BioAmber's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.13.14 | About: BioAmber (BIOA)

BioAmber, Inc. (NYSE:BIOA)

Q4 2013 Earnings Conference Call

March 13, 2014 4:30 PM ET

Executives

Mike Hartmann - EVP

Jean-François HUC - President and CEO

Andy Ashworth - CFO

Analysts

Patrick Jobin - Credit Suisse

Daniel Baksht - Pacific Crest Securities

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2013 BioAmber Incorporated Earnings Conference Call. My name is Denise and I will be the operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Mike Hartmann, Executive Vice President of BioAmber. Please proceed.

Mike Hartmann

Thank you, Denise. Good afternoon, everyone and thank you for joining BioAmber's fourth quarter 2013 earnings conference call. I'm Mike Hartmann, Executive Vice President of BioAmber and with me today are Jean-François HUC, our Chief Executive Officer; and Andy Ashworth, our Chief Financial Officer.

I would like to remind everyone that this conference call contains estimates and forward-looking statements that represent the Company's view as of today, March 13, 2014. BioAmber disclaims any obligation to update or revise these statements to reflect future the events or circumstances. 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.

Please refer to today's earning release and BioAmber's filing with the SEC for information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements. In our fourth quarter earnings press release you'll also find reconciliations to the most comparable GAAP financial measures for any non-GAAP financial measures discussed on this call. Our Q4 2013 earnings release is available on the Investor Relations page of our corporate website at www.bio-amber.com. An audio replay of this call will also be available on the Company's website starting two hours after the end of this conference call.

I will now turn the call over to JF who will provide you with the business update.

Jean-François HUC

Thanks Mike. Welcome everyone to BioAmber's fourth quarter 2013 earnings call. I'm going to summarize the progress that we've made over the past year and then Andy Ashworth, our CFO will walk you through our full year financial results.

We’ve made good progress on construction in Sarnia since our last call in November 2013. We’ve completed over 60% of the detailed engineering and are now focused on completing the detailed piping and electrical instrumentation work. The piling work that was ongoing in Sarnia is now finished. Our plants in Sarnia will have three principal structures; a warehouse, a process building, and an office building. Our schedule has us initially building the warehouse which will serve as the lay down area for the future equipment as the process building goes up. We’ve completed the foundation work and we’re now erecting the structural steel for the warehouse. The foundation work on the remaining buildings is underway and the subcontracted work packages for both the process building structural steel and the office building have been awarded to third-party subcontractors.

Now we are seeing a positive trend with respect to the capital cost that we’ve incurred to-date. For most for equipment purchases and work packages that we’ve awarded to subcontractors, we’re seeing bids there are coming in on or slightly below budget. This is an encouraging trend that is giving us an increasing confidence that we can bring the plant construction in on budget. At this stage of the project our trend is showing a total capital expenditure that is within our 125 million plus or minus 10% estimate.

With respect to the schedule, the Sarnia area has been hit with exceptionally cold weather and heavy snowfall this winter. To-date we’ve lost approximately eight work days due to extreme cold and snow. We’ve also identified the potential for delays in a few key equipment deliveries. The current trend suggests that if we do not recover the lost days due to weather moving forward and we’re not able to mitigate the risks around the equipment delivery dates, the project completion could be delayed by up to four to six weeks.

In our last earnings call we highlighted the efforts that we were undertaking to prepare for the commissioning and startup of the plant, following its mechanical completion, so that we could get the plant up and running in a steady state as quickly as possible. We’ve made further progress in this area including hiring an experienced plant manager, purchasing the IT systems we will need to run the plant and planning for ISO 9001 and ISO 14001 Certification.

We hired a plant manager who has over 30 years of relevant experience including seven years in Sarnia, pardon me, as the manager of the large Suncor Ethanol Plant. He oversaw all aspects of the Suncor facility from the planning, permitting and construction of the plant through to its commissioning and startup, its daily operation, and a subsequent expansion. He knows the Sarnia environment, he understands fermentation, he’s familiar with the local supply chains and labor relations and as such he will be a tremendous asset to the Company moving forward. He is leading the commissioning and startup team.

We’ve purchased the ERP system that will be used to manage the plant and the system will be implemented over the next six months, so that it’s fully operational when we begin commissioning in Sarnia. We’ve also purchased the maintenance management software that will allow us to effectively execute our preventative and predictive maintenance strategy at plant commissioning and startup. We’ve also higher quality and environment manager who has extensive quality system implementation experience. This person is responsible for ensuring that the processes and procedures that we’re putting in place will be aligned with ISO 9001 and ISO 14001 standards, so that we’re in a position to obtain both certification as soon as possible after we have commissioned the plant.

Now this past year saw meaningful progress for our commercial development efforts. We brought on 18 new customers in 2013 that will help to base load Sarnia and we worked with a number of companies to test our bio-succinic acid in new and emerging applications that offer the prospect of significant growth. Our average selling price dropped in 2013 relative to 2012 as we increased Bio-SA sales to selected strategic customers who required pricing that was more in line with the pricing we’re offering for future Sarnia productions. Over the past year we worked with a number of innovative companies that validated our Bio-SA in several new applications that we had not previously identified. They demonstrated that our Bio-SA offered better performance and/or functionality than the chemicals that our Bio-SA was replacing.

For example, in artificial leather they demonstrated that the polyester polyol made with Bio-SA offers better aesthetics including softer touch than the polyols made with adipic acid. This market reportedly consumes 150,000 tonnes of adipic acid annually. Another example is in foams made with Bio-SA and recycled PET. The Bio-SA provided performance benefits to the polyols that were made from recycled PET, including reduced viscosity, increased density and tensile strength, reduced brittleness and improved stability in addition to increased renewable content. These foams have been developed for a number of applications including insulation panels and the near-term market is estimated at 15,000 to 20,000 tonnes per year but with significant growth potential.

Several coatings companies have also demonstrated that resins and polyols made with the Bio-SA offer advantages over adipates in paints and coatings. These advantages include better gloss retention and higher renewable content. We now believe that the total addressable market for Bio-SA in coatings is approximately 600,000 tonnes per year. Our goal is to sign supplier agreements with market innovators in these emerging market segments and to announce product launches incorporating Bio-SA over the coming year.

Now in the fourth quarter of 2013 we did not produce any Bio-SA in the French toll manufacturing facility. This is because ARD, the owner of the facility, had a commitment to another customer and required the balance of the year to produce another product. ARD has committed to providing BioAmber with the additional access to the plant in 2014 to compensate for the lost time in Q4 2013. We may use some of this time to conduct additional test runs in the French plant in 2014 with our yeast to validate additional improvements and requirements that we have made to the fermentation protocol we plan to run in Sarnia.

This would reduce the time available for commercial production of Bio-SA and now that ARD has begun the toll manufactured products for other customers there will be the expected reduction in production capacity that comes along with that. Taking this more limited capacity into account, we plan to manage our sales of Bio-SA in 2014 and focus on meeting the needs of our new customers of strategic buyers that require test samples and existing niche customers who are commercializing products that incorporate our Bio-SA today.

Our goal is to build up inventory levels during 2014 and have a greater quantity of Bio-SA on hand when we startup Sarnia. We will need Bio-SA in significant quantities to commission the Sarnia plant and we also want sufficient inventory so that we can ride out a longer than expected commissioning and startup period in 2015. As a consequence, we do not expect our sales in 2014 to be significantly higher than they were in 2013. However, if the production levels in the toll manufacturing plant end up being higher than our conservative assumptions, we would plan to generate incremental sales, but this would not likely occur before the fall of 2014.

Our take-or-pay agreement with Vinmar International, which we signed in January 2014, was a focus of ours for most of 2013. This agreement is a major milestone for BioAmber. We secured in Vinmar an off-taker for a large Bio-BDO plant that knows the BDO market and has been selling close to 50,000 tonnes of BDO per year for the past several years. Vinmar also has project development and financing expertise having helped several partners secure project financing by leveraging Vinmar’s banking relationships and the take-or-pay agreements that they sign.

It is an important vote of confidence that Vinmar has selected our BDO technology as its future source of BDO and we feel that their equity contribution in the planned Bio-BDO plant will bring further credibility to the project. This agreement should significantly improve our ability to raise project financing thereby reducing the capital we need to contribute. At recent BDO prices and to give you a sense of those the global average price over the past three years was approximately $2,800 per metric tonne according Tecnon OrbiChem data, the annual sales from this plant would be approximately 280 million representing over 4 billion in revenues over the term of the contract.

Our focus now is on preparing the engineering for our toll manufacturing plant, signing a toll manufacturing agreement and bringing online approximately 400,000 tonnes of BDO capacity per year in the second half of 2015. The production of 4,000 tonnes of BDO will require approximately 6,000 tonnes of Bio-SA from Sarnia and the Vinmar take-or-pay agreement will apply to the 4,000 tonnes of BDO that are produced annually at the toll manufacturer. We are finalizing our choice of toll manufacturer which we expect will be in U.S. In parallel we’re continuing to work with our exclusive partner Evonik to scale up and commercialize the catalysts we have licensed from DuPont.

Now at the corporate level we continue to manage our expenses very carefully. We reduced our net cash, used in operating activities by 15% in 2013 relative to 2012, despite becoming a public company and incurring higher legal, accounting and insurance costs. Our goal is to keep our cash burn under 20 million in 2014 while spending more money on BDO development and engineering for the remainder of this year as we prepare to bring the BDO toll manufacturing facility online next year.

So in conclusion we feel 2013 was an excellent year for the Company marked by the achievement of several important milestones. Over the past year, we have completed an initial public offering, built a strong project team and made good progress on Sarnia construction, hit our final development milestone for the Cargill yeast, secured additional customers for Sarnia and developed new applications for Bio-SA that have the prospect of strong future demand.

For 2014, we’ve set equally ambitious goals, we want to secure at least 30 million in additional government loans for Sarnia, 10 million of which we have already obtained from Agriculture Canada. We’d also want to secure customers and an equity partner for our large BDO plant which we’ve now achieved with the signing of the Vinmar agreement and we want to secure take-or-pay agreements for the Sarnia plant.

We also want to sign additional supply agreements with customers in high growth applications such as those I mentioned earlier and most importantly we want to meet the schedule and budget for the Sarnia plant. So that concludes our business update and I’d now like to the call over to our CFO Andy who will outline our financial highlights for the full year 2013.

Andy Ashworth

Thank you JF. I will briefly summarize our full year financial results and then we can answer questions. Revenue for the full year 2013 increased 16% to $2.7 million from $2.3 million for the full year 2012. The increase in revenue was due to higher volumes of bio-succinic acid sold partially offset by a decrease in the average selling price as we expanded our customer base and sold to certain customers who saw pricing closer to selling prices we’re offering for future Sarnia production.

Gross profit decreased to a loss of $24,000 in the 12 months ended December 31, 2013 from a profit of $545,000 in the same period in 2012. The reduced gross profit in 2013 was due to the lower average selling price and this was partially offset by a 32% reduction in the unit cost of goods sold in 2013 relative to 2012.

Research and development expenses decreased by $3.8 million to $16.6 million for the year ended December 31, 2013 as compared to $20.4 million for the year ended December 31, 2012. This was due to the completion of the yeast development project with Cargill, a reduction in outsourced research and consulting fees as more efforts were brought in-house in the Plymouth, Minnesota research facility, and the lower stock option expense resulting from the vesting of certain stock options upon completion of the IPO in the second quarter of 2013. These reductions were partially offset by an increase in payroll costs that resulted from hiring additional personnel for in-house research and development and engineering development work related to the Sarnia facility.

Sales and marketing expenses increased by $537,000 to $4.7 million for the year ended December 31, 2013 as compared to $4.2 million for the year ended December 31, 2012. This increase is primarily due to an increase in incentive compensation, including stock-based compensation expense due to new stock options being granted in 2013.

General and administrative expenses decreased by $1.9 million to $9.8 million for the year ended December 31, 2013, as compared to $11.7 million for the year ended December 31, 2012. The decrease was primarily due to a $3.1 million decrease in financing costs associated with the one-time write-off of deferred IPO costs in 2012. This was partially offset by a $1.2 million increase in professional fees and insurance premiums resulting from being a public company.

Impairment losses in 2013 were $8.6 million compared to $1.2 million in 2012. In 2013 BioAmber decided to solely use its yeast technology in the planned facility in Sarnia, Ontario and as a result the Company reported a non-cash charge of $8.6 million for asset impairments to a E. coli technology, of which $7.8 million was related to E. coli in-process research and development that was no longer applicable to the Sarnia plant, and $834,000 attributable to Sarnia construction in progress related to this technology.

Foreign currency losses were $306,000 in 2013 as compared to $50,000 in 2012. In 2013, BioAmber decided, I am sorry the increase was driven by the weakening of the Canadian dollar versus the U.S. dollar and the impact on Canadian dollar cash balances being carried on the books to meet vendor obligations of the Sarnia project. The Canadian dollars were converted at favorable rates to the project budget and are expected to be used solely for the construction of the facility and not to be converted back into U.S. dollars.

During the 12 months ended December 31, 2013 the Company incurred financial charges of $2.9 million comprised of $1.8 million of interest expense applicable to the Hercules loan and $1.1 million charges for issuance cost related to the warrants offered in the IPO. Originally warrants issuance costs were recorded on the balance sheet as part of equity. However it was subsequently determined that these costs should have been expensed since they were applicable to the warrants issued with the units in the IPO.

These aforementioned financial charges were offset by $10.308 million non-cash gain related to changes in the fair market value of the warrants issued in the IPO including a $560,000 non-cash gain recorded in the fourth quarter. These warrants will be revalued in each reporting period resulting in a non-cash amount being recorded in the statement of operations while the warrants remain outstanding. The Company recorded a net loss attributable to its shareholders of $33.2 million or $2.13 per share, for the 12 months ended December 31, 2013 as compared to a $39.3 million or $3.82 per share loss, for the 12 months ended December 31, 2012. Finally we ended the year with $83.7 million of cash on hand.

I would like now to turn the call over to the operator, so we can answer any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Patrick Jobin with Credit Suisse. Please proceed.

Patrick Jobin - Credit Suisse

Hey, good evening. Congratulations on all the progress.

Jean-François HUC

Thank you, Pat.

Patrick Jobin - Credit Suisse

First question just more or less make sure I understand the timing of the plant correctly, the potential delay just for some of those other items kind of puts mechanical completion in late ’14 or early ’15 is that fair and what type of commissioning phase are you kind of currently thinking about as you ramp kind of initial production? Thanks.

Jean-François HUC

And so what we’re seeing now Patrick are trends right, so we track the trends and we identify risks and we have had some delays or some lost days due to very cold weather and heavy snow, but today they are only trends because there are opportunities to mitigate some of these risks and in some instances catch up with some of this time. But if we weren’t able to catch some of this time back up then we are looking at a four to six week delay at the end of the project and that would put the project from a late 2014 into early 2015.

Patrick Jobin - Credit Suisse

Great. On supply agreements for production from Sarnia, just want to understand kind of your thought process for when you would want to strike contracts with that production and what level of volume you are comfortable committing today? And if you think more of that will kind of be during startup or if you want to do that contracting this year? Thanks.

Jean-François HUC

I would say that when you mechanically complete and you commission and startup your plant, realistically you anticipate a three to five month period, three months being aggressive and five months being more conservative. You will certainly start to produce some product in that timeframe, but evidently as you’re bringing operations online and doing testing and validating your process you may not have consistent production or consistent quality during that commissioning process. So, that’s why we like to have inventory on hand and because inventory on hand allows you to test some of the downstream operations without necessarily even having the fermentations running smoothly. It allows you to do some things in parallel, but realistically speaking our supply agreements give us some flexibility in terms of when we’d start to supply. Our expectation is that the plant would be running in a continuous stable mode after five months and we would have some capacity during that first of the year though and -- or some quantity produced and as such that the guidance we’ve given in the past is that we hope to sell about 45% of the nameplate capacity in the first year.

Patrick Jobin - Credit Suisse

Right. And you would expect to enter into those contracts late this year or during commissioning in ’15?

Jean-François HUC

You mean the take-or-pay contracts?

Patrick Jobin - Credit Suisse

Correct.

Jean-François HUC

So, we’re hoping to sign some take-or-pay contracts this year, but realistically speaking a lot of the people that we’re or a lot of the customers we’re supplying now or that were outside of a few strategic customers I would say that we might want to sign take-or-pay contracts ahead of the commissioning. The other ones we would likely convert once we’ve got stable production.

Patrick Jobin - Credit Suisse

Great, great. And last question from me just on Vinmar, congratulations that’s very meaningful. I guess, from your perspective what induced Vinmar to move forward today just given markets or capacity, are they waiting for Sarnia to come online obviously not. Just trying to understand what induced them to enter into the contract today and if it was other party parties interested as well? Thanks.

Jean-François HUC

So, we were evaluating a number of options, I would say that from -- and I’m only speaking -- I can’t be sure what Vinmar’s motivation was but Vinmar was looking for another source having lost the source of supply that they had in Saudi Arabia because the -- our understanding is that Saudi Arabian’s decided captively use that BDO to make engineering plastic and as a consequence they were looking -- they have been looking for a while for an alternative source, they believe that bio-based a portion of the BDO market is going to prefer bio-based or renewable BDO moving forward and having done due diligence on us, they felt that we had a process that had an attractive cost structure.

So, they did due diligence on us, they visited Sarnia, they looked at our engineering, they looked at our cost structure and our economics for BDO and they were motivated to sign that agreement now in order to lock up our -- to be the exclusive off taker of our first plant. And I guess they felt that there would be a competitive advantage for them to secure that capacity.

Patrick Jobin - Credit Suisse

Thanks so much.

Jean-François HUC

Thanks Patrick.

Operator

(Operator Instruction) Our next question comes from Daniel Baksht with Pacific Crest Securities. Please proceed.

Daniel Baksht - Pacific Crest Securities

Yes, hi. Thanks for taking my questions. First related to Vinmar, you mentioned that the toll would begin in the second half of 2015. And I was just wondering would that imply that Vinmar would take the first capacity out of Sarnia?

Jean-François HUC

Well, indirectly because some of the production in Sarnia is going to be going into toll manufacturer. Indirectly, yes the take-or-pay of BDO coming out of that toll manufacturing facility indirectly results and take-or-pay of some of the Sarnia succinic.

Daniel Baksht - Pacific Crest Securities

Okay. And then, so you’ve also mentioned in the past that your target margins for Sarnia are about 50% and Vinmar takes about as essential loft of 20% capacity at Sarnia. Does that margin profile change if the margins for Vinmar are different than 50%?

Jean-François HUC

What I would say is that those margins are when the plant’s operating at full capacity and so until we get up to full capacity we’re evidently going to have a fixed cost base that’s implied to a smaller number of tonnage that’s sold. And as a consequence we don’t expect to generate the same margin in the first couple of years, but as you can imagine anything that base loads that plant and generates margin on a variable basis is going to help cover fixed costs and therefore helps us to become profitable faster. So, that’s the way we’ve looked at it.

Daniel Baksht - Pacific Crest Securities

Okay, sure. So would you be willing to put a timeline on when you’d expect that reach that 50% full capacity, like a year from completion?

Jean-François HUC

The guidance we’ve given so far is that we -- our plan is to hit about 45% of nameplate capacity in terms sales in 2015 about 80% in 2016 and 100% in 2017.

Daniel Baksht - Pacific Crest Securities

Right, okay. And related to the Vinmar you mentioned that they’d take lease at a 10% equity stake in the new BDO plant and sort of maturity pickup 30% ownership in the plant. I’m just curious why BioAmber will target an equity ownership of 60% growth and 70% at Sarnia? Is it for capital reasons or…?

Jean-François HUC

Well, that’s a good question and I think we don’t have the exact percentage today because it’s going to depend on several factors. The take-or-pay agreement with Vinmar and the banking relationships that Vinmar has with project type lenders, we’ll make it easier for us to secure project financing. And depending on the level of project financing that we’re able to secure and the amount of government support that we’re willing to secure, if the remaining cash contribution is much smaller. So, let’s say of the order of 20% to 30% of the total cost of the plant, we would definitely seek to take a bigger equity percentage. I think today what’s unclear is, what the net cash contribution that BioAmber will need net of government support and project financing. And so we want to leave it open today so that we can have a controlling stake in that BDO plant in consolidation of the top-line, but a manageable cash contribution.

Daniel Baksht - Pacific Crest Securities

Okay so and I believe you’re targeting a financial close sometime in 2015 so we’ll just wait and see what happens with the product financing before you kind of know what kind of equity ownership here it’s going to take.

Jean-François HUC

Right now what we’re focused on is we’ve begun the site selection process in North America, building on the site selection process we had run a few years ago for Sarnia a lot, as you can imagine the front-end of this BDO plant it’s just a big succinic acid plant, so most of our requirements in terms of site selection are identical to those we used in finally choosing Sarnia. So we’ll be building on that, and looking at some additional sites that offer other advantages and for making BDO which is a liquid as opposed to succinic acid which is a crystal, a solid crystal. And in parallel we’ll be working to see what kind of government support we can secure for that project so, that has to dovetail with a toll manufacturing facility coming online in the U.S. and a successful startup of the Sarnia plant and ideally all those things come together in the summer of 2015 so that we’re in a position to move to a financial close with a group of lenders and equity partners.

Daniel Baksht - Pacific Crest Securities

Okay, fair enough. And then last one from me, just in terms of just getting Sarnia closed you offered some color on the $20 million in loans that remains outstanding, do want to offer up any more color on that, should we be worried about any kind of timing issues because of those loans not being able to get secured or…?

Jean-François HUC

No, all I would say is that this is a consortium and as such there are multiple lenders and things take longer than expected. And so it’s not a done deal yet, if it were we would have press released it already, but we have signed off on a term sheet. We have agreement on a term sheet, and we’re working on a definitive agreement and we’re just now in the process of going through the usual due diligence that our lending group will subject a project like this to. But we’re optimistic about closing on that money in the next quarter but anytime you’re dealing with, and this is a lending group that includes government agency these things take time and they sometimes take longer than we would like.

Daniel Baksht - Pacific Crest Securities

Okay, great, that’s all I got. I really appreciate your time, thanks.

Jean-François HUC

Thank you.

Operator

We have no further questions. I would now turn the call back over to management for closing remarks. Please proceed.

Jean-François HUC

Thank you, Denise. So that wraps-up our full year financial results call for 2013. We are pleased with the accomplishments over the past year and we’re excited about our prospects for 2014. Our goal is to deliver on our milestones, to keep identifying risks and trends as they emerge and to mitigate them as quickly and effectively as we can. I’d like to thank everyone for listening to this call and wish everyone a good evening.

Operator

This concludes today’s conference. You may now disconnect. Have a great day.

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