statements constitute forward-looking statements.

Such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated, including the risks and uncertainties detailed in Metabolix’s filings with the Securities and Exchange Commission, including the company’s most recent 10-K. 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 the conference call.

With that, I would like to turn the call over to Rick Eno. Rick?

Richard P. Eno

Thanks, Lynne. Good afternoon and thank you everyone for joining us today. Please turn to slide 3. On today’s call I’ll review the key drivers of our strategy and describe the enterprise we are working to build, we’ll then move on to an operational and financial review of the third quarter. As a reminder our business is based on innovations around the family of naturally occurring polymers or PHAs. This proprietary technology enables us to target the growing market for advanced biomaterials in high value market segments.

In our primary business, biopolymers we have maintained our focus on three segments, film, performance additives and functional biodegradation. We’ve developed and will continue to build a portfolio of products where our PHA polymers enable value-added solutions for customers.

This focus on targeted market segments and customers will be key to generating attractive margins in our business model.

For Metabolix, there are four key factors for our success. First, developing strong customer relationships that can generate long-term purchasing commitments and contracts as we work towards establishing commercial production, these relationships will validate market demand and will base load our first commercial scale plan. We’re already seeing the benefits of providing ongoing supply to our targeted markets and customers. We are gaining deep insights into differentiated customer needs and accelerating our pace of innovation to address them.

Second, establishing captive PHA manufacturing capacity, this captive production will enable us to sell on an ongoing basis both neat biopolymers as well as formulated products in which our PHA production is leveraged with other biodegradable polymers available to select suppliers. Third, as the recognized leaders in PHA biopolymers, using our extensive IP portfolio to create commercial opportunities and competitive barriers and finally maintaining a strong balance sheet in a disciplined approach to cash management and operations. We fully and clearly recognize the need to deliver upon these success factors and can see substantial business potential when we do so.

Based on these factors, we are building a performance bio materials company. Our products meet the needs of the rapidly growing biodegradable market which many analysts estimate is growing at 15% per year as well as provide differentiated performance in large existing markets such as the PVC market. Each quarter, we aim to demonstrate additional proof points towards this vision and believe we have made considerable progress in the 18 months since launching this biopolymers business as Metabolix.

I will now turn the call over to Johan van Walsem our Chief Operating Officer to review operational highlights of the third quarter. Johan?

Johan van Walsem

Thanks Rick. I would like to provide you with an overview of the key operational activities of the third quarter. Now I will discuss our three strategic biopolymer market segments and the supporting manufacturing strategy. I will then touch briefly on our chemicals and crops programs.

Please turn to slide 4. In our film segments, I will note that we saw a decline in biopolymer product shipped and billed during Q3 relative to Q2. Sales of Mvera B5008 continued at a low level during the quarter. Mvera B5008 compost rapidly but it processes most effectively on a limited range of equipment unique to subset our customers. It will remain part of our film portfolio.

This quarter we brought entire suite of compostable film products with the launch of Mvera B5008 which we designed through compostable bags in full market worldwide. Mvera B5010 was our first commercial product developed in collaboration with Samsung. Using Mvera B5010, our customers are able to easily produce film with a very good balance of strength and toughness. The B5010 films run very well on a range of bag lines providing exceptional seal strength and good print-ability making it an ideal option for compostable shopping bags and food use collection bags. This product delivers on Metabolix’s aim to expand our product range to meet customer needs in the marketplace offering a robust suite of products. We showcase B5010 at the recent K 2013 industry trade in Düsseldorf and so interest in this product from film converters around the globe.

We have been encouraged by initial feedback from film customers based on more than a dozen customer trials over the last several weeks. Commercial ramp up is ongoing. We will continue to build our suite of compostable film products with optimization for different properties.

Please turn to slide 5. Our performance additive segment, leverages the unique attributes of PHA technology to improve the performance of other materials. Last month we launched I6003rp, a new bio-based polymeric performance additive for recycled PVC. With disposal of short life PVC products such as packaging, bottles and medical devices, as well as durable products such as PVC siding and window frames which are reaching the end of the useful lives, more PVC is entering the wide stream.

Although PVC is one of the largest consumed polymers by volume, the amount of discarded post industrial scrape and post consumer wise that is actually recycled is very large compared to the amount that goes to landfills every year.

According to Vinyl plus out of a total 6 million tons of PVC consumed in Europe during 2012 only 360 kiloton or about 6% was recycled; mostly window frames and also wire and cable. Our I6003rp product is designed to enable PVC convertors to increase the amount of recycled PVC used without compromising performance. We share technical data supporting this performance enhancement at the recent Vinyltec tech 2013 conference held two weeks ago and generated significant interest. You can find our most recent presentation on our website.

Our functional bio-degradation segment is founded upon the inherent degradability of PHA in soils, streams and oceans. We have been delivering specific products into water treatment applications where PHA is an important media to natural de-nitrification processes and over pipeline of innovative applications of PHA in the segment.

Now please turn to slide 6. Establishing commercial PHA manufacturing is critical to our commercial success. While we continue to monitor the legal process for the restructuring of antibiotics as inspiring, we are actively developing alternative manufacturing options and have our engineering team conducting technical due-diligence on the alternative size to enable ongoing commercial supply. In the interim, we have alternative supply options for both PHAs and other biodegradable polymers and are making strategic use of the inventory we have in hand. We will provide manufacturing updates as appropriate.

Please turn to slide 7. In our chemicals platform, we are using our PHA microbial technology to produce bio-based chemicals for applications that have typically relied on product managed from petroleum feed stocks. We continue to advance our technology and achieve three technical milestones this quarter.

First, we demonstrated production of ultra high purity bio GBL from fermentation growth. Second, we showed that our P4Hb technology can be adopted to produce bio GBL through fermentation and thirdly we demonstrated the robustness of our microbial strength for bio-based chemicals backing through very successful fermentation conversion of second generation or (indiscernible) to PHA precursor for both C3 which is bio-acrylic and C4 chemicals.

Finally in our crops platform we will continue to work through several active grants for our industry leading crop research. The long term research targets multi-gene expression and transformation of plants as well as the use of switchgrass as a platform for making industrial chemicals. We are also seeking additional grants to fund this research and we look forward to provide further updates on that front in future quarters.

And with that I will turn the call over to Joe Hill our CFO for financial results of the quarter. Joe?

Joseph Hill

Thanks Johan. I’ll now focus on the financial results for our third quarter ended September 30, 2013.

Please turn to slide 8. Third quarter shipped and billed during the third quarter were $200,000. Revenue recognition was deferred for the majority of these shipments. Therefore, product revenue recognized during the third quarter 2013 of $300,000 was primarily from shipments to customers completed during the second quarter of 2013. We anticipate the product revenue will increase during the next 12 months as we continue to gain market acceptance for our new formulated high performance products that are currently entering the market. Although there will be fluctuations from quarter-to-quarter.

To the first nine months of 2013, ending September 30, product orders including excess raw materials sales shipped and billed for $1.3 million as compared to $1.1 million during the first nine months of 2012. Product revenue recognized during the first nine months of 2013 was $1.9 million as compared to $500,000 for the comparable period of 2012.

Please now turn the slide 9 for a review of our financial results. Total revenue for the third quarter was $900,000 versus $700,000 in the comparable period of 2012. The year-over-year increase in revenue of $200,000 was primarily related to an increase in biopolymer product sales recognized. Total revenue for the nine months ending September 30, 2013 was $4.5 million versus $40.9 million for the year ago period. The year-over-year decrease was primarily related to $38.9 million in deferred revenue which is recognized as a result of the termination of the Telles joint venture in early 2012.

Product revenue, grant revenue and research and development revenue increased by $1.4 million $500,000 and $600,000 respectively during the first nine months of 2013 compared to the first nine months of 2012. The cost of product revenue for the nine months ended September 30, 2013, was $2.2 million during compared to $800,000 in the comparable period in 2012. The $1.4 million increase is primarily the cost corresponding to the increased product sales revenue recognized during the period. R&D and SG&A expenses were relatively flat quarter-over-quarter.

Research and development expenses were $14.4 million for the first nine months of 2013 compared to $16 million for the same period of 2012. Selling, general and administrative were $9.7 million for the first nine months of 2013 as compared to $11 million to the comparable nine months period in 2012. The decrease in R&D and SG&A were primarily the results of decreased employee compensation and benefit expenses which declined by $1 million and $700,000 for R&D and SG&A respectively.

Net loss for the third quarter 2013 was $7.3 million or $0.21 per share as compared to net loss of $7.7 million or $0.23 per share for the third quarter of 2012. Net loss for the first nine months of 2013 was $21.9 million or $0.64 per share compared to net income of $13.1 million or $0.38 per share in the same period of 2012.

Now onto the balance sheet, as of September 30, 2013 we had unrestricted cash and investments of $25.7 million. This compares to $53.6 million of September 30, 2012.

Please now turn to slide 10. For the third quarter 2013, net cash used in operating activities was $5.9 million which was the decrease from the $6.3 million of the net cash used in the comparable quarter of 2012. For the first nine months of 2013 ending September 30, net cash used in operating activities was $20.2 million as compared to net cash used of $24.4 million for the comparable period of 2012. The decrease of $4.2 million was mainly attributable to one time purchase of biopolymer inventory and restructuring expenses in 2012. We are focused on strengthening our balance sheet and we will attempt to obtain additional funding through public or private financing collaborate agreements with strategic partners with additional credit lines or other debt financing sources to increase the funds available to support operations. We believe that our cash and investments together with expected funds to be received from existing grants and anticipated product sales will be sufficient to meet our projected operating requirements into third quarter of 2014.

Before we move on to Q&A, I would like to provide an update on the shareholder class action that was filed against the company in 2012 and that related to the law suit. We are pleased to note that on September 20, 2013, the court granted the defendant’s motion to dismiss the class action in full and derivative action is still pending.

With that we will now open the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Laurence Alexander with Jefferies & Company. Please proceed with your question.

George Stengel – Jefferies & Company Inc.

Hi! this is actually George Stengel on for Laurence. I have a question on securing production partnerships. Do you guys have any update on there and expected CapEx out lays or working capital needed to scale up?

Richard P. Eno

Sure. Obviously manufacturing – establishing manufacturing capacity is a key goal for the company and we are focusing on servicing that captive PHA production on a number of trends, we continue to monitor the legal processes of antibioticos but in parallel and actively looking at alternative manufacturing options that we will also conduct in technical due-diligence on to secure that commercial manufacturing supply. In the meantime, we continue to develop and launch new products to develop our customer relations based on materials that we source both on PHA and other biodegradable resins while we also make use of inventory.

Joseph Hill

And I just add a bit to that that you know one of the characteristics of sites we are looking at are really a brown field nature which implies existing equipment which our technology is integrated into.

George Stengel – Jefferies & Company Inc.

Okay thanks. Also PVC blending of PHAs, could you talk a little about what is the average price plan of that relative to selling PHAs directly?

Richard P. Eno

As we’ve developed our business to really a performance material business, we offer and sale value to a range of different applications areas that's especially true in the PVC performance additives. So we do not disclose pricing there. We will continue to report revenue and other time also margins. We are really securing and identifying the value by working with select customers and then obviously capturing value that’s typical in this performance material space to not disclose price list.

Joseph Hill

Yes, I think it is early stage in the PVC market and differences of small amounts in terms of the type of quantities PHA require to achieve certain performance has an implication into pricing levels which we are paying very close attention to.

George Stengel – Jefferies & Company Inc.

Okay. Thanks and just one more and you guys press release, there is a statement towards the end saying that you will attempt to obtain additional funding through private or public partners. That can be all but I was just wondering if that was like different in the last press released and how much money if that's true, are you guys looking to rise?

Joseph Hill

No I don’t think this is different than what our strategy has been and things haven’t changed from the previous press release. There are a number of avenues we are pursuing for strengthening the balance sheet but nothing material has changed from last quarter.

George Stengel – Jefferies & Company Inc.

Okay. All right. Thanks for the clarity. Thanks guys.

Richard P. Eno

Thank you.

Operator

Thanks George. And our next question comes from the line of JinMing Liu with Ardour Capital. Please proceed your question.

JinMing Liu – Ardour Capital

Thanks for taking my question.

Richard P. Eno

Thank you, JinMing.

JinMing Liu – Ardour Capital

Yes. Okay. First question about the Q3 achievement, it looks like you only shipped about $0.2 million products during the quarter and I think that's the lowest ever since you started to sale from inventory. What happened there?

Johan van Walsem

JinMing, quite correct. In Q3 we shipment was about $230,000 worth of product. The product B5008 a film product continued at a very low level and we attributed this to the product having somewhat narrow processing window which means that it not only really runs effectively on a narrow range of converting equipment. We do continue to provide the product because it has a very good balance of properties in the sense that it biodegrades fast so that's the key advantage but we have launched as we spoke in the prepared remarks about our B5010 product and that has been really developed to broaden that processing to run robustly on a very wide range of processing lines and we have conducted more than a dozen initial trials and so far the feedback has been good and we continue actually to support sales on B5010. I want to stress that we will continue to also support 5008 in those markets where we need fast bio degradation.

Joseph Hill

You know I will add to that, you know, say, as Johan describes it's a product that is in very clearly in a subset of our market and it's not scalable across a large customer base. The market is still quite interesting and quite attractive, but we intend to have a suite of products and you will be seeing other announcements of products in the future and B5008 has a role as does B5010.

JinMing Liu – Ardour Capital

Okay. In terms of new products B5010, two questions; where are those customers showing initial interest? Are they based mainly in Europe or some other areas as well? Secondly, really to that new product, can you make B5010 using your existing inventory or supplies from other companies like group Bell?

Johan van Walsem

So in terms of the markets, the B5010 is designed for a variety of film applications but specifically with the balance of strength and toughness very good in shopping bag market which is the strongly European market, but we have also interest and some sales in the U.S. where we see the market actually also growing for some of that reasons. So it's broadly directed at shopping and wise collection back, we need good strength and toughness but onto the question of the particular materials used in the manufacturing of B5010, we do not disclose our formulations for sort of obvious reasons but it is a product that is the result of our collaboration with Samsung as we mentioned so there are also some third-party materials in there, but we continue to use our inventory in our products and also in some cases customers will use multiple products and glance so.

Joseph Hill

And we are seeing activity in both sides of the Atlantic and 5010 is finding its way to customers in both sides of the oceans.

JinMing Liu – Ardour Capital

Okay. Which to your capacity, commercial production capacity, can you give us some idea how long it will take to develop commercial capacity if you choose to use a brown field site and also on that front notice another U.S. company made claim that they’ll have 60 million pounds capacity by the end of the next year, what do you feel about the timing of that and your efforts?

Johan van Walsem

As Rick mentioned earlier, assuming the capacity is that we really focused on this too. We have accelerated and capital like strategy to get into commercial manufacturing and that also implies shorter time line and conventional projects that might be two to three years when you do start from scratch. We are certainly looking at leveraging existing capacity. We are still evaluating sides and doing due-diligence and so the – once we have identified and secured a site, we will have more clarity on the timing. And yes, we have seen on your second question the same announcements and obviously we cannot comment on other company's plans and projections. We are really focused on building our own business securing additional customers and proving and validating the value of our materials specially the high performing PHAs.

JinMing Liu – Ardour Capital

Okay. Lastly, given your current cash position, do you have any plans to cut more costs or to more restructuring?

Joseph Hill

JinMing that’s a good question. You know we do take the discipline approach to our cash management and our operations. If you look at our SG&A and R&D quarterly spent in 2013, you will see that it is lower than the 2012. At the same time, we do look at this carefully and we need to make sure we strike the right balance in investing our business so we can grow the top line of revenue but still maintaining a strict focus on cash management.

JinMing Liu – Ardour Capital

Okay. Got that. Thanks a lot.

Johan van Walsem

Thank you

Operator

And our next question comes from the line of Jeff Zekauskas with J.P. Morgan. Please proceed with your question.

Yoyo Chen – J.P. Morgan

Hi this is Yoyo Chen for Jeff. So I remember maybe earlier in 2012, you entered into the agreements with antibioticos and you were expecting to ramp up the capacity is successful maybe at the first half of 2013 so that being said, if you were to find another partner to do the Brown field expansion that would take roughly a year to bring on the commercial capacity is that reasonable?

Richard P. Eno

As we’re conducting due-diligence from a number of sites and part of that due-diligence really is to determine the certain capital required and the time line frankly. So fraction of many, no in fact not least of the specific at the site. So I can't comment on specific timing.

Yoyo Chen – J.P. Morgan

Okay. So another question would be I would assume maybe there would be roughly four million pounds remaining of the products that you bought from ADN, so is there any possibility that you would consider lower your average selling price so that maybe you can have a better revenue number of going forward?

Joseph Hill

The inventory is as we mentioned we have a number of – the key focus for us is to really develop high valued applications for PHA and customers and our key segment as film and the performance additives which include PVC and other polymers. And inventory as for us one of our key interim supply to meet that objective. So it's really targeting at validating and improving the value in use of these materials which is counted to trying to move to lowest price. So we are really using it more strategically than just setting as fast as possible for the lowest products.

Johan van Walsem

Yes, I think that ties to a typical customer development cycle in this industry typically customers will start with relatively small quantity to reduce some internal testings going to small scale market testings and going to commercial launches. So we are looking quite far out about the best way to use the inventory and has been really the best thing for us is not to cut the price and try to dump at all. It's really to look at what applications map best to the inventory we have and continue to bring customers along that development cycle consistent with their longer term strategy within those segments.

Yoyo Chen – J.P. Morgan

Okay. Thank you.

Operator

At this time we have reached the end of the Q&A session. I would now like to turn the call back over for any closing comments.

Richard P. Eno

Thanks everyone for joining the call and your continued support of Metabolix. In summary we continue to execute all phases of our strategy with a keen emphasis on market development and establishing commercial biopolymer supply. We are building our markets for PHA and bio-degradable materials by developing high valued products and strong customer relationships. We aim to demonstrate to you ongoing progress towards our goal of building a robust and differentiated biomaterials business. And thanks again for joining us today and we look forward to speaking with you again on our fourth quarter call.

Operator

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

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