Marrone Bio Innovations, Inc.
Q3 2016 Earnings Call Transcript

Published: 15 Nov 2016

[Operator:]

Good day and welcome to the Marrone Bio Innovations’ Third Quarter 2016 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 Ma'am.

[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 the Form 10-K that the Company has filed on March 30, 2016 and our Form 10-Q that was filed today for the third quarter of 2016, under the heading Risk Factors and elsewhere 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 site. 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.

[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 are excited to report our results for the third quarter. This marks our fourth consecutive quarter of solid performance and year-over-year improvement. We are demonstrating increasing consistency and our ability to deliver revenue growth, margin improvement and expense control. We also remain disciplined and executed well again this quarter. I’m very proud of the great work that our teams are doing across the entire Company. We were really pleased to celebrate our 10th anniversary just a few weeks ago. In 10 years, we have registered and commercialize four new active ingredients and launch by products with global potential, this is a remarkable achievement. Our newest product newest product Majestene and Nematicides was recognized that the best new products in the Biopesticide category by Agrow, one of our industry’s leading trade publication. Majestene is off to a strong commercial start and we believe to deploy to become a major product in our portfolio. As we discussed last quarter, we have been intently focused on growth, domestic growth, international growth, growth of existing products, growth with new products, and growth we create through partnerships. Our third quarter performance includes success in each of these areas despite a generally soft agricultural market environment. This gives us confident that we are positioned for continued progress in the fourth quarter and next year. It’s worth stressing as we have discussed before better products to farmers with the short-term economic return associated with better yield, higher gross quality and an expanded export capability. At the same time, our product also provide farmers with the longer term economic benefit by mitigating the development of test and disease resistance to synthetic chemical. We continue to see good results from a close coordination of our technical team with our sales and marketing team. This thoughtful, science based approach is appreciated by farmers and distributors and improved how our brand is viewed by the market. We also believe it has resulted in market share gain that give us the solid and expanded base of business. I would like to review a few financial highlights from our third quarter results. We maintain the strong rate of top line growth. We grew GAAP revenues by 46.8% to $3.6 million in the third quarter. Product shipments were up 72.2% to $3.1 million as compared to $1.8 million in the last year’s third quarter. Our net use of cash in the third quarter was $5.1 million. While our third quarter is seasonally smallest for product shipment. We are pleased with our results and perhaps more importantly we are pleased to have begun the fourth quarter with significant momentum. We are seeing continued demand, a steady curve in adoption rate, incremental growth in freed acres and attractive inventory levels in the channel. As we have discussed our growth has results of a wide range of operational objective that collectively are driving our business forward. The long risk of objectives with which we began 2016 is nearly completed and we are now setting our sites on new goals and milestones for 2017. First, there was one remaining item yet to be fully achieved from our prior, list finding in United States development partner for Zequanox. We are happy to announce today our partnership with Zequanox in Europe [Indiscernible] a water industry services and engineering firm based in Spain. They are urgently working towards emergency approval for Zequanox to address a recent aggressive and problematic spread of zebra mussels throughout Spain. If granted, this would be a good spring board for the broader opportunity in Europe or invasive mussels continue to spread. In the U.S., we have continued to engage the potential partners for pipe and open water treatment although as Zequanox is at outside of our core group of ex-products it is highly effective as a large potential market is environmentally friendly and addresses a very difficult problem for the water treatment industry. Second, we are working towards the third grow crop deal to supplemental our agreements we have put into place with [coke] (Ph) and Albaugh. Our field trials continue to demonstrate a product of compelling value to grow as in distributor in the grow crop market. Third, sequential launch of at least one new commercial product in 2017, a suite of bio based solutions addresses a wide range of crop [Indiscernible] diseasing. Expanding the breadth of our portfolio as powerful for our brand and the diversification it create is an important part of our strategy to deepen our market penetration and to drive strong stable financial results. Fourth, we are working hard to complete development of MBI-010 our systemic Bio-Herbicides interest submitted for the EPA. We are excited to announce today that we recently were able to expand our potential market by developing two new formulations for both pre and post converged control of weeds that has developed resistance to traditional chemicals including [Indiscernible]. Fifth, international growth, market development and penetration in Latin America, Europe, Asia and Africa are priority for us. Achievement of this objective should come in the form of a variety of strategic distributions and collaboration agreement several of which are in process. Sixth, we are working hard to achieve EPA registration of MBI-601 and MBI-110 our biofumigant and biofungicide. Fumigants are an extremely important category due to eh high levels of toxicity our traditional chemical fumigant. MBI-601 is in strawberry field trails rights now. Likewise, the downy mildews and white mold fungicide segment need additional solution. We are pleased to see MBI-110 perform well for control of white mold on dry beans and for soil disease control in potato confirming results from previous trial. We are also seeing good results on control of downy mildew for lettuce crop in California. Seventh is our clear objective to main consistent significant year-over-year revenue growth with each passing quarter. We expect this to be a consequence and a reflection of our success in many of these areas I just discussed. We remain focused and committed to excellence and execution and/or to build on our momentum. Finally, the continued growth in good execution, we expect to address our needs to raise capital. As we have said in the past, we believe, we have a number of options to raise capital and build stronger balance sheet. As we achieved sales, we expect our needs to be increasingly driven by the working capital necessary for growth. We believe our portfolio of breakthrough technology creates high growth opportunities unique to MBI to drive shareholder values. Beyond these objectives as you know, we maintain a research and development focus to improve manufacturing processes, develop new formation and identify new uses of already commercialized product that help to drive our growth. For example, R&D improvements in our manufacturing processes, reduced fermentation time of Majestene and Venerate reducing costs by 35%. Our patent portfolio continues to increase with all product lines protected by existing and pending patents. MBI now has 32 issued U.S. and 121 issued foreign patents, 23 pending U.S. and 174 pending foreign patent application. Our continued investment in testing for new crops and a broader range of tests increases our market opportunity. This is the time of year that [fields] (Ph) results are also coming in and we are really pleased with what we have seen so far, we are having a fairly year in this respect. I would like to quickly list some of the recent highlights. There is increasing evidence that Grandevo and Venerate have good performance against key pass in a variety of high valued fruit crops, including blueberries, strawberries, grapes, stone fruit, citrus crop and cherry. In particular, we continue to see solid performance for Grandevo get Spotted Wing Drosophila newly introduced devastating non-native invasive pests where resistant management solutions are needed. This quarter, we received registration of Grandevo and Venerate in Mexico allowing us to begin sales in this important country. Our team has been in Mexico training our distributor and growers on the best use practices for these products. Our Biopesticide are external rotational partners for resistance management as evidenced by the addition of both Grandevo and Venerate to the publish list of materials approved by and Aneberries national association in Mexico. They represent exporters of fresh berries and identify product that comprised the stringent standard of the U.S. and Europe. Grandevo and Venerate are also showing broad efficacy against [indiscernible] in apple crops. We anticipate both products will be listed for control of this test in the upcoming 2017 Michigan State University Fruit Production Guide. Positive Southern Hemisphere study showing Grandevo and Venerate’s efficacy on Citrus psyllid, citrus rust mite and [indiscernible] are creating interest in major citrus producing and exporting countries internationally. We saw Venerate performance as well as two commercial chemicals on walnut husk fly in California, this is an increasingly problematic test for this crop. Our granular formulation of Grandevo specifically design for turf application controlled lawn grubs better than commercial standard. First trials of Venerate also showed activity against lawn grub. In row crop, Venerate continues to show INFERNO and seed treatment applications protect against corn rootworm as well as the commercial standard. We received an allowance from the U.S. Patent & Trademark Office this quarter for use of this microbe against corn rootworm. Our new nematicide Majestene is showing efficacy on carrot in both Michigan and California and on tomatoes, squash, strawberries and turf in Florida. Potatoes in Michigan and the Pacific Northwest. Soybeans in the U.S., Brazil, and then bananas in Central America. As we continue to work out the use rate in key crops through irrigation, we think that Majestene can become a cornerstone product in our portfolio of solutions. Regalia is showing 10% to 15% yield increases in tomato crops in California with an increasingly from a problematic soil disease through [Indiscernible] as well as in blight console programs through walnut and also for rice where we had three rice studies demonstrating increased average yield of 1,000 tons per acre a productivity gain of 12%. One of our pipeline product [Caden] (Ph) or MBI-505 is showing good performance in reducing suns stress and increasing yield for certain apple varieties walnuts, tomatoes and corns. An initial data for trials with the biological stack seed treatment developed with our partner GroundWorks bio-lab we are extremely promising for protection from corn rootworm and plant parasitic nematodes on corn and soybean, we are expecting more data soon. In Iowa against nematodes and corn bio-stack seed treatments, increased yield of corn by 20% to 50% bushels per acre or 11% to 27% increase and perform just well or better than expected as standard commercial seed treatment. Similarly, in Iowa trials for soybean cyst nematodes, bio-stack seed treatments resulted in 23% to 27% yield gains comparable to the standard commercial seed treatment. In summary, our science based approach is working to drive growth and market opportunities. We have been pleased to see the work in progress we are making reflected in our stock performance over the course of the past quarter. We are grateful for the support of the financial community. This support has been and will continue to be very important to our Company and to our path forward. 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 and our manufacturing. Jim.

[James Boyd:]

Thank you, Pam. Good afternoon everyone. I would like to walk you through our third quarter results. Our GAAP revenue in the third quarter was $3.6 million, up 46.8% as compared to $2.5 million in the third quarter of last year. In addition, during the first nine-months of 2016 we have grown our GAAP revenues to $11.4 million up 43.9% versus the prior year nine-months totaled of $7.9 million. This GAAP revenue number does not include deferred revenues not yet recognized from customers on the sell-through revenue recognition method versus the sell-in method. Please note that while we use the sell-through method for certain customers, our standard terms of sale do not include any return or inventory rights or other than normal warranty claims. As we did in prior quarters, we are also providing information on product shipments, a non-GAAP measure of sales that includes the net change in deferred revenues in the period, in order to represent the value of our product shipment volumes in a given period and to provide additional insight into our business performance. In the third quarter, we grew product shipments by 72.2% to $3.1 million as compared to $1.2 million in the third quarter of last year. In addition, during the first nine-months of 2016, we grew our product shipments to $11.2 million up 72.7% versus the prior year nine-months total of $6.5 million. Our GAAP gross margin in the quarter increased to 31.4% as compared to 5.5% margin last year. The improvements reflect growth and revenues and more diverse product mix and improved manufacturing efficiencies. We were very pleased to see unabsorbed manufacturing cost from idle capacity during the quarter drop to $169,000 from $718,000 in the third quarter of 2015. For the first nine-months of the year, our gross margin increased to 30.6% from 7% in the first nine-months of 2015. Unabsorbed manufacturing cost from idled capacity during the first nine-months of 2016 were $537,000 greatly improved from approximately $1.9 million during the first nine-months of 2015. Our team at the Michigan plant continues to work very high and perform extremely well. SG&A expense in the third quarter was $3.8 million down from $5.3 million last year. This reflects the reduction in outside service costs related to our investigation restatement and related litigation. Our R&D expenses were down to $2.7 million and this year’s third quarter compared to $3.4 million last year. As a final note, I’ll point out that a year ago period had approximately $1.5 million of cost associated with our investigation restatement and related litigation and were no special expenses in this year’s third quarter. For the first nine-months of 2016, SG&A expenses came in at $13.8 million versus $20.6 million in the first nine-months of 2015, a $6.9 million reduction from last year. R&D expenses for the first nine-months were $7.3 million this year, as compared to $10.2 million last year. Turning to the balance sheet, inventory at the end of the third quarter was $8.4 million. At the end of the third quarter, our balance sheet had cash, cash equivalents and restricted cash of $19 million. This is $5.1 million lower than last quarter’s total of $24.1 million. Thank you and we will now take question.

[Operator:]

Thank you. [Operator Instructions]. And we will take our first question from Laurence Alexander with Jefferies.

[Jeffrey Holford:]

Hi Pam. This is Jeff on for Laurence. In your prepared remarks, you highlighted the pipeline and number of products in trials. Can you size some of the opportunities let’s say Haven, 601 and maybe one or two others that are close to commercialization and I guess are these $25 million, $50 million and $100 million opportunities at peak and how should we think about it?

[Pamela Marrone:]

We are not going after the blockbuster drug strategy, each one of our product is going to be equally important, I would say the same for our pipeline product as well. So the range you gave is appropriate in terms of the sizing, but let's take the biofumigant category, nine million pounds of fumigants were used in California last year in 2015 and a lot of them are heavily restricted. So it's the significant market need and so that's also global need as well for new fumigants. And then with the 110s is also win. We have been focusing 110 on white mold and downy mildews and the few other things, but it's got a lot for other spectrum than that. so I think it will be as large as for Regalia overtime. Haven, we are just we have seen some great results on reduce on suns stress and yield improvements and we are also just scratching the surface on the yield improvements that we are seeing it seems to be quite broad across quite a number of crop categories.

[Jeffrey Holford:]

And 010?

[Pamela Marrone:]

010? Well that one has to be potential that overtime I think could be the biggest one in the portfolio because it's a herbicide that we needed [Indiscernible] weeds. Technically the most challenging, so we are working on it's a real excited that R&D has done a awesome job in the first 10 months of the year as the main thing what they have accomplish in the getting that new formulations and stabilizing the actives and so forth for this that particular one and for both organic and conventional.

[James Boyd:]

And the pre and post increases from our side.

[Pamela Marrone:]

Yes, it does. We knew long years ago that the pre-emergence activity we had it but pick up bound within the soil and our crack team to formulations people we are able to make it active so we are excited by that.

[Jeffrey Holford:]

Great, and then, on the pipeline our most of the products that you have developed are spearheaded by customers or your distribution partners or you developing them and then trying to find the demand in the market?

[Pamela Marrone:]

So it's kind of a little bit of legacy of both, some of them like Haven we have had an portfolio for a long time. The other ones were by design based on market needs we heard from our customers of course organically the control is always sighted as the number one by all customers whether it's the most chemically intensive distribution or not, because they have a lot of customers that need that. And then the 110 was specifically screened to look for a downy mildews, white mold products and then the fumigant was also specifically selected, because it was a large unmet need as well.

[Jeffrey Holford:]

And then I guess last one if I can. Any early thoughts on the elections or it relates to approval biological?

[Pamela Marrone:]

I have seen a lot of administrations come and go over my carrier and it's really hard to predict, it really depends on the political points and the senior staff EPA and how they manage the staff, but we do have a Pesticide Registration Improvement Act. That is actually legislated in the time frames that we get our products approve so there is not a lot of wiggle room, we like to think any way there is not a lot of wiggle room in those timelines because they are statutory.

[Jeffrey Holford:]

Got it. Thanks for your time.

[Operator:]

[Operator Instructions] We will now move to Tyler Etten with Piper Jaffray.

[Tyler Etten:]

Good afternoon, guys. How are you doing?

[Pamela Marrone:]

Good.

[Tyler Etten:]

I guess can you talk a little bit about the bio-stack corn seed treatments and what sort of timeline, that looks like the commercialization obviously very impressive year left out of the trial?

[Pamela Marrone:]

Yes, we are too excited. So the uses for our microbes on corn for that some of those trials. Some already registered by EPA and then one of the uses is pending and will be registered next year on arrangement that one. Yes, it will be registered next year. But, so it’s relatively near-term in terms of the ability to get it out in the market, but we have set no commercialization timing for that product yet.

[Tyler Etten:]

Okay. I guess kind of building off of that. In row crop market, has there been any sentiment change confirmers about biological and just to [Indiscernible] obviously the row crop farmer still very challenge. But any incremental interest in these types of products compared to a year ago?

[Pamela Marrone:]

We see the trends remain the same that if you can demonstrated ROI, attractive ROI performer regardless of the price the point of yielding and is a pace for yielding the cross of the input pace of the yield increase they are interested. And we are seeing that increasingly with our partner [Indiscernible] taking into the partner that Regalia, which we expect it would be based on all our trial data demonstrates that continue to show that ROI. Some of these new seed treatment, clearly there is ROI there. So I think that’s really, what it’s come down willing to try something that’s going to make them money.

[Tyler Etten:]

Got it. And then one more if I could and I apologies if this already asked, I was disconnected briefly. Could you talk about the biofungicide market, what kind of cross make-up that market and which opportunities that your products target?

[Pamela Marrone:]

So the [indiscernible] regulation data face that’s public estimated in 2015, nine million pounds of fumigants were used last year in California alone. California, we do have some carryover of the methyl bromide which under the [Indiscernible] is being passed out for 2017 is the last year. So replacement for methyl bromide has been a number of chemical fumigants, which are quite toxic and California has restricted them with very larger buffer zone. So they are difficult to use and they require prior notice and county notices and all that. And so what we are talking about it would be California strawberries would be our number one target crop and that’s one of the crops we have it out in the field right now. Leafy green, tomatoes peppers in Florida. Those are some of the top crops, tress and wines replant disease in any tree and wine when they are replanted in the same location nematodes and other diseases often cause of yield drop and that’s why those fields are fumigated, that’s another market for us. We have post harvest market with our fumigant as well, which we would be putting it inside of the boxes for preventing fruit rot in shipping that is a longer term market, which we will target but right now, we are focusing on the soil fumigation.

[Tyler Etten:]

Got it, and of the top of your head do you know the dollar amount of those nine million pounds or fumigant in California?

[Pamela Marrone:]

I don’t at the correct time.

[Tyler Etten:]

Okay, no problem.

[James Boyd:]

Thank you.

[Operator:]

We will now go to Amit Dayal with Rodman & Renshaw.

[Amit Dayal:]

Thank you, good evening Jim, Pam how are you. In regard to the gross margin Jim. We came in at 31.4% this quarter, we were at around 38% last quarter is it just the function of the lower sales number this quarter?

[James Boyd:]

It's a combination of mix that's really impacting it and the amount of unabsorbed manufacturing cost there or plant utilization rather, which was about six percentage points.

[Amit Dayal:]

Okay, understood. And then maybe to the gross margin. You have shown a lot of improvement in the yield across the product line; in respect to that aspect of the story like how should we think about potential opportunities for further improvements in yield across different product lines.

[James Boyd:]

Well, I think we should continue to experience improvements in yields as we get the yield up in any particular product and as we develop more process improvement within the plant and with our third-party manufactures. That will be moderated a bit by the introduction of new product, so introduced our products and our model is such that we don’t have them perfected in terms of yields or production capabilities when we introduce them so they start out at lower margins and would approve over several years.

[Pamela Marrone:]

As time goes on, a steady run rate margin will certainly we are expecting it to continue to increase.

[Amit Dayal:]

Got it. Pam in regards to your comments around Zequanox partnerships the European partner I guess you found at least one partners. Is this exclusive for all over Europe or is this just with bean?

[Pamela Marrone:]

We are starting with same for now.

[Amit Dayal:]

Okay, so you potentially will be looking for other partners in other countries.

[Pamela Marrone:]

Not clearly yet. We may use this one for the entire Europe.

[Amit Dayal:]

And in regards to the U.S. partnership opportunity do you think by the end of the year you may have somebody or will this potentially lead into 2017?

[Pamela Marrone:]

We are in discussions with the number of partners. It’s hard for me to predict the timing when you start getting holidays and larger companies go on their own time schedule. I'm not going to make the prediction on that one.

[Amit Dayal:]

Understood. And then you mentioned one new commercial product to be launched in 2017, actually cash the name, if you could recap this.

[Pamela Marrone:]

I didn’t actually say which one so we can't we have several opportunities for more than what I think so because there are…

[Amit Dayal:]

Yes, because I see from your last presentation I think you have around four products potentially available for commercialization in 2017. So I was wondering which one of those this might be.

[Pamela Marrone:]

We are working on that now in terms of which ones. we know first of all 110 won't be approved, its target approval date is in the latter half of next year so 110 would be later, , 010 also would be later. So your first two up would be the biofumigant and the [ISx.1] (Ph) and Haven MBI-505.

[Amit Dayal:]

So then the way to read it is basically at least one commercial product?

[Pamela Marrone:]

I think I, said at least one.

[Amit Dayal:]

I heard that just one more total.

[Pamela Marrone:]

No, no. At least one, I'm pretty sure I scripted at least one.

[Amit Dayal:]

All right. That’s all I have. Thank you so much. I’ll take it off.

[Pamela Marrone:]

Okay. Thank you.

[Operator:]

I will now turn the conference back over to Mr. Pam Marrone for any additional or closing remarks.

[Pamela Marrone:]

Thank you all for listening. We are excited about our momentum, solid growth, improved margins, new opportunities and our growing technology platform. We have a clear vision for our future and we look forward to talking with you again soon. Thank you.

[Operator:]

Ladies and gentlemen this does conclude today's conference. We thank you for your participation.