Amyris, Inc.
Q3 2015 Earnings Call Transcript

Published: 6 Nov 2015

[Operator:]

Welcome to the Amyris Third Quarter 2015 Conference Call. This call is being webcast live on the Events page of the Investor Section of Amyris' website at amyris.com. This call is 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 Investor Section of Amyris' website. I’d now like to turn the call over to Peter DeNardo, Director of Investor Relations and Corporate Communications.

[Peter DeNardo:]

Thank you, Amanda. Good afternoon and thank you for joining us this afternoon. With me today are John Melo, our Chief Executive Officer and Raffi Asadorian, our Chief Financial Officer. Please note that on this call you will hear discussions of non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most comparable GAAP financial measures is contained in the news release distributed today, which is available at investors.amyris.com. The current report on Form 8-K, furnished with respect to our press release is also available on our website as well as on the SEC's website at sec.gov. During this call, we will make forward-looking statements about events and circumstances that have not yet occurred, including projections of Amyris' operating activities and financial results for 2015 and beyond. These statements are based on management's current expectations, and actual results and future events may differ materially due to risks and uncertainties, including those detailed in the Company's recent SEC filings and the Risk Factor section of its quarterly report on Form 10-Q filed with the SEC on August 10, 2015. Amyris disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the Amyris SEC filings for detailed discussion of the relevant risks and uncertainties. Before we begin today, I’d like to note that included in our webcast is a slide presentation we will refer to in today's presentation. I’ll now turn the call over to John Melo. John?

[John Melo:]

Thank you, Peter. Good afternoon and thank you for joining us today. Our third quarter was in line with our business plan and delivered strong sequential product revenue growth, lower operational costs and we continue to improve the health of our balance sheet. Product revenue when adjusted for a large one time fragrance shipment in the year ago period in currency impact was in line with 2014. We are on track to deliver our second significant fragrance ingredient in the current quarter which will favorably impact fourth quarter revenue. We are pleased as we secured our second major agreement of the year and the third largest in our history with a close of the DARPA contract during the third quarter. We are also tracking two to three additional collaboration opportunities we expect to close in the near term. With successful execution of these, we expect to close out 2015 as planned and with Amyris solidly positioned for growth and to deliver 2016 as a free cash flow positive year. During this afternoon I'll cover our third quarter business highlights and our outlook for the remainder of 2015. I will then pass the call over to Raffi for a detailed financial update on the third quarter. I will end the call with an update on our strategy and some color on our early outlook for 2016. Now to our third quarter highlights, we successfully completed an offering of $57.6 million of convertible senior notes despite a challenging market condition for financing in our sector. Although that the $57.6 million exceeded the original $50 million expect of offering amount and most of the participating investors were existing investors that we believe continued to see the long term revenue growth inherent in our partner funded business model. Along with positioning the company for growth, we also continued to focus on plans to reduce our cash burn. We anticipate reducing cash burn by approximately $23 million to $27 million in 2016. We expect to accomplish this by three key operational initiatives, reducing OpEx and production costs, growing higher margin product sales and reducing our debt service. Our operational focus will benefit from favorable currency impact, lower spend in marketing since we will not be introducing new direct to consumer brands and products, lower customer acquisition costs for these products by shifting more revenue to channel partnerships, and more efficient utilization from internal staffing resources coupled with a reduction in third party spend for consultants and services. Along with these planned initiatives, we believe we’ll see continued declines in our production costs. Our pharmacy manufacturing costs per liter was $2.41 for the third quarter down from $4.21 earlier year-to-date for the period ending September 2014, and we hit a record low point of a $1.75 per liter for the month of September. We already have an improved farnesene strain ready for production in 2016 that we believe will deliver an additional 10% production cost reduction. Product sales are anticipated to accelerate sequentially with the strongest performance expected from our flavors and fragrances business where we plan to shift our second fragrance ingredient to our partner in the fourth quarter. This product was merely an R&D target just 10 months prior to its very successful manufacturer early this quarter. This is a testament to the strength of our technology platform for accelerating our customer's time to market and delivering on time and lower than expected target costs than we promise them. We continue to see strong demand for our Squalane business with end user demand growing at over 100% year-on-year for most of our distributors and over 450 cosmetic companies now using across their brands. Amyris Squalane has also experienced strong acceptance with approximately 470 brands currently sampling the product and 20 having advanced to using this great joy ingredient in their formulas. We expect 120 brands to use Amyris Squalane by the end of the first full year of this product's introduction. The leading cosmetic brands around the world are indicating Amyris Squalane is a breakthrough replacement for Isohexadecane in silicons. This strong demand continues to work through distributor inventories and we expect the fourth quarter to be one of our strongest quarters for personal care product sales. We are also excited about the potential of our emerging business relationship with [Contém uma grama] [ph]. While we are still in negotiations following execution of the memorandum of understanding, we hope to complete a final agreement during the current quarter. Contém uma grama is the fora of Brazil and this would give us exclusive access to its sales channel for our bioscience skincare line. Brazil is the second largest and one of the fastest growing cosmetic markets in the world and we expect this opportunity to rapidly accelerate the sales of Biossance and reduce our consumer acquisition costs. While it is not easy to launch a beauty brand with a single stocking unit SKU, we have made significant inroads with our Biossance plant and what we believe is about a 50% lower investment compared to most other skin care brands and plan to add three products to our product line in the coming months that have already received very positive response from lands, channel partners and consumer who have completed testing of these new products. We demonstrated the ability to generate over $1 million in annual sales with our single product and direct channel and expect $5 million to $8 million in revenue for 2016 as we expand through partnered channels of distribution. We expect this will enable much faster growth at significantly lower consumer acquisition costs and better leverage our ability to be the low cost producer of some of the world's leading ingredients. To summarize where our business model has come to, we developed making supply ingredients and formulated products and our customers and partners sell to consumers through their channels. In performance chemicals, we continue to make inroads with our Muck Daddy brand having signed our first co-branding agreement with Adam's Polishes. This is the first and only hand cleaner Adam's is offering its customers. During the third quarter, we added one more tire manufacturer along with Sumitomo with both now commercializing tires with our material. The three fastest growing areas of our product revenue in 2016 are expected to be polymers, solvents and industrial lubricants where our revenue is expected to grow from under $3 million a year to over $20 million in 2016 and where we have good visibility from the relationship with our partners that have completed development and customer acceptance for these products. In all three of these areas we are delivering lower cost, better performing alternatives to the end customers current raw materials. In industrial lubricants, we are delivering high performance applications that are meeting specific environmental requirements. During the quarter, we also received a significant long-term agreement to supply one of the world's top three lubricant brands with a high performance base oil for better class and better biolubricant. This is one of two significant long-term agreements that Novvi, our lubricants joint venture has signed during the third quarter and a critical part of our 2016 revenue growth. In fuels, during the third quarter, we sold a record volume amount of diesel fuels. This had a negative impact on our bottom line. Due to continued low crude oil prices and a growing number of both favorable and higher margin opportunities for polymers, solvents and industrial lubricants we plan to reduce fuel sales significantly in 2016 to focus on these higher value markets. Ultimately, we anticipate that the growth aspects of our performance chemicals and industrial lubricant products will deliver three to four times the revenue for every unit we produced a fuel. At the same time, it will afford us reasonable production plant utilization in producing products at volume that have a positive impact on our financial results. This will also help support our operational flexibility and plans I shared with you earlier to significantly reduce cash burn in 2016. We anticipated that phasing down fuel sales alone will reduce cash burn by approximately $5 million to $7 million next year. We are very pleased with our partnership with TOTAL and expect to expand the partnership over an additional five years. Our fuel technology continues to be recognized as the highest performing renewable fuel available today and we expect and that will have the ability to perform and competitive economics with crude oil in the long-term. This is a critical part of our long-term growth and will be monetized as royalty and partnership economics through exclusive regional partnerships for renewable diesel and our current global exclusivity and joint venture through TOTAL for our jet fuel. We were excited to announce a new technology investment agreement with DARPA in September. This multi-year agreement with a contract value of $35 million collaboration revenue and 100s of new molecules for our product portfolio is a key element of making the promise of industrial biotechnology a reality. As the only Company to have successfully engineered it's scale to industrial production, several disruptive molecules, we beat out some 60 other applicants in winning the contract. We expect this agreement to facilitate a radical extension of our collection of building block molecules, and give our industrial partners the opportunity to develop unique products with novel performance characteristics at a vastly accelerated rate. We are thankful to the vision of DARPA, in securing the future of biomaterials and accelerating the transition to a bio economy for our country. We are in ongoing discussions with existing and new collaboration partners. We expect to execute on two to three of these before year end. One of which would be the second largest collaboration for us by way of near and long term revenue contribution. Successful execution would have us ending the year with over 80% of our plan 2016, collaboration revenue already under contract. Now, let me cover our outlook for the remainder of 2015. We are pleased with what we have accomplished during the third quarter and our delivery against the Biossance we are sure to give. 2015 has been a year of significant debt reductions for our balance sheet, significant expansion of our collaboration portfolio and successful new product introductions while reducing our operating expenses. Our outlook for the rest of 2015 remains in line with prior guidance. This is underpinned by what we expect to be. First, our best quarter in Personal Care from both cosmetic ingredient sales and the delivery of our newest scaled up fragrance molecule. Second, continued sequential growth in the rest of our products with the exception of fuels, where we are exiting unprofitable sales. And third, the expected signing of two to three new collaboration agreements, while there is still work to be done, the year is shaping up about how we expected and we should end the year with significant topline revenue growth over 2014. Now, let me turn the call over to Raffi, to discuss our third quarter financial results before we review our strategy and business outlook for the remainder of 2016.

[Raffi Asadorian:]

Thank you, John, and good afternoon, everyone. As John, noted, we are about where we expected to be at this point in the year. Slight encountering delays including some collaborations. Even with the delays our existing collaboration portfolio and the pipeline of expected collaborations continue to grow nicely providing future innovation potential and the product development. Our third quarter revenues were in line with our previously announced expected range. We believe that the fourth quarter will be demonstrably better due to a large anticipated fragrance ingredient shipment and an expected sequential improvement in flavoring ingredient sales. And while the timing of closing collaboration agreements, it's always subject to risk and contract execution. We are hopeful that the collaboration inflows will also show a substantial sequential improvement. Before getting into the results for the quarter, I would like to briefly touch upon our recent financing. Just after the close of the quarter we announced the completion of a $57.6 million convertible notes issuance. The amount rates exceeded the $50 million we had announced and we are pleased to have completed this next step in the process of improving our financial position despite difficult market condition. Net proceeds after transaction cost and expenses was approximately $54.5 million. Of this amount, we used approximately $27.1 million to repurchase $32.6 million of face value of then outstanding notes. The transaction supports our continued objective to improve the balance sheet and liquidity, and expect it to reduce annual cash interest statement by approximately $1.5 million. In addition, our gross leverage has declined by $159 million since June 30, 2015, after reflecting the recent financing. To further improve our liquidity we are reviewing other debt refinancing opportunities which will provide us an opportunity to improve the cash flow over the next couple of years. Now, let me take you through our third quarter results in more detail. GAAP revenues for Q3 2015 were $8.6 million compared to $7.8 million in Q2 2015, and $16.3 million in Q3 2014. The increase from the second quarter this year was driven by 27% increase in product revenues as collaboration revenues were relatively flat with the previous quarter. The $7.7 million decline from the prior year Q3 was due to our initial once per year fragrance ingredient shipment that occurred in the third quarter of 2014. As I mentioned earlier we expect a similar positive effect when we ship our second once per year fragrance ingredient in the current quarter. Product sales in Q3 2015, were evenly distributed across product categories between cosmetics, F&F, and fuels, which led to a higher fuels contribution than normal. The higher rating of fuel sales in the current quarter had a negative impact on our average selling price which was $2.96 per liter and as a result gross margins for the quarter. For the third quarter our cost of products sold was $8.5 million compared to $10.1 million for the third quarter of 2014, and $11 million in Q2 2015. On an adjusted basis, adjusting for inventory provisions, excess capacity, and depreciation, our adjusted gross margin in Q3 2015 was 26.7% compared to 47.2% and 37.7% for Q3 2014 and Q2 2015 respectively. As highlighted earlier, the decline mainly driven by the sales mix with fuels representing a significant part of our product sales for the quarter, we expect this mix to change considerably going into Q4 and to next year as John previously mentioned. During September, our farnesene cash production cost per liter hit a record low of $1.75. While this is a key milestone, we continue our development and process improvement to further reduce our production cost. With the third quarter our farnesene cost per liter was $2.41, which was up slightly from the second quarter of 2015 due to running a shorter campaign that allowed us to start production of our other ingredients, and this compares to $4.21 for the year-to-date 2014 period. The effects from the continued lower farnesene cost are not yet reflected in the current cost of sales, as we continue to work down inventory from end of last year which was produced at a higher cost base. We should start to see a favorable result from our lower 2015 production cost as we move into the first half of 2016. Our third quarter combined R&D and SG&A expenses were $24.4 million down about $1 million sequentially and down almost $2.1 million from $26.5 million from the third quarter of 2014. Excluding stock based compensation and depreciation and amortization, combined operating expenses for Q3 2015 were $20.1 million and $20.6 million for Q3, 2014. The combined reduction in operating costs are tracking below our guidance despite higher spend on sales and marketing and we expect to realize further reductions and cost improvements going into 2016. Moving onto cash flows, the third quarter free cash flow improved but similar to the second quarter had higher cash outflows given the lower levels of collaboration cash, which a primary driver of cash flow. Net cash outflow before the equity financing completed in Q3 was $25 million in the third quarter this year, which includes approximately $6 million in debt service. We expect more improvement in Q4 2015 and full year 2016 cash flows driven by expected closing of new collaborations, increased product sales and improved product mix, the refinancing of our senior loans and reduced operating expense levels. In summary, we anticipate an annual improvement in cash flow of between $23 million to $27 million in 2016 from the aggregate effect of three initiatives including lower operating expenses, reduced loss making fuel sales and lower debt service. We will provide more color around our 2016 outlook on our year -end earnings call. Our reported net loss for Q3 2015 was $76.7 million or $0.55 per share. There were several large non-cash, non-recurring type charges negatively impacting the net loss for the quarter mainly driven by the accounting for our recent capital transactions. We provided a reconciliation of our reported net loss to adjusted net loss excluding these items. The main adjusting items related to our recent capital transaction including $7.1 million for the acceleration of the amortization of the debt discount related to the recently repurchase notes and $6 million for the extinguishment of debt related to the recent debt conversation transactions. We have also recorded an impairment charge of $7.3 million related to certain assets held in the SMA joint venture, which we do not believe will have a future value to the Company as we explore our options related to the joint venture. In addition, the recurring, revaluing of the derivative instruments related to our existing credit facilities and resulted in a non-cash charge of $21.7 million in the quarter. After these adjustments plus adjusting for non-cash stock compensations, our adjusted net loss for the quarter was $32.3 million or $0.23 per share. In summary, we are pleased with a continued progress we have made in improving Amyris's balance sheet and positioning the company for improved financial results as expected volume and mix improvements in product sales and collaboration in flows are realized in the fourth quarter and into 2016. Coupled with ongoing reductions and operating expenses, we believe these initiatives will support our finishing out the year on a solid note and enable us to position the company to achieve positive free cash flow in 2016. Now let me turn the call back over to John for outlook and some color as to what we expect for the rest of the year and then we’ll open it up for your questions.

[John Melo:]

Thanks Raffi. We're ending 2015 with over $150 million less debt on our balance sheet. We anticipate our cash burn will enter 2016 at a $23 million to $27 million lower. We have visibility on strong product revenue growth from personal care and performance materials where we generate significantly higher revenue than fuel and a at positive margins and we’re ending the year with over 80% of our collaboration revenue contracted for next year and above the high end of our $50 million to $60 million state of range for collaboration inflows. Our strategy remains unchanged. First to continue to be the leader in synthetic biology, developing and making products at a lower cost and better performing ingredients, and current raw material sources that do not support sustainable growth. Second, when our customers prioritize the challenges they face in growing their business and let them select the molecules that can provide them competitive advantage. They fund the development of these products, reengineering scale to industrial production and deliver a lower cost, better performing product then their alternative raw material sources. Third, our partners market and share the benefit of the value creation with us. This part of our business is fully funding our R&D spend and driving our revenue growth. We've not missed a revenue generating milestone in three years and have reduced our time to market by two thirds during this time. This is how we believe we can accelerate the transition to bio produce materials and deliver sustainable growth platform for our partners. This is what we believe can make our planet better for our children. This is also how we believe our business will become self sustaining in 2016. Let me summarize the actions we are taking. First, we are reducing our cash burn by $23 million to $27 million, this is underpinned by lower OpEx cash spent in marketing as a result of no new plan launches and positive currency impacts. We are reducing our cash losses from $5 million to $7 million from eliminating fuel sales at a loss and we're reducing by about $10 million our debt service. We are contributing $20 million to $30 million in positive cash from product margins. This is from the accelerated growth from products that we have now completed customer acceptance and were mostly launched in 2015. And we expect to continue our strong track record of delivery from partner collaboration inflows that are expected to be above the high end of the $50 million to $60 million range we have stated previously. We have successfully industrialized the ability to code, the chemistry the world needs in the DNA of living factors. This is disrupting many industries where they could only access what nature provided or the limited chemistry available from cracking of their oil. We save thousands of children's lives with our Malaria technology as the proof-of-concept of our capability and where we are now providing hundreds of brands and millions of consumer access to products they love without damage to our planet. The industrialization of this technology has been a very costly road for us. We are grateful for the support of our long-term shareholders who own approximately 80% of our company and have been steadfast in their commitment to deliver our disruptive technology platform for the world. I would now like to open the line for any questions you may have. Amanda, can you help us?

[Operator:]

[Operator Instructions] And our first question comes from Mary Kate Gorman from Cowen and Company. Your line is open. Please go ahead.

[Mary Kate Gorman:]

Hi, this is Mary Kate Gorman on for Jeff Osborne. I just had one question regarding how we should be thinking about operating expenses as you are shifting to more consumer product focused business.

[John Melo:]

Sure. I think the guidance we just gave is going into next year, we will be reducing our current level of marketing in commercial and sales expenses. We expanded quite a bit with the launches of the products this year and with the recent SKU introductions, we do not expect to have to spend at the same level. So I would say our current level of OpEx we are on a run rate of about $80 million. We expect to bring that down by about $5 million to $8 million going into next year.

[Raffi Asadorian:]

Another, I will just add to that Mary. Just to reinforce that, we mentioned in the call, one of the things we’ve learned is that product acceptance has been very good. The consumer or customer acquisition costs for a Company like ours who is not prevalent in many channels, has been pretty high and because of the high acceptance, we've had several channel partners approach us who want to sell their products into the end consumer. So our model for the consumer products is evolving into one of - we develop brands, we develop formulas, we develop great package products, we then partner with great channel partners who have access to consumers so that we can actually drive significant revenue growth with those products but through their channels.

[Mary Kate Gorman:]

All right, great. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Sven Eenmaa from Stifel. Your line is open. Please go ahead.

[Sven Eenmaa:]

Yes, thanks guys. First I wanted to ask regarding your guidance. Are you staying with your $63 million to $75 million GAAP revenue guidance range, is that what you are expecting still for this year and what is the expected mix here between renewal products versus collaboration?

[John Melo:]

Sven, this is John. I think we put that out there before regarding the mix and I think we are staying within that. I think one of the things we are expecting to underpin that obviously as we got a couple of collaborations that have the big impact on that total number. And the biggest issue for us is really how we end up accounting for what comes in those collaborations, but other than that we are saying within the range we put out there.

[Sven Eenmaa:]

That's great to hear. And in terms of the flavors and fragrances, with the molecule 2, just wanted to clarify is that - last year you guys had a very nice margin shipment in the third quarter of last year. Is this the same molecule which is shipping now instead of third quarter of 2015, will be shipping in fourth quarter or is that an additional molecule?

[John Melo:]

It’s an additional molecule, very similar margin profile to what you saw last year with that molecule, but it’s a different one. It’s really our third successful scale that brought us of a completely engineered strength ease making a completely different molecule at the plant.

[Sven Eenmaa:]

Got it. And in terms of like - if you think of – you gave cash flow expectations for the next year, what is your view - kind of overall renewal revenue growth - renewal product revenue growth that would underpin such cash flow performance.

[John Melo:]

We had indicated in the past, and I think it was in the slide that was up 50% year-over-year. I think going into 2016 based on our current visibility that will be more like 50% to 100% versus 50% renewable product revenue growth.

[Sven Eenmaa:]

Great. And it sounds like that is coming in with much lower diesel component right, is that set soon.

[John Melo:]

Yes, if there is diesel in there, it will be drops of diesel not large percentages on it.

[Sven Eenmaa:]

Got it. And finally just a quick maintenance questions here, in terms of your – you indicated that the revenue mix was evenly splits in the quarter. If you think in the volume terms what was the mix between flavors and fragrances, cosmetics and fuels in the quarter.

[Raffi Asadorian:]

I think volumes - from a revenue perspective side they were about equal between cosmetics, flavor and fragrances in fuels. We have given the much, much lower price on the fuels. I would say that fuels in terms of volume was probably closer to two-thirds of the volume with the remaining one third split even may between the cosmetics and the F&F.

[Sven Eenmaa:]

That's helpful. And last question, you highlighted your production cost on the farnesene side, but what was the average cost over the farnesene where you recognized revenues. I understand there is still a prior work down on inventories and I am just trying to get a bit of better understanding when will you see the lower costs starting to impact your actual margins reported.

[John Melo:]

Farnesene roles in to the quarter - was produced really at the end of last year. So, that was at a price that was probably in the range of about 3.75 to 4 in the year-to-date period of 2014. So year-to-date September the production cost is $4.21 per liter and that was an average right. So the most of it that was coming through in the third quarter with that the end of last year which was a bit lower so in that three - you can use about 3.50 or so that was rolled in to the 3.75 of 2015.

[Sven Eenmaa:]

Got it. Thanks for answering my questions.

[John Melo:]

Thank you, Sven.

[Operator:]

[Operator Instructions] At this time I like to turn the call back over to John Melo for any closing remarks.

[John Melo:]

Thank you for joining us today and for your continued support for Amyris. We are pleased with our progress and reaching what we believe is a self funding and sustainable company. We are quickly gearing up to what we believe will be the best year yet for Amyris in 2016 with this building on profitable revenue opportunities and much healthier financial results. With a core to complete in 2015, with the execution of the additional milestones that position us for growth and enable our partners to gain competitive advantage while doing less farm to our planet. Thank you and good afternoon.