Danimer Scientific Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 8, 2024

Key Takeaways

  • Danamer reported Q2 revenue of $7.6 million versus $12.9 million a year ago, reflecting a 30% decline in PHA resin sales primarily due to Starbucks reallocating straw resin business and lingering impacts from the Ukraine conflict on PLA sales.
  • The company expects to achieve full capacity utilization of its Kentucky facility over the next several quarters, reach positive EBITDA in Q2 2025, and exit 2025 with an annualized EBITDA run rate of approximately $15 million.
  • Danamer secured an award to supply $20 million of PHA resin for cutlery and $3 million for cutlery wrappers to a large global QSR, with initial orders received and full run rate anticipated by mid-2025.
  • Q2 cost-saving measures delivered about $7 million in annualized savings—part of over $20 million since early 2022—including headcount reductions and pausing non-core operations at its Dan Mercatilate Technologies business.
  • The recently launched warrant dividend program allows warrants to be exercised with 3.25% convertible notes, resulting in the retirement of $6.1 million in debt and expected further deleveraging of the balance sheet.
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Earnings Conference Call
Danimer Scientific Q2 2024
00:00 / 00:00

There are 5 speakers on the call.

Operator

Greetings. Welcome to the Danymore Scientific 20 24 Second Quarter Earnings Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, August 8, 2024.

Operator

I would now like to turn the presentation over to Mr. Blake Chamblee, the company's Investor Relations representative.

Speaker 1

Thank you, operator. Good afternoon, everyone, and thank you for joining us today for Danamer Scientific's 2024 Second Quarter Earnings Call. Leading the call today are Steve Crossgreen, Chief Executive Officer and Mike Hajos, Chief Financial Officer. I'd like to note the slide deck that accompanies today's discussion, which is available on the Investor Relations section of our website at nanomerscientific.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

Speaker 2

turn the call over to Steve Crossgrief, Chief Executive Officer of Danamer Scientific. Good afternoon, and thank you for joining us. Before I get into the Q2 results, I'd like to step back and take a moment to discuss what we originally set out to do many years ago, where we are today and how we see our business shaping up in the near future. Our mission began 20 years ago to provide sustainable biodegradable plastic solutions to combat petroleum based plastic waste that is plaguing our planet. We began by purchasing polylactic acid or PLA and functionalizing it for use in various difficult applications such as liners for coffee cups, which is how we developed our core competencies around formulating biopolymers and developing end use applications.

Speaker 2

We always knew PLA had limitations, so we expanded our search into other solutions, ultimately landing on what we believe to be the Holy Grail of biopolymers, PHA. We purchased the PHA technology from Procter and Gamble and quickly discovered that the performance of their organism was not sufficient to reach commercial scale. We spent the next 4 years optimizing for a more scalable functional polymer based on a different bacteria. We built our original PHA pilot plant in 2014 in Bainbridge, purchased a used fermentation plant in Kentucky in 2018 and successfully sold our first commercial load of PHA resin for fade straws to WinCup in March of 2020. However, several days later, our progress was disrupted by the implementation of shutdown orders from governmental agencies around the world to combat the COVID pandemic.

Speaker 2

The COVID shutdown hit us particularly hard because we had several key research and development projects in process requiring in person meetings and testing, some of which never recovered to reach commercialization. Additionally, we were burdened with the high fixed cost of our production facility without the ability to produce and ship product. This led to the decision to seek additional capital take Danvers Scientific public in December of 2020. Now, nearly 4 years later, after navigating various challenges, including a longer epidemic than expected, the conflict in Ukraine, hyperinflation, short reports and various lawsuits, we are still here, not unscathed, but intact. Today, we stand as the only producer of PHA at commercial scale with independently validated biodegradable resins capable of producing a variety of single use plastic products.

Speaker 2

We have produced more PHA than has ever been produced by anyone else in the world on a combined basis and by large multiples. And we have conducted commercial trials and research based sampling with hundreds of potential customers covering a vast array of products from coffee pods to snack packaging to aqueous coatings. Every day we learn more and our lead over our competitors increases. We are now in the process of beginning a significant scale up of our business. We have passed many tests, achieved all required certifications and have 4 plus years of real world experience and feedback through shipment of our resins to customers including Starbucks and WinCup for their fade straws.

Speaker 2

Based on existing customer demand and new awards, including the decision of a very large QSR to begin using cutlery made with our PHA, we are confident in achieving full capacity utilization of our Kentucky facility over the next several quarters and then further scaling up additional product capacity from there, including potential tolling partnerships and licensing agreements. Further, we expect to cross over to positive EBITDA in the Q2 of 2025 and also expect to exit 2025 at a run rate approaching $15,000,000 of EBITDA annually. To drive these higher volumes, our primary commercial focus continues to be on the foodservice market and in particular, quick service restaurants or QSRs. Just the markets for drinking straws and plastic cutlery where we are fully commercial and our residents have achieved end of life certifications provide more than enough demand to fill our Kentucky facility and will allow us to continue to grow from there. We are currently working with 6 of the top 8 QSRs in terms of annual volume of single use plastic products.

Speaker 2

These QSRs are leading the charge to be able to provide their customers with 100 percent biodegradable solutions. We are greatly encouraged by these partnerships the commitment these companies are making towards solving the global petroleum based plastic pollution epidemic. As I mentioned, we have conducted development efforts on literally dozens of applications that will at some point be commercialized using PHA. In many cases, we know the resin performs and is ready to be deployed commercially. However, some of our potential customers have been slow to deploy this new technology as they grapple with rising costs and focus on priorities other than sustainability.

Speaker 2

But because the market opportunity is so vast, our near term focus on existing applications, next several years. Our deep research and development experience and historical customer relationships will provide us with decades of further opportunities as our customers choose to move forward with reducing their use of petroleum based forever plastics. So with that reminder of our mission and game plan, I also want to provide some color related to my decision to retire from Danamer and the current CEO search process. I was asked to come out of retirement almost 9 years ago to lead and amplify the company's growth initiatives. I had been and still maintain a firm belief in the company's mission and I have worked tirelessly to help us achieve those goals.

Speaker 2

As I mentioned above, we faced countless challenges and I'm proud of how our team has persisted throughout. However, there is still work to be done to fill and expand our manufacturing capacity in order to fulfill the promise and expectations we all have for the company. We have started the search for the next leader who has the necessary skill set and aptitude to lead Danvers to success. I will continue to remain involved with the company in a role on the Board of Directors and will be available to provide guidance and support to the new CEO as needed. Now I will turn more specifically to our Q2 results and near term developments.

Speaker 2

Our Q2 results were consistent with our expectations, factoring in the headwinds noted last quarter related to the shift to converters for the Starbucks straw resin business. This was the primary cause for an overall decline of $2,500,000 or 30 percent in PHA revenues on a year over year basis. I'll talk more about this in a bit. PHA revenues during the Q2 made up 81% of product revenue and 69% of product revenue in the prior year quarter. Our award to supply £20,000,000 annually of resin for cutlery and £3,000,000 for cutlery wrappers to a large global QSR chain continues to progress.

Speaker 2

The first commercial orders have been received with planned deliveries of cutlery to at least 1 customer distribution center in the next couple of months. Our converter partners have received delivery of initial sets of cutlery molds and some have purchased new injection molding equipment. We expect this award to reach full run rate in mid-twenty 25. Another large QSR is trialing our NO DAX based biodegradable straws in several states. We expect a larger commercial launch in late 2024 or early 2025.

Speaker 2

With this same QSR, we are also making progress on lids and coated paper containers under a joint development agreement. We continue to advance in the commercialization process of compostable cups using our PHA resins for both aqueous and extrusion coatings. The top paper producers and coders in North America and Asia remain highly engaged in the success of this project. This represents a substantial market opportunity with over £250,000,000 of petroleum based plastics used annually as liner material in the production of cups. Coming back to a topic I mentioned briefly just a moment ago, we alerted you last quarter to a development with our end customer Starbucks who reallocated a portion of its NODEX based straw resin business to WinCup from their previous sole source provider.

Speaker 2

This reapportionment led to excess inventory in the channel with our converter partners, which had a negative impact on our results in the Q2. We expect this same dynamic carry over to our Q3 and impact results by approximately $1,000,000 We would expect this issue to be largely behind us by the 4th quarter. It is also important to reiterate that we partner closely with both converters and continue to retain 100% of the Nodex based straw resin business with Starbucks. As we look to grow our top line, we remain focused on managing our liquidity runway. In support of that objective, at the end of the second quarter, we implemented operational cost reductions resulting in approximately $7,000,000 in annualized savings on a go forward basis.

Speaker 2

This encompassed a reduction of headcount and other operating costs through several functional areas. This also included the decision to pause operations at our Dan Mercatilate Technologies business. We were able to make this decision based on the success we had in completing the expansion of our pilot plant during the Q1 of 2024, which demonstrate our ability to produce this unique polymer at higher volumes and validated key material properties such as moisture and oxygen barrier and biodegradation levels as well as formulations that combine Renovo with node acts at promising levels. Through this expansion and proof of concept, we were able to produce enough inventory to continue progress with key development partners on Renovo R and D initiatives. We remain confident that our novel Renovo polymer will ultimately be a large driver of revenue for the company in the future.

Speaker 2

Including the $7,000,000 in annualized cost reductions implemented at the end of the Q2 of 2024, our total annualized

Speaker 3

cost reductions since early 2022 now

Speaker 2

exceed $20,000,000 since early 2022 now exceed $20,000,000 Another important topic for today's call is the successful launch of our warrant dividend program. Our shareholders and certain other recipients recently received 1 dividend warrant for each 3 shares of common stock held as of the record date. These warrants trade over the counter under the symbol DNRW and there has been a very active market for them today. While the warrants can be exercised for our common shares with cash, the critical feature of this program is that the warrants may also be exercised with our 3.25 percent convertible notes. We expect this will allow our note holders to exchange notes for common stock at values greater than where they could sell the notes previously and allow us to reduce debt without using cash.

Speaker 2

It also rewards shareholders with a valuable asset as convertible note holders purchase warrants to facilitate the conversion of their depositions to equity. We expect this activity will contribute to the deleveraging of our balance sheet and reduce cash interest expense. We have had one note holder exchange their convertible notes for equity to date and we expect this process to continue. To date, we have permanently retired $6,100,000 of our outstanding 3.25 percent convertible notes. Lastly, I want to mention that we continue to make great progress in regard to the DOE loans program and are in the final stages of the process.

Speaker 2

I will now turn the call over to Mike Hajjost, our Chief Financial Officer, to update you on the financial results for the Q2 of 2024.

Speaker 4

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. Total revenue was $7,600,000 in the 2nd quarter, which was down from $12,900,000 in the prior year quarter. PHA based resin sales of $5,900,000 decreased by 30% or $2,500,000 in the Q2 of 2024 compared to the prior year, which was primarily driven by Starbucks reallocation of its straw resin business that Steve spoke about earlier. PLA based resin sales of $1,400,000 decreased $2,400,000 compared to prior year due to lost customer orders from the impact of the Ukraine conflict.

Speaker 4

This will be the last quarter of comparative impact from this conflict on our PLA sales. 2nd quarter 2024 PHA sales represented 81% of product sales and we expect this percentage to increase throughout the remainder of the year as we continue to ramp up PHA volumes. We reported a Q2 2024 gross loss of $6,900,000 which was in line with the prior year quarter's gross loss of $6,600,000 After adjusting for depreciation and stock based compensation, we reported an adjusted gross loss of $1,800,000 this quarter compared to an adjusted gross loss of $1,600,000 in the prior year quarter. R and D and SG and A expenses, excluding depreciation, amortization, stock based compensation and certain non recurring items, totaled $8,100,000 in the Q2 of 2024 and was $8,600,000 in the Q2 of last year. The year over year reduction in these operating costs was a result of continued cost control initiatives across many areas of the business.

Speaker 4

Adjusted EBITDA loss was $9,900,000 in the Q2 of 2024 and was an improvement over a loss of $10,200,000 in the Q2 of 2023. Adjusted EBITDA excludes stock based compensation, depreciation, amortization, interest and other non recurring items as reconciled in the appendix. Unrestricted cash and cash equivalents was $40,300,000 at the end of the second quarter and $59,200,000 at

Speaker 3

the end of

Speaker 4

2023. Restricted cash as of June 30, 2024 was $14,200,000 and is mainly held for future interest payments under our senior secured term loan. Capital expenditures were $1,800,000 in the current Q2 and $6,600,000 in the prior year Q2. The prior year included required greenfield project equipment payments, which have substantially diminished in the current year. We ended the 2nd quarter with a total debt balance of $394,000,000 comprised mainly of our convertible senior notes, our senior secured term loan, our revolving asset based credit agreement and $46,000,000 of our new market tax credit loans, which we expect will be forgiven starting in 2026.

Speaker 4

Liquidity remains a significant focus for us as we seek to manage cash while we ramp up our sales. In addition to our unrestricted cash balance, we have $5,200,000 in excess availability on our revolving asset based lending credit agreement as of the end of the second quarter. I will remind you that this agreement also contains an option to expand the facility by an additional $5,000,000 which we will plan to do once our collateral supports the larger size. Availability under the credit agreement at any given time is subject to a borrowing based formula based on our accounts receivable and inventory balances. Let me now provide an update to our full year guidance expectations.

Speaker 4

With respect to our 2024 adjusted EBITDA, we expect there will be a full year negative impact from the changes that Steve described earlier relates to the Starbucks straw resin business. We now expect adjusted EBITDA will be within the range of minus $30,000,000 to minus 35,000,000 dollars Our CapEx expectations remain unchanged and we reiterate our prior guidance for capital expenditures in the range of $8,000,000 to 10,000,000 dollars We estimate that our end of year liquidity comprising unrestricted cash and availability under our revolver will now be in the range of $15,000,000 to 20,000,000 dollars Looking a little further out, we are now forecasting annualized PHA revenues to triple by the end of the Q2 of 2025, which is solely based on demand from existing customers where we are currently selling products. I'll now hand the call back to Steve for his closing remarks.

Speaker 2

Thanks, Mike. We remain confident that recent progress in our commercialization efforts and R and D trials will generate increased revenues during 2024 and beyond. As shown in our investor presentation, we continue to grow our sales pipeline with 104 customers in the material selection phase compared to 89 at the end of the Q1. We often say that with just the customers on our sales pipeline, we can fill up several plants. As Mike just noted, considering just our customers that have already launched, forecasted PHA sales remain on track to triple by this time next year.

Speaker 2

We are also pleased by the initial success of our dividend warrant program, which has resulted in the retirement of $6,100,000 in debt. This program has the potential to greatly improve our balance sheet leverage and strengthen our capital structure, while maximizing our shareholder value. Thank you to everyone listening to today's call for your attention and your continued support. We will now open the line for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Our first question comes from the line of Jon Tanwanteng from CJS Securities. Go ahead please.

Speaker 3

Hi, thanks for taking the question. I was wondering just the sources of the reduced EBITDA guidance. Is that just more inventory that needs to be burned off at the converters for Starbucks? Or is it a result of something else wasn't quite clear? Thank you.

Speaker 2

Hey, John. It's mostly the impact of the Starbucks inventory adjustment that's causing that. Now last quarter, we guided towards the lower end of our guidance. So with the impact of that inventory issue, it's putting us over somewhere a little higher lower than what we expected last quarter.

Speaker 3

Got it. Okay. And then just the halting of the catalytic operations, how much does that save you over the year? And can you just start that back up whenever you need to? Or is it something that you're shutting down?

Speaker 2

Yes. We're saving, John, about $1,500,000 annually by doing that. And we're retaining enough key employees there to be able to start back up when we need to, which we don't necessarily think that we will have to. If we are successful with some of the commercial opportunities that we're working on, it would not be impossible to go to a commercial plant from this stage.

Speaker 3

Okay, got it. And then could you discuss the tolling and licensing arrangements that you thought might be possible beyond Kentucky? I think that's the first time I've heard that outside of the catalytic business.

Speaker 2

Yes. We can't really talk about much detail there, John, but it's just something that we're working on and looking into to see if we can bridge any potential gap in capacity between Kentucky filling up and the greenfield coming online. But we'll keep you updated as that progresses with any news that we can share.

Speaker 3

Okay. Is that being demanded by customers? Or is that something that you're exploring in anticipation of that?

Speaker 2

Well, it's indirectly being demanded by customers because of the volume forecast that being given and what we're seeing in the marketplace. We know that, again, depending on the exact timing of the greenfield coming online, could be a gap there.

Speaker 3

Understood. And then finally, just you mentioned you're in the final stages of the DoE. I wonder if you could give us an update on the timing of when you expect to move through?

Speaker 2

Yes. Not specifically, John, but what I can tell you is that both teams are very, very focused on getting it done before the end of the year.

Speaker 3

Got it. Okay. Thank you very much.

Speaker 2

Thanks, John.

Operator

Thank you. There seems to be no further questions at this time. I'd now like to turn the call back over to Mr. Koski for any final closing comments.

Speaker 2

Thank you, operator, and thanks everybody for your attention. And I got to tell you that I'm looking forward with great expectations to our next call because we'll be 3 months closer to the scale up of this large piece of cutlery's business and be able to get into a lot more specifics about what the ramp will look like going forward. So really excited about that and thanks again.

Operator

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask you to please disconnect your lines. Hello, LJ.

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