Marrone Bio Innovations, Inc.
Q1 2017 Earnings Call Transcript

Published: 12 May 2017

[Operator:]

Please standby. Good day and welcome to the Marrone Bio Innovations' First Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Linda Moore, General Counsel. Please go ahead.

[Linda Moore:]

Good afternoon, everyone, and thank you for joining our call. Before beginning, I would like to remind you that this conference call may contain statements regarding management's expectations, hopes, beliefs, intentions, or strategies regarding the future, as well as projections, forecasts, or other characterizations of future events or circumstances. Such statements are based on management's current expectations and beliefs concerning future developments and the potential effects on the Company. There can be no assurance that future developments affecting the Company will be those that management has anticipated. Such statements involve a number of risks and uncertainties, some of which are beyond management's control or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these statements. Important factors that could cause differences are contained in reports filed by the Company with the Securities and Exchange Commission, including under the heading Risk Factors and elsewhere in the Company's Annual Report on Form 10-K for the 2016 fiscal year and the Company's Form 10-Q to be filed for the first quarter of 2017 and in our earnings release posted on the company's website. Should one or more of these risks or uncertainties materialize or should any of management's assumptions prove incorrect, actual results may vary in material respects from those discussed today. Additionally, the Company will be making reference to certain non-GAAP financial measures on this call. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the Company's earnings press release published today, which is posted on the Company's Investor Relations website. Any guidance that management may offer in this conference call represents a point-in-time estimate. The Company expressly disclaims any obligation to revise or update any guidance or other forward-looking statements to reflect events or circumstances that may arise after the date of this call. After our remarks, we will answer your questions. Now, I will turn the call over to our Chief Executive Officer, Pam Marrone. Pam?

[Pam Marrone:]

Thank you, Linda. Good afternoon and thank you to everyone for joining us. With me today is Jim Boyd, our Chief Financial Officer; and as you just heard Linda Moore, our General Counsel. We are off to a great start for 2017. We have a number of very positive developments in the business to discuss today our strategic progress, our operational gains, and our financial improvements are all clear. I'll touch on each of those areas and I'll start with perhaps the most critical area of success, revenue growth. We built on the momentum of our strong fourth quarter and I'm very pleased to have set a new quarterly record for product shipment. We have pushed hard to capture growth from existing product, growth from new product, growth that comes from strategic partnership, growth here in the United States, and growth in international markets. I'm pleased to report that we continue to achieve tangible results in every one of those areas. This diversified across the board growth is by design. Our growth is stable and healthy as we pursue a portfolio approach to developing our company. Just as important our portfolio strategy validates our brands in exactly the way we want. We are positioning MBI with a key tagline Marrone on the acre to reflect our comprehensive biological solutions for unmet farmer needs. Our first quarter 2017 GAAP revenues grew by 56% to $4.2 million. We drove product shipment to $6.5 million. This is up 66% to last year's first quarter and as I mentioned a new record for any quarter in our history. As we saw in the fourth quarter, every one of our agricultural products Regalia, Grandevo, Venerate, and Majestene contributed to our growth in revenues or margins when compared with the comparable quarter during 2016. We also are pleased to have shift Haven to customers for demos in the first quarter. While it is early for this new yield enhancing product, we believe it has the potential to become a meaningful part of our portfolio. Regalia our largest revenue product continues to perform well. Grandevo also grew nicely and we are on track to bring the granulation of Grandevo, Grandevo WDG in-house in the fourth quarter. Venerate continued a strong pace of growth and Majestene which launched in January of last year continued its forward progress. With Haven as a best seller to our ag business and our first non-pesticide product, we're excited about our ability to continue to expand to expand to meet unmet market needs. Along with revenue growth solid margin improvements is also key to achieving sustainable success. I'm pleased to report that our gross profit margins have been strong again also another new record this quarter as a public company. We reported a gross margin of 45.1% in the first quarter, up over 30 percentage points relative to last year's first quarter. While there are a number of factors that contribute to a strong margin a consistent performance we are driving in our Michigan manufacturing operations is and will continue to be critical. Our expense rate continues to reflect a lean but capable organizational structure and a highly targeted R&D approach. We continue to be focused on a pipeline of products with the best near-term commercial opportunity. We have been and continue to be acutely aware of cash management. On that point we are very pleased to have strengthened our balance sheet. On April 28, we closed an equity offering that yield estimated net proceeds of $8.2 million to the company. While this raise will not be the last infusion of capital the company requires it gives us some time to continue to demonstrate a trend of a strong result. The size of the deal reflects our intent to satisfy our capital needs with as little dilution as possible to our shareholders. We also have begun to access the $7 million working capital line we signed in March with LSQ. As we grow working capital requirements are becoming a larger piece of our total needs one with a wider range of financing options. We now have six consecutive quarters of consistent year-over-year growth and solid progress. We are a strong company as we have ever been and we are achieving short-term targets while building a foundation for sustained performance. I'm very proud of our entire organization. We are executing extremely well and while we certainly have our challenges the size and scale of our opportunity is tremendously compelling. Our opportunity stands in sharp contrast so the larger agricultural inputs market which is mature and is experiencing only sluggish growth, our technology is proving to be a game changer in our industry, what we do at MBI is very challenging science, our technology creates a lot of value certainly for farmers and the same opportunity exists for our shareholders. I'd like to now update you on a few specific initiatives. The response to Haven for reducing stress and increasing yields and quality in a range of fruit and nut crop has been strong and we successfully manufactured and shipped products this quarter. On MBI-601, our EPA approved biofumigant we are collecting data from our fall field trials in California strawberries, across with the most critical needs for alternative to toxic chemical fumigant. We are ramping up the ability to manufacture at commercial scale. MBI-110 our Downy Mildews fungicide is on track for EPA registration in third or fourth quarter. MBI-010 bioherbicide development is also on track for EPA submission later this year. This product continues to show exciting results against difficult weeds such as palmer amaranth and waterhemp that are resistant to glyphosate and other chemical herbicides. We have a second year of field trials with our biostacked seed treatment with Groundwork BioAg and are now conducting semi commercial trials. Today, we announced an agreement with Jet Harvest Solutions to be the master distributor for Jet-Ag; they are working in agricultural sanitizer control of disease causing bacteria and fungi. Many farmers already use this product and Jet-Ag is an excellent 106 [ph] product that combines well with our biofungicide Regalia and soon our second biofungicide MBI-110. Similar to our distribution of Isagro's Bio-Tam 2.0 Jet-Ag further expands our product portfolio to address program wide need for farmers. We are excited to market Grandevo, Venerate, and Jet-Ag as an effective coordinated regime in the fight against the ongoing invasion of a dreaded spotted wing Drosophila. With regard to international growth, we signed a distribution agreement with Agri-Star in Mexico for Grandevo and Venerate. Mexico is an important export market with a growing need for biological for the Organic segment and to reduce chemical residues and to manage pest resistance. We have trial and registration activity in the Philippines, Korea, Vietnam, parts of Africa, China, and Central America, among others. I also want to mention that we have seen the cannabis industry quickly emerge as an important segment for us. MBI's products are transforming cannabis production through the reduction of toxic chemicals and pesticide residues that are harmful to both the environment and to people. Additionally, cannabis growing practices are intensely yielding quality focus as well as safe constraints and therefore call for much heavier use of input relative to traditional agriculture. We commissioned the UC Davis Graduate School of Management to assess the growth potential for cannabis input, pesticide, biostimulant, and fertilizers. They estimate the market in just Colorado, Oregon, and Washington to be currently $91 million. Including California with the recent change in legislation, the study estimates the market will grow to an astonishing $1.4 billion within the next five years. In less than one year, a brand new customer in this space grew from zero to become one of our top five customers. I would now like to turn the call over to Jim to go through the numbers and to provide additional detail on our financial performance. Jim?

[Jim Boyd:]

Thank you, Pam. Good afternoon everyone. I'd like to walk you through our solid first quarter results. We reported GAAP revenue in the first quarter of $4.2 million, up 56% compared to $2.7 million in the first quarter of last year. Product shipments for the first quarter were $6.5 million, up 66% compared to $3.9 million in the first quarter of last year. This is a new record level of product shipments for any quarter in our history. This growth illustrates the strength and momentum in our business. As a reminder, our GAAP revenue recognition policy requires us to diverse some revenues to certain customers on the sell-through revenue recognition method. We do not grant any return rights to these customers and deferred revenues are recognized over time. Cash is collected on a normal terms exactly the same as with our selling customers and is not affected by this recognition method. Now returning to GAAP reporting. Our gross margin in the quarter was 45.1% a significant improvement compared to the 15% gross margin for the first quarter of last year. Last year's results included a non-recurring charge for inventory write-down. We also benefited from improved capacity utilization and better product mix. SG&A in the first quarter was stable at $5.3 million compared to $5.5 million in the same period last year. R&D costs in the first quarter were $2.4 million also stable relative to $2.3 million in the same quarter of last year. Included in our total $7.8 million of operating expenses are approximately $1.1 million of non-cash expenses. We expect our operating expenses to remain at approximately these levels and to be sufficient to support continued rapid growth. Now turning to the balance sheet. Inventory at the end of the first quarter was $8.1 million as compared to $8.5 million last year. At the end of the first quarter, we reported total cash of $4.8 million. Importantly this does not include the net proceeds from our recent offering of approximately $8.2 million which closed on April 28. It also does not reflect any borrowings under our $7 million working capital lines an additional source of flexibility. Both of these deals have strengthened our balance sheet since the close of the first quarter. Our first quarter cash usage from operations was $7.6 million, an improvement of $2.2 million or 22.3% compared to the $9.7 million of cash used in the prior year's first quarter. While first quarter included are semi-annual interest payment which was $1.6 million in the first quarter of 2017 and $1.2 million in the first quarter of 2016, the 2016 number was lower because the debt was not outstanding for the full period. We expect to remain on this growth trajectory with broad based strength and well-positioned for ongoing opportunity in 2018. Thank you and now we will take questions.

[Operator:]

Thank you. [Operator Instructions]. We will take our first question from Sameer Joshi from Rodman & Renshaw.

[Pam Marrone:]

Hello.

[Sameer Joshi:]

Good afternoon. Hello how are you, Pam?

[Pam Marrone:]

Good.

[Sameer Joshi:]

So let me jump into questions, the first question is just tracking product shipments versus revenues, in the last quarter your product shipments were roughly $5.2 million if I'm correct and the revenues for this quarter for products are $4.2 million, so the question is what generally what is the delay between recognizing deferred revenue and then recognizing the value?

[Jim Boyd:]

Well I would expect that most of the deferred in one quarter would sell-through any other but it's not always the case and this year I think we've had some delayed planting in the first quarter due to the cold weather.

[Pam Marrone:]

And also some row crop shipments when there is typical timing for row crop buying is in fourth quarter but that might not go out on the ground until to be recognized in a couple of quarters later.

[Sameer Joshi:]

Okay, got it. And the gross margins are really nice, should we expect these levels going forward or should we expect some fluctuations to drop into this level?

[Jim Boyd:]

I think the last few quarters of revenue; our margin levels are in the grade of what you can expect going forward with a little some improvement because our R&D keeps improving margins.

[Sameer Joshi:]

Okay. And then coming to commercial launch of products, I think in the last quarter call or annual call, you said that you would launch at least one product if not three or four, is Haven that product or is there another product that we should expect?

[Pam Marrone:]

Well Haven is the first one of the list, yes.

[Sameer Joshi:]

Okay. And so we're still on track to launch more two, three potential more products?

[Pam Marrone:]

Right. I don't believe I said three or four but pretty two to three, four is the right number.

[Sameer Joshi:]

We will rectify that and then one just last one from me. What is the status of the Zequanox agreement in the U.S., I know you haven't done?

[Pam Marrone:]

Yes we are -- it's on track, so yes we have said in the past that we are working with large companies to -- for both open water and for pipes and still going forward. Yes, so still making progress, haven't been able to announce it yet but hopefully we will be able to do in the near future.

[Sameer Joshi:]

And if I may do one last one the cannabis opportunity you mentioned, are you already selling into that market or is it potential market that you have identified and would target in the future?

[Pam Marrone:]

As I mentioned in the script, we actually have sales through a distributor who targeted that segment and that distributor is now -- our one of our top five customers. So yes we have revenue but let me just say that we did not target this, they beat our drawdown, so they -- they saw us potential of our product for powdery mildew, Botrytis/grey mold, and mice and the growers have the non-stop in chat rooms and walk-ins and on our customer service line asking for our product.

[Operator:]

And our next question comes from Tyler Etten with Piper Jaffray.

[Tyler Etten:]

Hey, Jim, Pam and Linda, congrats on that stuff.

[Pam Marrone:]

Hi Tyler.

[Linda Moore:]

Hi.

[Tyler Etten:]

How are you doing?

[Pam Marrone:]

Good, very good.

[Tyler Etten:]

Good. May be just building up the last question I'm sure you guys are doing a lot of research into the cannabis market right now as more states legalize either recreational or medical upon cannabis.

[Pam Marrone:]

Yes.

[Tyler Etten:]

How do you see how this market developing over the next couple of years and what sort of roles do you see Marrone playing in that stage given one to two years out?

[Pam Marrone:]

Yes, and that's why we commissioned at UC Davis study to show the potential for growth but where we're focusing on is on the regulatory front, we are a leader in regulatory basically on the cutting edge of legislation and regulation when it comes to biological and so because of the excessive use of chemical pesticides and excessive residues and a lot of cannabis products, our head of regulatory has been working very hard with the states and they've asked us to lead the way on creating proper pesticide labels with worker protection and environmental protection and pesticide residue languages on the label because it's not federal like regulated by SIPRA the state watch up to the state, so we’ve been actively working to try to come up with some common late labels to protect both the environment and the people and consumers in this area. So that's been our focus and as such our products are getting listed for use in all the states that are currently the legal states. California certainly will drive the growth of the future that's the biggest market.

[Tyler Etten:]

Right that was certainly an exciting addition to the story and looking forward to digging into that, maybe we could talk about the specialty crop market still a great growth driver for you guys. Are you seeing any shift in product based on the types of crops that are being planted or intended to be planted this coming season and what sort of -- what products are having the most growth in the specialty crop market?

[Pam Marrone:]

Well if you just drive down any where we live here there's nuts everywhere, I mean there is lot of tomato, tomato land has gone into nuts. And so we have actively targeted Almond and Walnut particularly Almond because our products have a great fit in that market and so we went actively very targeting getting really good field data to support the growth in those crops. So for example we got to supply Venerate really good is on Walnut supply and Regalia is very good on a number of the diseases wrapped round rod and scab and real infection almond. So that as the acres continue what we're hearing from the almond board and others is that there's a lot more acres but there is still ability to continue to market almonds globally so they expect this to be a healthy almond market for the years to come, so that's going to help us as all the acres planted come into production and they need pest management input. So that's one of the big areas that we've been focusing on.

[Tyler Etten:]

Interesting okay. And then maybe just one more from me before I pass it along, could you explain how the distribution is going to be set up in Mexico and just if I guess is it going to one distributor and it's other guys control as you have some sort of visibility on what sales reps are distributing the product?

[Pam Marrone:]

So Agri-Star is owned by Albaugh, it's a U.S. company but Agri-Star is actually a local distributor in Mexico, so they were purchased by Albaugh, so they are on the ground with their sales force. So our role in that through our Latin America manager and other technical service people that do travel to support our products would be to help train their sales forces and sales force and provide technical support to the sales force. But as an exclusive arrangement they're largely responsible for doing most of that.

[Operator:]

We will take our next question from Michael Bursik [ph] with National Securities.

[Unidentified Analyst:]

Just have two sort of connected questions. Is Q1 your normal seasonally highest quarter?

[Pam Marrone:]

No typically Q2 is.

[Unidentified Analyst:]

Okay and with you mentioned some international trials including in the Southern hemisphere, do you expect if all that successful that will smooth out your seasonality or is it potential not?

[Pam Marrone:]

So that's great question and yes because of the Southern Hemisphere crops coming in the third quarter that that over time not immediately because we're still waiting on registrations in some of the areas but yes it will the third quarter will pop up because of the crop seasonality there, yes, yes fourth quarter too yes.

[Unidentified Analyst:]

Thank you very much. I appreciate it and appreciate meeting you in Chicago.

[Pam Marrone:]

Nice to meet you too.

[Unidentified Analyst:]

All right, see you.

[Operator:]

[Operator Instructions]. And we will take our next question from Robert Smith with Center for Performance Investing.

[Robert Smith:]

Hi thanks for taking my questions. Pam can you go over the product pipeline and the potential opportunity as far as market size are these products compared to what's already on the market for you?

[Pam Marrone:]

So the fumigant market is for us if I can recall approximately it has been the $1 billion range and that can be I said so $1 billion, I'm talking about the total addressable market and then from that contract in the script we're working on scaling up the manufacturing and we've got some trials in the key crops where we're measuring yield now as the berries come into production and comparing it to the chemicals more toxic fumigants and untreated. And then we have MBI-110 which is downy mildew, grey mold, and white mold fungicides and that's on track for approval and then some small targeted placements with growers this year. And that fungicide market is quite large, it's several billion dollars, this particular segment I would estimate of the total addressable market is approximately in the $3 billion range. Then MBI-010 which is our herbicide $53 billion of chemical pesticide still this year, 45% of that is half of that, roughly half of that is chemical herbicide, so it's a very large addressable market, it's early for me to say exactly how much of that market we will address. But as the product develops, certainly we'll know more but it addresses both the chemicals herbicide market where we have developed resistance through the key chemicals, many -- most key chemicals like the palmer amaranth, palmer pigweed and waterhemp and then the organic market, if I go anywhere in California and I can go into the Central Valley, middle of Ag-land, and I'll say to a distributor who has chemical stacked up in his warehouse and say what's your biggest unmet need and they will say organic weed control. So we are targeting that market and I estimate that it’s because they don’t use a lot of things, they are still using a lot of tractors and hoeing and such and so it's hard to get an estimate of that market but I would say it's probably approximately a couple hundred million in the U.S.

[Robert Smith:]

Okay. And so just circling back to the cannabis question, so the study that was done for on your behalf with the growth projection, is that growth projection is realized and you kept your penetration rate improved it, or increased it what kind of market opportunity is that for you in that out year?

[Pam Marrone:]

We haven't really projected that -- we haven’t really projected that, we're still in the process of assessing that market first and foremost focusing on the regulatory needs in that market to strengthen up the crop.

[Robert Smith:]

Okay. Can you give me any color on the averaging working with them?

[Pam Marrone:]

Yes that continues to progress along, so in the last quarter we did say that we had made it hit a milestone where we moved some of that insecticide approaching into the next phase and based on what I see from my R&D report they're continuing to continue to test and assess the performance on the insects and everything that's necessary keep something moving along, so, so far, so good.

[Robert Smith:]

They are doing quite a bit of work away from you, so the question is do you got some assurance is that a fair play in this?

[Pam Marrone:]

Yes I don't, they are great partner.

[Robert Smith:]

Okay. And so the Syngenta maintained its interest in the company.

[Pam Marrone:]

Syngenta does have still own some shares in the company, yes.

[Robert Smith:]

How many?

[Pam Marrone:]

I'm just estimating, it's approximately in the $600,000 range but we don’t, I don't know the exact number.

[Robert Smith:]

Yes so they’re going to be taken over by Chinese company it looks like that's going to happen, so any thoughts on what might happen to their interest?

[Pam Marrone:]

I do not know.

[Robert Smith:]

All right. And so the capital raise that you did, you said point to believe that you sized potentially to moderate the dilution aspects but is there any sort of strategic partners to work with to kind of climb out of that battle so to speak that you're nearing?

[Pam Marrone:]

Yes at each call we have message that we are actively working on strategic partnership that have and we will continue to do so, yes.

[Operator:]

And this concludes today's question-and-answer session. I'd like to turn the call back over to Dr. Marrone.

[Pam Marrone:]

Thank you. First, we now have six consecutive quarters of strong year-over-year product shipment growth with first quarter being a new record quarter with $6.5 million in product shipments, a great beginning to the year. Second, strengthening our balance sheet enables us to continue to demonstrate strong results and to show investors what we're capable of. Third, we're building momentum in our results and our role in agricultural input market where our brand and company are increasingly recognized for science and innovation; we're excited about who we are, where we are and where we are going, we are also grateful to our investors to share our business vision. We are committed to driving shareholder value. Thank you and we look forward to talking about our progress with you again soon.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.