Q2 2023 Danimer Scientific Inc Earnings Call
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This is the conference operator, please standby the call will begin in about one minute. Please stay on the line and the call will begin in about one minute. Thank you for your patience.
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Okay.
Greetings and welcome to the tandem or scientific 2023 second quarter earnings call I would now like to turn the presentation over to Mr. James <unk>, The Companys Investor Relations representative.
Thank you operator, good afternoon, everyone and thanks for joining us today for denim or Scientifics 2023 second quarter earnings call, leading the call today will be Steve Cross greet Chairman and Chief Executive Officer, and Mike Hey, Joseph Chief Financial Officer, I'd like to note that there was a slide.
Deck that accompanies today's discussion, which is available on the Investor Relations section of our website at Danaher scientific Dot com.
As we begin I'll call your attention to the company's Safe Harbor language, which is published in our SEC filings and on slide two of the presentation I just referenced on today's call. We may discuss forward looking statements within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 as amended.
We're looking statements include among other things statements regarding future results of operations, including margins profitability capacity production customer programs and market demand levels.
Results could differ materially from what is expressed or implied in our forward looking statements.
The company assumes no obligation to update any forward looking statements to reflect events or circumstances. After the date hereof, except as required by law.
Today's presentation also includes references to non-GAAP financial measures within the meaning of SEC regulation G. We believe these non-GAAP measures have analytical value, but note that they should be taken as supplementary measures of performance and not as alternatives to GAAP results.
We have provided reconciliations for non-GAAP financial measures to the most comparable GAAP financial measures in our earnings release and our presentation. Thank.
Thank you and it's now my pleasure to turn the call over to Steve Cross greet Chairman and Chief Executive Officer of Danaher scientific good afternoon, and thank you for joining us.
Our second quarter financial results were consistent with our expectations. In particular, we are pleased to have delivered year over year and strong sequential growth in PHA based sales.
More importantly, as you should have seen in a separate release or part two application for the department of energy loan guarantee program has been accepted.
We're very excited to take the next steps and will move into the confirmatory due diligence in terms of negotiation process. If successfully completed this program will provide funding necessary for us to complete a greenfield facility.
It's important to remember that the Doe loan guarantee program basic mandate to identify emerging technologies that are in the national interest and to provide the financial support necessary to enable their growth.
The program off just at the deal we had been very supportive throughout this process and we've received consistent positive feedback about our candidacy.
At the core of our application well went through 8000 pages of documentation is a simple very powerful truths that danaher has a serious solution decades in the making that has the potential to be a meaningful part of addressing pollution from petroleum based plastics.
The D O a evaluation process has been exceptionally rigorous a greenfield project, our business model and our market opportunity I've been put under a microscope and.
The most work intensive and time consuming part alone process is behind us for the next steps are important and the outcome isn't guaranteed we are pleased to have the validation. We think just acceptance of our application signals.
This should also signal our clear intent and opportunity to the market that we can serve demand not only right now, but as they persist and capable partner in the years ahead staying power is important to our customers and is one of the number of active beats that competitive leadership requires I'd like to walk you through the additional reasons why we believe we are emerging as a leader in the market for responsible.
Alternatives to petroleum based plastics and expect to retain that position.
Leadership in that market requires the ability to provide solutions to a wide range of customer needs with.
With each passing quarter, we are increasing the diversification of end use applications that are resins address and a portfolio of end use customers that have adopted those products.
Our addressable market opportunities through diversification as a competitive cars, we are way out in front with regard to the technology of PHA manufacturing <unk> DHA polymers, and the blending of those polymers and uniquely capable biodegradable resin glands.
When we think about competition for the foreseeable future are fighting against the entrenched, but increasingly vulnerable position held by petroleum based materials.
Consumers corporate executives across many industries and regulators now understand that the true cost of petroleum based plastic is much much higher than simply the price per pound.
It's become increasingly clear that single use petroleum based plastics are particularly responsible for tremendous collateral damage to the environment.
I'd tell somewhat recently scientific studies have focused on the invasion of the global food chain by micro plastics.
Increasingly research is focused on the impact of much smaller nano plastic particles, which we now know pollute the very air we breathe nano plastic particles have been finding a bloodstream and tissues, even in the tissues of unborn children.
Finding suggest that nano plastic particles attached to it may be killing other pollutants, including carbon monoxide with them as they penetrate in our bodies.
Recent research suggests any link between nano plastic pollution any wide range of chronic health problems, including cancer diabetes.
It seems inevitable that the alarm the coffer alternative materials will do nothing but grow in intensity and urgency.
The companies to adopt our residence for use in their businesses brands and reputations to protect.
We also currently use a great deal of petroleum based plastics.
Shifting to a new material. It takes time as challenging creates some short term risks and may have incremental costs.
Even so across many industries there is an increasing awareness that a reckoning is approaching <unk>.
The reckoning that Kennedy's reputation risks the brands and consequences for the businesses that do not move to adopt environmentally responsible materials.
This is particularly the case with regard to single use plastics as.
As consumers reach a tipping point of awareness that there are solutions to these problems the risks and consequences of doing nothing easily eclipses those associated with updating supply chain practices. Our partners for disposable items that in many cases class pennies or even fractions of a penny per unit.
Jana Danaher has been working for nearly two decades to create the alternative materials that our customers and the world need.
The challenge has been creating materials that are seamlessly placements that don't negatively impact the experience for consumers.
This is important to mitigate any related risks of damage to our brand or business.
<unk> make for a good example, most.
Most people consumers restaurant owners think legislators know that plastic drinking straws are a pollution problem and yet despite the environmental impact we're still using depending on which estimate you use anywhere from 200 million to half a billion strives everyday just here in the United States.
It's hard to know for sure how many of those scribes leak into the environment as pollution estimates can range anywhere from a low single digit percentage to as much as the 32% global average for food packaging estimated by the Ellen Macarthur Foundation.
Just to illustrate if you take a midpoint of those estimates and do the quick math and 350 million strives everyday in the U S. At approximately 750 <unk> per pound of plastic and an environmental leakage rate of 20% that math gives you well over 15000 tons of pollution every year.
That's over 15000 tons of environmental damage every year, just from strides ingestion the United States.
We can debate because there are lots of different estimates from various sources the numbers in that equation, but what is not debatable is that strives there only a fraction of the larger an extremely serious problem of pollution from single use plastics.
It also seems beyond debate because PHA based materials are the solution at this problem should no longer be tolerated.
By now I suspect most of you have used a straw made from our PHA resins without even realising it.
For example, if you've been to Starbucks those green straws, that's danaher is material and it's impossible to tell it isn't petroleum based plastic.
Our material is nonpolluting, it's fully biodegradable, including Marine Degradable. It is home composed to bolt it does not get soggy. It does not melting hot liquids PHA based RASM is a seamless replacement material and use the solution at the market and the environment need. We believe the same is true in many other categories dominated by petroleum.
Based plastic.
Developing a true material solution to create and capture opportunities to replace petroleum based plastics has taken many years about technology process engineering and material Science and then in most cases additional years of acceptance testing bio degradation testing and field trials by each individual customer and their supply chain partners.
Many of those efforts are now bearing fruit.
Just this quarter, we have diversified into residents for protective films shrink wrap and produce bags and there are many more end use applications in our pipeline at various stages of development.
Well the development process is generally lengthy we are increasingly able to leverage our prior R&D work to move much more quickly.
The commercialization of Compostable coffee pods for example required rapid development efforts over the past year, we've began to work with several potential commercial customers in this category, including one that is already moving into industrial trials. The last step before for full commercial production.
Our long standing leadership position in the research and development of these materials enabled us to respond to the urgency in this category and help our customers. They have no choice, but to move quickly to address the risk of disruption from legislation in Europe , which if passed will prohibit the use of petroleum based materials, which they are currently entirely reliant upon.
Our leadership position may prove strongest of all in the quick service restaurants or <unk> space.
Now we have a significant customer that is proceeding through store trials for strives in two states and we expect a successful outcome in a full rollout to follow.
Additionally, we are pleased that checkers rally's as adopted PHA based drives has begun their national rollout through one distribution center.
Credit for this opportunity goes to our customer Columbia packaging group.
Checkers rally's as a great new customer with just under 900 locations nationally.
We continue to await decisions on two very large opportunities for new <unk> programs that we mentioned on last quarter's call one for cutlery and one for straws. We're increasingly confident we'll win the cutlery program, which has an annual requirement of approximately 15 million pounds of resin with first shipments preliminary expected to begin sometime in the late fourth or early first.
We stand ready and are confident we can execute both programs in their entirety.
We expect our emergence as a leader for alternative materials in the <unk> channel will be extended by the development of compulsive coatings for paper Cups, a technically challenging category, but one that we are confident we will soon enter successfully.
We believe that Havent cuts in Lids. In addition disk drives in Colorado will put us in a powerful position to offer our <unk> customers an end to end solution for most of their single use plastic waste.
Before I move on I'll also mention that AMC theatres with approximately 500 locations sources their single use foodservice items much like <unk> does and has also begun to offer PHA based straws.
This customer was also captured by our direct customer converter Columbia packaging Group G.
TPG purchases our residence at manufacturers straws among other items and then sells those products do their distribution network.
Our leadership position also comes from our continuous innovation.
January is the first and only commercial scale manufacturer ph in the world and because we are at the cutting edge, we're constantly discovering new areas for improvement.
This not only reflects reflected in our creation of new resins for additional end use applications, but at finding ways to improve the manufacturing process, we used to produce those resins.
As you May recall, our Kentucky facility successful successfully achieved much better levels of phe output from fermentation than originally anticipated.
A few months ago, we started testing some new equipment in our downstream processing and believe we have found a path with faster more efficient extraction process that yields higher quality meet PHA than we previously thought possible.
Ultimately, we believe we'd be able to achieve better throughput reduce waste and reduce cost.
It will take some time to validate these process improvements, but the work is exciting, especially as it reminds us.
We are still on the early stay in the early stages of commercializing PHA polymers and there are powerful science and engineering improvements that we have yet to discover.
I will now turn the call over to Mike Hey, Joe <unk>, Our Chief Financial Officer to update you on the numbers for the quarter and our outlook for the rest of the year.
Thank you, Steve and good afternoon, everyone I'll start with our financial results on slide seven of our presentation for those of you following along.
Second quarter total revenue was $12 9 million compared to $12 7 million in the prior year as growth in product revenue was mostly offset by a reduction in service revenue.
Second quarter product revenue was $12 2 million up 5% compared to the prior year level of $11 6 million.
This growth was entirely attributable to PHA based resin sales, which grew 10% compared to last year.
H a base resins were 66% of total revenue in the second quarter of 2023 versus 61% in the second quarter of last year.
I also want to note that product sales were up 10% sequentially compared to the first quarter's 111 1 million.
The sequential growth in product sales was led by a 69% growth in PHA based resin, partially offset by a 40% decline in P. L. A base resin sales.
Second quarter service revenue was approximately 700000 this.
This is about 400000 lower than last year's second quarter.
As in previous quarters. This was expected and reflects the completion of funded R&D projects for certain customers that are now moving to commercialization.
We reported a second quarter 2023 gross loss of $6 6 million.
Which was an increase compared to the prior year quarters gross loss of $2 2 million a.
The year over year increase primarily reflects higher noncash depreciation and amortization expenses.
After adjusting for depreciation and stock based compensation and certain nonrecurring items, we reported adjusted gross loss of $1 6 million as compared to an adjusted gross loss of half a million dollars in the second quarter of 2022.
We continue to expect gross margin to improve markedly with growth in volume.
R&D and SG&A expenses, excluding depreciation amortization stock based compensation and one time items totaled $8 6 million in the second quarter, a significant improvement relative to the $12 4 million of expenses for these categories in the second quarter of last year.
As discussed previously we improved efficiency across many areas of business through broad cost control initiatives lower R&D expenses are.
Are also reflective.
At the conclusion of certain discrete projects.
Adjusted EBITDA loss for the second quarter improved to $10 2 million compared to an adjusted EBITDA loss of $12 9 million in the second quarter of 2022.
Adjusted EBITDA excludes stock comp.
Other income and other add backs as reconciled in the appendix.
Cash and equivalents at the end of the second quarter were $98 million as compared to $62 8 million at the end of 2022.
Pursuant to our recent loan agreement. We also established a restricted cash account for $12 5 million for expected interest payments cash.
Expenditures in the second quarter were $6 6 million and year to date had been $23 million.
We continue to guide to full year Capex spend in the range of $26 million to $31 million.
We ended the second quarter with a total debt balance of 378 million comprise mainly of our convertible senior notes. The senior secured term loan we closed during the first quarter and our new market tax credit loans, which we expect will be forgiven starting in 2026.
We continue to view the magnitude and timing of customer demand ramp up for PHA resins, and our increased utilization to serve that demand for our Kentucky operations as the largest factors for variability in our short term financial results.
Both our first quarter.
Quarter results have been consistent with our expectations, even so as we look to the second half of this year the timing of certain expected customer programs has moved to the right. So while we are reiterating our full year 2023 guidance for adjusted EBITA, We believe an expectation closer to the low.
Sure end of our range of negative 31 two.
<unk> negative $23 million is prudent.
I'll now hand, the call back to Steve for his closing remarks, Thank you Mike.
Before we turn to Q&A I'd, just like to quickly revisit how pleased we are to have received approval from the department of energy to now move into the due diligence and negotiation of terms for funding needed for the construction of our Greenfield expansion.
While the last part of this process will take some time and there is still no guarantee of success, we're very confident in the strength of our Canada to see for the program.
We are also no less excited by what we expect to see in terms of growth in our business from new programs over the next few months as I said, we think that as we enter 2024, there will be no question as to our leadership position in the market for alternatives to petroleum based plastics across a wider range of applications across a more diverse assortment of customers.
Well there is always some uncertainty as to the timing of individual programs or to specific events. We remain very confident that danaher is well positioned for the future will finish and we will finish this year with momentum in several key areas of the business and will experience long term success.
Thank you to everyone listening to today's call for your attention and your support and operator, we're now ready to take questions.
If you would like to ask a question. Please press star one on your telephone keypad now you will be placed into the queue. In the order received please be prepare to ask your question and prompted please.
Please limit yourself to one question and one follow up question.
Once again, if you would like to ask a question. Please press star one on your phone now.
And our first question comes from Thomas Boyes from P. D. Cohen. Please go ahead Thomas.
Hey, thanks for taking the questions.
First maybe could you just talk about the progress that you've seen between for extrusion and increased coding for cups I mean, the challenges. The same here just around the lip of the cup and ceiling of the bottom and is there one application or one.
Approach that that's further ahead than the other.
Yes, Thomas Thanks, Great question.
We've made really good progress through several different value chains.
To get cups to market.
Can you give some kind of insight I guess into what that looks like.
The industry measures.
Cups.
Quality of cups by the number of leakers per thousand.
And I.
I would say for several months we were.
Round five per thousand and hunger and now we're getting down to where we're under one so we have at this point had a one.
Of the of the three value chains I had mentioned one.
Jane.
Now produced cups that.
We believe in the converters believes will be acceptable to the quick service restaurants.
And that one was through extrusion coating, we have a second value chain different can burgers.
That have also produced a cup, which we believe.
We'll be successful and on the aqueous coating side.
We.
Have a third value chain.
They are currently making cups and have a high degree of confidence that based based on that.
Coating process.
They're going to be successful, making tough. So we are hopeful that here shortly we're going to have three different.
Sets of converters and paper manufacturers.
Set ready to make ups and those those are being delivered to the quick service restaurants, and we'll go from there.
Based on that.
Experienced in that progress.
I know that some of our customers have goals to have a store trials in place by the end of the year and I believe we're going to be able to meet that spec.
Thanks Thomas.
Oh, that's great to hear obviously, a pretty significant opportunity for the company longer term and for my follow up I just wanted to just dig a little bit further into the guidance.
Murray.
The slide.
Do you have in there for some exposure to the UK, Russia conflict and I haven't seen I know that was of course an impact when the.
First broke out so just was there an assumption that maybe there was going to be some improvements in that way. It was kind of in prior periods. It was it's more steady state or is there something that has happened.
Has caused that to change.
Yes.
Good questions.
As we as we talked when we told you last year I believe it would have been when I can't remember when we reported Q1 or Q2 that because of the war in the Ukraine are our most significant pls customer has it has has a very significant exposure.
To that region and that we expected our pls business to decline off into the future and at that point had no expectation of when that might.
Bounce back.
What happened is in an early Q1.
That customer started placing orders again, and we had a stronger than expected sales in Q1.
But in during Q2.
In may that customer canceled all the orders for the remainder of the year and so we don't know the ins and outs.
They're going through there, but it's definitely still related to the war in Russia and the Ukraine.
Now that.
So we would expect.
<unk> business to be off this year kind of what you expect to be at the very beginning of the year. So that has affected our guidance.
I will say on a positive side.
With the Pls business.
We are seeing a little bit of a bounce back from Covid.
<unk> got three different programs that during COVID-19.
Went away.
Where the demand was gone and now that's starting to come back I don't really expect to see anything.
The consequence volume wise until early.
Early 'twenty four.
But that's a positive for the PMA business, which is really the first thing positive we've seen out of that business for sure.
Yeah.
Excellent I appreciate the color, obviously I understand that PHA is really the focus here, but make sure I understood. The dynamic that will take the rest offline.
Thank you Thomas.
And our next question comes from John 10, when track Peng from Securities.
Securities. Please go ahead John .
Thanks. Good afternoon. This is actually Dan Moore on for John Thanks for taking the questions and I jumped on a little late so if you've covered these forgive me.
I'll start with the congrats again on the D O a D O V loan program acceptance can you talk a little bit about the timeline from here.
And what alternative financing sources.
Likely to pursue if they're delayed or gets pushed out further to the right.
Sure Dan Thanks for joining us I will Oh.
I'll cover part of that and I'll turn it over off hand, it off to Mike and he can kind of pick.
Pick up behind me there, but we're obviously very encouraged to have moved into the final stages of this process and we're really happy to have the support the support of the program office, we're confident in the strength of our application and our fit with the program.
As far as the timing of the funding.
I would not expect to see an actual closing any sooner than first quarter of next year that would be the earliest possible based on the timeline outlined.
Mike do you want to add to that.
Yeah, Dan So I would just add you know first of all this is our primary method for financing the completion of this facility and we've been working on this for a long time, but we're pleased to be moving through the process with a lot of enthusiasm from the D O.
And and is by far the best source of capital that we can't get it at the lowest rate, we think that the terms for that so.
If this were to not work out.
I think we would continue to look at the strength of our PHA business and the demand for our products and then I think we'd probably have to go down the path, where we'd be start partnering with our customers and solicit some of their help in terms of you know take off agreements take or pays and things like that that could make sure that they have.
Shored up the.
The supply, but theyre going to need for their business, but again.
For we're starting to see prices there that start with the seven handle and ER and then you know kind of Q2, 'twenty four and beyond.
What we're looking at right now is 76 to 77 eight.
Range for that so there's a lot of things are impacting cobalt prices right now one of them being the war in the Ukraine.
That.
That region produces a lot of canola oil supply and we're also been sort of impacted by North America.
Most of the Canada was burn it up to summer, we've got them heat waves and in America, and they're planting more corn and reducing soybean canola. So those things are also having some effect I think we would've expected crude oil prices to be coming down having said all that these things can change very quickly a more mild winter.
Perhaps we'd get prices going back down again, but again, we've got pass through mechanisms were not truly exposed to these prices necessarily but anytime you can have lower input prices that's just easier.
No too for our customers to purchase more from us.
Yes.
Yeah.
Go ahead, if I could just to be clear. These prices are have come down and are going down but your.
Scott.
Reduction has slowed based on those factors that Mike pointed out.
Perfect makes sense less and I'll sneak one more in and jump back, but and you I think you touched on this in the prepared remarks as I was jumping on maybe talk to any volume commitments have you received for the Greenfield in Georgia on the <unk>.
Pipeline of the.
How is your pipeline or customer forecast change in over the last you know 123 months. Thanks again.
Thanks, Dan I would say the forecast Hasnt really changed over the next several years because the demand.
Demand.
From the pipeline is so great that there's only so much we're gonna be able to sell in the out years. So it doesn't really change the forecast, but the pipeline is getting bigger and deeper broader more diverse and so that's fantastic.
As far as any contracts for the Greenfield.
There are some that are already in place and working with the D. O E on the commercial side of this they've been provided with a.
Support letters from customers and they're there they're satisfied with where we're at at this point.
As a reminder, if you would like to ask a question. Please press star one on your phone now.
Okay.
Okay.
At this time there appear to be no further questions I'd like to turn the call back over to Stephen for closing remarks.
Thanks, operator.
Thank you for your time, everyone and for your attention. This afternoon and I hope we've given you a good sense of why the whole team here has energized and as confident as ever <unk> been working.
Hard for a very long time in order to address the significant issue of plastic waste, we have real scalable solutions to address a meaningful part of this very complex and important global problem.
After all the investments we've made of time capital and effort I'm not sure. We can express just how gratifying it is to see the market embracing our materials and how good it feels to have this opportunity to lead. Thank you for your investment and Danaher will be looking forward to our next update with you in November Thank you.
This concludes today's conference call. Thank you for attending.
The House has ended this call goodbye.