Marrone Bio Innovations, Inc.
Q3 2018 Earnings Call Transcript

Published: 14 Nov 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Marrone Bio Innovations Third Quarter 2018 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d 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 the reports filed by the company with the Securities and Exchange Commission, including under the heading Risk Factors and elsewhere in the company’s Quarterly Report on Form 10-Q for the third quarter of 2018 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 respect from those discussed today. 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 hold a question-and-answer session. I will now turn the call over to our Founder and 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 President and Chief Financial Officer; Kevin Hammill, our Chief Commercial Officer; and as you just heard, Linda Moore, our General Counsel. We had a very good quarter, as we continue to build our company’s infrastructure and execute upon our business plan. As the CEO and Founder of Marrone Bio Innovations, I continue to be confident about our growth opportunity and the future of our company. We have seen progress in the following areas. First, from a financial standpoint, we are very pleased with the third quarter of 2018. We continue to make progress on our three target areas

[James Boyd:]

Thank you, Pam. As noted, I would like to walk you through our third quarter 2018 results. Revenues for the third quarter of 2018 totaled $5.4 million, compared to $4.2 million in the third quarter of 2017, a 29% increase and a record for what historically has been our lowest quarter of the year. Gross margins in the third quarter grew to a record 48.3%, compared to 40.9% in the third quarter of 2017. This again is a record for our company. Gross profit for the quarter was $2.6 million, up $900,000 from $1.7 million in the third quarter of 2017. This 52% year-over-year increase is significant, and an important example of the potential that quarterly revenue growth and a quarterly margin improvement can have on our level of cash usage, which we will discuss in a moment. We expect to see long-term gross margin improvement over the lifecycle of each of our products. As we continue to communicate and are now demonstrating, we launch our products early and then we focus on continuous improvements, improvements in the field with art of use, improvements in R&D with efforts to increase the yield and potency of our various microbes and improvements in manufacturing as our great Michigan team continues to drive efficiencies in each product’s production processes. Our investment in R&D and manufacturing translate directly into margin improvement across all of our products and is now showing in our financial results. Growing sales and gross profits are both improving long-term profitability and reducing our cash usage. SG&A in the third quarter decreased 20% to $4.1 million, our lowest in two years, compared to $5.2 million in the same period last year. R&D expenses in the third quarter of 2018 decreased 16% to $2.7 million, compared to $3.2 million in the third quarter of 2017. As Pam has already mentioned, operating expenses totaled $6.8 million in the third quarter of 2018, a notable decrease of $1.6 million per quarter, or 19%, compared with $8.3 million last year. These significant operating expense reductions are part of a group of key performance indicators that we are focused on to drive long-term profitability and improved cash usage. A combination of growing revenues, improving margins, reduction of interest payments and disciplined cash management of expenses drives improvement in profitability and cast usage. Net loss was $4.4 million in the third quarter of 2018, as compared to $8.5 million in the third quarter of 2017, a decrease of $4.1 million, or a 48% reduction. This improvement was primarily driven by a $1.6 million reduction in interest expense, a $1.6 million reduction in operating expense, and a $900,000 improvement in gross profit. Now turning to the balance sheet. Total ending cash and cash equivalents, including restricted cash was $22.1 million as of September 30, 2018, as compared to $24.9 million as of June 30, 2018, a reduction of $2.8 million. This is the first quarter in several quarters that cleanly reflects our current cash usage. Similarly, cash usage from operations for the nine months ended September 30 was $16.8 million, compared to $14.4 million for the nine months ended September 30, 2017. Cash usage from operations during the third quarter was $1.9 million, which compares very favorably with $4.6 million for the third quarter of 2017 and another indicator of how steady improvements in our three KPIs, that is revenue, gross profit and expense management can have a significant impact on our profitability and cash usage. 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 and into 2019.

[Pamela Marrone:]

Thank you, Jim. We certainly had a good quarter and have made good progress on key strategic goals and operations, and I want to highlight where our focus will remain for the balance of 2018 and into 2019 On the commercial front, we expect continued concentration on customer demand creation, including on-farm demos and increased number of customer and food channel, educational programs to build awareness, as well as expand our labeled uses. Expand our seed treatment offerings, approval of MBI-110 Stargus in California, early 19 – 2019 approval of MBI-110 Stargus and Amplitude in Canada. The federal government has already posted an intent to approve on October 19, 2018, and it is now in the public comment phase. Working with the Ontario Ministry of Agriculture Food and Rural Affairs, MBI has received approval from federal regulators to add greenhouse cannabis uses to the existing REGALIA MAXX label. As with MBI-110, the proposed cannabis label expansion is being posted for public comment, the final step prior to federal regulators finalizing the new label for commercial sales to the cannabis industry in Canada To sign at least one more international distribution agreement in the key global market, several international regulatory submissions such as South Africa, Kenya, Europe Brazil, Ecuador, Canada, Australia and Vietnam, several new international regulatory approvals, including Mexico, Morocco, Zealand, Kenya, Philippines, South Korea and Canada. Operationally, driving revenue growth by increasing our presence with key large growers and strengthening our channel partnerships, all the while continuing to build a high-performance commercial team. Plans are proceeding to add Venerate, Majestene production to our Michigan facility. Continued gross margin improvement over the longer-term, as R&D and manufacturing initiatives continue to increase efficiencies and yield. In summary, we remain laser-focused on commercial execution and building our longer-term vision of being the market-leading biologicals company through our own products, combined with other potential synergistic products and technologies. With that, I’d like to now open up the call for questions.

[Operator:]

Thank you. [Operator Instructions] We’ll take our first question from Sameer Joshi with H.C. Wainwright.

[Sameer Joshi:]

Good afternoon, Pam and Jim. How are you, guys?

[Pamela Marrone:]

Hi.

[James Boyd:]

Good. How are you?

[Sameer Joshi:]

Good, good. So thanks for taking my question. The first question relates to the accounting standard ASC 606. Were the revenues in 2018 increased because of that accounting standard, because it – that’s not exactly an apples-to-apples comparison to the peers?

[Pamela Marrone:]

Yes.

[Kevin Hammill:]

Yes. The previous revenue number for the quarter would have been approximately $1 million higher.

[Sameer Joshi:]

$1 million higher. Okay, got it. And then, Pam mentioned several initiatives on the commercial front with grower-focused efforts, industrial podcast obligations. At the same time, we see a reduction in SG&A sequentially, as well as year-over-year. What was the reason for this reduced SG&A expense?

[James Boyd:]

Well, just general operations reduce throughout, everything audit fees…

[Pamela Marrone:]

Yes, audit fees is a big one.

[Kevin Hammill:]

Yes.

[Pamela Marrone:]

Legal fees is a big one. We’re not raising money later in the year.

[Kevin Hammill:]

But I think just general, a reduction across the board.

[Pamela Marrone:]

Yes.

[Sameer Joshi:]

Was there any effect of further employee attrition or any such thing because [indiscernible]?

[Pamela Marrone:]

Not really.

[Kevin Hammill:]

Well, we had a number of open positions…

[Pamela Marrone:]

In the sales, yes.

[James Boyd:]

Yes, in the sales in this – area, but I don’t think it was unusually weighted toward that.

[Kevin Hammill:]

So, in fact, in the last three quarters, we added people to our commercial operation. As noted by Pam, we have added Barner Jones to the Head of National Sales and Marketing. And over the last period, we hired two additional sales reps to help us out in the California area. So we continue to add to drive our sales forward in the sales and marketing group.

[Sameer Joshi:]

So going forward, we may see a slight increase, but not further reduction, right, in SG&A?

[Pamela Marrone:]

Yes.

[James Boyd:]

Yes. And consistent with what we said in the past, we’re investing slightly in sales and marketing.

[Pamela Marrone:]

Yes.

[Sameer Joshi:]

Okay. And so moving on to the additions to the Board of Directors, how do these people help you in your commercialization effort, or was there any other angle that you’re looking to when you got these people on Board?

[James Boyd:]

Well, the great thing about our two new Board members, they have so much commercial insight and they’re able to give us a lot of insight into how the opportunities are out there and also how we can use our product as is. And also two, opens up a number of opportunities to talk to other growers that they’re associated with.

[Sameer Joshi:]

So it was commercialization focused as against R&D, or any other focus?

[James Boyd:]

Yes. Although there’s quite senior business people, they know the business from start to finish. But one of – for myself, the greatest insight to give is from the commercialization and ground-truthing all our options as we go forward.

[Sameer Joshi:]

Okay. Just two more questions for me. I think, a couple of quarters ago, there was talk about steady on induced systemic response for cannabis. Has there been any progress on that, or is that not required? A - Pamela Marrone1 So we were looking at the increase in the compounds, the phenolics and others, that led to quality of cannabis And, Kevin, maybe you have an update, but as far as I know, that study is still under….

[Kevin Hammill:]

Yes, the study has not – we do not have the results back yet.

[Pamela Marrone:]

We do not have the results back yet. When we have the results, we’ll let you know.

[Sameer Joshi:]

Okay. That could be.

[Pamela Marrone:]

Growers can report good thing, but, yes.

[Sameer Joshi:]

Yes, that could be important for all regions, right

[Pamela Marrone:]

Yes.

[Sameer Joshi:]

And the last one is, when you look at the – your current product portfolio and your efforts around the world, which regions and which products are emerging as major revenue contributors currently? And then which do expect to grow in the future?

[Kevin Hammill:]

We expect growth in actually in all of our key active ingredients, our key microbes or in plant extracts as we go forward. One of the greatest opportunities we see is increasing need in both seed treatment and soil application and we’ll continue to build our portfolio, both the fungicide and insecticides and nematicides in that territory – in that area, that space. But as we look forward in a five-year plan, we see growth in all of our key brands and active ingredients.

[Sameer Joshi:]

Okay. I know I said the previous question was going to be the last, but just a couple more. What is the expected timing of the MBI-041 clearance by the EPA? And then how do you see the MBI-110 application going forward – moving forward?

[Pamela Marrone:]

Yes. So 041 was submitted in August. So minimum is 18 months, we figured about two years for approval. So the first targeted placement would be in 2022 organic growers. As we – by that time figure out all the art of use and how it’s going to fit much bigger into the conventional market. And then 110, what was your question about 110?

[Sameer Joshi:]

You mentioned…

[Pamela Marrone:]

Same question?

[Sameer Joshi:]

…in your – yes, same question basically, label expansion?

[Pamela Marrone:]

So 110 was launched very late last year, just when we were getting a few key state registrations and it’s not approved in California yet. But that, as we said in the script, it is expected. And that – and to our surprise, it was quite fast in Canada, so we expect that first quarter. But maybe Kevin can talk about just the trajectory, any comments about the trajectory of it over the – all the crops that we’re in?

[Kevin Hammill:]

Yes. We see great promise in the 110 molecule as we go forward, both as a standalone in combination with conventional chemistry out there. As Pam mentioned, we do not have the California market, which would be one of our largest market opportunities. So we’re anticipating that and looking forward to that registration. And in Canada, it will become – some more timing to our other active ingredients or the other brand Regalia and we see that as a great opportunity, both in the greenhouse market, including vegetables and cannabis, but also the outdoor market in Canada.

[Sameer Joshi:]

Okay, great. Thanks for all the answers. Thanks.

[Operator:]

[Operator Instructions] We’ll take our next question from Ben Klieve with National Securities Corporation.

[Benjamin Klieve:]

All right. Thanks for taking my questions. I’ve got a few here. First, I’m wondering if you can talk a bit about the productivity of the new sales force. Curious kind of what degree do you think the ramping of the new force has contributed to revenue growth in this quarter? And then, maybe if you can just kind of elaborate a bit on the typical timeline that it takes new reps to ramp up? Any kind of metrics you can provide that will give us any kind of visibility to the priors would be helpful?

[Kevin Hammill:]

Yes. We’re actually really excited we’re on the sales force. To answer part of your question, usually, typically, six to 12 months depending on the individual to get up to speed and contribute in the territory. So most of our sales reps were with us early in the years not only do we see some good contribution to this quarter’s success, but we really, really see the – we’re excited about their contribution for the 2019 period as we go forward.

[Benjamin Klieve:]

Okay. Thanks, Jim. And also I’m wondering…

[Kevin Hammill:]

This is Kevin.

[Pamela Marrone:]

Kevin.

[Benjamin Klieve:]

Oh, I’m sorry. Sorry, Kevin.

[Kevin Hammill:]

Hey, no problem.

[Benjamin Klieve:]

And I have another question as well for anybody, but Pam, really curious about your insights here. You seem to be really excited about the opportunities that Vietnam presents. And I’m wondering if you can elaborate a bit on kind of how you see the next 12 to 24 months unfolding here? Is there any kind of estimated timeline of kind of when you think that could become a meaningful revenue contributor?

[Pamela Marrone:]

Yes. So the trial – so every trial outside of the United States – California requires efficacy data, none of the other states do, and then all countries outside of the U.S. require efficacy data. So we have to have a couple seasons of efficacy data under our belt in order to submit in these foreign countries. So we have the efficacy data now with Vietnam. And what was really interesting are some very large hectares, like or acres. So, for example, rice. Regalia showed substantial yield increase when applied to rice. And so there’s several million hectares in Vietnam. And then the number of fruits and vegetables, which are exported. And because of the sensitivity of residues by the importing countries, which could be Japan, for example, we – there’s an intensity of the pesticide market, where they literally spray every five days for some of these pets. So while a little country, it’s in the very intense pesticide market and we will be a significant one for us. I think that, what I said was that, we’re expecting some registration approval in 2019. So if that happens, then we would expect revenue next year.

[Benjamin Klieve:]

Got it. Another question I have here is, now that you have a few months of CG brands kind of in the market under your belt, I’m wondering if you can compare how you see the commercialization process here as compared to your traditional products. And I guess, really specifically, I’m wondering if you can touch on kind of given the controlled nature of the cannabis market and high-dollar value of the crop here, if you can – if you see that timeline from initial demos into initial sales being condensed relative to your other products, or am I getting ahead of myself here?

[Kevin Hammill:]

It’s definitely a different ramp-up pace and we’re excited about how 2019 is going to go. We had a great year in 2018, but it’s interesting is that kind of a different end user clientele set and they’re actually in terms of how you approach and how you access them is a little bit different in that, they tend to be more social media-focused. And so what we have done is, put a conservative effort in terms of reaching these end user, working with our channel partners to make sure the product is there, they’re educated on there and how it’s using it. While this market is so exciting for us, it’s very similar to the organic market in that both of them are rapidly growing. They need great products, such as the Marrone Bio products and – but also they’re highly regulated and there is also restricted number of products in that market. So we see this as a very attractive and growing market for us as we go forward.

[Benjamin Klieve:]

All right, very good. Thank you. And I guess one last one, then I’ll get back in queue here. Wondering if you can comment a bit more granular with the progress you made on your on-farm demos. Can you talk a bit about the degree to which the progress has been made on initial small acreage plots versus larger acreage plots with growers or maybe in their second or third year of demos?

[Kevin Hammill:]

So the major demonstration emphasis with this year and with all crop protection product – crop protection usage in crops, we traditionally only get one cycle with our products as we go through the year. There’s very few crops such as lettuce, where we get multiple crops. So we’re expecting the – be able to build on our success in the various crops that we did demonstrations this year with into 2019. I think, Pam referenced in the comments section is that, for example, we had a great performance of our products with traditional chemistry and controlling and reducing damage on navel orange worm. So that trial is coming off this year. We got the results back here in the last two or three weeks. And now that will be used to continue to ramp-up our business as we go into 2019 and for the control navel orange worms and reducing the damage in almonds.

[Pamela Marrone:]

I think, we have more than 300 demos this year so far, right, year-to-date.

[Kevin Hammill:]

Yes.

[Pamela Marrone:]

Yes, yes.

[Kevin Hammill:]

Significant.

[Pamela Marrone:]

That’s significantly up from last year, yes.

[Benjamin Klieve:]

And then – sorry, I said that was my last question. I guess a clarification on that. 300 up significantly from last year, can you quantify what that was last year?

[Pamela Marrone:]

Double?

[Kevin Hammill:]

No, 50 was last year?

[Pamela Marrone:]

Oh, maybe.

[Kevin Hammill:]

I think, it’s up from 50 last year.

[Pamela Marrone:]

Oh, 50. Yes, okay. So quite a bit.

[Kevin Hammill:]

50 to 300.

[Pamela Marrone:]

Yes.

[Benjamin Klieve:]

Very good. Well, congratulations on all your progress, and thanks for taking my questions. I’ll get back in queue.

[Pamela Marrone:]

Okay. Thank you.

[Operator:]

We’ll take our next question from Robert Smith from the Center for Performance Investing.

[Robert Smith:]

Yes. Good afternoon. Thanks for taking my questions. In the process of educating growers, when you say you want to educate them on the use of your products in conjunction with chemicals. Is this – are you using your products – use your products has been add-on, or is there the opportunity also to reduce the chemical input to usage?

[Pamela Marrone:]

Yes, both. Yes.

[Kevin Hammill:]

There’s probably three opportunities as we see how to fit our products into growers, crop management system. There’s – one is, how can we increase the return on investment, whereby we combine our products with a label rate of the traditional chemistry and whereby they get increase yields or decrease damage or increase performance. Another opportunity we see is, how do we help the farmer manage these crop management systems where some of his products are getting restricted by regulatory assignments. And the third prop area, where we see a great opportunity for our products is fitting in then help them in their management system. This could be where they have a reentry interval restrictions or pre-harvest interval restrictions, so you can go in there and allow them to harvest earlier or their workers to reenter their crop sooner or maybe they’re looking forward to combine in the crop management systems with beneficials. So overall, as we entered into their crop management systems, we can play a different role. As I mentioned upfront, we can complement the chemistry they’re using to increase yield, decrease damage or increase performance. We can help them manage their pest, wherein their products are getting restricted due to regulation and we can help them in the management systems if they have reentry intervals or pre-harvest interval requirements.

[Robert Smith:]

Thanks for that clarification. And my additional question is – focuses or centers on Zequanox. Pam, can you just say a few words about what’s happening with that – usage of that product?

[Pamela Marrone:]

[indiscernible]

[Kevin Hammill:]

Yes. So this year, we’re doing with some improvements in our manufacturing initiatives, we see an opportunity to improve our value proposition to large energy users out there. So what we’re doing is a significant beta trial with large customers to quantify a beta test or a new value proposition. And we already started this about a month ago and we’d be progressing with this over the next four months. And at that time, we’ll be analyzing the beta test and performing our assumptions that this has a great value proposition to large energy companies and continue to move forward with Zequanox.

[Robert Smith:]

So is that – if the results are positive, what is that opportunity then?

[Kevin Hammill:]

Well, this is a…

[Robert Smith:]

Can you quantify it in anyway?

[Kevin Hammill:]

I don’t think we get into quantifying our future revenues, but the market size for this is in the hundreds of millions of dollars in terms of the total available market.

[Robert Smith:]

In energy?

[Kevin Hammill:]

No, in terms of pipe…

[James Boyd:]

Pipeline.

[Kevin Hammill:]

In terms of the pipeline opportunity, in terms of products they’re currently using. We offer a great alternative to their current management practices in terms of controlling the – in their pipes.

[Robert Smith:]

But you said that this was a test really for the energy company, right?

[Kevin Hammill:]

With, I should say, with the energy companies.

[Pamela Marrone:]

Yes. There’s energy and then there’s in the pipe treatment market, there’s energy and then there’s other facilities like steel and paper and pulp, but the largest users are the energy one, which is where we’re doing. We know the product works. This is not a efficacy demonstration. This is a commercial demonstration of the value proposition relative to their other tool.

[Robert Smith:]

Yes, I was just wondering, if it’s targeted specifically at energy, what is the size of that opportunity?

[Pamela Marrone:]

Yes, it’s $100 million.

[Kevin Hammill:]

Yes.

[Robert Smith:]

Okay. All right. Thanks so much.

[Operator:]

Ladies and gentlemen, at this time, I would like to turn the conference back to Pam Marrone for any additional or closing remarks.

[Pamela Marrone:]

Yes. Thank you, operator. In closing, I want to thank each of you for joining us today. And we sincerely thank our dedicated and committed employees, board members, suppliers, partners, shareholders and customers for the confidence they have placed in us. We recognize the tremendous responsibility we have to realize MBI’s significant potential as a leading force in the adoption of biological and global crop protection and sustainable food production practices. We continue to conduct road shows and attend conferences on both coasts. If you’re interested in a meeting, please contact management or 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 longer-term. Thank you very much.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. We appreciate your participation.