Danimer Scientific (NASDAQ:DNMR) disclosed a significant new cutlery program and shared a mixed financial picture during its 2023 third-quarter earnings call. The company, known for its Nodax-based resins and PHA-based materials, announced a deal that will require it to deliver approximately 20 million pounds of resin annually. While the company reported a gross loss of $7.7 million and an adjusted EBITDA loss of $9.3 million, it remains optimistic about future growth opportunities and ongoing partnerships.
Key takeaways from the call include:
- Danimer has been awarded a large quick-service restaurant (QSR) program for biodegradable cutlery, with first shipments expected in the second half of 2024 and full run rate by mid-2025.
- Partnerships with Bacardi, Bolthouse Farms, Delta Coffee, and a large QSR customer have been highlighted as evidence of progress in developing compostable packaging solutions.
- Despite a 58% growth in revenue from PHA-based products, launch delays and additional testing have impacted the expected revenue growth.
- The company reported a gross loss of $7.7 million, primarily due to higher depreciation and raw material costs, and an adjusted EBITDA loss of $9.3 million.
- Danimer ended the quarter with $77.4 million in cash and cash equivalents and a total debt balance of $379.8 million.
- The company revised its full-year 2023 guidance for adjusted EBITDA to be in the range of negative $40 million to negative $37 million, citing the timing of customer programs as a factor affecting short-term financial results.
The company's representative, Steve Croskrey, revealed that they anticipate a run rate of over 5 million pounds by the end of next year, with full run rate expected by Q2 of '24 to '25. He also highlighted potential growth opportunities beyond North America in the QSR space. Croskrey also mentioned that the company is working with major coffee pod producers in Europe to address expected legislation changes regarding single-use coffee pods.
Despite financial challenges, Danimer remains optimistic about its capacity utilization and plant footprint expansion strategy. The company envisions the newly awarded cutlery program as a significant shift in its business, which, once revealed, will send a powerful message to the market about its commitment to reducing plastic pollution.
InvestingPro Insights
InvestingPro's real-time data and tips provide valuable insights into Danimer Scientific's financial health and future prospects. According to InvestingPro, the company has a market cap of $169.38M and a negative P/E ratio of -1.17. The revenue for the last twelve months as of Q2 2023 stands at $50.56M, showing a decline of 13.63%.
InvestingPro Tips highlight some potential areas of concern. The company has been operating with a significant debt burden and has a declining trend in earnings per share. It is also quickly burning through cash, which could be a red flag for potential investors.
On a more positive note, the company's liquid assets exceed short-term obligations, indicating that it has enough resources to cover its short-term liabilities. However, it's worth noting that the company has not been profitable over the last twelve months, and analysts do not anticipate it will be profitable this year.
InvestingPro offers dozens more tips and data points for companies like Danimer Scientific. These insights can help investors make informed decisions and potentially identify opportunities and risks.
Full transcript - DNMR Q3 2023:
Operator: Greetings. Welcome to the Danimer Scientific 2023 Third Quarter Earnings Call. At this time all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please be advised that this call is being recorded today November 14, 2023. I would now like to turn the presentation over to Mr. James Palczynski, the company's investor relations representative.
James Palczynski: Thank you, operator. Good afternoon to everyone and thank you for joining us today for Danimer Scientific's 2023 Third Quarter Earnings Call. Leading the call today is Steve Croskrey, Chairman and Chief Executive Officer, and Mike Hajost, Chief Financial Officer. I'd like to note that there is a slide deck that accompanies today's discussion, which is available on the investor relations section of our website at danimerscientific.com. As we begin, I'll call your attention to the company's safe harbor language, which is published in our SEC filings, and on Slide 2 of the presentation I just referenced. On today's call, we may discuss forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Forward-looking statements include, among other things, statements regarding future results of operations including margins, profitability, capacity, production, customer programs, and market demand levels. Actual results could differ materially from what is expressed or implied in our forward-looking statements. The company assumes no obligation to update any forward-looking statements to reflect events or circumstances after the date here around, except as required by law. Today's presentation also includes references to non-GAAP financial measures within the meaning of SEC Regulation G. We believe these non-GAAP measures have analytical value, but note that they should be taken as supplementary measures of performance and not as alternatives to GAAP results. We have provided reconciliations for non-GAAP financial measures to the most comparable GAAP financial measures in our earnings release and our presentation. Thank you, and it's now my pleasure to turn the call over to Steve Croskrey, Chairman and Chief Executive Officer, Danimer Scientific.
Steve Croskrey: Good afternoon, and thank you for joining us. We recently received notification that a very large quick service restaurant program for biodegradable cutlery specifying our Nodax-based resins has now been awarded. We have anticipated this notification for some time. Five of our converter partners have each been granted awards and will participate in that program. We will supply each of them with the resin they need and in total the program will require us to deliver approximately 20 million pounds annually. We expect to begin making first shipments in the second half of next year and for the program to hit full run rate as we approach the midpoint of 2025. This is an unprecedented award that serves as tremendous validation of our PHA-based materials, which are the first to truly help to reduce plastic pollution through a seamless material replacement strategy. This is critical because changing consumer behavior to completely solve the pollution problem is infinitely more difficult and problematic for businesses. Our materials enable brands to differentiate, to extend their environmental leadership, and to enhance their reputation for sustainability. They immediately become part of the solution. We're exceptionally pleased and excited by this new program. While our PHA-based products revenue grew by 58% over the same quarter last year, we had expected more. We are currently in the late stages of commercialization with a number of customers, including major brands, some of which I'll discuss further in a moment. These launches incorporate rigorous final qualification and testing, frequently involving a number of partners in addition to Danimer, and will need some additional time to complete their final steps than we previously anticipated. We certainly appreciate that our customers are generally adopting our resins with the intent of permanently converting away from petroleum-based plastics and the long-term pollution they cause, especially given that there are often several years of research and development already invested prior to commercial launch, we understand that the launch itself should be an unqualified success across the board. In some cases, we underestimated the time required for final testing and qualification, particularly for novel end-use applications where we were asked to make adjustments that then we needed to retest and re-qualify, sometimes adding months to the process. We're confident that each of these launches will be successful and, just as we have been increasingly able to leverage our prior R&D work to move more quickly on new development projects, we'll be able to drive process efficiency into this last stage before commercial launch and avoid some sources of delay in future programs. I'd like to now give you some specifics about the brands and programs we're currently launching. First, I'll focus on Bacardi, a prototypical example of a great partner. Bacardi is a 161-year-old family-owned company with an ambitious goal to be 100% plastic-free by 2030. They knew three years ago when we began to work together that success would require breakthrough advances in engineering materials and packaging design. We began our work with a focus on pioneering the development of a composable spirits bottle, one of, if not the single most technically challenging initiatives we have ever undertaken. That work continues and the progress we've made is encouraging. Both we and Bacardi remain focused on bringing that success home as soon as possible. That said, along the way, Danimer and Bacardi have identified additional, more rapidly implementable development initiatives to eliminate plastic waste elsewhere in their supply chain. These are also very powerful and exciting, and we will be sharing more at the earliest opportunity. As you may recall, last quarter we talked about a number of new Nodax -based film resins. One new film resin application is for home compostable retail packaging for vegetables and fruit. The development partnership for this application began in 2020 with BIOLO, a division of CPG, or Columbia Packaging (NYSE:PKG) Group, one of our converter partners. Bolthouse Farms, a carrot producer, is their launch customer and at retail the product will be offered first by Myers Grocery in 240 large-format grocery stores. The first end use will be badged for 1-pound Earthbound Farm organic mini pill parents. The bags are home compost certified by TUV Austria, a globally recognized leader in independent testing, inspection and certification for biodegradability. This is a difficult certification to meet, and we're very pleased to have qualified. CPG intends to develop and market compostable bags, film and rollstock for packaging needs across not just produce but a wide variety of consumer goods. While this initial launch is modest, the category presents a huge opportunity. CPG is intently focused on the growth opportunity they believe the company's a value-added product and are working towards next steps in their go-to-market strategy. I'll now turn to our work with Delta Coffee, a coffee roasting and packaging company that has led the Portuguese coffee market since 1961. We've developed compostable single-use capsules for their Delta Q line of ground espresso, which we believe will be the first product on the market in full compliance with proposed new EU regulations requiring any copy sold in the EU to meet new compost standards. The capsules degrade completely inside industrial composting environments, leaving no micro plastics or other residues that would harm natural ecosystems. We've developed these pods in partnership with Total Energy's Corbion, who will supply the PLA that is also a key ingredient in the PHA-based resin used for the pods. Our engagement with other major disposable coffee pot producers is ongoing. We view this category as an important one for us regardless of the passage of proposed legislation. Finally, I'll return to the QSR space. In addition to the 20 million-pound cutlery program, we are still engaged in field trials for Nodax-based draws and advance the planned nationwide rollout by another major QSR customer. Our development efforts for the QSR channel remain a focus, and we're excited to have just executed a joint development agreement with a large QSR to develop packaging materials that are specific to their menu. Additionally, we're getting closer to commercialization of biodegradable cups using resins for both extruded coatings and in partnership with Kemira aqueous coatings. Our partnership with Kemira has been especially important in this effort. These are the key technologies for not only disposable cups, but for all coated paper materials used in foodservice. We expect to have more to say about the coating work we're doing over the next couple of quarters. For now, I'll just say that we are confident we are emerging as a leading source for alternative materials in the QSR channel. As I look across these partnerships, even those that have modest initial volume associated with them, they're each opening boards to a new category or a new range of customers. They each diversify our business and add to our addressable market opportunity. The importance of these launches has been underlined by the recent dramatic increase in engagement opportunities with new potential end-use customers that they have generated. Our recent developments and product launches have triggered discussions with potential partners across multiple industries major customers seeking long-term solutions to plastic waste. While we continue to work through near-term challenges and launch delays, we have great conviction that we are on the right path towards filling our existing capacity in Kentucky and continue to make progress on our plant footprint expansion strategy. Our work with the Department of Energy loans program office to complete due diligence is proceeding as planned and we continue to look forward to the terms negotiation phase. We are now making significant progress toward full capacity utilization in Kentucky and believe that there is more than enough specifically identifiable demand to make our greenfield project a success. The partnerships we have been talking about today illustrate the way forward, ensuring that it is possible to disrupt petroleum plastics address the global pollution problem and building enduring business category by category, customer by customer and end market by end market. I will now turn the call over to Mike Hajost, our Chief Financial Officer, to update you on the numbers for the quarter and on our outlook for the rest of the year.
Mike Hajost: Thank you, Steve, and good afternoon, everyone. I'll start with our financial results on Slide 7 of our presentation for those of you following along. Third quarter total revenue was $10.9 million compared to $10.4 million as growth in product revenue was mostly offset by a reduction in service revenue. Third quarter product revenue was $10.5 million, up 14.9% compared to the prior year level of $9.1 million. This growth was entirely attributable to PHA-based resin sales, which grew 58% compared to last year. PLA-based resin sales were down 51% or $1.8 million versus prior year due to the ongoing issues associated with the Ukraine conflict. Third quarter service revenue was approximately $500,000. This is about $800,000 lower than last year's third quarter. This is consistent with the recent trends and was expected as funded R&D projects for certain customers move to commercialization. We reported a third quarter 2023 gross loss of $7.7 million, which was an increase compared to the prior year's quarter's gross loss of $4.1 million. The year-over-year increase primarily reflects higher depreciation and amortization expenses as well as higher raw material costs related to our product mix. After adjusting for depreciation and stock-based compensation, we reported an adjusted gross loss of $2.6 million as compared to an adjusted gross loss of $1.5 million in the third quarter of 2022, primarily due to other increased fixed production costs. R&D and SG&A expenses excluding depreciation, amortization, stock-based compensation and certain nonrecurring items, totaled $6.6 million in the third quarter, a significant improvement relative to the $11.5 million of expenses for both categories in the third quarter of last year. The improved efficiency across many areas of the business through broad-based cost control initiatives continues to drive this improvement. Lower R&D expenses also reflect the conclusion of certain development projects. Adjusted EBITDA loss for the third quarter improved to $9.3 million compared to an adjusted EBITDA loss of $12.9 million in the third quarter of 2022. Adjusted EBITDA excludes stock-based compensation, other income and other add-backs as reconciled in the appendix. Cash and cash equivalents at the end of the third quarter was $77.4 million as compared to $62.8 million at the end of 2022. Restricted cash was $14.5 million, including $12.5 million for expected interest payments pursuant to our recent loan agreement. Capital expenditures in the third quarter were $2.7 million and year-to-date have been $25.7 million. We have tightened our range of expected full year CapEx spend to be between $27 million and $29 million towards the more favorable end of our prior range of $26 million to $31 million. We ended the third quarter with a total debt balance of $379.8 million, comprised mainly of our convertible senior notes, the senior secured term loan we closed during the first quarter and our new market tax credit loans, which we expect will be forgiven starting in 2026. We continue to view the magnitude and timing of the customer ramp for PHA-based resins and our increased utilization to serve that demand for our Kentucky operations as the largest factors for variability in our short-term financial results. As Steve discussed, the timing of certain expected customer programs has moved further out than we had expected. And as a consequence, both this quarter and next quarter do not have the benefit of the previously expected initial shipments from new launches. Our full year 2023 guidance for adjusted EBITDA is now in the range of between negative $40 million and negative $37 million. I'll now hand the call back to Steve for his closing remarks.
Steve Croskrey: Thank you for your attention this afternoon. The cutlery program awards we've announced today constitute a watershed event for Danimer in many ways. They are a seal of approval and open the door for us to capture additional volume in the QSR channel and other categories. In addition, this program gives five of our converter partners critical mass of revenues and the incentive to look for ways to grow their Nodax-based business. These awards also carry a major positive impact on our future financial performance. One of the most powerful aspects of our business is how longevity is built into every program when we capture. Our customers are seeking permanent solutions to the problem of plastic pollution, a problem so large and damaging the only permanent solutions matter, solutions that we have. We expect that once our capacity is spoken for because our customers are large enduring businesses with stable demand for consumables, that capacity is essentially permanently absorbed. We have a tremendous opportunity that we believe is ours and ours alone. Thank you. And operator, we're now ready for questions.
Operator: [Operator Instructions] Your first question comes from Jon Tanwanteng with CGS Securities. Please go ahead.
Jon Tanwanteng: Hi, good afternoon. Thank you for taking my question. I was wondering what programs pushed out. What was the scale of them that you expected, number one? And number two, does that delay you getting to the relatively full utilization of Kentucky by the end of next year?
Steve Croskrey: Hey, Jon. Thanks for the question. This is Steve. Well, this cutlery program that we just announced as an example, is roughly six months behind where we initially expected it to be. We originally thought we would be able to get some shipments in this Q4, but that's been pushed out now probably into Q2 of next year. And as far as the utilization rates with this program and the other programs that we've discussed and the programs that are currently being launched, we will hit that utilization rate. It will depend on how fast those things scale, whether or not we'll hit it by the end of the year. And we'll give you on that further next quarter.
Jon Tanwanteng: Okay. Great. Thanks. Mike, I was wondering where do operating expenses go from here? Do you expect any meaningful change either up or down?
Mike Hajost: I think, look, we're very proud of how we did cut operating costs year-over-year, and there's certainly some things that won't repeat. There are some things that had a positive influence on our operating expense year-over-year such as reduction in our AR reserve. A year ago, we were increasing that reserve. This year, we're actually reducing that reserve. So you kind of get the year-over-year effect that's exaggerated a little bit because of going in two different directions there. We do believe that there are opportunities as we kind of are putting together our budget right now to look for additional cost savings opportunities. So we do think they're there then there's going to be other things, though, that are going to be some headwinds in terms of overcoming some of the benefits we had this year versus last year. But net-net, our expectation is that they will either be flat to down from where we are this year.
Jon Tanwanteng: Okay. Great. And then where do you see -- where are you in the DOE loan process? Help us understand what the DOE is saying to you? And kind of when do you expect that to play out?
Mike Hajost: Sure. Yeah, I think overall, there's still a tremendous enthusiasm between both parties working together. As you know, we announced we're going into the due diligence phase, which we're in the thick of right now, working with third partners. They bring in experts on their side manufacturing, technical, financial, and they're now scouring through with our teams, there's been meetings on site. And again, a lot of collaboration and still a lot of enthusiasm for the project going through. The timing of this is, again, probably taking a little longer than what we had previously expected. And as we kind of learn more about the program and the time frame of what they have to do, I think we're now expecting that the funding probably wouldn't come through until maybe early Q3 of next year. And it's not that there's any concerns on our part with that, it's just a process that's going to be a little bit longer -- and -- than we had expected there. But again, everyone is feeling very good about so far.
Steve Croskrey: And I would just add to that, that whatever our chances were of getting that accomplished, have now improved significantly with this cutlery award.
Operator: Your next question comes from Thomas Boyes with TD (TSX:TD) Cowen. Please go ahead.
Thomas Boyes: Thanks for taking the questions. When speaking with customers that have delayed their launches, is there a common theme around -- they're maybe slowing down? Is it related to kind of the macroeconomic backdrop? Or is it really just around validation periods taking longer to get through?
Steve Croskrey: Hey, Thomas, thanks for the question. I would say that there is a wide range of reasons, but most of them are focused on the technical challenges of getting the product finalized. As an example, sometimes -- and this was the case with the cutlery program. The R&D work is a lot of trial-and-error. And when you start to get confidence as you optimize production performance that you've got something that's going to work for the converter, we can start doing the end-of-life trials, the end-of-life certification tests to qualify the material. What happened in this case is the product that we started with became apparent during the course of the testing that it was not going to pass in a timely manner. And so we had to readjust and kind of refine the formulation to allow it to pass in the appropriate time frame. So that was the specific cause of delay in that case, and that's a pretty typical type of a thing that has happened.
Thomas Boyes: Got it. And my sense is, obviously, there hasn't been any cancellations. So just to kind of put a finer point on it. All of these are just really launched pushouts, correct?
Steve Croskrey: Yes, that's correct.
Thomas Boyes: Great. And then my last one, and I'll hop in queue. We just would love to drill down on the relationship with Chevron (NYSE:CVX) Phil Chemicals that you had announced for the Danimer Catalytic business. Could you talk about your efforts there? And maybe discuss some of the long-term opportunities of the business as it relates to the acrylic acids and things like that.
Steve Croskrey: Yeah. Unfortunately, we can't talk too much about the specifics of those programs because of confidentiality. But I can tell you that both teams are very excited and it's a great opportunity for us to get close to a major chemical company like that, who could potentially be a tremendous partner in the future.
Thomas Boyes: Got it. I appreciate it. Thanks again.
Operator: Your next question comes from Charles Neivert with Piper Sandler. Please go ahead.
Charles Neivert: Good afternoon guys. A quick thing on the ramp-up of production for the cutlery, when do you anticipate having to start building some inventory or anything like that for delivery of that product. So if it's going to go off in third quarter, start ramping in third quarter of next year, when do you guys have to start ramping up production to get -- to set up for that and delivery?
Steve Croskrey: Yeah. We'll -- Charlie, we’ll start building inventory probably in early Q2, anticipating at this point that we expect some orders in Q2 at this point.
Charles Neivert: Got it. Okay. And then -- so you said it will take round numbers. It sounds like you said about a year to go from zero to full bore, the $20 million you were talking about. Is that sort of even? Or is that a slow ramp building speed? How does it look to go out? How are they distributing the product? I mean when should we expect the full chunk of it?
Steve Croskrey: Yeah. I can tell you what we know now is our expectation would be that by the end of next year, we will be at a run rate above 5 million pounds and then it will kind of close quickly from there to sometime like middle of early to middle of Q2 of '24 to be at full run rate -- ’25 to be at full run rate.
Charles Neivert: Right. And then last question for now. Just -- is there a length for this contract? Is it -- does it have an end to it? Is it five years, three years? Is there anything on that? Or is it just sort of we'll play it by year and see how it goes from there?
Steve Croskrey: Yeah, it will just be ongoing business unless the customer decides to move in another direction. But one of the beauties of this segment is it is so difficult to ever change out a material like we've done that -- or that we're doing, that there's just not a lot of motivation on anybody's part to go through the process to change to something else than again. And these companies have other priorities and things they would focus on before they would do that. So unless somehow we were just to fall in our face, that's certainly not something we would expect to have happened.
Charles Neivert: Is there any possibility, again, is -- the deal for this $20 million, is that sort of the end of that particular thing? Or can that even grow from that point, assuming all goes well specific to that deal.
Steve Croskrey: Well, obviously, it will grow with the customer. But this is only for North America. So there are other opportunities with -- in other parts of the world, but also with other applications in the QSR space.
Charles Neivert: Got it. Okay, thanks very much.
Steve Croskrey: All right. Thanks, Charlie.
Operator: [Operator Instructions] Your next question comes from Laurence Alexander with Jefferies. Please go ahead.
Kevin Estok: Hi. This is actually Kevin Estok on for Laurence. So my first question, I just wanted to touch back on Nodax-based resin for single-use coffee pods. So you obviously touched on the Portuguese company. I guess I was just wondering if there are any other customers maybe with initial trials. And I just want to get some update there. And then maybe in the same vein, I guess, any other regulatory updates in markets that you operate that could provide some sort of tailwind for the next several years?
Steve Croskrey: Kevin, I'll answer the first part of the question and I'll ask you to repeat that second part. It blurted out a little bit on me. But as far as the coffee pods, go, we are working with all of the major coffee pod producers or companies in Europe. Because of the expected legislation there, they're hot to solve for this. So that's why this is a very important announcement for us as it's just going to accelerate adoption in Europe. And could you go ahead and repeat the second part of your question, Kevin?
Kevin Estok: Sure. Yeah. I was just wondering if there were any other regulatory updates that were, sort of, in the pipeline that you expect could provide a tailwind in the near medium term in the markets that you operate?
Steve Croskrey: Off the top of my head, Kevin, I can't think of anything in particular that we have not discussed in the past. But if I come up with something, we'll get back to you on that.
Kevin Estok: Okay. Great. Thanks. And I'm not sure if this has been brought up yet, but any progress on what you've seen in the aqueous coatings for cups?
Steve Croskrey: Yes. It's going very well. We are expecting to have cups in stores for trials by Q1. There's actually a push to see if that can be done sooner, but I think that Q1 is a good expectation for trials.
Kevin Estok: Okay. Great. Thank you very much.
Steve Croskrey: All right. Thanks, Kev.
Operator: I will now turn the call over to Stephen Croskrey. Please go ahead.
Steve Croskrey: Thank you, operator. Before we end the call, I'd like to stress the importance of this cutlery program that's now been awarded. This is a major change in our business. When we are able to talk about who the QSR customer is, this will also send a powerful message to the market. We're approaching a tipping point where decades of investment and work are about to deliver tangible benefits and not just for our shareholders. The world desperately needs engineered material solutions like ours to address the growing problem of plastic pollution. Thanks again for your time and attention, and we look forward to speaking with you again on our next quarterly call. Thanks.
Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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