Danimer Scientific Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 6 speakers on the call.

Operator

Greetings. Welcome to the Danomer Scientific 2023 Second Quarter Earnings Call. I would now like to turn the presentation over to Mr. James Palczynski, the company's Investor Relations representative.

Speaker 1

Thank you, operator. Good afternoon, everyone, And thanks for joining us today for Danamer Scientific's 2023 Second Quarter Earnings Call. Leading the call today will be Steve Crossgreed, Chairman and Chief Executive Officer and Mike Hajjost, Chief Financial Officer. I'd like to note that there is a slide deck that accompanies today's Discussion, which is available on the Investor Relations section of our website at danemerscientific.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 2 of the presentation I just referenced.

Speaker 1

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. 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 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.

Speaker 1

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 you. And it's now my pleasure to turn the call over to Steve Crossgrief, Chairman Chief Executive Officer of Danamer Scientific.

Speaker 2

Good afternoon and thank you for joining us. Our second quarter financial results were consistent with our 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, our Part 2 application for the Department of Energy's loan guarantee program has been accepted. We're very excited to take the next steps and we'll move into the confirmatory due diligence and terms negotiation process. If successfully completed, this program will provide funding necessary for us to complete our Greenfield facility.

Speaker 2

It's important to remember that the DOE loan guarantee program has a 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 office at the DOE has been very supportive throughout this process And we've received consistent positive feedback about our candidacy. At the core of our application, woven through 8,000 pages The documentation is a simple very powerful truth that Danmer has a serious solution decades in the making that has Potential to be a meaningful part of addressing pollution from petroleum based plastics. The DOE evaluation process has been exceptionally rigorous. Our greenfield project, our business model and our market opportunity have been put under a microscope.

Speaker 2

The most work intensive and time consuming part of the loan process is behind us. While the next steps are important and the outcome isn't guaranteed, we are pleased to have the validation we think this 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 a persistent and capable partner in the years ahead. Staying power is important to our customers and is one of the number of attributes that competitive leadership requires. I'd like to walk you through the additional reasons why we believe we are as a leader in the market for responsible alternatives to petroleum based plastics and expect to retain that position.

Speaker 2

Leadership in our market requires the ability to provide solutions to a wide range of customer needs. With each passing quarter, we are increasing of end use applications that our resins address and a portfolio of end use customers that have adopted those products. Growing our addressable market opportunities through diversification is a competitive priority. We are way out in front with regard to the technology of PHA, Jay, the manufacturing of PHA polymers and the blending of those polymers into uniquely capable biodegradable resin blends. When we think about competition for the foreseeable future, our fight is against the entrenched but increasingly vulnerable position held by petroleum based materials.

Speaker 2

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 has become increasingly clear that single use petroleum based plastics are particularly responsible for tremendous collateral damage to the environment. Until somewhat recently, scientific studies have focused on the invasion of the global food chain by microplastics. Increasingly, research is focused on the impact of much smaller nanoplastic particles, which we now know pollute the very air we breathe. Nanoplastic particles have been found in our bloodstream and tissues even in the tissues of unborn children.

Speaker 2

Recent findings suggest that nanoplastic Particles attached to and maybe carrying other pollutants including carbon monoxide with them as they penetrate our bodies. Very recent research suggests a link Between nanoplastic pollution and a wide range of chronic health problems, including cancer and diabetes, it seems inevitable that the alarm and the call for alternative materials will Do nothing but grow in intensity and urgency. The companies who adopt our resins for use in their businesses have brands and reputations to protect. They also currently use a great deal of petroleum based plastics. Shifting to a new material takes time, is challenging, Create some short term risks and may have incremental costs.

Speaker 2

Even so, across many industries, there is an increasing awareness that a reckoning is approaching, A reckoning that carries reputational risk to 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 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 and partners for disposable items that in many cases Costs pennies or even fractions of a penny per unit. Danner has been working for nearly 2 decades to create the alternative materials That our customers and the world need. The challenge has been creating materials that are seamless replacements that don't negatively impact the experience for consumers.

Speaker 2

This is important to mitigate any related risk of damage to a brand or business. Straws make for a good example. Most people, consumers, restaurant owners and legislators know that plastic drinking straws are a pollution problem. And yet, Despite the environmental impact we are still using, depending on which estimates you use, anywhere from 200,000,000 to 500,000,000 straws every day just here in the United States. It's hard to know for sure how many of those straws 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.

Speaker 2

Just to illustrate, if you take a midpoint of those estimates and do the quick math, at 350,000,000 straws every day in the U. S. At approximately 7.50 straws per pound of plastic at an environmental leakage rate of 20%, That math gives you well over 15,000 tons of pollution every year. That's over 15,000 tons of environmental damage every year just from straws and just 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 straws are only a fraction The larger and extremely serious problem of pollution from single use plastics.

Speaker 2

It also seems beyond debate because PHA based materials are the solution that this problem should no longer be tolerated. By now, I Most of you have used a straw made from our PHA resins without even realizing it. For example, if you've been to Starbucks, Those green straws, that's Danner's material and it's impossible to tell it isn't petroleum based plastic. Our material is non polluting. It's fully biodegradable, including marine degradable.

Speaker 2

It is home compostable. It does not get soggy. It does not melt in hot liquids. PHA based resin is a seamless replacement material. It is the solution that the market and the environment need.

Speaker 2

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 of biotechnology, process engineering and the chill science and then in most cases Additional years of acceptance testing, biodegradation 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 resins for protective films, Shrink-wrap and produce bags and there are many more end use applications in our pipeline at various stages of development. While the development process is generally lengthy, we are increasingly able to leverage our prior R and D work to move much more quickly.

Speaker 2

The commercialization of compostable coffee pods, for example, required a rapid development effort. Over the past year, we began to work with several potential commercial customers in this Category, including one that is already moving into industrial trials, the last step before 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 Our leadership position may prove strongest of all in the quick service restaurant or QSR Right now, we have a significant customer that is proceeding through store trials for straws in 2 states and we expect a successful outcome and a full rollout to follow. Additionally, we are pleased that Checkers Rally's has adopted PHA based trials has begun their To roll out through 1 distribution center.

Speaker 2

Credit for this opportunity goes to our customer, Columbia Packaging Group. Checkers Rally is a great new customer with just under 900 locations nationally. We continue to await decisions on 2 very large opportunities for new QSR programs that we mentioned on last quarter's call, one for cutlery and one for straws. We are increasingly confident we will win the cutlery program, which has an annual requirement of approximately £15,000,000 of resin with first shipments preliminary expected to begin sometime in the late 4th or early Q1. We stand ready and are confident we can execute both programs in their entirety.

Speaker 2

We expect our emergence as the leader for alternative materials in the QSR channel will be extended by the development of compostable coatings for paper cups, a technically challenging category, but one that we Confident we will soon enter successfully. We believe that having cups and lids in addition to straws and cutlery will put us in a powerful position to our QSR customers and 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 5 hundred locations versus their single use food service items much like a QSR does and has also begun to offer PHA based straws. This customer was also captured by our direct customer converter Columbia Packaging Group. CPG purchases our resins and manufacture straws and other items and then sells those products through their distribution network.

Speaker 2

Our leadership position also comes from our continuous innovation. Danomer is the 1st and only commercial scale manufacturer of PHA in the world and because we are at the cutting edge, We are constantly discovering new areas for improvement. This is not only reflected in our creation of new resins for additional end use applications, But in finding ways to improve the manufacturing process we use to produce those resins. As you may recall, our Kentucky facility 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 to a faster, more efficient extraction process that yields higher quality meat PHA than we previously thought possible.

Speaker 2

Ultimately, we believe we may able to achieve better throughput, reduce waste and reduce cost. It will take some time to validate these process But the work is exciting, especially as it reminds us that we are still 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 Hajos, our Chief Financial Officer, to update you on the numbers for the quarter and our outlook for the rest of the year.

Speaker 3

Thank you, Steve, and good afternoon, everyone. I'll start with our financial results on Slide 7 of our presentation for those of you following along. 2nd quarter total revenue was $12,900,000 compared to $12,700,000 in the prior year as growth in product revenue was mostly offset by reduction in service revenue. 2nd quarter product revenue was $12,200,000 up 5% compared to the prior year level of $11,600,000 This growth was entirely attributable to PHA based resin sales, which grew 10% compared to last year. PHA based resins were 66% of total revenue in the Q2 of 2023 versus 61% in the Q2 of last year.

Speaker 3

I also want to note that product sales were up 10% sequentially Compared to the Q1's $11,100,000 The sequential growth in product sales was led by a 69% growth in PHA based resins, Partially offset by 40% decline in PLA based resin sales. 2nd quarter service revenue Was approximately $700,000 This is about $400,000 lower than last year's Q2. As in previous quarters, this was expected and reflects the completion of funded R and D projects for certain customers that are now moving to commercialization. We reported a Q2 2023 gross loss of $6,600,000 which was an increase compared to the prior year Quarter's gross loss of $2,200,000 The year over year increase primarily reflects higher non cash depreciation and amortization expenses. After adjusting for depreciation, stock based compensation and certain non recurring items, we reported an adjusted gross loss of $1,600,000 as compared to an adjusted gross loss of $500,000 in the Q2 of 2022.

Speaker 3

We continue to expect gross margin to improve marketably with growth in volume. R and D and SG and A expenses, Excluding depreciation, amortization, stock based compensation and one time items totaled $8,600,000 in the 2nd quarter, A significant improvement relative to the $12,400,000 of expenses for these categories in the Q2 of last year. As we've discussed previously, we improved efficiency across many areas of business through broad cost control initiatives. Lower R and D expenses are also reflective of the conclusion of certain discrete projects. Adjusted EBITDA loss for the 2nd quarter Improved $10,200,000 compared to an adjusted EBITDA loss of $12,900,000 in the Q2 of 2022.

Speaker 3

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 $90,800,000 as compared to $62,800,000 at the end of 2022. Pursuant to our recent loan agreement, we also established a restricted cash account for $12,500,000 for expected interest payments. Capital expenditures in the 2nd quarter were $6,600,000 and year to date have been 23,000,000 We continue to guide to full year CapEx spend in the range of $26,000,000 to 31,000,000 We ended the Q2 with a total debt balance of $378,000,000 comprised mainly of our convertible senior notes, The senior secured term loan we closed during the Q1 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 demand ramp up for PHA based resins and our increased utilization to serve that demand from our Kentucky operations as the largest factors for variability in our short term financial results.

Speaker 3

Both our first and our second 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 EBITDA, we believe an expectation closer to the lower end of our range of negative 31 to negative $23,000,000 is prudent. I'll now hand the call back to Steve for his closing remarks.

Speaker 2

Thank you, Mike. Before we turn to Q and A, I'd just like to quickly revisit how pleased we are to have received approval from 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 are very confident in the strength of our candidacy 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 and across a more diverse assortment of customers.

Speaker 2

While there is always some uncertainty as to the timing of individual programs or to We remain very confident that Danamer is well positioned for the future and will finish this year with momentum in several key areas of the business And we'll experience long term success. Thank you to everyone listening to today's call for your attention and your support. And operator, we are now ready to take questions.

Operator

Please be prepared to ask your question when prompted. Please limit yourself to one question and one follow-up question. And our first question comes from Thomas Boyce from TD Go ahead, Thomas.

Speaker 4

Hey, thanks for taking the questions. First, maybe could

Operator

you just talk about the progress

Speaker 4

that you've seen between Extrusion aqueous coating for cups. I mean, the challenge is the same here just around the lip of the cup and then sealing of the bottom. And Is there one application or one approach that's further ahead than the other?

Speaker 2

Yes, Thomas. Thanks. Great question. We've made really good progress through several different value chains to get cups to market to 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 1,000.

Speaker 2

And I would say for several months we were around 5 Per thousand and under, and now we're getting down to where we're under 1. So we have at this point had One of the 3 value chains I mentioned, one chain has now produced cups That we believe and the converters believe will be acceptable to the quick service restaurants. And that one was through extrusion coating. We have a second value chain, different converters That have also produced a cup, which we believe will be successful. And on the aqueous coating side, We have a 3rd value chain, where they are currently baking cups And have a high degree of confidence that based on the coding process That they're going to be successful making cups.

Speaker 2

So we are hopeful that here shortly we're going to have 3 different Sets of converters and paper manufacturers set ready to make cups. And Those are being delivered to the quick service restaurants and we'll go from there. Based on that Experience in that progress, I know that some of our customers have goals to have store trials in Please by the end of the year and I believe we're going to be able to meet that expectation. Thanks, Thomas.

Speaker 4

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 in on the guidance summary, the slide. You have been there for some Exposure to the U. K. And Russia conflict.

Speaker 4

And I obviously I know that was of course an impact when the war 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 more steady state or is there something that has happened that Has caused that to change.

Speaker 2

Yes, good another good question. So When we told you last year, I believe it would have been, I can't remember when we were reporting Q1 or Q2 that because of the war in the Ukraine, Our most significant PLA customer has a very significant exposure to that region And that we expected our PLA business to decline off into the future and at that point had no expectation of when that might Bounce back. What happened is in early Q1, That customer started placing orders again and we had stronger than expected PLA sales in Q1. But 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 of what they're going through there, but it's definitely still related To the war in Russia and the Ukraine.

Speaker 2

Now that so we would expect the PLA business to be off This year, kind of from what we expect, might be at the very beginning of the year. So that's affected our guidance. I will say on a positive side, With the PLA business, we are seeing a little bit of a bounce back from COVID. We've got 3 different programs that During COVID, just went away, where the demand was gone. And now, that's starting I don't really expect to see anything of consequence volume wise until early 2024, But that's a positive for the PLA business, which is really the first thing positive we've seen out of that business for

Speaker 4

Excellent. No, no, I appreciate the color. Obviously, I understand that PHA is really the focus here, but just want to make sure I understood the dynamic.

Speaker 2

Yes, take

Speaker 3

the rest offline. Yes.

Speaker 2

Thank you, Thomas.

Operator

And our next question comes from Jon Tan Wantrang from CJS Securities. Please go ahead, John.

Speaker 2

Thank you. Good afternoon.

Speaker 5

This is actually Dan Moore on for John, thanks for taking the questions. And I jumped on a little late, so if you covered these, forgive me. Start with Congrats again on the DOE loan program acceptance. Can you talk a little bit about the timeline from here and what alternative financing sources you're likely to pursue if it's delayed or gets pushed out further

Speaker 3

to the right.

Speaker 2

Sure, Dan. Thanks for joining us. I will cover part of that and I'll turn it over hand it off to Mike He can kind of 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 of the program office. We're confident in the strength of our application and our fit with the program.

Speaker 2

As far as the timing of the funding, I would not expect to see An actual closing any sooner than Q1 of next year. That would be the earliest possible based on the timeline outlined. Mike, do you want to add to that?

Speaker 3

Yes, Dan. So I would just add, 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 DOE. And this is by far the best source of capital that we can get at the lowest rate and we think 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.

Speaker 3

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 takeoff agreements, take or pace, things like that, that could make sure that they have Sure enough, the supply that they're going to need for their business. But again, that's not the primary path we're looking at right now To do this, we're really pleased where we are with the DOE program.

Speaker 5

Very helpful. Shifting gears, maybe talk a little bit about pricing, how that's trended both from an input cost perspective as well as your pricing to customers?

Speaker 2

Sure. I'll cover the customer part and then Mike can handle the input pricing. At this point in time, we're still averaging just a little less than $3 a pound on our average Price to our customers, so that has not changed. Mike?

Speaker 3

Yes. I think our biggest Input is always on the canola pricing. And I think overall, we've seen that Just to kind of give some perspective, our inputs for canola pricing in the second quarter, kind of in a tight range around $0.87 to $0.88 for pound. And as our contracts out through the second half, we're expecting really kind of a similar pricing range somewhere $0.86 to 0 point 8 $7 As we look out to Q1 of 2024, we're starting to see prices there that start with a 7 handle. And Kind of Q2, twenty twenty four and beyond, what we're looking at right now is $0.76 to $0.78 range for that.

Speaker 3

So there's a lot of things that are impacting canola prices right now. One of them being the war in the Ukraine and that region produces a lot of canola oil supply And we're also been sort of impacted by in North America. Most of Canada was burning up this summer. We've got heat waves in America And they're planting more corn and reducing soy and canola. So those things are also having some effect.

Speaker 3

I think we would have expected canola prices to be coming down. Having said all that, these things can change very quickly, a more mild winter, and perhaps we can get prices going back down again. But Again, we've got passing mechanisms. We're not truly exposed to these prices necessarily. But anytime you can have lower input prices, that's just easier for our customers to purchase more from us.

Speaker 4

Go ahead.

Speaker 2

If I could just be clear, these prices are have come down and are going down, but that reduction has slowed Based on those factors that Mike pointed out.

Speaker 5

Perfect, makes sense. Last, I'll sneak one more in and jump back. And I think you touched on this in the prepared remarks as I was jumping on. Maybe talk to any volume commitments Chief of the Greenfield in Georgia and the pipeline of the how has your pipeline or customer forecast changed in over the last 1, 2, 3 months? Thanks again.

Speaker 2

Thanks, Dan. I would say the forecast hasn't really changed over the next Several years because the demand from the pipeline is so great that there's only so much we're going to So 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 DOE on the commercial side of this, So they've been provided with support letters from customers and they're satisfied with where we're at this point.

Operator

At this time, there appears to be no further questions. I'd like to turn the call back over to Steven for closing remarks.

Speaker 2

Thanks, operator. Thank you for your time, everyone, and for your attention this afternoon. I hope we've given you a good sense of Why the whole team here is energized and as confident as ever. Danube has 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.

Speaker 2

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 And how good it feels to have this opportunity to lead. Thank you for your investment in Danamer. We'll be looking forward to our next update with you in November. Thank you.

Operator

This concludes today's conference call. Thank you for attending.

Remove Ads
Powered by Quartr
Earnings Conference Call
Danimer Scientific Q2 2023
00:00 / 00:00
Remove Ads