Q4 2019 Calyxt Inc Earnings Call
NEW BRIGHTON Apr 1, 2020 (Thomson StreetEvents) — Edited Transcript of Calyxt Inc earnings conference call or presentation Thursday, March 5, 2020 at 1:30:00pm GMT
TEXT version of Transcript
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Corporate Participants
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* Daniel Voytas
Calyxt, Inc. – Founder & Chief Science Officer
* James A. Blome
Calyxt, Inc. – CEO
* William F. Koschak
Calyxt, Inc. – CFO
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Conference Call Participants
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* Adam L. Samuelson
Goldman Sachs Group Inc., Research Division – Equity Analyst
* Adam Samuel Bubes
Jefferies LLC, Research Division – Equity Associate
* Benjamin David Klieve
National Securities Corporation, Research Division – Analyst
* John Joseph Baumgartner
Wells Fargo Securities, LLC, Research Division – VP and Senior Analyst
* Kenneth Bryan Zaslow
BMO Capital Markets Equity Research – MD of Food & Agribusiness Research and Food & Beverage Analyst
* Robert Michael LeBoyer
Ladenburg Thalmann & Co. Inc., Research Division – MD Equity Research
* Steve Byrne
BofA Merrill Lynch, Research Division – Director of Equity Research
* Christopher Tyson
MZHCI, LLC – MD
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Presentation
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Operator [1]
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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Calyxt’s Fourth Quarter and Full Year 2019 Financial Results Conference Call. (Operator Instructions) This conference is being recorded today, March 5, 2020.
At this time, I would like to turn the conference over to Chris Tyson, Managing Director of MZ Group North America, Calyxt’s Investor Relations firm. Please go ahead, sir.
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Christopher Tyson, MZHCI, LLC – MD [2]
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Thank you, and good morning. I’d like to thank you all for taking time to join us for Calyxt Fourth Quarter and Full Year 2019 Business Update and Financial Results Conference Call.
Your host today are Jim Blome, Chief Executive Officer; Bill Koschak, Chief Financial Officer; and Dan Voytas, Chief Science Officer. A press release detailing these results crossed the wires this morning at 7:15 a.m. Eastern today and is available on the company’s website, calyxt.com. Today’s conference call will also include a formal presentation that listeners can follow via the webcast link provided in today’s press release or a downloadable version in the Events section of the IR website at ir.calyxt.com.
Before we begin the formal presentation, I’d like to remind everyone that statements made on the call and webcast, including those regarding future financial results and future operational goals and industry prospects are forward looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call.
Please refer to the company’s SEC filings for a list of associated risks. This presentation also includes a discussion of adjusted EBITDA and gross margin as adjusted. Both are non-GAAP financial measures. In Calyxt’s press release and its filings with the SEC, each of which is posted on the Calyxt website at www.calyxt.com, you will find additional disclosures regarding these non-GAAP measures.
Reference to these non-GAAP financial measures should be considered in addition to GAAP financial measures and should not be considered a substitute for results that are presented in accordance with GAAP.
Finally, this conference call is being webcast the webcast link is available in the Investor Relations section of our website at www.calyxt.com. At this time, I’d like to turn the call over to Calyxt’s Chief Executive Officer, Jim Blome. Jim, the floor is yours.
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James A. Blome, Calyxt, Inc. – CEO [3]
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Thank you, Chris, and thank you for joining us today for Calyxt’s Fourth Quarter and Full Year 2019 Results Conference Call.
Calyxt is a technology company focused on delivering plant-based solutions that are healthy and sustainable. We’re focused on health and wellness benefits for consumers, including better-tasting plant proteins, gluten-free alternatives, heart health, higher fiber and reduced allergens. Our product development efforts are also focused on sustainability benefits, including projects in alfalfa, hemp, potatoes and soybeans.
TALEN technology, which powers our innovation platform, enables us to produce plants with desired characteristics that can benefit people and planet. Our gene-editing and plant-breeding techniques mimic how plants could develop in nature. We can assess the viability of a trait in less than 2 years, with another 3 to 4 years required for commercialization, all at a significantly reduced cost compared with traditional development methods.
To protect our market position, we have built a broad IP portfolio with over 70 patent families across multiple gene-editing platforms. We currently have 14 products in development and expect to launch as many as 6 product candidates over the next 4 years.
A major highlight for Calyxt in 2019 was the completion of our voluntary consultation with the FDA for our high-oleic soybean. We were the first in the world to undertake this process, and we believe this validates our leadership position in the industry. With the commercial launch of our high-oleic soybean products underway. We have proven the commercial viability of our technology for use in plants. As we continue to innovate, we expect to bring future products to market with options for more diversified and higher-margin revenue streams, that are also less capital intensive.
Outside of soybeans and wheat, we expect to bring products to market using a collaboration business model, enabling us to capture cash flows from access to Calyxt’s TALEN technology. Milestone payments — technology milestone payments as we achieve development success and ongoing payments from royalties or other streams tied to the value of the product development.
Bill Koschak, our CFO, will talk during his prepared remarks about how we expect to both expand on our margins on soybean products and how these new revenue streams will dramatically improve our gross margin profile in 2020 and beyond.
Before proceeding the Calyxt 2019 accomplishments, I want to touch on our ESG initiatives here at Calyxt. Sustainability is central to Calyxt, stemming from our commitment to innovation and our belief that by further — by furthering environmental, social and corporate guidance — governance initiatives, we will create a stronger company capable of improving the world and the lives of those living in it.
To that end, we are working diligently to create and report ESG metrics to improve our transparency with our stakeholders. Our ESG commitments will be based on 3 core Calyxt principles. The first principle is to successfully execute our core business while maintaining strong corporate governance practices as our business success naturally improves and revolutionizes agriculture.
The second principle revolves around environmental stewardship, where Calyxt seeks to make an impact by first establishing and then meeting Calyxt emissions reduction targets, and as importantly, by helping our customers and collaborators meet their targets.
The third principle is social responsibility where we support sustainable agriculture and fair labor practices and strive to improve the sustainability of our supply chain, foster a diverse work environment and give back to the communities where we live and work as we did with our Harvest Fest in South Dakota last fall. We look forward to reporting on our progress on various ESG initiatives as appropriate and would encourage our shareholders to watch developments on this front.
Now, turning to our operational accomplishments. 2019 was a transformational year for Calyxt, having launched our first commercial products and setting the stage for robust growth in 2020 and beyond. We have proven to the world that TALEN technology, which powers our innovation platform is capable of improving plants, enabling us to develop products with health and sustainability benefits.
We transformed our leadership, science and sales teams in 2019, bringing on several experienced, talented individuals to operate the business. The impact they have had is reflected in both the scientific and commercial progress we made. I look forward to working to achieve even greater successes with this group in 2020 and beyond.
We are a technology company and 2019 saw us make multiple advances in our scope of activity and work processes. We more than doubled the number of projects we have in development to 14, up from 6 at this time a year ago. We expanded the number of crops we are working in to 9, up from 5 a year ago. And we expect to launch at least 6 product candidates by 2024, and I am excited to announce today that we expect to launch our first product in hemp later this spring.
In our work processes, we made a 50% improvement in the assembly time to make a TALEN construct and we’ve cut plant growth cycles in half. Under the leadership of Dan, Travis and Bobby, we expect this meaningful progress to continue.
I am also pleased to report that we met our financial metrics for the year. We sold all of the HO soybean meal we produced. And at year-end, we had a small quantity of oil on hand. We have a robust crush plan in place for 2020, and we expect — that we expect will enable us to meet customer demand as 2020 unfolds. Our high oleic soybean products have a robust sales funnel and is being tested by multiple customers. The oil orders we received in early 2020 are a validation of our HO soybean oil’s capability and performance.
To meet the expected demand for our oil, in 2020, we have already nearly tripled our contracted soybean acreage compared to 2019 planting and expect to have a 25% market share of all HO soybean acres planted in the United States in 2020.
We’ve also built a supply chain to support the scaling of our business, working with 3 leading agricultural cooperatives on seed distribution, grain handling and grain processing aspects of the operation. All these activities give us confidence in our ability to meet the expectations of our customers, both current and potential.
With this, I’d like to hand the call over to our Chief Science Officer, Dan Voytas, for an update on innovation and our product pipeline.
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Daniel Voytas, Calyxt, Inc. – Founder & Chief Science Officer [4]
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Thank you, Jim. As a founder of the company, I am amazed by the progress we make each year and especially with what we accomplished in 2019. I’d like to provide a brief overview of how our TALEN technology and plant breeding techniques work.
The first steps in our development process are focused on identifying a target site in the plant genome for the selected crop. Then we develop a TALEN, make the edit or edits and confirm the outcomes of what we expected. After we have confirmed the results, the plants progress through our development process, moving from the lab to a growth chamber to a greenhouse and ultimately to a test plot. We check for accuracy every step of the way. After the test plot, we grow and collect seeds from those plants, we validate them and then begin the commercialization process.
As Jim mentioned, we had many scientific highlights in 2019, culminating with our updated R&D pipeline. We increased the number of crops we’re working on to 9, up from 5 a year ago. We added hemp, oats, peas and peanuts in 2019. We increased the number of products under development to 14, up from 6 a year ago. Our pipeline projects address significant challenges in their respective markets and create new opportunities.
One great example is our high-fiber wheat product, in which we’ve been able to deliver 3x more dietary fiber than traditional white wheat flour. We expect to launch this project as early as 2022. Outstanding achievements such as these give me confidence in Calyxt’s ability to revolutionize agriculture.
We expect to continue making advances on projects in our development process in 2020. We expect to launch at least 6 product candidates from now through 2024, including our hemp product candidate in the second quarter of 2020, our high-fiber wheat product candidate as early as 2022 and 3 additional product candidates, either via our integrated business model or in collaboration with third parties.
This is particularly exciting as we continue to accelerate our efforts to develop rewarding collaboration agreements with industry-leading firms to bring our products to market in a high-margin, capital-light manner. We continue the commercialization progress of our alfalfa product, an improved digestibility alfalfa, expected to launch in 2021 through a collaboration with S&W Seed. We expect to collect a royalty on the sales of the seed, monetizing our technology platform in a capital-light manner.
This alfalfa product is an exciting example of what we’re able to achieve as a more easily digestible alfalfa could mean a reduction in the water intake and methane output of dairy cows to produce the same quantity of milk. With this product, Calyxt will provide benefits to farmers, consumers and the world through economical, logistical and environmental efficiencies.
We look forward to sharing more about this and other sustainability products in our development process. I’m excited about our R&D pipeline and working to expand it along with others inside and outside our organization, advancing our technology and expanding our IP portfolio, enabling us to continually push the boundaries of what we previously thought was possible through TALEN. Through this, we will explore new target crops, traits, pathways and transformation methods.
In addition to our already disclosed products, we will continue to expand our pipeline to bring what could be blockbuster products to the marketplace. Some examples of products we are aggressively pursuing are in sustainable oil replacement, where we’d replace one oil with another more sustainable or healthier alternative.
We are working on nongluten alternatives in the areas of protein flavor, where we’re exploring project ideas like improved-tasting plant proteins. We also have multiple projects underway in hemp, including several that enable us to leverage our plant breeding expertise to accelerate market introductions as no gene editing is required.
In summary, we accomplished much in 2019, setting the stage for an exciting 2020.
I’ll now hand off to our CFO, Bill Koschak, who will give an update on our high oleic soybean sales and marketing efforts as well as our financial results.
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William F. Koschak, Calyxt, Inc. – CFO [5]
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Thank you, Dan. Our high oleic soybean oil has several characteristics that make it as good or better than any other premium oil in the market today including its fat content and polymerization levels. This includes other HO soybean oils. When we started out with our idea, we were fortunate to get an acre planted.
We have demonstrated that there is demand for our HO soybean products in the market today. As we scale our business, we have brought on several leading agricultural cooperatives to run our supply chain at scale, and we have expanded both our acreage and state footprints over time.
With the new soybean varieties we are launching in 2020, we will be able to access acres across 6 states. Those 6 states also represent 45% of the total soybean acres in the United States and a significant portion of the wheat acres as well. This creates room for us to grow both the market and our share. Our estimates of the high oleic soybean market in 2020 indicate we will have 25% of the planted acres, which we will expect give us a seat at the table with major vegetable oil users as they evaluate their purchasing needs.
We break the U.S. vegetable oil market down into commodity and premium oils to assess the target addressable market for our products. We compete in the premium oil segment, which in 2018, was nearly 15 billion pounds according to USDA estimates. A variety of oils, many of which are imported, comprise this portion of the market. Within the premium oil market, we intend to focus on 4 segments based on the quality of our oil and our ability to scale with large customers while working with others in the market.
Food service, food ingredients, industrial and animal nutrition are our prioritized market segments. We estimate these 4 represent an 11 billion pound addressable market. Our oil as a value proposition in each of these 4 market segments, in addition to several overarching points of distinguishment, for example, our oil has superior stability, a clean neutral flavor and low polymerization. These benefits make our oil very competitive and versatile across our target market segments, particularly in food ingredients and food service.
We’ve developed a robust sales funnel and are sampling, testing and going through supplier approval processes with multiple customers. Through today, we’ve demonstrated customer success in the food service and industrial market segments and are in late-stage testing with multiple customers in the food ingredients segment, with supplier approval processes underway in multiple instances with large, widely known brands and companies.
We also recently received a series of purchase orders for future deliveries of our HO soybean oil as a plant-based alternative to synthetic fluids. These orders are from a new world-class customer that operates in all 4 premium oil target market segments, food service, food ingredients, industrial and animal nutrition. To enable the best probability of success, we segment further these prioritized market segments by customer type in food service and by product category in food ingredients, focusing our efforts to maximize results.
Within food service, we’ve achieved success with distributors who sell our products to their account. We also directly are pursuing large operators with a focus on those who fry extensively. Within food ingredients, we prioritized 4 market categories, salty and grain snacks, plant-based proteins, industrial frying and nondairy creamers. These categories are also where we have significant users of oil to provide benefits to their customers.
To other categories where we see near-term opportunity are baked snacks and roasting applications. The inclusion of a brand in this presentation does not indicate we have any existing contracts with the brand, are meant simply to show where we have opportunities. In summary, we represent a significant share of the HO soybean acres and with our focused approach to customer acquisition, we believe our oil is poised for growth.
I’ll now give an update on our fourth quarter and full year 2019 financial results. Our press release contains a full discussion of the fourth quarter and annual results. We also filed our Form 10-K this morning. The fourth quarter was a continuation of our rapid pace of operational execution. Revenue in the fourth quarter of 2019 was $3.8 million, driven entirely by sales volumes of our HO soybean products. Our HO soybean oil was 32% of revenue in the fourth quarter.
Cash used in the fourth quarter was $7.9 million, better than our annual run rate projection for 2019 as the operational savings, we projected earlier in the year, began to impact our spending. For 2019, we reported revenue of $7.3 million. HO soybean oil revenue represented 23% of the total.
We sold out of our HO soybean meal production in the year. Cost of goods sold in 2019 increased by $9.3 million, reflecting the cost of products sold in the period and adjustment to the net realizable value of our inventories that reflects the higher costs we have experienced at this early stage of commercialization.
Gross margin as reported for 2019 were negative $2.0 million or 27%. We also report gross margin as adjusted, which for 2019 was a negative $4.5 million or 61%.
We’re providing gross margin as adjusted at this time because we believe that this non-GAAP financial metric provides investors with useful supplemental information at this early stage of commercialization as the amounts being adjusted, affect the period-to-period comparability of our gross margins and financial performance.
Net loss for 2019 was $39.6 million or a loss of $1.21 per basic and diluted share as compared to a net loss of $27.9 million or negative $0.91 per basic and diluted share in 2018, driven by higher personnel costs, higher stock compensation expenses and negative margins associated with the launch of our HO soybean products.
Adjusted EBITDA for 2019 increased to a loss of $29.8 million as compared to a loss of $18.9 million in 2018, driven by increased personnel costs as the cost of commercialization in 2019 were largely offset by reductions in grain cost expensed as R&D in 2018.
Net cash used in 2019 was $35.3 million as compared to $18.4 million in 2018. The commercialization of our HO soybean products, including investments in personnel and purchases of grain drove the increase in cash used during the year. Cash and cash equivalents totaled $58.6 million as of December 31, 2019, compared to $93.8 million as of December 31, 2018.
In summary, I am pleased with our financial progress. We achieved more than $7 million of revenue and used less than $36 million of cash. Our investments in the team are expected to enable us to rapidly advance our pipeline and expand both our customer and collaborator relationships and bring future products to market.
Looking forward into 2020, we expect to nearly double revenue year-over-year and use approximately $34 million to $38 million in cash. We are managing our cash position and spending such that I expect our cash position will be sufficient to fund our operations into mid-2021. We also expect to expand our gross margin, as adjusted in 2020.
To accomplish the margin expansion, we expect to sell our products at higher prices than we did in 2019, and we also expect to begin the optimization of costs in our supply chain as we scale production. We do not provide a reconciliation of gross margin as adjusted on a forward-looking basis as we are not able to determine, without an unreasonable effort, the 2020 adjusted gross margins because we are not able to determine the amount of potential net realizable value adjustments to our inventories at year-end 2020.
With that, I turn the call back to Jim.
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James A. Blome, Calyxt, Inc. – CEO [6]
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Thank you, Bill. We’re proud to offer products to our customers and collaborators focused on health and wellness benefits for consumers and sustainability benefits for all. Our pipeline advancements and commercial success set the stage for a breakthrough 2020, where we expect to power our R&D pipeline with new projects, processes and tools. We expect to initiate voluntary consultations with regulatory authorities and continue to advance products through our development process.
We also have multiple projects in hemp, including several that enable us to leverage our plant-breeding expertise to accelerate market introductions as no gene editing is required in this project.
Our new hemp breeding program is set for commercial launch in the second quarter of 2020. What excites me most about this launch is that our scientific team was presented with a the challenge in hemp and was able to develop a solution, including the strategy, tools and work processes, in just a few short months, demonstrating the power of our technology platform and our team.
We expect to expand our soybean product customer base across our prioritized market segments, realize synergies in our supply chain and improve our adjusted gross margin profile. We also expect to develop and report on our ESG commitments and accomplishments.
We are an innovation platform and leader in our industry. We continue to drive execution of key operational milestones across R&D and our commercial activities and are regularly exceeding our internal goals. We have a first-mover advantage we intend to defend and rapidly capitalize on.
We will share more on our developing story at our upcoming 32nd Annual Roth Conference in Orange County, California and our soon to be announced Analyst Day in May 2020.
With that, I’d like to open it up, the call, for any questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions)
The first question is from John Baumgartner of Wells Fargo.
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John Joseph Baumgartner, Wells Fargo Securities, LLC, Research Division – VP and Senior Analyst [2]
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Bill, just to come back to the 2020 guidance a bit more. I guess, I’m trying to understand the revenue, the outlook. I mean, the acreage is tripling year-on-year. You’ve announced more customers for the product. We continue the annoying commodity prices as well. So I guess, are more sales shifting into 2021? I mean, it doesn’t seem to be a pricing issue? I’m just trying to bridge the uptick in raw materials in HO versus what you’re going to actually book on revenue for this year.
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William F. Koschak, Calyxt, Inc. – CFO [3]
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Sure, John. To start your question, the — remember, we’ve got a 1-year lag between acres planted and harvested and when we convert those to revenues. So the tripling is actually — will be of revenue for 2021 not 2020, right? So we’ll be doing a lot of revenue for 2020 will be geared off of the 18,000 acres we — sorry, the 36,000 acres we had planted in 2019.
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John Joseph Baumgartner, Wells Fargo Securities, LLC, Research Division – VP and Senior Analyst [4]
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Okay. And then on the…
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James A. Blome, Calyxt, Inc. – CEO [5]
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Based on the strategy.
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John Joseph Baumgartner, Wells Fargo Securities, LLC, Research Division – VP and Senior Analyst [6]
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Okay. So there’s nothing unusual in terms of customers or anything like that, it’s just a simple timing of — okay, fine.
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William F. Koschak, Calyxt, Inc. – CFO [7]
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Secondly, we did the — we did — John, we did the $7 million to $8.3 million this year off of the acres we grew in 2018 and prior. And our pricing and a number of other factors weighed in, changes in soybean prices and things like, what drive the range of numbers for next year, but it’s all driven off the 36,000 acres.
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John Joseph Baumgartner, Wells Fargo Securities, LLC, Research Division – VP and Senior Analyst [8]
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Okay. And then secondly, in terms of the thinking to the middle of the P&L, can you just maybe walk through your expectations for the split between R&D and SG&A in 2020? I mean, it looks like the underlying R&D run rate is closer to, I guess, $9 million, adjusting for the grain adjustments there. So how do you think about R&D, SG&A? And then also, any thoughts on working capital as well, to kind of get to that cash burn number.
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William F. Koschak, Calyxt, Inc. – CFO [9]
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Yes. So our — sorry, our R&D number for 2019 was closer to $12 million, right? And there’s no noise in that number. The comparability is affected by what went through the R&D expense a year ago. So I’d expect our run rate to be at that level. And as we gear up on some of these projects, that would be our focal point for investment in 2020 from an SG&A perspective.
From a working capital standpoint, we learned a lot through the 2019 harvest in terms of how much grain might be delivered, what expectations were, how quickly we’re able to convert it to cash, and we have a crush plan, as we mentioned in the remarks, that will allow us to burn through our current grain inventory with a high level of certainty in 2020. And then it will all be about how much of those acres that we are harvesting in the fall of 2020 that will drive the working capital need at the end of the calendar year.
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Operator [10]
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The next question is from Ben Klieve of National Securities Corporation.
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Benjamin David Klieve, National Securities Corporation, Research Division – Analyst [11]
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All right. A couple of questions here. First, a follow-up on the 2020 revenue outlook. To clarify, the 18,000 acres that were harvested last fall, to what degree — are 100% of those acres expected to be revenued in 2020? Or was there some that was realized in late 2019? Is there some percentage of acreage that is going to be harvested but utilized for R&D purposes or for demo purposes? How one-for-one is your harvest from ’19 going to convert into revenue in ’20?
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William F. Koschak, Calyxt, Inc. – CFO [12]
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Thanks, Ben. Appreciate the question. I need to clarify. The acres we planted in 2019 were 36,000.
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Benjamin David Klieve, National Securities Corporation, Research Division – Analyst [13]
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I apologize. No, yes. I just misspoke there. I’m sorry,
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William F. Koschak, Calyxt, Inc. – CFO [14]
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No worries. So the 36,000 will be converted to revenue in 2020. The impact of samples and other things like that on the total quantity of product we have available for sale is not meaningful. If somebody wanted to do a large sample, we would likely — not likely, we would sell them the oil. We wouldn’t just give them a tanker, for example.
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Benjamin David Klieve, National Securities Corporation, Research Division – Analyst [15]
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Okay, got it. And then, I guess, just to be clear, no meaningful revenue from the harvest in the fall was realized before the end of the calendar year. Is that correct?
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William F. Koschak, Calyxt, Inc. – CFO [16]
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That is correct.
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Benjamin David Klieve, National Securities Corporation, Research Division – Analyst [17]
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Okay. And then turning to 2020 acreage. I guess, first, just a clarifying question. You said that, that acreage was nearly tripling. You put out that press release a few weeks ago that acreage hit 100,000. Is contracted acreage at this point still 100,000 or is it north of there?
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William F. Koschak, Calyxt, Inc. – CFO [18]
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We announced that number about a month ago. And obviously, there’s still time to contract acres. So it’s continued to increase. We’re more focused on our share of the HO acres in the U.S., which is a number that we’re really excited about, having 1/4 of the share, based on our estimates.
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James A. Blome, Calyxt, Inc. – CEO [19]
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But your point is a good one, Ben. We sold all the way up through past April 1 last year to reach our goal. And so just reaching our goal earlier told you a little bit about the demand. But we’ll continue to look and support growers.
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Benjamin David Klieve, National Securities Corporation, Research Division – Analyst [20]
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Got it. Okay. And then last question for me and I’ll get back in line here. How are you looking — how are you setting the company up in advance of planting this spring to provide you with seed inventory going into 2021? And are you increasing that planted acreage more than your double — your goal of doubling? How can you help us kind of understand what your outlook is for 2021 from a seed inventory perspective?
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James A. Blome, Calyxt, Inc. – CEO [21]
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Yes. We are introducing — thanks for the opening, Ben. We’re introducing 5 new soybean varieties in 2020, which allows us to expand geographically and reduce our risk to weather, which was a real risk in 2019. But it also then allows us to multiply those seeds during the growing season in 2020 to expand further in our chosen geographies to improve the optimization of our margins.
So we have always said in our original business plan that we’re focused on a plan that would double acreage every year and that’s our public guidance so far.
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Operator [22]
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The next question is from Adam Samuelson of Goldman Sachs.
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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division – Equity Analyst [23]
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So a clarifying question just on the 2019 revenue number in the K this morning. You disclosed the revenue from meal of $5.7 million in oil of $1.6 million. And I guess, I’m trying to think about the mix of that in the premium kind of oil value that you generate. That revenue split would, I think, be below what you’d expect to generate, if you’re just crushing commodity meal and oil. And I’m sensitive that you still have some carryover oil to be sold in 2020 and you’re probably — there were some trialing and sampling kind of volumes out there. But just help me think about the revenue mix there, just if you’re kind of crushing, come out of a value-added oil, I would have presumed the revenue mix would be more skewed towards the oil versus the meal.
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William F. Koschak, Calyxt, Inc. – CFO [24]
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Thanks, Adam. The way we think about it in 2019 is that — and this is one of our margin optimization levers as we look forward, is that we sold our oil in 2019 into different parts of the market, but not at the premiums we expect on a go-forward basis because we are more focused on making sure we didn’t incur more costs as we are working to manage our crush plans and demand. So we believe we had to move the crop out so that our farmers could put new crop in the bins and all of that conversion so we weren’t sitting on a large amount of inventory, resulted in the prices that we saw reflected in the reported numbers.
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James A. Blome, Calyxt, Inc. – CEO [25]
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I would add to that, that’s one of the excitements around the 100,000 acres. We’re finally at an acreage and oil supply contract that allows us to talk about bigger volumes with bigger customers on a reliable, stable process. And I would [chalk] 2019 experience up to startup.
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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division – Equity Analyst [26]
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Okay. So I mean, maybe we could — I could circle up with this off-line, but I wanted to — I mean, if I went — I was going to go back and think about some statements you guys have made on earnings calls over the past over the past year, as you started to commercialize the high oleic soybean oil, kind of the messaging has been pretty consistent that you were getting premium values that you have been targeting. As what’s the dissonance there?
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William F. Koschak, Calyxt, Inc. – CFO [27]
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It’s a combination of 2 things. When we were selling the oil to customers that we expect to on a long-term basis, we were getting premiums. When we were selling it to make sure we didn’t incur additional cost and wanting to convert it to cash, we didn’t get the premium that we’ve talked about.
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James A. Blome, Calyxt, Inc. – CEO [28]
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Exactly right, customer mix. And now it’s established — now it’s establishment in the reliable supply, we’ll be able to move to the top segment rather than the bottom.
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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division – Equity Analyst [29]
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Okay. That’s helpful color. And then just more on a long-term basis, thinking about how you’re laying out the product pipeline. And I think it’s notable the word collaboration, it features considerably more prominently in that forward view today than it might have 6 or 6, 12 or 24 months ago.
And I guess, Jim, I’d be interested in your thoughts on how — maybe the learnings of having the value — the fully integrated kind of product chain on the high oleic soybean has maybe changed your thinking in terms of collaboration versus integrated into the model, and how that has impacted your forward thinking on the business?
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James A. Blome, Calyxt, Inc. – CEO [30]
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Great question, Adam. I think we’ve been consistent in saying that, in the soybean market, we had to go farm-to-fork to proof-of-concept and control the supply chain. And we built a wonderful supply chain around soybeans that could also be utilized for wheat. So you’ll see, over the past year, we’ve always talked about doing soybeans and wheat because they’re diluting a fixed cost that we had or the system that we built, that we would consider doing those on our own, but would always consider collaborations with people in other crops and markets that had a go-to-market brand and our strategy and/or resources.
So I think it’s consistent what you’re seeing talking today is the fact that all the hard work of 2019 to build that soybean system will be useful for wheat. But now we’re turning and pivoting to use the science to go into other crops, which, as we’ve said, will take us into collaborations with other companies that already have established distribution networks in these crops of markets, and we’re excited to do it, but that’s the difference between the last earnings calls and today: You’re seeing finally say, yes, we’ve successfully built that soybean/wheat distribution system, and we’re moving on into other crops and other collaborations.”
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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division – Equity Analyst [31]
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Okay. Well, as just — sorry, just maybe a point of emphasis there. And if — why wouldn’t you leverage the existing infrastructure and relationships you’re building on the soy and wheat side to further develop additional traits and capabilities in those crops to sustain that franchise into the future? Why is the incremental investment not continuing in that direction versus — I’m not saying that the investments in the other crops is a bad idea, I’m just trying to make sure I understand why. It doesn’t seem like the future R&D is actually on soybean at all. And similarly, wheat. You have the high-fiber wheat, but after that, there’s nothing else.
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James A. Blome, Calyxt, Inc. – CEO [32]
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Yes, that’s a good point. In this call, we really talked about what we were introducing before 2024, and that’s the difference. We continue to invest. We continue to invest in soybean. The easiest thing we could do is stack traits for more value at the same cost in soybeans, and we — and you can rest assured, those are ideas that are kicking around for us.
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Operator [33]
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The next question is from Ken Zaslow of Bank of Montreal.
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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research – MD of Food & Agribusiness Research and Food & Beverage Analyst [34]
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Yes. So a couple of questions. One is, can you frame the potential opportunities of the products outside of high-oleic soybean oil? And can you put in relative terms too high oleic soybean oil, so we just get a concept to that? That’s my first question.
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James A. Blome, Calyxt, Inc. – CEO [35]
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Sure. And so when we talk about that, we’ll talk about the near terms mentioned on this call, which is hemp and alfalfa and high-fiber wheat in that 2024 period. So Bill, do you want to talk about the relativity?
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William F. Koschak, Calyxt, Inc. – CFO [36]
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Sure. So from a — I think what you’d see, Ken, and what we expect, certainly, is that as we move into a crop like hemp and while we were able to bring a product to market on the revenue in 2020 from that project won’t be significant relevant to the soybeans, but it proves to people we can quickly get into that crop. And we’ll — as we talked about, we’ll launch a number of other projects between now and 2024. Those revenue streams will be because we’re going at it, all of them from those projects will be through collaborations. They will be lower because there will be likely the recurring revenues, but they’ll also be very high margin.
We haven’t provided a quantification, but from an alfalfa perspective we did lay out size of the market and our expectations for what we think S&W, our partner there, their market share would look like. And applying a royalty rate gets us to a royalty stream that’s in the greater than $1 million a year, but less than $15 million a year. There’s — based on the size of the market and the pace at which they expand geographically beyond just the U.S.
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James A. Blome, Calyxt, Inc. – CEO [37]
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No, I’m just going to add. We’re planning on our very first year of high-fiber wheat in 2022. So just in that ’24 horizon, we’ll be scaling up. So as we continue to grow soybeans, the relativity of it is a great point. And I think you can see the relativity of it in that shorter window for an R&D company.
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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research – MD of Food & Agribusiness Research and Food & Beverage Analyst [38]
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Okay. Let me just get the — it was interesting, the first question is, if I think about how I think your revenues, if I — can I use the proportion of 36,000 acres to this year. And then if I triple it, do I kind of put a relative — can I do almost like a — if this then that kind of analysis of, okay, that’s what’s going to be in 2021 based on 100,000 acres given the relationship between the 36,000 and the $50 million of revenue? And then do we add on top of that, some of these incremental opportunities? How do I think about that? Does that make sense?
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William F. Koschak, Calyxt, Inc. – CFO [39]
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It does, Ken, and that is a great way to think about it, is to take the revenue from this year based on acres and projected forward using what we’ve talked about for just soybeans. And then these other revenue streams would be incremental to the soybeans.
Our goal is to get as any of those incremental revenue streams into our P&L over the next 12 to 36 months.
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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research – MD of Food & Agribusiness Research and Food & Beverage Analyst [40]
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Okay. It is and then within that, though the profitability would go greater than that percentage just because as you are going into higher-margin products and becoming more efficient, so the relative improvement in operating profit will accelerate at a greater rate than the sales growth. Is that fair? Is that how to think about it?
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William F. Koschak, Calyxt, Inc. – CFO [41]
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Yes.
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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research – MD of Food & Agribusiness Research and Food & Beverage Analyst [42]
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Okay. And then my last question…
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William F. Koschak, Calyxt, Inc. – CFO [43]
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We will get margin leverage from things we will do in soybeans, and we will add higher margin revenue streams to it.
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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research – MD of Food & Agribusiness Research and Food & Beverage Analyst [44]
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Okay. A lot of changes to management for the last, well, year or so. Is that done? Is there more to go? And how do you think about that? And do you have your team set now and is this — can we assume that this is the team? Can you talk about that? And then I’ll leave it there, please.
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James A. Blome, Calyxt, Inc. – CEO [45]
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Sure. A lot of 2019 and taking the first commercial product to the marketplace and this farm-to-fork model meant bringing in significant talent to build out whole departments. So you’ve seen us add several and we believe, enlisted them here in the release, but several key talents in to lead these departments and create the systems and all of the things that have to go with being a food and R&D in the ag company all in one. And we have — I think we have a base group here that can take us to the next level. So the answer to your question is pretty much yes.
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Operator [46]
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The next question is from Laurence Alexander of Jefferies.
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Adam Samuel Bubes, Jefferies LLC, Research Division – Equity Associate [47]
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Hi, this is Adam Bubes, on for Laurence today. I just have one question. I was wondering if you guys are seeing any delays in R&D collaboration discussions with peers, given the economic and coronavirus concerns? Or do you think the ag R&D community is fairly insulated?
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James A. Blome, Calyxt, Inc. – CEO [48]
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I can answer your question upfront. We haven’t seen any delays. We have business going on and have had and don’t see any change from week-to-week so far.
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Operator [49]
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The next question is from Robert LeBoyer of Ladenburg Thalmann.
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Robert Michael LeBoyer, Ladenburg Thalmann & Co. Inc., Research Division – MD Equity Research [50]
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Congratulations on a nice quarter. My question has to do with the hemp market and introduction year. Are you going for the entire market, any particular segments, whether they’re recreational, medical, industrial or you also discussed some of the changes that you’ve made to the gene editing, to the plant?
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James A. Blome, Calyxt, Inc. – CEO [51]
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Yes, 2 questions. We’re focused solely on hemp in the ag use and the wellness use of hemp versus the other product in that family. And our first product has been done without gene editing or other projects on the board and what we’re working on in the lab, likely will. And so that’s where we’re at today.
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Robert Michael LeBoyer, Ladenburg Thalmann & Co. Inc., Research Division – MD Equity Research [52]
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Okay. And could you also discuss some of the changes to the oats, canola, peanuts, I think it was peas, those plants?
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James A. Blome, Calyxt, Inc. – CEO [53]
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Yes. We haven’t talked about the targets or what we’re doing there specifically on those publicly. But with those crops, you probably — can get an ideation of what we’re working on around in those areas and looking at.
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Robert Michael LeBoyer, Ladenburg Thalmann & Co. Inc., Research Division – MD Equity Research [54]
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Okay. And any revenue guidance on the hemp rollout? Or any metrics in terms of acreage or the type of things that you’ve laid out for soybeans?
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William F. Koschak, Calyxt, Inc. – CFO [55]
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Not at this time, Robert. Our expectations for that hemp product are included in the overall guidance for the company for 2020.
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Operator [56]
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The next question is from Steve Byrne of Bank of America Merrill Lynch.
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Steve Byrne, BofA Merrill Lynch, Research Division – Director of Equity Research [57]
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Yes. Just wanted to continue on the hemp products you’re developing it would seem that gene editing would be the key to adjusting all these various cannabinoids in that product and so it seems well suited to you. Are you developing relationships with pharmaceutical companies to develop these products that would then go through clinical trials? Or is it more likely going down the path of over-the-counter food products?
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James A. Blome, Calyxt, Inc. – CEO [58]
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Thanks, Steve. We’re focused on the wellness aspect of it. But what we’re learning and what we’ve learned quickly and which leads to this first product being in the market, is that we — as we better understand how to cultivate and how to look at this thing on a genome basis, we have several opportunities, and we’re keeping all of those open going forward.
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Steve Byrne, BofA Merrill Lynch, Research Division – Director of Equity Research [59]
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And then on your high oleic soybeans, you indicated you have 25% of the acres. Is it fair to assume that the other 75% are the old transgenic products, this doesn’t plenish, and just wanted to hear how you incentivize the grower to go down your path where you essentially give them a benefit on top of basis and buy the crop back from them, as opposed to the other route, where I don’t really know how the farmer captures value on those products since there is they’re basically on their own to sell the soybeans. How do you compare those 2 paths?
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James A. Blome, Calyxt, Inc. – CEO [60]
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No, great question. Just to answer your first one, yes, the bulk of the other market share is held by those older products. How we’re penetrating and what we’re doing is we’re bringing different value. So our growth rate is much higher than theirs. And one of it is due to the fact that we pay a premium to the grower that we’re sharing from the food ingredient companies.
But one of the other ones is agronomic where theirs is GMO and still using some of the herbicide tolerance traits, ours is not. So for a farmer who’s had experienced Roundup Ready crops and rotations for maybe 20 to 30 years, he’s experiencing some weed resistance issues on his farm. One of the benefits to rotating to our non-GMO product is that you’re using a different weed control system that takes out the resistant weeds and improves the value of your land. So many people are really excited about doing this and getting that benefit. Their landlords are happy.
And secondly, because ours is not GMO, our seed is a lot less costly to buy. So when you think about financing a grower, and one of the first things he finances or buys is seed. Ours is significantly lower cost seed because we don’t have the GMO trait in it. And therefore, the bankers and other people supporting the farmer are much happier because their financing cost for that crop are lower because of that specific thing, specific reason or should be as he analyzes how — what crop he puts in the ground.
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Steve Byrne, BofA Merrill Lynch, Research Division – Director of Equity Research [61]
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And then maybe just one more on that. So your 25% of the acres, but if I understood you correctly, you’re capturing 70% of the high-value oil end markets in these 4 key end markets, do I have that right?
And why are you able to capture so much more share of that? Is it the non-GMO oil having a benefit or an access to an end market that only your product can achieve as opposed to the transgenic route products don’t have access to them?
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William F. Koschak, Calyxt, Inc. – CFO [62]
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Steve, it’s Bill. I’ll take that one. The market penetration for premium oils is the 70% of the sort of 11 billion pounds of the 15 billion pound market size for all premium oils. Our share of that 11 billion pounds is obviously very, very small, as is HO soybean in total. And so what we’re excited about is, as people look at what oils they could use in their products, the expectation is that HO soybean oil will become a greater share of the total market, and that’s how we and others will all benefit, if you will as we look forward. So that’s the tailwind that we’re riding as customers evaluate oil options, they’re trading off those transgenic HO soybean oils, perhaps, but they’re also trading off high oleic canola or sunflower or one of those other premium oils mentioned on our slides, to look at soybean.
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James A. Blome, Calyxt, Inc. – CEO [63]
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Some of the reasons for the conversions are, people are looking at sustainability. So a local soybean grown here — soybean being a great crop anywhere and crushed and used here locally is a lot different than some of these imported oils coming from Canada or the Ukraine or from Argentina. So that’s also a reason for people switching and moving among the premium oils that are available now that we have the health profile to compete.
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Operator [64]
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The next question is from Adam Samuelson of Goldman Sachs.
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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division – Equity Analyst [65]
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Just one quick follow-up, and it kind of goes back to Ken’s question a little bit. So your ’19 versus ’18 acreage was basically double year-on-year, and you’re talking about revenue doubling year-on-year. But you also said that in ’19, you had not fully captured the kind of premium high oleic soybean oil price? So just wouldn’t your revenue be up more if you’re actually getting the full premiums in 20 versus ’19? Or was the yield loss in your key growing regions, significant enough to — that you just have notably lower production to our soybeans to process this year.
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William F. Koschak, Calyxt, Inc. – CFO [66]
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Great question, Adam. There are a number of factors that drive the year-over-year revenue expectations and yields are one, prices are another, both prices that we pay for the grain as well as prices we expect to receive in the market base wherever meal prices flow-through or oil prices for that matter. And we we’re capturing premiums over the cash price or the board price, depending upon customer and product. So with all of those factors considered, that’s how we arrived at our guidance for 2020.
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Operator [67]
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At this time, this concludes our question-and-answer session. I’d now like to turn the call back over to Mr. Jim Blome for his closing remarks.
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James A. Blome, Calyxt, Inc. – CEO [68]
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Yes, I want to thank everyone for joining us on the call today. Just a reminder, we have a really dedicated and hard-working team here at Calyxt who really push themselves to further our mission each day. And I just want to give them a sincere thanks from all of the management, all of them. We certainly couldn’t do this without them.
And lastly, if we weren’t able to address all of your questions on today’s call, please feel free to contact us or our Investor Relations firm, which is MZ Group, who would be happy to answer them.
So we look forward to providing more updates on the next call and thank you very much for your time today. Operator?
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Operator [69]
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This concludes today’s conference. Thank you for your participation.