Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Verenium (NASDAQ:VRNM)

Q3 2011 Results

November 10, 2011 5:00 p.m. ET

Executives

Kelly Lindenboom – VP, Corporate Communications

James Levine – President and CEO

Janet Roemer – COO and EVP, Specialty Enzymes Business Unit

Jeffrey Black – CFO, SVP and Chief Accounting Officer

Analysts

Rob Walker - Jeffries

Operator

Thank you for holding. Welcome to Verenium’s third quarter 2011 financial results conference call. At this time, all participants are in a listen-only mode. There will be a question-and-answer session to follow. Please be advised that this call is being taped at the company’s request.

At this time, I would like to introduce your host for today’s call, Ms. Kelly Lindenboom. Please go ahead.

Kelly Lindenboom

Thank you for joining Verenium’s third quarter 2011 conference call. I’m Kelly Lindenboom, vice president of corporate communications. With me today are Jamie Levine, our president and chief executive officer; Janet Romer, our chief operating officer, and Jeff Black, our chief financial officer.

The agenda for today’s call is as follows. First, Jamie will give an update on progress made during the third quarter and year to date. Janet will then discuss commercial opportunities including Q3 performance. Jeff will then summarize our third quarter and year to date financial results, and we will then take your questions.

Before we begin, I would like to advise you that this discussion will include certain statements that are not historical facts and are forward-looking statements that involve a high degree of risk and uncertainty. These statements relate to matters such as our strategy, future operating plans, markets for our products, partnering and collaboration activities, public policy and financing activities, technical and business outlooks.

The company’s actual results may differ materially from those projected in such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed in our filings with the SEC, including but not limited to our Form 10-K for the year ended December 31st, 2010. These forward-looking statements speak only to the date hereof.

I will now turn the call over to Jamie.

James Levine

Thanks Kelly. Good afternoon everyone, and thank you for joining us on our third quarter earnings call. As you’ll hear in the call, this has been a very solid quarter for Verenium.

I’d like to start today by highlighting that we’ve just celebrated an important milestone for the company at the one-year anniversary of the transaction with BP that positioned us to build a leading industrial enzymes company.

As you’ll hear on this call, I think our team has achieved a lot over that time. As we reported today, we’ve seen strong growth over the first nine months of this year in both product revenue and product gross profit, and we’ve taken concrete steps to reduce the costs and are demonstrating clear results.

I believe we’re on track to achieve our goal of building the kind of business we set out a year ago to create, with a number of critical successes now behind us as well as several near-term levers for driving additional growth and value on the horizon. I believe Verenium is different from many of our peers in the broader clean technology space in that we have validated our platform technology through our track record of product sales.

We have been growing sales of our high-performance commercial products into competitive markets for several years now. The key to our future success comes down to execution on our business model and product commercialization plans, and we’re not dependent on new platform technology development.

I’ll now review a few areas to show how we’re making good on our plans. This quarter, for the first time in the history of the company, I’m pleased to say we’ve reported a quarterly operating profit of $2.1 million. As we’ve stated previously, we don’t anticipate continuous profitability from operations until 2013, and Jeff will provide important details on our financial results later in the call. I simply want to highlight that since the transaction with BP a year ago, we are making progress toward our mission to create and sell the highest performing industrial enzymes.

I’d now like to take a moment to talk about our strategy for partnerships. Today we are partnered with some of the largest companies in their respective businesses, such as DuPont, Bunge, and Novus International, all of whom have seen first-hand the product development capabilities of our unique technology.

As we continue to engage in further partnering discussions, we generally have one or two objectives: either taking our current enzyme products into new markets to increase near-term product sales or alternatively, derisking product development for new markets we want to target, such as enzymes used in food production.

We are currently in advanced discussions with several potential partners, focused on both of these objectives. So as we announce new partnerships, you can generally expect them to be highly targeted and commercially focused as opposed to broad-ranging technology development initiatives. For each of the current markets we have varying partnership structures, and you can expect we will tailor any future partnerships to meet our product development and sales goals.

One area where we see significant opportunities is the oil field services sector, providing enzymes to oil and gas companies. We currently sell small amounts of our product Pyrolase for use in hydraulic fracturing, or fracking as it’s commonly called.

Pyrolase performs a critical step, breaking the guar often used in fracking, and in certain applications it performs better than the harsh and potentially dangerous chemical oxidizers and acids conventionally used for this purpose. Given the heightened scrutiny this industry has come under because of environmental concerns, we see an important opportunity for our Pyrolase enzyme.

In addition to Pyrolase, and based on our work this year with oil field services players, we expect to launch a second product for this market before the end of 2011 for use in drilling of new wells, again replacing acids and chemicals with more-efficient enzymes. We believe we can play an important role in addressing the challenges of making fracking and drilling greener processes while also offering greater efficiency over non-enzymatic methods.

I’ll now conclude with a comment on our current outlook as a company. We’ve been told time and time again that our share value is overshadowed by our debt, and since laying out our financing need at our June analyst day, we’ve taken concrete steps to address this need, including our new partnership with Novus and the lines of credit we announced a month ago.

We continue to believe that we will address our remaining funding needs and unlock a share value commensurate with our track record, both as a leading technology player and a company with a suite of high-growth, market-tested products.

I make these points to emphasize my earlier theme that as we celebrate the first anniversary of the transaction with BP, Verenium is well-positioned in a highly attractive area of the growing clean tech trend. Our goal of reaching sustained profitability in 2013 is based on execution against our marketing and manufacturing plans for our current products, not by riskier technology development.

I look forward to updating you on our continued progress toward our goals. And with that, I’ll now turn the call over to Janet.

Janet Roemer

Thank you Jamie. As Jamie stated, we continue to demonstrate our ability to execute on our business plan. I will address the important markers of progress in the business in our third quarter and year to date.

These include growth and diversification of sales in terms of products, markets, and geographies, as well as the progression of pipeline products through the development phase and in addition the formation of key partnerships and improvements in manufacturing.

In terms of operational performance, I will start with our largest product line in terms of revenue, animal health and nutrition and Phyzyme Phytase. In the third quarter we saw a 7% increase in revenue over the second quarter and 12% over the same quarter in 2010, reflecting increased demand for Phytase enzymes in all regions of the world.

In addition, our marketing partner, Danisco, which is now part of DuPont, reports gaining traction in educating the industry with scientific data showing the feed cost savings that can be achieved by increasing the dose of Phytase enzymes above typical levels.

In our second largest product line, grain processing, sales were up 17% versus the third quarter of 2010 and 29% for the first nine months, reflecting the addition of new customers earlier in the year. Sales were down 13% in the third quarter versus the second quarter due primarily to adverse industry conditions in Europe, which mainly affected the sales of Xylathin Xylanase used in wheat ethanol plants.

A positive development for this business in in product availability. In the past, we’ve reported that capacity constraints have impacted our ability to grow this business, but with improvements in manufacturing we’ve recently been able to increase production, which I will comment on further in a moment.

Turning to the oil seed processing product line, we’ve continued driving adoption in this new market for enzymes with our product Purifine PLC, and this product has more than doubled since the beginning of 2011 and now represents 11% of our total product revenue.

In addition, since Purifine increases oil yield, the sustained trend of higher oil prices strengthens its value. In the third quarter we made our first shipment to another new customer, bringing the number of plants that have implemented purifying enzymatic degumming process to seven, and an additional implementation went under contract with one of our engineering partners, maintaining the number of plants in the engineering and construction phase at six.

Geographically, our oil seed processing business today his highly concentrated in Argentina and Brazil. We targeted this region for our initial efforts because it is the largest soybean processing center in the world and has a larger scale plant. Our strong third quarter sales reflect the height of the crushing season in these countries.

Strategically, it is important for us to diversify geographically so that we are less exposed to the seasonality. While we continue to enjoy great momentum with a number of potential new customers in the southern hemisphere, we are intent on building our business in the other two major soybean processing geographies: the US, where the season is of course opposite of South America, and in China, where most of the soybeans are imported and there is essentially no seasonality.

On that front, in the third quarter we made our first shipment of Purifine to a new plant in China and progressed a number of important discussions with additional prospective customers. We also added a seasoned sales manager for the Chinese market, a chemical engineer who has extensive experience doing business in China and speaks the language. This addition to our Purifine sales team is further validation of our commitment to expanding our footprint in this important oil seed processing region.

Moving to our product pipeline, an important driver of future growth, our pipeline projects continued progressing according to plan. As we’ve stated before, we forecast launching new pipeline products as early as 2013, with multiple products launching in the 2013 to 2015 timeframe. Of note, our partners Bunge in processing, and Novus in the next generation of animal feed products, remain well-aligned and enthusiastic about our continued innovation and progress.

Turning now to manufacturing, as I mentioned earlier, we have improved our capacity to produce Fuelzyme by successfully moving production to larger scale. We will continue to optimize and incrementally expand our deals as we move forward.

In addition to the third quarter, we achieved notable improvement in purifying yields compared with 2010, and with our manufacturing partner Fermic, we will continue to invest in projects to make improvements, and looking down the road, are moving forward in our development of options for a second manufacturing site with emphasis on safety, reliability, capital efficiency, and low cost.

To summarize, with three-quarters of the year now behind us, and a year since launching Verenium as a pure play industrial enzyme company, we have delivered growth in sales and profits, diversified product lines and geographic footprint, as well as continued to advance pipeline products toward commercial launch, and delivering improvements in manufacturing.

Now, I will turn the call over to Jeff.

Jeffrey Black

Thank you Janet, and thank you everyone for joining us today. For the next few minutes I will cover three topics. First, I will provide some commentary on the financial results we announced earlier today. Second, I will touch briefly on our view of progress against full-year guidance we’ve provided. And third, I will recap our recently announced financing agreements and our plans to continue to address the financing needs of the company.

With respect to financial results, I’ll start with a review of our product revenue performance. For the nine months ended September 30, 2011, total product revenues came in at just more than $42 million, which is a 14% increase over the same period in 2010.

This increase is a result of increased market penetration of our products and our grain processing and our oil seed processing product lines. These two product lines grew to 40% of product revenues year to date compared to 32% in 2010, and this is consistent with our objective to diversify our revenue mix.

Turning to gross profit, in the first nine months of 2011, we generated product gross profit of just more than $16 million, an increase of about 16% over the same period in 2010 and a record $6 million in product gross profit during the recently completed third quarter. This is indicative of the continued product gross profit performance across all of our product lines.

Our collaborative revenue increased to just below $5 million for the first nine months of 2011 when compared to the same period in 2010. During the third quarter, in conjunction with the rights assigned to us as part of our separation agreement with Syngenta in 2009, we received a nonrecurring license fee of $3.25 million for a commercial enzyme candidate that Syngenta had previously licensed to a third party. We recorded this payment as collaborative revenue during the third quarter.

We should also note that pursuant to our collaboration with Novus International, we received a separate cash payment of $2.5 million for our license in June of 2011, and based on current accounting rules we’ve not yet recognized this license fee as revenue. We expect to recognize a significant portion of this within the next two quarters.

Turning to our operating expenses, excluding cost of sales and restructuring charges, on a non-GAAP basis our gross operating expenses decreased by more than $3 million during the first nine months of 2011 to roughly $22 million compared to $25 million in 2010.

Consistent with the financial results reported for our second quarter, while our total operating expenses have decreased over prior year, our R&D costs increased by $3.5 million, and this trend remains consistent with our overall corporate strategy to focus investment on advancing products through the pipeline while at the same time controlling G&A costs.

During the first nine months of 2011, our SG&A costs decreased by nearly $7 million, or more than 30% of the same period in 2010, and this is primarily due to the reimbursement of 2010 legal fees of about $1 million for expenses incurred during a note holder litigation matter which we settled in early 2011, the temporary reduction in facilities related costs as a result of BP assuming our San Diego building leases, and to initiatives to decrease general and administrative expenses. Additionally, during the third quarter of 2010, we paid and expensed 2009 bonus payments of nearly $1.5 million.

Another notable financial achievement for us is operating profitability during our recently completed third quarter. While this was due in part to the one-time $3.25 million license fee I just mentioned, we’re encouraged by the continued progress toward sustainable profitability based on our gross profit growth and expense management.

As we mentioned in our press release earlier today, we believe we have balanced the right level of investment with the appropriate cost controls, and we remain keenly focused on continued growth and medium-term profitability.

With respect to our balance sheet, we ended the third quarter of 2011 with just under $36 million in cash and cash equivalents, $5 million in restricted cash, and just under $35 million in debt at face value.

With respect to financial guidance, we believe we’re in line to meet the full-year 2011 guidance we released in March. And finally, before I wrap up, I’d like to briefly touch on our financing initiatives.

At the close of the transaction with BP last year, we had approximately $95 million in convertible debt outstanding, and since that time we’ve retired about $60 million. So today we have a current debt balance of approximately $35 million in 5.5% convertible notes. The holders of these notes have a put option in April 2012 that we expect will require us to retire these notes for cash.

During the third quarter, we repurchased a total of about $9 million in principal amount of convertible notes outstanding, including just more than $4 million to completely retire our 9% notes. The 9% note repurchase was particularly important for us as it freed up the collateral that enabled us to execute our recently announced financings.

In October, we announced our agreement with Comerica Bank and the Export Import Bank of the United States for two 18-month secured revolving credit facilities totaling up to $13 million and separately we announced that we have also put in place a facility that will provide up to $3 million in additional secured equipment financing to be utilized for the buildout of our new labs and corporate headquarters.

At our analyst and investor day in June, we outlined a financing need of $30 million to address cash needs until breakeven operations in late 2013, including our capex requirements and the assumed retirement of our existing 5.5% notes in April 2012.

We view these facilities as an important step in addressing our total financing needs, and importantly we have retained flexibility under these facilities which will enable us to leveraging certain additional assets including our intellectual property for additional secured financing. We continue to pursue aggressively a number of additional options to solve the remaining component of our funding needs in the short term.

And with that, I’d like to turn the call over to the operator to take your questions.

Question-and-Answer Session

Operator

[Operator instructions.] Our first quarter comes from Laurence Alexander from Jefferies.

Rob Walker - Jeffries

Hi, good afternoon. This is Rob Walker on for Laurence. Just a few questions. I guess first on Pyrolase, I guess the last number you gave around that opportunity was about $10-30 million. Can you help size that as you look at the next few years, and how quickly you could ramp up? Or maybe kind of opportunity by well drilled or something like that?

James Levine

I’d say that the $10-30 million was an estimate of the types of enzyme sales that we believe are going on today, because there are a small number of enzymes that are being sold for this purpose in the market.

When we look at the total addressable market, and we say what is the market for guar breakers, and where we think that enzymes have the ability to serve that role relative to the acids and the oxidizers that are currently used, we think that’s more on the order of $250 million. So a substantially higher market.

One of the things that we believe has restrained the growth of enzyme products in this area is that the performance characteristics required were not being met by the enzymes that were being targeted here. And obviously one of the things that we as a company are focused on is achieving the type of performance characteristics that opens up markets for enzymes.

And so as we look at that market, I think that’s the market that we intend to chase. Certainly I think we have a process that we’re going through, as we say. We may approach markets with partners. We may approach them ourselves, or we may use a mix of those approaches, but we think a substantial amount of that market is something that we can attack with our enzyme that we currently have today, Pyrolase, and also think about developing new products for that market as well.

Rob Walker - Jeffries

And when should we expect to see revenue from those products? I imagine there’s some this quarter?

James Levine

We have been selling Pyrolase now. It’s just we haven’t targeted at the market as aggressively in previous years as we have this year. And so we’ve been spending a lot of time with the types of players that you’d expect in the oil field services industry in order to make sure that we can really focus on selling more of this product, and I think at this stage, clearly we’re now breaking out more of our revenue, because previously we had been breaking out animal health as well as grain processing.

This quarter, we’re now breaking up oil seed processing as well because it’s grown over 10% of our revenues. So the amounts are relatively small, but I think you’ll have to wait until future announcements in terms of what our plans are and expectations are for being able to penetrate that market with our enzymes.

Rob Walker - Jeffries

And then on animal nutrition, was there any change in the mix in terms of sales channels for Phyzyme in the quarter sequentially? I’m wondering if we can read into the sequential increase based on the amount of dosage? And then kind of as you look out the next two to three years, any update to your growth rate for that that you laid out at your analyst day?

Janet Roemer

I would say that for the results that we saw in the quarter, the information we have comes from our partner, who reported that they had succeeded in increasing sales in all regions of the world, and that really there had been a dip in demand in the last previous quarters. I’d say kind of looking ahead, I really don’t have a sense of what that’s going to do. I think one of the great things about our new relationship with Novus is that we will be an active party to all of the marketing of the enzymes and will have greater insight into how they’re marketed and where they’re marketed, and the future prospects.

Rob Walker - Jeffries

And then I guess just finally, just to clarify in terms of the financing side, the up to $16 million or so in what you’ve announced, what amount would you be able to access given current sales rates? And I guess when would you be able to access all the $16 million potentially?

Jeffrey Black

The $16 million is really broken up into three pieces. There’s $3 million that is available for equipment financing that we negotiated separately from this $13 million facility. The $13 million facility is broken up into two lines. One is a $10 million line that we can borrow against based on eligible foreign receivables, and the other is a $3 million line that we can borrow against based on eligible domestic receivables. So it will be a function of our receivable balance and generally speaking we will be able to borrow 80-90% of eligible borrowings against that line. So that should give you an indication, if you take a look at our balance sheet, what level of borrowing we’d be looking at. Now we obviously have an expectation to grow the business. We have an expectation that our revenue base will grow on the international side, particularly around purifying, that we expect that that borrowing base will increase over the next few quarters.

Rob Walker - Jeffries

And just finally, on purifying, I’m just wondering, any thought on incremental margins there? And are you guys fully implemented now at terminal 6 and Molino?

Janet Roemer

The third quarter does reflect the height of the crushing season, and the implementation at terminal 6 and Molino. I would say that in terms of margins, high oil price, we do have some benefit that accrues to us when oil prices are high. So in addition to that we’ve been able to make improvements in manufacturing this year that have had a nice improvements in our COGS versus last year. So we’re coming down the learning curve on that end as well.

Operator

I’m showing no further questions at this time.

Kelly Lindenboom

Okay, then I think that will wrap it up for this evening. Thank you so much for joining us this afternoon, and we look forward to updating you on our continued progress.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Verenium's CEO Discusses Q3 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts