Danimer Scientific, Inc. (NYSE:DNMR) Q4 2023 Earnings Call Transcript March 28, 2024

Danimer Scientific, Inc. reports earnings inline with expectations. Reported EPS is $-0.39 EPS, expectations were $-0.39. DNMR isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Danimer Scientific 2023 Fourth Quarter Earnings Call. At this time all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for a question. [Operator Instructions] I would now like to turn the presentation over to Mr. Blake Chamblee, the Company's representative. Please go ahead.

Blake Chamblee: Thank you, operator. Good afternoon, everyone, and thank you for joining us today for Danimer Scientific's 2023 fourth quarter earnings call. Leading the call today are: 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 two 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 hereof, 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. The conclusion of the fourth quarter of 2023 marks the end of a challenging year as Danimer experienced delays in anticipated commercial launches. Despite these delays, we are greatly encouraged by our successes during the year and we believe we remain well ahead of the competition in both deep understanding of the bio-dividable plastics industry and the available production capacity to meet our current and future customers' needs. Some examples of our recent successes include the previously announced 20 million pound PHA resin cutlery award for a large quick service restaurant chain or QSR, the start of a Nodax based draw scale up with another large QSR, as well as the commercial launch of home compostable certified mini carrot bags under the Boathouse Farms brand completed in conjunction with our converter partner, Columbia Packaging Group.

We are excited about our partnership with Delta Coffee’s in the development of single use coffee pods that will meet stringent EU environmental standards. Additionally, we have made great strides in research and development efforts with several of our customers, including Mars Wrigley, Kemira, Eagle Fishing, and Pepsi. We have also announced the completion of our Rinnovo pilot plant in Rochester, New York. This allows us to demonstrate the capabilities of this unique PHA material in meeting our end customers' needs and provides an important proof-of-concept supporting our designs for commercial scale production. We remain engaged with a major oil and gas company as a co-location partner for a commercial facility and are also in negotiations with another partner to engage in research applications using our Rinnovo PHA.

Our work with Chevron Phillips Chemical to develop and commercialize cast-exclusion films, blown-exclusion films, injection molded parts, and rotational molded parts using Rinnovo polymers continues to progress in a very positive manner. Our primary focus remains our development and commercialization efforts in the quick service restaurant channel. We work closely with the top three QSRs as measured by U.S. system-wide sales for a variety of end-use products including straws, cutlery, film wrappers, bowls, and container lids. Our previously announced 20 million pound annual awards provide cutlery resin to a large global QSR chain continues to progress as we anticipated. We have entered the first stages of scale up and expect the first commercial shipments in the second quarter of 2024, with Cutlery being delivered to at least one customer distribution center during the third quarter of 2024.

We expect this award to reach full run rate in the second quarter of 2025. We have also recently learned of an opportunity to expand both in geography, specifically into Asian markets including Japan, and into additional end product categories including straws and film wrappers for cutlery with this same customer. Scale up of our Nodax based straw resin with another large QSR has progressed and is expected to enter commercial launch during 2024. The success of these trials has also led to a joint development agreement with the same QSR for lids and coated paper containers. We also continue to advance in the commercialization process of compostable cups using our PHA resins for both aqueous and excruciating coatings. This has been a technically challenging area, but we are very close to a successful outcome.

Our partner Kemira has recently exercised an option to extend their license and exclusivity with us to commercialize biodegradable aqueous barrier coatings to be used on paper-based food and beverage applications. This extension builds on our longstanding successful development partnership which began in 2020 and bodes well for the future. The QSR industry continues to rapidly move towards more sustainable solutions and we are thrilled to be a part of this transformation. We partnered with Delta Coffees, a coffee roaster and coffee packaging company in Portugal to develop a compostable single-use capsule for their Delta Q line of ground espresso. We have begun commercial shipments of this resin in the first quarter of 2024. These pods are in full compliance with proposed new EU regulations requiring any coffee pod sold to meet new compost standards.

These capsules degrade inside industrial composting environments leaving no microplastics or other residues that would harm natural ecosystems. As a reminder coffee pods and tea bags represent a potential 500 million pound opportunity in the European marketplace. We've also expanded our research and development contract with Mars Wrigley to further our relationship with their snacking division, including the completion of testing and validation of a unique product packaging using fully biodegradable PHA materials this year. Our partnership has also made significant progress towards the development of compostable PHA packaging that showcases the desired performance for products in Mars pet care and food and nutrition businesses. Another promising R&D project is focused on the sports fishing industry.

Eagle Fishing, an innovation leader in the industry, has partnered with us to develop a new PHA technology for soft fish baits. Development of this new PHA soft plastic technology is nearing completion, and full-scale testing should be underway by mid-year, which will help to replace the plasticized PVC lures that harm our aquatic ecosystems. This is an exciting market for us as we continue to grow in new directions and end-use applications with our Nodax PHA-based resins. We have successfully completed a joint development agreement with PepsiCo to create home compostable multilayer films for use in snack food packaging. Our combined R&D efforts have led to the development of a multilayer packaging structure that meets the practical requirements for protecting the product while offering a sustainable, disposable alternative.

The expected demand growth for our PHA-based products allows us to reaffirm our projected profitability timeline for our Kentucky operation and the company in total. We expect our Kentucky facility on a standalone basis to become EBITDA positive during the second-half of 2024 at plant capacity utilization of just over 30%. We expect the total company will become EBITDA positive when our Kentucky facility reaches 70% to 80% capacity utilization near the start of 2025. To support the customer revenue growth outlined above, we decided to further augment our liquidity position to help ensure an adequate cash runway. As we previously announced, we recently completed an equity offering, generating $13.5 million of additional cash after customer closing fees.

This additional liquidity, along with our projections for a decreasing cash burn rate as volumes increase in our Kentucky facility will aid us in meeting our forward cash needs. I would like to now draw your attention to slides five and six in our investor presentation, which provides a visual reminder of our sales cycle process. From the initial lead to commercialization, this can be a lengthy, iterative process rather than a linear one, but we have been at this a long time. We currently have 85 customers in the material selection cycle ranging from initial sample production to larger scale trials to market testing to regulatory and certification work. This cycle establishes the long-term sales pipeline for our business. We recently announced two new board members.

We're honored to welcome Dr. David J. Moody and Mr. Richard Altice to the Danimer Scientific Board of Directors. Dr. Moody, who was appointed to the board on January the 17 of this year, is the former Chief Executive Officer of Jadex, Incorporated, a U.S.-based manufacturing and material science company. He has over 30-years of experience managing chemical and polymer related businesses. Mr. Richard Altice, whose appointment will be effective April 15 2024, is the Former President and CEO of Nature Works, a developer and manufacturer of biopolymers. He has over 30-years of sales, marketing, operational, and management experience in especially chemicals and biopolymer industries. These new board members bring valuable industry perspective and experience as we seek to rapidly grow our business and we were very excited about adding these seasoned executives to our team.

Finally, we are entering the final stages of our due diligence work with the DOE Loans Program Office, and we look forward to negotiations on a projected term sheet. I will now turn the call over to Mike Hajost, our Chief Financial Officer, to update you on the financial results for the fourth quarter and on our outlook for 2024.

Mike Hajost: Thank you, Steve, and good afternoon, everyone. I'll start with our financial results on slide seven of our presentation for those of you following along. Fourth quarter total revenue was $10.9 million compared to $15.3 million led by a product revenue decline of $4 million or 28%, compared to the prior year level. PHA-based resin sales grew by 11% in the quarter compared to last year. And we continue to experience steady growth, but PLA-based resin sales fell 74% compared to last year, primarily due to the ongoing issues associated with the Ukraine conflict. We reported a fourth quarter 2023 gross loss of $6.4 million as compared to the prior year quarter's gross loss of $2.7 million. The year-over-year increase is primarily due to overall lower PLA sales as well as higher depreciation expenses.

After adjusting for depreciation and stock-based compensation, we reported an adjusted gross loss of $1.2 million as compared to an adjusted gross profit of $2.0 million in the fourth quarter of 2022, primarily due to the lower PLA sales. R&D and SG&A expenses, excluding depreciation, amortization, stock bid compensation and certain nonrecurring items, totaled $9.4 million in the fourth quarter of 2023 compared to $10.5 million in the fourth quarter of last year. Our continued cost control initiatives across many areas of the business created this $1.1 million year-over-year improvement. Adjusted EBITDA loss was $10.7 million in the fourth quarter of 2023 and was at loss of $8.6 million in the fourth quarter of 2022. For the full year, we had an adjusted EBITDA loss of $39 million, which was in line with our latest guidance range of minus $37 million to minus $40 million.

On a year-over-year basis, this represents a $6 million improvement over prior year's adjusted EBITDA loss of $45 million. Adjusted EBITDA excludes stock-based compensation, depreciation, amortization, interest and other nonrecurring items as reconciled in the appendix. Cash and equivalents at the end of the fourth quarter was $59.2 million as compared to $62.8 million at the end of 2022. Restricted cash was $14.3 million which is mainly held for future interest payments under our senior secured term loan. Capital expenditures were $2 million in the fourth quarter and $27.7 million for the full year which was in line with our latest guidance range of $27 million to $29 million. We ended the fourth quarter with a total debt balance of $382.8 million comprised mainly of our convertible senior notes, the senior secured term loan 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 from our Kentucky operations as the largest factors for variability in our short-term financial results. With the customer expectations described earlier, that will improve cash flow from our Kentucky operations, we are set to release our full year 2024 guidance. We believe our adjusted EBITDA will be in the range of minus $22 million to minus $32 million. With very little required spend on the greenfield project in 2024, we're expecting our total capital expenditures for the company to be in the range of $8 million to $10 million. We also expect to end 2024 with an unrestricted cash balance in the range of $20 million to $25 million.

The ending cash balance range is driven by the adjusted EBITDA range as a proxy for cash flow, the 2024 CapEx range, known cash interest for the year based on our current debt structure, the net cash received from our recent equity issuance and significant improvements in working capital. The working capital improvements will be led by our opportunities to reduce inventory from artificially high current levels and our ability to improve our overall receivables collections to include collections from completed R&D contracts. This ending cash balance range does not include potential cash or liquidity from other financing transactions that are available to us. I'll now hand the call back to Steve for his closing remarks.

Steve Croskrey: Thanks, Mike. In conclusion, and as we look towards 2024, we are focused on the immense long-term opportunity to transform the plastics market. With our developmental expertise, capacity footprint and a growing blue-chip customer base, we believe we remain well ahead of any competition and have a clear path to deliver on our goals for 2024 and beyond. Thank you for your time today, and we look forward to updating you on our progress. We will now open the line for questions.

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