Danimer Scientific Inc

NYSE:DNMR

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Greetings. Welcome to the Danimer Scientific 2024 Second Quarter Earnings Call. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. This call is being recorded on Thursday, August 8, 2024. I would now like to turn the presentation over to Mr. [ Blake Shambly], the company's Investor Relations representative.

[Unknown Executive]

Thank you, operator. Good afternoon, everyone, and thank you for joining us today for Danimer Scientifics 2024 Second Quarter Earnings Call.

Leading the call today are Steve Croskrey, Chief Executive Officer; and Mike Hajost, Chief Financial Officer.

I'd like to note the slide deck that accompanies today's discussion, which is available on the Investor Relations section of our website danimerscientific.com. As we begin, I'll call your attention to the company's safe harbor language, which is published in our SEC filings and on Slide 2 of the presentation I just referenced.

On today's call, we may discuss forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Forward-looking statements, 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, Chief Executive Officer of Danimer Scientific.

[Stephen Croskrey, executive]

Good afternoon, and thank you for joining us. Before I get into the second quarter results, I'd like to step back and take a moment to discuss what we originally set out to do many years ago, where we are today and how we see our business shaping up in the near future.

Our mission began 20 years ago to provide sustainable biodegradable plastic solutions to combat petroleum-based plastic waste that is plaguing our planet. We began by purchasing polylactic acid, or PLA, and functionalizing it for use in various difficult applications, such as liners for coffee cups, which is how we developed our core competencies around formulating biopolymers and developing end-use applications.

We always knew PLA had limitations, so we expanded our search into other solutions, ultimately landing at what we believe to be the holy grail of biopolymers PHA. We purchased the PHA technology from [ Procter & Gamble ] and quickly discovered that the performance of their organism was not sufficient to reach commercial scale. We spent the next 4 years optimizing for a more scalable functional polymer based on a different bacteria.

We built our original PHA pilot plant in 2014 in [ Bainbridge, ] purchased a used fermentation plant in Kentucky in 2018 and successfully sold our first commercial load of PHA resin for [indiscernible] draws to [ Win cup ] in March of 2020. However, several days later, our progress was disrupted by the implementation of shutdown orders from governmental agencies around the world to combat the COVID pandemic.

The COVID shutdown hit us particularly hard because we [indiscernible] key research and development projects in process, requiring in-person meetings and testing, some of which never recovered to reach commercialization. Additionally, we were burdened with the high fixed cost of our production facility without the ability to produce and ship product. This led to the decision to seek additional capital and take Danimer Scientific public in December of 2020.

Now nearly 4 years later, after navigating various challenges, including a longer epidemic than expected, the conflict in Ukraine, hyperinflation, short reports and various lawsuits, we are still here, not unscathed, but intact.

Today we stand as the only producer of PHA at commercial scale with independently validated biodegradable resins capable of producing a variety of single-use plastic products. We have produced more PHA than has ever been produced by anyone else in the world on a combined basis and by large multiples. And we have conducted commercial trials and research-based sampling with hundreds of potential customers covering a vast array of products from coffee pods to snack packaging to [ aqueous ] coatings. Every day, we learn more and our lead over our competitors increases.

We are now in the process of beginning a significant scale-up of our business. We have passed many tests achieved all required certifications and have 4-plus years of real-world experience and feedback from shipment of our residents to customers, including Starbucks and [ Wind cup ] for their [indiscernible].

Based on existing customer demand and new awards, including the decision of a very large QSR to begin using color we made with our PHA, we are confident in achieving full capacity utilization of our Kentucky facility over the next several quarters and then further scaling up additional product capacity from there, including potential tolling partnerships and licensing agreements.

Further, we expect to cross over to positive EBITDA in the second quarter of 2025 and also expect to exit 2025 at a run rate approaching $15 million of EBITDA annually. To drive these higher volumes, our primary commercial focus continues on the food service market and, in particular, quick service restaurants, or QSRs.

Just the markets for drinking straws and plastic celery where we are fully commercial and our resins have achieved end-of-life certifications provide more than enough demand to fill our Kentucky facility and will allow us to continue to grow from there.

We are currently working with 6 of the top 8 QSR products. [indiscernible] of single use products. These QSRs are leading the charge to be able to provide their customers with 100% biodegradable solutions. We are greatly encouraged by these partnerships and the commitment these companies are making towards solving the global petroleum-based plastic pollution epidemic.

As I mentioned, we have conducted development efforts on literally dozens of applications that will at some point be commercialized using PHA. In many cases, we know the resin performs and is ready to be deployed commercially, however, some of our potential customers have been slow to deploy this new technology as they grapple with rising costs and focus on priorities other than sustainability.

But because the market opportunity is so vast, our near-term focus on existing applications, which also include injection molded products such as coffee pods and single-layer films positions us to grow the business at a high rate in the next several years.

Our deep research and development experience and historical customer relationships will provide us with decades of further opportunities as our customers choose to move forward with reducing their use of petroleum-based forever plastics.

So with that reminder of our mission and game plan, I also want to provide some color related to my decision to retire from Danimer and the current CEO search process. I was asked to come out of retirement almost 9 years ago to lead and amplify the company's growth initiatives. I had been and still maintain a firm belief in the company's mission, and I have worked tirelessly to help us achieve those goals.

As I mentioned above, we faced countless challenges, and I'm proud of how our team has persisted throughout. However, there is still work to be done to fill and expand our manufacturing capacity in order to fulfill the promise and expectations we all have for the company. We have started the search for the next leader who has the necessary skill set and attitude to lead Danimer to success. I will continue to remain involved with the company in a role on the Board of Directors and will be available to provide guidance and support to the new CEO as needed.

Now I will turn more specifically to our second quarter results and near-term developments. Our second quarter results were consistent with our expectations, factoring in the headwinds noted last quarter related to the shift of inverters for the Starbucks [ Draw ] resin business. This was the primary cause for an overall decline of $2.5 million or 30% in PHA revenues on a year-over-year basis. I'll talk more about this in a bit.

PHA revenues during the second quarter made up 81% of product revenue and 69% of product revenue in the prior year quarter. Our award to supply 20 million pounds annually of resin for cutlery and 3 million pounds for cutlery wrappers to a large global QSR chain continues to progress.

The first commercial orders have been received with planned deliveries of cutlery to at least one customer distribution center in the next couple of months. Our converter partners have received delivery of initial sets of cutlery molds and some have purchased new injection molding equipment. We expect this award to reach full run rate in mid-2025.

Another large QSR is trialing our [ NODAX-based potagreedable strives ] in several states. We expect a larger commercial launch in late 2024 or early 2025. With this same QSR, we are also making progress on lids and coated paper containers under a joint development agreement.

We continue to advance in the commercialization process of compostable cups using our PHA resins for both aqueous and extrusion coatings. The top paper producers and [ cutleries ] in North America and Asia remain highly engaged in the success of this project. This represents a substantial market opportunity with over 250 million pounds of petroleum-based plastics used annually as liner material in the production of cups.

Coming back to a topic I mentioned briefly just a moment ago. We alerted you last quarter to a development with our end customer Starbucks, who reallocated a portion of its [ NoDAX-based draw ] resin business to WinCup from their previous sole-source provider. This reapportionment led to excess inventory in the channel with our converter partners, which had a negative impact on our results in the second quarter.

We expect the same dynamic to carry over to our third quarter and impact results by approximately $1 million. We would expect this issue to be largely behind us by the fourth quarter. It is also important to reiterate that we work closely with both converters and continue to retain 100% of the [ NoDEX-based straw ] resin business with Starbucks.

As we look to grow our top line, we remain focused on managing our liquidity runway. In support of that objective at the end of the second quarter, we implemented operational cost reductions resulting in approximately $7 million in annualized savings on a go-forward basis. This encompassed a reduction of head count and other operating costs through several functional areas.

This also included the decision to pause operations at our Danimer Catalytic Technologies business. We were able to make this decision based on the success we had in completing the expansion of our pilot plant during the first quarter of 2024 and which demonstrated our ability to produce this unique polymer at higher volumes and validated key material properties such as moisture and oxygen barrier and biodegradation levels as well as formulations that combine Rinnovo with [ Nodaxat-promising ] levels. Through this expansion and proof of concept, we were able to produce enough inventory to continue progress with key development partners on Rinnovo R&D initiatives. We remain confident that our novel Rinnovo polymer will ultimately be a large driver of revenue for the company in the future.

Including the $7 million in annualized cost reductions implemented at the end of the second quarter of 2024, our total annualized cost reduction since early 2022 now exceed $20 million.

Another important topic for today's call is the successful launch of our warrant dividend program. Our shareholders and certain other recipients recently received one dividend warrant for each 3 shares of common stock held as of the record date. These warrants trade over-the-counter under the symbol DNMRW, and there has been a very active market for them today.

While the warrants can be exercised for our common shares with cash, the critical feature of this program is that the warrants may also be exercised with our 3.25% convertible notes. We expect this will allow our noteholders to exchange notes for common stock at values greater than where they could sell the notes previously and allow us to reduce debt without using cash.

It also rewards shareholders with a valuable asset as convertible noteholders purchase warrants to facilitate the conversion of their depositions to equity. We expect this activity will contribute to the deleveraging of our balance sheet and reduce cash interest expense. We have had one noteholder exchange in our convertible notes for equity to date, and we expect this process to continue.

To date, we have permanently retired $6.1 million of our outstanding 3.25% convertible notes. Lastly, I want to mention that we continue to make great progress in regard to the DOE loans program and are in the final stages of the process. I will now turn the call over to Mike Hajost, our Chief Financial Officer, to update you on the financial results for the second quarter of 2024.

[Michael Hajost, executive]

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. Total revenue was $7.6 million in the second quarter, which was down from $12.9 million in the prior year quarter. PHA-based resin sales of $5.9 million decreased by 30% or $2.5 million in the second quarter of 2024 compared to the prior year, which was primarily driven by Starbucks reallocation of a [ straw ] resin business that Steve spoke about earlier.

PLA-based resin sales of $1.4 million decreased $2.4 million compared to prior year due to lost customer orders from the impact of the Ukraine conflict. This will be the last quarter of comparative impact from this conflict on our PLA sales.

Second quarter 2024 PHA sales represented 81% of product sales, and we expect this percentage to increase throughout the remainder of the year as we continue to ramp up PHA volumes. We reported a second quarter 2024 gross loss of $6.9 million, which was in line with the prior year quarter's gross loss of $6.6 million.

After adjusting for depreciation and stock-based compensation, we reported an adjusted gross loss of $1.8 million this quarter compared to an adjusted gross loss of $1.6 million in the prior year quarter.

R&D and SG&A expenses, excluding depreciation, amortization, stock-based compensation and certain nonrecurring items, totaled $8.1 million in the second quarter of 2024 and was $8.6 million in the second quarter of last year. The year-over-year reduction in these operating costs was a result of continued cost control initiatives across many areas of the business.

Adjusted EBITDA loss was $9.9 million in the second quarter of 2024 and was an improvement over a loss of $10.2 million in the second quarter of 2023. Adjusted EBITDA excludes stock-based compensation, depreciation, amortization, interest and other nonrecurring items as reconciled in the appendix.

Unrestricted cash and cash equivalents was $40.3 million at the end of the second quarter and $59.2 million at the end of 2023. Restricted cash as of June 30, 2024, was $14.2 million and is mainly held for future interest payments under our senior secured term loan. Capital expenditures were $1.8 million in the current second quarter and $6.6 million in the prior year second quarter. The prior year included required greenfield project equipment payments, which have substantially diminished in the current year.

We ended the second quarter with a total debt balance of

$394 million, comprised mainly of our convertible senior notes, our senior secured term loan, our revolving asset-based credit agreement we expect will be forgiven starting in 2026. Liquidity remains a significant focus for us as we seek to manage cash while we ramp up our sales. In addition to our unrestricted cash balance, we have $5.2 million in excess availability on our revolving asset-based lending credit agreement as of the end of the second quarter.

I will remind you that this agreement also contains an option to expand the facility by an additional $5 million, which we will plan to do once our collateral supports the larger size. Availability under the credit agreement at any given time is subject to a borrowing base formula based on our accounts receivable and inventory balances.

Let me now provide an update to our full year guidance expectations. With respect to our 2024 adjusted EBITDA, we expect there will be full year negative impact from the changes that Steve described earlier relates to the Starbucks straw resin business.

We now expect adjusted EBITDA will be within the range of minus $30 million to minus $35 million. Our CapEx expectations remain unchanged and we reiterate our prior guidance for capital expenditures in the range of $8 million to $10 million. We estimate that our end of year liquidity comprising unrestricted cash and availability under our revolver will now be in the range of $15 million to $20 million.

Looking a little further out, we are now forecasting annualized PHA revenues to triple by the end of the second quarter of 2025, which is solely based on demand from existing customers where we are currently selling products. I'll now hand the call back to Steve for his closing remarks.

[Stephen Croskrey, executive]

Thanks, Mike. We remain confident that recent progress in our commercialization efforts and R&D trials will generate increased revenues during 2024 to grow our sales pipeline with 104 customers in the material selection phase compared to 89 at the end of the first quarter. We often say that with just the customers in our sales pipeline, we could fill up several plants. As Mike just noted, considering just our customers that have already launched forecasted PHA sales remain on track to triple by this time next year. We are also pleased by the initial success of our dividend warrant program, which has resulted in the retirement of $6.1 million in debt.

This program has the potential to greatly improve our balance sheet leverage and strengthen our capital structure while maximizing our shareholder value. Thank you to everyone listening to today's call for your attention and your continued support. We will now open the line for questions.

[Operator]

[Operator Instructions]. Our first question comes from the line of Jon Tanwanteng from CJS Securities.

[Jonathan Tanwanteng, analyst]

I was wondering just the sources of the reduced EBITDA guidance. Is that just more inventory that needs to be burned off at the converters for Starbucks? Or is it a result of something else that wasn't quite clear?

[Stephen Croskrey, executive]

Jon, it's mostly the impact of the Starbucks inventory adjustment that's causing that. Now last quarter, we guided towards the lower end of our guidance. So with the impact of that inventory issue, it's putting us over somewhere a little higher -- lower than what we expected last quarter.

[Jonathan Tanwanteng, analyst]

Got it. Okay. And then just the holding of the catalytic operations. How much does that save you over the year? And can you just start that back up whenever you need to? Or is it something that you're shutting down?

[Stephen Croskrey, executive]

Yes. We're saving, John, about $1.5 million annually by doing that. And we're retaining enough key employees there to be able to start back up when we need to, which we don't necessarily think that we will have to. If we are successful with some of the commercial opportunities that we're working on, it would not be impossible to go to a commercial point from this stage.

[Jonathan Tanwanteng, analyst]

Okay. Got it. And then could you discuss the tolling and licensing arrangements that you thought might be possible beyond Kentucky? I think that's the first time I heard that outside of the catalytic business.

[Stephen Croskrey, executive]

Yes. We can't really talk about much detail there, Jon, but it's just something that we're working on and looking into, to see if we can [indiscernible] any potential gap in capacity between Kentucky filling up and the greenfield coming online. But we'll keep you updated as that progresses with any news that we can share.

[Jonathan Tanwanteng, analyst]

Okay. Is that being demanded by customers? Or is that something that you're exploring in anticipation of that?

[Stephen Croskrey, executive]

Well, it's indirectly being demanded by customers because of the volume forecasts that were being given and what we're seeing in the marketplace. We know that, again, depending on the exact timing of the greenfield coming online, there could be a gap there.

[Jonathan Tanwanteng, analyst]

Understood. And then finally, just -- you mentioned you're in the final stages of the DOE. I'm wondering if you could give us an update on the timing?

[Stephen Croskrey, executive]

Specifically, John. But what I can tell you is that both teams are very, very focused on getting it done before the end of the year.

[Operator]

[Operator Instructions] There seems to be no further questions at this time. I'd now like to turn the call back over to Mr. Croskrey for any final closing comments.

[Stephen Croskrey, executive]

Thank you, operator, and thanks, everybody, for your attention. And I got to tell you that I'm looking forward with great expectations to our next call because we'll be 3 months closer to the scale-up of this large piece of [indiscernible] business and be able to get into a lot more specifics about what the ramp will look like going forward. So really excited about that. And thanks again.

[Operator]

Thank you, Sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.