Solazyme: ROI next year, and some Return on Dream too

July 31, 2014 |

solazyme-logoSignature AkzoNobel deal expansion highlights Solazyme’s Q2 results.

But there’s something more to this company than the cash that sustains it, though sustain it cash does, and necessarily so.

In California, Solazyme and AkzoNobel announced that they have expanded their multi-year agreement with supply terms targeting 10,000 MT annually of algal oils for a new proprietary surfactant and with funding for the joint-development. The parties said that they expect Solazyme’s algal oil to replace both petroleum- and palm oil-derived chemicals. Product development is expected to commence immediately, and the parties anticipate entering into a definitive supply agreement as they near completion of product development.

At the same time, Solazyme announced a net loss for the quarter of $42.9M on Q2 revenues of $15.9M. For Q2 2013, the company lost $25.8M on revenues of $11.2M.

The 43% revenue jump

In May, Solazyme’s joint venture with Bunge started producing commercially saleable products at the Solazyme Bunge Renewable Oils plant in Brazil and has subsequently begun shipping. Both oil and encapsulated lubricant, Encapso, products have been manufactured using full-scale production lines that include the 625,000L fermentation tanks. In addition, Solazyme expanded its customer base and increased total output by >40% from Q1 2014 to Q2 2014 at its Clinton/Galva processing facility in Iowa.

Reviewing the commercial highlights

Highlights include:

  • AlgaVia brand launched at the International Food Technology (IFT) Food Expo, Solazyme’s High Stability High Oleic oil won a prestigious 2014 IFT Innovation Award, and Solazyme added key food ingredient customer, and distribution agreements. Solazyme secured an important new AlgaVia Whole Algal Flour customer, and also signed agreements with two of the top North American food ingredient distributors to meet demand in the US and Mexico.
  • Signed agreement with a leading North American oleochemicals company to commercialize microalgae-derived oleic acids. The agreement is to commercialize kosher certified high oleic algal oils for the oleic fatty acid market. The Soleum base oils, the company says, offer “performance, safety and sustainability.”

Solazyme’s progress

The Solazyme view

“Solazyme made important progress in the second quarter on its commercialization path,” said Jonathan Wolfson, CEO of Solazyme. “We are now manufacturing product in three facilities on two continents. We are shipping multiple oils and have increased production volumes out of our Clinton/Galva, Iowa operations, and we have begun production and shipment from the Solazyme Bunge Renewable Oils plant in Brazil. We are also building commercial momentum, including an expanded multi-year agreement with AkzoNobel involving funded joint development and targeting up to 10,000 MT of oil per year.

“In food ingredients, we launched our AlgaVia brand and won the highly prestigious IFT Food Expo innovation award. We have more work ahead as we progress on our production ramps and continue to build our commercial pipeline, but I believe we have the products, the plants, the capital and the team to execute moving forward.”

“We are continuing to drive fiscal discipline and balance sheet management as we ramp our capacity and focus on delivering products to our customers,” said Tyler Painter, CFO and COO of Solazyme. “We achieved a number of milestones this quarter and continue to strengthen our sales and market application efforts across our targeted markets.”

View from The Street: Bear side, Mike Ritzenthaler, Piper Jaffray

Initial commercial volumes at Moema prove anticlimactic on limited commentary. The framework (non-binding) collaboration expansion with AkzoNobel announced on the call is for up to 10 kMT/yr, and even if converted to a binding sale agreement, still leaves the majority of the 100 kMT capacity unsold. We believe that, ultimately, low sales volumes and high fixed costs will beget poorer than expected economics in an effort to secure volumes. We remain concerned about the alarming cash burn rate, the very limited visibility/obfuscation into tangible production metrics (in order to gauge the underlying health of the ramp), and lack of firm off-take agreements in place, in addition to the standard start-up risks that we have outlined previously. Maintain Underweight rating and $4 target.

View from The Street: Bull side Rob Stone, Cowen & Company

Q2 financial results missed the St., impacted by plant startup and 1x expenses. However, revenue grew 29% Q/Q, shipping customers increased 50%, the AkzoNobel partnership was extended, Encapso is expanding outside N. America, an important food ingredient customer was signed, and Algenist added customers and countries. Revenue grew Q/Q in every segment: Algenist $6MM (+21% Y/Y, 22% Q/Q), funded R&D $6.9MM (+10% Y/Y, +37% Q/Q), chemicals, fuels and nutrition $3MM (vs. $0 last year, +26% Q/Q). At Clinton there are 15 Customers (vs. 10) and 75 Qualifying; Algenist +40% Store Count. Maintain Outperform rating and $18 price target.

View from The Street: Bull side Pavel Molchanov, Raymond James

“The key inflection point for scale-up is materializing in 2014. The balance sheet is also in great shape, with by far the largest cash balance in the peer group, implying optionality of yet-to-be-disclosed growth initiatives. The adjusted loss per share of $(0.43) was below our estimate of $(0.37) and consensus of $(0.36), the delta coming from higher operating expenses, same as in 1Q. Total revenue of $15.9 million was exactly in line, with upside in R&D revenue offsetting slightly slower-than-expected growth in product sales. The latter, while not increasing quite as rapidly as we had modeled, rose 84% y/y (and 23% q/q) to a new record. This was the second quarter with sales from the Clinton plant, where output jumped 40% q/q.

Clinton customer count rises to 15. January marked the first of Solazyme’s major scale-up milestones, as production began at the Clinton, Iowa plant, built with Archer Daniels Midland. Production will ramp over 12 to 18 months until reaching nameplate capacity of 20,000 metric tons per year. Product from Clinton has been shipped to 15 customers to date, up from 10 in 1Q, and another 75 industrial customers (an impressively long list) are prequalifying product. Positive cash flow on deck for 2015. Outperform 2 – Target price = $12.50;

The Digest view

You get a lot of insight from Solazyme’s progress as to the general direction of the industry. Consider this cool chart from Cowen & Co’s Rob Stone:

Screen Shot 2014-07-31 at 6.18.02 AM

The key takeaways, in our view:

1. Ramping capacity and utilization are the story for 2014-17. The company has gone from less than 20,000 metric tons last year (and less than 1 million tons less than four years ago) to a projected 401,000 metric tons by 2017. Utilization is modeled to grow to 85% by 2017.

2. Multiple product lines and application sectors. Algenist skin care products started the company on its road to revenue and profit. It remains a dominant product along with R&D revenue even by 2014. Despite strong YoY growth rates, it is expected to be swamped by fuels and chemicals by 2017, which by then would represent 65% of the revenues.

3. Higher margins in personal care and skin creams.

5. It will have taken 14 years from start-up to $1B in revenues.

The Bottom line

Look at that AkzoNobel announce — tailored algal oils will be replacing not only dread petroleum but (for some) dread palm oil. Up until now, the alternatives have been to pay one heck of a lot more to use an alternative, or simply stop consuming a given product in order to show support. Look how the equation has changed. And that’s not exactly Ed Begley Jr. embracing a new world order – that’s AkzoNobel.

Consider where they are making this product. Anywhere you can grow sugars in reasonable quantities. It happened to be Iowa and Brazil. It could have been sugarbeets in Idaho or Russia, or sugarcane in India or Pakistan or Angola, or ultimately synthetic sugars made by companies like Proterro wherever you can find water and CO2 in concentrated quantities. Any country could have capacity — everyone has access to the riches of the new world.

Because the new world doesn’t consist any more of somewhere you sail to. It’s found within. You don’t have to grab some advantaged geography rich in mineral wealth, to be pumped or dug out of the ground until the country’s wealth is exhausted. It’s not renewable oil, it’s renewable wealth, and distributed opportunity.

A number of years ago, Solazyme put this graphic out. It remains a Digest favorite — just a simple graphic that shows all the places where renewable products touch and change everyday lives.

Solazyme-infographic-jpg

Now, investors will see things through a slightly different lens — not just a case of making a difference, but making one with an attractive yield at an attractive rate of return. Rate matters. They would, for example, measure Van Gogh’s Starry Starry Night by the metric of a financial return. There is more to life than the cash that sustains it, though sustain it cash does, and necessarily so.

Solazyme just changed the world. It happened in your lifetime, you got to see it. Lucky you.

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