Ceres' CEO Discusses F4Q13 Results - Earnings Call Transcript

Nov.21.13 | About: Ceres, Inc. (CERE)

Ceres Inc. (NASDAQ:CERE)

F4Q13 Earnings Call

November 21, 2013 4:30 PM ET


Gary Koppenjan – Director, IR

Richard Hamilton – President and CEO

Paul Kuc – CFO


Duffy Fischer – Barclays Capital

Michael Cox – Piper Jaffray

Pavel Molchanov – Raymond James


Good afternoon, ladies and gentlemen and thank you for standing by and welcome to Ceres, Incorporated Fiscal 2013 Year-end Earnings Conference Call. As a reminder this call is being recorded and webcast over the Internet. You can access the webcast in the investor events section at ceres.net. A replay will be available for the next 30 days at this address as well.

At this time I’d like to turn the call over to Gary Koppenjan, Director of Investor Relations. You may proceed sir.

Gary Koppenjan

Thanks, operator, and good afternoon to everyone. Thank you for joining us today to discuss our fiscal year-end results. I’m joined by Richard Hamilton, our President and CEO and by Paul Kuc, our Chief Financial Officer.

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

Before we get started please be reminded that this presentation contains forward-looking statements. You should not place undue reliance on these forward-looking statements because they involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. Factors that can materially affect actual results can be found in our reports filed with the SEC. Ceres undertakes no intention or obligation to update or revise any forward-looking statements.

I will now turn the call over to Richard.

Richard Hamilton

Thanks Gary. Good afternoon. Thanks to everyone for joining us. On our call today I will focus primarily on our sorghum opportunity in Brazil and our expectations for the current season. Plantings are now underway and we expect them to be completed in December. We also have some exciting results from our trade evaluations that were conducted this summer in the northern hemisphere in a variety of commercial crops, including corn, which provides another interesting outlet for our genetic technology.

Finally I’d like to discuss our views on the cellulosic biofuels and biopower markets in the U.S. and Europe. These are attractive long term opportunities, but where we believe we already have a strong lead in developing feed stocks and need to be mindful about how we utilize our working capital in light of our priorities on sorghum in Brazil and the pace of market development for cellulosic biofuel and biopower. Following my comments, Paul Kuc will provide a financial summary and we will end today’s call with questions from our analysts.

As we reported in our earnings release today there continues to be broad interest in the development of sweet sorghum in Brazil. This season our products will be planted at approximately 50 mills and suppliers, up from about 30 mills last year. This is a key metric for us and we believe this increase demonstrates the strong appeal of the sweet sorghum opportunity amongst ethanol producers.

Total plantings are expected to approach about a 1,000 hectares by the time they are completed in December. This is consistent with our previous estimates and the nature of the evaluations underway this season. Our goal for these plantings is to clearly establish the economic basis for sorghum cultivation and processing. We have already demonstrated on a pilot scale basis that economically attractive yields can be obtained with our products. Our opportunity as well as our challenge therefore is to duplicate this success across a broad range of customers and geographies.

To achieve more consistent results we have made a number of adjustments in our go-to-market approach and product development processes that will allow us to provide more support to the mills and greater oversight in the valuations, especially during critical cultivation windows such as land preparation and planting. These changes will also allow us to more effectively develop and target new products in our pipeline.

Finally we’ve taken steps to raise the profile of sweet sorghum in Brazil by working with some highly influential agricultural leaders as well as extending our market development agreement with Syngenta. First this season we focused more on mills located in geographies where our products have been well adapted and where our agronomy teams are located. Like previous seasons we’ll be working with large multi mill groups, independent mills, major suppliers of sugarcane as well as innovative mills that have the resources and commitment needed to be successful.

We believe we have the right mix of customers to build momentum for larger scale adoption once we build confidence in the economics of field production. As you know the ethanol industry is much more consolidated in Brazil than in the United States, and if one or more mills within a larger group performs well we could anticipate adoption by other mills owned by the same group.

At the same time we have expanded our team in Brazil. We now have more than double the number of employees in the local market than last year at this time and have established coordinated teams across various regions to provide closer support to the mills. This proximity, combined with geographic targeting of our customers will also allow our teams to spend far more time in the field with customers, and less time on the road travelling from mill-to-mill.

With more boots on the ground we’ve also established more robust processes at the local level to develop test and launch new products. For example we’re fine tuning the process by which we match our current products and pre-commercial hybrids with different growing regions and customers. As you recall last year we experienced more variability than we expected due in part to crop management issues but also due to how well the genetics of individual products responded to certain environments or G by E as it is referred in the seed industry.

With our plantings this season our agronomists will be able to provide greater oversight as well as collect and correlate more consistent data among the mills. The mills themselves will also get a first-hand look at our current and future products as well as best crop management practices. More importantly they will get yield data directly relevant to their growing conditions from which they can select the best mix of products for the following season.

Our plantings with customers this season include approximately 10 hybrids, including both commercial and pre-commercial hybrids. These pre-commercial products performed quite well in our breeding trials last season in Brazil. We also have the first data in from culture season evaluation in the summer in the northern hemisphere. These evaluations demonstrated that our newest hybrids out yielded the products that we introduced just last season by more than 30%. So we feel we have ample cause for optimism in the products we’ll bring into market. Based on the industry feedback we believe that minimum average yields in the range of 2,500 to 3,000 liters of ethanol per hectare will be necessary to achieve broad commercial adoption.

We achieved yields in this range last year including top yields as high as 3,600 liters per hectare but not consistently. As we noted last season two neighboring mills, planting the same mix of products had a yield difference of approximately 1,500 liters per hectare due primarily to how closely they followed our crop management protocols.

At this time we believe that at least two growing seasons, including this one will be required for mill customers to have a high degree of confidence that they can consistently achieve these attractive yield levels. This will allow their agriculture teams to gain greater confidence in producing the crop and adhering to our crop management protocols.

During this time we also plan to continue to develop and launch new products that provide more yield headroom for when conditions to support execution are not ideal. In addition to our advanced pre-commercial products we’ll be testing hundreds of new hybrid crops in a number of growing conditions and regions. The goal of these trials is not to commercialize hundreds of new products but to select the best candidates for various growing conditions in wider scale testing.

This data is also used to guide the next round of hybrid classes and selection. This is our product development flywheel in action. In addition to our hybrid development we are developing product solutions that increase yields and provide greater yield protection. We are developing products that maintain peak sugar levels longer have high sucrose purity, perform well under various growing conditions and which can be harvested at various times of the year. As I mentioned earlier we had established an Advisory Council in our subsidiary in Brazil to help inform our activities and raise the profile of sweet sorghum.

Earlier this month Paul and I were able to attend a meeting of this council which is chaired by Roberto Rodrigues, who is the former Brazilian Minister of Agriculture during the Lula administration. I had the opportunity last season to tour our research center in [Central Elina] with him and he was impressed with the depth and the breadth of our product pipeline and certainly interested in the potential of sweet sorghum in Brazil. He brings a great deal of experience to the council as well as very high level industry and government contacts and we value his insight and leadership.

Other council members include one of the largest sugarcane growers in the world as well as several other executives from leading sugarcane mill groups. We’re very grateful to these respected leaders who’ve agreed to help, inform and guide the development of our Brazilian sweet sorghum business. If you like to see a list of all the members please visit our Brazilian website at CeresSementes.com.br.

In October we also announced the formal extension of our market agreement with Syngenta. This collaboration continues to work well. As you recall we are working with them in Brazil to determine the best mix of our hybrids in Syngenta’s crop protection products. They indicated their interest in commercializing additional crop protection products for sweet sorghum. As you may know registering a new crop protection products sometimes requires not an insignificant investment in type of resources and we believe this provides another assurance to mills that a mature sweet sorghum protect, crop protection industry will have a broad array of crop management tools at their disposal.

From a competitor standpoint we are not aware of any major shifts to competitive landscape at this time and believe one of the best ways to maintain our lead is to never stop improving our product offerings. This is the nature of the seed business and this is exactly what we are doing.

To sum up the status of our Brazil opportunity I believe that we continue to be recognized as a leader in sweet and high biomass sorghum development. We have expanded our approach this season, brought in top industry experts expanded our team and continue to apply our integrated technology platforms to rapidly advance new materials already in our product development pipeline. Our goal this season is to clearly establish the economic basis for sorghum cultivation and processing.

The final piece of this opportunity will be demonstrated in the field and that’s where we’re concentrating our efforts. As I indicated in my opening plantings are underway and we’re focused today on getting these plantings off to a good start.

I would like to provide you now with an update from our biotech trade development pipeline. As you recall we are developing biotech traits for using sorghum amongst other crops or in the past few years we’ve been rapidly transforming these traits in the sorghum. We’ve seen excellent results in the green house and in several cases have advanced candidates to open field evaluations.

I am pleased to report that these field evaluations have largely confirmed previous results obtained in green house and laboratory settings. In certain cases we have demonstrated yield increases but more than 50% over controls. We are moving these genes in more advanced germplasm including the [parenteral] lines of hybrids. As we evaluated and confirmed in several different species to-date which gives us the high level of confidence moving forward.

In addition to our energy crops we’ve also developed many biotech traits for using cereal crops like rice and corn and increase grain yields and provide greater yield stability across different environments. Our strategy is to focus on genes that have shown large step wise increases in performance. In rice we have events well past proof of concept and are moving forward to the final phase ahead of commercialization which includes field evaluations of our traits and hybrid rates.

Earlier this month our commercialization partner in India confirmed our genes in rice provided up to 100% yield enhancement under drought and other stress conditions. These genes are currently being introduced into hybrids rice parenteral lines by a partner who is planning additional field evaluation.

This month we also received new results from field evaluations of several of our biotech traits in corn which provided other interesting outlook for our genetic technology. Here again our genes have moved well beyond proof of concept testing. We have previously confirmed their performance in multiple species. Preliminary data from our field evaluations in China has been positive with some lines delivering over 20% increases in corn yield in the kind of stress conditions that commonly affect production.

We intend to pursue out licensing opportunities for certain of these traits in corn but only after further evaluations in hybrid corn that allow us to more definitively determine their commercial value. These studies are in progress and the next critical steps should be completed as early as next fall. There is of course a large existing market for corn seeds in the U.S. with end users that understand the value of biotech traits and numerous companies experiencing commercializing them.

For all of these trails I will add my usual word of caution that results from a research setting not a guarantee of future performance and further evaluations are going to be necessary to confirm performance but calls for optimism nonetheless.

Finally today I would like to discuss the cellulosic biofuel and bio power markets in the U.S. and Europe. Cellulosic bio-refineries have been successfully built in the U.S. and Europe and first companies are showing that the conversion to technologies can work at commercial scale.

These are attractive long-term markets that we need to be mindful how we utilize our working capital in light of our near term priorities on sorghum in Brazil as well as the pace of market development. With this in mind we’ve made some changes to our product development approach to biomass crops and traits to take advantage of the number of recent advantages in our pipeline.

We are transferring a number of pre-commercial hybrids and traits from R&D to our seed production department where we can produce gene for pilot and larger scale commercial production by commercial partners. These products have demonstrated significant performance benefits of our current products in the market and we believe we can maintain our leadership position in biomass crops with minimal new investments at this time.

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

Paul Kuc

Thank you, Richard. I would like to go over a few highlights of our results for fiscal year 2013 which ended August 31st. Our total revenues decreased by $0.2 million to 5.2 million for the year ended August 31, 2013 compared to the previous fiscal year. The decrease was due primarily to reduced activity under our various research and collaboration.

Turning now to operating expenses our cost of product sales increased by $3.9 million to $6.2 million for the year ended August 31, 2013 compared to the previous fiscal year. The increase was primarily due to write down expenses of $2.2 million for absolute seed inventory related to sweet sorghum product. Like all seed companies we expect incur write down expenses on an ongoing basis as new products replace old products and seeds lots fall below quality standard. However we believe that this process has been accelerated at this point due in part to the substantial improvement we have made over our first product in a relatively short period of time as well as the analyst page of the market.

The change of cost of product sales was also due to expenses of $1.7 million for crop management services performed last season in Brazil. Turning to Research and Development our expenses decreased by 2.8 million to 16.4 million for the year ended August 31st, 2013. The year-over-year change was due primarily due to reduced personal and related expenses in the United States as well as reduced R&D expenses, looking forward for the current fiscal year we anticipated R&D expenses will continue to decline.

Our selling general and administrative expenses increased by $2.6 million to $15.2 million for the year-ended August 31, 2013 compared to the prior year. The change was due to increased headcounts and related administrative expenses associated with our activities in Brazil. Looking forward we expect SG&A expenses to decrease in the near term. Our net loss for fiscal year 2013 was $32.5 million compared to a net loss of $29.4 million for the prior fiscal year.

At the end of fiscal year 2013 our cash and cash equivalents and marketable securities totaled $13.5 million. This represents more than a year of working capital assuming our historical net burn and the cost savings of up to approximately $5 million that we expect to realize this fiscal year other result of the measures we’ll reported in October.

To fund the company in the long term we believe we will need to raise additional fund. For a more detailed presentation of our financial result including a breakdown of our fourth quarter results please refer to today’s press release or our forthcoming 10-K. That conclude my prepared comments I will now turn the call back to Richard.

Richard Hamilton

Thanks Paul and thanks to everyone for your attention we would now like to take your questions.

Question-and-Answer Session


Sure, thanks sir. (Operator Instructions). And it looks like our first question in queue will come from the line of Duffy Fischer with Barclays. Please go ahead sir your line is now open.

Duffy Fischer – Barclays Capital

Yeah, good afternoon. I guess first one is kind of the elephant in the room, how are you thinking the funding? I mean how should we think about the timing of the funding? What do you think some of your options are and kind of what the decision points on which path you end up going?

Richard Hamilton

Duffy I am going to ask Paul answer that for you.

Paul Kuc

Exactly. So as you know we have a strong balance sheet, scale 30 million in cash and marketing securities. But as I said we will have to fund the company going forward. So currently we are actively monitoring capital to determine the appropriate timing and so that’s what we can say at this moment.

Duffy Fischer – Barclays Capital

Okay. And then when you looked you talked about a 1,000 hectors kind of split between commercial and pre-commercial. How many of those would be commercial? And what’s the thinking behind going out with pre-commercial loans? If I just think about may be some of your competitors here in the U.S. Monsanto when they came out with SmartStax, when they came out with Roundup Ready two one of the reasons that they didn’t do very well is they came out early relative to kind of testing in different environments.

Do you think that puts your hybrids at risk or may be not performing as they should because they haven’t been tested enough?

Richard Hamilton

Well I think when, thanks for that question Duffy. I think when you look at the pre-commercial hybrids they are going to be done on a small scale. And when we see the yield increases that we are seeing year-on-year and we’ve tested these new hybrids and we see a 30% increase over the existing products. We want to get those things out in front of mills and get them to be as excited as we are about the yield potential of those. So none of the pre-commercial things are going to get out and be planted on a commercial they will all be in smaller scale valuations.

Duffy Fischer – Barclays Capital

Okay and then just the last one, of the mill groups that you put the product on last year how many came back this year and how many did you not have repeat sales to?

Richard Hamilton

Yeah so it’s about half are coming back as repeat customers but again there is a number of customers that we agreed not to work with simply due to geographic restrictions. So really trying to restrict ourselves geographically to areas where we can have agronomy teams that could provide adequate coverage.

Duffy Fischer – Barclays Capital

Okay. Okay great thank you guys.


Thank you sir. And it looks like our next phone question comes from Michael Cox with Piper Jaffray. Please go ahead your line is open.

Michael Cox – Piper Jaffray

Good afternoon guys. My first question is the use of protocols and I think you talked, you addressed this briefly on the call of working more closely with the mills and getting more goods in the fields. But could you provide may be some additional commentary as to what you’ll be doing in terms of resourcing and the types of protocols you’ll be putting forth such that you can ensure consistent results across the plantings?

Richard Hamilton

Sure Mike it’s – I think it starts with making sure you have somebody there ethanol location going over with the mill agronomists the land selection making sure that there hasn’t been, that there aren’t any herbicide residues that the lands has been prepared adequately that appropriate planting equipment is used. And then again having a team that can do follow you with the nose on the regular basis to make sure that crop protection agents are being applied properly, that fertilizers being applied properly that’s sort of blocking and tackling.

Michael Cox – Piper Jaffray

Okay and in terms of the relationship with Syngenta. Can you may be discuss what to what extent they might be able to help with some of this as well with their own force of personnel on the ground there in Brazil?

Richard Hamilton

I don’t see Syngenta is adding to that you know we have spent a lot of time to train our agronomy staff we’ve brought our entire Brazilian agronomy states to the United States for a week to train in the Northern Hemisphere with Sweet Sorghum agronomy experts. And so in terms of execution against the agronomy protocol I think it’s best left in the hands of our team than anybody else. Having said that we are still pleased that the relationship with Syngenta is moving forward.

Michael Cox – Piper Jaffray

Okay as you look at the or as I look at your business you have your sorghum operations and then you are working on traits for row crops, would you ever consider pursuing a different strategic path for the row crop component such that, that could be funding mechanism for your kind of core sorghum operation?

Richard Hamilton

So I think all options are on the table with regard to those traits. I think what we want to do is make sure we have a pre-definitive evidence of the impacts that these genes and trades can have. I think as you know Mike some of the major corn seed company they’ve been testing a lot of genes through corn and they have frankly very little success to show for it. So if we’ve done something differently we want to be able to demonstrate that as they said pretty emphatically. And then I think again we’ll consider a lot of different options as how we best monetize those assets, how we best see to their commercialization and what that means for our other business areas.

Michael Cox – Piper Jaffray

Okay and my last question is on the team you have in Brazil you’ve made sort of overhauled that group there. Could you may be speak to just for me and other listeners on the line to get comfortable with the people you have on the ground there. I know you hired someone formerly from Monsanto but may be speak to some of the individuals that are now leading that effort on the ground in Brazil.

Richard Hamilton

Yeah as you just mentioned our general manager there, André Franco comes with 20 plus years of seed industry experience. And he spent most of that with Monsanto and he has assembled we think a very good team of people just not only in sales but also in agronomy and seed production and the other areas that we have on the ground in Brazil.

Michael Cox – Piper Jaffray

Okay. Thanks a lot guys.


Thank you, sir. (Operator Instructions) And it looks like our next one question will come from Pavel Molchanov with Raymond James. Please go ahead, sir. Your line is open.

Pavel Molchanov – Raymond James

Thanks for taking the question. I want to try to understand did something change between July and now because in July you guys I believe indicated that while plantings wouldn’t grow as robustly as you had originally anticipated that it should be flat to up from 2013 and now you are guiding to pretty big hair cut so something change in last 90 days?

Paul Kuc

No, again I think as we pointed out in the press release the number of mills went up and order of magnitude, the number of factories remained more or less the same. So you might want to read a lot into 1,000 versus 3,000 hectors but I wouldn’t read much into that.

Pavel Molchanov – Raymond James

Okay. And then on the biofuels as you mentioned you are putting some products into commercial production. I mean are you seeing customer interest that guys knocking on the door or what’s the deal?

Richard Hamilton

Yes we have some people knocking on the door. Again I think you know the issues and challenges that face cellulosic bio-refiners and the challenges that they have to gain excess to debt capital to build more facilities but of the people who have facilities or who have financing to build facilities, we’re having some very interesting discussions.

Pavel Molchanov – Raymond James

Okay At the time of the IPO a year and half ago you guys indicated that the first trade revenue would be no earlier than 2016, what the time having passed is there any refinement to that time table?

Paul Kuc

Look those time tables get driven more by regulatory approval than anything else. And so we can do the product development work that we need to do but we don’t control the regulatory authorities. So I am always hesitant to try and give time trends on those because I cannot control timeline in which for example the Indian regulatory authorities might approve GMO rice line just don’t know.

Pavel Molchanov – Raymond James

Understood, I could certainly appreciate that point. Thanks.


Thank you, sir. (Operator Instructions) Presenters, at this time, I am showing no additional questioners in the phone queue. I would like to turn the program over to management for any additional or closing remarks.

Richard Hamilton

Thanks, operator, thanks to everybody for your time and questions today. Our next scheduled earnings report will be in January. At that time we expect to have the final sales number in Brazil as well as an update on how the season is progressing. This concludes my remarks. Have a good afternoon and evening.


Thank you, gentlemen and thank you ladies and gentlemen. Again this does conclude today’s call. Thank you for your participation. And have a wonderful day. Attendees you may log off at this time.

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