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Welcome to the Amyris Fourth Quarter 2017 Conference Call. This call is being webcast live on the Events Page of the Investor Section of the Amyris' website at amyris.com. This call is the property of Amyris, and any recording, reproduction or transmission of this call without the expressed written consent of Amyris is strictly prohibited. As a reminder, today's call is being recorded. You may listen to a webcast replay of this call by going to the Investor Section of Amyris' website.
I would now like to turn the call over to Peter DeNardo, Director of Investor Relations and Corporate Communications.
[audio gap] at investors.amyris.com. The current report on Form 8-K furnished with respect to our press release is also available on our website as well as on the SEC's website at sec.gov.
During this call, we will make forward-looking statements about events and circumstances that have not yet occurred, including projections of Amyris' operating activities and their anticipated financial impacts on our business and financial results for 2018 and beyond. These statements are based on management's current expectations, and actual results and future events may differ materially due to risks and uncertainties, including those detailed from time to time in the filings that Amyris makes with its Securities and Exchange Commission, including annual reports on Form 10K, quarterly reports on Form 10Q and current reports on Form 8K. Amyris 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 the Amyris SEC filings for detailed discussion of the relevant risks and uncertainties.
Before we begin today, I'd like to note that included in our webcast is a slide presentation that we will refer to in today's presentation.
I'll now turn the call over to John Melo. John?
Thank you, Peter. Good afternoon and thank you for joining us today. We completed a very good 2017 and an excellent fourth quarter. We simplified our business and are focused on executing across three core markets where we have product and technology leadership.
In 2017, we've also successfully evolved our business to profitable growth, through a series of strategic transactions with DSM. The fourth quarter was the completion of this transformation of Amyris. Our fourth quarter results are a good indication of what you can expect from us going forward.
During our call today, I will update you on our core markets and also on how we are simplifying our reporting. I will share our fourth quarter and full year 2017 results from a business perspective and then I'll provide you with guidance for 2018 and a high level view of our growth through 2022.
We have with us today Eduardo Alvarez, our Chief Operating Officer who will also be on the call. He will share a few words regarding his focus and progress around our manufacturing agenda. Kathy will cover our financial results for the fourth quarter and full year 2017.
Let me start with our core markets and how we are simplifying our reporting. Our business is focused on three core markets, performance health and wellness, Clean Skin-Care, flavor and fragrance pure ingredients, here's what's common to each of these markets. First, we are the leading product and partner portfolio of any company in our industry around these three core markets.
Secondly, there are markets growing at, at least two times GDP with a significant need for natural sustainably-sourced products where we have the best technology platform to support this demand. And thirdly, these are markets where our no-compromise promise, this means products that perform better are lower costs and competitively price, is taking significant share and enabling very strong profitable growth for Amyris where we see this growth continuing for the next three to five years.
In addition to making our core markets clear to you, we are also simplifying how we talk about our business model and how we report our results. We've been explaining the value share part of our business model to you and have been blending this into our product revenue line. This has become very material faster than we expected and we will now be reporting separately and labeling these as license and royalties.
When you see this line, in our GAAP results, this is mostly value share and represents the revenue we received from partners as our share of the value we create when our customers and partners use our product in their formulations. This is a good indicator of the level of disruption our technology is enabling.
License and royalties for 2017 were $64.5 million compared with $15.8 million for the prior period. As we've indicated before, we consider our product gross margin as the combination of direct margin gained when we ship the product and then the future payments received that represent our share of value from the sale of the final product with our ingredient.
For the fourth quarter, we also included the license payment received from DSM and the licenses and royalty line of our financials due to the accounting treatment applied to the sale of the asset and nature of the transaction. With a historical classification of the revenue, we would've expected to exceed $60 million in collaboration payments for 2017. This is above our guidance range of $50 million to $60 million of annual collaboration payments.
On the value share component, we would have expected to exceed $30 million of value share in 2017, which compares to about $6 million of guidance we have provided in the past. So, to summarize, going forward when you see royalties and licenses, this is where we will report our value share payments.
Product revenue will not include value share. This will keep the product revenue and product direct cost of goods clean and near breakeven and the gross margin from products or what we see as our value share reported as a royalty. Think of royalties as 100% gross margin, think of products having the fully loaded cost of goods for those products.
Let me now cover key headlines from our fourth quarter and 2017 results. We delivered over $143 million of revenue for 2017 with performance, health and wellness, representing about $77 million of our revenue. This core market has delivered a CAGR or cumulative annual growth rate of 716% from 2015 to 2017 and we expect continued strong growth through 2022 from this core market.
Our Clean Skin-Care business delivered our second strongest growth. In this core market, our bioscience consumer brand has become one of the fastest-growing independent skin care brands in North America. We delivered over 650% growth in retail consumer sales in 2017 and we are running at over 300% growth in consumer retail sales so far in 2018.
Our gross margin is expanding at three times our revenue and our total revenue is growing at a cumulative annual run rate or annual sales rate of 113% from 2015 through the end of 2017. We are expecting continued strong growth through 2022 and beyond and how this well underpinned by customer agreements in each of our core markets.
We are expecting continued strong expansion of our gross margin into 2018 as a result of product mix and the full impact of our strategic partnership with DSM. Our fourth quarter was all about execution. We delivered lower cost of goods. We deliver best Farnesene production to date. We delivered the largest strategic transaction of our history with the sale of Brotas and the structure of a long-term manufacturing partnership with DSM and we met or exceeded all of our technical milestones.
This resulted in our best revenue quarter to date at over $80 million and the best profit from operations performance to date with over $33 million of operating income for the quarter. We delivered an adjusted gross margin of 78.4% in the quarter and we expect around a 70% adjusted gross margin for the full year of 2018.
2018 is starting off very well with very strong gross operating performance and revenue that will be around double the first quarter of 2017. We are also very pleased that we have completed the first industrial production of our sweetener product at our Brotas facility. This was a successful production run and we expect to start selling our sweetener commercially in the second half of this year.
We are now in the process of introducing bioscience in the Brazilian market for consumer sales starting in April. This is a very exciting highlight as Sephora Brazil has indicated that we have become one of the top five, most requested skincare brands by their consumers in Brazil.
This is a great early indication and really driven by the strong desire consumers have for no compromise Clean Skin-Care and a strong connection and efficacy our product reputation has in the market. We are just pre-marketing at this time in Brazil and we are very excited about the outlook for sales in Brazil.
These are just a few of the results we wanted to highlight. We are making good on our promises. There is so much more progress to cover. I hope many of you attend our Investor Day Bio-revolution conference, actually I think we're calling it the Bio Disrupt Conference where we will share much more detail about our progress in technology around our core markets and with our customers in the room to help you understand better the impact we are having.
Let me now turn to Eduardo Alvarez, our Chief Operating Officer who's leading our production scale up and supply chain execution. When Eduardo is done, I'll provide our 2018 outlook and then I'll turn to Kathy to update you on our financial performance. Eduardo?
Thanks John. Let me share some details on our production results and future plans. For 2017, we set production records in both October and November. In fact, the fourth quarter was our best production quarter on record. We also scaled two new molecules and since brought us with that capacity we leveraged our CMO Antibioticos in Spain to produce the remaining three products.
In January, we transitioned successfully our Brotas facility to DSM without any loss of production, focus or momentum. Looking ahead, I am confident on our production plan for 2018 and beyond. We will continue to leverage our supply agreement and partnership with DSM to supply Farnesene, specifically in 2018, we plan to use nine months to produce Farnesene for the vitamin, lubricant and cosmetic emollient markets and leverage the remaining three months to produce two additional products at Brotas. We plan to use Antibioticos for the rest of our products.
We just returned from Brazil last week and reviewed the projects for our specialty and sweetener plants. We are on track to bring these facilities online by 2019 and 2020 respectively. Finally, let me spend a little bit of time about our cost of goods sold plan. For 2018, 90% of our cost of goods would be managed through six call centers each with clear controls and owners. I am confident on the volume, costs and margins that underpin our plan in 2018.
Now let me turn the call back over to John.
Thanks Eduardo. We believe that consumers throughout the world should have access to products that are healthier for them from the inside out with high-performance vitamins and great nutritional products that treat the microbiome and the outside in with Clean Skin-Care products, that can be produced sustainably at a lower cost than alternatively sourced materials and are healthier for the planet.
By applying the leading biotechnology platform in the world, we believe we can do this while delivering significant growth and positive returns for our shareholders. Weather it is vitamins, Clean Skin-Care, human nutrition products or healthy sweeteners, our promise is to make the world healthier one molecule at a time. Our goal is that 20% of all consumers will use an Amyris product or ingredient by 2030.
What's the outcome we expect? An acceleration in the world's transition to sustainable consumption. This is good for the world and good for business. Now let me review our outlook for 2018.
We have proven our ability to grow. We have now transitioned our business the profitable growth would very strong gross margin performance in 2017 and beyond. We expect our revenue pattern to reach quarter of 2018 to be largely consistent with prior years.
As a result, the first quarter will start off sequentially lower and 2018 is anticipated to be back half loaded as before with the sales growth of our sweetener product and new flavor ingredient, the batch production and sale of our fragrance ingredients the establish space, as well as the expected close of several new collaborations in the fourth quarter.
To give you more granularity, we expect that roughly one third of our 2018 revenue will be delivered in the first half with the remaining two thirds coming in the second half and more of it in the fourth quarter versus the third quarter.
For 2018, we anticipate revenue of approximately $185 million to $195 million. Gross margin on a blended basis across all four quarters is expected to average above 70%, with high marks anticipated in the first half of this year and then some moderation in the second half due to planned expenses associated with launching several of our new products.
We expect EBITDA of positive $10 million or better in 2018 and to be net income positive in 2019. We expect to deliver an average annual growth rate of around 60% through 2022. We expect our debt-to-equity ratio to be about 3x-to-5x on a run rate basis by around June of 2019.
We make good. We believe that delivering no compromise products will accelerate the transition to sustainable consumption throughout the world. We are leading this transition in performance, health and nutrition, Clean Skin-Care and pure ingredients for the flavor and fragrance markets.
Consumers demand, healthy pure products and our planet should not be harmed with meeting that demand. We make good, for all consumers. We are very pleased and feel lucky to be partnered with the market leaders in each of our core markets. We all share a common belief that the planet deserves better and we can do better for all.
Let me now turn to Kathy for a detailed financial review of the fourth quarter. Kathy?
Thank you, John and good afternoon, everyone. As I look back to the beginning of 2017 when I joined Amyris' as CFO and the statements we made on our earnings calls, I am very happy to see that we achieved all of the goals we set forth.
We not only met our revenue guidance of $115 million to $125 million, we exceeded it by over 19%. We achieved positive cash flow in the fourth quarter. We brought down our debt by over $60 million, improved our cost of goods sold and successfully commercially manufactured two new products.
We are pleased with having completed the solid year and with having executed on our plans to position the company for more profitable revenue growth in 2018 and beyond.
Now let me review our fourth quarter and 2017 results. As John mentioned, due to the growth of our value share revenues, we are reporting them in a separate line item as licenses and royalty income and will no longer be grouped with product revenues. Prior year amounts have been reclassified to conform to that presentation.
We feel this presentation better reflects our business model and will provide more transparency as that part of our revenue grows. Q4 2017 GAAP revenue, which benefited from the DSM transaction was $80.6 million compared with $22.2 million for the fourth quarter of 2016.
Licenses and royalty revenue contributed $57.7 million and were up from $300,000 for the fourth quarter of 2016. Product sales were $13.4 up over $11.2 million for the same period a year ago. This increase was driven primarily by higher product sales in our health and nutrition business.
Collaboration revenues of $9.4 million compared with $10.8 million for fourth quarter of 2016 included within collaboration revenue for the quarter were project related activity with DARPA, VSAM, Givaudan and Firmenich.
Our collaboration revenue would have exceeded $60 million for the full year 2017, if we kept our previous classification and did not create licenses and royalty revenue classification. In addition to our strong Q4 2017 revenues, we realized income from operations of $33 million in Q4 of 2017, which is the first quarter that we have recognized an operating profit in a while.
Our Q4 2017 operating profit resulted from increased revenues $58.4 million, $6.6 in lower cost of products sold and $2.5 million in lower operating expenses when compared to Q4 2016.
Non-GAAP gross profit was $63.2 million compared with $3.2 million for the fourth quarter of 2016. The key driver was significantly higher revenue and the positive impact of royalties, which will continue to play a very important role in improving our profitability in future quarter.
Q4, 2017 non-GAAP gross margin was approximately 78% which was more than double that of Q2 and Q3 and certainly better than our negative margin posted for Q1. Even though Q4 gross margin was positively impact by impacted by the effect of the DSM transaction as John noted, we anticipate that margins through each quarter of 2018 will average about 70%.
For the fourth quarter of 2017, selling, general and administrative expenses were $18.8 million compared with $12.7 million for the fourth quarter of 2016, primarily reflecting increased headcount, sales and marketing expenses to support Biossance growth, ASC 6O6 implementation costs and costs related to the Amyris Brazil transaction.
R&D expenses of $12.7 million were down from $14 million compared with the fourth quarter of 2016, due to lower overhead allocation charges incurred in the fourth quarter of 2017.
In addition, I'm very happy to report our cost of goods sold of $16.1 million is down for the fourth quarter of 2017 compared with the fourth quarter of 2016 of $22.7 million. This reduction is due to increased productivity at Eduardo and John mentioned and the release of a tax provision at our Brazil subsidiary.
Eduardo is making a significant impact in improving our manufacturing processes and reducing our cost of goods sold. Non-GAAP operating expenses representing combined R&D and SG&A expenses, excluding stock-based comp, depreciation and amortization were $27.2 million compared with $23.1 million for the fourth quarter of 2016.
This increase was primarily due to additional headcount and SG&A expenses to support our growth. This relatively small increase is remarkable given the increase in our non-GAAP gross margin.
GAAP net loss attributable to common stockholders for fourth quarter 2017 was $8 million or a loss of $0.17 per basic and diluted share. This compared with the net loss of $48.8 million or $2.67 per basic and diluted share through the fourth quarter of 2016, most of the GAAP losses related to derivative accounting impact from our convertible debt and outstanding warrants.
I would now like to highlight the improvements made to our debt structure during 2017. We have reduced our total debt during 2017 by $62 million to $165 million at December 31, 2017, net of discount compared to $227 million as of December 31, 2016. This reduction has been accomplished through restructuring our debt with certain debt holders and converting debt to equity with other debtholders.
In the first few weeks of this year, we have diligently continued to review our current debt structure and have several parties presenting solutions to further decrease our debt and/or restructure the terms of our debt to alleviate some of the interest expense burden that we have incurred during the past few years. We will share more on that at the appropriate time.
Cash, cash equivalents, short term investments and restricted cash as of December 31, 2017 was $60.1 million compared with $32.9 million at December 31, 2016.
We are very pleased to have completed an excellent year for Amyris' and to have executed well on multiple fronts. These include revenue growth, rationalizing our manufacturing, improving and building our product portfolio and reducing debt. The results of these endeavors position us well for 2018 and should help leverage our path to profitability in 2019.
Tiffany, I would now like to open the call for questions anyone might have.
[Operator Instruction] Okay. And our first question comes from Carter Driscoll from B. Riley FBR. Your line is now open.
Well, congratulations guys. This was really astonishing quarter and very strong guidance. So, wanted to say that right off the bat. First question, you talk about producing some commercial quantities of the sweetener. Can you talk about how many customers hands are going through the qualification process?
And maybe you could just talk John more high level about the advantages of the sweetner market maybe just the total opportunity for the sweetener that you see out there today and maybe about the ramp in the second half of the year, it sounds like it's going to have a disproportionate impact on 4Q? Then I have a couple of follow ups. Thank you.
Sure. Carter, thank you. And by the way thank you for being on the call. It's great to have you as part of our following analysts. So, thank you for being on board. Couple of thoughts there, I mean the first is, we've actually been sampling for a bit now and really through our partner for this activity.
So, our channel to market is both partner and direct. And in the direct channel, we've got several customer relationships. Probably the most interesting one is -- a couple of interesting ones is a large bulk access to market and then the second one is, a consumer offer that we expect to have reformulated and in the market in the not too distant future.
So, the best way I could say it is, it's more than 10 people who are sampling the results so far have been very positive and we see good support for building out especially the kind of volumes that we're forecasting in the near term.
I think the second piece of that is really what do we see as the market opportunity. And I would think of the market opportunity in really two parts. First part is replacing some of the high intensity sweetener market.
We think of high intensity sweeteners as probably somewhere around $10 billion as a total market size and we see ourselves well positioned by having healthy, naturally sourced and best taste profile.
I think beyond that, we see a massive opportunity and what I will call the calorie reduction market. And I think of the calorie reduction market as really that sum of the current sugar market about $90 billion in total size of which, high fructose corn syrup I think is the near-term target/opportunity.
And the way we think about it is really aligned with what customers tell us? Customers tell us, they're looking for a very simple solution. It has to be cost competitive with what they're currently using.
It has to have large scale production and multiple sources of that supply so they can feel confident about switching their brands to it and it has to blend two or formulae to an equal or similar taste profile, so the consumer likes it. And that's exactly what we've been focused on and that's exactly the profile we're currently focused on delivering on.
So, I hope that helps Carter and just thinking about the opportunity, what our target an objective is from a product perspective and kind of how we are -- where we are today in sampling and feedback?
So, its excellent, very helpful. So next question is maybe ask Eduardo, so you talked about in terms of allocating, we're having responsibility I guess for different levels of cost centers. Could you elaborate a little bit about what each of those if you can are responsible for and how you kind of managing that expectations as you build out towards your Brotas 2?
Yes Carter, gladly. When we looked at our cost of goods sold and plan for 2018, we have a clear pipeline and production plan both through our partnership with DSM and as I mentioned our factory in Leland as well as our CMO relationship with Antibioticos.
In working with our Brazil team in North Carolina and with the rest of our manufacturing team in Emeryville, we have a clear plan to manage our campaigns to each one of these facilities and we're able to remap our baseline into six call centers we think are going to really help us manage the costs that are more surprises and execute with excellence.
So that is our plan for 2018 and just to build on it, we have been working on this for some time. And I feel very lucky to have had a chance to connect a few dots from our team at present.
Could you talk John, maybe about the impact of the transition over to the DSM running Brotas 1 has had? I know it's been only a short period of time, but now maybe either some of the things that you're learning to apply to Brotas 2 in terms of best practices and/or if you could quantify, in the short time what the impact may have been from them taking over the running of the facility?
Sure Carter. I think the first thing is I want to really acknowledge and thank the teams both on the Amyris side and the DSM side because the transition and integration has been flawless. Teams are working very well together.
The customer impact has been minimal to none because actually the process and the interface with us is the same and delivery has been meeting our objective. So, all good in the transition and integration.
Secondly, we had a significant amount of lessons learnt from the plant already and I think Eduardo has really helped to come on Board and go a step further in thinking about some of the operating processes and how we standardize them. So, I think in general I couldn't tell you there's a new big aha with him coming on other than their smooth operators.
They are doing a good job and we've got a pretty good collection of lessons learnt that were already built into the design and there's nothing really new that's come out that's impacting where we're going forward with our new plant. So, all good so far, no big aha and really executing well on both sides.
Okay. Maybe just a clarification in terms of Kathy the debt-to-equity ratio, you're hoping to hit by mid-2019, is that assuming I'm assuming you would either base refi some of the bullets coming due in that timeframe. Maybe just a clarification of what that target was and what moving pieces that would include?
I am sorry Carter; can you finish your sentence again for me?
Yeah, I was going to say, you gave guidance towards what you had hoped to achieve on a debt-to-equity level by if I recall correctly mid-2019. If I heard you correctly, it was either 3.5 times or range of 3 to 5 times and I just wanted to make sure I was understanding that moving parts to try to back into what the actual debt level is going to be and then obviously you can kind of use it as a proxy for profitability by that timeframe as well?
Sure, thanks for the question Carter. So, one of the things as we've been saying over the last four to five months is that we are well, we said it since the beginning of '17 I think that we would be cash flow positive for 2018 and into '19 and net income in '19 and that for us significantly changes the picture and allows a lot more optionality than we've had in the past.
But John and I have been speaking with many folks and also are just doing a lot of planning on and as I have said, we will make announcements when appropriate but yes, we feel comfortable with that 3 to 5 range.
Last question for me before I get back in queue. You talked about two additional molecules you are hoping to introduce in the latter part of the year. I'm assuming that's in 4Q, it wasn’t clear if you had put that in the morning your three core buckets or not?
Yeah, I will just emphasize that we are not designing engineering and/or producing anything that's not in the three core buckets going forward and one of those molecules will be in health and wellness, performance health and wellness and the other will be in the pure F&F ingredient side.
Got it. Okay. I'll get back in the queue and take the rest offline, appreciate all your answering.
Thank you, Carter.
Thank you. [Operator instructions] And our next question comes from Amit Dayal with H.C. Wainwright. Your line is now open.
Thank you. Congratulations again everyone. Really strong quarter and the guidance is looking really good as well. Kathy, did you mention in your prepared statements that you are expecting gross margins of around 70% in 2018. Just wanted to double check if I have this number right.
Yes, that's correct.
Perfect and is this mostly supported by licenses and royalty revenues if you believe.
So, what I would -- primarily the answer to that question is yes.
I think to just emphasize that and I want to do that because of the language change right. I know we're now using licenses and royalties, in the past it was value share. So, you can think of what's happening in '18 as predominately value share affecting that gross margin, but it will be reported and categorized as royalties and licenses and it's the royalty piece/value share that drives a lot of that gross margin performance.
Got it. And you received some pretty large sized grants, I guess, early in the year. Could you talk a little bit about where those are going to be applied towards and how soon you might see some contribution from those efforts?
Yeah Amit, happy to do that. A big portion of that will be in Portugal. You'll start seeing some of that come through in the second half of the year and that is all about as you can imagine AI, artificial intelligence and bioinformatics have become like really a core part of everything we do.
And locally great access to talent and cost has become more and more challenging. So, we have found an amazing pool of people and by the way so has Google and others. We're not the only ones to discover that pool. But we have found a great pool of people and we have great support from the Portuguese Government to be able to actually hire and focus on developing some of our software and AI in Portugal.
You can think of the three priorities for Portugal as all about first developing applications from our waste streams. Secondly, really deepening our position in AI and informatics and thirdly, taking some of the core scientific challenges and passing them to a team that can spend more time and not disrupt our path to delivery with our core science here in Emeryville.
Got it. Interesting. And in terms of the sweetener opportunity, I know you provided some color on the questions answered previously, but is this initial revenue coming from just one customer or are the multiple customers that you hope to generate revenues from in 2018?
There are multiple.
Thank you for that. And maybe just one last question on the Brotas 2 plant. Do you expect to commission this and put it into production early 2019 or will that happen later in 2019?
Yes, so Amit as I said, I think we hope to be operational by the fourth quarter of 2019 certainly by the end of the year.
Okay. Got it. That's all I have guys. I will take my other questions offline. Thank you so much and congratulations again.
Thanks Amit. Appreciate you being on the call.
Thank you. [Operator instructions] Okay. I am showing no further questions in queue. I'd like to turn the call back over to John Melo for any further remarks.
Thanks Stephanie appreciate your help and thanks everybody for making the call and for your continued support of the company and our mission. I'd like to note that in the coming weeks, Amyris will be participating in the Rodman & Renshaw Global Life Sciences Conference on April 8 through 10, the Oppenheimer Emerging Growth Conference on May 15 and the B Riley FBR Annual Conference on May 23. We will also be hosting the Amyris Bio Disrupt Conference, our second Annual Investor Day, Bio Disrupt Conference and Annual Meeting into one on May 22.
Again, thanks for joining and I really appreciate your continued support have a good rest of the day.
Ladies and gentlemen, thank you for your participation in today's conference. this concludes the program. You may now disconnect. Everyone, have a great day.