Q2 2023 · Earnings Call Transcript

Aug 25, 2023

Operator

Good morning, ladies and gentlemen, and welcome to the Evolva presentation regarding the half year 2023 results. At this time, all participants have been placed on a listen-only mode.

The floor will be open for your questions following the presentation. Let me now hand the floor over to Christian Wichert, the CEO of Evolva.

Christian Wichert

Thank you. Yeah.

Good morning, everyone, and welcome to our Evolva half year results presentation 2023. My name is Christian Wichert, CEO of Evolva.

And with me in the room here are Doris Rudischhauser, our Head of Corporate Communications and Investor Relations, and Carsten Daweritz, our CFO. May I first draw your attention to our standard legal disclaimer before we come to the agenda of today.

Looking at the agenda, I will start with providing the business highlights of the first half of 2023. Carsten then will report on the financial results of the first half before we give an outlook on 2023 and beyond.

And as always, we will have a Q&A session at the end of our presentation. Let's start now with our business highlights as our current situation is quite complex, I tried to summarize for you on one page the key achievements of our organization, which we can be proud of, on the one hand side, and major challenges we are facing on the other side.

Bottom line is that Evolva showed a strong operational performance and good progress in our transformation program despite major challenges and headwinds. We continuously grow -- grew profitably with Valencene and Nootkatone, we have initiated solid growth of Resveratrol with a substantial sales pipeline starting to materialize and managed to further increase our gross contribution margin.

In May, we announced the achievement of a major milestone as we signed a multiyear agreement with a leading CMO to support the Vanillin business and for further credibility gains. We entered the new personal care market with Resveratrol and launched L-Arabinose as well as Natural Nootkatone for European markets and F&F.

We also signed a strategic partnership with Grace Breeding to enter the new field of sustainable agro solutions. And finally, we continue to manage our cash very effectively with cost avoidance and cost reduction initiatives.

All that was done despite major challenges. Nice & Green informed us in May and June time frame about different interpretations of its then existing contractual financial obligations.

As this posed an immediate emergency for the company, we needed to renegotiate the financing agreement with Nice & Green to secure sufficient liquidity at least until end year. For obvious reasons, we had to immediately install strict cash management across the company, including postponing certain relevant business activities into 2024.

And the Board of Directors launched a strategic review of all strategic alternatives, including the potential sale of the company, which obviously absorbed a lot of time and energy of the management team. Looking at the KPI table, we can report total revenues of CHF4.5 million in the first half of 2023.

However, to compare apples with apples, we should exclude the Vanillin deliveries from the CHF8.1 million in the first half of 2022. As such, Vanillin deliveries did not take place during the first half of 2023 and had been budgeted and planned as previously communicated for the second half of this year.

As we are also not in the driver's seat for EverSweet, we should also exclude this to evaluate the core product portfolio of Valencene, Nootkatone and Resveratrol against previous year period. Doing so, we see below the solid revenue growth of 11%.

More importantly, this growth was characterized by a significantly increased gross contribution margin of 30.4% compared to the 10.9% last year. The adjusted EBITDA also improved significantly from minus CHF7.5 million by CHF1.2 million to now CHF6.3 million negative.

Cash stood at CHF4.4 million at the end of June with available financing lines of CHF5.2 million. More to that with Carsten later on.

The 11% product-related growth was driven by Valencene, Nootkatone and especially Resveratrol. The solid performance of our sales organization can be seen as an even bigger achievement when we consider the current difficult market conditions with destocking behavior across many markets and the business disruption in May and June due to the Nice & Green situation.

What makes me even more excited is the fact that our sales organization has built over the last 12 months, a strong sales pipeline with attractive opportunities, which are starting to materialize. And we expect an accelerated growth already in the second half of this year and onwards.

EverSweet royalties were again below expectations, more to that on a later slide. As promised, we continue to increase further our gross contribution margin now to 30%.

This was achieved by improving our relationships with key CMO network partners and jointly implementing and benefiting from process technology enhancements. On the sales side, we further executed our pricing strategies to better capture the value we create for customers and consumers.

Capturing more value for Evolva, obviously, resulting in higher margins, as you can see. There's additional margin upside as current margin levels still reflect the sell-off of existing inventories at higher costs from previous years.

Evolva is active in three promising business areas. Here, again, this slide is an overview about our business structure.

We are active in Flavors & Fragrances as one of our two core businesses, F&F, as we call it, and Health Ingredients, HI. In F&F, we now added Natural Nootkatone to the core product, Valencene, Nootkatone and Vanillin.

And in Health Ingredients, you find Veri-te Resveratrol for dietary supplements. At Animal Health, functional food and beverage and pharma as well as now the new Juneo, which is Resveratrol and Larally, L-Arabinose, both for the personal care industry.

In Health Ingredients, we also report the royalty income from EverSweet with Avansya, which is the joint venture of Cargill and DSM as well as our third pillar, which we call Health Protection with new businesses like NootkaSHIELD. All business activities capitalize, as you know, on the global market trends, health, wellness and sustainability.

In F&F, we continue to grow by plus 7% compared with previous year period and more than 5% before that. This growth was driven by Valencene and Nootkatone, excluding Vanillin, as explained before.

We now are able to broaden our product offering with the successful launch of Natural Nootkatone, especially developed for European markets. And with the multiyear agreement we signed with a leading CMO, we enable our Vanillin business going forward at favorable conditions.

We now launched Natural Nootkatone at the tradeshow Simppar in Paris with a convincing boost and receiving many customers, great feedback and interest in our offering. Evolva is now able to target additional customers, especially Europe, which demand natural declaration also in Europe, which we were not able to serve in the past.

Natural Nootkatone is fully natural and a more sustainable solution to customers in food and beverage and perfumery reapplications, which are not happy with ex-citrus derived products. First sales are expected as early as Q4 of this year.

Let us talk in more detail about the major milestone we proudly communicated in May, the signature of a multiyear agreement with a leading CMO. First of all, the new contract enables Evolva to supply its global F&F customer with Vanillin volumes worth around CHF35 million between 2024 and 2026 at much improved conditions.

Second, this contract will also allow us to further reduce our cost for several key products and revenue drivers and therefore, further enhance significantly our profitability levels. For 2023, the Board of Directors and the management team have decided to postpone the Vanillin production originally planned for the second half of 2023 to 2024 to preserve most of our cash in our situation and benefit from the lower cost as of 2024.

For Health Ingredients, we can report solid and profitable growth with Resveratrol of 14%. The reworked go-to-market strategy with segment-specific sales approaches, including differentiated pricing is paying off.

At various trade shows like in-cosmetics in Barcelona, Suppliers' Day in New York and the SupplySide East in New Jersey, our commercial team launched the responsible care concept, introducing Resveratrol and L-Arabinose to the attractive personal care industry, as well as creative value-add concepts, imagining so many benefits and claims while debottlenecking nature in a more responsible and sustainable manner. As promised, we entered new market segments in addition to our core segment, human dietary supplements, pet animal health and now the attractive personal care market.

The first new product is a specific quality and version of Resveratrol for personal care, which we call Juneo, the beauty power house, and the second new product is Larally, the skin microbiome influencer based on L-Arabinose. Both products are supported by very creative value-add concepts with ready-to-market solutions for our customers, which already led to existing -- exciting new opportunities in our sales pipeline.

Such strong sales pipeline overall market segment now is starting to materialize and well beyond the 14% growth in the first half. We expect accelerated growth already now in the second half with Resveratrol on track to reach close to CHF7 million by year-end, which would represent a growth of 83% compared to 2022.

And as previously mentioned, the underlying gross contribution margin is on a much higher level already by now with further upside potential to be expected on the back of the new CMO agreement from 2024 onwards. A slide on EverSweet.

While again below expectations, we continue to believe in the high-potential and have high hopes that things will change to the better very soon. DSM reported here, you can see it on the left-hand side in 2021, good commercial progress with sales estimated at EUR100 million in the next three to four years, well, out of the perspective of 2021 and a market potential of EUR1 billion to EUR2 billion overall, seeing EverSweet as best-in-class to replace artificial sweeteners.

Cargill took over with assigning a new CEO in July last year. We are in regular contact with him and Avansya's senior management team, seeing how they progress to accelerate their market penetration and commercial performance.

They recently won an innovation award for their combination of our EverSweet and their ClearFlo technology, which further nurtures our hopes. Last, but not least, we are making good progress within Health Protection.

We have successfully conducted our test launches with our business partners in Southeast Asia and learned a lot with regards to consumer feedback and consumer preferences for our formulation and application development. As previously communicated, we are working with the CDC, the Center for Disease Control and Prevention in Atlanta in the United States to develop new application forms for NootkaSHIELD, especially in the area of tick bite prevention, which the CDC supports with a grant of more than $0.5 million as communicated previously.

And finally, we partnered with Grace Breeding to enter the high-volume market of sustainable agro solutions to replace chemical fertilizers. I would like to say that we were well on track with our defined immediate levers and strategic initiatives to boost our commercial performance, growing revenues and especially increasing our profitability.

Due to the Nice & Green situation since May, June time frame, we had to immediately shift our focus and implement, in addition to our cost disciplined initiative, strict cash management to ensure liquidity for as long as possible to enable a successful strategic review, which means also that we had to postpone certain relevant business activities to 2024. With full attention, the management team is engaged in the review of all strategic alternatives to find an appropriate solution by end of 2023.

With that, I now hand over to our CFO, Carsten Daweritz for the financial details.

Carsten Daweritz

Good morning, and welcome to the financial results section of our presentation. First, a short recap of our financial highlights as we track them the three categories, revenues, profitability and liquidity.

As Christian already outlined, we had total revenues of CHF4.5 million and product-related revenues of CHF4.3 million, which represents a growth of 11%, excluding Vanillin and EverSweet. Our gross contribution margin increased further from a first-time positive figure of 10.9% last year to now 30.4% this year, resulting to another CHF1.2 million improvement of adjusted EBITDA to now minus CHF6.3 million.

Last, but not least, our cash balance stands at CHF4.4 million at the end of June with available financing lines of CHF5.2 million. Now looking at our P&L in more detail.

Despite the lower revenue levels due to the timing of Vanillin as mentioned, our gross contribution increased to positive CHF1.3 million. This is the result of the gross contribution margin significantly improving to 30.4%.

And recurring operational expenses reduced by CHF2.1 million as a result of our cost efficiency initiatives with a combination margin increase and reduced operational costs, the adjusted EBITDA improved by another CHF1.2 million to now minus CHF6.3 million. Turning to our balance sheet.

Our total assets significantly reduced from CHF131 million to CHF53 million, which is primarily driven by an impairment test that led to an extraordinary impairment charge of CHF68.3 million. Of this amount, the intangible assets were impaired by CHF66.3 million, broken down into the entire goodwill write-off in the amount of CHF40 million, a proportional reduction of royalties and licenses, CHF11 million, patents and patent applications by CHF10 million and product and process development by CHF4.3 million.

As a result of the current financing situation, the company-specific risk factor that was used for the impairment test was significantly increased, leading to weighted average cost of capital of 23.9% versus 13.2% in December 2022. It is important to mention that other than this back change, the underlying business assumptions and the valuation model did not fundamentally change.

As in the second half of last year, we made continuous progress in decreasing our inventory levels, which decreased by another CHF2.5 million in the first half of this year. Our cash position stands at CHF4.4 million at the end of June with the already mentioned remaining financing lines of CHF5.2 million.

Looking at the other side of the balance sheet at our equity and liabilities, mainly as a result of the mentioned extraordinary impairment charge of CHF68 million, our equity significantly reduced to now CHF28.6 million. Current liabilities include the convertible notes with Nice & Green.

They are at a similar level at the end of December last year. Last, but not least, our cash flow was impacted by the following components.

We substantially improved our free cash flow from operating activities by spending CHF10.7 million less than in the first half of last year. This is of course costs driven by the underlying operational improvements as reflected in the improved EBITDA but also by the continued net working capital reduction that started already in the second half of last year.

In addition, less capital expenditures were needed in the first half of this year. So as a result, considerably less cash was needed, reducing the cash flow from financing activities by almost CHF8 million, down to CHF3.3 million for the first half of this year.

This leaves us with a cash balance of CHF4.4 million and the already mentioned open financing line of CHF5.2 million, additional financing lines of CHF6.75 million are dependent on certain trading volumes and market capitalization levels. With this, I would like to hand back to Christian for a view on our outlook 2023 and beyond.

Christian Wichert

Yeah. Thanks, Carsten.

Yeah, as you can see on this slide, Evolva was well on track with its transformation program. We had completed the first phase in 2022 with building the foundation for commercial success and we were about half through with phase two to accelerate profitable growth.

Other strategic initiatives to reach the full potential of the new Evolva are now partly on hold for cash preservation reasons and until our financing situation is resolved. For 2023, the current financing situation by Nice & Green forced Evolva to implement strict cash management and postpone certain relevant activities.

Revenue in 2023 is now expected in the range of lower double-digit millions in Swiss francs, while we also expect a further improvement of EBITDA and cash flow. Short term, we expect an accelerated revenue growth and a continuously increasing gross contribution margin as well as further improvement of EBITDA.

We also aim to successfully finalize the strategic review by finding the right partner for Evolva. Midterm, our ambition remains for EBITDA and cash breakeven in 2025, provided the going concern can be secured.

We expect slightly lower revenues, around up to CHF45 million, but at a higher profitability level than presented in our midterm plan. Let me close with an update on the strategic review, at least what is allowed for me to do -- to share with you, which is basically reading the relevant excerpt of the half-year report, which is available as of today.

The Board of Directors initiated a comprehensive review of strategic alternatives to accelerate discussions with strategic partners or to facilitate other strategic transactions, including a potential sale of the company. Evolva is currently in active discussions with multiple interested parties.

The Board of Directors estimates that the most likely scenario is a sale of the company. By the publication date of this half year report, no decision has been taken regarding a potential buyer yet.

At the latest by the end of 2023, the Board of Directors is confident to have found a suitable solution that will secure the going concern of the group in the long term. However, if no buyers, strategic or financing partner can be found during the strategic review or no other strategic transaction or measure can be implemented, the company would eventually have to seize its operations.

We are now kind of happy to answer your questions in our Q&A session.

Operator

Thank you very much. [Operator Instructions] And first up is Daniel Burki from Zurcher Kantonalbank.

Over to you.

Daniel Burki

Yeah. Thank you.

Good morning, everyone. I would have a question on the operating free cash flow, which was about CHF4 million negative in the first half.

Maybe a question for Carsten. Of course, difficult to forecast, but do you -- would you see a similar development in the second half so you would have cash stream of also CHF4 million in H2?

Is this sensible augmentation?

Carsten Daweritz

Yeah. Thank you, Daniel.

The second half will require a little more cash than the first half due to capital expenditures. Now for the new CMO contract that we start next year.

So a slightly higher expenditures in the second half than in the first half.

Daniel Burki

So what is slightly? Will it go to double digit or a couple of million?

Carsten Daweritz

No. Between, let's say, around CHF6 million, CHF7 million.

Daniel Burki

Okay. And maybe an add-on on the Nice & Green financing.

So the CHF5.25 million is clear. But then you also have some covenants on the additional money going up to CHF12 million, if you could elaborate a little bit on this one.

Carsten Daweritz

Yes. The first covenant is basically the amount of shares Nice & Green is able to sell.

So if we reach a certain -- if they reach a certain threshold, which obviously depends on the trading volume, which allows them to sell, then we would get more funds. And the second covenant is at the beginning of next year, our market capitalization, which needs to be under a certain level -- over a certain level in order to draw additional funds.

Daniel Burki

Thank you.

Operator

The next question comes from Laura Pfeifer from Octavian. Over to you.

Laura Pfeifer

Yes. Hi, good morning.

So maybe first, just some clarification on your sales guidance for '23. So you say a lower double-digit million amount.

Is this a low teens amount or rather maybe CHF10 million to CHF13 million? Or could it also be more, maybe like up to CHF14 million?

So that's the first one. And then also specifically on Vanillin, do you expect to book some revenues this year?

Or will this be more or less now zero and then a large amount next year? And then maybe the last question is a more general one on your customers.

So how do they react given the disruptions in your business and the challenges you experience, for example, I'm thinking of IFF for Vanillin. I mean, is it now an issue for them that you have to postpone the production into next year?

Just wondering a little bit if you could give here some more insights. Thanks.

Christian Wichert

Yeah. Good morning, Laura.

Thanks for your questions. I think I'll take all 3.

So on your first one, lower teens is absolutely correct, how you defined the range as your first option of the two you gave, which obviously, we, as a team, are working on, not only our forecast, but also on always upsides and downsides in our forecasting per month. And therefore, we are trying to work that number up as much as we can.

But obviously I mean, that is in connection with your second question, we decided very recently, which is basically yesterday, together with the Board that we would move the Vanillin business into 2024, very likely first quarter because we just need to preserve cash to an extent that it just doesn't make sense or is not feasible for us. And second, also from a business -- let's say, financial perspective, it makes absolutely sense to produce those new volumes in 2024 at our new CMO to much lower -- much better conditions, much lower costs.

So two major reasons why this decision has been taken together with the Board. Also in regards to your third question, customers are having a lot of understanding for our situation.

They are very supportive. I must say, really great to see that people continuously want to work with us because we are what we are.

And also people believe that we will find a solution to our financing situation. So we are working hand-in-hand with our key partners with a lot of support.

I just can only thank our customers and also suppliers for continuously supporting us in this difficult situation. To give you an example, we would have had the possibility to move forward with our distributor landscape project, but this is taking more time just because there are certain uncertainties, is a funny way of saying it.

But -- so it's a mixed bag, but mostly supportive in regards to our customer -- from our customer side.

Laura Pfeifer

Okay. Thank you.

Christian Wichert

Are there any further questions?

Operator

Yes, I'm sorry. So there are no further questions at the moment.

[Operator Instructions]

Christian Wichert

Since this is not the case…

Operator

Yes. Exactly, no further questions.

Christian Wichert

Very good. So we are now at the end of our call, and we'll relocate to attend the Extraordinary General Meeting today at 11 a.m.

Central European Time at the Victoria Hotel in Basel. We thank you for your time and interest in Evolva and see you soon.

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