Marrone Bio Innovations, Inc.
Q2 2017 Earnings Call Transcript

Published: 15 Aug 2017

[Operator:]

Good day and welcome to the Marrone Bio Innovations' Second Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to 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 their 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 second 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 on 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?

[Pamela 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've continued our steadfast progress in the second quarter of 2017, and despite some challenges, such as unfavorable weather that reduced the number of sprays typically observed and expected across all of our product line, we managed to grow shipments by 36.1% to $5.7 million, and GAAP revenue by 28.3% to $6.5 million. This marks 7 consecutive quarters of consistent year-over-year growth and solid progress. In the first half of 2017, we grew product shipments to $12.1 million, a 50.6% increase over the first half of 2016. Similarly, GAAP revenues in the first half of the year grew to $10.6 million, a 37.7% increase over the prior-year period. So we've built on our momentum, establishing 2016, and continue to enjoy above industry average growth for our entire product portfolio. Our efforts to grow revenues in all areas, from existing products to new products, as well as strategic partnerships here in the United States and internationally, are paying off. Our broad-based growth is due to our portfolio approach to product development, which promotes significant opportunity for each of our products. We believe our brand tagline, Marrone on the acre, which we to continue to leverage and expand successfully, reflects our focus on addressing under market need through biological solutions. But before going further, for those of you who may be new to Marrone Bio Innovations, I would like to take a moment to discuss who we are, what we do, why we are innovation leaders and why it's so very important. Put simply, we develop natural products, commonly called biologicals, for controlling pests and increasing crop yield and quality. Our products are all biologically based and fall into 2 categories under the umbrella of biologicals

[James Boyd:]

Thank you, Pam. Good afternoon, everyone. I'd like to walk you through our solid second quarter results. We reported GAAP revenue in the second quarter of $6.5 million, up 28.3% compared to $5 million in the second quarter of last year. Our revenues in the second quarter were negatively impacted due to cold wet weather in key growing areas, which contributed to an absence of pest and a delayed planting season. Product revenue growth was led by Majestene, then Venerate, Regalia and finally, Grandevo. Sales from Haven launch and contributions from Bio-tam and Jet-Ag altogether were slow - small, rather, but helped results. Revenue for the first half of 2017 grew 38% to $10.6 million, compared to $7.7 million in the first half of 2016. Product shipments for the second quarter were $5.7 million, up 36.1% compared to $4.2 million in the second quarter of last year. Product shipments for the first half of 2017 increased 50.6% to $12.1 million, compared to $8.1 million in the first half of 2016. We believe this continued growth illustrates the strength and momentum in our business. Although, product shipments were affected by weather this quarter, our first half was strong and we believe we are well-positioned for ongoing growth opportunities. Our product experienced good growth year-over-year. For example, as Pam mentioned, Majestene's volumes grew 180% year-over-year and 63% quarter-over-quarter. Our new formulation of Grandevo WDG was supply constraint in the second quarter, which is why we are currently installing our granulation line at our Michigan plant. We are expected to be in production of Grandevo WDG later this year. As a reminder, our GAAP revenue recognition policy requires us to defer some revenue 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 under normal terms, exactly the same as with our sell-in customers, and is not affected by this revenue recognition methodology. Now returning to GAAP reporting. Our gross margin in the quarter was 38.8%, an increase compared to the 38.2% gross margin for the second quarter of last year. Gross margins decreased sequentially, primarily due to higher sales mix of one of our lower margin products. Operating expenses increased year-over-year from $6.8 million to $7.9 million, included in our $7.9 million of operating expenses are approximately $1.7 million of non-cash expenses. SG&A in the second quarter increased to $5.1 million, compared to $4.5 million in the same period last year. The increase from last year was largely due to one-time expenses, including consulting and legal fees, our implementation of an Oracle cloud ERP system and the purchase of an electronic data information system, giving us access to data and grower purchases of our products. R&D cost in the second quarter were $2.9 million, also up relative to $2.3 million in the same quarter of last year, approximately $300,000 of this increase was in field trial expenses, giving us valuable data to enter new markets. We remain intensely focused on managing our operating expenses. We expect our operating expenses to remain flat, which we consider sufficient to support our high growth. Now turning to the balance sheet. Inventory at the end of the second quarter was $8.4 million, as compared to $8 million last year, which we consider adequate to address near-term demand. At the end of the second quarter, we reported total cash and cash equivalents of $13.2 million, including restricted cash of $3 million. This cash balance includes net proceeds from our last offering of approximately $8.2 million, as well as borrowings under our $7 million working capital line. Our year-to-date 6-month cash usage from operations was $9.8 million, or an average of $4.9 million per quarter. The $9.8 million represents a 27.4% decrease when compared to the $13.5 million of cash used from operations in the first half of 2016. Second quarter 2017 cash usage from operations was $2.3 million versus $3.8 million for the second quarter of 2018 - 2016 rather, a 40.4% decrease. I'd now like to turn the call back to Pam for a discussion on some of our initiatives for the remainder of the year.

[Operator:]

[Operator Instructions] We'll take a question from Sameer Joshi with H.C. Wainwright.

[Sameer Joshi:]

So my first question relates to the R&D effort and increasing your gross margin. Will you be able to quantify what those gross margin improvements are?

[Pamela Marrone:]

In the future? I think we will. Like I mentioned in the script, we have a new drying process with Grandevo that reduces the cost of drying by 40%. We have a 4x improvement in potency of the fermentation of Grandevo. And that certainly would translate to gross margin but I didn't say exactly how much. And the Majestene, 50-fold improvement of the nematicidal activity. It will definitely increase gross margin but I haven't quantified that yet.

[Sameer Joshi:]

Okay. So the next question is about the Michigan facility. I know you are going to improve the packaging, the drying and fermentation tank. What is the time line for this? And what is the additional CapEx required?

[James Boyd:]

Actually, the CapEx is rather modest, a few hundred thousand dollars. We'll be adding granulation for WDG. We'll be adding a packaging line and automated fill line.

[Pamela Marrone:]

And the Regalia mix tank.

[James Boyd:]

We're increasing Regalia capability in the plant to handle increased design. That's about it for the first phase.

[Pamela Marrone:]

And the time line, as I mentioned in the call, for the Grandevo granulation will be...

[James Boyd:]

Before the end of the year.

[Pamela Marrone:]

Before the end of the year, yes.

[James Boyd:]

And beyond that, we're studying further increases in the plant that would have for us actually have to expand the building. And we'll probably do that as we get more heavily into Venerate and Majestene production. I'd like to add that those capital expenditures that we're planning in the near term, at least through the balance of this year, will all come from the restricted cash, the loan that we - the guaranteed loan by the USDA that we got last year.

[Sameer Joshi:]

Understood. Just one last one from me. For the Zequanox, were you looking for a U.S. partnership for distribution? What is the status on that?

[Pamela Marrone:]

Yes, we are. And yes, we've mentioned that a number of times. And it's going well. So we are in a draft distribution agreement at this time. And they've been absorbing some of our treatments in power plants. So we're aiming to finish that off.

[Operator:]

We'll take our next question from Tyler Etten with Piper Jaffray.

[Tyler Etten:]

I had a couple of questions here. When we're talking about product shipments being up 56% year-over-year, obviously a nice milestone. I was wondering if you could split out the differences between penetration in previous regions and what shipments are going into the new regions.

[Pamela Marrone:]

Okay. So we have continued strong growth in all of our regions. But we've been in California the longest. And despite being in California the longest, we're still increasing quite dramatically in California. Pacific Northwest, we've seen dramatic growth. I would say we had salespeople in the Southeast. So the hiring of the salespeople in the Southeast was not until like April or May of last year. So now we're just starting to see - I mean, it usually takes some time to see the effect of having the people in place. And so now we're seeing the dramatic contribution of those guys being hired in the Southeast. So we also added last year, if you recall, a person to Michigan. And that Great Lakes region is turning out to be a really nice - he's doing a great job. It's going to been a really nice territory for us because of the high amount of fruit and potatoes and other - and vegetables production there, which has a really great fit for something like Haven. We saw beautiful control of bitter pit, which is beyond just sunscreen. It's actually a really good quality thing with Haven, and so the apple growers there are really keen on using it. And we've got - we just keep continuing to get really good results from our grower demos there.

[Tyler Etten:]

Got it. That's helpful. And I mean, over the last, I would say, years, so you've really revamped the sales team in advance into these newer regions such as the Southeast and Michigan. Not that it sounds rushed or anything, but are there any other regions that you have identified that you would like to get these products into as you gain traction in these established regions?

[Pamela Marrone:]

Yes. As I mentioned in the call, the [Fresno] person we have, it's tough for him to serve the whole Arizona, New Mexico, Texas, Imperial Valley market. So we did add a sales rep this quarter, wasn't it? And so that's one we expanded into. At some point, we'll look to address the mid-Atlantic and expand eastward at some point into Eastern Washington, Idaho, where we have a good fit for whole foods and more potatoes and such.

[James Boyd:]

I think we're expecting good growth out of the Southeast, especially in the spring or fall.

[Pamela Marrone:]

Yes, we are, yes. So we're not going add a lot of salespeople. But we're - as our - as progress comes on, we may add a couple more.

[James Boyd:]

Don't forget international.

[Pamela Marrone:]

International. We do - well, we have a very small international team. And our strategy with international is continue to use our distributors to do the bulk of the work internationally. So they pay for the - they do the field trials and do - and then often submit the registration, and we support them with that.

[Tyler Etten:]

Excellent. Maybe sticking to the subject of distributors, I was wondering how the Jet Harvest Solutions is expected to fit into the distribution model. And I know Jim said, it didn't significantly impact this quarter. But do you expect this addition to significantly impact future quarters?

[Pamela Marrone:]

Well, we hope so. It's a good product. And it's a category, the sanitizer category where Regalia is preventative and MBI-110 is preventative where this one is a little more curative where you can zap the leaves and it will reduce it even if some of the disease is there. So it's a nice one-two punch. And this category of the sanitizer is pretty well known by growers. And so as our sales team meets with growers, so we - being the master distributor, we sell to our distribution channels who then sell to growers. So it's adding a layer in there, but it's - because we don't have all the R&D cost and we get it fully, the products fully - packaged - developed and packaged. It's still a good business for MBI.

[James Boyd:]

We see efficiencies of being able to send more products down the same sales channel.

[Pamela Marrone:]

Exactly, exactly, yes. Continue to broaden the suite of products and have more products contributing to that sales. It really derisks the business model.

[Tyler Etten:]

Excellent, yes. That's helpful. I guess just one more from me. An interesting comment you made about registering on Amazon. I was wondering if you had done any research about the retail market and what's potential of the products that you have could - or what the potential would be when you sell into - in a smaller form and not to these commercial - the traditional commercial customers.

[Pamela Marrone:]

Well, I have experience in this market because in my past life, I actually got the first organically listed product into Walmart stores in the garden section. And the fungicide category, which was - that product is actually a small category, so we have products that fit the largest category, which is insect control, bugs is what homeowners want to control. And so we have continual questions and - I mean, requests from homeowners, and they certainly don't want to buy 1 and 1 gallon quantities. So we - the home and garden market is quite large, although the markup is more by the companies in that. So the good portion of the margin into the home and garden market is taken by the ScottsMiracle-Gro and those types of people or the retailer - and the retailers. But it still could be a nice contributor to revenue based on my experience and not just stores but also through catalogs, online. We have - in my past life, we had a significant amount of sales through even just online catalogs, the garden catalogs. So it's not - we don't have the - we have to focus our resources and be mindful of really focusing and executing on our plan. So it's a nice upside. We actually have not even forecast anything much in the business for that, but it's a great upside for us in the future.

[Operator:]

[Operator Instructions] We'll next go to Robert Smith with Center for Performance Investing.

[Robert Smith:]

So Pam, could you characterize the results of the Great Lakes study? In other words, this is an open water study. How can you put a framework around this? I mean, what is the opportunity?

[Pamela Marrone:]

Yes, yes. So we have already treated lakes with Zequanox. So we know that works. So this was less about does it work on mussels. We already proved that in a lake. It was more about how to apply it because in the past treatments, it was - we would put barriers down, what are called water curtains. And so then that was to keep the Zequanox in the mussel area. And this one was without these barriers. It was right out there in the open water. And we got some beautiful drone footage, and we can actually see from the drone footage, tracking where the product went. So because Zequanox is slow kill, it kills a few over a month period, we'll know in about 30 days whether this application method, which was without the water curtains on much larger scale, and how - and if that application method works. So we're optimistic and we'll see. But lake treatments right now, there's nothing really useful for lake treatment. So this is the beginning of the test of how we can reduce the mussel population in the Great Lakes contributories and other lakes because they have done such - the mussels have done such devastation to the ecosystem and native mussel populations, which is why we have this partnership. It is about consumers walking on the beaches and cutting their feet, but it's actually really about saving space - saving native species as well.

[Robert Smith:]

So is this application methodology, does work? I mean, you said within 30 days and kind of have a handle on? What's the next step? How do you take this to the banks so to speak?

[Pamela Marrone:]

I think that we'll then start looking at finding partners. We can't - since we're focused on our ag business, we can't do this on our own. So we do have companies that treat for algae and weeds and aquatic weeds, and they know how to go out in boats and deliver products. In that case, it would be more like chemicals and dust to control weeds analogy. And so we have a number of possibilities for partners to help broaden and expand it into other lakes. We get a lot...

[Robert Smith:]

Are these prospective partners awaiting the results of this trial?

[Pamela Marrone:]

No. It's not dependent on that. So it's in parallel. We can go out to private lakes with other partners.

[Robert Smith:]

Can you put a dollar value on the opportunity?

[Pamela Marrone:]

We haven't said that. Because nothing is used for native - nothing is used for invasive zebra and quagga mussels right now in lakes, so we have done the math and said okay, how many lakes are infested, what would a shoreline treatment - can't treat the whole lake as Zequanox right now is too expensive, but what would a shoreline treatment be in cost and revenue to MBI. We've done that math. So we'll see.

[Robert Smith:]

Can you share that?

[Pamela Marrone:]

No. I haven't - we haven't actually put out a number on that.

[Robert Smith:]

All right. I'm about to move on to the cannabis market. So you mentioned some numbers, $91 million going to $1.4 billion in 5 years. So what is your target within those numbers? I mean, the $1.4 billion, what do you have a shot at?

[Pamela Marrone:]

So that $1.4 billion includes the pesticide and fertilizer market. So we - because right now, we have one major distributor and they've become our top 5 distributor, when setting up more distributers into that market and as it becomes legal in other areas, it can be a significant - we haven't - again, we haven't guided to a quantification of what we can do but it could be a significant driver. But we have actually included it once again as compared - like the home and garden as an upside to our plan. So we're not dependent on the cannabis market for our growth. We're executing just well and growing very well in our target crops, our 6 target specialty crops. And so the cannabis makes a really nice upside.

[Robert Smith:]

So just moving on to MBI-014. So how is this redesignated? Was it a significant improvement in product from 010?

[Pamela Marrone:]

Hence, the name. Yes, exactly. So they had versions 12, 13 and so - yes. So they decided that because it was such a significant improvement that they wanted - they really needed to give it a codename from the original - new codename from the original, yes, dramatic improvement in herbicidal potency and reduction of cost. And the reduction of the amount of pounds per acre is around between a 10- and 20-fold reduction in poundage per acre. It's really very exciting, what our R&D has done with this product.

[Robert Smith:]

So what do you feel the opportunity is with that product?

[Pamela Marrone:]

Well, we have said in the past, this is - the herbicide market - so if you have a $55 billion chemical pesticide market, 40% of that total global pesticide market is herbicide. So 40% of $55 billion is a very large opportunity. I estimate that the organic market in the - is about a $100 million opportunity in the U.S. So it's smaller but easier to get and then large chemical opportunity. So it over time becomes probably one of our largest opportunities.

[Robert Smith:]

And any time line on that?

[Pamela Marrone:]

Well, we're submitting to EPA. We hope to before the end of the year, if all goes well, in the late fourth quarter. And then it takes about 18 months for approval. There are growers who are - would love to get it on an emergency use basis and sooner. So if we have the opportunity, we'll try to have the growers petition for a faster track. We'll see, but we're planning for '19 launch.

[Robert Smith:]

Okay. And the roundup controversy framework, I mean, especially in California, what is your view on that?

[Pamela Marrone:]

I'll let the regulators deal with that. It's just - I don't comment on things like that. It's too controversial. But I do know that it's - I just focus on the - there's a significant market opportunity with an unmet need there for this product, 014.

[Robert Smith:]

Okay. And if you were take a shot, what might be a breakout product for you guys?

[Pamela Marrone:]

That one. That one.

[Robert Smith:]

That one. Okay. And so during the call today, you went over the product lines and there were very handsome percentage increases, I assume, from lower number so to speak.

[Pamela Marrone:]

Yes, coming from a small base, yes.

[Robert Smith:]

Yes. So with new products entering the market pretty much on a regular basis, looking out a couple of years, 2, 3 years or something, so what might growth rates be like? It seems that you really could grow the company very, very significantly.

[James Boyd:]

Well, I - we agree.

[Pamela Marrone:]

We agree.

[James Boyd:]

We agree. We have always characterized the company as a high-growth opportunity. And especially when we're coming from a small absolute number, we think the percentages can be quite high.

[Robert Smith:]

So in other words, you're running at 50 and then you drop down to maybe 25, 30 because of weather conditions, this and that. But at some point in the future, with these products each contributing, I mean, it's - there really are little excuses so to speak for a much higher growth rate.

[Pamela Marrone:]

So the strategy, as you mentioned, is a portfolio approach, yes. So it's no - although I think 014 could be a significant product, we're characterizing - we have all of our products growing in parallel. So there's no - it's not a blockbuster drug strategy. At the same time, as we get international registrations, international does become a driver of growth in the longer term - the medium to longer term. So all the parallel - in parallel, growth efforts, getting into more uses, more sprays on the acre, more crops, new uses of our existing products, launching new products and international growth, all, we believe, contributes to significant growth. And I would say we're modelling growth the way we - kind of the way - yes, it could be substantially higher, but we're modelling it in a way that we have seen.

[James Boyd:]

We're modelling it the way we believe it will grow.

[Pamela Marrone:]

The way it will grow, yes.

[James Boyd:]

Yes. We have our own belief. We believe in the company. We believe in the products. We think there's a bright future ahead.

[Operator:]

And we'll take a question from Michael Brcic with National Securities.

[Michael Brcic:]

I have 2 quick with questions. One is on the weather delays in this last quarter. Does that - is there any spillover into the next quarter? Or has that just gone until next year?

[Pamela Marrone:]

A little bit of both. Some spillover and some gone, yes, because the Pacific Northwest, right, some of them are sub-truncated. They could only get out 1 spray instead of 2 or 3, and that's lost. And then others, the bugs picked up and then moved out into the next quarter.

[Michael Brcic:]

Great. Finally, can we talk about when and maybe what revenue levels we're talking about to get to cash flow breakeven?

[Pamela Marrone:]

I know someone's going to ask that. All right.

[James Boyd:]

Let's focus on EBITDA breakeven. And I think we had operating expenses of $6.8 million last quarter. We mentioned that we had several non-recurring type of expenses or special projects, if you will. Let's just call that $0.5 million. So you're looking at $6 million, $6.25 million in terms of operating expenses. I always just think of the company as 50% margins. And if you do that, you just double that revenue to get to a breakeven revenue figure - or product shipments rather, figure. And we think that we can do that in a reasonable amount of time.

[Pamela Marrone:]

Yes, yes. We got back out stock comp, yes.

[James Boyd:]

Just let me add and point out that when I talk about EBITDA, I am excluding stock comp.

[Michael Brcic:]

Right. So a reasonable amount of time, is that within 4 quarters, 2 quarters, 8 quarters?

[James Boyd:]

Well, I think we've talked about in the earlier questions that we see ourselves as a high-growth company. We're not going to make any projections.

[Operator:]

That concludes today's question-and-answer session. At this time, I'll turn the conference over to Pam Marrone, for any additional or closing remarks.

[Pamela Marrone:]

Thank you. In closing, I want to thank each of you for joining us today. We will be conducting several roadshows and attending conferences on both coasts in the second half of 2017. So if you're interested in a meeting, please contact our management of our IR firm, MZ Group, to arrange. We look forward to updating you on our progress as we move forward with a number of key initiatives to build shareholder value over the long term. Thank you.

[Operator:]

That concludes today's conference, and thank you for your participation.