Q3 2021 Danimer Scientific Inc Earnings Call
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Greetings and welcome to the denim or scientific third quarter 2021 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being re.
Accordingly.
It is now my pleasure to introduce your host Rusty Koski, Vice President of corporate finance. Thank you Ross you may begin.
Thank you operator, and thank you everyone for joining us today for our third quarter 'twenty or 'twenty one earnings call.
Hosting the call today are Dan Murphy, CEO, Steve Cross Creek, and CFO, Chad Daddy Bill.
L band from our Chief Science, and Technology Officer will also be joining us for Q&A.
During our discussion today, we will be referring to our earnings presentation, which is available on the Investor Relations section of our website at their mercy scientific dotcom.
On slide two please note that we may discuss forward looking statements within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
These forward looking statements include among other things.
Future results of operations capacity production.
A man levels.
[noise] differ in a material way.
Those expressed or implied in the forward looking statements.
We assume 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 reconcile.
Reconciliations to the most comparable GAAP financial measures can be found in the earnings presentation.
I will now turn the call over to Steve.
Thank you Raj.
Everyone. Thanks for joining us.
Today, we will discuss our third quarter results and some exciting business updates.
The third quarter of 2021 marked another period of continued progress on our path to deliver best in class solutions for biodegradable packaging and other products, which address the global plastic waste crisis.
During the quarter, we made progress on several key objectives, including the initial integration of our recent acquisition of November.
The application development work increased production of J P products, and we continue to negotiate both development and supply agreements with our blue chip customers.
We remain on schedule with the scaling up of our Kentucky phase one operations as well as the construction of our Kentucky based to operation.
And we are happy to announce that we now plan to break ground on our state of the art Greenfield facility in Banbridge, Georgia, Hey that schedule later this month.
Looking at our customer relationships and business development, we have several exciting updates we continue to see an increase in demand for our products during the third quarter and we are making progress on both supply and development agreements for a wide array of product applications, including coatings lids.
Fibers and utensils and other injection molded items.
Our partner Wind Cup stage strides made but danaher signature no tax base resins are now being sold in Cvs stores across the country.
In addition, wake up recently announced its sponsorship on the Atlanta Falcons, introducing phage tries to the Mercedes Benz Stadium in Atlanta, beginning in August of this year.
Wake up also reached only apply to the city of Fort Myers Beach, Florida for body to amend the city's ban on traditional plastic straws to allow for more biodegradable solutions.
Following the vote went up that'd be able to distribute eight scratching the community to better protect theory as beaches and water ways.
Furthermore, one of our striping burgers is making progress in scaling up their production.
Previously mentioned U S or our customer with their expected goal of hitting full stride and you wanted to try and do.
We are excited by the positive reception to our known Rackspace strides and have found that many of our strike customers also want no tax base lids and cups. So they can offer a complete biodegradable solution.
Separately, our partnership with Marriott is progressing well.
We have already conducted successful product crowds with aqueous coatings and continue to develop our relationship.
Also recently, we announced a long term collaboration with both our core beyond TLA, securing BLA supply to support production of PHA based regimens for our growing blue chip customer base.
Additionally, this alliance securing supply for our expected anchor tenant at our door the Greenfield facility.
Growing commercial scale production of PHA remains a core focus of our business savvy P. L. A is an important it but many of them are no tax base formulations.
Partnering with the top corner Pele provides an ideal solution to support long term growth opportunities ahead, while ensuring our short term customer needs remain fulfilled.
We have a couple of promising developments on the R&D side in China as well.
In our food and efforts to evaluate an array of feedstocks for use in a commercial scale production of our signature no tax polymer we were pleased to receive a research grant from the United Soybean Board in September it to expand research into the use of high oleic soybean oil for bad Degradable plastics production.
This grant represents a continuation of our collaboration with United Soybean Board. After we successfully completed a one year project to develop a practical model for production in the second phase of the project will now focus on scaling up soybean oil potential use in manufacturing at a commercial level.
Additionally, during the quarter, we opened the Danaher conversion lab in Georgia can help us make the process of conducting customer product browse more efficient.
As a reminder, our application development process. It's iterative typically we send sample material and Burger processes. It and then gives us feedback.
We then modify the material.
The only final acceptable result is achieved.
Throughout the COVID-19 pandemic, we have not been allowed to be proud.
The in person and can burgers have often times delayed payoffs due to employee constraints.
Our new lab enjoy games manufacturing equipment, where we can stimulate our estimate browse on site without the.
Back and forth the approach and the initial iterations.
Beating up the process to provide our cash conversion with the final product.
But for us and their commercial production.
Now moving onto our November integration update.
You guys spent our last earnings call in August we closed on our acquisition of November a leading developer of thermal catalytic conversion technology that produces high performing carbon fiction cost effective polymers and chemicals, including RIN Nobel APAC of PHA.
We are pleased to report that our integration is progressing in line with our plan and we are on track to realize the benefits of the acquisition enhancing the strength of product applications. We can develop due to the complementary nature of our novo when combined with no tax.
Fortunately none of them are <unk> technology will enable us to significantly lower our production costs and capital expenditure for attribution, while also providing improved barrier properties instead of our packaging products.
As part of our effort to export technology that can help us lower our manufacturing gosh, we had announced a new partnership with Chevron Phillips chemical in September to collaborate on the development of the loop slurry reactor design for the manufacturer ever Novo.
Through this collaboration we will evaluate the use of CP Chem loop slurry reactor design.
Knowledge. They originally transform polyolefin production to evaluate easy ability if incorporating a continuous reactor system in the manufacturing process for right now though.
If the testing is successful.
This react designed to increase utilization of future manufacturing plants, driving higher production volumes and lowering overall cost per unit.
Now looking at our facility expansions, we are making significant progress on our previously announced expansion plans.
We remain well positioned to further scale up production of note export by our expectation of reaching 100% of our Kentucky phase one facility's annual run rate capacity by the end of 2020 one.
Okay.
Initiatives at Phase one were completed earlier this year, we have found that all of our functions and downstream processing are operating on average at nearly twice the speed of our original plan with the exception of Brian capacity, which is running below our expectations.
With that said, we have a plan in place to remediate this shoot which should allow us to achieve our production targets by the end of the year.
Furthermore, we expect that excess space to drying capacity coming online in February.
We believe will more than make up for any shortfall.
Our production of neat PHA acts as an intermediate step in our overall manufacturing process.
In October at our Phase one facility are neat PHA production was approximately 70% of capacity up from 62% during the second quarter over 50% in the first quarter.
That'd be phase two construction is progressing ahead of schedule and we have included slides five through seven in our presentation to provide you with an aerial view of our progress in 2020 one.
As a reminder, phase two construction at our <unk> facility commenced in December 2020.
It is expected to come online in the second quarter of 2022.
Emily providing us with an expected 45 million pounds of finished product capacity.
The completion of both phases will elect to leave bringing our nameplate finished product capacity up to an expected 65 million pounds per year at our Kentucky facility.
Our new state of the art Greenfield facility in Bainbridge, Georgia, we were excited to break ground on construction in the latter half of November.
We have already placed orders for several of the long lead time items needed to complete our construction plans.
Primary rationale for getting the construction process ahead of our initial schedule is to lock in previous price quotes avoided significant inflation in the cost of certain construction materials.
To avoid labor constraints.
Additionally, as our phase two subcontractors come up Java, Kentucky, It we'll be able to transition immediately did a greenfield facility in Georgia.
We continue to expect the pretty firm Energen extrusion facilities come on line by mid 'twenty two 'twenty three.
As it relates to our plans for another plant we already got.
Are you waiting several attractive locations for site selection or potential partners to collaborate with as we add this capacity.
Upon completion of Kentucky Phase two Greenfield facility and there are another plant we expect to have an overall, yeah, Jay finish product nameplate capacity of approximately 390 million pounds.
About 60 million pounds of Standalone renova.
We are excited by our progress to date on our capacity expansions and look forward to updating you further on our progress next quarter.
With that let me turn.
On the call over to Jack for an update on our financial results.
Thank you, Steve I'll speak to slide eight we closed out our third quarter of the year with DHA, representing a growing share of our revenue.
Discuss our third quarter results, followed by some color on the full year 2021.
Revenues for the third quarter of 2021 grew to $13 $4 million compared to $12 $8 million.
Third quarter last year.
This increase was primarily driven by the one building scale up with PHA production for phase one of the Winchester, Kentucky facility that we brought online in 2020.
In the third quarter, we derived 32% of our revenues from sales of no tax base resins compared to 12% in the third quarter of 2020.
While demand for P. L. A remains strong L. A revenue for the third quarter 2021 decreased year over year due to the timing of customer purchases.
We reported a gross loss of approximately $230000 in the third quarter of this year.
It was a profit of $3 $6 million in the third quarter of 2020.
Adjusted gross profit, which excludes depreciation stock based compensation and rent related to our manufacturing operations was $2 $6 million compared to $4 $6 million in the third quarter of last year adjust.
Adjusted gross margin was 19, 7% compared to 35, 8% in the third quarter of last year, primarily due to elevated fixed cost absorption as production continued to scale up at a at the Kentucky facility.
Both periods the average cost per pound of PHA based product sold was significantly higher than the light based products. So as a result of this elevated fixed cost absorption.
As we have mentioned previously we expect our average cost per unit at our existing facilities to improve as production scales.
R&D and SG&A expenses, excluding depreciation and amortization stock based compensation and one time items were $9 $2 million in the third quarter of a point in 'twenty, one compared to $4 $1 million in the third quarter of 2020, mainly due to an increase in head count and salaries to support our.
Future growth plans as well as increases in costs associated with having a larger asset base, such as property taxes and property and liability insurance.
Public company expenses added approximately $1 $7 million of incremental costs for the third quarter of 2021, which we did not incur in the third quarter of last year.
And clearly, it's D&O insurance increased public company, auditing and accounting costs and Sox readiness fees.
In addition, we incurred approximately $750000 of R&D and operating expenses as a result of consolidating none of them are in our third quarter financial results, which we did not incur in the prior year quarter.
Third quarter adjusted EBITDA loss is reconciled in the appendix was $7 $4 million as compared to a loss of $500000.
Period last year attributable to the factors I just discussed.
Adjusted EBITDA was a loss of $6 $6 million in the third quarter of 2021 compared to a gain of $500000 in the second quarter of 2020, we add back our rent expense is primarily related to a sale leaseback agreement associated with the Kentucky facility.
The us is essentially a replacement of depreciation and interest expenses.
Turning to slide nine I'll provide an update on our outlook for the full year 2021.
We continue to expect that the increase availability from the completed phase one capacity expansion.
The successful completion of our Debottlenecking initiatives in Q2 should allow us to significantly scale up production as we move into year end.
While we believe demand for our products will remain strong for the foreseeable future. We continue to see impacts to our customer's product launch timelines.
Mobile supply chain challenges such as shortages.
Painter, a shifting in trucking.
Constraints in supply issues for materials, including items such as paper.
Sure.
We're confident these challenges ultimately it will be resolved or customers and bama.
We continue to expect adjusted EBITDA and cash flow from operations to benefit in 2021 from operational efficiencies as the Kentucky facility increases utilization levels.
Total operating costs to be approximately $31 million for 2021, including the post acquisition period from November and excluding D&A and stock based compensation and one time items.
Additionally, we expect zero cash taxes for the year.
For the full year 2021 we now expect that.
Visitors to be in the range of 200 million to $210 million almost entirely due to one accelerated investments related to the earlier groundbreaking of our greenfield construction to get ahead of further potential construction material inflation costs in two phase two construction building faster than previously anticipated.
Capex range is also inclusive of investments associated with November for the post acquisition period.
Looking at our balance sheet.
Our total long term debt was approximately $29 $9 billion at quarter end and includes $21 million of low interest in new market Paas credit loans that we expect to be forgiven plenty of 26.
Our cash position continues to support our planned capacity expansions in 2021.
And we are actively evaluating financing options for our planned capital expenditures into 'twenty, two and beyond now.
Now I will turn the call back to Steve for closing remarks.
Thank you Chad in conclusion, we are confident in the trajectory of our business as we move forward.
We're extremely pleased with our team's efforts to execute our growth strategy and to continuously build on the strength of our core app and see a product application development as we look to capture a growing share of the outsized demand for bioplastics.
We are helping our customers fulfill their ESG commitments and at the same time, we are marching towards our goal of reducing plastic waste in the environment and to help people build a circular economy that we believe will benefit generations to come.
We are excited by our progress year to date and believe we are still in the very early innings of an immense opportunity for long term growth and value creation.
Thank you for your time today.
I'll now open the line for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Interest of time, we ask that participants limit themselves to one question and one follow up and then re queue for additional questions.
One moment, please while we poll for questions.
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Thank you. Our first question comes from Laurence Alexander with Jefferies. Please proceed with your question.
Good evening I have two questions first on the partnership with total.
Can you give a sense for can you give a little bit more detail on the benefits.
Who is committed to watch and how this differs from a regular purchase agreement.
Sure Laurent Thank you for the question.
Basically our partnership with Tau is a long term and both parties are committed to the supply and off take.
Material.
Okay, Great and secondly for the Kentucky one facility.
Given the what you now know about the order book likely mix.
And current trends in raw material costs and the <unk>.
Facility in the first half of next year hits your original benchmarks for margins and free cash flow generation on a kind of a unit basis, just Kentucky, one on a standalone basis.
Lawrence could you repeat the question.
I feel like we got cut off here.
Sure. So given what you know about cut through you know the the order book likely product mix.
Raw material cost changes.
Should Kentucky, one once it is hitting the full operating rates in the first half of next year.
Hope you to hit your original targets for margins and free cash flow generation on a kind of a unit basis economics, I mean will that just can you give a sense of.
Well, that's it's still as he looks to be tracking things what you originally thought.
Yeah Laurence.
The phase one and phase two facilities, even though we're calling them when it phase two it's really one plant.
It'll it'll be hard to bifurcate that because we've already hired the folks for a lot of the folks for phase two and we're gonna be continuing to hire through next year. So you can't really separate the two out like that.
But given what we know on the operation side.
If we hit the volume numbers.
That's the kind of performance that you know that we planned for.
Thank you great I'll hop back in queue. Thanks.
Thank you. Our next question is from John 10, one thing with C. J S. Securities. Please proceed with your question.
Alright, Thank you for taking my question Steve.
Steve I got dropped into the beginning of the call and I Might've missed this but did you give an update on the total expected sellout.
You have in the pipeline right now for phase two and phase three I think as in the last call you got a.
A couple of customers lined up for phase III, just wondering if that's changed at all have you increased that.
Thanks, John No we did not.
Not updated that and there's no change at this point in time, we are <unk>.
Having some great conversations with some of our customers, though about that.
I will just anecdotally tell you one one customer that has it in previous previously discussed, but it's been a long time customer recently told us that they have 100 million pounds of business that they want to convert to PHA now that kind of thing it takes a long time.
Just didnt negotiate the agreement to do the development work, but it's really an exciting.
Yeah.
Yes.
Do you need to build that long term demand that we see out on the horizon.
Okay, Great and then I hope you didn't give an S. T number this quarter you usually do I was wondering if you could supply that and also the volume of PHA products in the quarter or maybe an average utilization rate compared to the nameplate capacity.
Sure.
So the.
Okay.
Yes.
S P.
We have decided that we're not going to continue to provide that due to competitive reasons.
We've only provided that in the first place to correct misinformation in the market.
So we're not going to continue that in the future, but we were up.
Slightly on a year over year basis, and slightly up slightly on a quarter over quarter.
Basis, and thank you for asking the second question, because I think I I.
Might have misread the.
The script on the the.
<unk> in Q3 Q2 Q.
Q2 utilization was 47% in Q3 utilization was 62%.
Got it and that's on average right and you mentioned October being 70% I think.
Talk with 70% correct.
Got it thank you I'll jump back.
Oh go ahead I'm sorry.
I was just going to say you know as I mentioned earlier.
We what we've figured out is that all the step functions in phase one are operating in downstream processing are operating.
Nir twice as fast as what's required with the exception of brine and what we've discovered there is that different grades are growing at different speeds and we have a fix in place and we expect to be at that 100% run rate by the end of the year.
Yeah.
Got it thank you.
Yeah.
Thank you. Our next question is from Thomas Boyes with Cowen and company. Please proceed with your question.
Great. Thanks for taking my questions just to just to follow up on that one point. So it was really the driving kind of keeping that needs to be solved between now and the end of the year, that's going to get through the 100% is there any other gating factors or things that you've identified.
No Thomas Thank you had Brian is the only thing that we're not hitting at 100%.
We're running on average between 50 and 125% of plan I'm, Brian. So that's the last thing that needs to be resolved and we're very confident in and some steps that we have in place and as I said on the on the read through the.
The phase two drying capacity that is coming online in February so we'll have more than made up for any.
Shortage by that time.
Perfect.
Maybe just because we were talking about the asps.
Canola I believe was like 47 cents.
As per pound last quarter in Tokyo, and with the expectation that maybe that gets you no I appreciate that like 10 through the end of the year is that still a good number looking forward what was it this quarter.
Yeah, right now our canola oil prices 58 cents Thomas.
We expect that.
We know it will go to around 80 next quarter.
The good news here on the on the supply in the spot pricing is that it has finally leveled off and we see signs of it now decreasing out into the future. So we.
We continue to work on alternative feedstocks, but one of the things. That's happened there is some of the more traditional vegetable oils that we were looking at at sort of have not completely close the gap with canola oil in terms of the cost but have narrowed that gap.
A little less interesting to make a switch, but we're continuing to work on that but long term we're focusing on.
Non food.
Oh snap that we could implement now that will take longer because you actually got to kind of develop.
Your chain.
That's where we're at right now.
No absolutely I appreciate the color I'll jump back in queue.
Yeah.
Thank you. Our next question is from Laurence Alexander with Jefferies. Please proceed with your question.
Hi, just a question about the brands on slide three.
What does it mean for brain to be listed is there kind of a timeline.
Or a reasonable timeline for for them to hit commercial.
Sort of purchases of your products and putting those in the hands of consumers I mean should we be thinking that say by 2023 or 2025 all of those brands we have.
You know it should be commercial.
Yeah, I think I think by 'twenty two 'twenty three it would be reasonable to assume that that most of those brands would have some kind of a commercial offering if not all of them.
Perfect. Thank you.
Yeah.
Thank you. Our next question comes from Jon <unk> with CJS Securities. Please proceed with your question.
I just wanted to follow up on the inflation question as we head into 2020 through 2022 what what's your expectation of an ability.
Paas costs through them.
How much do you think your asp's are going to go up.
Ballpark.
Well I'm not going to make an estimate on the Asp's John but.
We feel.
Comfortable that we can pass most of the inflation that we're seeing through.
I guess, if there is ever good news in an inflationary environment as everybody's going through the same thing.
So, it's it's difficult but no.
Not surprising.
When you have to pass those on.
We we.
A couple things here too.
Mitigate some of the effects of inflation on our business one in particular I just want to point out.
We have made the decision to break ground on a greenfield this month.
Versus waiting until Q1 and the reason is there were two reasons for that.
One reason is that the quotes that we were getting were all scheduled to increase it.
If they wanted to accepted within a certain time period. So by starting now we've been able to lock in about 45% of our purchase equipment costs. So that we protect those.
Adams from further inflation over the life of this project.
And then secondly.
B.
Contractors off a phase two are just now starting to come off the job there are progressing.
They brought it down if you will off the job and if we didn't start.
Soon in Georgia, we would lose them now a couple of years ago. If you were doing a project like this you know a few months gap between two things wouldn't have been a big deal, but in this environment. If I, if theres going to be a three month gap between jobs, you're going to lose those contractors. So that was it just a matter of motivation to get started a little early.
And we believe that will help us hold the timeline as much as possible.
Got it thank you and just to be clear was there any inflation in the and the increase to the $200 million 210 million. This year or was that purely just the acceleration and pull forward and maybe just a follow up what are your expectations for spending in 'twenty two.
We haven't provided that guidance, yet John but in that that 200 to 210 million number was up.
Almost entirely the pull in of the Greenfield project.
Okay.
Thank you.
Thank you. Our next question comes from Thomas Boyes with Cowen.
Cowen and company. Please proceed with your question.
Great I appreciate it.
Just want to make sure I understood. The recent P. L. A supply agreement. It sounds like is this only for applications, where it's actually going to be blended with the formulation that includes no tax or would this also if you like.
L a where you would just be.
That's the existing.
Existing customers.
Yeah. Good question Thomas.
So this is a really important contract to us because of the tightness in the biopolymer market and then the appellate market itself. So it was a really important part of our long term strategy here to secure that supply.
The real intent of it is.
To use that material to blend with DHA.
As you're aware, we're using quite a bit of other polymers in conjunction with DHA, which allows us to sell basically to bounce for every one pound of PHA that we produce.
But there is nothing.
Prevent us from using that BLA on a standalone basis as well.
Got it got it and then just.
Because there was that pre buy do you think that that same type of dynamic occurs.
And for you or is that largely normalizes.
Yes.
Thomas based on our current forecast, we think that's normalized out already.
Yeah.
Right.
Alright, I appreciate it thanks, so much.
Thank you. Our next question comes from Jon <unk> with CJS Securities. Please proceed with your question.
Steve I just wanted to follow up on your your point about your customers being constrained.
Heading into next year do you expect that to impact your demand at this point or is it too early to tell.
Yeah.
John I think what we're focused on here is the long term and we see that demand getting bigger and bigger.
In the very short term and I'm I'm I'm not talking about in a year or anything like that.
For the next several months.
It is more difficult to do business out there right now and there's just no way to get around that so we think that that's taking things.
Taking a little longer just to get things done due to those constraints in the economy, but I'm also confident that we will work around it.
One of the things that we've done.
We've been working on for a while with with the advent of Covid, but is the creation of the Danaher conversion lab too.
Help me help shorten that.
That acquisition cycle.
In the development cycle with customers.
Alright, thank you.
Thank you there are no further questions at this time I would like to turn the floor back over to Steve Croskey for any closing comments.
Thank you everyone for joining us today, we're encouraged by our progress and remain excited about our business prospects as we move into 2022.
I'd like to say, thanks to our shareholders and partners for their continued support and we look forward to updating you in the future.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Okay.
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