Danimer Scientific, Inc.
Q1 2022 Earnings Call Transcript

Published: 10 May 2022

[Operator:]

Greetings, and welcome to the Danimer Scientific First Quarter 2022 Conference Call. At this all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host Russ Zukowski. Please go ahead.

[Russ Zukowski:]

Thank you, operator. And thank you, everyone for joining us today for our first quarter 2022 earnings call. Hosting the call today are Danimer's CEO, Steve Croskrey; and CFO, Mike Hajost. 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 two, 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. During the first quarter, we progressed further on our journey to deliver leading biodegradable packaging solutions for a variety of in-demand customer applications. Today, I will discuss our first quarter performance, recent business development updates and the progress of our capacity expansion plans. Every initiative we have undertaken aligns with the key strategic priorities we outlined last quarter, shown on slide three. These priorities are

[Michael Hajost:]

Thank you, Steve. I'll speak to slide nine. We closed out the quarter with a record first quarter sales of $40.7 million, which was an increase of 12% from the year-ago first quarter. PHA-based resin sales nearly doubled over this timeframe, and now represent 52% of our revenues. This is a significant increase compared to 29% of revenues in the prior year quarter. The increase in sales of PHA-based resins more than offset a decline in PLA sales, which was due to the Ukraine factor that Steve described earlier impacting this non-core part of our business. We reported a first quarter gross loss of approximately $1.3 million compared to gross profit of $1.5 million in the prior year period. On an adjusted basis, gross profit was $2.6 million, representing an adjusted gross profit margin of 17.5% compared to $3.9 million, or 29.2% in the prior-year quarter. The decrease in margin was driven by lower PLA volumes that led to a lower margin for that product in the current quarter, combined with lower R&D and tolling services revenue, partially offset by higher PHA volumes and improved margins. As we have mentioned previously, we expect our average cost per unit at our existing facilities to improve as production scales. We're already seeing those unit costs go down. For better understanding of our progress, I'll provide a sequential-quarter comparison. PHA represented roughly half of our sales in both the first quarter of 2022 and the fourth quarter of 2021. During the first quarter, adjusted gross margin increased sequentially to 17.5%, which is up from 2.3% in the fourth quarter. This was largely attributable to higher cost PHA material getting worked out of our inventory and replaced by more efficiently produced and lower-cost inventory associated with the higher capacity utilization from our Phase I Kentucky operations. We expect this trend to continue and to more than offset the incremental cost associated with the startup of our Phase II Kentucky operations. Adjusted gross profit in the first quarter of 2022 excludes a $1 million PLA additive inventory reserve associated with an anticipated decline in our PLA-based resin business due to conflict in Ukraine, as well as the expected reformulation of certain PLA product. For the first quarter of 2022, R&D and SG&A expenses, excluding depreciation, amortization, stock-based compensation, rent and one-time items were [$12.3] (ph) million compared to $5.4 million in the prior year quarter, 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. In addition, we incurred approximately $1.3 million of R&D and operating expenses as a result of consolidating Danimer Catalytic Technologies in our first quarter financial results, which we did not incur in prior year quarter. The adjusted EBITDA loss for the first quarter was $10.6 million compared to a loss of $2.3 million in the prior year quarter, primarily due to the factors I discussed in our gross profit SG&A and R&D results. Adjusted EBITDA excludes stock comp, other income and other add-backs as reconciled in the appendix. First quarter adjusted EBITDAR was a loss of $9.7 million compared to a loss of $1.6 million in the first quarter of 2021. We hit back our rent expense because it's primarily related to a sale leaseback agreement associated with Kentucky Facility, and thus, is essentially a replacement of depreciation and interest expenses. Our total debt outstanding was approximately $261.7 million [Technical Difficulty] refining our forecast model. I was able to accomplish that and based on that assessment, I want to walk through my current view on the full-year forecast of adjusted EBITDA, CapEx spend, and expected end-of-year cash balance. Looking at our outlook for the full year of 2022 on slide 10, we remain excited about the profit potential of this business in coming years. We believe we are making disciplined investments that will allow us to capture the incredible opportunity for our products. As we view full year 2022, we expect to see another year of sound investment with an intense focus on getting our PHA business to profitability. As Steve mentioned earlier, we have several factors at play this year. So to provide a clear view of our financial expectations we are introducing a guidance framework for 2022 and beyond. For the full-year of 2022, we expect adjusted EBITDA to be in a range of negative $45 million to negative $35 million. As a bright spot, we reiterate our expectation for the Kentucky facility to turn profitable as we increase capacity and drive operational efficiencies at the expanded facility. It is a solid step in the right direction and a stepping stone to overall profit trajectory in the out years. For 2022, the positive year-over-year contribution from higher PHA resin volumes will be more than offset by several dynamics. First, a portion of PLA sales that were negatively impacted in Q1 by the war in Ukraine are not expected to return in 2022. Combined with the anticipated reformulation of a portion of PLA business, this will further reduce PLA volumes. Next, over the past year, we have invested heavily in our organization to support our future expansion plans. In 2022, we will have a full year of expense associated with higher headcount and other costs to support our asset base. That compares to only a partial year of expense in 2021. Finally, Novomer, which we now refer to as Danimer Catalytic Technologies is a key part of our growth story. We are making investments in R&D and other operating expenses. In addition, we're getting sample products from our pilot plant and taking the needed steps to strengthen our formulations for customers. 2022 will incur a full year of consolidated cost from the newly formed Danimer Catalytic Technologies operations compared to a partial year in 2021. Regarding cash flow, we expect capital expenditures in 2022 to be in the range of $190 million to $200 million, inclusive of capitalized interest and internal labor. As we discussed last quarter, we will remain flexible with our spend so we can speed up or slow down the greenfield construction, given the rising cost environment and supply chain uncertainties that are impacting the build-out of that plant. With the flexibility in our spend we expect to end the year 2022 with cash in excess of $50 million. We believe our adjusted EBITDA and CapEx outlook, which provides a constrictive framework or approved results from our business, combined with the investments we're making elsewhere in our business have us on a path to profitability in coming years. Looking beyond 2022, we expect our PHA revenue to drive a significant increase in our overall profitability. PLA revenues will likely remain challenged. We have already made significant investments in our SG&A and R&D that we can now leverage over time as revenues grow. And our investments in our Danimer Catalytic Technologies are progressing. We expect this business to contribute meaningfully to our results in the coming years. We are confident on our ability to execute against our objectives with a prudent focus on profitability and cash management. Now, I will turn the call back to Steve for closing remarks on slide 11.

[Stephen Croskrey:]

Thanks, Mike. In conclusion, our continued expansion of production capacity, application development expertise, contracted revenue streams, and future efficiencies of scale should continue to shape our bright path forward as an increasing number of companies evaluate solutions to maintain their ESG commitments using our superior biodegradable alternatives to traditional plastics. We will continue to build off of a record 2021 as we move through this year, and I would reiterate that we are still in the very early stages of a unique opportunity to create long-term shareholder value. Thank you for your time today, and we look forward to updating you on our progress next quarter. We will now open up the line for questions.

[Operator:]

Thank you. At this time we will be conducting a question-and-answers session. [Operator Instructions] Your first question comes from Jon Tanwanteng from CJS Securities. Please go ahead.

[Jon Tanwanteng:]

Hi, good afternoon, guys. Thank you for taking my questions. My first one is, could you give a little bit more color on the reasons for the sequential decrease in both PHA and PLA. I think we got the high level of reasoning behind both of them, but I was wondering if you could for PHA specifically, how permanent is that situation, is it going to relieve itself soon? And then for PLA, what was the size of that impact, and kind of what was the ongoing expectation for the rest of the year for the PLA business?

[Stephen Croskrey:]

Jon, thanks for the question. As far as the PLA business, the guidance is reflected in the -- the EBITDA guidance that Mike gave reflects our expectations related to that business going forward. At this point, it's pretty clear that the portion affected by the war won't come back this year, but the portion that's reflected by the reformulation is just an unknown at this point in time. But we're going to have an opportunity to rebid on that business, and we may retain a piece of it. As far as the PHA business, the supply -- I think you're referring to the supply chain issues that some of our converters had procuring equipment. We've got an equipment manufacturer out at Taiwan. It's been making a special straw machine to run PHA that a lot of our customers have been purchasing. And there has just been delays there in the scale-up with our customers. Kind of compounded by some of the things going on with COVID and that it's been difficult for their tax to come visit our customers and help them get the equipment up and running. I would expect to still see some drag from that in this current quarter. Even though we do see them improving, but I would still expect some drag from that in this quarter. But these are non-strategic problems, but just tactical or execution things that we'll get through with no problem.

[Jon Tanwanteng:]

Okay, understood. You've been pretty vocal in the past about your Kentucky facilities being sold out at some future point. I was wondering when do you expect to be there? And just what does the ramp look like as we head towards there?

[Stephen Croskrey:]

Well, as you know, we have over $200 million of contracts in hand, the only issue that we've had with those contracts is that, as you know, we start -- we first brought this plant online right in the middle -- like two days before COVID started. So with respect to the timing of those contracts coming online, we had to be very flexible with our customer. We kind of had to make a choice between enforcing the contracts or working together to get through what was certainly an unprecedented experience. So at this point in time, we see the launches coming out into the future. I would say kind of between Q3 and Q1 next year, we see several launches getting ready to happen. But since we don't specifically control that, it's hard for us to give guidance on that specifically.

[Jon Tanwanteng:]

Okay, understood. Could you talk a little bit more about the Kemira and the Hyundai Oilbank agreements? Are those -- are there any off-taker contract associated with that? Or are they more R&D contracts with off-take options and if any of that played for the greenfield at all?

[Stephen Croskrey:]

Yeah. The Kemira contract has a supply agreement with it, and we would expect that to get us -- by the time that we get towards the latter years of that contract, we would be well into the greenfield. This contract is an expansion of our -- collaboration with Kemira. Our recent agreement, our plan to develop biodegradable aqueous coatings, and the project was a success. The new agreement really sets the stage to just follow up on that success by commercializing this product in Europe, the Middle East and North and South America. So our product works validated the demand we couldn't be happier with this partnership. Kemira is a great company. This will be one of those things that helps us accelerate our speed to market. Kemira has 5,000 employees versus Danimers like 284 and multiple locations all over the world. The Hyundai agreement is really a memorandum of understanding. So there is no off-take agreement associated with it at this time. The idea there is that, the first step which we're in the middle of is doing some market analysis and then turning to customer trials where we will work together with Hyundai to engage with customers truck yield experimenting with PHA products and I'm sure we probably will start out in South Korea. But it's not limited, so that it could be anywhere in Asia. With the idea then to progress from there to a potential construction of a plant which could be any possible combination of things of how that can be structured whether it's a joint venture or license or any of the shortest investment on their part.

[Operator:]

Thank you. Your next question comes from Laurence Alexander with Jefferies. Please go ahead.

[Laurence Alexander:]

Good afternoon. I guess the first one just on the Kemira, that $500 million, is that the sale of the product or is that the potential market size for Danimers ingredients in the product?

[Stephen Croskrey:]

That would be the market size for coatings, Laurence. Thank you. It does not include paper, just to be clear.

[Laurence Alexander:]

Understood. And can you give a sense for -- and so just to be clear, Danimer would be producing the coatings or are you just producing one ingredient that's used to make the coatings.

[Stephen Croskrey:]

Ultimately, we would just be producing the PHA and Kemira would produce the actual aqueous coatings. And today as we sit here, we are making the coatings, but that will change.

[Laurence Alexander:]

Understood. And can you give a sense for the -- how you envisage the Catalytic Technologies business model playing out over, say, the next four or five years. Just in terms of sort of potential licensing or revenue like timelines for and what you hope to see and what you would be disappointed to not see from that business?

[Stephen Croskrey:]

Yeah, let me just kind of talk about where we see that business growing like right now and I'll try to round out to get to your specific question. So since the acquisition we've been exploring several options for site selection for the first plant. This process has resulted in substantial conversations with several companies that have strategic interest in the technology. We're also discussing of actual -- straight licenses to companies that are interested in building plants. I am super excited about this particular piece of business because of the low cost of construction and production costs. And I think it's going to play a very, very important role in our future growth, not just in combination with Nodax in our formulations, but as a standalone profit center basically licensing this technology. As you've heard me talk about in the past, I think this particular technology is just a fantastic fit with the kind of existing fossil fuel and big, big chemical industry, because they already have their raw materials and the technology to make this product and you know how much pressure they are all under to be green. So we get tremendous amount of interest in that technology. And I don't think we're ready to give specific guidance, Laurence, on when we could expect the first licensing agreement to be done, or anything like that, but we are in serious negotiations with several parties on it.

[Laurence Alexander:]

Great, thank you.

[Operator:]

Thank you. Your next question comes from Thomas Boyes with Cowen & Company. Please go ahead.

[Thomas Boyes:]

Thank you very much for taking my questions. Nice to see, obviously, Phase II and Kentucky is on track still given all the learnings that you have from Phase I, how quickly do you anticipate being able to reach 100% capacity? Or maybe as a follow on to that, do you need 100% capacity, that EBITDA profitability number is actually a much lower number for each. I think about it more holistically at a kind of a broader plant level?

[Stephen Croskrey:]

Yeah, it's a much lower number than full capacity, Thomas. So we certainly do not need full capacity. In fact our models, the way we've always modeled this. I would say at this point, is conservative. We model these scale-ups to get to about 90% of nameplate in about two years. Now if you look back at what happened with Phase I, that's pretty much what we did. I mean, where we actually ran over 100% in April, which would be two months -- two years and one month since we turn that thing on. So we're very happy with that progress, especially given the circumstances in which we did. The first nine months that plant was running, we didn't have the cash, so we weren't spending any money trying to wrap it up. And then as that year 2020 progressed COVID got worse and worse. And so we did that right in the middle of COVID and did it in that time span, so that should encourage everybody that we would be able to scale Phase II up more quickly than what we are budgeting. And in addition, just to give you a little color on it I'll point out that all of the downstream equipment is the same equipment that we have in Phase I. There is -- maybe the only difference in kind of whole process is that, the dryers are a little bigger, but they are the same dryers, they're just longer than the dryers that we have now. So we ought to be able to scale that more quickly than that two year period.

[Thomas Boyes:]

Got it. And you actually had mentioned in previous calls that downstream equipment is running significantly faster than it was kind of originally expected. And then maybe longer term versus the nameplate capacity of facility, you could operate at a greater rate than that. If you're over 100% now in Phase I, is that something that you could theoretically continue longer term or using some of the construction that's in Phase II that's completed just to run more product through?

[Stephen Croskrey:]

Yeah, I would expect that we could repeat that. And just to clarify the way that we design the plant, we designed downstream to actually -- we set it up, so that fermentation was the bottleneck. We designed downstream to be greater advance fermentation because you can always add another dryer or add some other piece of equipment. But if -- you have to remember here the real work is being done by the microorganism, the polymer synthesis is taking place in fermentation, that's where the real work is taking place, and if you achieve significant improvements in fermentation on yield you got nowhere to go with that if you can't run it through downstream processing. So we intentionally designed downstream processing to not be the choke point here.

[Thomas Boyes:]

Got it. And then obviously I appreciate some of the timing changes as it relates to the greenfield facility, but I'm just wondering if you had maybe any update on the potential for a DOE loan, Phase I of their process versus their Phase II or even a sense of what that loan size could look like? Is it predicated on an anchor tenant do you think to move forward? Or any insight there would be helpful.

[Stephen Croskrey:]

Yeah. Thanks, Thomas. It's a good question. I've been saying that we are very confident in getting a Phase I approval letter, and I would say today that our confidence is even greater, that's going to happen very soon, but the piece that I’ve always cautioned on is until we get that and get into Phase II we won't have a good sense for what all the requirements might be to close. I guess the good news is, we'll have plenty of time to work through any issues. And so, when we get the approval we will quickly work to assess kind of what the weak points might be in terms of the contingencies and start addressing those. So we're pretty confident that we're at least going to get that opportunity.

[Thomas Boyes:]

Great. I appreciate the answer. If I could just squeeze one quick one in here just on canola pricing, any insight there? I know in the past you have been able to pass along some of the kind of the increases along to customers, is that still the case and how do you think that is moving up through time.

[Stephen Croskrey:]

Yeah. Mike, why don’t you take that one.

[Michael Hajost:]

Yes, Sure. Thanks, Thomas. Great question. Yeah, I think overall we've been kind of been able to stay kind of below the curve here in terms of our pricing -- in terms of where futures have gone and the spot prices in the market. And I think our average price in Q1 was $0.59 and I think that was well below the price seen in the quarter as the war in Ukraine started, we locked in Q2 in an average of about $0.78 per pound, which is lower than the kind of the current market or the futures price, which is now over $1. For Q3 we locked in at around $0.91 per pound, just again looking at the futures is about $1.17 and for Q4, we're at around average at about $0.86, which was lower than the futures of about $1.09. So I think you can see that we're doing a decent job of kind of staying ahead of all of that. We are starting to evaluate the timing to start locking in actually Q1 of ’23. And just talking to our broker two to four weeks or so they're saying our suppliers and other crop planted volumes. If we were to lock in now, they're saying, hey, hold off it's a little high. It’s about $1.2 or $1.4 and you can get a $0.10 premium in that current price. So one to two months ago that estimate was actually $0.85 to $0.89. So I think it was a chance, we're expecting that we can now probably sometime in mid-May to mid-June timeframe get a better price point than what we have right now and in takes some of that risk off. Now having said all that, we do have pass through mechanisms with our sales contracts that provides price escalators, de escalators for the major cost component not under our control and I think we see evidence of those working on our PHAs, ASPs are trending up into Q2 compared to Q4 as those prices are going up, we able to pass those along. So I hope that answers your question.

[Thomas Boyes:]

Absolutely. I appreciate the color. I'll hop back in queue.

[Stephen Croskrey:]

All right. Thanks Thomas.

[Operator:]

Thank you. Your next question is a follow-up question from Jon Tanwanteng from CJS Securities. Please go ahead.

[Jon Tanwanteng:]

Hey guys. Thanks for the follow-up and it's good to hear you making progress on the DOE loan. The question I have is, what kinds of PHA volumes are implied in the guidance, it does not be exact, but maybe a range.

[Stephen Croskrey:]

Yes. We're not a bit of points really not the guide on sales or volumes, obviously the volumes are going to be higher as we bring out the capacity. As you say we're kind of running at capacity right now in Phase I. We're not building up inventories at that plant and we're going to scale up Phase II here as we go and we feel like the pace of that scale up and that incremental costs associated with that will not be disruptive to our margins, as a matter of fact, we continue to think that we can improve both the volumes and the margins on that product as we kind of go through the rest of this year. So the PHA portion of the guidance is the positive spot. And obviously as we talk about further down into 2023 that’s the huge driver in terms of the increased profitability of this company. So that's -- really I don’t want to get too granular in terms of the breakout of those different pieces there, but that's certainly a nice chunk there. And unfortunately for this year, we're seeing great promise there, but as Steve outlined, we are seeing some challenges though on the PLA business as it related to war and this potential change in the formulation, but obviously as I kind of talked about in my remarks, we do have a lot of other year over year things that are challenging this year that will start to mitigate. As we get into next year, we're not going to see the types of increases in the overhead. We've built a lot of that -- a lot of those cost in already to kind of be there and built in to be absorbed by a larger business, and it comes from a small percentage of the sales. And again it's the PHA though, it's kind of more or less a -- more of a fixed base that's going to grow the profitability of the business longer term. Along with Catalytic technologies.

[Jon Tanwanteng:]

Got it. I was also wondering went in 2004 do you expect the greenfield to start? And then maybe as a follow-up to that, is it possible to get Rinnovo sales and revenue even before that if you're pursuing licensing agreements.

[Stephen Croskrey:]

I think it would be likely that we would see some Rinnovo revenue, not from our plant, but from licensing agreements by 2024. We're not guiding right at this point about when in ’24 the plant will come online, just given the uncertainties in the current economy. But we're paying close attention to the cost of materials and equipment and obviously very closely monitoring our cash position to make sure that we will be imprudent about that spend.

[Jon Tanwanteng:]

Okay, great. Thank you.

[Stephen Croskrey:]

All right, thanks.

[Operator:]

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Mr. Croskrey for closing remarks.

[Stephen Croskrey:]

Thanks again for everyone for joining us today. I'd like to thank you for your continued interest in Danimer Scientific and we look forward to updating you on our progress next quarter. Thank you.

[Operator:]

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