Verenium Corporation (NASDAQ:VRNM) Q4 2011 Earnings Call March 5, 2012 8:30 AM ET
James Levine – President, Chief Executive Officer
Jeffrey Black – Senior Vice President, Chief Financial Officer
Janet Roemer – Chief Operating Officer
Kelly Lindenboom – Vice President, Corporate Communications
Good day ladies and gentlemen and welcome to the Verenium Corporation Fourth Quarter 2011 Earnings call. At this time, all participants are in a listen-only mode. If anyone should require assistance on the call, please press star then zero on your touchtone telephone. As a reminder, today’s call is being recorded.
I would now like to turn the conference over to your host, Kelly Lindenboom. Ma’am, you may begin.
Thank you for joining Verenium’s Fourth Quarter and Year-End 2011 conference call this morning. I’m Kelly Lindenboom. With me today are Jamie Levine, our President and CEO, Janet Roemer, our Chief Operating Officer; and Jeff Black, our Chief Financial Officer. The agenda for today’s call is as follows: first, Jamie will discuss today’s announcement, including our current financing strategy as well as the potential sale of the Company, and then give an update on progress made during 2011. Jeff with then review our financial results for the full-year 2011 and provide 2012 guidance, and Janet will then discuss commercial operations, including Q4 and full-year 2011 product performance.
Given the nature of the items we disclosed this morning and the status of ongoing discussions, we will not be taking questions on today’s call.
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, collaboration activities, public policy, financing and M&A activities, technical and business outlook, and our 5.5% notes. The Company’s actual results may differ materially from those projected in such forward-looking statements. Factors that could cause or contribute to differences include but are not limited to those discussed in our filings with the SEC, including but not limited to our report on Form 10-K for the year ended December 31, 2011. These forward-looking statements speak only as of the date hereof.
I will now turn the call over to Jamie.
Thanks Kelly, and good morning everyone. Thank you for joining us. 2011 was an important and productive year for Verenium as we continued to build and maximize our product portfolio, which addresses the large and growing industrial enzymes market. I’d like to start today by discussing the news related to our financing strategy we announced in this morning’s press releases and SEC filings.
This morning, we launched a tender offer for our outstanding convertible notes pursuant to the provisions allowing holders to put their notes to the Company on April 2. In anticipation of this event, over the past month we have been exploring a number of options to address the Company’s funding requirements. We are currently working on two primary strategies: a potential financing to raise capital, and the potential sale of the Company. With regard to a financing, we have continued to advance discussions regarding the issuance of new equity or equity-linked securities. Regarding the potential sale, we are actively evaluating proposals we have received to acquire 100% of the stock of the Company. We remain committed to developing the most favorable outcome for all of our stakeholders. Given these conversations are ongoing, we are unable to provide additional details at this time but look forward to providing continued updates as appropriate.
I’d now like to turn to some of the progress made by the business in 2011. I’ll start with our financial performance for the year in relation to the 2011 guidance we previously announced. Jeff will go into greater detail in the financial section of this call, but to summarize, in 2011 we increased total revenue to just over $61 million, slightly higher than our revenue guidance range. We grew product gross margin to $21.5 million, within our guidance range. We increased R&D spend to $11 million, within our target range. We significantly decreased our SG&A spend to approximately $19 million, coming in below our guidance range, and we spent a total of $6.5 million in capital expenditures, within our target range, primarily for the build-out of our new facility in San Diego. I’m pleased with our financial performance in 2011, including our ability to meet our financial guidance and grow the business, especially given the current state of the economy and it’s effects on the industries we serve.
Now, I’ll walk through some of our recent accomplishments. In an effort to further grow and diversify our product revenue, we recently expanded our product portfolio to offer two enzyme products to the oilfield services industry. These products include Pyrolase cellulase for hydraulic fracturing of oil and gas wells, and VEREFLOW Alpha-Amylase for filter cake removal, a critical step when drilling a well. Together, we estimate that the addressable market for these enzyme products is approximately $270 million. Like our Purifine PLC product for oilseed processing, the oilfield services industry has not widely employed enzymes in their processes; however, we see great potential in this industry because enzymes can help to replace currently used expensive and often toxic chemicals. Enzymes have a number of benefits, including the fact that they are safer for both the user and the environment, are less harmful to operating equipment, and can improve operating efficiency.
Moving to partnerships, in the last year we signed agreements and began collaborations with two industry-leading companies, Novus International and Tate & Lyle. In June 2011, we announced a strategic collaboration with Novus International around animal health and nutrition products. Since then, we’ve made excellent progress and recently selected a next-generation phytase as the first and lead product candidate to develop as part of the collaboration, an important milestone that we were able to accomplish ahead of schedule. In January, we announced an agreement with Tate & Lyle, a global provider of high-quality ingredients and solutions to the food, beverage and other industries. Due to the competitive nature of this marketplace for Tate & Lyle, we can’t discuss the specifics of the enzyme license, but I will say that this is an important collaboration for Verenium in that it further validates the power of our technology platform to create enzyme products with highly distinctive properties necessary to develop novel food ingredients.
Partnerships continue to be a key element of our growth strategy and we remain focused on progressing discussions with several potential partners targeted toward either taking our current products to new markets or moving our pipeline product candidates through the development stages to commercialization. I look forward to updating you on our continued progress on all of these initiatives, and with that I’ll now turn the call over to Jeff.
Thank you, Jamie. Over the next few minutes, I will cover three topics. First, I will provide some commentary on the year-end financial results we announced earlier today; next, I will discuss the Schedule TO we filed this morning with the SEC; and finally, I will provide our financial guidance for 2012.
With respect to financial results, I’ll start with a review of our revenue performance, and as Jamie noted, in 2011 total revenues increased 18% to about $61 million, which exceeds our guidance range of 55 to $60 million, and product revenues increased 11% to $56 million from the prior year. This increase is primarily due to growth in revenues from market penetration of our grain processing enzymes. This product line grew 19% over 2010 primarily from Fuelzyme Alpha-amylase, which continued to gain share in the grain ethanol market. But in addition, Purifine PLC for soybean oil processing achieved more than 60% revenue growth over 2010. For 2011, product revenue from non-Phyzyme products increased to 46% of total product revenue compared to 35% in 2010, and this is consistent with our objective to diversify our revenue mix.
Turning to product gross profit, we generated product gross profit in 2011 of about $21.5 million, within our guidance range, and this was an increase of about 15% over 2010 which is an indication of overall growth from our grain and oilseed processing products. Collaborative revenue more than doubled to approximately $5 million in 2011. This increase was largely the result of a license fee of approximately $3 million for a commercial enzyme candidate that we had previously licensed to a third party.
We should also note that under 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 have not yet recognized this license fee revenue, and we expect to recognize a significant portion of this in 2012.
In terms of our total operating expenses excluding cost of product revenue and restructuring charges, our gross operating expenses decreased by approximately $4 million during 2011 to roughly $30 million. While our 2011 operating expenses have decreased from the prior year, our R&D costs increased by roughly $5 million. This trend remains consistent with our overall strategy to focus investment on advancing products through the pipeline while at the same time controlling our G&A costs.
During 2011, our SG&A costs decreased by $8 million or 30% versus 2010, primarily due to a reimbursement of 2010 legal fees of about $1 million for expenses incurred surrounding a settlement in early 2011, from the temporary reduction of facilities-related costs as a result of BP assuming our San Diego building leases, and to initiatives to decrease general and administrative expenses generally, including the shut-down of our Cambridge offices.
Regarding our balance sheet, we ended 2011 with just under $29 million in cash and cash equivalents, approximately $8 million in restricted cash, and just under $35 million in debt at face value.
Now I’d like to move to the press release issued this morning regarding the tender offer filed on Schedule TO. Under the requirements of our 5.5% notes, we’ve provided notice to our note holders on the upcoming April 2 put option that will allow holders of our 5.5% notes to redeem their notes for cash at face value. As part of that notification, we announced that our ability to fund the put option in the event that all the holders of the approximately $35 million in notes elect to redeem their notes is subject to a financing condition. We currently do not have sufficient cash resources to completely fund the put option.
As Jamie just mentioned, we remain committed to developing and finalizing an appropriate financing solution that will maximize shareholder value and best position the Company. We continue to pursue a number of alternatives to raise capital to enable us to fund both the April put and our ongoing operations, and we are also exploring options around the potential sale of the Company.
I’d now like to wrap up with our financial guidance for 2012. First for 2012, we expect total revenue between 63 and $68 million. This estimate is based on continued growth in our newer products and with approximately 10% of total revenue coming from partnerships. Next, we expect to generate product gross profit between 23 and $25 million, and we expect to end 2012 with an operating loss between 4 and $8 million. Finally, we expect planned capital expenditures of between 10 and $12 million. This includes both investments in manufacturing at Fermic as well as capital required to complete the build-out of our new San Diego facility in 2012. Note that about $4 million of this expected spend includes capital at Fermic that we expected in 2011 but has been deferred to 2012.
I will now turn the call over to Janet.
Thank you, Jeff. I’m pleased to provide you more information regarding operational results in 2011, a year when we continued building a more robust business by growing and diversifying revenues in terms of products, end-use markets, and geographies. First, our largest product line in terms of revenue, animal health and nutrition. Revenues from this product line for 2011 increased when compared to 2010 with strong sales in the fourth quarter of 2011 by our marketing partner, Danisco, which is now part of Dupont.
In our second largest product line, grain processing, 2011 sales increased versus 2010 due to the addition of new customers earlier in the year, supported by increased product availability through improvements in manufacturing. Sales were down in the fourth quarter versus the third quarter due primarily to adverse industry conditions in Europe which mainly affected sales of Xylathin Xylanase, used in wheat ethanol plants. Overall, grain processing product revenue now represents 28% of our total product revenue.
Turning to oilseed processing, we’ve continued driving adoption in this new market for enzymes with our Purifine PLC product and saw a significant increase in revenue in 2011 versus 2010. Purifine PLC now represents 10% of our total product revenue. In 2011, we expanded our geographic footprint through our first shipment of Purifine PLC to China. With this, the number of plants that have implemented enzymatic degumming is seven compared to four plants at the end of 2010. There are also six plants currently in the engineering and construction phase as compared to five at the end of 2010.
In addition, we recently began marketing Purifine PLC for use in biodiesel production. Since Purifine increases oil yield, the sustained trend of high oil prices strengthens its value, and we expect to see continued growth in both edible oil and biodiesel processing throughout 2012.
Now I’ll move to our product pipeline, an important driver of future growth. Our pipeline candidate enzymes continued to move through the necessary stages of development as planned throughout 2011 and to date. Of particular importance, as Jamie mentioned, along with our partner Novus we recently selected one of our late-stage phytase enzymes as the lead candidate and continue to move this product along towards commercialization. We have three additional product candidates currently in late stage development for animal health and nutrition which are part of the suite of enzymes also being developed in partnership with Novus. These are NSP, or non-starch polysaccharide enzymes which are increasingly being incorporated into wheat and barley diets to improve digestibility and feed conversion. These pipeline products, together with two advanced pipeline products for the oilseed processing industry, are on track for first commercial sales in the 2013 to 2015 time frame.
Turning now to manufacturing, we made significant progress in our operations at Fermic, our partner in Mexico City, throughout 2011 including scaling up the manufacturing of Fuelzyme to increase capacity for this important product and adding cooling capacity to provide more consistent operating conditions and reduce batch-to-batch variability for all of our products. Further, our focus on process enhancements resulted in a very significant improvement in Purifine batch yields versus 2010.
As Jamie stated earlier, 2011 was an important year for Verenium, especially from an operational standpoint, and we are very pleased with our performance and what we were able to accomplish relative to product sales and diversification, manufacturing improvements, and the development of our pipeline programs.
In closing, I’m very proud of our operational accomplishments to date and look forward to reporting on our continued progress in 2012. With that, I’ll turn the call back over to Kelly for close.
Thank you. As I stated earlier, we will not be taking questions this morning, but thank you for joining us and we look forward to updating you on our continued progress.
Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day.
Question and Answer Session
No Q&A offered on this call