Q4 2022 Amyris Inc Earnings Call
Welcome to the Emirates fourth quarter 2020 financial results Conference call.
This call is being webcast live on the events page of the investors section of the Amyris website amorous dot com.
As a reminder, today's call is being recorded.
You may listen to a webcast replay of this call by going to the investors section of Emerson's website.
I would now like to turn the call over Fredrik on Houston Belt, Chief Financial Officer. Please go ahead.
Thank you Andrea and good afternoon, everyone. Thank you for joining US today with me on today's call is John Melo, President and Chief Executive Officer, and also Eduardo Alvarez, Our Chief operating officer, who will participate in the Q&A session.
We issued our results today in a press release. The current report on form 8-K furnished with respect to our press release is available on our website <unk> dot com in the investors section as well as on the SEC's website.
The slides accompanying this presentation can also be found on the website and were posted today for your convenience.
Please turn to slide two.
Please note that on this call you will hear discussions of non-GAAP financial measures, including but not limited to core sales revenue gross margin cash operating expense and adjusted EBITDA reconciliation of these non-GAAP measures to the most electric comparable GAAP financial measures are contained in our financial summary section slides of the presentation.
In the press release distributed today.
During this call we will make forward looking statements about future events and circumstances, including Amyris is outlook for 2023 and beyond Amyris as goals and strategic priorities anticipated transactions in other future milestones as well as market opportunities girls prospects and fit to win actions. These statements are based on Madden.
<unk> current expectation 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-K for the fourth quarter and full year 2022 Amherst.
Amyris disclaims any obligation to update information contained in these forward looking statements whether as a result of new information future events or otherwise with that I'll turn the call over to John John .
Thanks, Hi, and good afternoon, everyone. Thank you for joining us today I'll.
I'll provide an update on our business performance and our key priorities for this year.
Todd will provide an update on our financial performance and our 2023 outlook and I'll recap before we turn to Q&A.
I'll start with a note about Silicon Valley Bank and the recent turmoil involving other banks. This unfortunate situation has impacted many let me confirm that amarin does not have direct exposure to either with banks that issue, we do not bank with our global banking platform is with J P. Morgan as our principal commercial bank.
We maintained back of banks in each of the regions, we operate and should we need to urgently shift deposits.
I'm also pleased to confirm that we have continued access to sufficient working capital as you may have seen from the 8-K disclosure, we made yesterday amyris secured 50 million and that should carry us through the point when we can capture the upfront cash payment from the recently signed transaction would you ever done which should be within 30 to 40.
Five days.
Slide four.
We delivered a solid fourth quarter with performance that marks our continued disciplined efficient use of funds and robust growth.
Our consumer business deliberate second consecutive quarter of record growth marked by 64% growth over the fourth quarter of 2021 are.
Our total core revenue of 76 billion is up 17% over the fourth quarter of 2021. This is also a new single quarter core revenue record for the company.
Our consumer business is running about 50% direct to consumer and about half would retail partners. Our D to C business continues to deliver strong results with growth.
About 60% year over year.
We are making good progress with our marketing spend and our head count we are afraid of the first half of 2022 with less than one dollar of revenue for every marketing dollar investing we are now at $2 of revenue for every marketing dollar invested and I expect for us to in 2023 and $3 of revenue for every dollar of <unk>.
Marketing invest it does.
<unk> come from significant insights and innovation across our teams, including a much more efficient customer acquisition model that is being scaled across all of our brands with support of MTN power, Our World class Social Commerce agency.
Our head count, we froze headcount during the fourth quarter and I can confirm that we've lowered our total head count since that I have eliminated 30% of my direct reports and we have simplified our leadership structure with a significant reduction of the executive team roles.
During the fourth quarter use of cash was our top priority. We operated in a working capital constrained environment and focus on best use of our very limited liquidity.
This resulted in over $14 million of ingredient product revenue, where we have orders that we were unable to support with working capital and did not ship. These are mostly foreign exchange related products and also our natural sweetener read that.
These orders are being filled in the first half of 2023 and are critical for the end customers' demand for our ingredients remains very robust our biggest challenge has been capacity access to feedstock and working capital. Both of these are improving and will be resolved through the first half of 'twenty time frame.
We are delivering on our commitment to be the growth leaders in the consumer categories. We participate in to drive core revenue growth of our biotech competitors.
We are prioritizing our cash use over our revenue and are pleased with the third quarter, which is the which is the third consecutive quarter of material reduction in cashews, we consumed $95 million of cash in the fourth quarter versus our prior indication of $100 million to $110 million.
This is a reduction of $100 million in quarterly cash use from the first quarter of 2022.
Our consumer growth is not happening at the expense of margin consumer direct gross margin for the quarter was our best of the year and an increase of 600 basis points over the fourth quarter of 2021.
We continue to execute our broad fit to win agenda, we are aggressively transitioning to more efficient sourcing and proprietary manufacturing we are already realizing better than expected production costs that are interfaces facility in Brazil, where we expect around 60% of all our consumer volume manufactured.
There by the third quarter of 2023.
For Bioscience best sellers alone the Yatra fastest manufacturing and cruise cost of goods by an estimated 50%.
These combined actions are expected to deliver three to 400 basis points of margin improvement.
For our consumer business through 2023.
Slide five our healthy top line and margins should be assessed in the broadly positive context of a thriving macro category prestige beauty environment, where we are leading in each category we participate in industry.
Industry data tells us that consumer demand for prestige beauty in hair care color cosmetics, skincare and healthy aging, which is very strong in the fourth quarter growing at over 15% year over year as a blended number across these categories. This trend has accelerated into the first quarter.
Often called the lipstick effect, which is to say that even when there is inflation in a degree of economic uncertainty consumers will spend on affordable indulgence.
See this reflected in the reported performance of L'oreal, Ulta beauty, and Lv and age as well as our retail partners. There is no doubt that the fundamentals of our business model, creating and building differentiated schumer brands and marketing our proprietary molecules through leading global companies that are market leaders are still.
Just quickly on trend.
Clean sustainable science backed beauty is what consumers are demanding and spending on it's a market driver that enables us to build and operate some of the best performing consumer brands in these categories.
We are focused on winning in the markets, where our technology is clearly the best path to replacing chemistry from not sustainable sources, and where we can accomplish that with superior products at lower costs.
We are executing our lab to market strategy.
This is where we own the underlying science and technology, we develop and scale as.
As the long term producer and we partner with leaders in their respective end markets, those who have the skills and resources to market and grow share through new product development and Leverages <unk> distribution reach.
Our partners are simply great at what they do and we are the best that's developing and making clean sustainable chemistry that enables them great market opportunities with their market access and reach.
Slide seven as far as consumer brands, we will continue to support this pillar of our strategy, while also making strategic adjustments, which I will get to in a few seconds.
These brands are doing great with growing demand from the retailers, we work with and solid direct to consumer performance as mentioned the categories. We compete and have real tailwind with continued strong growth in the first quarter.
Here's what we've learned and.
And what we've heard from our retail partners like Sephora is that when we smartly invest in our direct to consumer brands. The impact of that is felt at the shelf level.
Strong D to C business supported with healthy marketing investment drives a strong retail sales performance consumers are not just walking into stores to buy brands. They have no awareness up.
The success of our key strategic consumer brands drive more demand.
Of our ingredients when we get this right, it's an amazing and efficient flywheel for growth and market leadership, and we are getting better at it all the time.
We are committed to continuing to deliver industry, leading growth for our consumer portfolio and will moderate or accelerate this growth based on investments we.
We have great assets and significant and growing demand for our brands and the ingredients and products. We produce are available ingredient capacity is sold out for 2023.
Slide eight to fully leverage our assets to drive enterprise value requires a deeper focus on efficiency lowering our costs and also simplifying our portfolio.
We are narrowing our investments to where we have and can extend our market leadership in sustainable predictable growth, which includes the gross margin increase I mentioned earlier.
We are further focusing our consumer brand portfolio and expect to end with five to six brands that are market leaders represent over 90% of our current revenue and growth used a lot of our ingredients in their formulations and have a clear path to profitability.
This additional rational rationalization of non core assets in our consumer portfolio is expected to generate around $150 million of cash proceeds this year.
The brands that remain in our portfolio have a current market value of around $2 billion. We are in active discussions with potential buyers for these non core assets that were in the process of selling.
In parallel we will reduce and eliminate all other spend through further divestments and deep prioritization of where we invest our limited dollars.
Let me now move to the strategic transaction, we signed with <unk> in February .
This transaction has an expected value of over $500 million. This includes $200 million of upfront cash $150 million of earn out to be paid over three years and unexpected over $150 million and gross margin dollars from the production of the products during the <unk>.
First 10 years of our long term production agreement.
This does not include any value from future molecules, we add to the partnership or for joint development that are part of the strategic partnership we have created with EBITDA and for leading the beauty industry with clean sustainable chemistry produced from fermentation.
We expect that there will be less than $10 million revenue reduction on the basis of 2020 two's numbers as we continued to benefit from the production of these ingredients to the long term manufacturing agreement.
This transaction is for two molecules squalene and Hemi squalene and one formulation that includes these two ingredients clear screen a sustainable solution for Sun protection.
This transaction represents more than three times the value versus our other strategic multi molecule transactions and its consistent and structure with both the DSM flavor and fragrance transaction and the ingredient partnership for read them and other products into human nutrition market.
We already have an excellent relationship with EBITDA and where we develop the sample of life and their latest breakthrough by our retinal from our technology and fermentation platform.
When you combine our biotechnology stack, which EBITDA in some market insights and product development resources. The result is a powerhouse capability.
That is uniquely positioned for global growth and becoming a clear leader in clean sustainable chemistry into the glue the global beauty industry.
This transaction is a great proof of the value of our molecules and the power of our technology platform to truly transform in markets. The clean sustainable chemistry that makes our planet healthy.
As I previously communicated at the transaction is growing through the HSR waiting period, and we expect that 30% to 45 day closing and funding.
Having discussed the <unk> transaction, let me step back and put this in the context of our go to market model with fidelity to our fit to win rigor, we covered the beauty and personal care categories, which EBITDA.
There are three other verticals, where our biopharma taishan leadership create sustained long term growth for our current ingredients portfolio, along with significant potential to expand the development of new ingredients flavor.
Flavor and fragrance revenue streams will come from our DSM relationship. This is also performing extremely well with our blockbuster ingredients and their access to market.
Food beverage and nutrition opportunities will continue to emerge from ingredients. They are doing an excellent job of expanding the market for a read that this ingredient is expected to be in the top three ingredients for revenue in 2023, and it's growing at a faster rate than we have planned.
And we are engaged with a potential strategic partnership for commercialization opportunities in the human health and pharmaceutical markets that will include squalene for vaccine adjuvant.
As a competitive process and we are really excited about the participants and the potential outcome.
Slide 10.
We had been approached and are in active discussions regarding a manufacturing joint venture. We are exploring this opportunity with one of the world's top for sugar producers.
Our mill about the size of Bob when he took the proposed JV structure with combined some of our biomedical fracturing assets would release a significant amount of cash from our current production assets and the partner would fund the next bio manufacturing facility and downstream processing facilities. They have completed.
It'll diligence and are impressed with what we have built at Bajo benita and the quality of our teams and overall capability.
Bio manufacturing consumes the most significant amount of our working capital and it has a long cash cycle time. We believe this type of partnership can be deeply strategic and significantly advance our market leadership and bio manufacturing with a capital light approach. We are very pleased with this opportunity and we'll update you on.
Yes.
In addition to fully funding our much needed next production facility. This opportunity can also helped generate $50 million to $100 million of new cash to our balance sheet in the short term and free up $50 million of current working capital that is used to support our ingredients business.
If discussions continuous plan didn't we expect this facility to be in construction by the end of this year and the 100% foreigners seen dedicated by bio manufacturing facility.
The structure of this JV and the financial commitment from this partner is a great testimony to the best in class capability. We have built for Biopharma station in downstream biochemical processes. We believe we have the best in the world and our partnerships continued to prove this.
With the proceeds from the rationalization of noncore consumer brands and the opportunity to partner for manufacturing capacity, we see a clear path to self sustaining cash generation.
We now need 100% focus on efficiency and excellence across our operations, we intend to bring our operating cash use in 2023 to around $200 million run rate by the end of 2023 and over and from over $600 million in 2022.
We are delivering this reduction in cash used through our fit to win agenda portfolio rationalization of non core assets along with ensuring we have the right size the organization for supporting our lean and focused future.
We are also expanding our gross margin this year through the manufacturing cost savings and the fit to win agenda, but also through the <unk> earn out and the underlying growth of our flavors and fragrance business and the impact. This has on the DSM earn out.
Taken together, we expect these actions will enable us to meet our objective of ending 2023 S. A growing self sufficient enterprise with a capacity to fund its growth.
Let me close out by discussing our liquidity.
Our liquidity has been extremely challenging it has been a healthy forcing factor as we focused on what matters to ensure we invest where the growth and efficiency is and where we are the best.
As the EBITDA proceeds come in in cost savings I detailed we will be prepared to build enterprise value.
To summarize we are an investment model that combines proven and profitable biotechnology that sells to world leading companies with the ability to develop end market products that consumers love.
I don't know of any company health beauty and wellness markets, who have the lab to market capability and integration of Amyris and are delivering on what consumers are demanding today, we've never had as much inbound interest and development partnerships for new molecules and with retailers and brand owners wanting to work with us and needing.
Access to our capability to deliver new chemistry and great products.
We have a disciplined 2023 operating plan that is ambitious but realistic with visibility to self sustaining operating cash flow by the end of this year.
We will continue to streamline our portfolio.
Leaning into the greatest opportunities, while right sizing our cost base.
Thank you Joel.
Please turn to slide 11.
Before I start my remarks regarding the quarter and full year, let me note that as a housekeeping matter you will find that we are finding a prospectus supplement today to register the shares and warrants issued at the end of last year to four centuries in connection with our private placement and tomorrow, we will be filing an S. Three amendments to reflect our change in status from <unk>.
Dixie to a nonrecurring <unk>, which he is a well known seasoned issuer. This conversion will maintain the effectiveness of our existing S. Three registration.
Let me now proceed with discussing the quarter's financials and I will close out with an outlook for 'twenty three before handing the call back to John .
But as I said, we're on slide 11, our fourth quarter was another strong quarter of core revenue growth and the new records and consumer growth core revenue, which includes consumer and technology access and excludes strategic transactions increased 17% to $75 $8 million when compared to the fourth quarter of last year.
Core revenue included record consumer revenue of $52 $8 million, which increased to 64% for the quarter and 92% for the full year.
The fourth quarter as John said is the seventh quarter, the seventh consecutive quarter of record consumer revenue.
Amyris as consumer brands outperformed the sector the prestige beauty industry growth of 15% as recently reported by the NPD group their year end report confirm that every category in prestige beauty posted double digit gains in 'twenty, two with skin hair care in Cola cosmetics, growing 12, 22% and 18%.
Respectively.
<unk> brands in these categories delivered about five X industry growth and specifically in these categories, we delivered 44% in skin seven older than 44% in here and 145% growth in color cosmetics.
Technology access revenue of $23 million declined 30%. This was primarily due to a $13 million of joint venture revenue into human health and food and beverage industries in Q4 of 'twenty, one that did not repeat in 'twenty to Ingrid.
Ingredients products revenue decreased 12% to $14 million, reflecting temporary supply constraint as the business transitioned from hydro cost toll manufacturing to lower cost internal sourcing from our new fermentation plant in Brazil.
R&D collaborations revenue was down 2 million due to an increased focus on the development of molecules for our own man.
Our own marketing and formulation.
Our state of the Awesome Mentation plant in Brazil is now operational with simultaneous production of multiple ingredients up and running allowing us to address the supply constraints, we have experienced in the past and providing us a path to make progress on turning around the unfavorable margin economics, we have to bear in the past used due to sourcing product from third party.
Contract manufacturers.
As it relates to the revenue despite macroeconomic concerns we continue to experience strong demand from the market both for our consumer and ingredients products growth in consumer revenue continues to be best in class across publicly traded beauty companies and is now two third of our core revenue doubling since the end of 19.
The creation of demand for them is clean beauty products is driven by four factors first more brands secondly, new formulations that we've introduced third more stores and doors and finally, our international expansion, most notably into Europe .
We are focusing on ensuring that we can meet this increased demand with the improvements we are making in our supply chain and the cost savings measures that we will deliver lower unit cost and ultimately a positive bottom.
Bottom line.
This brings me to the next slide on gross margin slide 13.
non-GAAP gross margin was 20 or $21 4 million or 28% of revenue compared to 22 million or 34% of revenue in Q4, 2021.
Excluding the impact of technology license revenue in both periods non-GAAP gross margin increased by nearly $6 million and was 400 basis points higher as a percent of revenue than in the prior year. This was primarily due to consumer revenue growth and improved consumer margins.
Key cost the reduced profitability of freight and logistic expense, we experienced significantly higher spending in the first three quarters of 2022 as compared to the prior year, particularly due to increased inbound air freights and full year to support our growing consumer brand revenue as well as the importation of ingredients intermediate products.
We were pleased with our progress to reduce costs in these areas yoga and a reduction in inbound air shipping from $12 7 million in Q3 to just three and a half million in Q4.
We expect most of these freight and logistical expenses to continue to decline due to the full commissioning of our Brazil plant and a transition to Brazilian source components of manufacturing for our largest consumer brands.
The takeaway regarding gross margins is that we've made strategic investments in our manufacturing and supply chain footprint, both on the consumer and ingredients side.
We intend to take advantage of our scale with cost of goods sold and are revisiting all input cost as part of our fit to win actions.
Next I'd like to touch on operating expense slide 14.
We are actively operating 10 brands today following the recent launch of stripes Tobler and for you by tier in December two.
To support brand development and top line growth, we have significant investments, resulting in cash operating expenses would have grown to $148 3 million in the fourth quarter of 2022, an increase of $44 $9 million versus the prior year quarter.
The fourth quarter is historically seasonally our lowest revenue and thus have you spend quarter of the year and the year over year growth was driven by increased head count both organic and from acquisitions consumer brands freight and fulfillment activities and investments in consumer brands.
Shipping and handling of our consumer goods increased by five and a half million or 68%.
68% versus the same quarter last year due to continued growth in DTC orders that John also referenced.
We have slowed as we have slowed the pace of these investments in new brands to balance cash management and expense control.
As part of our fit to win actions. We recently negotiated a new parcel shipping agreement with a large global provider, which is expected to save us $15 million to $20 million over the three year life of the agreement.
As a result of our elevated expands our use of cash in the quarter was also elevated principally due to continued investment in brand marketing of both the new and existing brands and also the deployment of cash for the construction of the Brazil fermentation plant that has been entirely self funded to date.
We started the quarter with a cash balance of $25 million and raised net about 147 million through a term loan in the pipe.
We used 157 million during the quarter and operational adjusted EBITDA offset in part by favorable working capital leverage of $60 million driven by actions taken with suppliers to improve terms and also improve the cash conversion cycle.
We very closely managed inventories, resulting in a $17 million sequential degrees and inventory holdings, we close out the quarter as a result, the $71 million of cash.
Slide 15.
But you can see we sequence, we reduced cash used for operating and investing activities as the year progressed Q4 of 2022 was down $102 million as compared to the first quarter of last year.
We used a total of 526 million for operating activities during the year, which included all of our cost of goods sold operating expenses and working capital needs. We.
We used a total of $124 million in 2022 for investing of which 106 million loss related to capital expenditures, mostly related to the construction of our Barra Bonita fermentation plant.
We have worked extremely hard on reducing our use of cash by taking various steps. We did substantially reduce the cost involved with inbound air shipping from Q3 to Q4 by just over $9 million was 72%, but we also as Joe mentioned delayed our leadership structure affecting a $1 2 million initial restructuring charge.
The combination of staff reductions to be affected and walk for workforce attrition is expected to live a $9 million to $10 million in annualized savings in 2023.
We clearly have more to do on our fit to win agenda and are committed to delivering quarter by quarter improvements in.
Profitability and cash generation from operations.
We therefore expect this trend of reduced use of cash to continue in 2023.
The year end total cash balance of 71 million combined with our fit to win actions along with the $200 million of upfront cash we expect to receive from inhibitor deal along with the monetization of non core assets and potential funding our co investors investments from strategic partners are expected to provide us with the funding required.
To get to self sufficiency.
Before I address full year 2023 guidance, let me first summarize the two transactions that are in front of US we expect to soon complete the acquisition of an additional 49% of our joint venture in a pre Nova we have agreed to pay 49 billion to bring million to bring our ownership percentage in up renewal.
Up to 99%.
This will close at the same time as the dividend transaction.
We announced our agreement with Jim it onto a licensed certain cosmetic ingredients in exchange for 200 million upfront and up to $150 million in Illinois opinions.
Joe already scribed this detail.
We're excited to close this deal and it will bring in meaningful cash to start addressing our liquidity constraints.
Let me now move to comment on the outlook for 'twenty three consumer revenue is expected to continue growing at the current rate and ingredients revenues expected to regain momentum based on increased access to intermediate products and production output from our Brazil fermentation plant.
Revenue is expected to grow 95% to 100% for full year 2023 compared to the full year 2022, the strategic transaction with <unk> is expected to generate 200 million of license revenue in the second quarter.
Core revenue, which is the sum of consumer and technology access revenue is expected to follow approximate quarterly phasing off 15% of full year core revenue in Q1, 25% in Q2, 27% as expected in Q3 and 33 33.
Percent is expected in Q4.
Consumer brands are expected to continue to deliver industry, leading growth in skin hair color cosmetics, and baby care as well as healthy aging.
We are prioritizing delivering on our cashiers target from sequential quarterly improvements in our cost base.
Cost of goods sold and operating expense.
Our fit to win program is expected to deliver over $150 million of annualized cash cost cash and cost improvements and working capital efficiencies catheter.
Capital expenditure is estimated at 55 million, 50% lower than 2022.
We are contemplating no M&A activities for the time being with that let me hand, the call back to John John .
Han discussed opportunities to reduce cost improve efficiency and improve workflows across our company.
We completed the necessary short term funding and the strategic transaction is on track to close and fund in the next 30 to 45 days, we are very focused on creating a path to self sustaining profitability and cash generation.
The priorities are clear first deliver the best growth of our public peers in beauty and synthetic biology, secondly, only invest in what matters and is delivering on our financial and strategic agenda stock or sell the rest and thirdly, a radical focus on efficiency and productivity. These priorities.
Combined with our people and our assets are expected to deliver positive operating cash by the end of this year, we have a clear path ahead for liquidity with the funding from <unk> proceeds.
From the sale of our non strategic assets and the proceeds from the new partnerships. We are engaged at Bay.
Based on our current plans and what we know today, we have no current plans for a further equity offering.
Let me turn to Andre and our operator can you. Please open the line for Q&A.
We will now begin the question and answer session.
Asked a question you May press Star then one on you touched on phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question please press.
Sure the two.
We ask that you please limit yourself to one question and one follow up.
Once again that was star then one to ask a question at this time, we will pause momentarily to assemble the roster.
And our first question will come from Colin Rusch of Oppenheimer.
Okay.
Thanks, So much guys and I appreciate all the detail here.
I guess the first thing for me really is around understanding the maturity of the planning process here as well is that the discussions are.
For the divestitures just want to understand if you've gotten all the way to a complete plan that the board has approved around these strategic initiatives and how far into the discussions around the divestitures you are with potential buyers.
Collyn I'll start and then have high share any other commentary if you'd like.
We've had.
Discussions with the board about our strategy and portfolio will.
We'll actually be doing a formal review of that.
Upcoming board meeting that we have the next couple of weeks.
And then secondly, we have engaged buyers that are actively discussing the assets were in the process of.
Selling right now so that's the status hope that helps on I don't know if you want to add anything else to that.
No I think that's that reflects the situation in terms of where we are.
That's that's incredibly helpful and then I guess in terms of the.
The potential to move towards a.
An asset light model.
It looks like that's something that is repeatable.
And I guess are there multiple opportunities for that if you were able to get this first one done and is it something that you would plan to repeat on a on an accelerated basis that potentially could just helped drive revenue and limit some of the capital needs that the organization has.
Colin you you've been around us for quite some time and I know this has always been our objective and dream, which is to have a capital light model for manufacturing.
I think the fact that we've proven out now building two factories first broad question and monetizing that and know Vasco benita and the operating performance and what people are observing about possibly need to that's actually opened up.
Several conversations we have at least two or three that have approached us about a potential partnership for manufacturing. So I expect it is repeatable.
It's early days, so we'd like to get the first one done of the two or three that have approached us we've engaged in more detail in a deeper process, obviously with one.
And we're looking to advanced with that one, but I think in light of what we've experienced and I see this being a model that we could use to build more factories, but again I'd like to get the first one done.
Fantastic Super helpful. I'll take the rest of it offline. Thanks, so much guys.
Thanks Colin.
The next question comes from Rachel that sale of J P. Morgan. Please go ahead.
Okay, Hey, guys. Thanks for taking the question and I guess, just first up here on the strategic transaction. You. Previously noted that was going to be roughly $350 million cash now you are kind of pointing us towards the $200 million to pencil in for Kilkeel. So can you just talk about is that all that you're assuming for this strategic transaction throughout 'twenty.
'twenty three and then you know maybe just stepping back can you walk us through what the negotiations are looking like there has this really changed your confidence in terms of ability to get a higher dollar value on strategic transactions going forward, just given we've seen a step and so much and then and you know what's left for me negotiation standpoint for that.
The transaction as well just given and you know it still isn't signed here. So is that 200 million set in stone or could it go down even further.
Thanks, Rachel and thank you for being on the call.
First the agreement is signed there was actually no ongoing negotiation.
And so what we've shared is what is currently contracted.
We had started at $3 50, and by started I mean, I think somewhere around the third quarter. We had talked about $3 50, an upfront and we ended up with that 350 really being divided in 200 upfront and $1 50 and earn outs.
And that really was based on negotiating to get to an outcome that we both could feel comfortable with and a lot of it really in the.
I'd call it.
Implosion of the macro environment, both for the buyer and for Us and therefore, it's struggling with the fact that the macro had changed so much and we're rewarded valuation at the beginning versus where we were at the end of the year. So that's what evolved and how value changed over time as it relates to molecules.
This is still three times better than the value of any other molecule deal. We've done so I'd actually say the value per molecule has gone up considerably and remember the last deal. We did was less than two years ago. So in just less than two years for some blockbuster molecules right. I mean, it was to truly it was vanilla, it's molecules where the loss.
Producers in the World of these end markets and.
Deal less than two years after that we've got three extra value per molecule. So I don't I don't.
Yes, I would have liked to have gotten more I think it's a great deal for both parties I think we had a fair.
Process and we had several competitors involved that we're interested in.
Buying the business. So it wasn't like we were exposed to a single buyer and at our best for you with working with our board and.
In light of where the macro turns and we saw this is really getting the best value for the molecules are in the time that we're in.
Yeah, Let me add a quick comment perhaps if I may a radio just due to underlying Johns point about where we are in the process. The agreement is signed there was no further negotiation that needs to take place.
We have previously active publicized we just for everybody's benefit on the call here that we are in HSR review the process needs to run its course as John said in his prepared.
Prepared remarks.
No later than 30 to 45 days and then it will close and money will be will be coming forth. So just wanted to clarify that.
No no. That's helpful. And then maybe one here on the 20th me three guidance. So you pointed to that 95% to 100%.
Revenue growth for 2023, but that includes that strategic transaction, if we take out that strategic transactions and everyone was really affecting us economy. Four kilos 20 till then your numbers on a core basis come in you know $200 million lighter than I think the street was expecting so can you just kind of walk us through what are you expecting for growth between consumer.
The ingredients right now and then are you still really embedding that $660 million excuse me licensing revenue related to DSM payouts in 2023 as well.
Yeah look I'll start and then hand can jump in.
I think we've been explicit about the consumer part right consumer running at about the current level of growth and our real objective is not a single number growth target as much as it is remaining the leading growth.
And the brands that we have for the respective categories. We participate in so no change there.
I think in ingredients were sold out so there's not like we can add more ingredients.
And there is a significant change in the earn out and that now we have another $35 million or so potential coming in for the <unk> earn out.
I guess or our approach in guiding the way we did was actually not about anything to do with our underlying business. That's actually a simple message until we get into a routine of consistently.
Beating and raising our guidance, we're gonna be just.
Oh truck prudent in what we say, we don't like being in situations, where we're not exceeding expectations. So that's that's what's behind what you've heard today regarding our guidance and.
We're committed to it Han do you want to add anything to that.
No I think that's right I think we said look the consumer trend as we've seen it in the market and you can also see.
Where we've been in the last few quarters as well as from the for the full year.
We will continue of course, there is an element of who were keying off a larger base. If you look at brands like biosolids that always we have a significant critical mass, but we expect strong strong well above market kind of in meeting our growth, but keying off a bigger base. So that certainly plays into it too and then as John said on the ingredients side.
We obviously have the three components product.
Much will basically sold out on capacity there we have R&D collaboration and then and then the milestone aspect that will that will be in effect for both the DSM piece as well as the as well as now the dividend deal coming into play.
Paul maybe one last one on 2020 three guidance, if I could just squeeze it in here quickly.
You talked a lot about potential sources of funding for the year, but can you just walk us through each of the puts and takes in terms of what are your outflows for the year you had a few of these at least two of these short term bridge loans you also have paying up for Avenova.
And you know Casper and so net net how should we be thinking about these cash outflows and what's your total cash burn guidance for the year.
Yeah.
Yes sure.
So.
First and foremost if you look at we obviously had as I've made it doesn't meet the known in my remarks significant.
Demand for cash as we were building out but a bonita.
That's going to be obviously, a very different plays we're gonna be into 'twenty three hence my guidance on capex being significantly reduced that's one we had M&A activity in 2022, we've made it known that we do not plan any M&A activity in 'twenty three.
A number that we expect to go to zero.
From that vantage point.
And then of course, you know the whole fit to Inogen as plays into it.
We've confirmed again that it's 150 million I gave a few examples.
Things we're doing.
To underpin progress in a number of areas, particularly as it relates to supply chain to parcel shipping example, I gave.
15 to 20 million savings over the next three years or better green, So theres a lot of things news or just.
Simple example, so to speak but there's a lot a lot that's going on that will bring down our cost of goods sold as well as operating expense for that matter. So both on the operating side as well as the investing side.
Not only on the on the outflow you mentioned the of course the.
The upfront consideration from.
From dividend coming in.
We do indeed need to pay.
The upper Nova.
Shareholding that we took.
And other than that we are we from a debt reduction perspective, we had one payment to make but the rest is as all.
24 or later.
The next question comes from Corinne will Smile of Piper Sandler. Please go ahead.
Hey, good afternoon, and thanks for taking the question. So I think the first dive a little bit further into some of these brand divestitures that you've noted.
I think in the past you've talked about you know longer term target, maybe like 10 to 12 brands.
In the portfolio is that still like a longer term target you have in play or are you kind of readjusting.
Your your longer term viewpoint now.
I really.
Couldn't talk about number of brands and where we ended up carrying so I would say it's more about.
In those categories, we're really focused on brands the consumer have formulations that consume a lot of our ingredients, so that strategy and the ability to build off of that will continue.
We're resetting ourselves for five or six for now just based on where we are with our with our balance sheet and the maturity and opportunity we see around those brands, So said differently <unk>.
First thing in 12 versus six I think you can get more out of the five or six versus spreading the investment over over all of them.
But I wouldn't I wouldn't.
I wouldn't conclude that to determine a final number we're not operating in that way, which we're more looking at focused on what we have make sure. It performs at the level that we expect it to perform and then add as makes sense based on again, our strategy a clear strategy that we want to stay consistent with for what operates in the <unk>.
Folio.
Very helpful. Thank you and then can you just talk a little bit about you know that the phasing of margin expansion. Both from the gross margin line and EBITDA that we should expect over the course of the year like will it be more of a gradual ramp quarter to quarter it would be more back half.
Perhaps just any color on the phasing.
These fit to win benefits coming through it would be helpful. Thank you.
Yeah, I'll take that and maybe what are you talking about the activity. He is doing and then heine.
Framing how that falls through to the financials that makes sense guys.
Sure Let me, let me start with the.
The improvements we've already done I think we've already talked about the logistics side. Those were improvements that were already done in Q4 Q1 around the inbound logistics and optimizing our cost there.
I think we mentioned that John mentioned in his remarks that we expect 60% of our consumer production to be done at a lower cost facility by the third quarter. So the cost of goods solid improvements both at Barra Bonita.
It will be spread out.
Kind of throughout.
Throughout the year as we continue to ramp but they've costs for the consumer production will be.
80, 880, 90% would be towards the second half of the year for the consumers. So I hope that gives you a little bit of a fancy and logistics are already pretty much well captured and the the.
All lines will be facing as we discussed.
Yes, two called two comments I would make is.
Activities will continue to be deployed and improvements to the cost base, whether it's cost or cost of goods sold or operating expense will continue as the year progresses. So to your question Cory and I would expect.
We anticipate right now.
In our model is really.
Progression on a quarter by quarter basis, the other way I would say as Eduardo pointed out some of these actions have taken effect. However.
Of course, we're also holding inventory and before they actually find their way to the P&L.
Well through inventory into the P&L will also be a bit of a time lapse. So those two things but for that reason you know as the year progresses, you should continue to see margin improvement.
Very helpful. Thank you for the color.
The next question comes from Stephen Moss of Cowen and co. Please go ahead.
Great. Thanks for the questions.
Question on the HSR review.
I'm not a lawyer, but I thought the HSR.
Could proceed with a member a memorandum of understanding or letter of intent, which I believe was in late December .
Has regulator has been pushing back and requesting additional information in its up what's resetting the clock to another 30 to 35 or 30 or 45 days.
Steve two things by the way thank you for being on the call.
First of all we never actually made public exactly what the filing date was HSR so important.
Important clarification.
And then secondly.
We have had calls with the regulators they've gone as expected, we havent perceived or have gotten any feedback to leave this previous with any concern I think my third point is to say the timeline. We've given is one that gives us a lot of confidence that we could meet or exceed again I go back to my team a few minutes ago.
I want to get us consistently beating and raising what we say and that means milestones that we put out there. So don't take the 30 to 45 day to be a direct correlation to any specific data filing or any specific expectation we have about something we're gonna her back.
Okay.
That's helpful and then on the additional portfolio rationalization are you know I know you haven't been disclosing what the molecules are but you know could you give us a sense of if HSR reviews for these molecules, you're contemplating is that going to be coming.
Coming into play do you think or they have a smaller nature or maybe just any color if possible.
That's a great question I think on the brands.
Schumer side, we do not expect them to trigger an HSR review just based on their size.
I also don't think the molecule we're in process of the partnership and pharma triggers HSR review and the only question is really the manufacturing JV and whether that would trigger an HSR review and that's one that potentially would so I hope that helps give you a sense of scale between them.
Yes.
There's actually two Steve for your benefit as to kind of pull this war, but dumb it down as to like determining factors in determining the right. One is kind of is the nature of the molecule the ingredient order business all the competitive nature in terms of the other party you're dealing with one two is.
<unk> is a threshold around us and typically around 100 million. So and that's for example, why you see the trigger around the dividend transaction, it's actually not so much as a real competition here, but it's also a size threshold that triggers done an HSR review.
Okay understood. Thanks.
Thanks for the color and.
And then real quick on and I know John you talked about you know the the head count reduction given macro our current macro environment and you know I appreciate the focus on cash preservation, but is it staff sufficient to maintain growth.
Especially.
Q4, consumer revenue seem to be off the mark.
A bit.
Wanted to get your thoughts on that thank you.
Sure Stephen a couple of things right first hitting your last point Q4 consumer revenue off the Mark I can tell you that.
The big brands performed very well and really deliberate what we were expecting a lot of what's off the mark is driven by two things first we actually slowed down the investment and the new brands and slowed down the shift to trade for some of the new brands based on our working capital tightened so.
It was purely liquidity driven.
The liquidity effect of two things marketing investment than smaller brands and shift to trade timing.
And launch phasing of those brands. So it had nothing to do with the Big brands I think when it comes to people and capability look.
A lot of us have been in business for a long time in most businesses over time, which extend up.
Adding stuff and adding processes and people and whenever whenever the environment changes. It is rare that you can't go back and look at maybe we would've done differently, maybe would've had less maybe we would've actually wired differently and that's what we're finding is we started with the executive team.
Decorative teen in total is reduced by 60% and actual people, leaving the company is about 30% of my direct reports and I started with your executive team because we wanted to set a tone organizationally for how we really wanted to simplify the organization gets a faster decision, making and make sure we've got the right skill.
To execute on the business, we have so I'm not necessarily worried about in total us having the right people are I'm sorry, the right number of people I am worried because across our teams. It's not in balance we have some teams that probably have more than they should and other teams that don't have the critical skills to execute and that is why it takes.
And it's taking us time to really work through that in detail. The last point I'd make is.
Quite a bit of what we're seeing.
Change going ahead as far as head count reduction has to do with brands, we're deemphasizing or changes to our portfolio. So I hope that helps.
That's really helpful. I appreciate the color. Thank you.
Yeah.
The next question comes from Sameer Joshi of H C. Wainwright. Please go ahead.
Yes, good afternoon, everyone. Thanks for taking my questions.
Just wanted to confirm the Brazil facility.
I know it gets up and running but is it running at full capacity right.
No.
I'll, let <unk> talk to that I mean, the only thing I would just throw out there than there were before water starts I think we've made clear publicly that.
We focused on getting the three big lines up and running which by the way are equivalent to the process facilities from a capacity perspective.
And it's almost like a shrewd water well covered like three separate factories and the way it's configured the smaller lines, which are actually not very material volume are not up and running yet and that was really driven by liquidity, we decided to not invest in getting those two lines. All of the hardware is in place it's more about getting all the lines connected.
Making sure the critical.
Critical controls are in place, but I just wanted to frame that and then let Eduardo actually give you detail, but heat that.
Yes, I mean, I guess do.
I'll add some color to what John said.
We have all three lines at large lines fully operational just to remind everyone that each line has two tanks.
Thanks, So a toggle so it's almost like three separate factories, each with twice the volume capacity of 200000 liters.
Leaders for each one of those tanks. So just to give you that one thing I would like to say is the last of the three lines was being commissioned in the fourth quarter. I think we commented that we had some capacity constraints that what's really dealing with the commissioning of that last night as we were ramping up production.
Complete for different products during the fourth quarter in those three lines. So we've proved that we could really.
Operate multiple products at the same time across all three lines and even turnaround one of these lines for us for our fourth product at the end of the quarter. So the functionality of the plant was really well.
Demonstrated by the fourth quarter, albeit as we said and then immediately we had we were constrained as we work to commissioning the last the last part of the production.
Got it thanks, so that.
As long as the divestiture of the partnership for the human health.
Ingredients molecule.
Is there.
Should we expect that to be a 2023 event a quarter Houston announcement regarding that.
Yeah, we are expecting that to be a 2023 of it.
And then just the last one.
As a result of the transaction that you've done does it impact.
Any of your existing core revenues or profitability that off.
Yeah, I think I had mentioned earlier that.
The totality of.
The <unk> transaction would have impacted 2022 revenue by about $10 million.
And so that was on 2022 basis with the growth in that business.
I would expect on a.
On a like for like basis, the growth actually makes up most of the impact on revenue.
During 2022, so it would be almost neutral to what we saw in 2022 from that business based on the growth rate. So it's not a not a not a material impact to our revenue at all post transaction.
Thanks, Luke glad to fit in that.
Good luck, it's actually I should say Sameer, one thing I didn't pick up and all of that is when you actually include the revenue from it.
The earn out it becomes accretive to revenue post transaction, but it is earn out which is three years I would expect post start out.
Based on the annual growth rate the business will be about double the size of the time, we sold it to them of the 2022 revenue just to give you a sense of magnitude of how that business is operating today.
Yes, and I think you also mentioned the rest of the hundred and 50 would come from sort of gross margin dollars.
Gulf manufacturing abuse.
That's above the $3 50, so 50 to 500 Delta.
It's really based on the first 10 years of the long term production agreement gross margin contribution.
Got it.
Thanks Cynthia.
Our last question will come from Laurence Alexander of Jefferies. Please go ahead.
Good afternoon, John Hope as well just have a couple of questions hopefully I guess first for Han.
Can you give us the total backlog of milestones and earn outs.
And what do you think do you expect to drop through rate is from that backlog to your EBITDA.
Over say the next 510 years.
Alright, well when you say backlog.
Let me explain and then see what I'm actually answering your question.
So we we just completed so basically now right now we have to we have three agreements in Android, we have the flavor and fragrance agreement with DSM, we have the <unk> agreement with ingredient one and we have the the coming up of cosmetic actives with with dividend.
We're just coming out of here one of DSM.
We have recognized that revenue in.
Books, and we have two more years to go from out of the three years. So this there's two more years to come from a DSM perspective on the FNF portfolio.
On the.
The ingredient side with Ray ban there's two things one is we are sharing in a royalty stream.
We have looked at in 2022 and continue to to have a share in cola value share or royalty stream as part of the revenue that they are.
Having with with their end customers. That's one aspect. The other aspect is we have certain milestone payments.
Related to.
To certain criteria being met which is a combination of.
Unit cost.
And revenue.
And so.
<unk> you know certain amounts become become payable over time and there is about so if you look at that in terms of what has to go on that its about a $35 million.
In all <unk>.
Again think about it is over a two year period.
So that's that aspect and then would you have it on.
John explained it I think as part of his remarks debt.
Beyond the $200 million of phone does the 150 milestone spread over the three years, which is you know relatively equally spread.
If production and supply go to plan.
So that's kind of how you need to think about that aspect.
So those are the three that you'll be on your mind.
Okay, great and the only thing I'd add on is.
The only thing I would add is the sum of those three parts are about 335 committed $40 million over the next three years and expected earn out payments and based on our track record with.
DSM and what we see and how the milestones or earn outs are actually structured.
I would expect us to have a very high probability of attaining the majority of that.
Okay.
Okay, Great no that's very helpful and John This is not your first downcycle.
Curious about your thinking about Q areas, one why the fit to win target didn't change in response to the changing.
Macro conditions, and secondly, how you're protecting your R&D position.
In this what's a fairly severe simplification initiatives.
Okay.
Both.
Great question, So let me first.
Let me first deal with the R&D, that's probably the most straightforward one.
You've been with me I think for three major cycles at least and in all of them. We protected the R&D investment and I can tell you that as of today.
We're committed to protecting the R&D investment so no significant change to the R&D investment.
I think.
Like.
And in the fit to win we grabbed quite a bit of what was really the underlying operational opportunities that we had.
I think there is incremental right. So we didn't change the 150, but there is incremental and it's really coming out of the portfolio review and some of the assets that will be divested of noncore assets, but we did not add that so I wanted to avoid potential double counting so I wanted to stay very clean we have 150 million.
That is part of fit to win no change and that's part and that 150 is still in place because it relates to most of the core assets that we're retaining going forward, there's more to be had but that more will come from the impact of divestments that were in the process of executing so I hope I hope that helps.
Lawrence and how we're thinking about it.
Okay, Great and then just the last one I appreciate you don't want to get too far over your skis on.
Sort of.
Things that are kind of hard to time, but can you give a sense for what the current batch.
Backlog of potential other molecule licensing deals or discussions with the flavor is and in particular I guess I'm just curious.
It.
Jupiter one kind of a.
You unique white whale or do you are you seeing sort of a <unk>.
Shifting the industrial community, where companies are coming to you with more significant proposition than you've seen before can you just give a sense for what's most in terms of timing, but just kind of what the tenor is.
And the range of discussions.
Yes no.
The market and value chain extremely well Laurence so I, what I would tell you is there is there is a significant shift.
And it is and.
Who the people are that are coming to strike historically it would be the DSM. She would be the suppliers to the end markets that we're interested in.
Accessing new sources of chemistry, we still see some of those but if I if I look at the inbound inquiries right now it's probably a third from players you would know well that are looking for potentially new intermediate chemistry to replace their is their current feedstock for specialty and high value chemistry, Okay. That's.
And you you probably could imagine who those players are but the other two thirds is where the surprises. The other two thirds are major cause.
Schumer packaged goods companies consumer companies that actually you have made significant commitments.
Two the sustainability agenda. Some of these companies are committing 90% or more of their chemistry to be from sustainable sources by 2030, and what's clear around these commitments. Yes. They are very committed to them, but they are desperately sourcing how to solve that how to meet those obligations.
And we are very engaged with a handful of those companies and actually looking at their targets assessing the feasibility of bio Pee in a path.
And in all cases that we were engaged and they've determined we are their best path to solving it and now it's just actively negotiating how do we best do that how do we manage through the IP challenges how do we manage to the future supply opportunities what scale are they you know how do we how do we justify dedicating part of our.
R&D resource to solve their issues, but my guess is there's a few of them that we will definitely be double doubling down on <unk>.
Becoming key suppliers to that mission the idea that they need to replace their base to sustainable chemistry from their current sources I hope that helps your.
Your question.
No very helpful. Okay. Thank you very much.
Thanks Laurence.
This concludes our question and answer session I would like to turn the conference back over to John Melo for any closing remarks.
Very good thanks, everyone for joining us today Andrea Thank you for facilitating this I appreciate it very much I. Appreciate your continued interest I appreciate especially our long term shareholders who have been.
Great and sustaining.
For a long time.
I really appreciate our employee base, who have come through an amazing period and I'm, so glad to be on the other side and just starting to focus on getting our balance sheet back in order starting to invest in the things that really matter and really cleaning up our house to ensure we really deliver robust efficient growth that continues.
To lead our sector in the consumer markets, we participate in with that.
Good evening to everybody and thank you for your patience.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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