Q3 2022 Amyris Inc Earnings Call
Gross margin cash operating expense and adjusted EBITDA Reconciliations of these non-GAAP measures to the most directly comparable GAAP financial measures are contained in the financial summary section slides of the presentation or the press release distributed today.
During this call we will make forward looking statements about future events and circumstances, including Amyris is outlook for 2022 and beyond Amyris as goals and strategic priorities anticipated transactions in other future milestones as well as market opportunities growth prospects and fit to win actions.
These statements are based on management's current expectations and actual results and future events may differ materially due to risks and uncertainties, including those detailed from time to time in our filings with the Securities and Exchange Commission, including our 10-Q for the third quarter of 2022.
<unk> disclaims any obligation to update information contained in these forward looking statements, whether as a result of new information future events or otherwise.
Now I'll turn the call over to John John Thank.
Thank you hi, and good afternoon, everyone.
Thanks for joining us today I'll provide an update on our business performance and our expectations for the next several quarters, Tom who will provide an update on our financial performance, our <unk> initiatives and our fourth quarter and full year outlook and our recap before turning to Q&A.
Our third quarter was another solid quarter of core revenue growth and operational execution.
We deliver on our business objectives and made significant progress advancing our previously communicated fit to win strategic actions demand for several of our brands is higher than anticipated and we are prioritizing spend in investment to ensure we meet retail channel needs. While also delivering on our cost.
Savings initiatives.
Our consumer business grew 98% in the third quarter.
Over the same period in 2021 and has grown 107% during the first three quarters compared to the same period last year.
Our consumer gross margin was in line at just under 60%.
Q3 was our sixth consecutive quarter of record consumer revenue.
We have become the leading growth company in health beauty and wellness markets and are not experiencing a slowdown in demand for our leading brands.
Our technology access revenue has also continued to grow as a result of our industry leadership in the production of clean sustainable chemistry or ingredients demand has continued to outpace our capacity. We've continued to sell all that we can produce and have a backlog of orders that are shipping in the fourth quarter.
Margins for our ingredients products have been challenged by higher input costs from contract manufacturing in air freight that has been required for product delivery that meets the needs of our customers.
We will expect to see significant gross margin improvement now that we're increasingly making product at our new Barra Bonita precision fermentation facility.
We are in process of producing five ingredients at Barra Bonita during the fourth quarter.
Looking ahead, we expect gross margin expansion in the fourth quarter, resulting from increased production at Tahoe Bonita the transition to consumer production from third party contract manufacturers into our own production facility in Brazil, a reduction in packaging costs and reduced dependency on.
China source components, which to date have resulted in significant airfreight charges.
We executed most of these changes by the end of the third quarter through our fit to win agenda and expect much further realization of the cash and the margin benefit into the fourth quarter.
To sum up the third quarter, we delivered strong operational performance, we launched our fit to win revenue cost and cash initiatives, we maximize utilization of the production lines that had been commissioned at valley Bonita and our interfaces consumer production facility in Brazil, We also may.
Significant progress with the setup of infrastructure for our expansion in the U K and the European markets with our consumer brands.
In a few moments Tom will cover in more detail our financial performance the fit to win update and the outlook for the remainder of the year before that though I would like to transition to our plan and strategy for the next five quarters and our long term outlook.
Let me focus on four priorities, we are transitioning from a singular focus on growth in the end markets. We serve to a framework of disciplined growth and profitability focused on our four priorities.
Portfolio growth liquidity and profitability let.
Let me start with portfolio.
Our focus is to maintain our leadership in health beauty and wellness consumer markets underpinned by our best in class synthetic biology process development scale up and bio manufacturing assets, we continue to be the world leader in making clean sustainable chemistry, and delivering leading high value and high impact molecules to the world.
Fastest growing consumer brands no other consumer company in our end markets has the science or integration that we have built and are now executing on.
We intend to expand the availability of these molecules to the world's leading companies and brands through partnerships with respective leaders in each of the end markets. We will accomplish this through long term marketing partnerships, where we design engineer and make the molecules that are partners sell with exclusive marketing rights.
We are the only company in our sector that has now generated over $1 billion in value from these strategic transactions. We have a track record of executing significant strategic transactions that enable us to continue the manufacturing while partners gross sales through their leading position.
In their end markets.
As we continue to focus our business model and portfolio, we expect near term strategic transactions from the continued simplification of our portfolio to generate over $500 million of value that includes $350 million in upfront cash of which the net proceeds.
We plan to reinvest in our technology and consumer business.
Let me now discuss our growth we expect to continue delivering the leading growth compared to public consumer goods companies clean health beauty and wellness, we are transitioning to more prudent spending and adding a significant focus on making our company profitable.
The combination of our consumer brands, our science bio manufacturing and go to market strategy is enabling us to provide consumers with what they want and need.
We are focused on slowing the rate of investment in new brands, while continuing to support our leading brands to meet the strong demand they are experiencing.
Long term, we expect our portfolio to consist of around 12 brands and categories, where we can be leaders. These brands will continue to be sold through an omnichannel strategy with our own direct to consumer channel, leading and revenue contribution and success in retail from partnerships with the leading retailers in their risk.
<unk> geographies like Sephora Ulta Douglas in some European markets and our continued deepening of our partnership with Walmart in the U S, where we now sell pipette.
Our launching the <unk> brand and are expanding our metal labs brand into Walmart stores near you.
Currently each of our brands that have been in the market for more than one year are delivering the best growth in their respective markets on the beauty is more than doubling this year across the Brazil, JV and <unk> are all up more than 300% for the year to date and bioscience continues to be the.
<unk> growing brand and clean sustainable skincare powered by Science Bioscience is also our first brand to exceed $100 million in revenue in a single year.
Zinc has just launched in Brazil and is performing in the top 10 color brands at Sephora.
GBM is currently experiencing a significant store expansion in the U S. By tripling the number of doors Bioscience is seeing strong traction in China by delivering over $1 million in sales during a single week recently for the first time in the Chinese market we are.
We're launching the <unk> brand by tier into over 2800, Walmart stores in the US Meanwhile, we are slowing the pace of rollout for stripes and equal fabulous to ensure differentiated use of cash. The idea is simple invest where we have the leading brands and can grow ifs.
<unk> spend less on other brands to get to profitability faster and with better predictability.
The third priority for US is profitability, we are focused on ensuring that our growth is profitable and making our company financially sustainable and attractive we have a clear path to operating profitably. Our goal is to deliver 10% operating income on an estimated 200 million.
Revenue in the fourth quarter of 2023.
We expect this to be our first solid quarter of operating profitability for our core business based on maintaining our current growth rate and delivering on our fit to win initiatives.
We expect over 10% operating income for full year 2020 for expanding that to over 20% operating income by 2025 with the goal of more than $1 billion in revenue during 2025.
We have built the fastest growing consumer company, including health beauty and wellness and have proven differentiated business model underpinned by the world's leading science and bio manufacturing platform. We are focused on growth to reach the scale necessary to win and now we can turn our focus to profitability.
While continuing to deliver industry, leading growth we are the leading clean beauty company and the only company in beauty powered by the world's leading science to make clean sustainable chemistry, we make our own chemistry and formulate some of the best performing products in health beauty and wellness markets.
I'll now turn to our fourth priority, which is liquidity.
Consistent with the expectation we set during our last earnings call. We have closed on $180 million of term loan financing our porch, a portion of which is secured against future earn outs with our DSM strategic transaction.
This funding enables us to continue executing our strategy without any significant dilution to our equity we expect growth to continue at the current rate for both our consumer and technology access businesses. We also expect over $150 million.
Annualized 2023 impact from fit to win.
Impact revenue cost and cash are.
Current business performance current cash.
Fit to win improvements provide us with the necessary liquidity to self fund to the closing of our $350 million of expected upfront funding from our large strategic transaction.
Our strategic transaction regarding the marketing rights of two molecules for $350 million of upfront consideration and up to $500 million of total value remains on track for the fourth quarter and the fourth quarter is tracking toward another record revenue quarter for <unk>.
Combination of our current growth and operating performance combined with our fit to win actions and the successful execution of the strategic transaction enabled us to self fund our growth and deliver on sustained profitability. We have no current plans for dilutive financing.
Now, let me summarize and transitioned to hot as I described we are focused on four priorities our portfolio that enables us to continue delivering the best growth in consumer health beauty and wellness and is underpinned by our portfolio and our pipeline of the world's best clean sustainable ingredients.
<unk> second.
Our focus on growth continuing to deliver the best growth in the categories we operate in.
And doing it profitable in the near to medium term.
Our third priority profitability deliver 10% operating income starting in the fourth quarter of 2023 and expanding from there and our last our fourth priority is liquidity. We are committed to self funding based on the current growth rate delivery of our fit to win benefits and the execution of our strategic.
Teacher transaction in the near term with no further equity issuance planned. We believe these four priorities are underpinned by our leadership in the consumer business and by the best performing platform in synthetic biology and bio manufacturing.
Prioritizing profitability and sustainable shareholder returns over growth, let me now turn the call over to hi.
Thank you John Please turn to slide 10.
Afternoon, I will be covering three topics as follows first discover our acute discuss our Q3 financial results as it relates to revenue gross margin operating expense and cash second we provide an update on the fit to win revenue cost and cash actions. We are undertaking to much improved financial performance and third provide.
An update regarding our outlook for the fourth quarter and full year, well, let me start with revenue on slide 11.
As John described our third quarter was another strong quarter of core revenue growth and a new record and consumer growth.
Core revenue, which includes consumer and technology access revenue and excludes strategic transactions and other increased 49% to $71 1 million when compared to the same quarter last year core revenue.
<unk> included record consumer revenue of $46 6 million.
Which increased 98% and also it includes technology acts as revenue of $24 6 million.
We have now completed six consecutive quarters of record consumer revenue.
Also we are significantly outperforming the beauty and personal care sector with the peer groups are public company's most recent quarterly revenue performance ranging from minus 11% to plus 43% versus the same quarter last year.
As I, just said, we grew 98% and 81% on a like for like basis, meaning based on our brands. We are selling in the market at this time last year.
Technology access revenue growth was due to technology license revenue from the FNF really note, partially offset by lower R&D collaboration which was down $4 million due to an increased focus on the development of molecules for our own marketing and formulation.
When you guys plan to produce five ingredients in Q4, which will help address the supply chain.
Apply chain constraints, we have experience and also start to address the negative margin impact we are seeing from sourcing product from third party manufacturers.
As it relates to revenue and despite macroeconomic concerns we continue to experience strong demand from the market both for our consumer and ingredients products.
Growth in consumer continues to be the best we observed across publicly traded beauty companies and is now two third of our core revenue.
This by comparison was only one third at the end of 2019.
The creation of demand is driven by four factors, namely more brands, new formulations more stores endorse and finally international expansion.
We are focused on ensuring that we can meet increased demand with the improvements we are making in our supply chain and tools to deliver it with much better unit cost economics.
This brings me to my second item, which is gross margin now on slide 12.
Im always we have historically talked about our non-GAAP gross margin measure, which includes direct product cost of goods sold but not all aspects of making and delivering the product such as certain freight charges inbound freight and particularly air freight has been a significant cost to us for the year. So far we plan to move to gross profit.
<unk>, which includes all elements to make to make and ship product in the new year. So we can align our disclosure all at the same time.
non-GAAP core gross margin of $28 5 million or 40% of revenue increased from $17 7 million or 30%, 37% of revenue in Q3 of 2021.
Increased gross margin in Q3, 2022 reflects a year over year increase in consumer and technology license revenue, which was partially offset by lower R&D collaboration and higher ingredient input costs due to unfavorable contract manufacturing unit economics.
Additional impacts not shown here, but of note given that the impact profitability is the significant increase in freight and logistics expense due to increased inbound air freight rates and volume to support consumer revenue and imports of ingredients into media product.
We expect most of these freight and logistical expenses to decline as we transition to Barra Bonita fermentation and to Brazil source components and manufacturing for our largest consumer brands.
We see this freight expense as temporary in nature, and we expect to see a notable reduction starting in Q4.
Direct cost of goods sold grew by about $12 million and food grew by about 14 significant portion of the cost increase can be attributed to operating and growing at a fast pace and also the challenge supply chain caused by Covid as Walnut Street rate increases.
The takeaway regarding gross margin is that we have made strategic investments in our manufacturing and supply chain footprint footprint, both on the consumer and ingredients side, we intend to take advantage of our scale with cost of goods sold and are certainly revisiting all input costs as part of fit to win.
I'm going to operating expense next on slide 13, we are operating 11 brands today.
Following the recent launch of strikes and equal Fabulous in October .
To support brand development and topline growth, we have significant investments, which have resulted in cash operating expense that have grown to $137 8 million an increase of $56 4 million versus the same quarter same quarter last year sequentially. However, operating expense did not grow for the first time in seven quarters.
Marketing expense was actually down sequentially on the back of continued revenue growth, we have slowed the pace of investment in new brands to balanced cash management and expense control.
The year over year increase in operating expense was due to an increase of $42 million and selling expense approximately 10 million in G&A expense and $5 million in R&D expense.
Greece's were driven by a combination of increased head count significantly investments in existing and developing brands for paid media and advertising and expanded commercial activity in the U S and internationally.
Also growth driven consumer order fulfillment and shipping expense and comparatively low prior year travel expense due to COVID-19 restrictions.
Shipping and handling of our consumer goods increased by $5 million versus the same quarter last year due to continued growth in DTC orders.
As a result of our elevated expands our use of cash in the quarter was also elevated principally due to continued investments in brand marketing of both new and existing brands. Additionally, we continued to deploy cash for the construction of BELBUCA that has been entirely self funded to date.
We started the quarter with a cash balance of $107 million, we raised $80 million from a term loan that we closed in September and used $162 million during the quarter, resulting in a closing balance of $25 million.
The $162 million was $24 million less than the previous quarter Q2 of this year.
The majority of the $162 million related to operations, namely $142 million and adjusted EBITDA, and 27 million and capital expenditures of which $17 million was attributable to the construction of our <unk> plant.
We expect to complete capital expenditures full Barra Bonita in early 2023, working capital did not increase sequentially as a result of actions taken with suppliers to improve terms and improve the cash conversion cycle.
We started to reduce our use of cash in the third quarter and we expect to continue this trend into the fourth quarter the.
The Q3 quarter end cash balance of 25 million combined with a $100 million term loan that we just recently closed in the fourth quarter and fit to win actions are expected to support our needs until we complete the strategic transaction that John has referenced.
Let me now discuss fit to win actions that we've taken on slide 14.
51 is a company wide series of actions related to revenue cost of goods sold and SG&A.
Because of our portfolio and our scale, we expect to leverage what we've built for a much better cost structure and cash conversion cycle.
In the aggregate, we expect 51 to result in over $150 million of benefits in 2023. This at the annualized rate as compared to the cost base. We saw in Q2 of 2022.
Firstly price increases we have increased prices on selected ingredients as of July one and selective consumer products as of October one.
Additional actions are being taken in the first impact is expected in Q4.
Cost of goods reductions, we have taken several actions to ensure consumer products into our into fastest consumer production facility in Brazil. We have also changed the sourcing of packaging and components to achieve both better unit cost and a more sustainable offering <unk>.
Secondly, Rick Barra Bonita, producing we are leveraging our <unk> position fermentation capability to reduce production and shipping costs.
Firstly, we are very focused on our global sourcing network and a reduction of freight in general and air freight in particular, the latter has been very costly for us this year, albeit necessary to ensure continuity of supply we have realized $2 5 million in savings in the third quarter on this particular topic.
SG&A reductions we have implemented a number of actions intended to reduce our paid media and marketing spend as a percentage of revenue.
We are reducing the number of agencies and also use different approaches to access new revenue.
As micro and nano influences, we have realized $7 7 million in Q3 cost savings from these actions secondly, shipping and fulfillment as available costs, particularly related to consumer order activity in our DTC channel.
We have already implemented changes with our <unk> providers and parcel service to obtain better rates and a more suitable service model.
We are in renegotiating multiple cost components with a view to deliver a more fit for purpose cost basis, we realized $200000 in savings in Q3 from this particular effort.
Lastly, cash conversion cycle as I mentioned already working capital did not continue to grow into the third quarter, we have taken steps to change our sourcing model in terms with vendors we have more work to do but we have started to see early benefits.
Collectively the various initiatives delivered just over $10 million in the third quarter due.
Due to timing of sell through of products from inventory, we did not realize the results from some of the actions taken in cost of goods sold we expect to see a much greater impact in Q4, along with new actions underway.
Moving to slide 15.
<unk> was our sixth consecutive quarter delivering record consumer revenue demonstrating significant year over year growth.
Let me go to slide 16, and provide the outlook for Q4 and the full year.
Consumer revenue is expected to continue growing at the current rate and ingredients revenue is expected to accelerate based on increased Barra bonita production output and shipments in the fourth quarter as.
As a result, Q4 2022 core revenue is expected to be over $100 million.
Key success factors in our revenue plan for the fourth quarter include China, 11, 11, Singles' day, where we expect to see strong results with <unk> in particular.
Holiday shopping season for all of our consumer brands at the end of this year.
Early traction in the UK and Europe markets, where we have established our supply chain infrastructure in the U K and Netherlands with <unk> providers.
Launch of a new brand in Walmart. This is the hair care brands for which we expect to ship. The first order before the end of the year.
And lastly, the production output <unk> is now producing five ingredients to increase output and product supply to our customers.
You all for listening today, John has concluding remarks before we open the line for questions Joe.
Han discussed a number of opportunities to reduce cost improve efficiency and improve workflows across the organization. We completed the necessary short term funding and the strategic transaction is on track to complete in December we are very focused on creating a path to self sustaining profitability and cash generation.
The priorities are clear.
Portfolio growth profitability and liquidity, we have built a leading consumer brand portfolio and are delivering the best growth in health beauty and wellness markets, we have the brands consumers and retailers want and the products the world needs for all of US and our plan is to be healthier we are tracking towards another record quarter for both our core.
In our consumer revenue.
We expect to deliver our first quarter of over $100 million of core revenue and expect our current growth rate to continue into 2023, while also setting a clear goal of achieving operating profitability.
We also understand the need for our investors to win and we will provide quarterly guidance for 2023 at our Q4 and full year 2022 earnings call.
With that we'll go to Q&A, Dave can you help us move is aligned to Q&A. Please.
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Momentarily to assemble our roster.
Okay.
Our first question comes from Colin <unk> with Oppenheimer. Please go ahead.
And this is a specific one for Han the structure around the molecule monetization is this something that you guys can repeat because it looks like youre going to be monetizing multiple molecules on an annual basis.
Having the flexibility around liquidity team a real advantages you negotiated some of these channels.
Yes, certainly thank you Colin thanks for joining today will.
I will make equivalent and John can add if he wishes.
I mean the <unk>.
<unk>, we've been very successful Joe made some comments during his prepared remarks that we have a track record of actually delivering on these type of molecule transactions. We did it last year of course with our SNF portfolio with DSM, we did it with <unk> with ingredients and so what we're contemplating here was something similar which basically means.
We gave a an exclusive marketing license for the go to market for a set of set or a single molecule.
Basically we will continue to be the manufacturing partner.
And supply of the product into the future and typically there is a an upfront consideration and also an earn out over time as well as of course, the sale of product to our partner.
The only thing I would add and thanks, Colin from being on as we already have started.
Pretty well into negotiations for our next deal beyond the one we expect to close in December which would be.
Another deal for some time in 'twenty.
23, very much along the same lines really reinforcing what Hans you said, so and more than ever we probably have three or four other parties in the pipeline for monetization deals around the portfolio. So.
As you know we've aligned our portfolio very closely with the end markets, we are going into what our consumer brands that's given us.
The ability to really drive demand for the molecules and we've got parties on the other side that are interested in marketing those molecules as well as coming to us for additional molecules that they have that they'd like us to develop scale and scale, where they become the commercialization partner so.
I can see this really replicating.
And I could see replicating so that every year for the next three or four years, we've got a deal turning around this this model of <unk>.
They monetize or said differently the market exclusively we develop scale and produce hope that helps.
That's helpful. And then just thinking about the ability to have a flexible manufacturing facility can you guys talk a little bit about the.
The cycle time for switching from one molecule to another.
And how that process is going and trending in terms of the efficiency of that switchover process.
Look I think that was a major reason.
And you've been pretty close to us calling on the development or the design of the current facility. The Barra Bonita facility and what I can do is I can confirm for you that it's working the way we expected so instead of having.
Take the facility down and start all over for the whole facility.
<unk> focused on one molecule, we actually have multiple molecules running at the same time and the ability to isolate individual tanks to run individual molecules and thats. How we are able to do five molecules in a quarter, which has never been done before in our company right. So that youre already seeing the benefit of having bajo benita and the flexibility we have.
To do multiple molecules at the same time.
Excellent. Thanks, so much guys.
Thank you thanks Carla.
Who is next.
Dave are you there.
I'm going to step in and announced the next question. The next question will come from Rachel Barnes with Jpmorgan. Please go ahead.
Hey, guys. Thanks for taking the question.
Firstly with Husky.
Keeping my comments on 2025, John you said, reaching that $1 billion.
Revenue in 2025% to 20% operating income margin.
1 billion is that total business or is that referring more to the consumer business.
Yes, I didn't comment its actually meant to be for the entire business most of which is expected to be consumer and I did say.
A minimum of a 1 billion right, we actually have expectations to be a bit north of that but again majority consumer and it is meant to be the clear revenue of the business what isn't in there is obviously any transactional or a onetime revenue.
So maybe can you just walk us through the puts and takes there I believe earlier. This year you pointed to expecting to reach $2 billion in 2025. So I appreciate the comment.
Diane you will probably come in above that but I guess can you walk us through what's changed really are you seeing underlying shift in demand.
Regardless of some of the supply chain and more near term headwinds that you guys are facing in the market.
So I would say when I say north of 1 billion is probably 1517 somewhere in that range, Okay, which is really not a significantly different outlook than we had.
If I connect back to what is different.
I would say a couple of things first we now see more of these ingredient deals and we're actually figuring in what has to change to revenue on the ingredient side of the business as a result of some of these deals as they go forward. So that's kind of one part I think the other part is in the short term much higher prioritization.
On profitability and efficiency and our use of capital and as a result.
Really backing off investment in brands that aren't delivering that kind of growth. We expect our the kind of efficiency and customer acquisition that we'd expect so those are really the two changes right other than that.
Nothing different especially for our core right. The brands that are and have been in our portfolio. We don't see any significant change at all from what we said before.
Got it and then on the guidance for this year I think previously we are guiding to greater than 150% growth in consumer and roughly 40% growth in technology asset.
Now, you're pointing to that greater than $100 million of core revenue for <unk>.
Can you just kind of walk us through what you expect that split to be on.
Humira versus technology access for <unk>, and how we should be thinking about that rounding out the year.
Sure look we've said we expect the same growth going into the rest of the year for consumers. So so far year to date, we're at about 107% I think and I would expect that going into the fourth quarter, but the real change there is again by focusing on profitability and best use of our cash.
We've actually slowed down the ramp on some of our new brands. So that's really the shift but for the established portfolio. We continue to see the same kind of growth about 107% year to date and going into the fourth quarter. As you think about ingredients look the.
Ingredients ingredient growth is accelerating pretty significantly going into the fourth quarter as a result of us being able to finally get to the production we needed some of the backlog right. So.
You can expect.
The growth in the fourth quarter for ingredients to be well over 50%.
And that will translate into again better growth than we've had year to date on the ingredient side.
Got it and then kind of.
Final one from me here just on consumer you guys flagged that you werent seeing any slowdown related to macro so far.
On a sequential growth you guys grew 24% sequentially during Q2 and it looks like that stepped down roughly 8% sequential growth this quarter.
Consumer so just wondering is there anything else in that dynamic and then in terms of the broader guidance for the year are you guys contemplating any slow down going forward, just given the macro environment and pressures on the consumer wallet. Thank you.
Yes, Thanks for that question, Rachel I think first.
Remember that the base for this quarter for the third quarter is different and the base for the second quarter because in the third quarter of the prior year. We had a couple of new brands that had shipped to trade would change the base. So that's an important distinction that even though the year on year growth or quarter on quarter sequential growth.
Seems slightly slowed.
Slow down it's actually because of a different basis, if I look at like for like.
Brands year on year, we are maintaining the growth rate, we've been experiencing through the year. So no.
No no change there.
And then as we go into the fourth quarter, and where we are into the fourth quarter and I can tell you. So far in the fourth quarter, we're seeing consistent growth with what we've seen.
In the third quarter, and obviously year on year because of holiday playing in an additional doors and some of the geographies we play into.
We're seeing very very strong performance I think the question for us really.
Is coming up soon which is how well 11 11 does and then obviously we have a big week in the period between Black Friday and cyber Monday.
Two we will have a huge impact on the quarter and again, we see no. We see no signs currently on day to day of slowing down demand for the for our brands.
Our next question today will come from Cory <unk> of Piper Sandler. Please go ahead.
Hey, good afternoon, guys. Thanks for taking the question so.
Thank you backing piggybacking off that last question Rachel hard.
Can you just provide a little bit more color on what youre seeing geographically for some of your different consumer brands. I mean, you did note that biosciences doing mall in China can you just give any any further color on.
What youre seeing any specific markets.
<unk> seen some pretty volatile shutdowns and how youre factoring and the volatility in those markets into your guidance.
Sure and appreciate you being on.
Okay.
Let's start with the North American market is our biggest market.
And the best way for me to discuss our North American markets look at our D to C which is.
Really our biggest single channel in North America across our brands and I can tell you our D to C performance.
Continues to be very solid.
No no real change there I think the second way to look at performance in the North American market is how well we're ranked inside the sephora stores, especially for <unk>.
Bioscience, JVM, which both have been.
Great performance inside Sephora, and we've been increasing the rank of our brands inside Sephora. So.
<unk>.
I'd say strong performance in retail and continued very strong performance in D C.
And the I would say North America stayed steady.
Through the last couple of quarters for us and what we're seeing in the fourth quarter that is true for Brazil, if anything we're seeing accelerated demand in Brazil in the second half of the year and we just see a very solid consumer we see foot traffic increasing in sephora and we see our D to C performance.
Increasing in the Brazilian market I think as it relates to Europe , and then the U K, we've seen Super strong performance for our JV and brand and space <unk> K and the U K.
And for <unk>, Inc, and we've just launched direct to consumer in the UK. So early days and we've been pretty consistent with bioscience in the U K, we launched in Germany and.
In the last three months or so.
I think we launched in Germany around the August timeframe, and then we launched in Portugal.
The second quarter of the year in Portugal, we very quickly for Bioscience became number three.
<unk> online for the leading retailer in Portugal.
And then number five in store for total skincare brands in Portugal, and we achieved that in about 45 days and we've seen the demand in Portugal stay pretty constant and in Germany. We have seen very strong adoption of the brand and I would not be surprised if the brand becomes top 10 skincare in Germany. So a critical part to note and all.
That is we're starting from a pretty small base if I, if I add China just to round out the regions, if I add China what.
What I would say is we had a very small base in China right is like $2 5 million in 2021 in China. So in 2022, I expect us to do about $15 million and what I would tell you is the demand we're seeing and the activity by the consumer in China is really accelerating with a focus on cleaning.
Sustainable and high efficacy products with science being a critical component right we saw.
As I said during the scripted comments, we saw our first million dollar weak for the brand in China as a matter of fact, we had.
It was last month, one week, where the Chinese retail market was our number one retail market in the world and we're just seeing just very strong performance.
In the Chinese market, especially over the last over the last quarter I don't think Thats, saying I don't want to make that as a market comment I think thats really.
Our base being small and us actually being able to take a lot of share quickly in that market by having the right influencer being on the right platform and having a great brand. So I hope I hope that helps give you some color as to what we're seeing across geography.
Yes.
Super helpful. Thank you so much for all that color and then just quickly on <unk>.
The gross margin expansion plans I mean I appreciate all the color in the prepared remarks on fit to win but can you just provide a little bit more color explanation on how you are expecting that cadence of gross margin improvement herein in Q4, and then the early parts of 2023. Thank you.
I appreciate that.
We have auto on the phone I am going to let him.
Take the credit for this one.
All I can tell you is youre going to start seeing pretty big step changes in our cost of goods really across both ingredients in consumer and Eduardo can describe exactly the actions he and his team took in the third quarter and how they flow into fourth quarter, and then full year 2023, Eduardo we'd like to take that yes.
Yes. Thank you.
I think look in terms of the opportunities that we worked on the third quarter. We looked at this from the consumer side front to back.
<unk> talked about the airfreight and indeed, reducing the expedited components from China, we did more local sourcing, particularly on paper.
We also started to leverage our production facility in Brazil.
And Brazil, where we did see a very material.
Cost difference in the production cost compared to what we had done in contract manufacturing in the U S. And then the final thing that we did implement in the third quarter.
Much more efficient pick pack and ship the backend the outgoing portion of our supply chain, where we really moved to a just a better model in terms of footprint more nodes and also a far better productivity in terms of the level of automation that we had.
In the direct to consumer channel for consumers. So at Green All told I think we see very very very strong confidence in the fit to win initiatives against the cost of goods sold for our consumer business.
And just in your view.
A little Tidewater. So I'll give you a couple of data points I think that are important just on pick pack and ship, which is a new.
Supplier and model that Eduardo and his team implemented.
For our D to C business that has about a 30% reduction in the unit.
For every unit.
Chip.
Every order we get and then if you think about the bioscience products that we're making in Brazil.
And when you think about the savings and paper.
The packaging when you think about the savings and the grid.
The bottles in the pumps and then when we finally get everything implemented and sourced in Brazil, you'll be at 50% reduction in unit cost for Bioscience, which is our top top producing brands. So those are very material to the cost of goods that we see flowing through starting in the fourth quarter.
Okay.
Awesome. Thank you so much.
Our next question today will come from Steven Mah of Cowen <unk> Company. Please go ahead.
Hi, Thanks for taking the questions.
Good afternoon.
Hey, Hey, Dan Alright, So you talked about monetizing your portfolio of 25 plus ingredients.
Can you talk about your strategy now.
Given.
Your push to conserve cash and focus resources on more mature brands, how should we think about your prior strategy of developing applications for these 25, plus ingredients first and then partnering or licensing them versus straight monetization of assets.
I don't I.
I don't expect you will see any material change to the strategy I think what youll see is the pace be different. So a. Good example is we have three brands that we're all going to shift to trade and start selling and direct to consumer.
Within the last 60 days right and what we're doing a spacing those out and ensuring that we actually use our cash more wisely and launching those brands. So no change to strategy, but actually being much more thoughtful about the pace at which we invest and really ensuring that every one of the brands is actually.
Really fitting our playbook. So we know that for a brand to be super efficient from a marketing perspective, we need to be present with a top retailer and we need to have a great online presence so rather than invest in online presence alone make sure. We're actually marrying those things as they go to market and get the times.
Right. So I hope that helps Steven it's not a shift in strategy as much as it is slow the pace and actually be much more thoughtful about where and how we invest.
Okay got it and then.
For potentially.
Licensing out the marketing rights for these ingredients so.
Is the strategy to just.
To our licensed semi was just an ingredient or to develop a formulation and brand first.
It was more what I was asking.
Got it.
Look I think when it comes to personal care and beauty again no change its we like platform ingredients, we like packaging them with the brand we like creating consumer.
Demand in consumer interest and passion for that ingredients and then packaging. It tech packaging the marketing rights that is not necessarily the case when it comes to some of the pharmaceutical or more industrial ingredients, where we actually see.
Doing the marketing rights in licensing much earlier, so I will just say that.
There is a split there and I don't think we'd ever made that split explicit okay that when it comes to personal care and beauty. It is the delta brands, where the platform ingredient and then commercial way for when it comes to pharma and industrial we're actually seeing a much faster track and we don't plan on building a brand around dose and <unk>.
Markets.
Okay. That's helpful. I appreciate that and maybe a follow up to Rachel's question.
Could you provide a little bit more color on how you are maintaining your confidence around.
The total revenue guide of at least $1 billion in 2025, especially given the inflationary environment pressure on the consumer given the likely recessionary environment.
Are you being too aggressive, especially given the the guide down here in Q4 of 2022.
I think the guide down as I mentioned earlier is directly connected to the pace of new brands and the investment we make in.
Non mature activities.
When you look at the 1 billion plus for 2025 Thats connected to our current portfolio the established brands and their current growth rate. So I think the downside is if for some reason we saw a slowdown that we havent seen yet in the established brands, but assuming the established brands continued to grow and mature at the.
Right that we're experiencing currently then we have quite a bit of confidence in the underpinning to that shape right and it is a goal right.
We will keep updating that as if we see anything different but right now it's a clear goal that we feel we feel we can get to and it's really really I think a good way to articulate.
What's happening with our portfolio both in ingredients.
Powered by Barra, Bonita, and our partnerships and the brands.
We have empowered by consumer demand.
Okay. That's helpful. That's it for me thank you.
Thanks, Kevin.
Our next question today will come from Laurence Alexander of Jefferies. Please go ahead.
Afternoon, everyone. This is Dan Rizzo on for Laurence just kind of following up on what you're just talking about can you just tell me when it comes to this inflationary environment how price sensitive you customers are when it comes to the ingredients is it not at all or is this something that is sort of cropping up or has cropped up.
Weeks and months.
Very good question and I think it's something we're looking at across the portfolio not just ingredients on the ingredient side.
And especially with you guys BNS connected to some of the ingredients specialty chemical markets.
It's actually Ben.
Or said differently.
The openness to price increases has been quite good right, we haven't seen any big surprises and we've been able to actually push through.
A couple of very significant price increases on the ingredients side, So and I think part of it is because we're seeing it across markets and we're seeing a lot of the supply side.
Price increases through so.
I don't want to say because I'm sure. There are customers right now listening to the call I don't want to say there is no resistance to it but I would say that the acceptance of it is actually pretty solid.
Okay and I don't know if you can answer this question, but along the same tokens.
We are extending it now because we're in an inflationary environment, that's very unique or as I would like to have some time with is that with anticipation that when things moderate or go down that there will be some give back or some sort of I don't know rebates or even price concession.
Yes.
Not seeing that right.
Not having any of those conversations regarding a give back of concession in the future and as you know most of our ingredients did formulated into in consumer products. So once they are in the consumer products.
It's pretty hard to switch its not like Theres alternative sources for the ingredients. We supply we are single supply single technology owner of what we supply and there again formulated in the final customer ingredient.
Alright.
Product okay.
Thank you very much.
Our next question will come from Rick Schottenfeld Schottenfeld opportunities Fund. Please go ahead.
Yeah, Hi, guys I was wondering if you could give us some color on the molecule cell you said it would close by year end on earlier calls are you still confident that it will close by year end and and maybe you could give us a little color on the process and how it's going right now.
Alright, thanks for being on the call. We are still confident it will close by year end.
We are currently.
In the process it's.
<unk>.
Pending board approval by both boards.
And we expect that board approval.
To be really in the coming.
In the coming weeks color early December so thats, where we are in the process I hope that helps.
Thank you.
So again it is star then one to ask a question. Our next question comes from Graham Tanaka from Tanaka Capital Management. Please go ahead.
So there's a few surprises today it sounds like a lot of it is timing.
And I just wanted to get again, a little bit more understanding.
Why you have made.
I would say that the slower growth.
Longer term, even in the intermediate short term and longer term what could that growth rate be now say next three or four years.
And to what extent was this higher focus greater focus on profitability.
Give your question to be able to self finance your growth rate.
Thanks for being on Graham I mean first I think.
Again, we've.
We've reinforced that we don't expect the growth rate to change from what we've been seeing.
Again consumer.
North of a 100%.
And ingredients as Youll see in the fourth quarter.
Quarter.
Well over that 40% 50% level.
I think the big difference is really the pace at which we're launching new brands right. We had said.
New brands, which we expect it to be for Ron.
In the last 30 to 45 days and the reality is we.
We're going to focus on the ones, where we've got the greatest efficiency from a marketing perspective, which is really <unk>.
For you by tier into Walmart shipping that out the fourth quarter and then as we go into the first quarter or first half of next year stepping into the new brands.
With with more thoughtful investment so I don't think that changes at all what the growth rate looks like or what we've been communicating.
Going forward. It does create a short term disruption to not be in at the 150 plus level that we sit in consumer but more around the 107 level and then again as I said, we expect to stay.
As the fastest growing in consumer going forward.
I would tell you fastest growing for us is a minimum of 50% where if you look at the tables and what our consumer competitors have been reporting.
The best growth has been in the in the high Thirty's. Okay. So I wouldn't expect to go below 50, and I expect to stay pretty consistent with where we are now going into next year and then obviously.
Backing down a bit as we go beyond next year, but still north of that 50% level Graham I hope that helps.
Okay. So it sounds like you're really talking about sequencing.
Our brand launches not all at the same time.
You did last summer footfall.
Exactly it's basically and by the way I look if the macro has not changed significantly as it has.
And capital has not become so expensive im not sure we would have changed dramatically, but in fact the <unk>.
Fact that we are where we are in the macro is what it is we're not going to sit here and just keep.
On a plan of spending everything we need to to grow at whatever the number is we said publicly I think at this point, we're going to be disciplined we're going to step back just investing for the sake of growth, we're going to focus on delivering on our goal of profitability.
And because of the strength of our brands. We think we can do that and still maintain this north of 100% consumer growth, which is what we've been delivering all year.
Alright.
The other thing I was wanted to get a feel for it might come out later in the queue, but.
Your international revenues.
What percent of total or are the level of international revenues say say Q3 to Q4 and next year.
As opposed to what has been in the last few years, which is not very large thank you.
Yes, I think <unk>, probably has that my sense is it's probably gone from 90 10 to $8 20 in the short term and continuing to grow but I'll, let Han.
Are you a more detailed answer than that yes, I think that's directionally the right way to think about it a year ago. We were at 93 U S and Canada towards the 7% rest of world.
Right now we're at 89 and 11.
I think $85 15 will be kind of a next step as we expand into Europe and the UK in 2020 feels feels about right as we continue to expand over there.
And what was this due to margins.
Yes.
Well I mean, I think the fact that we're shipping.
Most of our European.
Demand out of Brazil, as we as we go through the fourth quarter and into the beginning of the year. My guess is margins will stay pretty constant and I don't expect a significant change in margin I think the only at least.
Said another way.
We will incur some extra shipping costs.
We'll produce at a lower unit cost level, a new facility in Brazil right exactly.
Okay.
No.
Hey.
One of the things that came up in your in your table with your cost savings and to win.
The marketing costs that can be very large component of that.
Why isn't it.
With Influencers.
But now we can understand a little bit more about your acquisition of <unk>.
<unk> labs.
<unk> and Mg.
In power, but I was just wondering if you could maybe elaborate a little bit more on how you can get these kinds of savings because they seem really very large as a percentage of consumer sales.
Yes no.
Just starting right I think getting to $30 million to $40 million of.
Savings in marketing expenses, where we're headed right I think it's a pretty significant part of what we wanted to deliver and the way we're doing that.
Actually interesting so thanks for asking the question Greenbrier, we're doing that is we've actually so you got to start with where is the most inefficient marketing spend currently.
Where historically, which has been really what I'll call meta top of funnel so using.
Net of brands to try to recruit or acquire new customers is not very efficient. It takes a lot of cash and you don't get a lot of return for it and I think the other is display ads on the internet. Neither of those are a very efficient use of cash. So what we've done really out of an experiment. When we first purchased on the beauty. We started looking at how can.
We significantly improve the performance of on the beauty Dot com and so beauty labs actually kicked off a project to do that and.
And about six weeks.
We basically increased our beauty dot com sales by 3% to Forex and we did it by actually spending like $300.
I started to give us some insight on this technology of writing an algorithm and using artificial intelligence to recruit like communities that are under key influencers really nano and micro influencers. So the idea of using technology to scan and find.
The REIT nano and micro Influencers and then.
Providing some rewards that nano and micro influencers. So they come and promote our brand has actually been a game changer for us and the economics of acquiring customers as I said, we basically tripled almost quadrupled on the beauty dot com in six weeks with about $400 $300 of investment which was.
Completely game changing for us and now we're actually starting to deploy that technology and you can imagine now with having MGM power onboard and the ability to really manage and and and coach Influencers that we can really use that to effectively grow and amazing new channel for us.
That really changes the economics of acquiring customers, which is really what we're doing in that regard and helping us reduce our total marketing spend.
I'm just trying to understand how different. This is this have you seen it being used by others.
And the cosmetics beauty beauty industry or in other industries or is this just something you've developed with beauty labs and MGM.
MGM power.
It's something we developed really coming out of our science background, we use data as the way, we do marketing and we use a lot of data that then enables us to focus on data science and artificial intelligence as to how we deploy.
And identify again the right communities online.
Speak to competitive brands in big companies and consumer all the time.
The thing I would tell you is the trend towards focusing on micro and nano Influencers is something we're seeing really across industry.
What's not across industry and what I think is very unique for us is applying science and artificial intelligence to do the work and identifying the right nano and micro Influencer and then two to use them.
Across our brands right. So that is unique and something we're really excited about and something I think youll start to see a lot of the benefit come through.
In our growth rate in marketing spend.
Great.
I'll, let I'll, let somebody go on to other questions, but I'll, let somebody else go on thank you I can come back. Thanks.
Thanks, Andrew.
Ladies and gentlemen at this time, we will conclude the question and answer session I would like to turn the conference back over to John Melo for closing remarks.
Great. Thanks, everyone for joining us today and for your continued interest and support.
If I did not get to your question. Please follow up with our Investor relations or.
Make sure you reach out to us directly and we'll be able to get back to you.
And we look forward to a continued very strong fourth quarter.
Closing our transaction self funding.
And really focusing on our profitability. Thanks, again and have a great rest of your day.
The conference has now concluded we thank you for attending today's presentation and you may now disconnect.