Amyris, Inc. (NASDAQ:AMRS) Q4 2022 Earnings Call Transcript

Amyris, Inc. (NASDAQ:AMRS) Q4 2022 Earnings Call Transcript March 16, 2023

Operator: Welcome to the Amyris Fourth Quarter 2022 Financial Results Conference Call. This call is being webcast live on the Events page of the Investors section of the Amyris website at amyris.com. As a reminder, today’s call is being recorded. You may listen to our webcast replay of this call by going to the Investors section of Amyris’ website. I would now like to turn the call over to Han Kieftenbeld, Chief Financial Officer. Please go ahead.

Han Kieftenbeld: Thank you, Andrea and good afternoon everyone. Thank you for joining us today. With me on today’s call is John Melo, President and Chief Executive Officer, and also Eduardo Alvarez, our Chief Operating Officer, who will participate in the Q&A session. We issued our results today in a press release. The current report on Form 8-K furnished with respect to our press release is available on our website, amyris.com in the Investors sections as well as on the SEC’s website. The slides accompanying this presentation can also be found on the website and were posted today for your convenience. Please turn to Slide 2. Please note that on this call, you will hear discussions of non-GAAP financial measures including but not limited to core sales revenue, gross margin, cash operating expense, and adjusted EBITDA.

Reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures are contained in the financial summary section slides of the presentation and the press release distributed today. During this call, we will make forward-looking statements about future events and circumstances, including Amyris’ outlook for 2023 and beyond, Amyris’ goals and strategic priorities, anticipated transactions and other future milestones, as well as market opportunities, growth prospects and Fit to Win actions. These statements are based on management’s current expectation and actual results and future events may differ materially due to risks and uncertainties including those detailed from time-to-time in our filings with the Securities and Exchange Commission, including our 10-K for the fourth quarter and full year 2022.

Amyris disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise. With that, I will turn the call over to John. John?

John Melo: Thanks, Han and good afternoon, everyone. Thank you for joining us today. I will provide an update on our business performance and our key priorities for this year. Han will provide an update on our financial performance and our 2023 outlook. And I will recap before we turn to Q&A. I will start with a note about Silicon Valley Bank and the recent turmoil involving other banks. This unfortunate situation has impacted many. Let me confirm that Amyris does not have direct exposure to either of the banks that issue. We do not bank with them. Our global banking platform is with JPMorgan as our principal commercial bank. We maintain backup banks in each of the regions we operate in should we need to urgently ship deposits.

I am also pleased to confirm that we have continued access to sufficient working capital. As you may have seen from the 8-K disclosure we made yesterday, Amyris secured $50 million in debt to carry us through the point, when we can capture the upfront cash payment from the recently signed transaction with Givaudan, which should be within 30 to 45 days. Slide 4 we delivered a solid fourth quarter with performance that marks our continued, disciplined, efficient use of funds and robust growth. Our consumer business delivered second consecutive quarter of record growth, marked by 64% growth over the fourth quarter of 2021. Our total core revenue of $76 million is up 17% over the fourth quarter of 2021. This is also a new single quarter core revenue record for the company.

Our consumer business is running about 50% direct-to-consumer and about half with retail partners. Our D2C business continues to deliver strong results with growth of about 60% year-over-year. We are making good progress with our marketing spend and our headcount. We operated the first half of 2022, with less than $1 of revenue for every marketing dollar invested. We are now at $2 of revenue for every marketing dollar invested and I expect for us to end 2023 at $3 of revenue for every dollar of marketing invested. This has come from significant insights and innovation across our teams, including a much more efficient customer acquisition model that is being scaled across all of our brands with support of MG Empower, our world-class social commerce agency.

On headcount, we froze headcount during the fourth quarter and I can confirm that we have lowered our total headcount since then. I have eliminated 30% of my direct reports and we have simplified our leadership structure with a significant reduction of the executive team roles. During the fourth quarter, use of cash was our top priority. We operated in a working capital constrained environment and focused on best use of our very limited liquidity. This resulted in over $14 million of ingredient product revenue, where we have orders that we were unable to support with working capital and did not shift. These are mostly farnesene-related products and also our natural sweetener, Reb M. These orders are being filled in the first half of 2023 and are critical for the end customers.

Demand for our ingredients remains very robust. Our biggest challenge has been capacity, access to feedstock and working capital. Both of these are improving and will be resolved through the first half of 2023. We are delivering on our commitment to be the growth leaders in the consumer categories we participate and to drive core revenue growth of our biotech competitors. We are prioritizing our cash use over our revenue and are pleased with the third quarter, which is the third consecutive quarter of material reduction in cash use. We consumed $95 million of cash in the fourth quarter versus our prior indication of $100 million to $110 million. This is a reduction of $100 million in quarterly cash use from the first quarter of 2022. Our consumer growth is not happening at the expense of margin.

Consumer direct gross margin for the quarter was our best of the year and an increase of 600 basis points over the fourth quarter of 2021. We continue to execute our broad fit to win agenda. We are aggressively transitioning to more efficient sourcing and proprietary manufacturing. We are already realizing better than expected production costs at our interfaces facility in Brazil, where we expect around 60% of all our consumer volume manufactured there by the third quarter of 2023. For our Biossance bestsellers alone, the interfaces manufacturing improved cost of goods by an estimated 50%. These combined actions are expected to deliver 300 to 400 basis points of margin improvement for our consumer business through 2023. Slide 5 our healthy top line and margins should be assessed in the broadly positive context of a thriving macro category, prestige beauty environment, where we are leading in each category we participate in.

Industry data tells us that consumer demand for prestige beauty and hair care, color cosmetics, skincare and healthy aging was very strong in the fourth quarter, growing at over 15% year-over-year as the blended number across these categories. This trend has accelerated into the first quarter. It’s often called the lipstick effect, which is to say that even when there is inflation and a degree of economic uncertainty, consumers will spend on affordable indulgences. You can see this reflected in the reported performance of L’Oréal, Ulta Beauty and LVMH as well as our retail partners. There is no doubt that the fundamentals of our business model creating and building differentiated consumer brands and marketing our proprietary molecules through leading global companies that are market leaders are synergistically on trend.

Clean, sustainable, science-backed beauty is what consumers are demanding and spending on. It’s a market driver that enables us to build and operate some of the best performing consumer brands in these categories. We are focused on winning in end markets, where our technology is clearly the best path to replacing chemistry from non-sustainable sources and where we can accomplish that with superior products at lower costs. We are executing our Lab-to-Market strategy. This is where we own the underlying science and technology, we develop and scale as the long-term producer, and we partner with leaders in their respective end markets, those who have the skills and resources to market and grow share through new product development and leverageable distribution reach.

Our partners are simply great at what they do and we are the best at developing and making clean, sustainable chemistry that enables them great market opportunities with their market access and reach. Slide 7, as for our consumer brands, we will continue to support this pillar of our strategy, while also making strategic adjustments, which I will get to in a few seconds. These brands are doing great with growing demand from the retailers we work with and solid direct-to-consumer performance. As mentioned, the categories we compete in have real tailwinds with continued strong growth in the first quarter. Here is what we have learned. And what we have heard from our retail partners like Sephora is that when we smartly invest in our direct-to-consumer brands, the impact of that is felt at the shelf level.

A strong B2C business supported with healthy marketing investment drives a strong retail sales performance. Consumers are not just walking into stores to buy brands they have no awareness of. The success of our key strategic consumer brands drives more demand of our ingredients. When we get this right, it’s an amazing and efficient flywheel for growth and market leadership. And we are getting better at it all the time. We are committed to continuing to deliver industry-leading growth for our consumer portfolio and we will moderate or accelerate this growth based on investment. We have great assets and significant and growing demand for our brands and the ingredients and products we produce. Our available ingredient capacity is sold out for 2023.

Slide 8, to fully leverage our assets to drive enterprise value requires a deeper focus on efficiency, lowering our costs and also simplifying our portfolio. We are narrowing our investments to where we have and can’t extend market leadership and sustainable predictable growth, which includes the gross margin increase I mentioned earlier. We are further focusing our consumer brand portfolio and expect to end with 5 to 6 brands that our market leaders represent over 90% of our current revenue and growth, use a lot of our ingredients and their formulations and have a clear path to profitability. This additional rationalization of non-core assets in our consumer portfolio is expected to generate around $150 million of cash proceeds this year. The brands that remain in our portfolio have a current market value of around $2 billion.

We are in active discussions with potential buyers for these non-core assets that we are in the process of selling. In parallel, we will reduce and eliminate all other spend through further divestments and deep prioritization of where we invest our limited dollars. Let me now move to the strategic transaction we signed with Givaudan in February. This transaction has an expected value of over $500 million. This includes $200 million of upfront cash, $150 million of earn-out to be paid over 3 years and an expected over $150 million in gross margin dollars from the production of the products during the first 10 years of our long-term production agreement. This does not include any value from future molecules we add to the partnership or for joint development that are part of the strategic partnership we have created with Givaudan for leading the beauty industry with clean sustainable chemistry produced from fermentation.

We expect that there will be less than $10 million revenue reduction on the basis of 2022’s numbers as we continue to benefit from the production of these ingredients through the long-term manufacturing agreement. This transaction is for two molecules, Squalane and Hemisqualane and one formulation that includes these two ingredients, clear screen, a sustainable solution for sun protection. This transaction represents more than 3x the value versus our other strategic molecule transactions and is consistent in structure with both the DSM Flavor & Fragrance transaction and the Ingredion partnership for Reb M and other products in the human nutrition market. We already have an excellent relationship with Givaudan, where we develop BisaboLife and their linguist breakthrough, Bio-Retinol from our technology and fermentation platform.

When you combine our biotechnology stack with Givaudan’s market insights and product development resources, the result is a powerhouse capability that is uniquely positioned for global growth and becoming a clear leader in clean sustainable chemistry into the global beauty industry. This transaction is great proof of the value of our molecules and the power of our technology platform to truly transform in markets to clean, sustainable chemistry that makes our planet healthy. As I previously communicated, the transaction is growing through the HSR waiting period and we expect that 30 to 45-day closing and funding. Having discussed the Givaudan transaction, let me step back and put this in the context of our go-to-market model. With Fidelity to our Fit to Win rigor, we covered the beauty and personal care categories with Givaudan.

There are three other verticals where our biofermentation leadership creates sustained long-term growth for our current ingredients portfolio, along with significant potential to expand through development of new ingredients. Flavor & Fragrance revenue streams will come from our DSM relationship. This is also performing extremely well with our blockbuster ingredients and their access to market. Food, beverage and nutrition opportunities will continue to emerge from Ingredion. They are doing an excellent job expanding the market for our Reb M. This ingredient is expected to be in the top three ingredients for revenue in 2023 and is growing at a faster rate than we have planned. And we are engaged with a potential strategic partnership for commercialization opportunities in the human health and pharmaceutical markets that will include squalene for vaccine adjuvants.

This is a competitive process and we are really excited about the participants and the potential outcome. Slide 10, we have been approached and are in active discussions regarding a manufacturing joint venture. We are exploring this opportunity with one of the world’s top four sugar producers, a mill about the size of Barra Bonita. The proposed JV structure would combine some of our biomanufacturing assets would we lease a significant amount of cash from our current production assets and the partner would fund the next biomanufacturing facility and downstream processing facilities. They have completed initial diligence and are impressed with what we have built at Barra Bonita and the quality of our teams and overall capability. Biomanufacturing consumes the most significant amount of our working capital and has a long cash cycle time.

We believe this type of partnership can be deeply strategic and significantly advance our market leadership in biomanufacturing with a capital-light approach. We are very pleased with this opportunity and we will update you on progress. In addition to fully funding our much needed next production facility, this opportunity can also help generate $50 million to $100 million in new cash to our balance sheet in the short-term and free up $50 million of current working capital that is used to support our ingredients business. If discussions continue as planned, then we expect this facility to be in construction by the end of this year and be the 100% farnesene dedicated biomanufacturing facility. The structure of this JV and the financial commitment from this partner is a great testimony to the best-in-class capability we have built for biofermentation and downstream biochemical processing.

We believe we have the best in the world and our partnerships continue to prove this. With the proceeds from the rationalization of non-core consumer brands and the opportunity to partner for manufacturing capacity, we see a clear path to self-sustaining cash generation. We now need 100% focus on efficiency and excellence across our operations. We intend to bring our operating cash use in 2023 to around $200 million run-rate by the end of 2023 and over €“ and from over $600 million in 2022. We are delivering this reduction in cash use through our Fit to Win agenda, portfolio rationalization of non-core assets along with ensuring we have the right size organization for supporting our lean and focused future. We are also expanding our gross margin this year through the manufacturing cost savings in the Fit to Win agenda, but also through the Givaudan earn-out and the underlying growth of our Flavors & Fragrance business and the impact this has on the DSM earn-out.

Taken together, we expect these actions will enable us to meet our objective of ending 2023 as a growing self-sufficient enterprise with a capacity to fund its growth. Let me close out by discussing our liquidity. Our liquidity has been extremely challenging. It has been a healthy forcing factor as we focused on what matters to ensure we invest with the growth and efficiency is and where we are the best. As the Givaudan proceeds come in and cost savings I detailed, we will be prepared to build enterprise value. To summarize, we are an investment model that combines proven and profitable biotechnology that sells to world leading companies with the ability to develop and market products that consumers love. I don’t know of any company health, beauty and wellness markets who have the Lab-to-Market capability and integration of Amyris and are delivering on what consumers are demanding today.

We have never had as much inbound interest in developing partnerships for new molecules and would retailers and brand owners wanting to work with us and needing access to our capability to deliver new chemistry and great products. We have a disciplined 2023 operating plan that is ambitious, but realistic, with visibility to self-sustaining operating cash flow by the end of this year. We will continue to streamline our portfolio leaning into the greatest opportunities while rightsizing our cost base. Last but certainly not least could not be more grateful to our teams who have delivered incredible performance without the full resources required to keep our customer supplied, when many companies fail to do this in 2022. They are scrappy, talented and passionate.

Let me now turn the call to Han.

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Han Kieftenbeld: Thank you, John. Please turn to Slide 11. Before I start my remarks regarding the quarter and full year, let me note that as a housekeeping matter, you will find that we are filing a prospectus supplement today to register the shares and warrants issued at the end of last year to force ventures in connection with our private placement. And tomorrow, we will be filing an S-3 amendment to reflect our change in status from a WKSI to a non-WKSI. WKSI is a well-known seasoned issuer. This conversion will maintain the effectiveness of our existing S-3 registration. Let me now proceed with discussing the quarter’s financials and I will close out with an outlook for €˜23 before handing the call back to John. As I said, we are on Slide 11.

Our fourth quarter was another strong quarter of core revenue growth and a new record in consumer growth. Core revenue, which includes consumer and technology access and excludes strategic transactions, increased 17% to $75.8 million when compared to the fourth quarter of last year. Core revenue included record consumer revenue of $52.8 million, which increased to 64% for the quarter and 92% for the full year. The fourth quarter, as John said, is the second quarter €“ the second consecutive quarter of record consumer revenue. Amyris’ consumer brands outperformed the sector, with prestige beauty industry growth of 15% as recently reported by the NPD Group. Their year-end report confirmed that every category in prestige beauty posted double-digit gains in €˜22 with skin, hair care and color cosmetics growing 12%, 22% and 18% respectively.

Amyris’ brands in these categories delivered about 5x industry growth and specifically in these categories, we delivered 44% in skin, 744% in hair, and 145% growth in color cosmetics. Technology access revenue of $23 million declined 30%. This was primarily due to a $30 million of joint venture revenue in the human health and food and beverage industries in Q4 of €˜21 that did not repeat in €˜22. Ingredion’s product revenue decreased 12% to $14 million, reflecting temporary supply constraint as the business transitioned from higher cost total manufacturing to lower cost internal sourcing from our new fermentation plant in Brazil. R&D collaboration revenue was down $2 million due to increased focus on the development of molecules for our own marketing and formulation.

Our state-of-the-art fermentation plant in Brazil is now operational with simultaneous production of multiple ingredients up and running allowing us to address the supply constraints we have experienced in the past and providing us a path to make progress on turning around the unfavorable margin economics we have to bear in the past due to sourcing product from third-party contract manufacturers. As it relates to revenue, despite macroeconomic concerns, we continue to experience strong demand from the market, both for our consumer and ingredients products. Growth in consumer revenue continues to be best-in-class across publicly traded beauty companies and is now two-third of our core revenue doubling since the end of €˜19. The creation of demand for Amyris clean beauty products is driven by four factors: first, more brands; secondly, new formulations that we have introduced; third, more stores endorsed; and finally, our international expansion most notably into Europe.

We are focusing on ensuring that we can meet this increased demand with the improvements we are making in our supply chain and the cost savings measures that will deliver lower unit cost and ultimately a positive bottom line. This brings me to the next slide on gross margin, Slide 13. Non-GAAP gross margin was $21.4 million or 28% of revenue compared to $22 million or 34% of revenue in Q4 2021. Excluding the impact of technology license revenue in both periods, non-GAAP gross margin increased by nearly $6 million and was 400 basis points higher as a percent of revenue than in the prior year. This was primarily due to consumer revenue growth and improved consumer margins. Key cost that reduced profitability of freight and logistic expense. We experienced significantly higher spending in the first three quarters of 2022 as compared to the prior year, particularly due to increased inbound airfreights and volume to support our growing consumer brand revenue as well as the importation of ingredients intermediate products.

We were pleased with our progress to reduce costs in these areas using the reduction in inbound air shipping from $12.7 million in Q3 to just $3.5 million in Q4. We expect most of these freight and logistic expenses to continue to decline due to the full commissioning of our Brazil plant and the transition to Brazilian source components and manufacturing for our largest consumer brands. The takeaway regarding gross margins is that we have made strategic investments in our manufacturing and supply chain footprint both on the consumer and ingredients side. We intend to take advantage of our scale with cost of goods sold and are revisiting all input cost as part of our Fit to Win actions. Next, I would like to touch on operating expense, Slide 14.

We are actively operating 10 brands today, following the recent launch of Stripes in October and 4U by Tia in December. To support brand development and top line growth, we have significant investments resulting in cash operating expenses that have grown to $148.3 million in the fourth quarter of 2022, an increase of $44.9 million versus the prior year quarter. The fourth quarter is historically seasonally our large revenue and was heavier spend quarter of the year. And the year-over-year growth was driven by increased headcount both organic and from acquisitions, consumer brands, freight and fulfillment activities and investments in consumer brands. Shipping and handling of our consumer goods increased by $5.5 million or 68% versus the same quarter last year due to continued growth in DTC orders that John also referenced.

We have slowed the pace of these investments in new brands to balance cash management and expense control. As part of our Fit to Win actions, we have recently negotiated a new parcel shipping agreement with a large global provider, which is expected to save us $15 million to $20 million over the 3-year life of the agreement. As a result of our elevated expense, our use of cash in the quarter was also elevated, principally due to continued investment in brand marketing of both the new and existing brands and also the deployment of cash for the construction of the Brazil fermentation plant that has been entirely self funded to-date. We started the quarter with a cash balance of $25 million and raised net about $147 million through a term loan and a pipe.

We used $157 million during the quarter on operational adjusted EBITDA offset and in part by favorable working capital leverage of $60 million driven by actions taken with suppliers to improve terms and also improve the cash conversion cycle. We very closely managed inventories resulting in a $17 million sequential decrease in inventory holdings. We closed out the quarter as a result with $71 million of cash. Slide 15. As you can see, we sequentially reduced cash use for operating and investing activities as the year progressed. Q4 of 2022 was down $102 million as compared to the first quarter of last year. We used a total of $526 million for operating activities during the year, which included all our cost of goods sold, operating expense and working capital needs.

We used a total of $124 million in 2022 for investing, of which $106 million was related to capital expenditures, mostly related to the construction of our Barra Bonita fermentation plant. We have worked extremely hard on reducing our use of cash by taking various steps. We did substantially reduce the cost involved within inbound air shipping from Q3 to Q4 by just over $9 million or 72%. And we also, as John mentioned, delayed our leadership structure effecting a $1.2 million initial restructuring charge. The combination of staff reductions we effected and workforce attrition is expected to deliver $9 million to $10 million in annualized savings in 2023. We clearly have more to do on our Fit-to-Win agenda and are committed to delivering quarter-by-quarter improvements in profitability and cash generation from operations.

We, therefore, expect this trend of reduced use of cash to continue in 2023. The year-end total cash balance of $71 million, combined with our Fit-to-Win actions, along with the $200 million of upfront cash we expect to receive from the Givaudan deal, along with the monetization of non-core assets and potential funding our core investors €“ investments from strategic partners are expected to provide us with the funding required to get to self-sufficiency. Before I address full year 2023 guidance, let me first summarize the 2 transactions that are in front of us. We expect to soon complete the acquisition of an additional 49% of our joint venture in Aprinnova. We have agreed to pay $49 billion to bring €“ $49 million to bring our ownership percentage in Aprinnova up to 99%.

This will close at the same time as the Givaudan transaction. We announced our agreement with Givaudan to license certain cosmetic ingredients in exchange for $200 million upfront and up to $150 million in earn-out payments. John already described this detail. We are excited to close this deal and it will bring in meaningful cash to start addressing our liquidity constraints. Let me now move to comment on the outlook for €˜23. Consumer revenue is expected to continue growing at the current rate, and ingredients revenues are expected to regain momentum based on increased access to intermediate products and production output from our Brazil fermentation plant. Total revenue is expected to grow 95% to 100% for full year 2023 compared to the full year 2022.

The strategic transaction with Givaudan is expected to generate $200 million of license revenue in the second quarter. Core revenue, which is the sum of consumer and technology access revenue is expected to follow approximate quarterly phasing of 15% of full year core revenue in Q1, 25% in Q2, 27% is expected in Q3, and 33% is expected in Q4. Consumer brands are expected to continue to deliver industry-leading growth in skin, hair, color cosmetics and baby care as well as healthy aging. We are prioritizing delivering on our cash use targets from sequential quarterly improvements in our cost base, both cost of goods sold and operating expense. Our Fit-to-Win program is expected to deliver over $150 million of annualized cash and cost improvements and working capital efficiencies.

Capital expenditure is estimated at $55 million, 50% lower than 2022. We are contemplating no M&A activities for the time being. With that, let me hand the call back to John. John?

John Melo: Han discussed the opportunities to reduce cost, improve efficiency and improve workflows across our company. We completed the necessary short-term funding and the strategic transaction is on track to close and fund in the next 30 days to 45 days. We are very focused on creating a path to self-sustaining profitability and cash generation. The priorities are clear. First, deliver the best growth of our public peers in beauty and synthetic biology. Secondly, only invest in what matters and is delivering on our financial and strategic agenda stop or sell the rest. And thirdly, a radical focus on efficiency and productivity. These priorities combined with our people and our assets are expected to deliver positive operating cash by the end of this year.

We have a clear path ahead for liquidity with the funding from Givaudan proceeds, from the sale of our non-strategic assets and the proceeds from the new partnerships we are engaged in. Based on our current plans and what we know today we have no current plans for a further equity offering. Let me turn to Andrea now, our operator, can you please open the line for Q&A?

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Q&A Session

Operator: And our first question will come from Colin Rusch of Oppenheimer. Please go ahead.

Colin Rusch: Thanks so much, guys, and appreciate all the detail here. I guess the first thing for me really is around understanding the maturity of the planning process here as well as the discussions for the divestitures. Just I want to understand if you’ve gotten all the way to a complete plan that the Board has approved around the strategic initiatives and how far into the discussions around the divestitures you are with potential buyers?

John Melo: Colin, I’ll start and then have Han share any other commentary he’d like. We’ve had discussions with the Board about our strategy and portfolio. We will actually be doing a formal review of that at a upcoming Board meeting that we have in the next couple of weeks. And then secondly, we have engaged buyers that are actively discussing the assets we’re in the process of selling right now. So that’s the status. I hope that helps. Han, I don’t know if you want to add anything else to that?

Han Kieftenbeld: No, I think that reflects the situation in terms of where we are.

Colin Rusch: That’s incredibly helpful. And then I guess in terms of the potential to move towards an asset-light model, it looks like that’s something that is repeatable. And I guess, are there multiple opportunities for that? If you’re able to get this first one done? Is it something that you would plan to repeat on an accelerated basis that potentially could just help drive revenue and limit some of the capital needs that the organization has?

John Melo: Colin, you’ve been around us for quite some time. And this has always been our objective and dream is to have a capital-light model for manufacturing. The overall maturity of manufacturing and highly engineered organisms and capability has been a significant challenge. That’s really the only reason we ended up doing it ourselves really as a matter of need. I think the fact that we’ve proven out now building two factories, first, Brotas and monetizing that and now Barra Bonita. And the operating performance and what people are observing about Barra Bonita, that’s actually opened up several conversations. We have at least two or three that have approached us about a potential partnership for manufacturing. So I expect it is repeatable.

It’s early days, so we’d like to get the first one done. Of the two or three that have approached us, we’ve engaged in more detail and a deeper process, obviously, with one, and we’re looking to advance for that one. But I think in light of what we’ve experienced, I see this now being a model that we could use to build more factories. But again, I’d like to get the first one done.

Colin Rusch: Fantastic. Super helpful. I’ll take the rest of it offline. Thanks so much, guys.

John Melo: Thanks, Colin.

Operator: The next question comes from Rachel Vatnsdal of JPMorgan. Please go ahead.

Rachel Vatnsdal: Perfect. Hi, guys. Thanks for taking the question. I guess just first up here on the strategic transaction. You previously noted that was going to be roughly $350 million of upfront cash. Now you’re kind of pointing us towards the $200 million to pencil in for 2Q. So if you just talk about, is that all that you’re assuming for the strategic transaction throughout 2023? And then maybe just stepping back, can you walk us through what the negotiations are looking like there? Has this really changed your confidence in terms of ability to get a higher dollar value on strategic transactions going forward, just given you’ve seen the step in so much? And then what’s left from a negotiation standpoint for the specific transaction as well, just given it’s still been signed here? So is that $200 million set in stone or could it go down even further?

John Melo: Thanks, Rachel, and thank you for being on the call. First, the agreement is signed. There is actually no ongoing negotiation. And so what we’ve shared is what is currently contracted. We have started at $350 million, and by started, I mean, I think somewhere around the third quarter, we have talked about $350 million in upfront, and we ended up with that $350 million really being divided in $200 million upfront and $150 million in earnouts. And that really was based on negotiating to get to an outcome that we both could feel comfortable with. And a lot of it really in the, I’d call it, implosion of the macro environment, both for the buyer and for us and their Board struggling with the fact that the macro has changed so much and where we were in valuation at the beginning versus where we were at the end of the year.

So that’s what evolved and how value changed over time. As it relates to molecules, I mean, this is still 3x better than the value of any other molecule deal we’ve done. So I actually say the value per molecule has gone up considerably. And remember, the last deal we did was less than 2 years ago. So in just less than 2 years for some blockbuster molecules, right, I mean it was patchouli, it was vanilla. It’s molecules where we’re the largest producers in the world of these end markets. And in a deal less than 2 years after that, we’ve got 3x the value per molecule. So I don’t €“ yes, I would have liked to have gotten more. I think it’s a great deal for both parties. I think we had a fair process, and we had several competitors involved that were interested in also buying the business.

So it wasn’t like we were exposed to a single buyer. And in our best view, working with our Board in light of where the macro turned, we saw this as really getting the best value for the molecules and the time that we’re in.

Han Kieftenbeld: Let me add a quick comment perhaps if I may, Rachel, just to underline John’s point about where we are in the process. The agreement is signed. There is no further negotiation that need to take place. We have previously actually publicized, we just for everybody’s benefit on the call here that we are in HSR review. That process needs to run its course. As John said in his prepared remarks, no later than 30 days to 45 days, and then it will close and money will be coming forward. So I just wanted to clarify that.

Rachel Vatnsdal: No, that’s helpful. And then maybe one here on 2023 guidance. So you pointed to that 95% to 100% revenue growth for 2023, but that includes that strategic transaction. If we take out that strategic transaction since everyone was really expecting that to come in 4Q of €˜22, then your numbers on the core business come in a $200 million dollars lighter than I think the Street was expecting. So can you just kind of walk us through what are you expecting for growth between consumer versus ingredients revenue? And then are you still really embedding that $600 million €“ the $60 million, excuse me, licensing revenue related to DSM payouts in 2023 as well?

John Melo: Yes, look, I’ll start and then Han can jump in. I think we’ve been explicit about the consumer part, right? Consumer running at about the current level of growth. And our real objective is not a single number growth target as much as it is remaining the leading growth from the brands that we have for the respective categories we participate in. So no change there. I think in ingredients, we’re sold out. So it’s not like we can add more ingredients. And there is a significant change in the earn-out and that now we have another $35 million or so potential coming in for the Givaudan earn-out. And I guess our approach in guiding the way we did was actually not about anything to do with our underlying business. It’s actually a simple message.

Until we get into a routine of consistently beating and raising our guidance, we’re going to be just ultra prudent in what we say because we don’t like being in situations where we’re not exceeding expectations. So that’s what’s behind what you’ve heard today regarding our guidance, and we’re committed to it. Han, do you want to add anything to that?

Han Kieftenbeld: No, I think that’s right. I think we said, look, the consumer trend as we’ve seen it in the market, and you can also see where we’ve been in the last few quarters as well as for the full year, will continue. Of course, there is an element of we’re keying off a larger base. If you look at brands like Biossance that obviously have a significant critical mass, but we expect strong well above market kind of leading growth but keying off a bigger base. So that certainly plays into it, too. And then as John said, on the ingredients side, we obviously have the three components, products, we’re pretty much basically sold out on capacity there. We have R&D collaboration and then the milestone aspect that will be in effect for both the DSM piece as well as the €“ as well as now the Givaudan deal coming into play.

Rachel Vatnsdal: Helpful. Maybe one last one on 2023 guidance if I could just squeeze it in here quickly. You talked a lot about potential sources of funding for the year, but can you just walk us through each of the puts and takes in terms of what are your outflows for the year? You have two of these, at least two of these short-term bridge loans. You also have paying out for Aprinnova cash burn. So net-net, how should we be thinking about these cash outflows and what’s your total cash burn guidance for the year? Thanks.

Han Kieftenbeld: Yes, sure. So first and foremost, if you look at €“ we obviously had, as I made known in my remarks, significant demand for cash as we were building out Barra Bonita, that’s going to be obviously a very different place, we’re going to be in €˜23. Hence, my guidance on CapEx being significantly reduced, that’s one. We had M&A activity in 2022. We made known that we do not plan any M&A activity in €˜23. So that’s a number that we expect to go to zero from that vantage point. And then, of course, the whole Fit-to-Win agenda plays into it. We’ve confirmed again that it’s $150 million. I gave a few examples of things we’re doing to underpin progress in a number of areas particularly as well as the supply chain, the parcel shipping example I gave, expect $15 million to $20 million savings over the next 3 years of that agreement.

So there is a lot of things. Those are just samples or examples, so to speak, but there is a lot that’s going on that will bring down our cost of goods sold as well as operating expense for that matter, so both on the operating side as well as the investing side. And then on the outflow, you mentioned the €“ of course, the upfront consideration from Givaudan coming in. We do indeed need to pay the Aprinnova shareholding that we took. And other than that, we €“ from a debt reduction perspective, we have one payment to make, but the rest is all €˜24 or later.

Operator: The next question comes from Korinne Wolfmeyer of Piper Sandler. Please go ahead.

Korinne Wolfmeyer: Hey, good afternoon. And thanks for taking the question. So I’d like to first dive a little bit further into some of these brand divestitures that you noted. I think in the past, you’ve talked about longer-term targeting maybe like 10 to 12 brands in the portfolio. Is that still like a longer-term target you have in play or are you kind of readjusting your longer-term viewpoint now?

John Melo: I really couldn’t talk about a number of brands and where we end up, Korinne. So I would say it’s more about clear market spaces and our strategy for winning in those spaces, right? So it’s more about the categories we like and it’s more about the consumer audiences we can target in those categories. And then in those categories, we’re really focused on brands that consume or have formulations that consume a lot of our ingredients. So that strategy and the ability to build off of that will continue. We’re resetting ourselves to five or six for now just based on where we are with our balance sheet and the maturity and opportunity we see around those brands. So said differently, investing in 12 versus six, I think we can get more out of the five or six versus spreading the investment over all of them.

But I wouldn’t conclude that to determine a final number. We’re not operating in that way, which we’re more looking at focus on what we have, make sure it performs at the level that we expect it to perform and then add as makes sense based on, again, a strategy, a clear strategy that we want to stay consistent with for what operates in the portfolio.

Korinne Wolfmeyer: Very helpful. Thank you. And then can you just talk a little bit about the phasing of margin expansion, both from the gross margin line and EBITDA that we should expect over the course of the year? Like will it be more of a gradual ramp quarter-to-quarter, would be more back half weighted versus front half? Just any color on the phasing of some of these Fit-to-Win benefits coming through would be helpful? Thank you.

Han Kieftenbeld: Yes, I will take that, John.

John Melo: I’ll pass that to maybe Eduardo talking about the activity he’s doing and then Han framing how that falls through to the financials. Does that make sense, guys?

Eduardo Alvarez: Sure. Let me €“ Korinne, let me start with the improvements we have already done. I think we have already talked about the logistics side those were improvements that were already done in Q4, Q1 around the inbound logistics and optimizing our costs there. I think we have mentioned that John mentioned in his remarks that we expect 60% of our consumer production to be done at our lower cost facility by the third quarter. So, the cost of goods sold improvements, both at Barra Bonita will be spread out in kind of in the throughout the year as we continue to ramp, but the costs for the consumer production will be 80% to 90% would be towards the second half of the year for the consumer. So, I hope that gives you a little bit of a sense. The logistics are already pretty much well captured and the production ones will be facing as we discussed.

Han Kieftenbeld: Yes. Two comments I would make is activities will continue to be deployed and improvements to the cost base, whether its cost of goods sold, or operating expense, will continue as the year progresses. So, to your question, Korinne, I will expect, and what we anticipated right now, in our model is really a progression on a quarter-by-quarter basis. The other way, I would say, as Eduardo pointed out, some of these actions have taken effect. However, of course, we are also holding inventory. And before they actually find their way to the P&L, while through inventory into the P&L will also be a bit of a time lapse. So, those two things, but for whatever reason as the year progresses, you should continue to see margin improvement.

Korinne Wolfmeyer: Very helpful. Thank you for the color.

Operator: The next question comes from Steven Mah of Cowen and Co. Please go ahead.

Steven Mah: Great. Thanks for the questions. Question on the HSR review, I am not a lawyer, but I thought that HSR, could proceed with memorandum of understanding or letter of intent, which I believe was in late December. Has regulators been pushing back and requesting additional information and is that what resetting the clock to another 30 days to 45 days?

John Melo: Steven, two things, by the way, thank you for being on the call. First of all, we never actually made public exactly what the filing date was of HSR, so important clarification. And then secondly, we have had calls with the regulators, they have gone, as expected, we haven’t perceived or we have gotten any feedback to lead €“ leave us with any concern. I think my third point is to say the timeline we have given is one that gives us a lot of confidence that we could meet or exceed. Again, I will go back to my theme a few minutes ago. I want to get us consistently beating and raising what we say. And that means milestones that we put out there. So, don’t take the 30 days to 45 days to be a direct correlation to any specific date of filing or any specific expectation we have about something we are going to hear back.

Steven Mah: Okay. That’s helpful. And then on the additional portfolio rationalization, I know you haven’t been disclosing what the molecules are. Could you give us a sense of if HSR reviews for these molecules, you are contemplating, is that going to be coming into play? Do you think or they have a smaller nature or maybe just any color if possible?

John Melo: That’s a great question. I think on the brands, on the consumer side, we do not expect them to trigger an HSR review just based on their size. I also don’t think the molecule we are in process of in the partnership in pharma triggers HSR review. And the only question is really the manufacturing JV and whether that would trigger an HSR review. And that’s one that potentially would, so I hope that helps give you a sense of scale between them.

Han Kieftenbeld: Yes. There is actually two state for your benefit. There is two kind of but there is more but to dumb it down. There is two like determining factors in determining right. One is kind of is the nature of the molecule, the ingredient or the business or the competitive nature in terms of the other party. We are dealing with one. Two is, actually there is a threshold around this and typically around $100 million so and that’s, for example, why you see the trigger around the given transaction. It’s actually not so much, there is the real competition here, but it’s also a size threshold that triggers down in HSR review.

Steven Mah: Okay, understood. Thanks for the color. And then real quick on and I know John, you talked about the headcount reduction given macro and current macro environment and appreciate the focus on cash preservation. But is the staff sufficient to maintain growth? especially Q4 consumer revenue seem to be off the mark, a bit. Just wanted to get your thoughts on that. Thank you.

John Melo: Sure, Steven, a couple of things right, first hitting your last point Q4 consumer revenue off the mark, I can tell you that the big brands performed very well, and really deliver what we were expecting a lot of what’s off the mark is driven by two things. First, we actually slowed down the investment in the new brands and slow down the shift to trade for some of the new brands based on our working capital tightness. So, it was purely liquidity driven, and the liquidity effect the two things marketing investment in smaller brands and shift to trade timing. And in launch phasing of those brands, so had nothing to do with the big brands. I think when it comes to people and capability. Look, a lot of us have been in business for a long time.

And most businesses over time, we just end up adding stuff and adding processes and people. And whenever the environment changes, it is rare that you can’t go back and look at maybe what we would have done it differently, maybe we would have had less, maybe we would have actually wired it differently. And that’s what we are finding, we started with the executive team, the executive team in total is reduced by 60%. And actual people leaving the company is about 30% of my direct reports. And I started with the executive team, because we wanted to set a tone organizationally for how we really want to simplify the organization gets to faster decision making, and make sure we have got the right skills to execute on the business we have. So, I am not necessarily worried about in total staffing the right people, I am sorry, the right number of people, I am worried because across our teams, it’s not imbalanced, we have some teams that probably have more than they should and other teams that don’t have the critical skills to execute.

And that is why it takes €“ it is taking us time to really work through that in detail. The last point I would make is a quite a bit of what we are seeing a change going ahead as far as headcount reduction, has to do with brands were de-emphasizing or changes to our portfolio. So, I hope that helps.

Steven Mah: Yes. That’s really helpful. Appreciate the color. Thank you.

Operator: The next question comes from Sameer Joshi of H.C. Wainwright. Please go ahead.

Sameer Joshi: Yes. Good afternoon, everyone. Thanks for taking my questions. This one to confirm the Brazil facility, I know it is up and running, but is it running at full capacity right now?

John Melo: I will Eduardo talk to that. I mean the only thing I would just throw up there in before Eduardo starts. I think we have made it clear publicly that we focused on getting the three big lines up and running, which by the way, are equivalent to the Brotas facility from a capacity perspective. And it’s almost like as I am sure, Eduardo will cover, like three separate factories and the way it’s configured, the smaller lines, which were actually not very material volume, are not up and running it. And that was really driven by the liquidity, we decided to not invest in getting those two lines, all the hardware is in place. It’s more about getting all the lines connected and making sure the critical controls are in place. But I just wanted to frame that and then let Eduardo actually give you detail beneath that.

Eduardo Alvarez: Yes. Sameer, just to add some color to what John said, we have all three lines, and large lines, fully operational, just to remind everyone that each line has two tanks. So, it toggles so it’s almost like three separate factories, each with twice the volume capacity 200 thousand liters for each one of those tanks, so just to give you that. One thing I would like to say is the last of the three lines was being commissioned in the fourth quarter, I think we commented that we have some capacity constraints that was really dealing with the commissioning of that last line. As we were ramping up production, we did complete four different products during the fourth quarter in those three lines. So, we proved that we could really operate multiple products at the same time across all three lines, and even turn around one of these lines for a fourth product at the end of the quarter.

So, the functionality of the plant was really well demonstrated by the fourth quarter, albeit as we said and admittedly, we had €“ we were constrained as we weren’t commissioning the last part of production.

Sameer Joshi: Got it. Thanks for that. As far as the divestiture of the partnership for the human health ingredient or molecule, is there €“ should we expect that to be a 2023 event, or at least an announcement regarding that?

John Melo: Yes. We are expecting that to be a 2023 event.

Sameer Joshi: Okay. And then just the last one, as a result of the transaction with Givaudan, does it impact any of your existing coal revenues, or profitability there off?

John Melo: Yes, I think I had mentioned earlier that the totality of the Givaudan transaction would have impacted 2022 revenue by about $10 million. And so that was on 2022 basis, with the growth in that business, I would expect on a like-for-like basis, that growth actually makes up most of the impact in revenue during 2022. So, it would be almost neutral to what we saw in 2022 from that business, based on the growth rate. So, it’s not a material impact to our revenue at all, post transaction.

Sameer Joshi: Thanks for clarifying that and good luck.

John Melo: It’s actually I should say Sameer, one thing I didn’t pick up on all that, is when you actually include the revenue from the earnout, it becomes accretive to revenue post-transaction. But it is earn-out which is 3 years, I would expect poster it out, based on the annual growth rate, the business will be about double the size of the time, we sold it to them of the 2022 revenue, just to give you a sense of magnitude of how that businesses are operating today.

Sameer Joshi: Yes. And I think you also mentioned the rest of the 150 will come from sort of gross margin dollars as a result of manufacturing this.

John Melo: Yes. That’s above the 350. So, the 350 to 500 delta is really based on the first 10 years of the long-term production agreement gross margin contribution.

Sameer Joshi: Got it. Thanks once again.

Operator: Our last question will come from Laurence Alexander of Jefferies. Please go ahead.

Laurence Alexander: Good afternoon, John. Hope all is well. Just have a couple of questions. Hopefully, I guess first for Han. Can you give us the total backlog of milestones and earn-outs? And what you think you expect to drop through rate is from that backlog to your EBITDA over say the next 5 years to 10 years?

Han Kieftenbeld: Alright. Well, when you say backlog, let me explain it and see what I am actually answering your question. So, we just completed. So, basically now, right now we have three agreements in hand, right. We have the flavor and fragrance agreement with DSM. We have the Reb M agreement with Ingredion. And we have the coming up cosmetic activists with Givaudan. We are just coming out of year one of DSM. We have recognized that revenue in our books, and we have 2 more years to go from out of the 3 years. So, there is 2 more years to come from a DSM perspective on the F&F portfolio. On the Ingredion side, with Reb M there is two things. One is we are sharing in a royalty stream. We have with that in 2022 and continued to have a share in call it a value share or royalty stream as part of the revenue that they are having with their end customers.

That’s one aspect. The other aspect is we have certain milestone payments related to certain criteria being met, which is a combination of unit cost and revenue. And so once those are met, certain amounts become payable over time. And there is about €“ so, if you look at that, in terms of what’s to go on that it’s about $35 million in all over the €“ again, think about it as over a 2-year period. So, that aspect and then Givaudan, John explained it I think as part of his remarks that beyond the $200 million upfront, there is $150 million milestones spread over the 3 years, which is relatively equally spread if production and supply go to plan. So, that’s kind of how you need to think about that aspect. So, these are the three that should be on your mind.

Laurence Alexander: Okay. Great. And then

John Melo: The only thing I would add on is €“ the only thing I would add is that the sum of those three parts are about $335 million, $340 million over the next 3 years in expected earn-out payments. And based on our track record with DSM and what we see and how the milestones or earn-outs are actually structured, I would expect us to have a very high probability of attaining the majority of that.

Laurence Alexander: Okay. Alright. No, that’s very helpful. And John, this is not your first down-cycle. And so I am curious about your thinking about two areas. One, why the Fit-to-Win target didn’t change in response to the changing macro conditions? And secondly, how you are protecting your R&D position in this what’s a fairly severe simplification initiative?

John Melo: Both great questions. So, let me first deal with the R&D, that’s probably the most straightforward one. You have been with me, I think for three major cycles at least. And in all of them, we protected the R&D investment and I can tell you that as of today, we are committed to in protecting the R&D investment, so no significant change to the R&D investment. I think like in the Fit-to-Win, we grabbed quite a bit of what was really the underlying operational opportunities that we had. I think there is incremental, right. So, we didn’t change the $150 million, but there is incremental and it’s really coming out of the portfolio review and some of the assets that we will be divesting the non-core assets. But we did not add that.

So, I wanted to avoid potential double counting. I wanted to stay very clean. We have $150 million that is part of Fit-to-Win, no change. And that’s part and that $150 million is still in place because it relates to most of the core assets that we are retaining going forward. There is more to be had, but that more will come from the impact of divestments that we are in the process of executing. So, I hope that helps, Laurence, in how we are thinking about it.

Laurence Alexander: Okay. Great. And then just the last one. I appreciate you don’t want to get too far over your skis on sort of things that were kind of hard to time. But can you give us a sense for what the current backlog of potential other molecule licensing deals are in discussions, what the flavor is? And in particular, I guess I am just curious, is Givaudan kind of a unique white whale or do you €“ are you seeing sort of a shift in the industrial community where companies are coming to you with more significant propositions than you have seen before? Can you just give a sense for what’s €“ not in terms of timing, but just kind of what the tenor is and the range of discussions?

John Melo: Yes. No, and you know the market and value chain extremely well, Laurence. So, I €“ what I would tell you is there is a significant shift, and it is €“ and who the people are that are coming to us, right. Historically, it would be the DSMs, it would be the suppliers to the end markets that were interested in accessing new sources of chemistry. We still see some of those. But if I look at the inbound inquiries right now, it’s probably a third from players you would know well that are looking for potentially new intermediate chemistry to replace their current feedstock for specialty and high-value chemistry, okay. That’s €“ and you probably could imagine who those players are. But the other two-thirds is where the surprise is.

The other two-thirds are major consumer packaged goods companies, consumer companies that actually have made significant commitments to their sustainability agenda. Some of these companies are committing 90% or more of their chemistry to be from sustainable sources by 2030. And what’s clear around these commitments is they are very committed to them, but they are desperately sourcing how to solve that, how to meet those obligations. And we are very engaged with a handful of those companies and actually looking at their targets, assessing the feasibility of bio being a path. And in all cases that we are engaged in, they have determined we are their best path to solving it. And now it’s just actively negotiating how do we best do that, how do we manage through the IP challenges, how do we manage to the future supply opportunities, what scale are they, and how do we justify dedicating part of our R&D resource to solve their issues.

My guess is there is a few of them that we will definitely be doubling down on and becoming key suppliers to that mission, the idea that they need to replace their base to sustainable chemistry from their current sources. I hope that helps your question.

Laurence Alexander: Very helpful. Okay. Thank you very much. Thanks.

John Melo: Thanks Laurence.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to John Melo for any closing remarks.

John Melo: Very good. Thanks everyone for joining us today. Andrea, thank you for facilitating this. I appreciate it very much. I appreciate your continued interest. I appreciate especially our long-term shareholders who have been great and sustaining with us for a long time. And I really appreciate our employee base, who have come through an amazing period. And I am so glad to be on the other side and just starting to focus on getting our balance sheet back in order, starting to invest in the things that really matter and really cleaning up our house to ensure we really deliver robust, efficient growth that continues to lead our sector and the consumer markets we participate in. With that, good evening to everybody and thank you for your patience.

Operator: The conference has now concluded. Thank you for attending today’s presentation and you may now disconnect.