Danimer Scientific, Inc. (NYSE:DNMR) Q3 2023 Earnings Call Transcript
Danimer Scientific, Inc. (NYSE:DNMR) Q3 2023 Earnings Call Transcript November 14, 2023
Danimer Scientific, Inc. misses on earnings expectations. Reported EPS is $-0.39 EPS, expectations were $-0.34.
Operator: Greetings. Welcome to the Danimer Scientific 2023 Third Quarter Earnings Call. At this time all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please be advised that this call is being recorded today November 14, 2023. I would now like to turn the presentation over to Mr. James Palczynski, the company's investor relations representative.
James Palczynski: Thank you, operator. Good afternoon to everyone and thank you for joining us today for Danimer Scientific's 2023 Third Quarter Earnings Call. Leading the call today is Steve Croskrey, Chairman and Chief Executive Officer, and Mike Hajost, Chief Financial Officer. I'd like to note that there is a slide deck that accompanies today's discussion, which is available on the investor relations section of our website at danimerscientific.com. As we begin, I'll call your attention to the company's safe harbor language, which is published in our SEC filings, and on Slide 2 of the presentation I just referenced. On today's call, we may discuss forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended.
Forward-looking statements include, among other things, statements regarding future results of operations including margins, profitability, capacity, production, customer programs, and market demand levels. Actual results could differ materially from what is expressed or implied in our forward-looking statements. The company assumes no obligation to update any forward-looking statements to reflect events or circumstances after the date here around, except as required by law. Today's presentation also includes references to non-GAAP financial measures within the meaning of SEC Regulation G. We believe these non-GAAP measures have analytical value, but note that they should be taken as supplementary measures of performance and not as alternatives to GAAP results.
We have provided reconciliations for non-GAAP financial measures to the most comparable GAAP financial measures in our earnings release and our presentation. Thank you, and it's now my pleasure to turn the call over to Steve Croskrey, Chairman and Chief Executive Officer, Danimer Scientific.
Steve Croskrey: Good afternoon, and thank you for joining us. We recently received notification that a very large quick service restaurant program for biodegradable cutlery specifying our Nodax-based resins has now been awarded. We have anticipated this notification for some time. Five of our converter partners have each been granted awards and will participate in that program. We will supply each of them with the resin they need and in total the program will require us to deliver approximately 20 million pounds annually. We expect to begin making first shipments in the second half of next year and for the program to hit full run rate as we approach the midpoint of 2025. This is an unprecedented award that serves as tremendous validation of our PHA-based materials, which are the first to truly help to reduce plastic pollution through a seamless material replacement strategy.
This is critical because changing consumer behavior to completely solve the pollution problem is infinitely more difficult and problematic for businesses. Our materials enable brands to differentiate, to extend their environmental leadership, and to enhance their reputation for sustainability. They immediately become part of the solution. We're exceptionally pleased and excited by this new program. While our PHA-based products revenue grew by 58% over the same quarter last year, we had expected more. We are currently in the late stages of commercialization with a number of customers, including major brands, some of which I'll discuss further in a moment. These launches incorporate rigorous final qualification and testing, frequently involving a number of partners in addition to Danimer, and will need some additional time to complete their final steps than we previously anticipated.
We certainly appreciate that our customers are generally adopting our resins with the intent of permanently converting away from petroleum-based plastics and the long-term pollution they cause, especially given that there are often several years of research and development already invested prior to commercial launch, we understand that the launch itself should be an unqualified success across the board. In some cases, we underestimated the time required for final testing and qualification, particularly for novel end-use applications where we were asked to make adjustments that then we needed to retest and re-qualify, sometimes adding months to the process. We're confident that each of these launches will be successful and, just as we have been increasingly able to leverage our prior R&D work to move more quickly on new development projects, we'll be able to drive process efficiency into this last stage before commercial launch and avoid some sources of delay in future programs.
I'd like to now give you some specifics about the brands and programs we're currently launching. First, I'll focus on Bacardi, a prototypical example of a great partner. Bacardi is a 161-year-old family-owned company with an ambitious goal to be 100% plastic-free by 2030. They knew three years ago when we began to work together that success would require breakthrough advances in engineering materials and packaging design. We began our work with a focus on pioneering the development of a composable spirits bottle, one of, if not the single most technically challenging initiatives we have ever undertaken. That work continues and the progress we've made is encouraging. Both we and Bacardi remain focused on bringing that success home as soon as possible.
That said, along the way, Danimer and Bacardi have identified additional, more rapidly implementable development initiatives to eliminate plastic waste elsewhere in their supply chain. These are also very powerful and exciting, and we will be sharing more at the earliest opportunity. As you may recall, last quarter we talked about a number of new Nodax -based film resins. One new film resin application is for home compostable retail packaging for vegetables and fruit. The development partnership for this application began in 2020 with BIOLO, a division of CPG, or Columbia Packaging Group, one of our converter partners. Bolthouse Farms, a carrot producer, is their launch customer and at retail the product will be offered first by Myers Grocery in 240 large-format grocery stores.
The first end use will be badged for 1-pound Earthbound Farm organic mini pill parents. The bags are home compost certified by TUV Austria, a globally recognized leader in independent testing, inspection and certification for biodegradability. This is a difficult certification to meet, and we're very pleased to have qualified. CPG intends to develop and market compostable bags, film and rollstock for packaging needs across not just produce but a wide variety of consumer goods. While this initial launch is modest, the category presents a huge opportunity. CPG is intently focused on the growth opportunity they believe the company's a value-added product and are working towards next steps in their go-to-market strategy. I'll now turn to our work with Delta Coffee, a coffee roasting and packaging company that has led the Portuguese coffee market since 1961.
We've developed compostable single-use capsules for their Delta Q line of ground espresso, which we believe will be the first product on the market in full compliance with proposed new EU regulations requiring any copy sold in the EU to meet new compost standards. The capsules degrade completely inside industrial composting environments, leaving no micro plastics or other residues that would harm natural ecosystems. We've developed these pods in partnership with Total Energy's Corbion, who will supply the PLA that is also a key ingredient in the PHA-based resin used for the pods. Our engagement with other major disposable coffee pot producers is ongoing. We view this category as an important one for us regardless of the passage of proposed legislation.
Finally, I'll return to the QSR space. In addition to the 20 million-pound cutlery program, we are still engaged in field trials for Nodax-based draws and advance the planned nationwide rollout by another major QSR customer. Our development efforts for the QSR channel remain a focus, and we're excited to have just executed a joint development agreement with a large QSR to develop packaging materials that are specific to their menu. Additionally, we're getting closer to commercialization of biodegradable cups using resins for both extruded coatings and in partnership with Kemira aqueous coatings. Our partnership with Kemira has been especially important in this effort. These are the key technologies for not only disposable cups, but for all coated paper materials used in foodservice.
We expect to have more to say about the coating work we're doing over the next couple of quarters. For now, I'll just say that we are confident we are emerging as a leading source for alternative materials in the QSR channel. As I look across these partnerships, even those that have modest initial volume associated with them, they're each opening boards to a new category or a new range of customers. They each diversify our business and add to our addressable market opportunity. The importance of these launches has been underlined by the recent dramatic increase in engagement opportunities with new potential end-use customers that they have generated. Our recent developments and product launches have triggered discussions with potential partners across multiple industries major customers seeking long-term solutions to plastic waste.
While we continue to work through near-term challenges and launch delays, we have great conviction that we are on the right path towards filling our existing capacity in Kentucky and continue to make progress on our plant footprint expansion strategy. Our work with the Department of Energy loans program office to complete due diligence is proceeding as planned and we continue to look forward to the terms negotiation phase. We are now making significant progress toward full capacity utilization in Kentucky and believe that there is more than enough specifically identifiable demand to make our greenfield project a success. The partnerships we have been talking about today illustrate the way forward, ensuring that it is possible to disrupt petroleum plastics address the global pollution problem and building enduring business category by category, customer by customer and end market by end market.
I will now turn the call over to Mike Hajost, our Chief Financial Officer, to update you on the numbers for the quarter and on our outlook for the rest of the year.
Mike Hajost: Thank you, Steve, and good afternoon, everyone. I'll start with our financial results on Slide 7 of our presentation for those of you following along. Third quarter total revenue was $10.9 million compared to $10.4 million as growth in product revenue was mostly offset by a reduction in service revenue. Third quarter product revenue was $10.5 million, up 14.9% compared to the prior year level of $9.1 million. This growth was entirely attributable to PHA-based resin sales, which grew 58% compared to last year. PLA-based resin sales were down 51% or $1.8 million versus prior year due to the ongoing issues associated with the Ukraine conflict. Third quarter service revenue was approximately $500,000. This is about $800,000 lower than last year's third quarter.
This is consistent with the recent trends and was expected as funded R&D projects for certain customers move to commercialization. We reported a third quarter 2023 gross loss of $7.7 million, which was an increase compared to the prior year's quarter's gross loss of $4.1 million. The year-over-year increase primarily reflects higher depreciation and amortization expenses as well as higher raw material costs related to our product mix. After adjusting for depreciation and stock-based compensation, we reported an adjusted gross loss of $2.6 million as compared to an adjusted gross loss of $1.5 million in the third quarter of 2022, primarily due to other increased fixed production costs. R&D and SG&A expenses excluding depreciation, amortization, stock-based compensation and certain nonrecurring items, totaled $6.6 million in the third quarter, a significant improvement relative to the $11.5 million of expenses for both categories in the third quarter of last year.
The improved efficiency across many areas of the business through broad-based cost control initiatives continues to drive this improvement. Lower R&D expenses also reflect the conclusion of certain development projects. Adjusted EBITDA loss for the third quarter improved to $9.3 million compared to an adjusted EBITDA loss of $12.9 million in the third quarter of 2022. Adjusted EBITDA excludes stock-based compensation, other income and other add-backs as reconciled in the appendix. Cash and cash equivalents at the end of the third quarter was $77.4 million as compared to $62.8 million at the end of 2022. Restricted cash was $14.5 million, including $12.5 million for expected interest payments pursuant to our recent loan agreement. Capital expenditures in the third quarter were $2.7 million and year-to-date have been $25.7 million.
We have tightened our range of expected full year CapEx spend to be between $27 million and $29 million towards the more favorable end of our prior range of $26 million to $31 million. We ended the third quarter with a total debt balance of $379.8 million, comprised mainly of our convertible senior notes, the senior secured term loan we closed during the first quarter and our new market tax credit loans, which we expect will be forgiven starting in 2026. We continue to view the magnitude and timing of the customer ramp for PHA-based resins and our increased utilization to serve that demand for our Kentucky operations as the largest factors for variability in our short-term financial results. As Steve discussed, the timing of certain expected customer programs has moved further out than we had expected.
And as a consequence, both this quarter and next quarter do not have the benefit of the previously expected initial shipments from new launches. Our full year 2023 guidance for adjusted EBITDA is now in the range of between negative $40 million and negative $37 million. I'll now hand the call back to Steve for his closing remarks.
Steve Croskrey: Thank you for your attention this afternoon. The cutlery program awards we've announced today constitute a watershed event for Danimer in many ways. They are a seal of approval and open the door for us to capture additional volume in the QSR channel and other categories. In addition, this program gives five of our converter partners critical mass of revenues and the incentive to look for ways to grow their Nodax-based business. These awards also carry a major positive impact on our future financial performance. One of the most powerful aspects of our business is how longevity is built into every program when we capture. Our customers are seeking permanent solutions to the problem of plastic pollution, a problem so large and damaging the only permanent solutions matter, solutions that we have.
We expect that once our capacity is spoken for because our customers are large enduring businesses with stable demand for consumables, that capacity is essentially permanently absorbed. We have a tremendous opportunity that we believe is ours and ours alone. Thank you. And operator, we're now ready for questions.
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