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

Amyris (NASDAQ:AMRS)

Q2 2012 Earnings Call

July 31, 2012 5:00 pm ET

Executives

Joel Velasco - Senior Vice President of External Relations

John G. Melo - Chief Executive Officer, President and Director

Steven R. Mills - Chief Financial Officer

Analysts

Robert W. Stone - Cowen and Company, LLC, Research Division

Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division

Vishal Shah - Deutsche Bank AG, Research Division

Smittipon Srethapramote - Morgan Stanley, Research Division

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Noah Kaye - ThinkEquity LLC, Research Division

Operator

Welcome to the Amyris Second Quarter 2012 Conference Call. This call is being webcast live on the Events and Presentations page of the Investors section of Amyris' website at www.amyris.com. This call and the accompanying slides are the property of Amyris, and any recording, reproduction or transmission of this call without the expressed written consent of Amyris is strictly prohibited. As a reminder, today's call is being recorded. You may listen to a webcast replay of this call by going to the Investors section of Amyris' website.

I would now like to turn the call over to Joel Velasco, Senior Vice President, External Relations.

Joel Velasco

Good afternoon. Thank you for joining us to discuss highlights of Amyris' recent progress and outlook. With me today are John Melo, Chief Executive Officer; and Steve Mills, Chief Financial Officer. On the call today and on this webcast, you will hear discussions of non-GAAP financial measures. Reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is contained in the press release distributed today or in the supplemental materials, which are available on the company's website at investors.amyris.com.

We will also provide certain forward-looking statements about events and circumstances that have not yet occurred and including projections of Amyris' operating activities in 2012 and beyond. Actual outcomes and results may differ materially from those contained in these statements due to a number of risks and uncertainties, including those provided in the company's recent SEC filings available on the SEC website at www.sec.gov. Please refer to these filings for detailed discussions of relevant risks and uncertainties. The company undertakes no responsibility to update the information in this call. The current report on Form 8-K furnished with respect to our press release is available on the company's website in the Investors section under SEC Filings and on the SEC website.

I would now turn the call over to John Melo.

John G. Melo

Good afternoon, and thank you for joining us for our quarterly update. During the second quarter, we continued to make progress on our technology development, our industrial-scale production and the execution of our commercialization plans, consistent with the strategy outlined earlier this year.

I'll first share what we've accomplished this past quarter and then provide some additional context for what we will be doing in the upcoming months. Amyris' first large-scale plant located in Brazil, at Paraíso, remains on track and on budget. Paraíso will be mechanically complete this week, with initially -- initial commissioning already started. We deliberately narrowed our current contract manufacturing operations, CMOs, from 3 to 1 CMO, Tate & Lyle in Decatur, Illinois. We transferred our trained operators from Biomin, our resilient CMO, to support commissioning and operations at Paraíso. We had stable and reliable operations, with no failed runs and performance at scale that is statistically indistinguishable from our last scale performance.

We have made improvements to our cost structure, both through OpEx reductions as well as efficiency gains. We are in the final stages of the plant closure of our ethanol trading business, which will reduce our top line revenue and offer more transparency into our renewables business, as Steve will describe later on this call.

Shipments to our customers remain on track across our 2 current commercial products: renewable diesel and squalene, and we are seeing strong interest in other farnesene applications. We have reached an agreement with Total on a revised structure and up to an incremental $82 million of funding, a 3-year funding program for farnesene research and development. We have simplified our joint collaboration to focus on renewable jet fuel and diesel from Biofene while giving Amyris governance over the research program, and Total predictability and security in funding our joint fuels efforts.

Finally, we are in active discussion with several other companies with the potential to receive additional funding in the coming quarters. In today's call, I will review our progress in these areas, as well as provide you with an update on our business strategy and funding opportunities. As we outlined in our previous call, we have focused our current production operations one contract manufacturing operation, as we prepare to bring online Amyris' own industrial-scale farnesene production facility at Paraíso.

We have met 3 main milestones during the past quarter as a result of our focused approach on technology and manufacturing operations. First, we narrowed our current CMO production platform to the Tate & Lyle facility in Decatur, Illinois. In May, we paused our production in Antibióticos in Spain and transitioned our staff at Biomin in Piracicaba, Brazil to prepare for commissioning of Paraíso. During the quarter, we produced approximately 810,000 liters of farnesene from these CMOs, bringing our year-to-date production to over 1.7 million liters. Over the last 12 months, we have produced approximately 2.5 million liters of farnesene, building inventory to meet near-term customer demand, particularly as we consolidate our CMO operations in Illinois and commission our plant in Brazil. As a result, we will have lower production volumes in the remainder of the year while growing our sales from inventory.

Second, as we noted in our press release today, Amyris' farnesene production facility at Paraíso will be mechanically completed this week and commissioning has started. We remain on track and on budget. For those following along the webcast presentation, you can see some of the before and after photos from Paraíso.

Third, we will complete commissioning in the second half of this year and begin commercial production in early 2013 at Paraíso, utilizing our experience from operating with multiple feedstocks and 3 CMOs over the last year, as well as our 2 pilot facilities in California and Brazil. We have significantly reduced costs thanks to improvements in our production processes, ranging from optimizing feedstock streams to modifying our process parameters to increase our production process efficiencies. In short, we expect that implementing these process improvements, deploying our ever-improving streams at scale and maintaining robust operations at our 2 production facilities will result in reductions of our cost of production, further expanding the range of markets we can target.

I will now discuss some highlights pertaining to customer acceptance and sales over the past quarter and how they relate to our expectations for the future. First, on fuels. We have met key milestones on diesel as well as on jet, which represent 2 large long-term market opportunities that require strong engagement with suppliers and customers. We continue to produce and sell renewable diesel in niche Brazilian markets, such as public bus fleet in São Paulo and Rio. Due to the outstanding performance of our fuel, the Brazilian fuels regulator, ANP, recently approved the expanded use of our renewable diesel to an additional 135 buses from the 180 already in place in São Paulo. We will begin delivering these additional volumes in the second half of this year. As we announced in mid-June, we successfully tested our renewable jet fuel in a passenger plane. We are now focused on the lengthy ASTM certification process for our jet fuel and are encouraged by the success of our demonstration flights and, above all, by the engagement of our existing partners who are eager to have our farnesene-derived jet fuel in the market. We are in advanced discussions with Azul Airlines for an uptake agreement for delivery, following regulatory and certification approvals, which we hope will be completed in 18 to 24 months. Again, in both diesel and jet, we see opportunities in the coming years. The customer acceptance and approvals we have already achieved has been tremendous and validates our underlying strategy of being an integrated, renewable fuels company. And as we announced this morning, Amyris will continue building its fuel business in Brazil and may later add this to the global joint venture with Total.

Turning to our higher value products. Let me provide you with an update on squalene, our best-in-class cosmetic emollient. Customer market response to our NEOSSANCE Squalene continues to be excellent, and there was a recognized differentiation of our product relative to shark- or olive oil-derived squalene. Here are some highlights. During the second quarter, we initiated shipments to Centerchem, our U.S. distributor. With the addition of the U.S. distributor, we now have global distribution reach for cosmetics. Working with our Japanese partner, Nikko, we continue to identify new opportunities for our high-quality squalene, such as in apparel and hair care products. In addition to new applications, our squalene is now coded with 3 of the top cosmetic companies in the world. Coding means that Amyris squalene is among the limited number of ingredients that will be used in future formulations with these companies.

Finally, we have received positive feedback for 2 new farnesene-based cosmetic products that we plan market introduction next year. This is consistent with our strategy to have 1 to 2 new cosmetic products launched each year. In addition to expanding niche diesel and squalene sales, we are entering new markets with high-value products, which as we described in our past calls, includes using farnesene as a building block chemical for liquid rubber and oxygen scavengers, as well as bringing to market our first fragrance oil.

Let me provide you some highlights regarding these opportunities. We have produced and delivered a sizable test quantity of our fragrance oil and have met our obligations to our partner, Firmenich. Various perfumers are in final stages of evaluating the oil's purity and quality, and we are getting ready for production. This first molecule serves as the proof point that we can have a disruptive impact in the fragrance ingredients segment. Working with Kuraray, our Japanese partner for liquid polymers, we have made considerable progress in increasing the market opportunities for liquid farnesene rubber, LFR. Major tire manufacturers have told us that this is one of the most interesting monomer innovations in the last 50 years. Six of the 12 leading global tire manufacturers are currently testing liquid farnesene in their rubber formulations. Initial reaction from manufacturers is that liquid farnesene rubber provides a differentiated performance by reducing rolling resistance, which improves fuel economy without reduction in tire wear. Our oxygen scavenger molecule for use in PET applications is being developed in partnership with Grupo M&G and remains on track.

Finally, as part of our relationship with Total, we expect to ship farnesene in 2013 for certain farnesene-derived products Total seeks to commercialize. The feedback and interest we continue to receive from our customers and partners is encouraging and continues to validate the strong attractiveness of our No Compromise products, high performance, cost effective, renewable products that have a positive impact in enabling sustainable growth, without subsidies. Our plans for commercialization remain on track.

In the past quarter, we executed on the plan we outlined to you earlier in the year. We deliberately narrowed our contract manufacturing operations, are on track with completion and commissioning of Paraíso, have reduced production costs and are successfully pursuing our highest-value market opportunities. We are confident because of the progress we have made and customer acceptance of our superior technology and our demonstrated ability to manufacture at scale.

Let me now turn the call over to Steve Mills for a brief overview of our financial results before some closing comments. Steve?

Steven R. Mills

Thank you, John, and good afternoon, everyone. From a financial perspective, our second quarter results reflect the impact of the activities that John just described, and these results are consistent with the strategy that we outlined for you earlier this year. Highlights for the quarter include: the wind down of Amyris Fuels, or AFL, our ethanol and gasoline trading business; the reduction of our CMO sites from 3 to 1; the progress of our Paraíso construction project; and a reduction in operating expenses.

Total revenue for the quarter was $19.3 million, down from $32 million in the second quarter of 2011 and down from $29.5 million of last quarter. This decline in revenue was virtually all due to the planned wind down at AFL. We will report the last AFL sales revenue in Q3, And we estimate that the AFL revenue number for the third quarter to be slightly less than $2 million. Excluding AFL, our revenues, which included the sales of Amyris' renewable products, as well as the revenue from collaborations and grant was $6 million. This number compares to $4.2 million of non-AFL revenue in last year's second quarter and $5.6 million in the first quarter of this year.

For the second quarter of the year, the weighted average selling price of our renewable products was $8.08 per liter. This average selling price reflects our focus on producing and selling higher ASP products until additional volumes become available when Paraíso starts up. Our cost of products sold also declined for the quarter, principally due to costs associated with the lower AFL sales volumes. This decrease was partially offset by the costs related to the year-over-year increase in renewable product sales. On a sequential quarter basis, renewable costs of products were down significantly, reflecting our planned reduction of production volumes as we reduced the number of CMOs down to 1 during the quarter.

During the quarter, we continued to take steps to lower our operating expenses. Excluding the impact of noncash, stock-based expenses, our combined R&D and SG&A expenses were down 16% from last year's second quarter, due primarily to lower consulting and outside services. And we're also down 13% from our first quarter, due principally to lower personnel-related costs.

Turning to the balance sheet. Our cash balance at the end of June stood at approximate $67 million. During the quarter, we received $4 million of new equity from a group of current shareholders and $26 million of debt funding in Brazil related to our Paraíso project.

For cash outflows for the quarter, about $24 million was used for capital expenditures for the quarter, principally at Paraíso. We paid down $10 million of debt obligations, and $29 million was used to support operating activities.

Looking forward, we expect the pace of capital expenditures to slow down significantly in the last 6 months of the year as we finish our Paraíso. We estimate CapEx for the rest of the year to be in the $20 million range.

Now I'll turn the call back to John.

John G. Melo

Thank you, Steve. Before we take your questions, I'd like to provide an update on our strategy in funding. As I said to you earlier this year, Amyris remains committed to deliver on profitable, predictable production. We have and will continue to drive technology in operations improvements to reduce production costs. We have and will deliberately continue to optimize our expense profile and seek to accelerate our product revenue growth, especially in higher average selling price applications in cosmetics and polymers, which are supported by the over-60 patents we have already received, plus our nearly 300 pending U.S. and foreign patent applications.

With our current patent portfolio, success with 4 commercial No Compromise products, a strong pipeline of new products to commercialize, industrial, global manufacturing operations and the leading bioengineering platform, we continue to attract the world's leading companies as partners and collaborators.

Earlier this year, we also said that we would have to secure additional funding to get us to cash flow-positive by the end of 2014. Today, we took another major step in that direction. We completed the expansion of our relationship with Total, which is providing an additional $30 million in the third quarter, and up to another $52 million over the next 2 years. As noted earlier and in more detail in our press release and regulatory filings, we have strengthened our relationship with Total, which remains focused on technology development and commercialization of our fuels.

So what's different regarding the Total relationship? We simplified the structure with a 3-year, up to $82 million program intended for both diesel and jet fuel from farnesene. The first $50 million was -- has reached us today, another $50 million in September, with subsequent tranches in mid-2013 and 2014. A joint venture will be formed following the completion of the R&D work on fuels. Amyris will have greater autonomy regarding the governance of the farnesene research program while leveraging Total's expertise in particular areas, such as downstream technology. Also the agreement encourages Amyris to pursue its renewable jet and diesel business in Brazil prior to formation of our joint venture for fuels. We achieved greater predictability and funding from Total, which reaffirmed its commitment of Amyris' best-in-class technology. And Total now has security with clearer go-no go decisions for options in commercializing fuels. We agreed to a structure that allows Total to commercialize some farnesene-derived products outside the joint venture through a non-exclusive arrangement, where Amyris supplies farnesene to Total. This simplified path for our fuels relationship with Total partially addresses our funding needs for the next 2 years.

We have also identified and continue to pursue additional opportunities, consistent with our strategy to remain an independent and integrated renewable products company. While I cannot disclose details of these confidential discussions, I can make the following points: we are committed to building additional relationships with major industrial partners that would be complementary to Total; we are in active discussions with several large players in the chemicals space; we expect at least one of these relationships will progress prior to end of the year; we will seek to minimize dilution by maximizing collaboration funding, debt where applicable and structured long-term financing.

What you should expect from us through the end of the year is additional funding, successful commissioning of Paraíso, a steady increase in renewable product sales from inventory on hand and a continued reduction in our cash burn.

Jonathan, would you please open the line for questions now?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Rob Stone from Cowen and Company.

Robert W. Stone - Cowen and Company, LLC, Research Division

My question relates to revenue recognition of the Total funding and grants and collaboration in general. So is the funding that you're going to receive in the second half going to flow through revenue? Or is it being treated as if it's convertible debt?

Steven R. Mills

We've not completely finalized our accounting review of this, but I'm 99% sure it will be accounted for as debt on our books.

Robert W. Stone - Cowen and Company, LLC, Research Division

Okay. So I know you're not giving guidance per se, but should we expect some ongoing level of grant and collaboration revenues, especially [indiscernible]?

Steven R. Mills

We have a variety of relationships, including some new ones including some new ones, including the other things that we received this quarter. So we expect, at this point in time, a similar, or hopefully growing, level of collaborations and grants.

Robert W. Stone - Cowen and Company, LLC, Research Division

Okay. And good job on expense reduction. Any comment on direction of the run rate in Q3?

Steven R. Mills

Well, we think it will continue to decline. We continue to look for optimization around here. We've reduced our headcount about 10% since the beginning of the year. And we continue to focus on the needs of the organization as we have it structured today.

Operator

Our next question comes from the line of Vishal Shah from Deutsche Bank.

[Technical Difficulty]

Operator

We don't seem to be getting any audio from Vishal Shah.

Our next questioner comes from the line -- from Jeff Zekauskas from JPMorgan.

Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division

This is Silke Kueck for Jeff. I also have a question regarding the Total agreement. My memory is, is that the original Total agreement had 2 parts: one was related to the fene development for renewable diesel and jet fuel; and then there was a piece that was related to other products. And my recollection was that the piece that was related to fene was something like $100 million or $105 million, something in that neighborhood. And some of that you collected already through the first half of the year. And so it looks like the funding component, in a way, related to fene really hasn't changed, but maybe the cash is accessible to you faster. Is that the right way to think about it?

John G. Melo

Two specific comments. The cash for -- focused on fene-based fuels has increased with this new agreement. And it's increased by actually shifting original collaboration dollars that were set in a pool, but not actually directly accessible without additional programs being named, and where some of that money was being used for a different product platform for jet. And we've actually agreed to take those dollars that were unpredictable and not actually being fully pulled down. Add those with a focus on farnesene-based fuels, and that incremental dollar amount beyond the original fuel collaboration is about $30 million. That's again beyond the $105 million that was initially dedicated to farnesene-based fuels.

Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division

And just can I ask a follow-up? If there is an additional $30 million, can I ask how much in total of the $105 million you've gotten today? Because it seems the incremental funding left is $82 million, which seems to me that you've done, collected a fair amount of money already from Total.

John G. Melo

Approximately $45 million of the $105 million, the original $105 million.

Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division

Okay, that's helpful. Secondly, like it seems to be based on the selling -- the average selling price that may be sold on the order of, I don't know, 300,000 liters of farnesene this quarter. Is that the right order of magnitude?

Steven R. Mills

Well, again, if you just do the arithmetic, that you can see the revenue, that's not too terribly far off. And of course, that $8.08 is a weighted average selling price between the niche diesel that we're selling and the squalene. But we're not giving...

Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division

So it just means that you probably sold a higher percentage of squalene this quarter than last quarter?

Steven R. Mills

Yes, I mean, that's the weighted average selling price, and that's how you have to do the calculation.

Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division

Sounds fair. And lastly, when do you expect to provide first products to Kuraray?

John G. Melo

We have initial shipments for the development cycle taking place, and then we expect that the volume ramp for that liquid farnesene rubber to start through 2013.

Operator

And Vishal Shah from Deutsche Bank has returned to the queue.

Vishal Shah - Deutsche Bank AG, Research Division

I wanted to just follow up on Total, and I apologize if you've already answered this question, but are there any milestones that you have to achieve in order to get the additional funding by mid-2013 and '14?

John G. Melo

Thanks, Vishal. The way the milestones are structured, it's not actually -- which is a big shift in the program, we had a program that was very much milestone-by-quarter-driven. What we've gone to is a stage gate annually, that's part of an overall review, and then that stage gate triggers the next year's funding. And so it is an annual review. The program is agreed upfront, and it's not specifically a set of technical milestones as much as it is an overall progress towards the goal of commercialization. And as long as there are no significant blockages or any major obstacles in the way of being able to have visibility towards commercial economic targets for fuels, we'll continue to move the program forward in the way it's currently structured.

Vishal Shah - Deutsche Bank AG, Research Division

That's very helpful. One other question, you had mentioned last time that the estimated month will be on hold. Any changes to that sort of time frame as to when you want to start working on that plant?

John G. Melo

Yes, Vishal, the way we're looking at it today is based on the success we're seeing, again, with the technology at scale. The Paraíso project and how well that's going, our expectation is once Paraíso starts producing commercially, and we shift out of Paraíso for a good 6 months sustainable production, I would expect that to turn the SMA positive back on. And my expectation would be that all that timing works, the mechanical completion of São Martinho sometime in the second half of 2014, with production out of São Martinho sometime in 2015.

Vishal Shah - Deutsche Bank AG, Research Division

That's great. And then one last question, Steve, if you can maybe talk about your cash projections for the third to fourth quarters, what your cash flow and expectations are on a quarterly basis. And then with the Total cash inflow, where you think your year-end cash commission will be without any additional funding?

Steven R. Mills

Without giving you specific guidance, as I mentioned to you earlier, if we see CapEx line down dramatically, looking at about $20 million for the rest of the year, our operating expenses have been declining, and we continue to see that trend. We have -- we're down to the 1 CMO, and we know production levels are going to be quite a bit lower in the last half of the year, therefore, fewer expenses. So we definitely smell the burn-down dramatically. The Total money, we're going to get $30 million in. We've -- as we look forward, we think that we're going to need the additional funding that John described earlier. And we're really trying to get ourselves in a position where we've got the majority of this behind us, so all of our focus can be on getting the business where we want it to be.

Operator

Our next question comes from the line of Smitti Srethapramote from Morgan Stanley.

Smittipon Srethapramote - Morgan Stanley, Research Division

John, a quick question on the Total agreement. Can you talk about the factors that led to the new agreement with Total, who or why -- what was the rationale for the revision of the original terms?

John G. Melo

Happy to do that, Smitti. I think there were 3 key factors. I think one of them was, I think, on both parties, a bit of concern about the overhead we were adding by moving to a joint venture so quickly and a realization that we're moving to that venture quickly because there was an interest to get the financials on Total's part to commercialize fene-derived product and that the joint venture was a way to be able to access farnesene and move to that production quickly, and a recognition that maybe there was an alternative way to do that without having the overhead of the joint venture structure so quickly. So that was one issue, which was kind of a pause on why the overhead is very different way to solve the farnesene, other farnesene-derived products for Total. I think the second was, between both parties, I think we kind of both lost track of what the strengths were of each partner, and we started getting a bit blurred about who and how the R&D program was being managed, so we had to reset for ourselves a more effective governing structure going forward that we could both live with long-term. And I think the third was really standing back and looking at our cost base and trying to find a way to focus the activity more. We started with several Total programs, 2 big ones, jet and diesel that were actually quite different because they were different platforms, the C10 and the C15. And recognition by both partners that actually it's in our mutual interest to go to a focused approach, use farnesene, and actually, use farnesene to go to both end markets and do it by concentrating all the investment in the evolution of the development of farnesene. So I look at those as the 3 key drivers that really drove to us standing back and renegotiating and coming out with what I think, and they think, is a much better agreement for both parties. And both of those are in service in aligning the interest of the parties in getting to a place where the incentives are aligned and are making the best choices together for the right direction for the company.

Smittipon Srethapramote - Morgan Stanley, Research Division

Great. And maybe just one quick follow-up. Under the new agreement, Total has the decision or has a possibility of electing to not continue to fund the JV. Can you talk about what kind of conditions that would lead them to walk away-- that will allow them to walk away going forward?

John G. Melo

Pretty simple, Smitti. I mean, again, I think both of us, and I think the whole industry is starting to realize that we're in the middle of it with Total, we realize this difficulty of getting to sustainable economics, especially at a very volatile environment for commodity. But again, to get to sustainable economics without subsidy for fuels is a very hard road to get to. And we both want to be clear that actually there's plenty of great opportunities for Amyris' technology without fuels and for Total and Amyris as a partner. We wanted to create a mechanism where as long as the economics for fuels are reachable, we will have a great fuels business together. If not, we needed a mechanism to protect both parties and to give us the opportunity to continue building out a high-value business without this distraction, if we can't get to the right economics for the high-volume piece of the business. So it's purely an economic test for viability of fuels long-term.

Operator

Our next question comes from the line of Mike Ritzenthaler.

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

Could you walk us through, briefly, the various components of your debt? I guess, at the higher level, you have the bridge loan, you have the previous promissory note, and now looks like from the latest K, another $25 million loan in anticipation of the BNDES. I guess, the spirit -- and now you have the convertible structure with Total for the research funding. I guess the spirit of my question is how much more that the balance sheet can take or that you're comfortable with to complete this current project suite?

Steven R. Mills

That's a great question, and something that we're looking at very carefully. There's 2 pieces to that. One, on the BNDES funding at the bridge loans, the bridge loans were there to help us get to our more permanent financing, and those bridge loans are going to go away and be repaid here in the third quarter. We're now in a position where the long-term BNDES funding is in place, and that is there specifically as project financing for the Paraíso plant. So it feels like that's well matched. The convertible structure, we've got ongoing convertible fidelity that we put in at the beginning of the year. And the -- part of the reason for Total, I look at it more of contingent debt. We're certainly hoping at the end of the day that, that will not be debt-- that would get no decision. But in case it doesn't, for whatever reason, that will turn into an alternative funding mechanism of Total, whether they -- we repay them in cash or take a convertible note. So yes, it's a fair question. And on the Total side, that won't happen until 2017. So it's out there a bit in the future, and it was negotiated 2-way street on that. But we're very careful about the debt structure, and the -- we continue to look at it as we need capital money for capital construction and to extent, when we get to a place where we have reliable production and reliable working capital levels, we may consider a working capital line. But can't see as much beyond that, at this point in time.

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

All right. And then this is just a follow-up to a previous question. I guess, you produced almost 1 million liters of fene in the first quarter, [indiscernible] in 10,000. And you're selling a couple hundred thousand a quarter, by our calculations. Is there -- are you tailoring back the production just because you're running out of maybe inventory or you've produced enough to this point that you can sell for the rest of the year of inventory, whether that's at Glycotech or the CMOs? And are there any, like, unusual costs that go along with that, that we should be aware of?

Steven R. Mills

No, I think, yes, it's a good observation. We -- it's the second of your options, that we purposely built the inventory up, knowing that we'd only be running 1 CMO and that we have [indiscernible] still up and running. We have got ourselves, we think, a bit of cushion to make sure that Paraíso starts up, it starts up well. But we're -- in fact, are seeing increasing demand for our products, so that's the positive side. And we're just going to be delivering, for the most part, our inventory.

John G. Melo

Yes, just to add a little on Steve's point, the idea was we've got a wide range of customer applications at different prices. And the whole idea was to really go to the minimum level that we needed to sell to satisfy our customer needs and then give us the space to really scale up at Paraíso since it's 100% owned site, and it is our targeted lowest cost production site.

Steven R. Mills

And I think the one other follow-up I'd like to make is that the unusual costs took place last quarter, and we recognize the fact that we were only going to be running the 1 CMO, and we took that hit there. So we're seeing this quarter and the future quarters, much more run rate in the cost of goods.

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

All right. And just one last one for me. I guess some [indiscernible] if I'd ask it a little bit, but what was the approximate decrease on a percentage basis in the cost of manufacturing versus last quarter or versus maybe when you started? I think that's kind of how you just talked about it in the past.

Steven R. Mills

That's a good question. I guess, I'm just trying to make sure I've got the right -- if you're looking at the dollar, absolute dollars or...

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

Percent.

Steven R. Mills

Unit? Unit costs are down, have been dropping dramatically over time. I don't know, John, if there's...

John G. Melo

Right now, a way to think of it is a simple look, it's index. So a simple way to think of it is with the drop it has since the beginning of the year, we expect the dropping to happen again between now and the end of the year.

Steven R. Mills

Yes, I think that's the way.

Operator

Our next question comes from the line of Ben Kallo from Robert W. Baird.

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

I just kind of want to add on to Mike's question there. Could you just talk maybe qualitatively about improvements you've made, whether in yield or in your process to bring down those costs?

John G. Melo

On a qualitative basis, I mean, what I can tell you is 2 key dimensions: one is just we've experienced realizing what are the best conditions to maximize the strengths' performance, and we've now really hit that very effective; and then secondly, really getting the downstream process to run effectively so that we reduce [indiscernible] differently, we improved the level of farnesene we recover. And I think in both dimensions, you can think of it as we weren't -- we started off by not recovering all the farnesene we expected, and we were throwing away farnesene from the fermentation, and the fermentation wasn't as effective as it could be. Where we've gotten to in optimizing the processes, real clarity on how we get the most effective fermentation and the ability in understanding how we'll recover our target farnesene from the fermentation. And those 2 drivers, with some improvements in the technology, have been really the key drivers to cost improvement we have on hand, and we expect to deliver for the rest of the year.

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then as it relates to Paraíso, are we still expecting a 2- to 3-year ramp for that? And then should we see a step-down in cost reduction, not only because you're not using a total manufacturer, but because you made some design at Paraíso, the mix cost there?

John G. Melo

I would just say, in general, you can expect ongoing cost improvement. We're not seeing in the foreseeable future a flat spot on costs. And then I think on the question of the ramp, I think we're just being cautious, rightly so, of what it's going to take to get the plant up, fully optimized and what it takes to match the technology improvements to that plant's cost and evolution and performance improvement. So it could be better, but we'd like to keep conservative in thinking it's going to take 2 to 3 years, and that's kind of -- it's not an Amyris issue. I mean, in a way, we have to think about that as what it takes for fermentation to actually evolve over time to achieve its start. So that's really our basis. As we look at the fermentation process, we look at what it takes to implement and execute over time for improvements and get to a stabilized performance base. And that's our basis for the 2 to 3 years.

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then finally, on additional funding. Do you expect it to be a product-specific funding? And would it come in the form of some type of partnership, or more in a JV form or more paid R&D?

John G. Melo

We're not actually describing this since we're in the middle of a pretty expensive negotiations right now. And I think you can expect, looking at the Total deal kind of what we're very good at, which is identifying specific product opportunities, establishing extensive collaborations and ensuring that we have a long-term access to that value by partnering in how that product gets commercialized. And I think that kind of structure is one that we're familiar with, works well for us and would not be too far to see other significant deals work that way.

Operator

Our next question comes from the line of Pavel Molchanov from Raymond James.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

John, in respect of the Total JV, a year ago, when you originally announced the relationship, I know the plan was to begin commercial production in 2013, 2014. Obviously, everything has changed since then. Realistically, if there was a go decision at a point in time, when would commercialization take place?

John G. Melo

Actually, Pavel, we're commercialized today. We're selling a commercial product today, and Total is going to access some of that commercial production for the applications. It wants to aggressively take the market outside of fuels. So what we did again, to re-emphasize my earlier point, is we actually realized that the establishing a joint venture to meet immediate commercialization needs for Total was not the best or most cost-effective way to go. We actually have a commercial production. We can supply commercial product to Total, and we will be doing that. On fuels, specifically, we have a commercial fuels business in Brazil. We'd like to keep that business independent for the time being and are happy to do that. And then the larger-scale fuels production to supply the European market and other Total markets is what we expect to actually bring on later. And for that, we expect to be able to get to a very competitive price for those end markets, and that is the time element of this, is ensuring that we can be competitive without subsidy for fuels long-term. And to have that visibility, it's going to take a few years before we decide to invest and put any overhead of a joint venture. The basic joint venture structure, including the initial capitalization of $50 million, is retained in the current agreement with Total.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Okay. Let me try asking it slightly differently. Once there -- if and when there is an agreement to move forward with a full-scale JV, how long would it take from that point to get to what you would consider a commercial scale output?

John G. Melo

From when you decide to start the JV commercial scale, 24 months.

Operator

Our next question comes from the line of Colin Rusch from ThinkEquity.

Noah Kaye - ThinkEquity LLC, Research Division

It's Noah Kaye in for Colin. First of all, congratulations on getting Paraíso mechanically complete. I just want to follow up, can you tell us a little bit about some of the hoops that you have to go through for the commissioning? I guess, you're doing yourself at least 6 months here. Talk a little bit about some of the checks that you have to cross off?

John G. Melo

Sure. I mean, you can imagine, there's everything from ensuring the instrumentation works, ensuring that all the piping works, actually ensuring that the environment maintains a sterile condition as you flow product through it and ensuring that all the people are trained in the 3 shifts to be able to operate effectively. And that -- those 3 things are all part of the commissioning process.

Noah Kaye - ThinkEquity LLC, Research Division

Sure. And just a bookkeeping note, how much CapEx have you actually spent on Paraíso to date?

Steven R. Mills

Well, we haven't given that number out specifically. But I think the -- at one point in time, I think the company talked about this facility being $50 million to $60 million, and that's -- as we shared, we're on budget.

Noah Kaye - ThinkEquity LLC, Research Division

Okay. So just trying to understand here, you said that you'll be looking at maybe about $20 million of additional CapEx throughout the year, most of that at Paraíso, but it's already mechanically complete. So can you kind of help us understand where that additional CapEx is going to be spent?

Steven R. Mills

Well, we got to pay the bills. As you know, they don't all come in -- and we still got some ancillary buildings and other -- whether it's got to do with the utility system and blending systems. And there's a lot of the ancillary, and they add up quite quickly. And that $20 million is for -- it's company-wide, so it takes care of the some of the other things that are going on in Brazil. So part of it is the timing of payments. When we talk about the quarter, it also top end-heavy and we're finishing up here in July. And as you can appreciate, there's been a lot of focus to get it done, so we've got that piece of the pie, which will be part the $20 million as well, so...

Noah Kaye - ThinkEquity LLC, Research Division

Actually, as you said so, some delayed payments from the part of the mechanical completion. A balance sheet question, other non-current liabilities grew by almost $20 million since December. Can you tell us what's in that number?

Steven R. Mills

I can. Yes, I can. That is where the Total's -- the bulk in contributions were going. We had to recognize that as kind of a deferred revenue line, the way the deal was structured. So that, as they paid us-- as we mentioned earlier, they paid us $45 million over the last 9 months or so. Most of that is in that account.

Operator

Our next question is a follow-up question from the line of Rob Stone from Cowen and Company.

Robert W. Stone - Cowen and Company, LLC, Research Division

I wanted to follow up a little bit on the cost of the production and the plan for the rest of the year. First question is, how many liters, approximately, do you have already in inventory?

Steven R. Mills

That's a good question. I know that number, but I don't have it in my head. In estimate, we've got more than enough to handle the rest of the year. It's been -- as I said, we built it up in the second quarter, and we're starting to hit into it a bit.

Robert W. Stone - Cowen and Company, LLC, Research Division

Okay. So if your production volume is going to go down significantly in the second half, and some good chunk of what you're planning to sell you've already produced, then you should already know what it costs you to produce what you already produced, and presumably, the cost isn't that much different, Steve, than what you're reporting this quarter, except that finally, by the fourth quarter, we'll get to see the naked bioproduct costs of goods sold without fuels up skewing it. So what is it on lower production volume and a good chunk that's already baked that's going to further reduce the costs by 50% by the end of the year?

Steven R. Mills

That's a lot of questions.

John G. Melo

Yes, that's a different question. That is -- that answer was the way our production costs are going to be. That is exactly what it's going to be. Now what the inventory base cost is and what that actually does for cost of goods, that's a different question, and we're not actually making that -- we're not giving any guidance on that at this point. But yes, those are 2 different questions. What's our COGS, and then what are our production costs and what's the profile that cost look like.

Robert W. Stone - Cowen and Company, LLC, Research Division

Okay. So the -- I'll split it into the 2 parts. At what point will you be comfortable actually giving this information without it being obscured by the fuels? And then the second piece is, I guess, if it's on lower volume, if the cost of incremental production is going to go down by 50%, that would have to be driven not by scale, but more increased deals and separation efficiency, is that right?

Steven R. Mills

That's right. I think you hit on several points there. First of all, the fuels are going away here. The third quarter will be the last quarter we're reporting in fuels. So that part's fine. To the extent we've got existing inventory, it's been written down to the market. So those costs of goods related to sales shouldn't have much impact on our margin, reported margin. We will have -- we'll incur some fixed costs because we've got fixed costs. And then the extent we -- as John pointed out, the extent that we start to ramp production up, we're expecting to have much lower unit cost. So I think your picture was drawn correctly. And I think as we get to the fourth quarter and approaching a new year, all this will become much clearer, exactly what the cost structure is and how it's going [ph], not just for you, but for us as well.

Robert W. Stone - Cowen and Company, LLC, Research Division

Can you say what the margin was on your bioproducts revenue this time around, stripping out the irrelevant fuel sweep?

Steven R. Mills

Well, certainly, we know those numbers, and we just said, it was much improved period-over-period. We'd rather not talk about it because -- again, because it's a mix of fixed and variable and some other items [ph] and I don't think it's a meaningful number.

Operator

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mr. John Melo for any concluding remarks.

John G. Melo

Thank you, Jonathan. In closing, during the past quarter, we executed on the plan we outlined to you earlier in the year. Amyris is on solid footing, with proven disruptive technology for the fuels and chemicals industry, and we will continue on the path to deliver predictable and profitable production in the coming quarters. Thank you for your time today and your interest in Amyris.

Operator

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

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: Amyris Management Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts