Q3 2023 Danimer Scientific Inc Earnings Call
Okay.
Greetings and welcome to the denim or scientific 2023 third quarter earnings call. At this time all lines are in listen only mode.
Following the presentation, we will conduct a question and answer session.
If at any time during this call you require immediate assistance. Please press star zero for the operator, please be advised that this call is being recorded today November 14th 2023.
I would now like to turn the presentation over to Mr. James Kawczynski, The Companys Investor Relations representative.
Thank you operator, good afternoon to everyone and thank you for joining us today for denim or Scientifics 2023 third quarter earnings call, leading the call today is Steve Cross Greig, 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.
<unk> on the Investor Relations section of our website at Danaher scientific got caught.
As we begin I will 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.
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 1095 as amended.
Forward looking statements include among other things statements regarding future results of operations, including margins profitability capacity production customer programs and market demand levels actual results could differ materially from what is expressed or implied in our forward looking statements. The company assumes no.
Jason to update any forward looking statements to reflect events or circumstances. After the date hereof, except as required by law today.
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.
<unk> financial measures in our earnings release and our presentation.
Thank you and it's now my pleasure to turn the call over to Steve Cross Creek, Chairman and Chief Executive Officer, Dan <unk>.
Good afternoon, and thank you for joining us.
Recently received notification that a very large quick service restaurant program for biodegradable cutlery specifying our node ex base Raisings, having that has now been awarded.
We had anticipated this notification for some time.
So I believe our converter partners have each been granted awards and we'll participate in that program.
We will supply each of them with the written they need and in total the program will require us to deliver approximately 20 million pounds annually.
We expect to begin making first shipments in the second half of next year and for the program to hit full run rate as we approach the midpoint of 2025.
This is an unprecedented reward that serves a tremendous validation of our PHA based materials, which are the first to truly help to reduce plastic pollution to a seamless material replacement strategy.
This is critical because changing consumer behavior to completely stop the pollution problem is infinitely more difficult problematic for businesses our materials.
To enable brands to differentiate to extend their environmental leadership and to enhance their reputation for sustainability.
They immediately become part of the solution.
We're exceptionally pleased and excited by this new program.
While our PHA based products revenues grew by 58% over the same quarter last year, we had expected more we're currently in the late stages of commercialization with a number of customers, including major brands some of which I'll discuss further in a moment.
These launches incorporate rigorous final qualification and testing frequently involving a number of partners. In addition to danaher and will need some additional time to complete their final steps than we previously anticipated.
We certainly appreciate that our customers had generally adapting our residents with the intent of permanently converting away from petroleum based plastics and the long term pollution they cause.
Especially given that there are often several years of research and development already invested prior to commercial launch we understand that the launch itself should be an unqualified success across the board.
In some cases, we underestimated the time required for final testing and qualification, particularly for novel end use applications, where we were asked to make adjustments that we needed to recast requalify, sometimes adding months to the process.
We are confident that each of these launches will be successful and we have been increasingly able to leverage our prior R&D work to move more quickly on new development projects, we will be able to drive process efficiency into this last stage before commercial launch and avoid some sources of delay and future programs.
I'd like to give you some specifics about the brands and programs. We are currently launching.
First I'll focus on Macquarie, a prototypical example of a great partner.
<unk> is a 161 year old family owned company with an ambitious goal to be 100% plastic free by 2030.
They knew three years ago. When we began to work together that's successful would require breakthrough advances in engineered materials and packaging design.
We began our work with a focus on pioneering the development of a possible spirits bottle one of if not the single most technically challenging initiatives we've ever undertaken.
That work continues and the progress we've made is encouraging.
And the Carty remain focused on bringing that success call me as soon as possible.
That said along the way Dan Brennan for clarity of identified additional more rapidly implement a mall development.
It is to eliminate plastic waste elsewhere in their supply chain.
We're also very powerful and exciting and we will be sharing more at the earliest opportunity.
As you May recall last quarter, we talked about a number of new no tax base film residents.
One newfield resin application is for home could pose to the retail packaging for vegetables and fruit.
The development partnership for this application began in 2020 with Biola division of CPG or Columbia packaging group, one of our converter partners.
Bolthouse farms carrot fiduciary as their launch customer and retail the product will be offered first by Myers grocery and 240 large format grocery stores. The firsthand use will be bags for one pound earthbound farm organic many field parents.
<unk> certified by <unk>.
A globally recognized leader in the independent testing inspection and certification for biodegrade ability.
This is a difficult certification to meet and we're very pleased to have qualified.
<unk> intends to develop and market compostable bags film and lowest after packaging needs across not just produce a wide variety of consumer goods.
While this initial launches modest the category presents a huge opportunity CPG is intently focused on the growth opportunities. They believe accompanies a value added product and working towards next steps in their go to market strategy.
I'll now turn to our work with Delta copies, a coffee roasting and packaging economy that has led to Portuguese coffee market since $19 61.
Developed composed of both single use capsules for their Delta Q line of ground espresso, which we believe will be the first product on the market in full compliance with proposed new EU regulations, requiring any coffee pods sold in the EU to meet new capital standards.
Capsules, the great completely inside industrial composting environments, we would email micro plastics will either raise do debit card natural ecosystems.
Develop these pods in partnership with total energy core behind who will supply the BLA and it is also a key ingredient in the PHA based resin used for the pods are engagement with other major disposable coffee pipe producers is ongoing we view. This category is an important one for us regardless of the passenger proposed legislation.
I'll return to the Q&A Smart space. In addition to the $20 million Pat Cutlery program. We are still engaged in field trials for <unk> based drives in advance they planned nationwide rollout by another major <unk> customer.
Our development efforts for the Q&A. So our channel remain a focus and we're excited to have just executed joint development agreement with a large carrier so hard to develop packaging materials. There is specific to their menu. Additionally, we're getting closer to commercialization of biodegradable cups, using resins for both extremely coatings and <unk>.
Partnership with Humira eight with coatings, our partnership with <unk> has been especially important in this effort. These are the key technologies for not only disposable cups, but for all coated paper materials used in food service.
We expect to have more to say about the coatings work were doing over the next couple of quarters.
Now I'll just say that we are confident we are emerging as a leading source of alternative materials into Q as to our channel.
As I look across these partnerships, even those that have modest initial volume associated with the <unk>.
They're each opening doors to a new category or a new range of customers to each diversify your business can add to our addressable market opportunity.
The importance of these launches has been underlined by the recent dramatic increase in engagement opportunities with new potential end use customers yet they are generated.
Recent developments and product launches have triggered discussions with potential partners across multiple industries major customers seeking long term solutions to plastic waste.
While we continue to work through near term challenges and launch delays, we have great conviction that we're on the right path toward filling our existing capacity in Kentucky and continued to make progress on our plant footprint expansion strategy.
Our work with the Department of Energy loans program office to complete due diligence is proceeding as planned and we continue to look forward to the terms negotiation phase.
We are now making significant progress towards full capacity utilization in Kentucky, and believe that there is more than enough specifically identifiable demand to make our Greenfield project a success.
The partnerships, we have been talking about today illustrate the way forward showing that it is possible to disrupt petroleum plastics addressed the global pollution problem and build an enduring business category by category customer by customer and end market by end market.
I'll 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 Good afternoon, everyone I will start with our financial results on slide seven of our presentation for those of you following along.
Third quarter total revenue was $10 9 million compared to $10 4 million and its growth in product revenue was mostly offset by a reduction in service revenue.
Third quarter product revenue was $10 5 million up 14, 9% compared to the prior year level of $9 1 million.
This growth was entirely attributable to PHA based resin sales, which grew 58% compared to last year.
CLA base resin sales were down 51% or $1 8 million versus prior year due to the ongoing issues associated with the Ukraine conflict.
Third quarter service revenue was approximately 500000.
This is about $800 lower than last year's third quarter.
This was consistent with our recent trends and was expected as funded R&D projects for certain customers move to commercialization.
We reported a third quarter 2023 gross loss of $7 7 million, which was an increase compared to the prior year's quarter gross loss of $4 1 million a year over year increase primarily reflects higher depreciation and amortization expenses as well as higher raw material costs.
Related to our product mix.
After adjusting for depreciation and stock based compensation, we reported adjusted gross loss of $2 6 million as compared to the adjusted gross loss of $1 5 million in the third quarter of 2022, primarily due to other increased fixed production costs.
R&D and SG&A expenses, excluding depreciation amortization stock based compensation and certain nonrecurring items totaled $6 6 million in the third quarter, a significant improvement relative relative to the $11 5 million of expenses for those categories in the third quarter of last.
Year.
Improved efficiency across many areas of the business to broad based cost control initiatives continues to drive this improvement.
Lower R&D expenses also reflect the conclusion of certain development projects.
Adjusted EBITDA loss for the third quarter improved to $9 3 million compared to an adjusted EBITDA loss of $12 9 million in the third quarter of 2022.
Adjusted EBITDA excludes stock based compensation other income and other add backs as reconciled in the appendix.
Cash and cash equivalents at the end of the third quarter was $77 4 million as compared to $62 8 million at the end of 2022.
Restricted cash was $14 5 million, including $12 5 million for expected interest payments.
Pursuant to our recent loan agreement.
Capital expenditures in the third quarter were $2 7 million and year to date have been $25 7 million.
We have tightened our range of expected full year capex spend to be between 27% and $29 million.
Towards the more favorable end of our prior range of 26% to $31 million.
We ended the third quarter with a total debt balance of $379 8 million comprised mainly of our convertible senior notes. The senior secured term loans, 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 the customer ramp for PHA based 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.
As Steve discussed the timing of certain expected customer programs has moved further out than we had expected.
As a consequence, both this quarter and next quarter do not have the benefit of the previously expected initial shipments from new launches.
Our full year 2023 guidance for adjusted EBITDA is now a range of between negative $40 million at negative $37 million.
I'll now hand, the call back to Steve for his closing remarks.
Thank you for your attention this afternoon.
Cutlery program Awards, we have announced today constitute a watershed event for danaher in many ways.
Seal of approval and opened the door for us to capture additional volume in the U S. Our channel in other categories.
In addition, this program is five of our converter partners at critical mass of revenues and the incentive to look for ways to grow their no tax base business.
These awards also carry a major positive impact on our future financial performance.
One of the most powerful aspects of our business is how longevity is built into every program win and recapture our customers are seeking permanent solutions to the problem of plastic pollution problems, so large and damaging that only permanent solutions matter solutions that we have we expect that once our capacity is spoken for it because our customers.
Our large enduring businesses with stable demand for consumables that capacity is essentially permanently absorbed.
Have a tremendous opportunity that we believe is ours and ours alone. Thank you and operator, we're now ready for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the wondering counsel you will hear three Tom prop acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by the two if you are using a speaker phone please lift.
The handset before pressing any keys.
First question comes from John <unk> with CGS Securities. Please go ahead.
Hi, good afternoon. Thank you for taking my questions.
Hi, Jeff.
Hi, Steve Hi, Mike.
I was wondering what programs pushed out one is the scale of them that you expected number one and number two does that does that delay you getting to the relatively full utilization of Kentucky.
By the end of next year.
Hey, John Thanks for the question this is Steve.
Well this cutlery program that we just announced as an example is.
Roughly six months behind where we initially expected it to be.
We originally thought we would be able to get some shipments in.
Q4.
But thats been.
Pushed out now probably into Q2.
Next year.
And.
As far as the utilization rates.
With this program and the other programs that we've discussed in the programs that are currently being launched we will hit that utilization rate.
It will depend on how fast those things scale, whether or not we will hit it by the end of the year and we'll update you on that further next quarter.
Okay, great. Thanks, Mike I was wondering word of operating expenses from here do you expect any meaningful change either up or down.
I think look we're very proud of how we did cut operating costs year over year and Theres.
There are certainly some things that won't repeat.
There are some things that had a positive influence on our operating expenses year over year.
Such as a reduction in our AR reserve.
A year ago, we were increasing that reserve. This year, we're actually reducing that reserves are you kind of get the year over year effect.
Exaggerating a little bit because that's going in two different directions there.
We do believe that there are opportunities as we kind of putting together our budget right now to look for additional cost savings opportunities. So we do think they are there.
And then there's going to be other things, though that are going to be some headwinds in terms of overcoming some of the benefits. We had in this year versus the versus last year, but net net our expectation is.
Is that they will either be flat to down from where we are this year.
Okay, Great and then.
Where do you see more and more.
Are you going to deal the loan process.
I understand what you're saying to you and kind of when do you expect that to play out.
Sure, Yes, I think overall there is still tremendous enthusiasm between both parties working together as you know we announced we're going into the due diligence phase, which we are in a pickup right now working with their partners. They bring in experts on their side.
Manufacturing technical financial.
And is there kind of now scouring through with our team. So theres been meetings on site and again, a lot of collaboration and still a lot of enthusiasm for the project going through the.
Timing of this is again, probably taken a little longer than what we had previously expected and.
As we kind of learn more about the program in a timeframe of what they have to do I think we're now expecting that funding probably won't come through until maybe early Q3 of next year and not that theres any concerns on our part with US just a process that's going to be at levels they have longer.
And.
Than we had expected there, but again everyone's feeling very good about so far.
And I would just add to that that whenever our chances.
Of getting that accomplished.
Have now improved significantly with Cutlery award.
Your next question comes from Thomas Boyes with.
Cowen. Please go ahead.
Thanks for taking the questions.
Speaking with customers that have delayed their launches is there a common theme around that there may be slowing down as it is it related to kind of the macroeconomic backdrop.
Backdrop or is it is it really just around validation periods, taking longer to get through.
Thomas Thanks for the question I would say that there is a wide range of reasons, but most of them are focused on that.
Technical challenges.
Getting the product finalized.
As an example.
Sometimes and this was the case with this with the cutlery program.
The R&D work is a lot of trial and error and when you start to get confidence as you optimize.
Production performance.
That you've got something that's going to work for the converter. We can start doing the end of life trials at the end of life certification test.
To qualify the material.
What happened in this case is the product that we started with became apparent during the course of the testing that it was not going to pass in a timely manner.
So we had to readjust and.
Refining the formulation.
To allow it to pass in the appropriate timeframe. So that was the specific cause a delay in that case.
That's a pretty typical type of thing.
And.
Got it and my sense is obviously there hasn't been any cancellations. So just kind of put a finer point on it.
All of these are just really launched push outs correct.
Yes, that's correct.
Great.
And then my last one and I'll hop in queue.
Just would love to drill down.
On the relationship with Chevron Phillips chemical.
Announced for the Dynamo Telerik business.
Can you talk about your efforts there and maybe discuss some of the long term opportunities of the business.
As it relates to the acrylic acid and things like that.
Yes. Unfortunately, we can't talk too much about the specifics of those programs because of confidentiality.
But I can tell you that.
Teams are very excited and.
It's a great opportunity for us too.
Get close to a major chemical company like that who could potentially be a tremendous partner in the future.
Yeah.
Got it I appreciate it thanks again.
Your next question comes from Charles <unk> with Piper Sandler. Please go ahead.
Good afternoon, guys a quick thing on the.
Ramp up of <unk>.
Production for the cutlery when do you anticipate having just started building some inventory or anything like that for delivery of that product. So if it's going to go up in third quarter start ramping in third quarter of next year. When do you guys have to start ramping up production to get to.
Set up for that and delivery.
Yes, we will certainly we will start building inventory probably in early Q2.
And anticipating at this point that we expect some orders in Q2.
At this point.
Got it Okay and then okay.
It will take round numbers. It sounds like you said about a year to go from zero to full bore the 20. The $20 million you were talking about is that sort of even or is that a slow ramp building speed.
How does it look to to go out how are they distributing the product.
Yes, again, you expect.
Got it.
Yes, I can I can tell you what we know now is our expectation would be that by the end of.
Next year.
We will be at a run rate.
Above 5 million pounds.
And then it will kind of close quickly from there just some time I'd like middle of.
Early too.
Middle of Q2 of 24 to be at full run rate.
25, I'm, sorry, yes, 25 to be at full run rate.
And then last question for now.
Is there a link for this contract as it does it have an end to it or is it five years three years is there anything on that or is it just sort of we'll play it by ear and see how it goes from there.
Yes, it will just be ongoing business unless the customer decides to move in another direction, but.
One of the beauties.
This segment is it is so difficult to ever change out a material like we've done that or that we're doing that.
There's just not a lot of motivation anybody's part that goes through the process to change it to something else then again and these companies have other priorities and things they would focus on before they would do that so unless.
Somehow we were just to fall on our face that's certainly not something we would expect to have happen.
Is there any.
Possibility.
It.
Is the.
The deal for this $20 million is that sort of the end of that particular thing or can that even grow from that point, assuming all goes well.
I think to that deal.
Well, obviously, it will grow with the customer.
But.
This is.
Only for North America.
There are other opportunities with other parts of the world, but also with.
Other applications in the <unk> space.
Got it okay. Thanks very much.
Alright, Thanks, Charlie.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by the one.
Your next question comes from Laurence Alexander with Jefferies. Please go ahead.
Hi, This is actually Kevin Estok on for Laurence.
So my first question just wanted to touch back on the Nordics based resin for single use coffee pods.
So you obviously touched on the Portuguese company I guess I was just wondering if there are any other customers maybe with initial trials.
Just want to get some updates there and then maybe in the same vein.
Any other regulatory updates.
So you operate that can provide some sort of tailwind for the next.
Several years.
Kevin I'll answer the first part of the question that asked I'll ask you to repeat that second part.
<unk>, a little bit Ami, but as far as the coffee pods go we are working with all of the major coffee pod producers of our companies in Europe.
Because of the expected legislation there they're hot too to solve for this so that's why this is a very important announcement for us as.
It's just going to accelerate adoption in Europe and could you go ahead and repeat the second part of your question Kevin Sure. Yes, Yes, I was just wondering if there were any other regulatory updates.
That were sort of in the pipeline that you expect could provide a tailwind in the near medium term.
And the markets that you operate.
Yeah.
Off the top my head, Kevin I can't think of anything in particular that we have not discussed in the past.
Yes.
If I if I come up with something we will get back to you on that.
Okay, great. Thanks.
And I'm not sure. If this has been brought up yet, but any progress on what you've seen in the aqueous cutting coatings for cups.
Yes.
It's going very well.
We are expecting to have cups in stores four trials by Q1.
There is actually a push to see if that can be done sooner but.
I think that Q1 is a good expectation for trials.
Okay, great. Thank you very much.
Alright, Thanks, Kevin.
I will now turn the call over to Steven Cross Creek. Please go ahead.
Thank you operator.
Before we end the call I'd like to stress the importance of this cutlery cutlery program. That's now been awarded this is a major change in our business when.
When we are able to talk about who the customer is this will also send a powerful message to the market.
We are approaching a tipping point, where decades of investment at work are about to deliver tangible benefits and not just for our shareholders. The world desperately needs engineered material solutions like ours to address the growing problem of plastic pollution.
Thanks, again for your time and attention and we look forward to speaking with you again on our next quarterly call.
Yes.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Okay.
Okay.
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Yes.