Danimer Scientific, Inc.
Q4 2020 Earnings Call Transcript

Published: 29 Mar 2021

[Operator:]

Hello, and welcome to the Danimer Scientific Fourth Quarter and Full Year 2020 Conference Call. Currently, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Russ Zukowski, Vice President of Corporate Finance. Thank you. You may begin.

[Russ Zukowski:]

Thank you, Shumail, and thank you, everyone for joining us today for our fourth quarter and full year 2020 earnings call. Hosting the call today are Danimer's CEO, Steve Croskrey, and CFO, John Dowdy. Phil Van Trump, our Chief Science and Technology Officer is also on the line for questions and answer.

[Steve Croskrey:]

Thank you, Russ. Good afternoon, everyone. Before we get started, I want to express my appreciation to our team for their strong execution, as well as to our new shareholders for their exceptional support. During 2020, we completed construction of the world's first commercial PHA facility, and went through a rigorous destocking process all during a pandemic, while simultaneously negotiating development agreements with Mars and Bacardi. Thank you for your hard work, dedication and support. I will start with a review of our business highlights. Following that, I will turn it over to our Chief Financial Officer, John Dowdy, who will provide financial highlights from the fourth quarter and full year 2020. I will then wrap up with some exciting updates on our growth strategy. I'm extremely pleased with our numerous accomplishments during 2020 to end the year with an outstanding customer base, and an unrivaled commercial scale bioplastic technology platform. Becoming public was an important milestone for our company, providing us with additional financial flexibility to achieve our long-term expansion objectives. 2020 was a year of record revenues for Danimer, and we are still in the early stages of an immense opportunity to grow our business and build long-term shareholder value. On today's call, we are going to address four key takeaways. First, the depth and capabilities of our high growth next generation eco tech company that produces 100% biodegradable polymers for use in plastic applications. Second, our massive addressable market spending 500 billion pounds. Third, our unrivaled growth potential from intense demand by blue chip multinational customers. And finally, the progress we have made to significantly expand our business to meet customer demand.

[John Dowdy:]

Thank you, Steve. I'll speak to Slide 9, given the early stages of our trajectory, I'll focus my comments today on the full year 2020 results, the fourth quarter context as applicable, followed by some color on 2021. Revenues for the full year 2020, grew 46% to $47.3 million, compared to $32.3 million in the prior year. This increase was driven by higher sales of our legacy PLA based resins, as well as significant sales of PHA based resins, as we commenced to scale up of commercial PHA production beginning in March of last year. Year-over-year growth of 38% and the fourth quarter was more modest compared to the full year. This accelerating PLA based resin sales earlier in the year as customer saw to increase inventory levels in order to prevent potential supply chain disruptions from the pandemic. As a result, today that we are currently producing PHA based resins out of our Kentucky facility, having recently completed the first of a two phase expansion for PHA production. Phase 1 added 20 million pounds of finished product nameplate production capacity with fermentation around starting in March 2020, at the same time, the pandemic related lockdowns began. Phase 2 construction has commenced in December. Phase two construction has commenced in December of 2020, and is expected to add an additional 45 million pounds of finished product nameplate capacity in the second quarter of 2022, with production ramping up thereafter. The completion of both phases will bring our total nameplate PHA capacity up to 65 million pounds of finished product per year. In 2020, we derive 10% of our revenues from sales the PHA based resins, a significant increase compared to 1% in 2019. In the fourth quarter PHA based resins climbed to 19% of sales reflecting our expanded production capabilities. Full year gross profit increased to $11.5 million compared to $11.1 million in the prior year. Adjusted gross profit which excludes depreciation, stock based compensation and rent related to our manufacturing operations increased to $16.6 million compared to $14 million in the prior year, driven by higher revenues.

[Steve Croskrey:]

Thank you, John. Please turn to Slide 11, we have seen customer demand grow as our blue chip multinational customers develop more sustainable products made from bioplastics. It's important to highlight that the growing plastic waste market does more than just increase our addressable market, it also pushes customers to adopt the best solutions amongst plastic alternatives. We therefore continue to experience intense demand and accelerating growth for our marine degradable PHA products.

[Operator:]

At this time, we'll be conducting a question-and-answer session. Our first question is from Jon Tanwanteng with CJS Securities. Please proceed with your question.

[Jon Tanwanteng:]

Good afternoon, everybody. Thank you for taking my questions. And congratulations on your first quarter as a public company.

[Steve Croskrey:]

Thank you, Jon.

[Jon Tanwanteng:]

And it's also great to see the demand that you've been talking about increase. My first question, I guess is, can you provide an updated expectation in terms of the profitability you're expecting, compared to what you had in your investor deck last fall? Given your new growth and expansion plans, and what looks like a significant inflation, that's coming through the supply chain right now.

[Steve Croskrey:]

Jon, can you be a little more specific in terms of timeframe, what you're asking about?

[Jon Tanwanteng:]

Sure. I mean, over the next two or three years, it will be perfect if you can go into, how you expect your profitability to ramp especially as these new plants complete.

[Steve Croskrey:]

So, we expect margins to improve over time, as we increase capacity. The more scale we have, the better we can spread out those fixed costs. So, I think when you look at the out years as compared to the previous models that you've seen, there'll be a tremendous increase in profitability, really just driven by volume. In the near-term, I would expect less profit, less profitability at the bottom line than what was previously disclosed. Because in order to accelerate that growth, we're pulling in quite a bit of OpEx, mainly with new hires. We're hiring quite a bit of people this year that we didn't intend to prior to the announcement to double the size of the Greenfield plant.

[Jon Tanwanteng:]

Understood. That makes a lot of sense. And can you just comment on the spreads that you are making on your product these days. How you're pricing to customers just given the price of feedstocks the canola oil going up?

[Steve Croskrey:]

Yes, let me say one more thing in terms of, kind of longer-term before I address that one specifically. We are just getting started. And you've heard me say this before, probably whether the fossil fuel industry has been optimizing for 70-years. So we know, this is one of those things, you have to talk about known unknowns and all that. This is one of those things where we know we're going to be able to take costs out of this business as we grow, both on our CapEx per pound basis, and on a cost of goods sold basis. In this as we kind of look at that, in the next five to 10-years, we think we can easily take 25% out of those costs, versus what we're currently forecasting. And then as far as your question, Jon, about margins, that's a little more. In the short-term, canola oil is going up in price. About half of our current contracts have escalators in them that allow us to pass that on to the contracted customer. We put that language in every contract that we had that was multi year. So, in the one year contracts that we did, we didn't have that in there, but we had hedged. So we won't really see impacts from that canola margin or canola pricing increase until the later part of this year.

[Jon Tanwanteng:]

Got it. Thank you very much. And then just on the new expansion plans, $700 million, about half of that you already have on the balance sheet. How do you plan to finance the rest?

[Steve Croskrey:]

We're exploring every option available, and we'll get back to you on that. And go back to your last question to Jon, I would also just want to remind you that, we are not limited to using canola oil as a feedstock. And so we are also aggressively looking at alternatives, which we know, there are a lot of alternatives, but obviously, we're looking for economical, more economical alternatives, if you will. So that's an ongoing project.

[Jon Tanwanteng:]

Okay, great. Actually, if you don't mind, one more. Has there been any change in the competitive environment, not that you've shown you the world that you're sold out for the next two years, and maybe for the next four or five? Are there perhaps companies that can't get on your list at the moment, who are turning to other PHA players, and maybe willing to fund them to accelerate their growth over the next couple of years in order to get their hands on similar products?

[Steve Croskrey:]

Well, we're not aware of any other major brand owners that are doing that. I will say this, that we have not ever engaged with one of these major brand owners, and then had them go somewhere else. I think we're far enough ahead that they see the benefit of dealing with us now. And we're working really hard, which is one of the reasons why we announced doubling of the Greenfield, we're working really hard to make sure that we can satisfy all these customers that have kind of interested their future packaging to us. So that's the goal is to try to keep them all happy and keep adding customers in the fold. But we have not seen anything yet that would indicate that our lead is in jeopardy.

[Jon Tanwanteng:]

Got it. Thank you very much, and congrats again.

[Steve Croskrey:]

Thanks, Jon.

[Operator:]

And our next question is from Laurence Alexander with Jefferies. Please proceed with your question.

[Laurence Alexander:]

Good afternoon. First, on the new expanded capacity targets. Do you already have an anchor tenant for the extra volume? Or to what degree is that capacity sold out, I mean under contract?

[Steve Croskrey:]

Yes. It's in the early years, I would say it's roughly 10% under contract warrants. But, we still have a lot of time to get to actual contracts. And so the answer is, yes, we have two new anchor tenants, which would be Mars and Bacardi. Mars and Bacardi were not contemplated in our financial models when we were marketing the pipe. And so those are new customers. We've also added a third brand, which we can't talk about, because they view it as a competitive advantage. So we really have three significant new customers in the pipeline from the financial model that we use to build the Greenfield plant, originally, the model for the plant. And while we don't have off-take agreements yet with those customers, we have forecasts and plans are in place.

[Laurence Alexander:]

And then, with respect to the State of Georgia, is the support from the State of Georgia is significant? And if so, is that factored into the 30% cash flow rate?

[Steve Croskrey:]

It is. We believe it is significant. It's valued in the 10s of millions of dollars, and it's not factored into the ROIC.

[Laurence Alexander:]

And then can you address sort of average selling prices? How they're doing now? And do you still expect them to be in roughly the 250 range or to what degree is these are moving?

[Steve Croskrey:]

Yes, the average selling price is pushing about 270 right now. So, I would say that it's been increasing slightly, over the last few months.

[Laurence Alexander:]

And then just the last one on my side. Can you address the criteria that you would have to do capacity project overseas? I noticed on Slide 14, you go from two green lines to three green lines to four green lines, and there's all sorts of interpretations for that. So just wondering how you think about geographic expansion or doing multiple projects in parallel?

[Steve Croskrey:]

Yes, so as you may have heard me say before Laurence, after we finish this -- by the time we finish completion of this first Greenfield project, we need to have the internal resources and competence built up to be able to build two plants at once. And one or both of those could be overseas. So, we're proceeding with that in mind. And when you see that the green lines on that slide, I guess it goes from two at once to three at once to four at once. It represents, our medium-term goal, if you will, to develop that competence and resources in house to build a build four plants at once.

[Laurence Alexander:]

Okay, great. Thank you.

[Operator:]

And our next question is from Vincent Andrews with Morgan Stanley. Please proceed with your question.

[Vincent Andrews:]

Thank you. Good afternoon, everyone. I want to just dig in a little bit on the $700 million for the two Greenfields. If you could just sort of bridge us from I believe the original estimate was 285 for one. So I'm just curious what's changed in terms of the cost of each Greenfield? And, I thought maybe there might be some scale benefits of building two, rather than one. So maybe you could just help us understand what's happened to sort of the per unit costs of construction since your last update?

[Steve Croskrey:]

Yes. So really, it's three things, Vincent. The first is and again some of you will have heard me explain this in the past, but a refresher, that original estimate, we spent about $200,000 on it's been well over a year, since that was done. And now, since we closed on the SPAC deal and had cash, we've started a $13 million engineering project to finalize, not just the price quote, estimate, but the actual plants be constructed with. So that started in late December. And we just about a week and a half ago, we got a plus or minus 30% estimate. That estimate by I believe July will be done, will go to a plus or minus 20%, and before construction, it'll get down to a plus or minus 10% estimate. So, we're hoping to -- no guarantees, it could go the wrong direction, but we're hoping to be able to drive that cost lower over time with value engineering. So the three things that I would point to that are different. First of all, it's just maybe the level of the thoroughness of the estimate at this point, relative to the first one that was made is part of it. Secondly and we were surprised as some of the inflationary things that we saw both with the cost of steel, but with labor as well. And I think one of the things that's happening right now is, as people are -- as we see ourselves coming out of the pandemic, I think there is a lot of activity like this going on. And then thirdly, we've intentionally added some costs to the project where we can drive COGS lower, or drive expenses out. So, there's been some optimization and some efficiencies developed that will cost more money. But ultimately, you have a great return. And that's why when we look at the efficiencies that we're getting, between those things and doubling the size of the plant, that's why we're still reporting that we believe its 30% ROIC.

[Vincent Andrews:]

Okay. And just as a follow-up to that, is the timing of how long it will take to build the Greenfield? Is that within that sort of plus or minus 10% estimate? Or is that subject to change, as the engineering sort of work is completed in the coming months?

[Steve Croskrey:]

Yes. Right now, the timing is the same on a relative basis, but it's going to be -- the entire project is going to take longer than the three fermenter version, because of the way we're doing it. We're starting with three fermenters, initially. And then when those are complete, we'll turn to the next three. So the second-half will take longer to complete than originally proposed. So the entire project is a longer project now than what it was originally. Did I answer that question?

[Vincent Andrews:]

Yes, I understand. You're saying the first Greenfield can take as long as you previously thought. But now that you've added the second one, it obviously takes longer to do both. But the timing of constructing each project hasn't changed. Is that correct?

[Steve Croskrey:]

Yes, it's pretty much. That's correct, the way you said it. Although, we are thinking of it really as just one plant.

[Vincent Andrews:]

Sure.

[Steve Croskrey:]

So, it's not really Greenfield 1 and Greenfield 2, it's really just a Greenfield 1. And it's just going to have six fermenters.

[Vincent Andrews:]

Got you. And maybe just one last clarifier for me. Did you earlier say that, you have about 10% of the new Greenfield capacity contracted? Or is that not correct?

[Steve Croskrey:]

No, I said that.

[Vincent Andrews:]

Okay. All right. Thank you very much. I'll pass it on.

[Operator:]

And our next question is from Jon Tanwanteng with CJS Securities. Please proceed with your question.

[Jon Tanwanteng:]

Hi. Thanks for the follow-up. So I just want to ask about the PLA business and what's your expectations for that this year? And how that tracks going forward as well?

[Steve Croskrey:]

Sure. So we had a really strange year, last year, on the PLA side of the business. We should just kind of call that the base business because, we are agnostic as far as the final formulation of a product. We're trying to solve customer problems. And if those formulations end up with all PHA all PLA or some combination in between, it doesn't really matter to us. But the base business is all PLA based and other biopolymers. So, we had a strange year last year when COVID came, our food service business just went away. And honestly we've had customers that have not ordered since before March. So some of that the folks that are in the restaurant business, some of that is still -- we're still seeing the effects of that. We made up for it last year in large part, because of one particularly large customer was concerned that what might happen if Danimer had a shut down due to COVID. And so they ordered in about 25% of their annual requirement as stocking inventory. And that had a significant positive impact last year. Now, unfortunately, we won't see that again this year. So it will -- we've got that in the history now, but it won't be in the growth numbers for this year. So, I think on a on a year-over-year basis, the PLA business is not going to look, it's not going to grow as rapidly as we're used to this year.

[Jon Tanwanteng:]

Okay. I got it. But still growing, just to clarify.

[Steve Croskrey:]

Yes.

[Jon Tanwanteng:]

Okay, great. Maybe just going back to the expansions, the 30% ROIC, it too sounds great. I was just wondering what the timeline is to actually reaching profitability, after you complete construction? What do you define that in terms of cash flow or EBITDA or net income? And just whatever you've been modeling to, is it six months? Is it nine months? How are you thinking about them, starting with the Kentucky and then going on to the Greenfield?

[Steve Croskrey:]

I don't know, if I know that answer off the top of my head, Jon. I do know that when we've modeled these projects that we hit breakeven when we are roughly a third of the stated capacity, when we get to that point we're breakeven.

[Jon Tanwanteng:]

Okay, got it. Okay, that's great. Thank you. And then finally, I just wanted to get the difference between the GAAP and the non-GAAP in terms of the other costs that though were expected to come through the stock comp fee, the depreciation? And just wondering what the difference is between GAAP and non-GAAP as we go forward?

[Steve Croskrey:]

John, you want to take that one?

[John Dowdy:]

As we go forward, we're planning on I guess reporting adjusted EBITDA and adjusted EBITDAR. And with adjusted EBITDA, we'll be adding back depreciation and amortization, taxes, stock based comp. And then, if there's some unusual one-time items, I think that in this year, for example, we'll have some expenses that we would term, one-time expenses that the company might incur, as we make the transition to becoming a public company. And that would be things like next year, we have to be compliant with the . So, we'll have some sort of rating this project that the company will have to undertake in the current year, that we think would be like an incremental expense. So, those are the types of things. And then we also have some rent expense that we've added back to give EBITDAR, that's primarily related to our facility in Kentucky. When we acquired that facility, we leased it back to a REIT, as an alternative to borrowing money. So, we'll also provide that metric. We'll look at our results with rent added back as well.

[Jon Tanwanteng:]

Okay. Got it. I just want to get a non-GAAP estimate for the OpEx this year.

[John Dowdy:]

No. For the OpEx over the non-GAAP estimate. Bear with us some seconds. Jon, I'll give you a little clarification on the PLA business this year. I would just make the point that we are still growing because we're in programs that are growing. But we don't forecast to add any pure straight PLA business this year. All our business this year that we're forecasting growth or new growth, new program growth would have PHA in it.

[Jon Tanwanteng:]

Okay. Got it. Thank you guys. If I can ask one more, just what is the share count at the end of Q1 that you're expecting to have?

[Steve Croskrey:]

Could you repeat that question, please?

[Jon Tanwanteng:]

What's expected diluted share count at the end of the first quarter?

[Steve Croskrey:]

So, I don't have the -- what I can tell you is that as of the day, we have about 88 million shares outstanding. And we also have about 11 million options outstanding to have a weighted average exercise price of about $13.94. In addition to the $16 million warrant that the company has outstanding as well.

[Jon Tanwanteng:]

Okay, great. Thank you.

[Operator:]

And our next question is from Laurence Alexander with Jefferies. Please proceed with your question.

[Laurence Alexander:]

Just one last one, could you give some detail on cadence of customer inquiries, types of end markets? If you have any new end markets, or applications that are requiring you to develop new grades of PHA? Or if you're all just focusing on the same narrow, the same set of PHA grades?

[Steve Croskrey:]

Yes, great question, Laurence. So kind of depending on where, where you want to make the comparison. Our incoming leads are 2x to 3x over what they were prior to us making the announcement that we were going public. So, the number of incoming leads has picked up considerably. Our pipeline of big brand owners is as robust as it's ever been. And just to kind of give you the history there, we signed up Pepsi in Q4 of '16, we signed up Nestle in Q4 of '18, we signed up Bacardi in Q4 of '20, and then in Q1 of 2021, we signed up Mars. And I expect that kind of compression to continue going forward. As far as applications, there I would say the majority of the inquiries are usually responding to things where they've seen a press release or an article about another an existing product or a product that's being we're announcing is being developed. But a good number of them it's obviously smaller, relative basis. I don't want to put a percentage on it. But there are some new applications coming to light. There are inquiries coming and development in process on applications that don't even have anything to do with plastic. I can't talk about any of the specifics. But that's one of the things that we've always thought could happen and would happen. And we're excited to see that there are definitely some opportunities to expand outside of the 500 billion pound addressable market that we've talked about in the past.

[Laurence Alexander:]

Great. Thank you.

[Operator:]

And our next question is from Vincent Andrews with Morgan Stanley. Please proceed with your question.

[Vincent Andrews:]

Thank you. I just wanted to follow up on the customer contracting for the Greenfield. And I get that there's this sort of chicken or an egg thing here where you can't contract a plant that you haven't announced yet. And now you've announced it, so presumably, the conversations are going to change and probably multiply. But I guess what I'm trying to understand is, if I'm looking at Slide 14, and it looks like you're going to break ground in early 2022, according to that. How much of the plant would you think you'll have contracted by the time you break ground? And how should we be thinking about that, maybe let's just start there.

[Steve Croskrey:]

Well, what I would like to see is to have a third of the whole plant contracted by the time we break ground on the second-half. But I'd like to -- that's a goal, not a hard forecast, but a goal.

[Vincent Andrews:]

So, just to be clear, a third of the overall Greenfield by the time you're doing the second three fermenters, or a third by the time you start the whole thing?

[Steve Croskrey:]

It'd be like as -- you could break it down into a sixth and a sixth. I'd like to have a sixth of it under contract by the beginning of next year, and then another six before the end of next year.

[Vincent Andrews:]

Okay. All right. Thanks very much.

[Operator:]

We have reached the end of our question-and-answer session. And I will now turn the call over to Steven Croskrey for closing remarks.

[Steve Croskrey:]

Thank you. Thank you, everyone for joining us today. I'm proud of our team and excited for our future. I'd like to thank our shareholders for their tremendous support. We look forward to updating you on progress in the future. Have a good day.

[Operator:]

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.