Gevo, Inc. (GEVO) Q4 2013 Earnings Report, Transcript and Summary

Welcome to the Gevo Q4 2013 Earnings Conference Call. My name is Janet and I'll be your operator for today's call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. If you would like to access the PDF file that goes along with the presentation please go to Gevo's Web site, click on the news and media tab, select press releases, select the webcast by microphone and the screen will appear with the link to open the file, Luverne Update on Progress on Commercialization. I will now turn the call over to Mike Willis. Mr. Willis, you may begin.

Good afternoon and thank you for joining Gevo's fourth quarter 2013 conference call. I'm Mike Willis, Gevo's CFO. With me today are Pat Gruber, our CEO and Brett Lund, our Chief Licensing Officer and General Counsel. Earlier this afternoon, we issued a press release which outlines the topics that we plan to discuss today. A copy of this release is available on our Web site at www.gevo.com. I would like to remind our listeners that this conference call is open to the media and we are providing a simultaneous webcast of this call to the public. A replay of our discussion will be available on our Web site later today. On the call today and on this webcast, you will hear discussions of non-GAAP financial measures. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in accordance with GAAP. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is contained in the press release distributed today, which is posted on our website. We will also provide certain forward-looking statements about events and circumstances that have not yet occurred, including projections of Gevo's operating activities for 2014 and beyond. These statements are based on management's current beliefs, expectations and assumptions and are subject to significant risks and uncertainty, including those disclosed in Gevo's most recent Annual Report on Form 10-K as amended, which was filed with the SEC on March 26, 2013, and in subsequent reports and other filings made with the SEC by Gevo. Investors are cautioned not to place undue reliance on any such forward-looking statements. Such forward-looking statements speak only as of today's date and Gevo disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to Gevo's SEC filings for detailed discussions of the relevant risks and uncertainties. On today's call, Pat Gruber, our CEO will begin with a review of our recent business developments. I will then review our financial results for the fourth quarter of 2013. Following the presentation, we'll open the call up for questions. I will now turn the call over to Pat Gruber, Gevo's CEO.

Thanks Mike. We have made a lot of progress moving through the isobutanol commercial process learning curve. Fundamentally, our technology works its scale with corn mash, the feedstock. And we are in the midst of learning how to run the integrated full scale isobutanol process. As we have advanced on the curve, we have discovered that the isobutanol technology not only works, but can work concurrently with producing ethanol. Our original vision was to focus reference on one product, however, we are now confident that we can leverage the flexibility of our technology and more fully utilize all the operating units of the plant to produce ethanol simultaneously with isobutanol. Needless to say, the additional cash flow is a benefit as we work to maximize (inaudible) per dollar as we scale up the technology. Therefore, we plan to arrange three of our fermenters to produce ethanol. We are (indiscernible) configuration side by side meaning both ethanol and isobutanol, we produce concurrently. I have a presentation for you today that discusses in more detail what we are doing at Luverne, the progress we’ve made on the isobutanol process, what our plans are, and it also discusses the side by side ethanol and isobutanol production. Let's turn to the presentation. Let's go straight to Slide 2, this is a picture of our plant in Luverne, Minnesota. You see that we have rail and truck access, corn comes in by truck, feed goes out by truck. Product goes out by rail or truck. On the right, you can see our corn storage bin, capacity is about 800,000 bushels, the process building in the center of the picture holds the majority of our fermentation equipment. The GIFT building near the top of the picture holds our GIFT equipment. The distillation building has majority of…

Thank you, Pat. Gevo reported revenue in the fourth quarter of 2013 of $1.7 million as compared to $1.9 million in the same period in 2012. Revenues in the fourth quarter included proceeds from sales from Gevo's hydrocarbon demo facility of $0.9 million including sales of bio-based jet fuel to the U.S. Air Force and the U.S. Army and initial sales of isooctane for specialty fuel applications. We also recognized revenue under Gevo's agreement with the Coca-Cola Company and revenue from ongoing research agreements. As you may recall in 2012, fourth quarter revenues benefited from the sale of excess corn inventory of approximately $1 million. R&D expense was $3.9 million in the fourth quarter of 2013 compared to $4.4 million reported in the fourth quarter of 2012. Our R&D activities in the fourth quarter of 2013 continue to be directed to the start-up operations at Luverne and the optimization of our technology to further enhance isobutanol production rates as well as production related activities that are hydrocarbons demo plant in Texas where we produced our bio-jet, paraxylene and isooctane products. R&D expense decreased in the fourth quarter of 2013 compared with the same period in 2012 due to ongoing cost cutting measures within the R&D group partially offset by increased cost at the hydrocarbons demo facility due to higher production levels at that plant. SG&A expense for the fourth quarter of 2013 decreased to $5.8 million compared to $7.8 million for the comparable quarter in 2012. Our fourth quarter 2013 results continue to show the benefit from cost savings, actions begun in the second half of 2012. The reduction in SG&A expense primarily resulted from decreases of $1.5 million in legal-related expenses in support of our ongoing litigation with Butamax and $0.8 million in salary and compensation related expenses. Within…

Thanks Mike for that. And with that I think we should open it up for questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Mike Ritzenthaler. Please go ahead.

Yes. Good afternoon. Two questions on Slide 21, the first question is, if Gevo achieved 100% isobutanol production per batch versus the target, what would the mix of isobutanol versus ethanol be with the current margin environment, would you still want to run one fermenter on isobutanol?

I think, right now, I think ethanol like 1, what was it Mike, what was the price today of ethanol?

I mean stock margins at Luverne are well over a dollar right now.

Right. It would be a tough call at that point. But, I think in general we would want to move into isobutanol.

Okay. And then what types of, I don't know nuts and bolts on the organism or operational parameters need to be improved to get from that 70 to 100?

Optimization around some heat exchangers, optimization around some of the fermentation conditions themselves. So, this is a combination of the nutrient packages, pH, how we feed the dextrose, practical things like that.

And it just –

In light of the recycle streams coming back and through the plant.

So, it’s more of getting further growth account during the batch, the organism growth that –

That's for example. And so, one of the things that we have – one of the things that we deal with is, this plant has had some variability as we start to stop and are running partial batches, full batches and getting the plant all the equipments operating. These plants capture all the water and then recycle it. And so, getting it to a steady state has been a pain.

Okay.

And so, what happens as impurities build up in the plant and then they come back in the fermentation, and then bite you. So what we are doing is, we spend a lot of time trying to manage that water balance, running ethanol helps probably.

Yes. I was supposed to say it running ethanol probably helps on that front.

Big time, because it allows – it helps in two ways. One, is it gets the stable flows on the mash that makes it easier to do the sterilization systems for the isobutanol, because it has more continuous flow. We don't have to stop and hold things when they are warm and fully sugar. Second thing is, it allows the water to be recycled more easily and it makes it more consistent which is a big deal because we are sitting here responding to variability in the water recycle, and the question is always in the back of our mind is that real or an artifact that the way the process is going. And then the last one, and this is really important is getting solids out of the plant that happens through animal feed.

Okay. Just one last one from us, I guess maybe a little bit higher level on the licensing deals. Not to get specific about any one particular potential license, but maybe could you just walk us through the regions internationally and what areas look particularly or structurally favorable for producing isobutanol or maybe a side by side isobutanol with ethanol?

Well, I mean sums the couple of logical ones, obviously are Canada and Argentina based off of (inaudible) LOIs that we have announced. Both areas Southern Ontario and Canada as well as in Argentina are both corn growing areas with very favorable commodity prices there. Other areas or regions that have shown interest have been Europe in particular. As we mentioned earlier, there has been some interest around bio-isooctane, and there is some demand from Europe for that product, and then in Southeast Asia, there is significant demand just based off of again biomass prices in that region.

Okay. Thanks very much.

And our next question comes from Caleb Dorfman of Simmons and Co. Caleb Dorfman - Simmons & Co: Good afternoon.

Hi, Caleb. Caleb Dorfman - Simmons & Co: I guess, Pat you certainly talked about 15 million gallons of ethanol, can you sort of walk us through what sort of run rate you're expecting initially in isobutanol front, and at what point you would think about switching all of the plant to isobutanol production?

Sure. So as far as the 15 billion gallon per year run rate for ethanol, that was pretty straight forward because the original plant capacity was about 22 million gallons or so for ethanol. When we're using -- we'll be doing the development process optimization work on one of the fermentation systems. We're in the 10s of thousands of gallons range in the near term as we perfect how we operate a batch and reach our goals, and then we shorten the cycle times between batches, then I think you'd be up in that. If you added all the gallons together, you'd be up in the total name plate kind of capacity range. Caleb Dorfman - Simmons & Co: Okay…

Did that answer your question? Caleb Dorfman - Simmons & Co: I think I guess what type of volume should we be able to – be expecting on isobutanol front during 2014, if all goes according to plan?

In this, will be tens and thousands of gallons and then over the several months pushing it to what 200,000 gallons per month later in the year. Caleb Dorfman - Simmons & Co: Okay. And then…

And when you go beyond that, and that's out of one train, and as we go beyond that, then it will, we could step it up even further, but that we have to decide overall economics of the time. Caleb Dorfman - Simmons & Co: So when do you think we should start expecting, may be the entire plant could switch to isobutanol if all goes according to plan?

I'll answer from a financial standpoint Caleb. I mean part of what we're doing here is leveraging the flexibility of our technology to be able to switch between ethanol and isobutanol or produce both same time. As I just mentioned or seeing outlandish ethanol margins right now, so I think part of the answer is what happens to the ethanol margin structure over the course of time.

It does and the course of that is that goes down and isobutanol would be expected to hold more steady we want to switch more of the capacity over to isobutanol. On the other hand, I suppose ethanol they're a $1.5, yes it's pretty attractive too.

Yes. So to me it's an economic decision where there is an inflection point where it makes sense to make that transition from ethanol to – or side by side approach to fill isobutanol. Caleb Dorfman – Simmons & Co: That makes sense. I guess earlier you had indicated that you'd hope to reach EBITDA profitability at the same level sometime mid this year, I guess with ethanol margins where they are do you think that's still possible and how much do ethanol margin if that is, how much to ethanol margins needs to climb from where they are to where that would be break-even again?

Well, we're still in the midst of the transition to the side by side approach. So we're not giving specific items but we do believe that we could be EBITDA positive at the plant under this…

Great expansion by construction.

Yes. Under this construction or this structure. Caleb Dorfman - Simmons & Co: That's helpful. Thank you.

And our next question comes from James Medvedeff of Cowen & Company. Jim Medvedeff - Cowen & Company: Good afternoon fellas.

Hi James. How are you doing? Jim Medvedeff - Cowen & Company: Never dull. So let me just clear up a couple of things there were no commercial shipments at all to Sasol or any of the other initial up takers in the quarter?

The sample quantities we've sent but not – we send it to ourselves down to Texas and make jet fuel out of it or octane. Jim Medvedeff - Cowen & Company: And that's all going under grants and collaboration revenue?

It is –

Mike will explain it here, where the way its done.

Yes. It did not, correct, grants revenue, research and development programming revenue, correct. So I mean basically or mostly, what we call hydrocarbon sales, so that's about $900,000 of that was based off of jet sales and isooctane sales. Jim Medvedeff - Cowen & Company: Okay. So of the what's – of the Toray and Coca-Cola collaboration, how much has come in and how much remains on those deals?

So on the Toray deal as you know they provided $1 million to help fund the construction of the facility itself and that we're producing on an off take with them and the details of which we haven't made public to basically produce paraxylene and ship that to them. And so we're in the midst of finalizing the production and the logistics in and around that shipment. So that should be a near term thing that we'll be talking about and then Coca-Coal we continue to generate some revenues from them in the Q4 of 2013. Jim Medvedeff - Cowen & Company: What I'm getting at is there was, I'm guess there was an initial size of the collaboration agreement which was never disclosed which is fine. But I'm wondering how much of that initial agreement has now run its course how much remains?

Well, we're in the midst of extending the agreement with Coca-Cola. Again, we can't obviously get into the specifics given the nature of the discussions with them. Jim Medvedeff - Cowen & Company: And how much of the 60,000 gallons, 66,000 gallons for the military, how much of that has been shipped?

Well, in the quarter we would have shipped approximate – well, generated revenue of, I'll call it $800,000 just shy of that. So we would have shipped about call it 16,000 gallons plus or minus in Q4. Jim Medvedeff - Cowen & Company: Okay. When did you actually begin the first runs of ethanol side by side with isobutanol, when did that actually start?

Well, we just made the decision in the last or last quarter being do to switch to side by side sort of in the midst of converting the plant. But in fact, we have run ethanol side by side with isobutanol at Luverne already. And part of this was a practical matter as we are operating the plant and we had, we loaded up a fermenter and we threw yeast – to answer the question what would happen, if we had ethanol pressing yeast in our plant, can we manage it, we actually had that experiment. Jim Medvedeff - Cowen & Company: So the experience of running side by side at full run rate and rapid recycle times is yet to be done, right?

Yes. Yes. I would say that's a fair statement putting ethanol plant will run like a normal ethanol plant. And then we will have our isobutanol production line operating like its a isobutanol production line. Jim Medvedeff - Cowen & Company: Well, I'm curious –

Rates altogether. Jim Medvedeff - Cowen & Company: I'm curious, how do you keep any co-mingling of – I understand you have really buttoned down the isobutanol process so you can keep the ethanol bugs out and you have done some pre-treatment to kill the ones that do get in?

Right. Jim Medvedeff - Cowen & Company: How, what about in the back-end, the isobutanol as to run over to the GIFT system and does the ethanol not go anywhere near that part of the plant, how is it done?

Correct. The ethanol does not go near the GIFT system. Jim Medvedeff - Cowen & Company: Okay. If you were running – once you get this going, three of one, and one of the other, what would be the actual mix of gallons? Would it be three to one?

At full rates, it will a little less three to one because there is a shrink when you produce isobutanol rather than ethanol. Jim Medvedeff - Cowen & Company: So slightly greater than three to one?

Slightly greater than three to one, right. Jim Medvedeff - Cowen & Company: Okay.

If you are running – Jim Medvedeff - Cowen & Company: Very interesting.

Yes. It is interesting, I will tell you what, it excites our partners in the marketplace. Jim Medvedeff - Cowen & Company: Yes. Congratulations on the LOIs. What are the hurdle rates – what are the milestones for turning those into contracts?

Mike?

Just to – [genuine] (ph) negotiation and discussion with those partners. So we are hopeful that in 2014, we will be able to effectively monetize one of those into something more concrete including our expectation for some upfront payments.

Interesting is, of course these partners had look another hood so to speak at Luverne, so they can see what we are doing, why we were doing it, how it makes sense? And they of course are familiar with operating plants and get the practical matters, what we are doing commercially at the plant. Jim Medvedeff - Cowen & Company: Okay. You have been generous. I will get out of the way and let other people ask some questions. I will talk to you later. Thanks. Bye.

Thanks Jim.

We have no further questions at this time.

Okay. Great. Thank you very much everybody. Bye-bye.