Danimer Scientific, Inc. (NYSE:DNMR) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Greetings. Welcome to the Danimer Scientific 2023 First Quarter Earnings Call. [Operator Instructions]. This call is being recorded on Wednesday, May 10 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, and good afternoon to everyone, and thank you for joining us today for Danimer Scientific’s 2023 First 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. 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 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 an additional measure of performance 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 of Danimer Scientific.

Stephen Croskrey: Thank you, James. Good afternoon, and thank you for joining us to talk about our progress thus far in 2023. When we reported our 2022 year-end results, we were just a few days shy of completing our first quarter, and as you might anticipate, our quarterly results are in line with our expectations. They show the pressure of a timing shift in top line revenue, which impacted gross profitability, but that temporary situation is now behind us. What’s also clear in the first quarter numbers and is expected to remain clear in future quarters is the progress we’ve made in controlling our operating costs. We continue to expect with the impact of new commercial opportunities to accelerate our growth through the remainder of the year.

We are gathering momentum in the business, harnessing our research and development to drive new solutions into the market and growing in confidence about the path in front of us. We have gained additional and specific visibility into the levels of demand associated with a discrete set of near-term commercial opportunities. If captured in full, this business would require the lion’s share of our remaining production capacity. We have a solid strategic and competitive position to secure those programs with uniquely capable material and ready capacity. We are increasingly confident that we will finish 2023 on a strong pace. I’d like to walk through a few recent operational and strategic highlights that should demonstrate why we feel that way. I’ll start by reviewing some important advances in our customer and product portfolio.

While it is premature to make any customer or program announcements, we are energized about the near-term opportunities that are materializing in the quick service restaurant channel were straws and for cutlery, especially but also in a cup category with our coating materials. As we speak, our product is in a multi-store test for straws with a new major QSR chain with thousands of locations in the United States. We anticipate a successful test will lead to a wider rollout in the third quarter. Additionally, we are in the late stages of an opportunity with another major QSR chain for straws, also numbering in the thousands of locations in the United States alone. Further, we are excited to be moving quickly forward with our biodegradable cutlery resin.

As we announced last quarter, we were pleased to capture in coordination with HAVI, cutlery for an important snack line with Zespri. We made the first shipments to execute that program at the end of the first quarter and believe that a fully biodegradable solution for this high visibility application will prove to be brand-enhancing. We are also pursuing a large and high priority opportunity in the cutlery market with a major QSR that we expect to begin shipping to in early 2024. We believe that the unique environmental benefits of our PHA-based resins are becoming increasingly visible, and we were honored to be invited to ring the closing bell of the New York Stock Exchange on April 17 to help recognize the importance of Earth Day. In conjunction with that event, we announced that we have successfully developed a partnership with TotalEnergies Corbion, a new engineered resin for the manufacturer of single-use coffee pods.

That material, which is used in an injection molding process, has been in development for a little over 2 years. While any new resin we develop benefits from decades of research into various blends, this is a challenging material to formulate given the combination of requirements for heat tolerance, barrier properties and stringent biodegradability standards required within the EU market for this product. Importantly, we have experienced in this category and currently have a PLA-based material used for the manufacture of coffee pods for a U.S. brand. We are pleased to have received certification for this new material from TUV Austria for Home Compost and are currently in testing with multiple potential customers. While somewhat obvious, this means that our material biograde safely and quickly in-home as well as industrial composting and can eliminate a tremendous amount of waste from the environment.

While the EU legislation is still a bit into the future, we expect that demand for our material may be strong even in advance of the legislations in action as major suppliers seek to preposition themselves to avoid potential disruption to their business. I’d like to turn to cup coating materials, which provide a barrier to contain liquids. In the aggregate, this is a significant application for single-use plastics. Currently, paper cups achieved functionality with a petroleum plastic liner, making them essentially nonrecyclable. Our PHA-based biodegradable coating materials can change that as an important customer of ours is demonstrating. We were very excited to see WinCup launch a new paper cup product with a Nodax-based coating under its distinctive Phade brand.

Phade is an increasingly meaningful and visible brand in an otherwise commodity-oriented set of categories. We think that is a powerful statement to the market, and we’re proud to provide the unique PHA-based resins that enable their products. While we share a vision for the future with many customers, we think what WinCup doing in the market speaks exceptionally well to that mission. As we look toward the second half of the year, we’re confident that our Kentucky manufacturing plant is capable of operating at a high level. It has consistently performed at or above all requested throughput targets. Further, we are working toward improved product quality and process efficiency, all of which should benefit our margins. In closing, I’ll just note that we have no information to provide regarding the Department of Energy’s process.

We will communicate any developments as soon as the DOE informs us of our status. Now I’ll turn the call over to Mike Hajost for a discussion of our first quarter results.

Michael 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. First quarter revenues were $11.9 million as compared to $14.7 million in the same quarter of 2022. We experienced a modest decline in both product and service revenue. First quarter product revenue was $2.1 million lower versus prior year, driven largely by an unfavorable shift in the timing of PHA-based shipments to a large customer relative to the first quarter of 2022. This was partially offset by modest growth in the PLA-based product sales in the quarter. I’d also note that the PLA business now shows normalized comparisons as disruption to that business from the war in the Ukraine impacted both this year’s and last year’s quarter.

First quarter services revenue continues to be lower, reflecting, as was the case in the fourth quarter that certain customers that have completed funded R&D projects are now moving to commercialization. We reported a first quarter 2023 gross loss of $6.3 million compared to a gross loss of $1.3 million in the first quarter of 2022. An increase of $3.4 million in noncash depreciation and amortization expenses was by far the largest driver. After adjusting for depreciation, stock-based compensation and certain nonrecurring items, we reported an adjusted gross loss of $1 million as compared to adjusted gross profit of $2 million in the first quarter of 2022. On top of an increase in fixed production costs associated with greater capacity in Kentucky, we also had unfavorable leverage of those fixed costs due to decreased production volume.

We expect gross margin to recover nicely with growing volume. R&D and SG&A expenses, excluding depreciation and amortization, stock-based compensation and onetime items totaled $7.6 million in the first quarter compared to $12.3 million in the prior year quarter. This improvement was a result of a broad cost control program that yields savings in many areas of the business. Adjusted EBITDA loss for the first quarter improved to $8.9 million compared to an adjusted EBITDA loss of $10.6 million in the first quarter of 2022. Despite the revenue timing impact, and fall off in adjusted gross margin, the positive operating cost factors permitted adjusted EBITDA to improve by $1.7 million year-over-year. Adjusted EBITDA excludes stock comp, other income, and other add-backs as reconciled in the appendix.

Including $12 million of restricted cash that has since become unrestricted, effective liquidity at the end of the first quarter was $114 million as compared to $62.8 million at the end of 2022. Capital expenditures in the first quarter were $16.4 million, mainly related to pre-existing obligations for the greenfield facility. This should represent the highest budgeted quarterly spend for CapEx this year. We continue to guide to full year CapEx spend in the range of $26 million to $31 million. We ended the first quarter with a total debt balance of $380 million. This now reflects the term loan we closed on during the first quarter. I’ll remind you that this includes about $46 million of new market tax credit loans, which we expect will be forgiven starting in 2026.

As we noted on our year-end call, the key to our performance in 2023 will be the magnitude and timing of the customer demand ramp-up for PHA-based resins and our increased utilization to serve that demand from our Kentucky operations. Our first quarter was fully consistent with our expectations and therefore has had no impact on our full year guidance. We are maintaining our expectation for adjusted EBITDA in the range of negative $31 million to negative $23 million in 2023, an improvement in profitability of between $14 million to $22 million over the negative $45 million we reported for 2022. I’ll now hand the call back to Steve for his closing remarks.

Stephen Croskrey: Thank you, Mike, and to everyone for joining us. Even in the short time since our last call, we’ve been able to make progress across the board. We feel really good about a few recent developments in particular, identification of some specific high-volume sales opportunities, which we expect to be decided very soon, ongoing process engineering work in Kentucky, increasing discipline on our expense line and progress on research and development is specific to a number of significant market opportunities. The momentum in our business is tangible. Major customer opportunities are now very close at hand, and we are very excited about the future we are creating. Thank you to everyone listening to today’s call for your attention and your support. And operator, we’re now ready to take questions.

Q&A Session

Operator: [Operator Instructions]. And first question comes from Laurence Alexander with Jefferies.

Operator: And next question, we have Thomas Boyes with TD Cowen.

Operator: Next question, we have Jon Tanwanteng with CJS Securities.

Operator: Next question, we have Charles Neivert with Piper Sandler.

Operator: Next question, we have Laurence Alexander with Jefferies.

Operator: [Operator Instructions]. Next question, we have Thomas Boyes with TD Cowen.

Operator: Next question, we have Jon Tanwanteng with CJS Securities.

Operator: There are no further questions at this time. Steve, do you have any closing remarks?

Stephen Croskrey: Yes. Thanks, Brian. I’d like to thank everyone on the call with us again for your time and attention today. We’re excited about the increased awareness of PHA-based materials among consumers and customers, pleased to have major opportunities for growth right in front of us and grateful for the ongoing support and dedication and shared vision of our investors, employees, partners, teammates and customers. We’ll be looking forward to speaking to you about our continued progress again next quarter.

Operator: This concludes your conference call for today. Thank you for participating and ask that you please disconnect your lines.