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Ceres, Inc. (NASDAQ:CERE)

F2Q 2014 Earnings Conference Call

April 10, 2014 16:30 ET


Gary Koppenjan - Director of Investor Relations and Communications

Richard Hamilton - President, CEO

Paul Kuc - CFO


Caleb Dorfman - Simmons & Company

Amanda Durow - Piper Jaffray


Good afternoon, and welcome to the Ceres Incorporated Fiscal Year 2014 Second Quarter 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 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. Please go ahead sir.

Gary Koppenjan

Thanks, Karen, and good afternoon to everyone. Thank you for joining us today to discuss our second quarter 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 quarter ended February 28, 2014. The press release we issued is available on our Web site. 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 could materially affect actual results can be found in our reports filed with the SEC. Ceres undertakes no obligation to update any forward-looking statements to confirm these statements to actual results or to changes in the company's expectations.

I will now turn the call over to Richard.

Richard Hamilton

Hi, Gary. Thank you everyone. Good afternoon.

Well, on our call today, I will start by providing you an update on our sorghum business in Brazil . We are pursuing two major markets for our hybrids. The first, using our sweet sorghum to extend the ethanol production season. And the other using our high bottom mass sorghum to provide biomass, it is the country's current biopower market.

I will focus on how our sorghum plantings are progressing this season with the expectation of sharing final results in July when we have yield data .

Following Brazil , I would like to highlight opportunities outside of our seed business where we continue to pursue our licensing opportunities for our trades and genomics technologies.

Following my comments, Paul Kuc will discuss our recent financing round as well as review our financial results for the second quarter. We will then end the call with some Q&A.

To begin in Brazil, I would like to recap the scope and purpose of our field evaluation this year. We have been working with 49 customers this season which include both mills and mills suppliers. These customers are responsible for approximately 30% of the sugarcane crushed in Brazil. So a valuable group to be working with and one that I believe speaks to the level of interest in the season extension and biopower opportunities.

Our averages are being evaluated at 55 different customer locations which are grouped near our agronomy teams. These groups are dispersed across an area of approximately the size of the American Midwest. Our plantings cover approximately 1000 hectares or about 2,500 acres and include both sweet and high bottom mass sorghum plants.

The purpose of our sorghum evaluation this season is to identify the optimal mix of hybrids for various regions. Through the ethanol season expansion opportunity, we believe we need to achieve yields in the range of 2500 to 3000 liters of ethanol per hectare product for commercialization. Likewise, for our biopower opportunity, we believe that we need to achieve yields per hectare in the range of 35 to 40 metric tons of biomass as measured at 50% moisture content, to achieve broad adoption of our high biomass sorghum hybrids.

We have already demonstrated on a pilot scale basis that such yields can be obtained with our products. And at this point, we need to duplicate the individual successes we demonstrated last season across a broader range of mills in geographies. There are few one hundred percent in agriculture but nonetheless, we are looking forward to demonstrating consistent progress and generating the data we need to make informed decisions for the next round of plantings this November. With the industrial processing of our products well established. Our intention is to utilize the results of this season and next to demonstrate to our mill customers the economics of growing our products.

Like many crop production seasons, the weather has played a prominent role in Brazil this year and it's one of the reasons why we have worked to mitigate this factor with multiple plantings across a broad geography. As you recall, we have significantly increased the number of plantings we had over last year. At the beginning of the season, our plantings experienced generally favorable conditions this led to good establishment rates and a strong start to the growing season. Since then, conditions have been variable and drier; excuse me drier than normal overall in South-Central Brazil with severe dry and hot [spots] affecting several regions within our sorghum evaluation areas, most notably in western São Paulo state. More recently, conditions have been more moderate.

Overall, evaluations have been managed according to our recommended protocols and assuming we continue to have favorable conditions through the end of the harvest. We expect to generate enough yield and performance data to make well informed decisions regarding product advancements and selections for various production regions in Brazil next season. In fact, we expect to generate a multifold increase in the volume of G by E or Genetics by Environment data over previous years. Simply put, we would have tested more hybrids, more locations and this will provide us the richer source of data from which the advanced hybrids and market our products to our mill customers next season.

We currently have 40 evaluation phase that we believe will provide such data. Based on visual inspections of plant health, size, populations per hectare, our agronomists estimate that approximately 65% of these customer evaluation phase are in good to excellent condition and 35% are in fair condition. Variation among locations in hybrids are primarily due to differences in growing conditions as well as the anticipated variation in the adoption range of individual hybrids under evaluation.

As we noted in our press release today, 15 evaluation sites have been lost or not expected to provide meaningful yield data at this point. This was due to severe shortages of rainfall that affected other crops in the area as well as minor mishaps like herbicide drift from nearby fields, herbicide residues in the soil and even run-off from too much rain in at least one instance.

I like to caution you that as growing conditions change, these assessments can change both positively and negatively. Sorghum is a crop that is naturally drought tolerant and resilient, but given the short history of growing sorghum in Brazil for bioenergy, it is not yet possible to accurately predict yields. So it's important to wait for the final results as we do ourselves.

Although weather has not fully cooperated this season, these dry conditions do make it easier to identify the most resilient product candidates in our pipeline, that we believe in the end will provide our mill customers with greater certainty that our products can perform consistently under the year-to-year differences in growing conditions.

At the same time, the sugarcane industry is forecasting that supplies of sugarcane which is used for both ethanol and electricity production will fall to low expectations this year and next as the result of these drug conditions. Likewise, water shortages in a country that relies on hydropower for approximately 80% of its power generation are driving up electricity prices. With few coal reserves in Brazil to fallback on, the spot market for biomass based electricity has spiked quite dramatically and is expected to remain above normal levels through next year.

We believe that this environment provides a tailwind behind our commercialization evaluations and we'll continue to generate interest and demand for both our sweet sorghum and high biomass sorghum products.

In addition to developing improved hybrids, we're also developing biotech traits to boost the performance of our sorghum products. We've seen excellent results in the greenhouse and in open field evaluations. Last year, we completed field evaluations of a high sugar trait in a non-commercial type of sorghum. This field evaluation largely confirmed previous results obtained in the greenhouse.

Based on these positive results, we have advanced this trait forward for additional evaluations in commercial type sweet sorghum hybrids in the field. We're planning both greenhouse and field evaluations this year and look forward to determining the impact of this potentially high value trait.

In addition to sorghum, we have also developed biotech traits for the large market of row crops, like rice and corn. For this market, we have chosen primarily to be a technology provider rather than a direct marketer of seeds. In rice, we are working in India with a well-established seed company. Here, our biotech traits for high grain yield and greater yield stability high advanced world-class proof of concept and are moving forward to the next stage which will lead to field evaluations of our biotech traits in hybrid rice. The process of introducing these traits into hybrid rice parental lines is currently underway. Our partner is preparing for open field evaluations as a part of the process and we expect to have results by the end of this year provided that the necessary field trial permits are issued in a timely manner.

We're also evaluating several biotech traits in corn. Here, we intend to pursue out-licensing opportunities, once further evaluations allow us to more definitively determine the commercial value. Spring plantings have been scheduled and we appear to be on track to complete this stage of field evaluations by the end of the year. Outside of cereal crops, we're working with one of the world's largest sugar beet companies for traits that improve productivity.

We're also evaluating our – excuse me our high sugar traits in sugarcane where we are taking a similar approach as we are in corn. We will seek out-licensing opportunities once we more definitely determine the performance and commercial value of our biotech traits in this crop.

I'd like to conclude my remarks today with a brief review of our upcoming calendar; we have a number of milestones to look forward to. The first step will be primarily driven by the cropping season in the North and Southern Hemispheres. As I mentioned, we expect to have sorghum yield results from Brazil in July from both mill evaluations as well as our own internal trials. Then in November, we are 100% of supplies in the scope for next round of pricing with mills with final seed sales in January. Our trait field trials will also follow the cropping season and we expect to have results from our corn and potentially rice evaluations by the end of the year.

We also have a number of potential business development milestones which are not calendar driven and these are related to the outlets and [few of] (ph) our traits to various crops like wheat or sugarcane as well as our proprietary genome-viewer software called Persephone which is currently being evaluated by a number of companies. We look forward to sharing our progress with you.

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

Paul Kuc

Thank you, Richard. Before I provide you with a summary of our results for the second quarter of fiscal year 2014, I would like to review the successful closing of our follow-on equity offering.

As we announced on March 10, the offering was oversubscribed and included participation from our largest stockholder as well as new high-quality institutions. The underwriters also exercised in full the over-allotment option prior to the closing. As a result, net proceeds were approximately $20.8 million. As we have previously discussed on our earnings call, we have endeavored to maintain a simple capital structure and a strong balance sheet and believe both the size and structure of the offering support this strategy. Most importantly, this infusion of capital will allow us to continue to move forward with our business plan.

I'd like now to provide you with a summary of our results for the quarter ended February 28, 2014. Our total revenues for the second quarter were $0.5 million compared to $1 million for the same period in the prior fiscal year. The change was primarily due to a decrease in collaborative research and grants revenue. Product sales remained relatively unchanged compared to the second quarter of 2013.

Our total cost and operating expenses decreased by $2.3 million to $7.7 million for the quarter ended February 28, 2014 compared to the same period in the prior year. The decrease was due in part to the cost saving measures initiated in the first fiscal quarter of this year and are generally in line with our expectations. Within our operating expenses, cost of product sales decreased by $1.7 million to $0.6 million for the second quarter of 2014 compared to the same period in the prior year. The decrease was primarily due to reduced expenses of $1.1 million for obsolete seed inventory and reduced expenses of $0.6 million resulting from changes and reductions in our sales incentive and promotional programs in Brazil.

Research and development expenses decreased by $0.8 million to $3.6 million for the quarter ended February 28, compared to the same period in the prior year. In the United States, research and development expenses decreased by $0.9 million primarily due to reduced personnel and related expenses and the reduced external research and development expenses.

In Brazil, research and development expenses increased by $0.1 million primarily as a result of increased personnel and related expenses. Selling, general and administrative expenses moved up marginally to $3.6 million for the quarter ended February 28, compared to the same period last year. In the United States, expenses decreased by $0.6 million primarily due to reduced personnel and related expenses and reduced professional fees and patent expenses. This reduction was offset by an increase of $0.8 million in Brazil primarily for personnel and related expenses.

Our net loss for the second quarter of fiscal year 2014 was $7.2 million compared to a net loss of $9 million for the second quarter of the prior fiscal year. We ended the period with $18.3 million in cash and cash equivalents and marketable securities. Of course, this has been enhanced since then by the proceeds from our follow-on equity offering. Assuming the current trends in our net run rate, our working capital will allow us to complete our current evaluations as well as the next planting and harvest cycle in Brazil along with other business development activities. For a more detailed presentation of our financial results, please refer to today's press release or our forthcoming 10-Q.

That concludes my prepared comments. I will now turn the call back to Richard.

Richard Hamilton

Thank you, Paul and thanks everybody for your attention. We would now like to take your questions.

Question-and-Answer Session


Thank you. (Operator Instructions) Our first question comes from the line of Caleb Dorfman from Simmons & Company.

Caleb Dorfman - Simmons & Company

Good afternoon, gentlemen.

Richard Hamilton

Hi, Caleb. How you're doing?

Caleb Dorfman - Simmons & Company

I guess Richard, first question, so obviously weather was an impact again this year. This is the second or third time in a row that we had weather impacts involving drought. Can you sort of quantify how much better the hybrids are doing in the drought conditions now compared to when we have big drought condition back in 2012?

Richard Hamilton

At this time, I really can't make that comparison because I don't have the yield data in hand. I think we might be able to make that comparison in July. I think just if we're relying solely on sort of agronomist rating, I think that I'm more optimistic this year than I would have been for the droughts that we had two years ago. And then I think it's a function of being a broader set of geographies with a broader set of hybrids.

Caleb Dorfman - Simmons & Company

Okay. That's fair. I look forward to this July results. And of those, I guess 15 trials which are not going to have adequate results, are these all due to weather-related issues or whether anywhere the hybrids simply were well-suited for the yield?

Richard Hamilton

Yes. It was not a question of hybrids being well-suited; we have at least one example of which tends to be affected by herbicide drift. So an adjacent field was being sprayed with herbicide and the wind blows the herbicide into your field and there is not a lot you can do about that, that's not us operating the tractor it happens to be a mill customer. We had at least one instance where there is still some herbicide residue in the soil and so that had a negative impact on one of the stands.

We had one, believe or not with that actually got too much rain and a lot of the stand got washed out. And then we had several that were severely impacted by the drought and those were all centered, I think largely at the most severe location for the drought in Western São Paulo.

Caleb Dorfman - Simmons & Company

Okay. So I guess Richard, you laid out sort of targets for yields for the high biomass sorghums.

Richard Hamilton


Caleb Dorfman - Simmons & Company

How are you basically getting to those numbers and do you think those are achievable numbers based on what you've had with your high biomass, hybrids in the past And how long do you think the high-biomass market opportunities of Brazil?

Richard Hamilton

Lot of questions in there, Caleb, we will kind of try and make sure we get them. So we think it's about 1 million hectare of opportunity in Brazil. And that's not just – there are mills who are selling electricity back to the grid and they want to extend that electricity generating season just as they might chose to extend their ethanol crushing season. And there are also a number of other biopower consumers in Brazil who are using biomass for a source of steam and power and these are variety of agro businesses whether it’s orange juice pasteurization or beef processing things like that.

Even we have seen and our customers have seen biomass yields at or above that 35 to 45 wet tons per hectare again at 50% moisture, and you got that 50% moisture Caleb, this is an important component of that because obviously, if you said 80% moisture that would weigh a lot more if you said 10% moisture would weigh a lot less. So that's kind of the range.

And then that targeted yield is really based on whatever the market price of biomass is in that geography which again varies a little bit. But the market price for biomass or biopower is obviously being set by the rules of supply and demand and what can people get for electricity prices which are going up in Brazil as I mentioned as related – as a result of the drought.

Caleb Dorfman - Simmons & Company

Great. Thank you very much.


Thank you. And our next question comes from the line of Michael Cox from Piper Jaffray.

Amanda Durow - Piper Jaffray

Good morning gentlemen. This is Amanda Durow on for Michael Cox, who is traveling today.

Richard Hamilton


Paul Kuc


Amanda Durow - Piper Jaffray

First question from us is, how is the new go-to-market strategy going with growers in order to minimize biomass yield variability?

Richard Hamilton

So far so good. Again, we don't – we can't measure a yield yet. But, based on what we have seen we are optimistic.

Amanda Durow - Piper Jaffray

Great. And do you have any update of that cost saving expectations and when we could see a reduction in overall R&D?

Paul Kuc

Right. So you already see in the current financial some of the reductions specifically in research and development as you pointed out. The way to look at it as I described during the last call is on sort of ongoing 12-month basis while when all these measures are introduced. Then we still expect those $8 million to $10 million savings. And this year – this fiscal year we are on track to achieve $4 million to $5 million altogether. And then you can see them already happening in the financial statements for this quarter in R&D.

Amanda Durow - Piper Jaffray

Great. Thanks for that color. And thanks again.


Thank you. (Operator Instructions) And I have no further questions at this time.

Richard Hamilton

Thanks operator. Thanks everybody for your time and questions today. Our next scheduled earnings report will be in July. Have a great afternoon and evening. Thank you.


Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.

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