Rick Eno - President and CEO, Director
Lucy Watson - Jefferies & Company
Metabolix, Inc. (MBLX) Jefferies 2012 Global Industrial and A&D Conference August 8, 2012 4:00 AM ET
Good afternoon. I am Lucy Watson. I work in, Chemicals & Clean Tech Equity Research for Jefferies & Company. My pleasure to introduce, Rick Eno, the CEO of Metabolix.
Thank you very much, Lucy, and it's a pleasure to be here at the Jefferies Global Industrial and Aerospace Conference.
We're a little different than a lot of the other companies you've met over the course of the day. Metabolix is an early-stage technology company, game-changing technology, very well positioned in the fields of renewable chemicals and renewable materials, which I'll take you into today, lots of potential, very evolving dynamic company making great progress. I'd like to provide you with some of those highlights today.
First, I'll point you to our Safe Harbor statement. There'll be numerous comments I may make that could be forward-looking, and please refer to our Form 10-Q and recently Form 10-K as well.
I am now on page three, the Metabolix division. Metabolix is focused on commercializing solutions that are clean, sustainable and that underscore economically viable for the world in plastics, chemicals and energy.
It's an early and one of the leaders of industrial biotechnology that has been recognized for numerous awards over the years. Innovation awards, bioplastic awards, green chemistry awards and most recently recognized by the World Economic Forum in Davos as a Technology Pioneer, very game-changing technology, which I'll now bring you into how we are aiming to commercialize that technology.
The technology that we have over 700 patents in is in areas called PHAs, otherwise known as polyhydroxyalkanoates, and these are natural storage molecules, and I'd like to describe it. Just as the human body stores energy in the form of fat, plants and microbes store energy in the form of these PHAs, and what we have managed to do is to figure out how to produce these PHAs at commercially viable quantities and really have started to make great progress in a wide range of end-use applications for these PHAs.
We produce them in two ways. In the left-hand-side, you can see a fermentation and at the end of a fermentation cycle over 80% by way of a microbe these PHAs [by way]. On the right-hand-side, because these are naturally occurring materials, we could also produce them directly in the leaf tissue of crops which offers a game-changing approach for production of chemicals and plastics.
We manage the company all around these PHA capabilities in three platforms. From going from left to right, they are in order of timing towards commercialization.
First is a family of bioplastics, which we call Mirel and these are biopolymers which can be molded into parts flow into bags, turned into phones, and I'll get into the details in a few minutes, but it's been proving technical at commercial scale. Just recently, we announced the Letter of Intent to introduce manufacturing of these materials with a company called Antibioticos, and we are aiming for production in 2013, as we bring these materials to market.
The second platform is an industrial chemicals platform, and this is a bit different and that the materials we produce here are the same chemicals that you find the market today except they are produced by renewable sources instead of petroleum based, so these cases either is what they call drop in chemicals, and here we've got a series of families working in all based on the same competency for the Mirel family of materials and we've announced the relationship with the company called CJ BIO, a Korean industrial biotechnology company.
Finally, our crop technology is longer term, primarily funded by government grants and this is continuing to increase the expression of PHAs in crops themselves, and here we are fortunate to have a very substantial department of energy grant that funds much of that work and really making good technical progress on that as well.
Now moving forward, I'll talk a bit about each of these platforms peeling back a little bit, getting you into some of the details, what we're doing first beginning with Mirel, the bioplastic family.
Just a bit of history for those of you that aren't familiar with Metabolix. This is a family of materials that in July 2006, we had struck a commercial alliance with Archer Daniels Midland. In December 2010, the plants at Archer Daniels Midland built started up and through about January 2012, together we grew the market to the point where we had about 57 customers, 26 repeat buyers as we gated as customers began to move to adopt the material all around the world in fact and really significantly de-risk the technology.
In January of this year, ADM chose not to continue with the relationship and retained the manufacturing plant. We at Metabolix, we retained all the intellectual property, we purchased the inventory and we took control of the business as of March of this year.
In April of this year, we announced our first sale of inventory. In July of this year, we announced the manufacturing partner with the target for production next year, so we have now taken control of the business and are launching under the Metabolix name having understood the markets and customers extremely well and there's a numerous years of commercial experience which we'll bring in to bear with our own launch.
Why biopolymers, for those of you that aren't familiar with it. A rapidly growing market. Today we are fortuned that biopolymers market is growing about 20% a year. The drivers of that demand, people wanting to reduce use of petroleum, want to improve existing products, providing better biodegradation that are physical properties and there's a whole host of innovative new applications which we have come across in the world of bioplastics. Film used in agricultural fields, biodegradable planters, shoreline restoration, a host of things one can do with a biodegradable plastic, which you cannot do with a plastic that is not biodegradable.
I am now on page eight. Talk a bit about our agreement with Antibioticos, our manufacturing partner for these materials. As I mentioned, we signed a Letter of Intent for production of Mirel bioplastics with Antibioticos. Antibioticos is located in Leon, Spain. Just for context for you, the vast majority of our sales with the ADM relationship were in continental Europe, where organic waste management is very well development.
Antibioticos in fact is within a 24-hour drive for the vast majority of our customers. They have more than 50 years experience producing fermentation production. We can get to market very quickly with them. Most of the manufacturing equipment we require is available on-site. They've got great capabilities, they have the right capacity that we require and I mentioned the location is ideal for our emerging customer base, and we've forecast production in 2013.
As you also know, the plastics market is huge, 540 billion pounds a year of plastic which is $0.5 trillion market. We have to be quite focused as a small company about where we choose to launch this material, and the segments we've chosen are shown on the right-hand side of the slide. Agriculture and horticulture and these are markets where the product which naturally degrades in agricultural applications is of high value, compostable bags, the market is growing at 20% a year as I mentioned.
Marine and aquatic applications where this biopolymer we are launching actually degrades in the ocean, so if you read about the Pacific Gyre, Mirel bio products, which I'll show you some test results in a second actually degrade in the ocean and broad base packaging. I mean, each of these applications we are launching with customers we know, in markets we know, competitive materials, we understand with the experience of our previous launch. It's very focused market.
Then on the left-hand side, I point to some of the longer term growth potential given the technical capabilities of this product making foam, which can displace polystyrene foam with a bio-based biodegradable foam, non-wovens for fabrics, blow molded bottles, so it's a material with an extremely broad application pattern, but in the launch as we get going under the Metabolix name plate, we're focused on segments where we know the customers, we know the applications thereby de-risking the launch.
Moving ahead to page 10. The example of some of our products. First, here's an example from Ball Horticulture and this is a SoilWrap product made with Mirel, beautifully printed material, stands out on consumer shelves being sold right now in Home Depot, in Lowe's and Shopko, and consumer can just take the plant, stick it right into the ground naturally degrades. Fantastic product that Ball has been growing around now in 20 states and anticipating to grow further.
Next an example of the composed to a bag line of products we have. There's a company, a partner we have in Delphi, in Italy. Tremendous growing demand for compostable bags in Italy. We are well positioned, particularly with our new launch site at Antibioticos, and Delphi is launching or has already launched a set of compostable bags based on one of our products in the market already.
Next, when I talk about some of the innovative things one can do with the marine degradable plastic, Zoë b has launched a set of biodegradable beach toys, and for those of you with young kids quite often things get left behind at the beach, interesting item now being sold at Pottery Barn Kids, where the product will naturally degrade in the ocean, but it is extremely durable and very, very colorful and very nicely marketed and as she calls it the fantastic anti-plastic beach toy, and this is just one of many, many things that people have come to us to launch based on a biodegradable plastic.
I mentioned some test results. We've been working with the U.S. Navy, and one of their suppliers. On the left-hand side, I am on page 13 now, we'll demonstrate some of the test results of plastics put into sea water.
You can see on the left, there is a Mirel cup and then beneath it, the cup made of our material after one month, other bio plastic cups after nine month, pretty much still retained their volume and their shape, so after one month in sea water, the Mirel cup 95% degraded and what is remaining is largely that folded little paper on the top of the cup, not necessarily the plastic, so extremely degradable in oceans, offers a tremendous solution for plastic in the ocean, however it's perfectly stable in a non-microbial state if it's in your kitchen or if it's in your desk, it's very versatile material.
So, that's the Mirel family, I mentioned we have three platforms. The second is the chemicals platform, and there's a remarkable amount of demand pool for bio-based chemical right now, and I am on page 14 of the presentation.
Here, we are focused on a couple specific families of chemicals, which people refer to as the C4 chemical family and the C3 chemical family and these are used in a wide range of applications, paints, coatings, diapers, personal care products, engineering plastics, and the whole key is we are converting petroleum-based feed stocks to renewable feed stocks for materials that exist.
The Mirel bioplastic family were launching a new family of materials in this set we are actually displacing existing materials. The key here is to be cost competitive with the incumbent materials, which we're well on the way to doing, and the reason we do is fermentation expertise and a process which we call FAST, fast-acting, selective thermolysis.
Here's a quick little picture for the technical folks attending the presentation on page 15. It's a process, where we feature goods to a fermentation facility. We drive the material and we recover it very simply, and there we have our industrial chemical products C3 and C4, and the utilities are captured and are used within the process to reduce energy. It's very simple, we're recovering the product in a wafer phase which makes purification very straightforward and we can use the same platform for a host of different products unlike what is done today in the petroleum industry where totally different production process are used to produce these type of products.
We've made some fantastic progress in our chemicals platform. We've got the foundation intellectual property. We've produced C4 chemical samples. We've got positive customer feedback from that and that continues to move forward. C3 chemicals, we've got them in the market for testing right now.
As I have mentioned, we announced a partnership with CJ BIO for C4 chemicals, we scaled the C4 chemicals process up to 60,000 liters, we produced tonnage quantities of C4 chemicals all in the development and scalar process of these materials. Right now, we are in the process, as shown in the bottom of this chart, is we are aggregating the customer portfolio, looking at preferred launch sites and business models talking to partners about that for our chemicals platform.
Our third platform, which I'll touch on briefly here, is our crop-based businesses, and here we have genetically modified crops and we're working in switchgrass, sugarcane and oilseed crop called Camelina, and here the sun, CO2 and a little bit of water actually produces the chemical precursor or plastic directly in the leaf tissue of the crop. The vision is to recover the crop, recover the chemical out of it and we're rather agnostic about what happens to the biomass it can be used for fuel, it could be used for power.
We don't spend a lot of cash on this. We fund this primarily to external grants and right now we are delivering a $6 million DOE grant for our crop programs, offers a lot of option value for the long-term for Metabolix, and offers ability to work in very different parts of the world with very low cost production pathways to chemicals and to plastics.
So, the game plan moving forward, I am now on page 18. Biopolymers, and I hope you picked up from my remarks. We're going to be working closely with Antibioticos to establish the Metabolix supply chain for Mirel plastics. We're deploying technology that has come so far since 2006 when the ADM venture was established. We have updated fermentation and recovery technology that are getting deployed under our nameplate for our Mirel launch.
We are managing customer relationships, and because we purchased all the inventory from ADM, we're using that inventory to bridge the customer base prior to the actual launch of production with Antibioticos. As I mentioned before, our market development efforts are focused on segments that we sold into before and we know the customers.
For chemicals, moving ahead to hone the technology to prepare it for launch, we've got lots of customer interest and we can continue to engage looking at different ways to aggregate that customer interest and we are now evaluating launch options to determine the best way to launch a bio-based chemical product.
Finally on crops, the goal is to move that towards cash neutrality for the company based on grants and just the relationships we've established through very solid scientific work in the crop world.
Quick snapshot of our financial situation. Cash, about $60 million. We estimate year end 2012 cash pre-capital expenditures of between $48 million and $50 million, and typical run rate of about $24 million, excluding capital expenditures and we are expecting the Antibioticos start-up in 2013.
Just to summarize the Metabolix value proposition, really look at us as a developmental company, game-changing technology, lots of intellectual property, you're on a really innovative field, very well positioned versus market trends. The ADM termination has given us the opportunity to launch this business under our own nameplate and we are moving very rapidly and very nimbly to do so.
It's a broad-based renewable platform reflecting chemicals and plastics. These are huge markets and the markets have a lot of demand pool through bio-based solutions. We've got a unique and leading position in this chemistry platform and the biopolymers' market is growing at 20% a year, and we're very well positioned there as well.
Chemicals has been shown by several external studies we have conducted to be very cost competitive which we absolutely believe is the key to launching a bio-based chemicals platform. You have to be cost competitive and we feel our technology will be, and we've got very strong pool demand across our entire portfolio.
Finally, we have a lot going on in a small company, but it's very synergistic, because we are focused on one set of chemistries is PHA chemistry, so everything we learn in one area is applied directly to another area of the company, which gives us a lot of synergy between all our staff and we manage the company in a highly integrated way, where we get lots of transfer skills from, say, the polymers platform into chemicals. As a result, we can manage the company very efficiently with a relatively conservative cash usage.
So that in a snapshot is the Metabolix story, perhaps a little bit different than some of the other stories you've heard at the Jefferies Conference today, but it's very exciting, moving very quickly and we believe we are extremely well positioned versus the trends.
With that quick overview, Lucy, I'll wrap-up and take any questions anyone may have. Yes.
The question is, when Archer Daniels Midland chose not to go forward with the relationship, what was the rationale and our interpretation there of? There was quite a few press releases around that time, and within ADM, they made the decision that the future returns for this business were too uncertain and they did have all the contractual rights to exit the relationship and that's what they chose to do.
We, at Metabolix controlled all the intellectual property and that all came back to us, and then the business decision we made at that point in time knowing the markets, knowing the customers, seeing the demand while it may not be as material for ADM, it was very important for us so we bought the inventory and some pilot facilities, trademarks and certifications and have already begun transferring the customers over to Metabolix. So, specifically the rationale was their future returns were too uncertain. Any other questions?
Lucy Watson - Jefferies & Company
Can you just spend another minute two describe the competitive landscape for biopolymers?
Absolutely. The competitive landscape for biopolymers. Biopolymer is rapidly growing market, lots of different solutions. I'd like to describe it as there is a family of biopolymers that are starch-based and they tend to be relatively low priced. They tend to be a bit susceptible to moisture, but they are very good for certain packaging supplies, certain relatively low performing applications, but very credible and very useful in that field.
Secondly, there is a family of materials called PLA, which is probably the most advanced bioplastic. Very good material for single-use food applications, can be turned into a range of applications, relatively inexpensive and then our family is the PHA family, a bit more costly, a bit more versatile and our family of plastics can actually degrade in marine conditions and has higher thermal properties, means they can handle more greater temperatures which is a big distinguishing factor between bioplastics, so that's the general landscape and there's a few other various types of bioplastic of smaller quantities.
What's important, Lucy, to know about bioplastics is everything is blended with everything else, so you've got starch PHA blends PLA/PHA blends, PLA/starch blends, so it's a market where the suppliers are working through compounds and with each other to meet customer needs so if our material PHAs may be too expensive for an application, we will work with other bioplastics to dilute the cost down.
If a lower performing bioplastic doesn't meet performance requirements that maybe blended with our material to increase performance, so the nice thing is that it's a market where there is not as much competitive intensity and a lot more collaboration and it's growing quite rapidly and we've got a unique family of materials to bring to that market, so I think we try hard to maintain relationships with the other bioplastics manufacturers. In fact earlier this year, we provided to NatureWorks, who is the world's leader in PLA, access to some technology we had to help them grow their business as well.
Lucy Watson - Jefferies & Company
You've been able to maintain a premium price range in the last several years in terms of gathering indicated interest. Can you just describe any sources of pushback if at all or potential customer reactions to that?
Yes. The question around pricing, you know, we are priced as a differentiated plastic, and in the plastics market, plastics range and I'll talk in cents per pound can range anywhere from $0.50 per pound up to well over $10 or $15 per pound depending on the specific properties that the material brings. We've priced our material historically at $2.25 to $2.75 per pound, and we understand that pricing structure quite well based on the customer interaction we had.
We aim for applications, where the customer wants biodegradation, because if the customer doesn't want biodegradation, we're going to be over priced, but there are certain other materials that traditional petroleum based plastics that don't biodegrade and can't possibly meet that requirement.
The way we work our price point is we look for applications where the product properties brought by our product meet very closely to customer needs, particularly on biodegradation and thermal properties, so we are quite comfortable with the pricing guidance we've given in the past, all our discussions with customers as we prepare for our launch in that zone and sure we get pushback, but with the kind of pushback we get are in places where those kind of properties may not be the most desired properties that the customer is looking for.
Lucy Watson - Jefferies & Company
Thank you, Rick. We'll have a breakout session for any more questions in the Broadway Room.
Good. Thank you much for attending and thank you for your interest.