Danimer Scientific, Inc. (DNMR) on Q3 2021 Results - Earnings Call Transcript
Operator: Greetings and welcome to the Danimer Scientific Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. 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 Ross You may begin.
Russ Zukowski: Thank you, operator. And thank you, everyone for joining us today for our third quarter 2021 earnings call. Hosting the call today are Danimer CEO Steve Croskrey, and CFO Jad Dowdy. Phillip Van Trump, our Chief Science and Technology Officer 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.
Steve Croskrey: Thank you, Ross. Good afternoon, everyone. Thanks for joining us. Today we will discuss our third quarter results and some exciting business updates. The third quarter of 2021 marked another period of continued progress on our path to deliver best-in-class solutions for biodegradable packaging and other products which address the global plastic waste crisis. During the quarter, we made progress on several key objectives, including the initial integration of our recent acquisition of Novomer, continued application development work, increased production of PHA-based, and we continue to negotiate both development and supply agreements with our blue-chip customers. We remain on schedule with the scaling up of our Kentucky Phase 1 operations, as well as the construction of our Kentucky Phase 2 operations. And we are happy to announce that we now plan to break ground on our state-of-the-art Greenfield facility in Bainbridge, Georgia ahead of schedule later this month. And looking at our customer relationships and business developments, we have several exciting updates. We continue to see an increase in demand for our products during the third quarter, and we're making progress on both supply and development agreements for a wide array of product applications, including coatings, lids, films, fibers, and utensils and other injection molded items. Our partner, WinCup Phage straws, made by Danimer signature Nodax -based resins are now being sold in CVS versus across the factory. In addition, WinCup recently announced its sponsorship on the Atlanta Falcons, introducing phage straws to the Mercedes Benz stadium in Atlanta, at the beginning at August of this year. WinCup also recently applied at the city of Fort Myers Beach, Florida for voting to amend the city's ban on traditional plastic straws to allow for more biodegradable solutions. Following the vote, WinCup will now be able to distribute phage straws in the community to better protect the area's beaches and waterways. Furthermore, one of our struck in burgers is making progress in scaling up their production portfolio, previously mentioned, QSR customer with their expected goal of hitting full stride in Q1 of 2022. We're excited by the positive reception to our Nodax-based straws, and found that many of our straw customers also want Nodax -based lids and cups. So, they can offer a complete biodegradable solution. Separately, our partnership with Comerica (ph) is progressing well. We have already conducted successful product prowess with aqueous coatings and continue to develop our relationship. Also recently, we announced a long-term collaboration with both our Corbion PLA in securing PLA supply disparate production of PHA based resins for our growing blue-chip customer base. Additionally, this alliance secures supply for our expected? anchor and our door dig? Greenfield facility. Growing commercial scale production of BHA remains a core focus of our business, however PLA is an important input in many of our Nodax -based of formulations. Partnering with Total Corbion PLA provides an ideal solution to support the long-term growth opportunities ahead, while ensuring our short-term customer needs remain fulfilled. We have a couple of promising developments on the R and D side effect on as well. In our prudent and efforts to evaluate a ray of feedstocks for use in that commercial scale production of our signature Nodax polymer, we're pleased to receive a research grant from the United Soybean Board in September to expand research in the use of high oleic soybean oil for bio-degradable plastic production. This grant represents a continuation of our collaboration with United Soybean Board after we successfully completed a one-year project to develop a practical model for production and the second phase of the project will now focus on scaling up soybean oil potential use in manufacturing and commercial level. Additionally, during the quarter we opened the Danimer Conversion Lab in Georgia to help us make the process of conducting customer product prowess more efficient. As a reminder, our application development process is iterative. Typically, we send sample materials to Berger (ph) who processes it and then gives us feedback. We then modify the material and send another sample until a final acceptable result as achieved. Throughout the COVID-19 pandemic, we have not been allowed to attend as many problems in person and converters have often times delayed products due to employee constraints. Our new lab in Georgia contains manufacturing equipment where we can simulate our customer trials on-site to cut back and forth approach in the initial relations, speeding up the process to provide our customers with a final product that is acceptable for use in their commercial production. Now, moving onto our Novomer integration update. As we discussed on our last earnings call in August, we closed on our acquisition of Novomer, a leading developer of thermal catalytic conversion technology that produces high performing, carbon efficient, cost-effective polymers and chemicals including Rinovo, a type of BHA. We're pleased to report that our integration is progressing in line with our plan and we're on track to realize the benefits of the acquisition, enhancing the strength of product applications we can develop due to the complementary nature of our no-go when combined with Nodax. Importantly, Novomer 's technology will enable us to significantly lower our production costs and capital expenditure per pound produced, while also providing improved barrier properties in some of our packaging products. As part of our effort to explore technology that can help us lower our manufacturing costs. We announced a new partnership with Chevron Phillips Chemical in September to collaborate on the development. I'll might have a loop slurry reactor design for the manufacturer of Rinnovo. Through this collaboration, we will evaluate the use of CPChem's loop slurry reactor design, a technology that originally transform polyolefin production to evaluate the feasibility of incorporating a continuous reactor system in the manufacturing process for Rinnovo. If the testing is successful, we expect this reactor design to increase utilization of future manufacturing plants. Thread a higher production volume and lowering overall cost per unit. Now, looking at our facility expansions, we're making significant progress on our previously announced expansion plans. We remain well-positioned to further scale up production of Nodax towards our expectation of reaching 100% of our Kentucky Phase 1 facilities with an annual run rate capacity by the end of 2021. Since our bottle-necking initiatives, that Phase 1 were completed earlier this year, we have found that all of our functions in downstream processing are operating on average at nearly twice the speed of our original plan. with the exception of brain capacity, which is running below our expectations. With that said, we have a plan in place to remediate this issue which should allow us to achieve our production targets by the end of the year. Furthermore, we expect to have excess Phase 2 brad capacity coming online in February which we believe will more than make up for any shortfall. Our production of neat PHA or Nodax is an intermediate step in our overall manufacturing process. In October at our Phase 1 facility, neat PHA production was approximately 70% of capacity, up from 62% during the second quarter. And over 50% in the first quarter. Our competitive Phase 2 construction is progressing ahead of schedule and we have included slides 5 through 7 in our presentation to provide you with an aerial view of our progress in 2021. As a reminder, Phase 2 construction at our Kentucky facility commenced in December of 2020 and is expected to come online in the second quarter of 2022 ultimately providing us with an expected 45 million pounds of finished product capacity. Completion of both phases will selectively bring our nameplate finished product capacity up to an expected 65 million pounds per year at our Kentucky facility. At our new state-of-the-art Greenfield facility in Bainbridge, Georgia, we are excited to break ground on construction in the latter half of November. We have already placed orders for several of the long lead time items needed to complete our construction plans. Primary rationale for bidding the construction process ahead of our initial schedule is to lock in previous price quotes of what it's significant inflation in the cost of certain construction materials and to avoid labor constraints. Additionally, as our Phase 2 subcontractors come up a job in Kentucky, they will be able to transition immediately to the Greenfield facility in Georgia. We continue to expect the 3-firm synergetic extrusion facilities to come online by midpoint 2023. As it relates to our plans for our Rinnovo plan t, we are evaluating several attractive locations for site selection and potential partners to collaborate with as we add this capacity. Upon completion of Kentucky Phase 2 the Greenfield facility and there are Rinnovo Plant we expect to have an overall PHA finished product nameplate capacity of approximately 390 million pounds, inclusive of 60 million pounds of standalone Rinnovo. We are excited by our progress to date, our best city expansions and look forward to updating you further on our progress next quarter. With that, let me turn the call over to Jed for an update on our financial results.
Jad Dowdy: Thank you, Steve. I'll speak to slide 8. We closed out our third quarter of the year with PHA representing a growing share of our revenue. I’ll discuss our third quarter results, followed by some color on the full year 2021. Revenues for the third quarter of 2021 grew to $13.4 million compared to $12.8 million in the third quarter last year. This increase was primarily driven by the ongoing scale-up of PHA production for Phase 1 of the Winchester, Kentucky facility that we brought online in 2020. In the third quarter, we drive 32% of our revenues from sales of Nodax-based of resins compared to 12% in the third quarter of 2020. While demand for PLE remains strong, PLE revenue for the third quarter of 2021 decreased year-over-year due to the timing of customer purchases. We reported a gross loss of approximately $230,000 in the third quarter of this year. And gross profit of $3.6 million in the third quarter of 2020. Adjusted gross profit, which excludes depreciation, stock-based compensation, and rent related to our manufacturing operations was $2.6 million compared to $4.6 million in the third quarter of last year. Adjusted gross margin was 19.7% compared to 35.8% in the third quarter of last year, primarily due to elevated fixed cost absorption as production continued to scale up at Kentucky facilities. In both periods, the average cost per pound of PHA -based products sold was significantly higher than the PLA-based products sold as a result of this elevated fixed cost absorption. As we have mentioned previously, we expect our average cost per unit at our existing facilities to improve its production scales. R&D and SG&A expenses excluding depreciation and amortization, stock-based compensation, and onetime items were $9.2 million in the third quarter of 2021 compared to $4.1 million in the third quarter of 2020, mainly due to an increase in headcount and salaries to support our future growth plans, as well as increases in costs associated with having a larger asset base, such as property taxes and property and liability insurance. Public Company expenses add approximately $1.7 million of incremental costs for the third quarter of 2021, which we did not incur in the third quarter of last year, and included them is D&O insurance, increased public Company automating and accounting costs, and saturating the fees. In addition, we incurred approximately. $750,000 of R& D and operating expenses. As a result of consolidating Novomer in our third quarter financial results, which we did not incur in the prior year quarter. The third quarter adjusted EBITDA loss as reconciled in the appendix was $7.4 million as compared to a loss of $500,000 in the same period last year attributable to the factors as discussed, adjusted EBITDA was a loss of $6.6 million in the third quarter of 2021 compared to a gain of $500 thousand in the second quarter of 2020, we add back our rent expense because as primarily related to a sale leaseback agreement associated with the Kentucky facility and thus is essentially a replacement of depreciation and interest expenses. Turning to slide 9, I'll provide an update on our outlook for the full-year 2021. We continue to expect that the increase availability from the completed Phase 1 capacity expansion and the successful completion of our de -bottle-necking initiatives in Q2 should allow us to significantly scale up production as we move into year-end. While we believe demand for our products will remain strong for the foreseeable future, we continue to see impacts to our customer's product launch timelines due to global supply chain challenges such as shortages of containerized shipping and trucking. Though the constraints and supply issues for materials including items such as paper and inks. We're confident in these challenges ultimately will be resolved our customers and vendor. We continue to expect adjusted EBITDA and cash flow from operations to benefit in 2021 from operational efficiencies at the Kentucky facility increases utilization levels. We expect total operating costs to be approximately $31 million for 2021, including the post-acquisition period for Novomer and excluding D&A and stock-based compensation in onetime items. Additionally, we expect 0 cash taxes for the year. For the full-year of 2021 we now expect capital expenditures to be in the range of $200 million to $210 million, almost entirely due to, 1. accelerated investments related to the earlier groundbreaking of our Greenfield construction to get ahead of further potential construction material, installation costs, and 2. Phase 2 construction moving faster than previously anticipated. This CapEx range is also inclusive of investments associated with the Novomer for the post acquisition period. Looking at our balance sheet., our total long-term debt was approximately $29.9 million at quarter end, and includes $21 million of low interest new market tax credit loans that we expect to be forgiven 2026. Our cash position continues to support our planned capacity expansion in 2021, and we are actively evaluating financing options for our planned capital expenditures into 2022 and beyond. Now, I will turn the call back to Steve for closing remarks.
Steve Croskrey: Thank you, Jad. In conclusion, we are confident in the trajectory of our business as we move forward. We are extremely pleased with our team's efforts to execute our growth strategy and to continuously build on the strength of our core path and see product application development, as we look to capture a growing share of the outside demand for bio-plastics. We are helping our customers fulfill their ESG commitments and at the same time we are marching towards our goal of reducing plastic waste to the environment and helping to build a circular economy that we believe will benefit generations to come. We are excited by our progress year-to-date and believe we are still in the very early innings of an immense opportunity for long-term growth and value creation. Thank you for your time today. We will now open the line for questions.
Operator: Thank you. We'll now be conducting a question-and-answer session. A confirmation tone will indicate that your line is in the question queue. For participants who use speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask the participants limit themselves to one question and one follow-up and then re-queue for additional questions. One moment, please while I poll for questions. Thank you. Our first question comes from Laurence Alexander with Jefferies. Please proceed with your question.
Laurence Alexander: Good evening, I've 2 questions. First on the partnership with Total can you give a sense for -- can you give a little bit more detail on the benefits? Who is committed to watch and how this differs from a regular purchase agreement?
Steve Croskrey: Sure Laurence. Thank you for the question. Basically, our partnership with Total is a long term and most parties are committed to the supply and off-take of the material.
Laurence Alexander: Great. And secondly, for the Kentucky 1 facility, given what you now know about the order book likely mix and the current trends in raw material costs, and the facility in the first half of next year hits your original benchmarks for margins and free cash flow-generation on unit basis, just Kentucky 1 on a standalone basis?
Steve Croskrey: Laurence, could you repeat the question? Actually, we got part of it cutoff here.
Laurence Alexander: Sure. So given what you know about customer, the order books, likely product mix, raw material cost changes, should Kentucky 1 once it is hitting the full operating rates in the first half of next year, will they be able to hit your original targets for margins and free cash flow generation on a kind of unit basis, economics. I mean just give a sense of how well that's facility looks to be tracking gains what you originally thought.
Steve Croskrey: Laurence, the Phase 1 and Phase 2 facilities, even though we're on them, Phase 1 and Phase 2, it's really 1 plant. So, it'll be hard to bifurcate that because we've already hired the folks for -- a lot of the folks for Phase 2, and we're going to be continuing to hire through next year. So, you can't really separate the 2 out like that. But given what we know on the operation side, if we hit the volume numbers, we expected that kind of performance that we plan for. Thank you.
Laurence Alexander: Good. I'll hop back in queue. Thanks.
Operator: Thank you. Our next question is from Jon Tanwanteng with CJS Securities. Please proceed with your question.
Jon Tanwanteng: Hi, thank you for taking my questions. Steve, I got dropped in the beginning of the call and I might have missed this, but did you give an update on the total expected sellout that you have in the pipeline right now for Phase 2 and Phase 3, I think as of the last call, you had a couple of customers lined up for Phase 3, just wondering if that's changed at all. Have you increased that?
Steve Croskrey: Thanks, John. No, we did not -- we have not updated that and there's no change at this point in time. We are having some great conversations with some of our customers though about that. I will just anecdotally tell you one customer that hasn't been previously discussed, but has been a long time. A customer recently told us that they have a 100 million pounds of business that they want to convert to PHA. That kind of thing takes a long time, even just in negotiate the agreement through the development work. But it's really an exciting step, I guess, in continuing to build that long-term demand that we see out on the horizon.
Jon Tanwanteng: Okay, great. And then you didn't give an ASP number this quarter, you usually do and if you could supply that. And also base the volume of PHA products in the quarter or maybe an average utilization rate compared to the nameplate capacity?
Steve Croskrey: Sure. So, the ASP, we have decided that we're not going to continue to provide that due to competitive reasons. We've only provided that in the first place to correct misinformation in the market. And so, we're not going to continue that in the future, but we were up slightly on a year-over-year basis and up slightly on a quarter-over-quarter basis. And thank you for asking the second question because I think I might have misread the script on the utilization in Q3 or in Q2. Q2 utilization was 47% and Q3 utilization was 62%.
Jon Tanwanteng: Got it, that's on average reading you mentioned October being 70%, I think.
Steve Croskrey: October was 70%, correct.
Jon Tanwanteng: Got it. Thank you and I'll hop back to the queue. Go ahead I'm sorry.
Steve Croskrey: I was just going to say, as I mentioned earlier, what we've figured out is that all the step functions in Phase 1 are operating and downstream processing are operating near twice as fast as what's required with the exception of broadening. And what we've discovered there is that different grades are growing at different speeds. And we have a fix in place and we expect to be at that 100% run rate by the end of the year.
Jon Tanwanteng: Got it. Thank you.
Operator: Thank you. Our next question is from Thomas Boyes with Cowen and Company. Please proceed with your question.
Thomas Boyes: Great. Thanks for taking my questions. Just to follow up on that 1 point. Is really the drying the key thing that needs to be solved between now and the end of the year that's going to get you to 100%? Is there any other gating factors or things that you've identified?
Steve Croskrey: No Thomas. Thank you. Drying is the only thing that we're not hitting at, at 100%. We're running on average between 50% and 125% of plan on drying. That's the last thing that needs to be resolved. And we're very confident in some steps that we have in place. As I said on the re the capacity of the Phase 2 brine capacity that is coming online in February. So, we'll have more than made up for any shortage by that time.
Thomas Boyes: And maybe just a few with the ASPs, Canola I believe was like $0.47 per pound last quarter in 2Q. And with the expectation that maybe that get to appreciate by like $0.10 through the end of the year. Is that still a good number looking forward? What was it this quarter?
Steve Croskrey: Yes. Right now, our canola oil price is $0.58, Thomas. We expect that when we know it will go to around $0.80 next quarter. The good news here on the supply and pricing is that it has finally leveled off and we see signs of it now decreasing out in the future. So, we continue to work on alternate feedstocks. But one of the things that cap and there is some of the more traditional vegetable oils that we were looking at that have not completely closed the gap with canola oil in terms of the cost, but have narrowed that gap. So maybe a little less interesting to make that switch, but we're continuing to work on that. But long-term we're focusing on non-food that will take longer because you actually have an independent. And both are helpful in the value chain. But that's where we're at right now.
Thomas Boyes: Absolutely. I appreciate the color. I'll jump back in queue.
Operator: Thank you. Our next question is from Laurence Alexander with Jefferies. Please proceed with your question.
Laurence Alexander: Just a question about the brands on slide 3. What does it you -- for grains to be listed, is there a timeline or a reasonable timeline for them to hit commercial purchases of your products and putting those in the hands of consumers? I mean, should we be thinking that say by 2023 or 2025 all of those brands have we -- should be commercial.
Steve Croskrey: Yeah, I think by 2022 or 2023, it would be reasonable to assume that most of those brands would have some commercial offering, if not all of them.
Laurence Alexander: Perfect. Thank you.
Operator: Thank you. Our next question comes from Jon Tanwanteng with CJS Securities. Please proceed with your question.
Jon Tanwanteng: Hi. I just wanted to follow up on the inflation question. As we head into 2020 through 2022, what's your expectation on the ability to pass costs through and how much do you think your ASP s are going to go up? Ballpark.
Steve Croskrey: We're not going to make an estimate on ASPs, John, but we feel comfortable that we can pass most of the inflation that we're seeing through. I guess if there's ever good news in an inflationary environment is everybody is going through the same thing. So, it's difficult, but not surprising. When you have to pass those on. We've done a couple of things here to mitigate some of the effects of inflation on our business. One in particular, I just want to point out, we have made the decision to break ground on the Greenfield this month versus waiting until Q1. The reasons -- there were two reasons for that. One reason is that the quotes that we were getting we're all scheduled to increase if they wanted to accept it within a certain time period. So, by starting now, we've been able to lock hand about 45% of our purchase equipment costs. So, we protect those items for further inflation over the life of this project. And then secondly, the subcontractors off a Phase 2 are just now starting to come off the job there are progressing prime down, if you will, off job. And if we didn't start soon in Georgia, we would lose them. Now, a couple of years ago, if you were doing a project like this, a few months gap between 2 things wouldn't been a big deal, but in this environment, if there's going to be a 3-month gap between job you're going to lose those contractors. So that was just another motivation to get started a little early. And we believe that will help us hold the timeline as much as possible.
Jon Tanwanteng: Got it. Thank you. And just to be clear, was there any inflation in the increase to the $200 million to $210 million this year or was that purely just the acceleration and pull forward and maybe just a follow-up. What are your expectations in your spending in '22?
Steve Croskrey: We haven't provided that guidance yet, Jon, but in that $200 million to $210 million number was almost entirely the Polen of the Greenfield project.
Jon Tanwanteng: Thank you.
Operator: Thank you. Our next question comes from Thomas Boyes with Cowen and Company. Please proceed with your question.
Thomas Boyes: Hey, I appreciate it. I just want to make sure I understood the recent PLA supply agreement. It sounds like is this only for applications where it's actually going to be blended with the formulation that includes Nodax. Or would this also feel like neat ploy where you would just be formulating that's for existing customers.
Steve Croskrey: Yes. Good question, Thomas. This is a really important contact to us because of the tightness in the bio-polymer market and the feel PLA market itself. As a really important part of our long-term strategy here is to secure that supply. The real intent of it is to use that material to blend with BHA. As, as you are aware, we're using quite a bit of other polymers in conjunction with PHA, which allows us to sell basically two pounds for every one pound of BHA that we produce. But there is nothing to prevent us from using that PLA on a standalone basis as well.
Thomas Boyes: Got it. Just because there was that pre -buy, do you think that that same type of dynamic occurs in 4Q or is that largely normalize it? There is nothing in these initiatives.
Steve Croskrey: Thomas, based on our current forecast, we think that's normalized out already.
Thomas Boyes: Got it. Perfect. I appreciate. Thanks so much.
Operator: Thank you. Our next question comes from Jon Tanwanteng with CJS Securities. Please proceed with your question.
Jon Tanwanteng: I just want to follow up on your point about your customers being constrained heading into next year. Do you expect that to impact your demand at this point or is it too early to tell?
Steve Croskrey: Jon, I think what we're focused on here is the long-term and we see that demand getting bigger and bigger in the very short term. And I'm not talking about in a year or anything like that. But over the next several months, it is more difficult to do business out there right now and there's just no way to get around that. So, we think that's taking things -- it's taking a little longer just to get things done due to those constraints in the economy. But I'm also confident that we'll work around it. One of the things that we've done, which we've been working on for a while with the advent of COVID is the creation of the Danimer Conversion Lab to help shorten that acquisition cycle and the development cycle with customers.
Jon Tanwanteng: Great. Thank you.
Operator: Thank you. There are no further questions at this time. I would like to turn the floor back over to Steve Croskrey for any closing comments.
Steve Croskrey: Thank you, everyone for joining us today. We're encouraged by our progress and remain excited about our business prospects as we move into 2022, I would like to say thanks to our shareholders and partners for their continued support, and we look forward to updating you in the future.
Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
