Danimer Scientific Q3 2023 Earnings Call Transcript

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November 14, 2023

There are 9 speakers on the call.

Operator

Greetings. Welcome to the Danamer Scientific 2023 Third Quarter Earnings Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. Please be advised that this Call is being recorded today, November 14, 2023.

Operator

I would now like to turn the presentation over to Mr. James Polzinski, the company's Investor Relations representative.

Speaker 1

Thank you, operator. Good afternoon to everyone and thank you for joining us today for Danamer Scientific's 2023 Third Quarter Earnings Call. Leading the call today is Steve Crossgreed, Chairman and Chief Executive Officer and Mike Hajjost, Chief Financial Officer. I'd like to note that there is a slide deck that accompanies today's discussion, which is available on the Investor Relations section of our Web site atdanamerscientific.com. As we begin, I'll call your attention to the company's Safe Harbor language, which is published in our SEC filings and on Slide 2 of the presentation I just referenced.

Speaker 1

On today's call, we may discuss forward looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Forward looking statements include, among other things, statements regarding future results of operations, including margins, Profitability, capacity, production, customer programs and market demand levels. Actual results could differ materially from what is expressed or implied in our forward looking statements. The company assumes no obligation to update any forward looking statements to reflect events or circumstances after the date hereof, except as required by law. Today's presentation also includes references to non GAAP financial measures within the meaning of SEC Regulation G.

Speaker 1

We believe these non GAAP measures have analytical value, but note that they should be taken as supplementary measures of performance and not as to alternatives to GAAP results. We have provided reconciliations for non GAAP financial measures to the most comparable GAAP financial measures in our earnings release and our presentation. Thank you. And it's now my pleasure to turn the call over to Steve Cross Creek, Chairman and Chief Executive Officer, Danamer Scientific.

Speaker 2

Good afternoon and thank you for joining us. We recently received notification that a very large quick service restaurant program for biodegradable cutlery Specifying our Nodex based resins has now been awarded. We have anticipated this notification for some time. 5 of our converter partners have each been granted awards and will participate in that program. We will supply each of them with the resin they need and in total, The program will require us to deliver approximately £20,000,000 annually.

Speaker 2

We expect to begin making first shipments in the second half of next year and This is an unprecedented award that serves as tremendous validation of our PHA based materials, which are the first to truly help to reduce plastic pollution through a seamless material replacement strategy. This is critical because changing consumer behavior to completely solve the pollution problem is infinitely more difficult and problematic for businesses. Our materials enable brands to differentiate, to extend their environmental leadership and to enhance their reputation for sustainability. They immediately become part of the solution. We're exceptionally pleased and excited by this new program.

Speaker 2

While our PHA based Products revenues grew by 58% over the same quarter last year, we had expected more. We are currently in the late stages of commercialization The number of customers including major brands, some of which I'll discuss further in a moment. These launches incorporate rigorous final qualification and testing, Frequently involving a number of partners in addition to Danamer and will need some additional time to complete their final steps than we previously anticipated. We certainly appreciate that our customers are generally adopting our resins with the intent of permanently converting away from petroleum based plastics and the long term pollution they cause. Especially given that there are often several years of research and development already invested prior to commercial launch, We understand that the launch itself should be an unqualified success across the board.

Speaker 2

In some cases, underestimated the time required for final testing and qualification, particularly for novel end use applications where we were asked to make adjustments Then we needed to recast and requalify, sometimes adding months to the process. We're confident that each of these launches will be successful and Just as we have been increasingly able to leverage our prior R and D work to move more quickly on new development projects, we'll be able to drive process efficiency into this last Before commercial launch and avoid some sources of delay in future programs. I'd like to now give you some specifics about the brands and programs we're currently launching. First, I'll focus on Bacardi, a prototypical example of a great partner. Bacardi is a 161 year old family owned company With an ambitious goal to be 100 percent plastic free by 2,030.

Speaker 2

They knew 3 years ago when we began to work together that Success would require breakthrough advances in engineered materials and packaging design. We begin our work with a focus on pioneering the development of a compostable spirits One of, if not the single most technically challenging initiatives we have ever undertaken. That work continues and the progress we've made is encouraging. Both we and Bacardi remain focused on bringing that success home as soon as possible. That said, along the way, Danamer and Bacardi have identified These are also very powerful and exciting and we will be sharing more at the earliest opportunity.

Speaker 2

As you may recall, last We talked about a number of new Nodex based film resins. One new film resin application is for home compostable retail packaging for vegetables and fruit. The development partnership for this application began in 2020 with Viola, a division of CPG or Columbia Packaging Group, one of our converter partners. Bolthouse Farms, a care producer, is their launch customer and at retail, the product will be offered first by Meyers Grocery in 2 40 large format grocery stores. The first end use will be bags for 1 pound earthbound farm organic mini peeled carrots.

Speaker 2

The bags are home compost certified by TUV Austria, The globally recognized leader in independent testing, inspection and certification for biodegradability. This is a difficult certification to meet and we're very pleased to CPG intends to develop and market compostable bags, film and roll stock for packaging needs across not just produce, But a wide variety of consumer goods. While this initial launch is modest, the category presents a huge opportunity. CPG is intently focused on the growth opportunity they believe accompanies a value added product and are working towards next steps in their go to market strategy. I'll now turn to our work with Delta Coffees, a coffee roasting and packaging company that has led the Portuguese coffee market since 1961.

Speaker 2

We've developed compostable single use capsules for their Delta Q line of ground espresso, which we believe will be the first product on the market in full compliance with Proposed new EU regulations requiring any coffee pods sold in the EU to meet new compost standards. The capsules degrade completely inside industrial composting environments, leaving no microplastics or other residues that would harm natural ecosystems. We've developed these pods in partnership with Total Energy's Korbion, who will supply the PLA that is also a key ingredient in the PHA based resin used for the pods. Our engagement with other major disposable coffee pot producers is ongoing. We view this category as an important one for us regardless of the passage of proposed legislation.

Speaker 2

Finally, I'll return to the QSR space. In addition to the 20,000,000 pound cutlery program, we are still engaged in field trials for nodax based straws and advance We're excited to have just executed a joint development agreement with a large QSR to develop packaging materials that are specific to their menu. Additionally, we're getting closer to commercialization of biodegradable cups using resins for both extruded coatings and in partnership with Chimera Aqueous coatings. Our partnership with Chimera has been especially important in this effort. These are the key technologies for not only disposable cups, But for all coated paper materials used in food service, we expect to have more to say about the coatings work we're doing over the next couple of quarters.

Speaker 2

For now, I'll just say that we are confident we are emerging as a leading source for alternative materials in the QSR channel. As I look across these partnerships, even those that have modest initial volume associated with them, they are each open doors to a new category or a new range of customers. To each diversify our business and add to our addressable market opportunity, the importance of these launches has been underlined by the recent dramatic increase Our recent developments and product launches have driven discussions with potential partners across multiple industries, Major customers seeking long term solutions to plastic waste. While we continue to work through near term challenges and launch We have great conviction that we are on the right path toward filling our existing capacity in Kentucky and continuing to make progress on our plant footprint expansion strategy. Our work with the Department of Energy Loans Program Office to complete due diligence is proceeding as planned as we continue to look forward to the terms negotiation phase.

Speaker 2

We are now making significant progress towards full capacity utilization in Kentucky and believe that there is more than enough Specifically identifiable demand to make our Greenfield project a success. The partnerships we have been Today illustrates the way forward showing that it is possible to disrupt petroleum plastics, address the global pollution problem and build an enduring business

Speaker 3

Thank you, Steve, and good afternoon, everyone. I'll start with our financial results on Slide 7 of our presentation for those of you following along. 3rd quarter total revenue was 10,900,000 Compared to $10,400,000 as growth in product revenue was mostly offset by a reduction in service revenue. 3rd quarter product revenue was $10,500,000 up 14.9% compared to the prior year level of $9,100,000 This growth was entirely attributable to PHA based resin sales, which grew 58% compared to last year. PLA based resin sales were down 51% or $1,800,000 versus prior year due to the ongoing issues associated with the Ukraine conflict.

Speaker 3

3rd quarter service revenue was approximately 500,000 This is about $800,000 lower than last year's Q3. This is consistent with the recent trends and was expected As funded R and D projects for certain customers move to commercialization, we reported a Q3 2023 gross loss of $7,700,000 which was an increase compared to the prior year's quarter's gross loss of $4,100,000 The year over year increase primarily reflects higher depreciation and amortization expenses as well as higher raw material costs related to our product mix. After adjusting for depreciation and stock based compensation, we reported adjusted gross loss of $2,600,000 As compared to an adjusted gross loss of $1,500,000 in the Q3 of 2022, primarily due to other increased fixed production costs. R and D and SG and A expenses, excluding depreciation, amortization, stock based compensation and certain non recurring items, totaled $6,600,000 in the 3rd quarter, a significant improvement relative to the $11,500,000 of expenses for those categories In the Q3 of last year, the improved efficiency across many areas of the business through broad based cost control initiatives Continues to drive this improvement. Lower R and D expenses also reflect the conclusion of certain development projects.

Speaker 3

Adjusted EBITDA loss for the 3rd quarter improved to $9,300,000 compared to an adjusted EBITDA loss of $12,900,000 in the Q3 of 2022. Adjusted EBITDA excludes stock based compensation, other income and other add backs as reconciled in the appendix. Cash and cash equivalents at the end of the 3rd quarter was $77,400,000 as compared to $62,800,000 at the end of 2022. Restricted cash was $14,500,000 Including $12,500,000 were expected interest payments pursuant to our recent loan agreement. Capital expenditures in the 3rd quarter were $2,700,000 and year to date have been $25,700,000 We have tightened our range of expected full year CapEx spend to be between $27,000,000 $29,000,000 towards the more favorable end of our prior range of $26,000,000 to 31,000,000 We ended the Q3 with a total debt balance of $300,000,000 the senior secured term loan we closed during the Q1 and our new market tax credit loans, which we expect will be forgiven starting in 2026.

Speaker 3

We continue to view the magnitude and timing of the customer ramp for PHA based resins and our increased utilization to serve that demand from our Kentucky operations as the largest factors for variability in our short term financial results. As Steve discussed, the timing of certain expected customer programs has moved further out than we had expected. And as a consequence, both this quarter and next quarter do not have the benefit of the previously expected initial shipments from new launches. Our full year 2023 guidance for adjusted EBITDA is now in range of between negative $40,000,000 and negative $37,000,000 I'll now hand the call back to Steve for his closing remarks.

Speaker 2

Thank you for your attention this afternoon. The cutlery program awards we've announced today constitute a watershed event for Danamer in many ways. They are a seal of approval and open the door for us to look for ways to grow their NO DAX based business. These awards also carry a major positive impact on our future financial performance. One of the most powerful aspects of our business is how longevity is built into every program WAN we capture.

Speaker 2

Our customers are seeking permanent solutions the problem of plastic pollution, a problem so large and damaging that only permanent solutions matter, solutions that we have. We expect that once our capacity is spoken for because our customers are large enduring businesses with stable demand for consumables, That capacity is essentially permanently absorbed. We have a tremendous opportunity that we believe is ours and ours alone. Thank you. And operator, we're now ready for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. From Jon Tanwanteng with CJS Securities. Please go ahead.

Speaker 4

Hi, good afternoon. Thank you for taking my questions.

Speaker 2

Yes. Hi, John.

Speaker 4

Hi, Steve. Hi, Mike. I was wondering what programs pushed out, what was the scale of them that you expected, number 1? And number 2, Does that delay you getting to the relatively full utilization of Kentucky, by the end of next year?

Speaker 2

Hey, John, thanks for the question. This is Steve. Well, this cutlery program that we just announced as an example is Roughly 6 months behind where we initially expected it to be. We originally thought we would be able to Some shipments in this Q4, but that's been pushed out now probably into Q2 of next year. And as far as the utilization rates with this program and the other programs that we've discussed and the programs that are currently Being launched, we will hit that utilization rate.

Speaker 2

It will depend on how fast those things scale, whether or not we'll hit it by the end of the year, And we'll update you on that further next quarter.

Speaker 4

Okay, great. Thanks. Mike, I was wondering where do operating expenses go from here? Do you expect any meaningful change either up or down?

Speaker 5

I think we look, we're very proud of how we did cut operating costs So year over year and there's certainly some things that won't repeat. There are some things that had a positive influence on our operating expense year over year, such as reduction in our AR reserve. A year ago, we were increasing that reserve. This year, we're actually reducing that reserve. So you kind of get the year over year effect that's exaggerated a little bit because That's going in 2 different directions there.

Speaker 5

We do believe that there are opportunities as we kind of are putting together a budget right now to look for additional cost savings So we do think they're there. Then there's going to be other things though that are going to be some headwinds in terms of overcoming some of the benefits we had this year versus last year. But net net, our expectation is that they will either be flat to down from where we are this year.

Speaker 4

Okay, great. And then where do you see where are you in the DOE loan process? Help us understand what the DOE is saying to you and kind of when you expect that to play out?

Speaker 5

Sure. Yes, I think overall there's still tremendous enthusiasm between both parties working together. As you know, we announced we're going into the due diligence phase, Which we're in the thick of right now working with their partners. They bring in experts on their side, Factoring, technical, financial and Zircon now scouring through with our teams. There's been meetings on-site And again, a lot of collaboration and still a lot of enthusiasm for the project going through.

Speaker 5

The timing of this It is again probably taking a little longer than what we had previously expected and as we kind of learn more about the program and the time What they have to do, I think we're now expecting that the funding probably wouldn't come through until maybe early Q3 of next year. And not that there's any concerns in our part with that, it's just a process that's going to be a little bit longer Than we had expected there, but again, everyone's feeling very good about it so far.

Speaker 2

And I would just add to that, that whatever our chances Aware of getting that accomplished have now improved significantly with this cutlery award.

Operator

Your next question comes from Thomas Boyes with Cowen. Please go ahead.

Speaker 6

Thanks for taking the questions. When speaking with customers that have delayed their launches, is there a common theme around that they're maybe slowing down? Is it related to kind of the macroeconomic backdrop or is it really just around validation periods taking longer to get through?

Speaker 2

Hey, Thomas, thanks for the question. I would say that there's a wide range of reasons, but most of them are focused On the technical challenges of getting the product finalized, as an example, Sometimes and this was the case with this with the cutlery program, the R and D work is a lot of trial and error And when you start to get confidence as you optimize production performance That you've got something that's going to work for the converter. We can start doing the end of life trials, the end of life certification tests To qualify the material, what happened in this case is the product that we started with became apparent during the course of the testing that it was not going Pass in a timely manner. And so we had to readjust and kind of refine the formulation To allow it to pass in the appropriate timeframe. So that was the specific cause of delay in that case and That's a pretty typical type of a thing that has happened.

Speaker 6

Got it. And my sense is obviously there hasn't been any cancellations. So just to Kind of put a finer point on it. All of these are just really launch push outs, correct?

Speaker 2

Yes, that's correct.

Speaker 6

Great. And then my last one and then I'll hop in queue. Would just be would love to drill down on the relationship with Chevron Philips Chemical that you had announced For the Dynamir catalytic business, could you talk about your efforts there and maybe discuss some of the long term opportunities of the business As it relates to the acrylic acids and things like that?

Speaker 2

Yes. Unfortunately, we can't talk too much about the Specifics of those programs because of confidentiality, but I can tell you that Both teams are very excited and it's a great opportunity for us to get close to a major

Operator

Your next question comes from Charles Neivert with Piper Sandler. Please go ahead.

Speaker 7

Good afternoon, guys. A quick thing on the Ramp up of production for the cutlery, when do you anticipate having to start building some inventory or anything like that For delivery of that product, so if it's going to go up in Q3, it will start ramping in Q3 of next year, when do you guys have to start ramping up production to get to set up for that and delivery?

Speaker 2

Yes. Charlie, we'll start building inventory probably in early Q2, Anticipating at this point that we expect some orders in Q2 at this point.

Speaker 7

Got it. Okay. And then you said it will take round numbers. It sounds like you said about a year to go from 0 to full bore, The $20,000,000 you were talking about, is that sort of even or is that a slow ramp building speed? How does it look To go out, how are they distributing the product?

Speaker 7

I mean, when should we expect this chunk of it?

Speaker 2

Yes, I can tell you what we know now is our expectation would be that by the end of next year, We will be at a run rate above £5,000,000 and then it will kind of close quickly from there Just sometime like middle of Q2 of 'twenty four to be at full run rate. 25, I'm sorry, yes, 25 to be a full run rate.

Speaker 7

Right. And then last question for now. Just Is there a length for this contract? Does it have an end to it or is it 5 years, 3 years? Is there anything on that or is it just sort of We'll play it by year and see how it goes from there.

Speaker 2

Yes, it'll just be ongoing business and unless the customer decides to move in another direction. But One of the beauties of this segment is, it is so difficult to ever change out a material like we've done That or that we're doing that there's just not a lot of motivation on anybody's part to go through the process to change to something else then again. And these companies have other priorities and things they would focus on before they would do that. So unless somehow We were just to fall in our face, that's certainly not something we would expect to have happened.

Speaker 7

Is there any Possibility, again, is the deal for this $20,000,000 is that sort of The end of that particular thing or it cannot even grow from that point assuming all goes well specific to that deal?

Speaker 2

Well, obviously, it will grow with the customer, but this is Only for North America. So there are other opportunities with in other parts of the world, but also with Other applications in the QSR space.

Speaker 7

Got it. Okay. Thanks very much.

Speaker 8

All right. Thanks, Shirley.

Operator

Your next question comes from Laurence Alexander with Jefferies. Please go ahead.

Speaker 8

Hi. This is actually Kevin Estuck on for Laurence. So my first question, I just wanted to touch back on the Nordics based resin for single use coffee pods. You obviously touched on the Portuguese company. I guess I was just wondering if there are any Customers maybe with initial trials and just want to get some updates there.

Speaker 8

And then maybe in the same vein, I guess any other regulatory updates in Markets that you operate that can provide some sort of tailwind for the next several years?

Speaker 2

Kevin, I'll answer the first part of the question and ask you to repeat that second part. It blurbed out a little bit on me. But As far as the coffee pods go, we are working with all of the major coffee pod producers or companies in Europe Because of the expected legislation there, they are hot to solve for this. So that's why This is a very important announcement for us as it's just going to accelerate adoption in Europe. And could you go ahead and repeat the second part of your question, Kevin?

Speaker 8

Sure. Yes. Yes. I was just wondering if there were any other regulatory updates that were sort of in the pipeline that you expect could provide a tailwind in the near and medium term in the markets that you operate?

Speaker 2

Off the top of my head, Kevin, I can't think of anything in particular that we have not discussed in the past. But If I come up with something, we'll get back to you on that.

Speaker 8

Okay, great. Thanks. And I'm not sure if this has been brought up yet, but any progress on What you've seen in the aqueous coatings for cups?

Speaker 2

Yes. It's going very well. We are expecting to have cups in stores for trials by Q1. There's actually a push to see if that can be done sooner, but I think that Q1 is a good expectation for trials.

Speaker 8

Okay, great. Thank you very much. All right. Thanks, Kevin.

Operator

I will now turn the call over to Steven Crosscry. Please go ahead.

Speaker 2

Thank you, operator. Before we end the call, I'd like to stress the importance of this cutlery program that's now been awarded. This is a major change in our business. When we are able to talk about who the QSR customer is, this will also send a powerful message to the market. We are approaching a tipping point where decades of investment and work are about to deliver tangible benefits and not just for our shareholders.

Speaker 2

The world desperately needs engineered material solutions like ours to address the growing problem of plastic pollution. Thanks again for your time and attention and we look forward to speaking with you again on our next quarterly call. Thanks.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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Key Takeaways

  • We received an unprecedented award for a 20 million-pound per year QSR biodegradable cutlery resin program, with first shipments expected in H2 2024, validating our PHA materials and opening doors to new QSR partnerships.
  • Total product revenue rose 14.9% year-over-year, driven by a 58% increase in PHA resin sales, while PLA resin revenue fell 51% amid ongoing Ukraine-related disruptions.
  • Adjusted EBITDA loss narrowed to $9.3 million in Q3 2023 from $12.9 million a year ago, reflecting broad-based cost controls and lower R&D spending on completed projects.
  • Several commercialization launches took longer than anticipated due to extended testing and re-qualification, delaying some shipments into Q1/Q2 2024.
  • $77.4 million in cash (plus $14.5 million restricted), debt of $300 million, and a tightened full-year CapEx range of $27–29 million underpin liquidity for growth investments.
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Earnings Conference Call
Danimer Scientific Q3 2023
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