Ceres' (CERE) CEO Richard Hamilton on Q2 2016 Results - Earnings Call Transcript

| About: Ceres, Inc. (CERE)

Ceres, Inc. (NASDAQ:CERE)

Q2 2016 Results Earnings Conference Call

April 14, 2016 04:30 PM ET

Executives

Gary Koppenjan - Director, IR

Richard Hamilton - President and CEO

Paul Kuc - CFO

Analysts

Operator

Good afternoon, and welcome to the Ceres, Inc. 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 of ceres.net. The replay will be available for the next 30 days at this address as well.

At this time, I would like to turn the call over to Gary Koppenjan, Director of Investor Relations. Please go ahead, sir.

Gary Koppenjan

Thanks, Jonathan, and good afternoon everyone. I am joined by Richard Hamilton, our President and CEO; and by Paul Kuc, our Chief Financial Officer. Today, after market closed, we announced our results for the quarter ended February 29, 2016. The press release we issued is available on our website.

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 conform these statements to actual results or to changes in the Company’s expectations.

I will now turn the call over to Richard.

Richard Hamilton

Thank you, Gary. Good afternoon. Thanks for joining us. So, I’ll provide you with highlights of the quarter, share a few comments on industry dynamics and take you through our upcoming milestones. Paul will then review our financial results for the quarter.

On the whole, the second quarter marked another period of improvement for the Company and our moving to forage crops. As a reminder, forages are simply plants that animals like cattle and sheep eat. Forage business is a growing market fuelled by global changes in the world’s population. There are more than 1 billion people entering the middle class and before they buy flat screen TVs and iPhones, they eat more meat and dairy products. This requires more cows and consequently more feed and forage crops.

In many developed countries like the United States, there is also greater demand for premium grass fed beef and dairy products, and this creates greater demand for forage crops as well. So, the forage business today has a number of macroeconomic tailwinds behind it and we believe we are well-positioned to benefit from these trends.

Our business strategy is to introduce new forage seed products to improve both yields and feed value. In forage sorghum, we are developing our own conventional and traited products. For other forage crops, we license our traits to leading feed companies and crop developers. In alfalfa for instance, we have licensed our traits to Forage Genetics International, which is one of the largest alfalfa seed developers in the world. As part of our trait development program, we have also accessed new trait technologies and we’ve begun evaluating new technologies like gene-editing, which we believe holds a great deal of promise. At the same time, we are moving our traits and other new technologies forward in our development and commercialization pipeline, we are also establishing ourselves in the U.S. forage market as a supplier of high quality seed products. Our hybrids have already outperformed existing sorghum products from competitors and in some cases have even out-yielded top performing forage crops like silage corn.

During the second quarter, we reported that our forage sorghum hybrids topped numerous competitors in multiple independently run field trials, in many cases by large markets. In test conducted by the University of Florida for example, one of our hybrids yielded 35% more milk per acre than the best yielding competitor. Similarly, in independent evaluations run by the University of New Mexico, our forage sorghum hybrids demonstrated double-digit percentage gains over competing products.

In the southwest, in an evaluation where water and nitrogen fertilizer were limited, biomass yields of our forage sorghum hybrids were more than 50% higher on average than silage corn. Based in part on results like this and positive feedback we have received from our commercial customers, we expanded our forage sorghum product line for 2016. Over the past year, we have also increased the size of our distribution network and we expect to continue to add new distributors to sell and market our Blade brand or private label seed products. For superior products validated by independent sources of larger sales and distribution network, we expect to surpass last year’s seed sales. Last year, we achieved closer 6x increase in seed sales over 2014 and we look forward to continuing our sales growth.

For our forage sorghum seed products, we plan to introduce traits, which provide us with the opportunity to increase, both the performance and the value of our seed. Traits also provide us the opportunity to increase gross margins as the cost of producing traited seed is essentially the same is untraited seed.

In addition, we believe, we can use our traits to expand the market for our forage sorghum products beyond historical planting areas especially in water deficient geographies and where producers are facing high input costs for seed. We believe that stacking our yield and quality traits together, we could significantly increase milk production per acre, which is a key metric for dairies. Dairies lie in the middle of the value chain and therefore operators rely on seed optimization practices and technology to protect and enhance the margins.

Results today have been positive. In February, we announced that our leading biomass trait met or exceeded multiple performance targets. We’re scaling up seed this year for commercial production as well as moving ahead with larger field evaluations. This trait is consistently demonstrated yield advantages across multiple crops and within sorghum across multiple product types and hybrids. In our first field trials in commercial type sorghum hybrids, our biomass trait provided more than 20% increase in harvestable biomass. In larger research scale trials, the trait delivered more than 30% increase in harvestable biomass.

In addition to such significant yield improvements, we noted that our biomass trait provided certain performance characteristics that could expand the harvest window, improve drydown following harvest and increase the possibility [ph] of the biomass for cattle. As a caution, favorable results from a research setting are not necessarily a guarantee of future commercial performance. In addition to increased tonnage, we’re also enthusiastic about another trait in our pipeline that can increase the energy content of forages.

This is in the greenhouse stage of testing and we’re currently evaluating our latest results and we look forward to moving this work to field trials in 2016. As I have highlighted on our previous calls, one of the reasons we’re enthusiastic about our traited forage sorghum is that we have received confirmation from the United States Department of Agriculture that our high biomass trait as we have implemented in sorghum is not considered a regulated article under the USDA’s mandate to regulate genetically engineered plants. This determination is likely to make it more cost effective and timely for us to develop this trait and sorghum. We expect traits to be key drivers of our business growth. Therefore, keeping our traits moving forward in our pipeline and scaling them up for commercialization remain key business priorities. We believe, we can have a traited product on the market as early as 2018.

Pursuing opportunities in the forage market is not without its challenges. For the next few seasons, we will be competing with conventional seed products ahead of the planned introduction of our first traited products. We’ll need to continue to expand our distribution network and support our marketing channels. Research, we will be introducing our traits to our breeding line and scaling up seed supplies. The same time, we intend to develop new products via new technologies.

Outside of forages, we are moving our trait pipeline forward in sugarcane. Sugarcane is a global crop with over 65 million acres harvested worldwide. There are few multinational seed companies involved in sugarcane development and no traits have been commercialized in the America thus far. So, we believe we have a significant opportunity to bring some disruptive technology to the market.

In greenhouse testing and in our initial field evaluations, we’ve seen some of the impressive results of all the crops we have worked at. In sugarcane, our traits have increased biomass yields, accelerated growth and provided greater resilience in drought conditions. We believe that traits like these could significantly change production dynamics and economics in sugarcane. Sugarcane variety with our trait, the gross faster increases yields could provide additional harvest during the lifecycle of sugarcane stand and that is real economic value.

We have moved forward well ahead of schedule. Our lead genes are in the field now for a second season in Latin America. We expect to have results from these larger scale research trials by July. So, as the key trial stage and positive results would provide us with the launch point on which to initiate business development discussions related to the licensing and commercialization of our traits in sugarcane in Latin America.

At our current pace, commercial sugarcane cultivars with our traits could be ready for commercial scale up as early as 2018. The next few months, we also plan to extend field trials of traited sugarcane to Brazil. Brazil is the world’s largest producer of sugarcane with approximately 25 million acres harvested each year, so a key potential market for us. In addition to traits, we continue to expand the capabilities of our bioinformatics software called Persephone. Persephone was originally develop for our internal use and is now the primary genome browser at a number of multinational plant science companies including Syngenta and Bayer CropScience.

In closing, I’d like to emphasize that we have responded rapidly to changes in the energy market and the economic challenges faced by bio-energy in Brazil. Today, we’re focused on large existing markets that have the greatest opportunity for increasing stockholder value. And as a result, we plan to achieve profitability sooner and we continued on our original course in bioenergy and Brazil. We are excited to see the momentum building in our business. We have consistently met our milestones in the forage business. We’ve recently acquired access technology [ph] that is showing great promise and we are looking forward to building on our early success in the marketplace.

To measure our progress, we have a number of upcoming milestones, first details of our forage sorghum products will clearly be an important measure as we build our market presence ahead of the introduction of our traits. We expect to have a good idea of this year’s sales in the United States by July. Secondly, we are scaling up seed of our leading biomass trait for commercial production and in parallel we are moving ahead with larger field evaluations of traited versions of our forage sorghum hybrids. We expect to have results from these evaluations by the end of 2016.

We also expect to move our traits for improved energy content to the field this season. Outside of forages, we expect to have the results from our current sugarcane field trials in Latin America by July. We also expect to move traited sorghum to field trails in Brazil in the next few months. In addition, we continue to pursue outlicensing opportunities for our technologies and we look forward to concluding additional deals.

And finally, along the way, we plant to keep a close eye on expenses. We’ll evaluate our capital needs and our financing options as the year progresses.

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

Paul Kuc

Thank you, Richard. Before I review our financial results for the quarter, I would like to take a moment to highlight how our realignment has reduced our working capital needs, and discuss our plans going forward. We have identified significant opportunities to reduce operating expense while redirecting the resources we need to rapidly build and support our forage business.

As we have reported on previous calls, our goal is to achieve profitability, largely through growing our forage seed business and reducing our expenditure. Among the measures we implemented, we cut operating expenses in both Brazil and U.S. Today in Brazil, we are focused on the oversight of our sugarcane trait activity for Latin America. This can be achieved with minimal cost and resources. In the U.S. we are increasing our activities around forages. We have trimmed our general and administrative costs.

These changes together greatly reduce the amount of capital we need to move ahead in the forage and trait business. We are targeting an $8 million to $10 million of reduction in our operating expenses in fiscal year 2016 as we realize the savings from our realignment. We had some trailing expenses extending to the beginning of second quarter as expected and as of February, we are fully benefitted from the changes we implemented.

In order to commercialize our traits and grow our seed sales, we will need to continue to invest in our business and attract additional financial resources. We took a key step in the second quarter when we completed an underwritten public offering. Net proceeds of the offerings were approximately $6.3 million after deducting underwriting discounts and commissions and offering expenses.

This season, we are also targeting greater product revenue as we expand our product lines and increase the number of distributors marketing our products in North America. We also intend to pursue ground funding to continue developing and introducing innovative technologies for forage producers. Grant awards help mitigate the cost of developing new products and have historically allowed us to broaden the scope and speed of our research and development activities.

And finally, we will continue to evaluate options for additional funding including public or private equity financing as well as the potential sale of intellectual property and other assets to strengthen our balance sheet and support our growth.

Turning now to our financial results, I’m pleased to report that we followed our strong first quarter with continued progress. This included a 57% reduction in operating expenses in the second quarter over the corresponding period last year. For the quarter ended February 29, 2016, our total revenues remained relatively unchanged at $0.4 million. An increase in services revenue was largely offset by a decrease product sales in Brazil. Here, I’d like to note that we expect the majority of our seed sales to occur in our third and fourth fiscal quarters due to the timing of customer plantings in the Northern Hemisphere. This timing is different from our historical seed sales season in Brazil. Total cost and operating expenses decreased by $4.8 million to $3.7 million for the second -- for the quarter ended February 29, 2016 compared to the same period last year.

As I noted, this was a 57% decrease that was reflected across our major spending categories. Cost of revenue decreased by $1.3 million or 63% to $0.8 million, primarily due to decreased seed and biomass production costs related to the Company’s historical sorghum business in Brazil.

Research and development expenses decreased by $1 million or 41% to $1.4 million, primarily due to reduced personnel and related expenses and reduced external R&D and consulting expenses.

Selling, general and administrative expenses decreased by $2.5 million or 63% to $1.4 million, primarily due to reduced personnel and related expenses in Brazil and the U.S. For the second quarter of fiscal year 2016, we reduced our net loss from operations by approximately $4.8 million or 59% to $3.3 million as we benefitted from lower cost and expenses and consistent total revenues. Consequently, our net loss for the second quarter decreased by $7.1 million or 87% to $1.1 million as we reduced our net loss from operation and benefitted from a change in the fair value of liability classified work. We ended the quarter with $5.8 million in cash and cash equivalents.

This concludes my prepared comments. For a more detailed presentation of our financial results, please refer to today’s press release or our forthcoming report on Form 10-Q.

I will now turn the call back over to Richard.

Richard Hamilton

Thank you, Paul. Thanks everybody for your time today. Our shift away from bio-energy in Brazil into forage and feed crops is going well. Our U.S. forage sorghum business is growing rapidly. We are closer to commercializing our first trade than ever before and we have a number of milestones to look forward to in 2016. We look forward to sharing our progress with you. Have a good afternoon and evening.

Operator

Thank you ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.

Question-and-Answer Session

Q -

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