Danimer Scientific, Inc.
Q4 2021 Earnings Call Transcript

Published: 28 Feb 2022

[Operator:]

Greetings, and welcome to Danimer Scientific Fourth Quarter and Full Year 2021 Earnings Call. . As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Russ Zukowski, Vice President of Corporate Finance. Thank you. You may begin.

[Russ Zukowski:]

Thank you, operator, and thank you, everyone, for joining us today for our fourth quarter and full year 2021 earnings call. Hosting the call today are Danimer CEO, Steve Croskrey; and CFO, Jad Dowdy. Mike Hajost will also be joining us for Q&A. During our discussion today, we will be referring to our earnings presentation, which is available on the Investor Relations section of our website at danimerscientific.com. On Slide 2, please note that we may discuss forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, future results of operations, capacity, production and demand levels that could differ in a material way from those expressed or implied in the forward-looking statements. We assume 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. Reconciliations to the most comparable GAAP financial measures can be found in the earnings presentation. I will now turn the call over to Steve.

[Stephen Croskrey:]

Thank you, Russ. Good afternoon, everyone. Thanks for joining. I am proud of the focused execution by our team and our many accomplishments during 2021 as we conclude our first year as a public company. In 2021, we progressed further on our journey to profitably deliver leading biodegradable packaging solutions and products as we dramatically increased customer deliveries to generate record fourth quarter and full year 2021 revenue. As we look back at our achievements for the year, I would like to note that every initiative we have undertaken as well as all of our current initiatives align with our strategic priorities. As shown on Slide 3, these priorities drive us to

[John Dowdy:]

Thank you, Steve. I'll speak to Slide 10. We closed out the fourth quarter of the year with PHA representing a growing share of our revenue. Given that we remain in the early stages of our long-term trajectory, I will focus my comments today on our full year 2021 results with fourth quarter context as applicable. Revenues for the full year 2021 grew 24% to a record $58.7 million compared to $47.3 million in the prior year. This increase was driven by higher sales of PHA-based resins as we scaled up production of Phase 1 at our Kentucky facility this year. Revenues for the fourth quarter of 2021 grew 47% to a fourth quarter record of $17.7 million compared to $12 million in the fourth quarter last year. In 2021, we derived 36% of our revenues from sales of PHA-based resins, a significant increase compared to 10% in 2020. In the fourth quarter, PHA-based resins climbed to 50% of sales, reflecting our expanded production capabilities. We produced full year gross profit of approximately $900,000 compared to gross profit of $11.5 million in the prior year. Full year adjusted gross profit was $11 million compared to $16.6 million in the prior year. On a margin basis, adjusted gross profit was 18.6% and compared to 35.1% in the prior year, primarily the result of elevated fixed cost absorption as production continued to scale at the Kentucky facility. As we have mentioned previously, we expect our average cost per unit at our existing facilities to improve as production scales. For the full year, R&D and SG&A expenses, excluding depreciation and amortization, stock-based compensation, rent and onetime items, was $31 million compared to $16.2 million in the prior year mainly attributable to an increase in headcount and salaries to support R&D efforts and our future expansion plans as well as increases in costs associated with having a larger asset base such as property and liability insurance. Public company expenses added approximately $4.6 million of incremental costs for the full year of 2021, which we did not incur last year and include items such as D&O insurance, increased public company, auditing and accounting costs and stock readiness fees. In addition, we incurred approximately $1.9 million of R&D and operating expenses as a result of consolidating Novomer in our full year financial results. which we did not incur in the prior year. The adjusted EBITDA loss for the full year was $22.6 million compared to a loss of $3.2 million in the prior year primarily due to the factors I discussed in our gross profit, SG&A and R&D results. Adjusted EBITDA excludes stock comp and other income and other add-backs as reconciled in the appendix. Full year adjusted EBITDA was a loss of $20.1 million in 2021 compared to a gain of approximately $400,000 in 2020. We add back our rent expense because it is primarily related to a sale leaseback agreement associated with the Kentucky facility and is thus essentially a replacement of depreciation and interest expenses. Our total long-term debt was approximately $261.3 million at year-end and includes $21 million of low interest new market tax credit loans that we expect will be forgiven in 2026. Our cash position continues to support our planned capacity expansions into 2022. Looking at our outlook for the full year of 2022. As Steve mentioned, we expect the Kentucky facility to turn adjusted EBITDA positive as we increase capacity and drive operational efficiencies at the expanded facility. Before I turn the call over to Steve, I wanted to briefly comment on our plans to file an extension for the 10-K and our material control weaknesses, as mentioned in our press release. During the annual reporting cycle for fiscal year 2021, we were required to comply with Section 404(b) of the Sarbanes-Oxley Act and accelerated 10-K filing deadline for large accelerated filers for the first time. During our control evaluation process, we identified certain material weaknesses that we will be disclosing in the 10-K, and the statements identified related to these issues have been corrected prior to releasing our results. I have full confidence that we will make significant progress towards remediation over the course of 2022 in eliminating these internal control matters going forward. We are working through these issues with our auditors and are confident that we will file the 10-K prior to the extended deadline. Now I'll turn the call back to Steve for closing remarks on Slide 11.

[Stephen Croskrey:]

Thanks, Jad. In summary, we are pleased with our capacity expansion progress and record revenue in 2021. Growing commercial scale production of PHA remains the core focus of our business, and I am confident we are on the right path to profitably execute our strategic priorities and capture a growing share of PHA demand in the years ahead. We have a large addressable market to serve, and we are working as quickly as possible to expand our production capacity further in 2022. Thank you for your time today, and we look forward to update you on our progress next quarter. We'll now open up the line for questions.

[Operator:]

. Our first question comes from the line of Laurence Alexander with Jefferies.

[Laurence Alexander:]

Can you unpack the comment about getting to positive EBITDA contributions this year? Do you see either of the 2 facilities in the current raw material environment having a path to the original 30% plus return on capital that happened -- that was being discussed before this inflationary period started? And can you talk a little bit about what you're seeing in terms of conversion costs relative to what you had expected before construction began?

[Stephen Croskrey:]

So Laurence, thanks for the question. As far as conversion costs, I assume you're talking about conversion of canola oil into PHA. Our -- yes, our costs have run about $0.10 higher per pound than what we had modeled, but we think we've got that taken out now and that we should be on plan. And so at scale, we still expect those kind of returns. We anticipate, as I mentioned earlier, that the Kentucky facility will be positive on an adjusted EBITDA basis before the end of the year. And then after that, it's just a matter of continuing to increase sales to cover our corporate overheads. And as a reminder, our current OpEx spend without -- we can cover our current CapEx spend without bringing on any additional capacity. Of course, that's not our plan. We strategically added expense mostly in the form of people to support our future growth, which includes both completing the greenfield facility in Georgia and the Rinnovo facility in the Gulf. But in this environment of tight biopolymer supply, anybody that can bring on capacity is going to win, and we expect to win.

[Laurence Alexander:]

Okay. Great. And an unfair question perhaps, but given that mics in the room, can you -- Mike, if you wouldn't mind speaking a little bit about your perspective on Danimer and the challenges or the opportunities to -- where you want to focus first and what your priorities are?

[Michael Hajost:]

Sure. I'm thrilled to be here with the group after the first call here. I look forward to future discussions with all of you. But on the first call here, I think, Laurence, really want to kind of start out and say why did I join this company and what did I see. And truthfully, I couldn't be more excited to be part of this exceptionally talented team. They're truly making our planet cleaner, and I decided to join the team as the CFO for several reasons. To start, I was impressed with the strength and conviction of the leadership team and the Board. It also became clear to me that Danimer has the leading technology position and a near-term sizable commercial opportunity that's well ahead of its competitors. This position is further enhanced by strong industry tailwinds as the brands and the manufacturers are prioritizing sustainability initiatives. And finally, I saw this as a great fit with my 30 years of broad financial leadership experience and skills. What brought me here in the first 3 weeks in a row has been -- done nothing but confirm my reasons for joining this terrific team and this company. So as I'm getting started, again, I've just kind of finished off my first 3 weeks, but my initial focus areas are going to be to get out to the facilities, meet with the team, learn the business, and I think those give me an opportunity to reframe what our guidance should be to you. I also -- I want to improve our communication with investors so that our actions can be clearly tied to our 6-pronged strategy that Steve laid out. And lastly, to continue to strengthen the finance and information technology teams to provide effective analysis and insights to our business leaders while ensuring appropriate controls. So again, I appreciate the question.

[Operator:]

Our next question comes from the line of John Tanwanteng with CJS Securities.

[Jonathan Tanwanteng:]

My first one is just about the greenfield and the potential changes you might be thinking about. Is this something that may delay the start date? Just tell me the scale and kind of the details on what you're thinking about doing or delaying that inflation effect your decision-making.

[Stephen Croskrey:]

Sure, Jon. Thanks for the question. We're very focused on managing and preserving our cash in this uncertain environment that we're in, and I should point out that the environment is even more uncertain now than it was even a week ago. We have developed a plan that allows us to maximize the flexibility to do that until we have more clarity moving forward, so we can speed up or slow down as we deem necessary. In the meantime, we'll continue to build out the greenfield facility and work with customers on product development and offtake agreements. Customer interest is still as strong as ever. But in these uncertain times, it's incumbent upon us to be careful stewards of our resources. My best guess at this point in time, if everything continues to go well through this year is that we could still have that plant up and running by the end of 2023. But obviously, if we slow down further, it will go -- it will bleed over into 2024.

[Jonathan Tanwanteng:]

Got it. And then as it pertains to this year, can you give us a sense of how you expect sell-through to trend your sales of PHA products as you bring online new capacity, as your customers' programs launch, states reopen and we all view it would be continuing headache of supply chain inflation issues that are still out there?

[Stephen Croskrey:]

Well, Jon, the first part of the question didn't come through clearly. Can you repeat it?

[Jonathan Tanwanteng:]

Yes. I was just trying to get a sense of what your expectations for PHA sales are going to be like this year and kind of what are the puts and takes to it.

[Stephen Croskrey:]

Well, obviously, we expect them to continue to grow, and I guess from a put and take standpoint is we always have the issue of customer timing. So as the capacity comes online, it's not a commodity that you're going to be able to sell on the spot market, so you have to be coordinated with customer launches and conversions. And other than that, I think I will defer to Mike's comment when he mentioned that he's going to be working on developing a plan for what guidance we're going to give going forward, so we'll wait for that to come out before I give you more specific guidance.

[Operator:]

Our next question comes from the line of Thomas Boyes with Cowen and Company.

[Thomas Boyes:]

Just following the recent convert offering, you obviously made some meaningful progress towards funding the greenfield facility. I was just wondering if you could talk about the capital allocation approach going forward, if you could just touch on any potential there for the DOE loan. Could that be a 2022 event? And then maybe anything having to do with a potential anchor tenant for the greenfield facility.

[Stephen Croskrey:]

Sure. Thanks, Thomas. So as you've identified, we have plenty of cash on hand now. And I just would like to point out that we control how fast we spend it, as I've mentioned with respect to our greenfield construction plan. So we believe that our focus right now should be on demonstrating capability in Kentucky. We want to get that scaled up and show that we can produce a quality product profitably, and then we will continue to focus on our negotiations to secure that anchor tenant for the greenfield, and we think that the combination of those 2 things will help us secure any financing that we need going forward. With respect to the DOE, we're still very optimistic that we will get accepted in Phase I. But there's no guarantee of that, and we expect to hear back from them within the next couple of months at the latest.

[Thomas Boyes:]

Excellent. Appreciate it. And then just as a follow-up on the CapEx plan for the greenfield facility. I think I saw that it was between $500 million and $612 million. Was that down from the $600 million to $700 million? Before, I wasn't sure maybe if that had included Phase 2 construction in it or Rinnovo piece, just with the change in kind of how you're building out is -- can you break down that dynamic for me?

[Stephen Croskrey:]

Yes, good question. That original $700 million top in estimate included the Rinnovo plant, so that is updated guidance on the greenfield facility. We got our plus or minus 10% estimate in and move the midpoint up, but the top end didn't go up as far because the previous estimate was plus or minus 20%. So we're still somewhere close to that $700 million. We're at the top end of that. I think that was an estimate from about 6 months ago, if I remember, we're still close to that range around the top end of it.

[Operator:]

Our next question is a follow-up question from the line of Laurence Alexander.

[Laurence Alexander:]

Could you discuss a little bit where you are on building customer acceptance of Rinnovo? How much trialing or how much volume do you need to have out for trialing? Or just how much time do they need for that to be comparable and acceptances where Nodax is?

[Stephen Croskrey:]

Sure. We're working diligently to increase the capacity of the pilot plant in Rochester, which will facilitate the speed of customer adoption and that product development work. So we're still working at this point with fairly limited quantities of material, but we are also having great results. And so our confidence is even higher in terms of what we might be able to do with that product. We -- also, just to remind you that some of the potential outputs of that plant involve acrylic acid and other derivatives of acrylic, and those products in this example are really commodities. Unlike Rinnovo or Nodax, which are value-added, highly engineered applications, the acrylic that could come out of this plant could be sold on a spot market, and so that's something that we are actively discussing with several potential customers that are interested in ultimately a renewable acrylic solution.

[Laurence Alexander:]

And then can you discuss a little bit more sort of with the Kemira, what milestones need to be reached for that to become a material opportunity?

[Stephen Croskrey:]

We are really in the process of papering that up at this point. So in terms of making -- having the agreement come together, we are very close. And then as far as having success in the marketplace, it's really just a matter of customer adoption. But we've always been very bullish on this product. And obviously, Kemira is as well where they wouldn't be proceeding with this. But some of the customers we have been in trials with are super excited about the product. The main application that we see at this point would be coating paperboard for cups. As you've heard me mention before, we are really excited that some of our straw customers are very focused on having a complete biodegradable system, which would include lids and cups. And using our aqueous coating as a coating for cups has the kind of the double benefit of allowing those cups then to be repulpable and so that, that paper can be reused, which you can't do now with a polyethylene coating. So as far as milestones, I guess, the first would be get the agreement signed, and then the second will be some potential customer announcements as soon as those come through.

[Laurence Alexander:]

And then just on to one last one is the -- can you talk a little bit about the trend in ASPs and mix? And sort of, obviously, lots of gives and takes in the supply chain, but maybe just what was happening towards the end of last quarter and how the backlog of orders looks for this quarter?

[Stephen Croskrey:]

I'm sorry, it was really broken up at the beginning. I couldn't hear -- we couldn't hear you how...

[Laurence Alexander:]

Sorry, if you can just touch on ASPs and mix and how prices were -- how realized prices have trended in Q4? And maybe what the backlog of orders looks like for Q1?

[Stephen Croskrey:]

Yes, Laurence, I'm going to punt on that one to Mike again on this work. He's going to do on kind of figuring out what guidance we're going to provide going forward, but that's a major initiative of his. He's going to be prioritizing here, so I'll delay answering that question until we've figured out how we're going to do it going forward.

[Operator:]

Our next question is a follow-up question from the line of Jon Tanwanteng.

[Jonathan Tanwanteng:]

Could you talk a little bit more about the deal with Hyundai Oilbank? What are they interested in doing at what scale? And how committed are they at this point to actually bring their own capital to the table to bring your product to Asia?

[Stephen Croskrey:]

Well, we're very happy with this development, and we hope it will form the basis for a long-term collaboration, which presents both parties with a compelling opportunity to meet the demand in Asia. We will initially be focusing on providing Nodax to commercial customers in South Korea and other Asian regions for more sustainable packaging. All forms of potential investment collaboration and joint projects will be considered under this partnership, including establishing production facilities in Asia, and we'll provide more updates on that in the future. But my concept of how these type of partnerships should work are that we are bringing the technology and quite often the product application know-how and in fact even customer contracts, and so we're looking for partners who are willing to invest capital in the business to grow the business going forward.

[Jonathan Tanwanteng:]

Okay. Great. And then I just wanted to come back to the prior comment about the return on the facilities. Were you just referring to the Kentucky facilities or the greenfield as well just in terms of your target return? And maybe related to that, as you talk to customers, getting -- trying to find an anchor tenant for the greenfield, are you talking about the increase in prices and trying to pass them on as you try to get a contract signed? How are they responding to that if that's what you're talking about?

[Stephen Croskrey:]

Yes. We've already passed on pricing for this year based on our current -- the current increases that we've received, so that's already been done. I'm sorry, what was the first part of your question, Jon? Sorry. Okay, I got you, yes. The -- I was referring specifically to Kentucky when we were talking about the production costs there. But going back to your question about the greenfield tenant, yes, those -- the new pricing is baked in to all of the discussions, and nobody is ever happy to get a price increase that I know of. But so far, we haven't had any trouble getting those increases passed on.

[Operator:]

Our next question is a follow-up question from the line of Thomas Boyes.

[Thomas Boyes:]

Excellent. Yes. Just a quick follow-up here. I know you're longer term working on alternative feedstocks, soybean Penny Crest. I was just trying to get a sense of what you're seeing on the supply side for the canola market. I think last quarter. You had mentioned maybe there's some additional supply that was coming on line longer term. Is that still the case? Do you think that like $0.80 is kind of that high watermark there? Or what kind of costs should we be thinking about for canola on a per pound basis?

[Stephen Croskrey:]

Sure. Thanks, Thomas. Our average price for canola oil in Q4 was about $0.56 a pound. We've locked in Q1 at $0.59 a pound, but Q2 is locked in at $0.07 a pound. The futures prices have been coming down, as you recall from our last call, actually into the low 70s. But then there was a weather event that affected crops in North America, and now the war in Ukraine is putting some pressure on prices, but we still expect them to moderate in the long run as that additional capacity comes online. But going out into the future now, I think low 80s is kind of the trend line, but there is a current spike in Q3 in the 90s. But we have not completed our -- we're still working on locking in Q3 for prices.

[Operator:]

There are no further questions in the queue. I'd like to hand the call back to Mr. Croskrey for closing remarks.

[Stephen Croskrey:]

Thank you again to everyone for joining us today. We're encouraged by our progress and remain excited about our business prospects as we move into 2022. I'd like to thank you for your continued interest in Danimer Scientific and your time on this call. We look forward to updating you on our progress in the future. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.