Q3 2023 Benson Hill Inc Earnings Call

Okay.

Good morning, Thank you for attending Benson.

That's cool to 'twenty to 'twenty, three adding scope.

My name is Laura and I know people want the right Oh.

<unk> told me with the presentation portion of the call with an opportunity for questions and answers at the end.

If you want to ask a question. Please press star one.

E bikes.

I want to pop the Koch foods to hoist reaping may ask Judy to director of Investor Relations with Bernstein. Please.

Please go ahead.

Thank you Lauren and good morning, we appreciate you joining us to review, our third quarter financial results and outlook.

With me today are Daniels there that's at Hill's Chief Executive Officer, and Dean Freeman, our Chief Financial Officer.

Early this morning, we filed our earnings release and form 8-K.

These documents and an investor presentation, we will reference during the prepared remarks are available in the investors section of the best in their website.

Comments today from management will contain forward looking statements, including pension hills expectation of future financial and business performance and industry outlook and current guidance for 2023 and preliminary directional outlook for 2024.

Forward looking statements are inherently subject to risks uncertainties and assumptions and are not guarantees of performance.

Caution you to consider the risk factors that can materially cause results to differ from those in the forward looking statements.

Such factors include those referenced in the cautionary notes included in our Form 10-K Form 10-Q press release, and Investor presentation, and other filings with the SEC.

Also during this presentation, we will discuss specific non-GAAP financial measures a reconciliation to GAAP is available in our earnings release and presentation.

I'll now turn the call over to Dee.

Thanks, Robin and good morning, everyone. The past few months have been an intense and pivotal time in the evolution of Benson Hill on October 31, we shared our plan to realize our vision as a leading food and feed technology company across multiple protein end markets the need for protein and nutrition security continues to grow.

And unlocking the natural genetic diversity implants is a way to address it that's the power of genomics to change the food system.

Our innovations have a multiplier effect across various end use applications. We plan to direct the value added attributes of our ultra high protein low look a soccer IDE or you H P. L. O seed varieties as we successfully launch for the aquaculture market into <unk>.

Served they established and growing poultry and swine markets to establish this benson hillis divesting its processing assets and evolving to an asset light model with robust partnership and licensing agreements to excess of $28 million, an acre addressable market and supply our novel soy meal to.

<unk> at scale.

What excites us about this opportunity is our first mover advantage, we have confirmed through multiple feeding trials that you H P. L. O is a game changer for animal producers are innovation available today amidst the nutritional quality trade specifications, they desire higher protein low like a soccer rights.

And the enhanced amino acids.

Additional innovations in our product pipeline with further increased protein enhanced amino acids and herbicide tolerance will be launched in 2027.

Competitors have announced partnerships in this space that underscore the exciting opportunities in these markets and Benson Hills first mover position.

By the end of the decade, others intend to launch first generation seed varieties with defined specifications that are you H P. L O varieties meet or exceed today.

By the end of the decade, that's inhaled plans to launch our Gen III seed varieties into this attractive market.

That's the Benson he'll advantage, our proprietary high protein germ plasm represent decades of breeding to optimize nutritional traits are strategic data layers represent extensive mapping and understanding of nutritional genetic markers and are crap OS innovation engine and crop accelerator provides.

<unk> industry, leading AI driven seed innovation platform to execute our quality trade breeding program.

Our crop Oss technology platform is distinct and highly complementary to the capabilities of other seed companies.

Ultimate advantage is an accelerated speed to market.

In a business that involves biology and implementation across millions of acres time is priceless.

We have defined a clear path forward focusing on our core strengths here's what you should expect from us in the coming months.

First we're executing the divestitures of our processing assets, specifically, we completed the sale of the soy crush assets at our C. More facility for approximately $36 million subject to working capital adjustments.

And we're currently exploring opportunities to divest the question and Dakota facilities.

We're executing the transition of our business, we expect the divestitures cost realignment working capital savings and efficient capital structure to enable an asset light model with a 12 month liquidity runway.

Finally, we're focused on securing strategic partnerships and licensing agreements to expand into the poultry swine and pet food markets. While also positioning <unk> for gross margin expansion and higher returns on capital.

The 'twenty to 'twenty three harvest is nearly complete for both our commercial and pre commercial soybean varieties. Our field teams report protein levels and our proprietary soybean portfolio consistent with what we've seen historically with some variety is delivering a slight year over year increase.

Notably one of our new you H P. L O soybeans showcased protein levels that outperformed our widely planted variety currently in use and agriculture.

Similarly protein levels in ultra high protein varieties destined for human food applications showed a modest year over year improvement.

Approximately 10% of the harvested bushels have already been delivered to our processing facilities and partners and we're establishing tolling agreements to processed grades.

The 2022 class products within our U HP and new H PLO categories continue to show stronger yield performance, surpassing the current portfolio.

Looking ahead, we anticipate a five percentage point year over year improvement in the yield performance of our 2024 commercial portfolio.

We remain firmly on track.

Transition, our first U H P herbicide tolerance varieties to seed production for the upcoming 2020 for crop year.

We plan to share an update with you on what will advance through the R&D pipeline by the end of the first quarter.

We will continue to support our existing engagements with farmers current customers and partnerships as we convert our business model to enter animal feed.

In our view the long term opportunities for food agriculture, and specialty oils remain positive. These markets will be challenged in the near term, but they will return to growth and we have proven our ability to scale our innovation to meet the needs of those end markets.

The hard work is underway to realize the evolution of Benson Hill.

Next year would be different as we begin the shift towards 100% proprietary products through an asset light model.

Access in the animal feed markets requires an acre acquisition strategy.

As our acre acquisition targets grow in the coming years towards an estimated $6 5 million acres by 2030, we expect broad acre licensing of our germplasm to be the catalyst to get us there.

Other sources of future revenues and margins will include direct seed sales and technology access fees from soy ingredient processors and customers.

We expect to share the estimated 100 to $230 per acre of value creation from our genetics with those partners.

One of the benefits of this approach is that we can monetize our innovation at least two years sooner than under the current closed loop model.

By securing value further upstream we can generate more sustainable earnings at a much higher gross margins.

I want to quickly shift to how the transition plan will affect 2024.

Fiscal 2024 is a transition year for us as we move to the asset light proprietary only revenue model several factors will impact our results for 2024, depending on the timing of our execution.

Specifically, a disposition of manufacturing assets will reduce our non proprietary revenue and operating costs versus 2023.

Our gross profit is still expected to be positive in 2024, and we will deliver our operating run rate reductions as promise, but we will continue to experience net operating losses for the year.

As we've announced we intend to pay off our high cost debt by March one 2024.

We expect our operating cash burn to be significantly lower than 2023 levels.

We will update you on 2024 expectations and regular cadence of our year end earnings call.

We have a lot to look forward to as we execute this plan and realize the tremendous opportunity for Benson Hill by leveraging our enduring competitive advantages. We will keep you apprised of our progress I will now turn the call over to Dean to discuss third quarter results and outlook for the fourth quarter zinc.

Thanks, Danny and good.

Morning, everybody.

As seen in our press release and earnings slides, so I won't read through all the numbers, but I wanted to focus on a couple of key takeaways here.

First we have mentioned on several occasions, the market factors affecting supply and demand unit economics, which are negatively impacting price and margin performance of our proprietary sort of ingredients meal and high oleic oil products.

This is an industry wide issue and it is part of a persistent broader challenges in the entire food value chain driven by broader inflationary economic uncertainty all of which is further eroding consumer demand.

Mark demand headwinds impacted gross profit in the second and third quarter by $2 million as we manage higher inventory supply by selling proprietary soybeans.

And the open commodity market and favorable pricing.

However, this did contribute to the approximately 20% increase in proprietary revenues to $33 million in the quarter.

The second takeaway is that the unfavorable comparisons to last year's gross margins, which were at peak levels last year. This led to a 17% decline in comparable non proprietary revenues.

Third.

There was negative impact of approximately $1 million and higher than planned manufacturing and logistics costs, which were largely nonrecurring, but negatively impacted our quarterly gross profit result.

And finally operating expenses in the quarter <unk>.

Included approximately $2 $5 million of nonrecurring costs related to our business transformation and other associated costs.

Noncash items for depreciation and stock compensation were $4 $7 million in the quarter.

Excluding the nonrecurring and noncash items cash opex declined by $1 2 million to $21 $4 million.

In the third quarter.

As we discussed last week, our plan is to deliver significant cost and working capital improvements to minimize cash burn in 2024, while enabling the execution of our strategic growth objectives, and as a result, we've announced $33 million and run rate operating expense reduction in 2024.

We're also in the process of identifying an additional run rate reductions of about $5 million to $10 million.

So as we close out the year, we expect market headwinds to persist in the fourth quarter and likely into 2024.

However, we expect improved proprietary and non proprietary product gross profit performance in the fourth quarter.

And this was driven by high volume short term supply agreements to supply white flake products and the sale of certain noncore gene editing intellectual property.

So for the full year, we're updating our revenue guidance.

Two $440 million to $450 million were.

We're maintaining our gross gross profit guidance as the favorability and improved performance, we expect in the fourth quarter should offset the market headwinds and cost pressures, we saw in the third quarter.

We expect to see further reductions in operating expenses and so as a result, we anticipate a reduction in the loss from continuing operations adjusted EBITDA and.

Free cash flow.

With the sale of the C more facility and the sale of noncore technology IP, we will utilize these proceeds and the restricted cash on hand to pay down approximately 50% of the short of the senior loan by the end of the month.

We plan to completely retire that debt.

<unk> by March one.

We're focused on positioning <unk> held for future sustained profitable growth.

The market dynamics of the industry is facing today.

Enforced the strategy, we are implementing to move to an asset light capital efficient operating model.

Further diversify our portfolio into higher value larger more established animal feed markets, where we have a leading competitive advantage and a compelling value proposition.

We believe our plan gives us the best opportunity to substantially improve shareholder value creation.

And with that let's move to Q&A.

Thank you.

If you want to ask a question. Please press star one <unk> pads.

Any reason you would like to repeat that question. Please press star one again.

To ask a question press star one.

If you use the speakerphone, please pick up your handset.

Asking questions.

We'll pause briefly questions all participants.

Our first question comes from Christian <unk> from iPad Honda Kristin. Please go ahead.

Great. Good morning, and thank you for taking the questions team.

Short term question just to start off with can we talk a little bit about the proprietary volume being sold into the conventional channel and I'm, assuming that was primarily a function of managing your working capital, but just any additional commentary that you could provide there would be helpful to start thank you.

No that's exactly it Kristen we manage as you can imagine is very tight working capital cycle, it's not unusual to have some off take into the commodity markets.

But in this instance, we had.

A meaningful amount such that it impacted our gross profit to the extent that it that it is very seasonal in terms of how it plays out quarter to quarter, given the inventory levels.

The harvest performance and the like.

In this instance, it was a combination of a strong harvest.

Higher inventories and the lower demand profile. So in order to manage that working capital get the inventory off the books, we push it into the commodity channels.

Okay.

Okay. That's helpful. So then as we think about the improved outlook for fourth quarter. How much of that then is a function of we're just seeing better crush margins.

Versus.

What youre seeing on the contracting side and in particular any visibility that you have on on getting that proprietary ingredient into.

The hands that will pay you well for that IP.

Yes, it's going to be a mix and as I talked about in my.

In my comments.

Right now modeling effectively the same volume of shipments going into.

Volume to say say same value of our proprietary product going into the commodity channels in the fourth quarter. So I'm holding that basically flat maybe conservatively, but we do have the upside higher margin white flake orders that are coming through in the fourth quarter that will offset that.

The combination of that coupled with the.

With gene editing IP technology that.

We recently sold.

That will more than cover the <unk>.

Trailing headwinds that we think will persist into the fourth quarter and possibly even into 2024.

Alright, if I may just one more and I do understand that things are in flux and Danny I. Appreciate you, giving some of those factors to think about for 2024.

Just continuing our thread here, how how we should think about modeling the the wind down of commodity volumes in 2020 for any sort of directionality or first half versus second half.

Any commentary that can help us dial our models that would be helpful. Thank you very much.

Yes, I think.

Look we provided some sort of directional view.

The timing of the disposition of the assets right. So we're kind of targeting early part of next year.

Later part of this year, we've already started is as you've seen.

The best sort of range I can give you is sort of a ramp up into the a.

Our ramp down into the first half of the year and then a modest ramp up into the second half of 2024 is as best a view as I can give you obviously theres a number of dependencies in terms of the timing of the ramp down the time TSA and contract obligations as a number of factors, but I would expect to have.

Slow slow ramp down in the first half of the year with a modest pickup in the second half of 'twenty 'twenty four.

Great. Thank you so much I'll pass it on.

Thank you.

Our next question comes from Brian, Brian Ross MTS, Brian. Please go ahead.

Okay.

Good morning.

A couple of things I, just wanted to start off with and I apologize if I missed this but.

Have you finalized the tolling agreement for the.

For the <unk> facility.

That agreement is still under underway.

Well, we will have a tolling agreement completed.

Okay and buy it as they are and I expect the timing or just negotiation of our negotiations.

Negotiations are underway, obviously will have to be sooner than later.

Okay. Okay. Thanks.

What I was just trying to get a little bit better.

Understanding is on the end market value creation per acre.

Yeah.

Of that value I guess, that's why it's on slide 11.

Some of the trades right.

On slide six.

Is there a way to like ring.

The traits as for as the drivers of that.

Market value creation, or how to think about which treats or the.

More valuable than others.

Absolutely, Brian what we've done as we've looked at the animal feed markets as we literally look species by species and then within each species sub species to understand the end user needs across the board animal feed is a very formulaic approach to pricing as you know, it's very very high volume.

And lower margin, but the formulate the the way you calculate the price point on that formulation is very formulaic and so really by far the biggest driver of formula costs is protein. So our protein on average is about 20% higher than commodities. So we get.

Goldstar for protein delivery, but protein does is it enables our producers to use more of our protein and replace higher cost ingredients streams in their formula cost. So it's a cost advantage to them. In addition.

No Lucas saccharide.

Trade is an anti nutrient nutrient trait what that means is it helps the animal's digest the soil as a result of that producers can actually use more of our soy and replacement of higher cost ingredients streams amino acids are also a valuable set of trades did.

Spending by animal species and amino acids today are supplemented with high cost.

Additives, because the soy meal tends not to have the right combination of the right levels of amino acids. So you can imagine how uhm PLO was 20% higher protein the lower leg of Sac right trade and enhanced amino acids actually really speaks.

Very positively to this market and in a very advantaged way we of course.

Estimated every one of those formulas and then we've brought in.

External experts from the animal nutrition industry to validate and shadow price, our estimates and so we feel pretty good about the value creation, we're bringing forward by species across those different acres and thats. What our plan is as we go out in the market.

Thank you that's super helpful.

Third thing.

Wanted to kind of understand kind of how we're thinking about it from a commercialization standpoint.

So some massive increase on the protein content, but even on the H T. It's a little bit of a drag on the yield but the protein content massively overwhelms that but like how do we think about like how that goes into the market as far as will it be direct contracts with farmers because.

Yes.

It's going to be driven more by the end market kind of pull demand versus just typical okay. I'm a farmer and this is the best.

Yielding.

Seed and just kind of how how we think about like how.

How that works from from from a commercialization standpoint.

Yes, it's a great question, so as I as I had mentioned the accessible market for animal feed is about 28 million acres for domestic consumption. So you can imagine the potential in these acres as we launch these acres into market ultimately what we're trying to get to is a value add.

For our farmers and our our producers and user producers.

As that comes to fruition.

That's where the value ultimately is going to be.

Overall, Brian I think I lost your question me repeat one more time I was on another.

Training I think I'll ask your question.

No no no I think that.

That was super helpful.

Thank you.

I just want to make sure I'm interpreting what you said so basically it's the animal feed companies that are going to drive for farmer too to take up this.

It's up to see them planted the seed and contract with it because of the.

<unk> that they get and they're going to share some of that with with the farmer is that kind of that's exactly right.

Right. So 28, Okay, Yes, 28 million acres, if we move to a pull model where the end users pulling that through the farmer, because theres a value benefit to them, that's where the value is going to be created.

And across the board, we are delivering that value across all of the players in the value chain and so we're creating a model where there is a lean in on this product across the board.

Okay.

Great. Thank you so much.

Yeah.

Okay.

Thank you.

We currently have nice to ask a question I will now hand, it back over to Danielle for closing remarks.

Yes.

Thanks, Lauren we appreciate your time and attention. This morning, we're confident in the path forward for Benson Hill by leveraging our competitive strengths.

Expect to diversify our portfolio our market reach while at the same time, creating an enduring business model centered on our core technology company. Please get in touch with roofing. If you have any questions. Thank you very much.

That concludes the Benson Ho Conference call you May now disconnect your line and exit the webcast.

[music].

Okay.

Yeah.