Solazyme's (SZYM) CEO Jonathan Wolfson on Q1 2014 Results - Earnings Call Transcript

May. 5.14 | About: TerraVia Holdings, (TVIA)

Solazyme, Inc. (SZYM) Q1 2014 Earnings Conference Call May 5, 2014 4:30 PM ET

Executives

Caroline Corner – Investor Relations

Jonathan S. Wolfson – Chief Executive Officer

Tyler W. Painter – Chief Financial Officer

Analysts

Brian Lee – Goldman Sachs Group Inc.

Rob Stone – Cowen & Co. LLC

Weston Twigg – Pacific Crest Securities LLC

Tyler Frank – Robert W. Baird & Company, Inc.

Laurence Alexander – Jefferies & Company, Inc.

Maheep Mandloi – Credit Suisse Securities LLC

Pavel Molchanov – Raymond James & Associates, Inc.

Michael Klein – Piper Jaffray & Co.

Operator

Good day ladies and gentlemen, and welcome to the Solazyme Incorporated Fiscal First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s conference, [Caroline Corner] [ph]. Please go ahead.

Caroline Corner

Thank you, operator. Good afternoon and thank you for joining us on today’s conference call to discuss Solazyme’s first quarter 2014 results. Leading today’s call are Jonathan Wolfson, Solazyme’s Chief Executive Officer and Tyler Painter, Chief Financial Officer. This call is being broadcast live over the web, and we have prepared a PowerPoint presentation to accompany this call. The release and presentation can be accessed at the Investor Relations portion of our website, www.solazyme.com.

I would like to direct you to Slide 2; it says, among other things, that some of the comments constitute forward-looking statements that reflect management’s current views and estimates of future events and economic circumstances, industry conditions, company plans, performance and financial results. Statements are based on many assumptions and factors, including the completion and ramping up of production facilities, the ability and pricing of raw materials and equipment, operating efficiencies, new product developments, market conditions, product sales, access to capital and actions of government, partners and customers.

Any change in such assumptions or factors can produce significantly different results. To the extent permitted under applicable law, the company assumes no obligation to update any forward-looking statements as a result of new information or future events. Solazyme has provided additional information in its reports on file with the SEC concerning factors that could cause actual results to differ materially from those contained in this presentation and encourages you to review these factors.

Also please note that certain financial measures we use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in today’s release.

With that, I’ll now turn over the call to Jonathan.

Jonathan S. Wolfson

Thanks for joining us today. The first quarter was a busy one for Solazyme. Our results for the quarter were solid and are good start on our goals for the year. Tyler will speak to the numbers shortly. I want to focus my update today in two key areas: first, plant start-up, an initial ramp progress with Clinton/Galva and Moema. And second, commercial activity across our target markets including our new Encapso offering. We’ll also touch on our recent $200 million capital raise, which will help accelerate our plants to commercialize multiple specialty products.

I’ll start with the update on our manufacturing operations beginning on the next slide. Commissioning is continuing at the Moema facility, production equipment, fermentation through Encapso downstream is commissioned and operable as is fermentation including the 625,000 liter fermenters and in fact, we’ve successfully inoculated fermentation in the 625,000 liter fermenters multiple times. However, our facility has been experiencing intermitting power and steam availability resulting from the start-up of a new cogen facility at the adjoining Moema sugar mill.

This intermittency was unexpected and while we don’t see reliable availability of power and steam as a long-term issue. We’ve not yet been able to complete production of our first commercial product. It’s a big disappointment, not to be able to report from our first commercial product for Moema today. We were really hoping to do that right up to the wire. But as we’ve said many times, starting a large industrial facility can be an unpredictable process.

That said we still see production of our first commercial products at Moema happening this quarter and limited if any impact on the ultimate scale up timeline of Moema. This kind of unexpected hiccup is why we’ve clearly defined the first phase of plant start-up to be about establishing consistent commercial operations. Solazyme, Bunge and our JV are all working together closely to ensure the consistent delivery of steam and power to the facility. We are as anxious as anyone to be up and running and we’ll keep you posted regarding completion of our first commercial products.

In the meantime, we continue to make steady progress in commissioning plant operations. The slide you are looking at now is an updated version of the Moema progress slide we presented last quarter.

Note that the items in white are updates from what we discussed last time indicating our progress, steam and power aside, we are progressing closer to completion of the plant. Key upstream functions are online and we’re making good progress on completing work on oil recovery. Recovery capability through finished Encapso product is now operational and we’re commissioning the oil extraction units that lead to finished oils.

Completion of this final stage of oil recovery has taken longer than anticipated, but we’re targeting completion and operation of the full oil recovery processes this quarter. As these processes come fully online, we’ll be following the same path as you’ve seen us follow at Clinton/Galva in terms of our focus on establishing consistent operations.

Let’s move to Clinton/Galva on the next slide. We continue to be pleased with the ramp progress at Clinton/Galva, as we enter our fourth month since commencing commercial operations there. As we’ve talked about many times, the first phase of our plant ramp up is focused on establishing reliable production and supply. Within that context we are making steady progress. Since the last earnings call, we’ve produced a fourth distinct product; the products we’ve scaled include two oleic oils and mid-chain oil and Encapso.

One of the oleic oils in production is our high stability high oleic oil. We’ve now shipped to 10 distinct customers, which I’m very happy to say is double the number we had shipped to at the time of our last quarterly recall in late February. Our oils have been used in applications included metal working and industrial lubricants, oil field services, home and personal care and advanced biofuels. We’ve shipped to several repeat customers including for the Encapso product.

While it’s still early there are a few key takeaways about the progress at Clinton/Galva. One, we’ve already demonstrated the ability to produce multiple oils at scale, including high value oils and products. Two, we’re shipping in commercial quantity to a growing number of customers, including repeat customers. This means, we’re making good progress in building trust and reliability. And three, our oils are being tested and used effectively in multiple end markets, again highlighting at an early stage the diversity and potential of our technology.

I’ll shift gears now and talk about our commercialization progress beginning on the next slide. We’ve talked for a long time about our focus on three high-value large target markets, industrials and fuels, nutrition, and skin and personal care. Last month, we announced the fourth market in conjunction with the launch of our Encapso, encapsulated oil products, oilfield services.

In fact, Encapso actually has a broad base of potential market applications far beyond the oilfield, of which the drilling fluids market is just the first. This particular market is a big opportunity and we’ve been focusing on it, as we test Encapso for use by oil field service companies. We are very enthusiastic about the product and the test results we’ve seen in the field.

I’ll talk more about Encapso shortly. Our commercialization activities are ramping across a number of markets and I’d like to touch on each of them. Starting with consumer products, our Algenist line has grown rapidly and is a major success story for Solazyme. Algenist performed well again in Q1 with revenue up 24% year-over-year.

This result represents a good start toward our goal of growing our consumer brands by 30% this year. We expect to benefit as we move through the year from the rollout of Algenist and support of China and several additional Asian and Latin American markets. We also announced in recent weeks, the launch of Algenist with Nordstrom, which adds another strong upmarket retail channel in the U.S. and represents our first high-end department store.

We’re also making steady progress in nutrition. The nutrition market is a key priority for Solazyme and we’re focused on commercializing our food ingredients broadly. During the quarter, we established the Algavia brand for our whole algal powders and flavors, as well as our food oils.

Potential customers are testing the Algavia powder and flower products in a range of foods. Our foods commercial team is engaged with customers on a variety of applications and supply agreements. We have some exciting opportunities in the pipeline that we look forward to announcing in the coming quarters.

We also recently completed the U.S. self-affirmed GRAS, generally recognized as a regulatory process for our high stability high oleic oil, meaning that we can start commercially for food applications in the U.S. This is a great news since we’ve also announced that we have successfully scaled up this oil in the Clinton/Galva facilities. This is the second oil; we’ve taken through the GRAS regulatory process. Between these oils and our Algavia flower and powder products, we now have four distinct products that are GRAS and can be sold in the U.S. for food, comprising the beginnings of a robust nutritional portfolio.

Let’s now look at industrials and fuels. Our oils are relevant across a broad array of industrial applications from soaps and detergents, the functional fluids and lubricants, to jet fuel, diesel and other engines. Oils like our best-in-class high oleics and several of our short and Mid-chain oils are in production today and shipping to customers, as we’ve demonstrated in the Clinton/Galva this year.

We’re also making good progress in establishing a commercially focused foundation in the fuels business. Our initial strategy is targeted to producing oils for higher-value blends. we are currently shipping product for this purpose and we now have a signed customer who is committed to purchasing very significant volumes of our biofuel blends. We hit a big milestone last week with our partner, Unilever and I’ll cover this on the next slide.

you may have noticed that last week, Unilever announced that its premier Lux brand became what we believe is the first soap brand in the world to use algal oils, and that these oils were provided by Solazyme. The soap is now on store shelves in Brazil.

This is the initial product source from oils we will be producing for Unilever for the supply agreement announced last fall. This development marks a critical milestone in Solazyme history and we’re very excited about it. we’ve already demonstrated for Algenist line, how our oils and other bioproducts have demand with consumers.

However, it’s another level of validation entirely, when a large consumer products company, that is a global leader personal care and it’s dedicated to sustainability end product performance, food products on shelves containing our oils and then announces it publicly.

Let’s now move onto Encapso on the next slide. In March, we announced a new product, Encapso which is initially targeted at a very important need oil field services market. Energy demand is growing, but new sources across the fuels are more difficult been ever to recover, which is driving the use of more complex and challenging drilling message particularly in the U.S.

Encapso was a first of its kind lubricant, a new high performance, environmentally friendly technology to help the drilling industry meet ever rising energy demand. The oil is encapsulated in an algal cell, and is only released when celluloid burst at the point of friction or pressure, providing lubrication when and where it’s needed, which we believe makes it ideal for drilling curves and horizontal wells.

Let’s look more closely at the market need on the next slide. Technological advances in drilling have dramatically altered the global energy map by making unconventional oil and gas deposits accessible and economically viable. Drilling activity in unconventional settings has grown rapidly and is expected to continue to increase partially, because of faster well depletion rates in the unconventional wells.

This means operators must grow constantly to maintain the fuels production levels. For example, the international energy agency estimates that the back-end formation requires 2,500 new wells per year to maintain production at 1 million barrels a day, while a large conventional field in Southern Iraq needs just 60 wells drilled to deliver the equivalent volume.

They continue to meet the world’s ever increasing demand for hydrocarbons. the industry needs new technologies that are not only higher performance, but also more environmentally responsible. Encapso brings significant benefits to the market and it’s designed to reduce drilling costs and risk increase drilling speed and control, protect valuable equipment and improve the users’ environmental footprint.

We’ve demonstrated these benefits in the field, which I’ll cover on the next slide. Encapso’s efficacy has been demonstrated in both the lab and field. at the time of our announced product launch, a few weeks ago, we noted that Encapso had already demonstrated performance benefits in 13 wells in a variety of formations.

We’re continuing to rapidly expand commercial Encapso use and testing and I’m very pleased to say that in just the last few weeks, we’ve expanded the well count by more than 50% to 20 wells across six separate basins. Encapso was demonstrated the operating benefits in all basin so far, including up to 216% improvement in rate of penetration, which reduces drilling time and related costs, up to 45% reduction in its work, allowing for much better directional control and up to 50% reduction in drag, enabling easier removal and protection of equipment.

We’re working with leaders in the oil field services and a number of top field operators that are recognized remains in the space, including anchor drilling fluids and arkofluide technologies. We’re also excited to already be delivering Encapso to a number of repeat customers. With the successful expansion of commercial wells and testing, we now have a critical mass of data in place, that’s enabling us to more rapidly deploy Encapso and to expand the customer base. We’ll share more in our progress with Encapso on future calls. in the meantime, if you’re interested in more information, including a video detailing, how the product works, please visit our website www.drillwithencapso.com.

Next slide, to wrap up, Solazyme is making continued progress toward broad commercialization. since our last earnings call, we’ve doubled the number of customers, we’ve shipped to/from Clinton/Galva, and we’re filling repeat orders, we’ve produced and sold four distinct products from Clinton/Galva, we’ve secured a significant fuels blend customer.

We’ve ramped by more than 50%, the number of wells being tested with Encapso. We placed our first consumer product, Algenist on the shelves of our major U.S. department store chain, Nordstrom and we’ve had a major global consumer products company, Unilever announced that it’s formulating a product featuring one of our algal oils in a leading brand. While we are truly disappointed that we haven’t yet achieved the foremost milestone of commencing production at Moema, we believe that day is coming soon.

Overall, we think the progress this quarter reinforces the company’s momentum toward broad commercialization and that position was further improved with the successful financing we completed at the end of the first quarter. The addition of $203 million in capital to our balance sheet gives us significant flexibility to pursue the most attractive path to growth and profitability.

In the bigger picture as developments like Encapso should indicate, we’re focused on prioritizing an aggressively pursuing high margin, specialty product application. We believe that we have an enormous opportunity to disrupt many markets from industrial oils, the nutrition; it’s again, in personal care to our newest target industry oil field services.

We’re positioning ourselves for these opportunities by developing a technology differentiated portfolio of products expanding specially oils and ingredients as well as fuels. Thanks again, and now here's Tyler.

Tyler W. Painter

Thank you all for joining the call today. As we discussed previously, our primary focus in 2014 is to execute across our growing technology platform, to establish and ramp commercial production, and to begin broadly commercializing our products into the marketplace. We are making steady progress in all of these areas. Initial manufacturing at Clinton/Galva is going well with four commercial products produced to-date and we are focused on making commercial products at Moema as quickly as possible.

We’re also making good progress in technology by expanding our suite of high-value tailored oils and products and in establishing our commercial footprint for these products. I’ll highlight our financial results, make a few quick comments about the production ramp process and recap our goals for 2014.

Next slide, revenue of $12.4 million for the first quarter was up 85%, versus $6.7 million a year ago. R&D revenue was $5 million in the quarter nearly double a year ago. Total product revenue was $7.3 million, of which $5 million from Solazyme consumer products represents growth of 24% versus last year’s Q1. we are on track to deliver against our anticipated growth of 30% – 30% or more in Solazyme consumer products with continued momentum in Algenist and additional product distribution and brand build out initiatives during the year.

This quarter marked an important milestone for Solazyme as it’s the first period in which we have produced and sold commercial ingredients and intermediates from one of our large commercial manufacturing facilities. We generated approximately $2.4 million in product revenue, from initial commercial operations at Clinton/Galva and from market development fuel blend activities. Revenues reflect 10 discrete customers to double where we were at the time of our last call and also include several repeat customers.

As we’ve mentioned on the last few quarterly calls, the first phase of manufacturing is focused on establishing commercial operations at the plants and building customer trust and our ability to manufacture and deliver products on spec and on time. This first phase at the plant is not about ramping volumes and as a result, growth in product revenues from the plant will be modest until we begin ramping production volumes more aggressively.

Next slide, looking at the full P&L, I’ll spend a moment on gross margins. Total reported gross margins for the quarter were 54%, the largest driver of product gross margins continues to be Solazyme consumer products where Algenist gross margins for the quarter were strong at 68%. At Clinton/Galva, gross margins for ingredients and intermediates were impacted by a few key factors worth mentioning. First, products sold during the first quarter included products manufactured prior to the startup of commercial operations. For these products manufacturing expenses were charged to R&D previously, per accounting convention, providing some zero costs products in the quarter and skewing gross margins positively.

Second, as we began initial operations a portion of production costs to establish planned operations are reflected in R&D, with the remainder of the cost reflected in cost of goods sold. As a result of these factors, we saw higher product gross margins in the quarter that were partially offset by higher R&D costs, also in the quarter. Turning to operating expenses, our total non-GAAP operating expenses were $34.8 million in the quarter, versus $33.1 million in the fourth quarter of 2013. R&D expenses as mentioned, included ramp up cost at Clinton/Galva which are expected to continue in coming quarters.

On March 31, our cash and cash equivalents balance was $133 million, on April 1 we completed a hybrid equity and convertible debt offering that raised net proceeds of $203 million. This financing further strengthened our balance sheet. With over $310 million in cash and cash equivalents ending in April, we have increased flexibility and are well positioned to take advantage of additional growth opportunities like Encapso and Algavia.

Our total share count ending the quarter was 70.2 million shares outstanding, after closing of - in total shares outstanding increased to $76 million. Net cash burn in the first quarter was $34 million, including an $8 million equity investment in our Solazyme Bunge Renewable Oils joint venture in Brazil, $2.5 million in interest payments and working capital investments related to our Encapso and fuels projects. With our current projects on hand we remain on track for a total CapEx, including equity investments in our SB Oils to be approximately $40 million for the year. Next slide.

We’re carefully staging up the start-up and ramp-up of our facilities. For those of you who have seen the slide before, we’re showing it again today just as a reminder that we continue to plan the production ramp at each facility as a 12 to 18 months process from initial commercial operations. The focus right now is on establishing a baseline for a liable production. The progress at Clinton/Galva has been good, we’re moving through the first phase and we’ll be gradually extending operations there. We’re also focused on bringing Moema online soon.

Next slide. Over the course of this year we are focusing on a clear set of objectives across key areas of our business. Our technology platform is the underlying value driver for the company and our aggressive development on this front will continue even as we increase focus on production and commercialization activities. This includes advancing current oil profiles, introducing new products like Encapso, executing to the timelines developed with our JDA partners and expanding our applications capability.

In manufacturing, with the start-up of Moema ongoing, we are in the early stages of ramping production on two continents. On the commercialization front, we are further building out a sales force to accelerate our transition to a multi-products specialty company. We’re looking forward to another strong growth year from our Solazyme consumer products and we are rapidly looking to build our Encapso business.

Thanks for joining the call today. That concludes our prepared remarks and we’ll now open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Brian Lee with Goldman Sachs. Your line is open.

Brian Lee – Goldman Sachs Group Inc.

Hey, guys. Thanks for taking the questions. Jonathan, first thing when you mentioned that much of Moema is operational here, just want to make sure that there's not anything process related here that's been part of the delay. It's all been mechanical issues?

Jonathan S. Wolfson

Well it’s been making sure that we can get the construction completed to the point where we can commission and start up. I’m not sure, Brian, I understand the process issue question. It hasn’t been anything other than construction to commissioning. Can you clarify?

Brian Lee – Goldman Sachs Group Inc.

Yes. I guess anything with respect to your technology specifically and then I guess I'm focused more on kind of that just the tail end of ramping up here and getting commercial product out the door.

Jonathan S. Wolfson

So yes, yes, yes, so the answer is no, not at all. In fact unlike maybe other technologies that are bringing up the first of their kind commercial plant, Solazyme is actually running at very large scale, our technology today at Clinton/Galva we’ve already produced four completely distinct and unique products and sold them and are shipping every day. It’s not – the delays have nothing to do with the process.

Brian Lee – Goldman Sachs Group Inc.

Okay. Great. My follow-up was just on the Lux brand soaps, announced with Unilever, congratulations by the way, I guess I'm wondering if there's a reason it's only in Brazil currently. What the expansion opportunity and timing is both for that line and then I guess as you think more broadly about Unilever addressing different products in its portfolio as you ramp capacity. Thanks.

Jonathan S. Wolfson

Yes, so quickly I just say that Lux is one of the largest soap brands in the world, it’s not in the U.S., but it’s one of the largest soap brands in the world. And these are Unilever’s decisions about where to put the product on what shelves. I think it had to do with initial supply volumes, but again I’m not going to speculate for our partners at Unilever about the choice of where to start to market products, I get into treacherous waters there quickly Brian, but I can you tell you that obviously as we bring up Moema and we scale it up, Unilever will be taking significant volumes under the existing supply agreement and we certainly hope quite a bit more.

Operator

Our next question comes from the line of Rob Stone with Cowen & Company. Your line is open.

Rob Stone – Cowen & Co. LLC

Hi guys. Jonathan, the first question on, you commented that the back end separation at Moema was taking a little bit longer than expected. I always thought your separation process was really pretty simple, just dry out the fermentation broth and press out the well. Can you provide any more color on what it was that was more complicated than you thought?

Jonathan S. Wolfson

Well I wouldn’t say it was more complicated, I would just say that if you break that down into multiple parts, the operations the unit operations to get to the Encapso product there are operable and really have been operable since later March. The part that just happens to be taking longer and to be specific Rob, it has to do with just getting some conveyance equipment installed – it’s the final oil extraction units. I wouldn’t say it has anything to do with complexity.

Rob Stone – Cowen & Co. LLC

Okay. Then my follow-up question is for Tyler. You noted specifically the gross margin and you got sort of a one-time benefit and a portion of the cost is in R&D. A two-parter here, I guess are you hinting that so the product gross margin should be lower in the second quarter as you are not going to have the benefit of costless product? And at what point do all the cost move up to COGS and out of R&D? Thanks.

Tyler W. Painter

Great, thanks, Rob. Yes, so, as we move forward you wouldn’t expect that you would have the products produced before you bring on commercial operations. So you’re right that the impact of the kind of one time or the free - zero cost product wouldn't impact the future quarters, so you would see some of that go away. To the other part of the question, in terms of the full cost showing in the COGS line, as we ramp towards nameplate capacity that the facility is designed for, you’ll see that actually become a lower and lower component. So, the overall P&L is just about placement on the P&L and timing. But, we would expect as we ramp toward nameplate as when you’ll see that fully burdened into COGS.

Operator

Our next question comes from the line of Weston Twigg with Pacific Crest. Your line is open.

Weston Twigg – Pacific Crest Securities LLC

I just have a couple of quick questions. One on Moema, you said some of delay is related to a new cogen facility. You do not expect it to be a long-term issue, but I’m just wondering, if you can give us some more color on that, whether it’s Bunge prioritizing, are they prioritizing the JV or the sugar mill and would there be maybe some intermediate term risk related to that and maybe this ramp takes a bit longer?

Jonathan S. Wolfson

As we know, Wes, Bunge has been a phenomenal partner to Solazyme and I should say is a phenomenal partner to Solazyme. I wouldn’t read much into this, other than these are - the intermittency of steam and power just - it is been something that has been really a recent issue. And what I would say that Bunge is that they are operating many, many facilities including many cogen facilities very successfully all around the world. And I think, between Solazyme and Bunge we don’t have concerns about the reliability of steam and power in the longer term.

Weston Twigg – Pacific Crest Securities LLC

Okay. And then just, on the Encapso piece I was wondering if you can help us understand the higher margin profile a little bit. Is it attributed to the last downstream processing required as well as maybe the direct sales channel?

Jonathan S. Wolfson

I think that you would look at a couple of pieces, one, it does have a different COGS profile than oil. Two, it has attractive ASPs as well. So, as a practical matter all around it’s an attractive product.

Operator

Our next question comes from the line of Tyler Frank with Robert Baird. Your line is open.

Tyler Frank – Robert W. Baird & Company, Inc.

Hi, guys. Thanks for taking the question. I was wondering if you could talk about ASP that you are seeing out there. I think you gave us some numbers last quarter and it was hoping for an update on where you guys are producing currently.

Jonathan S. Wolfson

Yes. So, we did provide ASPs out of Clinton/Galva for the kind of initial operations. We also at the same time, as Tyler mentioned that, we wouldn’t be providing them on a regular basis. It does rely on product mix, we’re very pleased the focus has been on having now four distinct products produced and distributed from Clinton/Galva. And what we’re seeing in the marketplace, I think what’s most important that, as we reached nameplate capacity the target gross margins which has both the average selling price obviously, as well as the cost of produce incorporated, we expect those target gross margins will remain very much intact.

Tyler Frank – Robert W. Baird & Company, Inc.

Okay, great. And then just as a follow-up, can you discuss the clients that you’re seeing for Encapso? Obviously you’ve sold to ten distinct clients now. And can you just, maybe a discussion of how many of those are repeat customers?

Jonathan S. Wolfson

I actually don’t have the number on repeat customers I know that there are multiple repeat customers and that’s the extent of what I have in my brain at this point. We’ll see whether we can provide more detail in coming quarters on that particular question. What I can tell you, is that, it’s with – I think, it’s been with probably in the vicinity of a half a dozen different E&P companies, we’re producing multiple wells and also through a number of oil fields services providers including mud services providers. So, as a practical matter, we’re dealing with making sure that the exploration and production guys understand the value proposition, and how they can shave days off of drilling and also drilling much tighter formations and shorten their curves.

But as a practical matter, we’re at this point, we’re telling you that we’re working with Anchor and we’re working with Ark and we’ll be giving more information out on who we’re working with moving forward.

Operator

Our next question comes from the line of Laurence Alexander with Jefferies. Your line is open.

Laurence Alexander – Jefferies & Company, Inc.

Good afternoon. I have two questions. one, can you give a little bit more detail on the food platform, in terms of what you think the next steps will be, and possible timeline to commercial products? And secondly, given the capital raise can you give a sense for your sense of urgency to deploy that capital either in the U.S. or in Asia? I apologize for the background noise.

Tyler W. Painter

Laurence, it’s not a problem. I think, the first thing I would say is, we try never to apply sense of urgency to deployment of capital, because we think that that may not lead to the smartest decisions. We want to make sure that capital that investors have placed with us in our trust is going to be used in the way that’s really going to drive returns. I would say that with respect to the full ingredients business, we are very happy and we mentioned today on the call that we took our first, we took actually our second oil through the GRAS regulatory the self-affirmed GRAS regulatory process, in the U.S. and that’s the first product that we can actually produce at large scale, as a high stability high oleic oil.

And so, we’re very happy that we have our first of four GRAS products that we’re actually able to make it large scale. And I would say that part of our focus now is to make sure that we get that out to market. At the same time, as mainly you are alluding to we’re engaged in a significant number of discussions with potential partners as it relates to expanding the production capabilities for the flowers and powders, and when we have something material there to report, we will.

Operator

Our next question comes from the line of Maheep Mandloi with Credit Suisse. Your line is open.

Maheep Mandloi – Credit Suisse Securities LLC

Thanks. Hey, this is Maheep on behalf of Ed Westlake from Credit Suisse. A quick question on the OpEx, given the high OpEx this quarter – how should we think about it going forward?

Tyler W. Painter

Yes. so we haven’t given specific quarterly guidance. What we have said for the year is that our operating expenses, if you exclude that piece that is showing up as the ramp in the scale across the facilities would grow by up to 15% in the year and we’re going to obviously continue what we have in the past as being very prudent in looking at each dollar we spend and how we grow that. So we’ve said that we expect to grow the OpEx up to 15% excluding the scale up process at the plants.

Maheep Mandloi – Credit Suisse Securities LLC

Thanks. And a follow-up – just on the capacity from Moema and Clinton/Galva, how much of that is undersupply agreements and what do you think is the optimal level of your target for later this year or the next six to 12 months?

Jonathan S. Wolfson

Well, we have qualities under supply agreements there. but one of the things that we’re really working through here is, we’re working through a series of decisions that relate to the availability of products. and obviously, you want to enter into supply agreements when you know that you’re going to be able to supply products. so that’s one of the things that we’re working through. And then we’re working on leaving volumes available for market ceding in some interesting markets at the same time, doing a fair amount of base load work and like the kinds of agreements that we announced with Unilever. And to the extent that we have more information that we can provide on the base load parts of the agreements or other new customers, we’ll do that moving forward as well.

Operator

(Operator Instructions) Our next question comes from the line of Pavel Molchanov with Raymond James. Your line is open.

Pavel Molchanov – Raymond James & Associates, Inc.

Thanks for taking my question. I want to go back to – I think to the very first one that was asked by Brian, and I’ll phrase this a little differently. Had it not been for the disrupted power supply from the cogen plant at the sugar mill, would you have made the original timetable for starting up Moema?

Jonathan S. Wolfson

We would have – Pavel, I believe we believe that have we had consistent power and steam, we would have produced first commercial product by now absolutely, yes.

Pavel Molchanov – Raymond James & Associates, Inc.

Okay, okay. I appreciate the clarity on that. And then let me ask about something you guys haven’t really addressed or your kind of positioning in the fuel market for quite a while and I think it’s pretty clear that it doesn’t seem like a huge priority in the near-term, but if you can just give an update on how you see your place in that part of the value chain?

Jonathan S. Wolfson

So I think we’ve been clear here obviously, you can assume that we looked at this very hard, as that was the whole foundation for the company when we were coming out of a garage more than a decade ago. The area where I think Solazyme can play an important role in commercialization of the advanced biofuels today is in the area of higher value blend stock provision.

So we use our tailoring capabilities to make much more valuable cuts and then those get blended into other things. and indeed, we are actually selling oils for that purpose today, and they’re actually being blended into fuels that are being used today. so while people at one point called us a biofuels only company and then later said that, we weren’t doing anything in biofuels. fuels is continued to be a real interest to us. but today, we believe the area where we can make an impact, given economics and opportunity and margin is really on the blend stock side. down the road, we certainly are – hope we’re able to provide straight neat fuels and much larger volumes. but today, given other product margin opportunities and pricing, this is where we are today.

Operator

Our next question comes from the line of Michael Klein with Piper Jaffray. Your line is open.

Michael Klein – Piper Jaffray & Co.

Hi. Good afternoon. There’s been continued rumors that Bunge is looking to sell its Brazilian sugar assets. so I'm curious with the impact to Solazyme and the SB Oils joint venture would be if they in fact sell?

Jonathan S. Wolfson

Sure.

Michael Klein – Piper Jaffray & Co.

Specifically, I think Bunge has agreed to provide utility services out of working capital, so if you can kind of just talk about that.

Jonathan S. Wolfson

Sure, Mike. The first thing I’d say is, I don’t think their rumors actually, I think Bunge’s actually gone on the record clearly saying that they’re exploring alternatives with respect to their sugar and bioenergy business. So I think that that’s something that they should clearly, what I can tell you is that we have had discussions with Bunge’s senior management who has said to us clearly that the joint venture with Solazyme and the production of tailored oils is strategic to Bunge.

And in fact, our joint venture is with Bunge Limited and Bunge Global Innovations and not with the sugar and bioenergy business. and we’ve been assured by leadership at Bunge that who is by the way, one of the largest originators and providers of vegetable oil in the world that the JV is directly strategic to Bunge. that said, you asked a very specific question about the provision of supply agreements and working capital, these are agreements that have nothing to do with the Moema facility per se. those are agreements directly with Bunge, I wouldn’t envision it could be impacted, however U.S. also about utilities and I would expect that if Bunge or if Bunge does anything strategically with respect to their sugar and bioenergy assets, we would clearly have ongoing agreements with anyone that could come.

Michael Klein – Piper Jaffray & Co.

Okay, great. Thanks for the color.

Operator

Our next question comes from the line of Rob Stone with Cowen & Company. Your line is open.

Rob Stone – Cowen & Co. LLC

Hi, Jonathan. Just a quick follow-up, are you willing to say which markets geographically these fuel blends are going into? Is that domestic or offshore somewhere?

Jonathan S. Wolfson

Rob, could you just ask that again, I apologize?

Rob Stone – Cowen & Co. LLC

I’m just curious in which market the fuel blends are being used? Is that in the United States or somewhere else?

Jonathan S. Wolfson

Well, it’s all domestic right now.

Rob Stone – Cowen & Co. LLC

Great, thank you.

Jonathan S. Wolfson

So, are there any other questions?

Operator

I’m not showing any further questions at this time. I’d like to turn the call back over to Jonathan Wolfson for closing remarks.

Jonathan S. Wolfson

Well, great I appreciate the time everybody has taken on the call with us today, and we continue to make very substantive progress, and I will repeat that we were really hoping today to be able to report from our first commercial product at Moema. But I’m really proud to say that we’ve doubled the number of customers, shift from Clinton/Galva, we’ve produced and sold four distinct products from that facility. we’ve added significant fuels blend customer.

we’ve launched Encapso and rapidly increased the well count over 50% since the launch, we expand the distribution of Algenist to Nordstrom, and Unilever has formulated a commercial product featuring our oils, Lux, and those are all since our last update in late February. so, well not everything is where we would like it to be and we’ll be working really hard to produce product out of Moema as quickly as possible. we are making very substantial progress and also on the commercial front. Thanks today. Thanks to everybody for joining us today.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone, have a good day.

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