2023-03-10 01:04:01 ET
Evolva Holding SA (ELVAF)
Q4 2022 Earnings Conference Call
March 9, 2023 04:00 ET
Company Participants
Christian Wichert - Chief Executive Officer
Doris Rudischhauser - Head, Corporate Communications and Investor Relations
Carsten Daweritz - Chief Financial Officer
Philipp Frech - General Counsel
Conference Call Participants
Henrietta Rumberger - awp
Laura Pfeifer - Octavian
Jonathan Herbert - Cologny Advisors
Presentation
Operator
Ladies and gentlemen, a warm welcome to the Evolva Full Year 2022 Results Presentation. [Operator Instructions] Let me now turn the floor over to Christian Wichert, the CEO of Evolva.
Christian Wichert
Yes. Good morning, everyone and welcome to our Evolva full year 2022 results presentation. With me in the room are Doris Rudischhauser, Head of Corporate Communications and Investor Relations; Carsten Daweritz, our CFO; and Philipp Frech, our General Counsel.
May I draw, as always, your attention to our standard legal disclaimer? And looking at the agenda for today, I will start with providing the business highlights of ‘22, Carsten then will report on the financial results of our last year, before we give an outlook on 2023 and beyond. As always, we will have a Q&A session at the end of the presentation.
Let’s start now with our business highlights. Looking at the KPI table here, I am very happy with the full year 2022 results, our first year under the new leadership team. And we can report strong revenue growth, reaching CHF15.5 million, which is a 57% growth rate on total revenues. Product-related revenues grew even stronger at 62% to CHF14.8 million. We can also report substantial progress on profitability. So gross contribution margin turned with 16% positive and double digit. Such strong revenue growth and much improved gross contribution margin, together with our cost improvement initiatives, led to a adjusted EBITDA figure of minus CHF13.3 million in 2022, which is almost CHF10 million better than in 2021. Our cash position at the end of the year 2022 was CHF5.1 million with available financing lines of CHF16 million. Kudos go to all people at Evolva, our customers and business partners who have made these results happen despite all the pressure we had faced.
Last time, we showed you the product-related revenues over the last 5 years from 2017 to 2021, growing from CHF2 million to CHF9.1 million at a CAGR of 46%. Our product-related revenue now of CHF14.8 million in 2022 accelerated our revenue growth at a rate of 62%. The strong revenue growth was especially driven by vanillin, as well as by profitable growth of valencene and nootkatone. Profitability was one of our key focus topics in 2022, especially for Health Ingredients and I am very pleased with the progress on gross contribution margin so far, which came from deep red minus 73% in the first half and minus 34% in the second half of 2021, now in 2022 turning positive double-digit at 11% in the first half and close to 22% in the second half of 2022. For the full year, the gross contribution margin was overall at 16%, well in line with our guidance. Key drivers for this performance was strengthened relationship with our CMOs, cost improvement from process technology enhancement and value pricing strategy to better capture the value we create for our customers and consumers.
Talking about initiatives, you might remember that we had introduced in March 2022, three levers as immediate focus for the organization. One was, boost commercial performance with the moto focus and deliver; the second one, cost discipline with the aim to run a tight ship; and third, the culture as enabler with the slogan all hands on deck. Those levers will remain in place also for 2023. Under one, last year the initial focus was set on Flavors & Fragrances, which clearly paid off. Now we will expand our focus to Health Ingredients, especially on resveratrol to enter new markets.
On cost discipline, we have already realized CHF2.5 million of cost improvements while shaping a lean and efficient organization. Now we selectively upgrade our capabilities in sales and R&D in the U.S. and Switzerland, along our strategic initiatives of our midterm plan. And for culture, we also started to foster new culture with teamwork in the center of the focus, lots of communication to understand the strategy of the new Evolva we are about to shape. For that, we will continue to become fast and agile, creating value-add for our customers with diverse opinions, challenging each other and providing constructive feedback to reach our full potential. Focus is clearly on accelerating profitable growth.
Before we come to the main developments in ‘22 and next steps per business area, here’s again an overview slide to clarify the business area structure of Evolva. We are active in three promising business areas, of which two are our core business areas, Flavors & Fragrances, F&F; and Health Ingredients, HI. In F&F, our current revenue drivers are valencene and nootkatone and vanillin. In HI, mainly are resveratrol as well as the royalty income from EverSweet with Avansya, the joint venture of Cargill and DSM.
Our third pillar is called Health Protection and is our developing business area, mainly with our NootkaShield concept for now being reported under Health Ingredients. All business activities are capitalizing on the global megatrends, as you know, in regards to health, wellness and sustainability. In F&F, we more than tripled our sales with a growth rate of 265% in 2022. F&F was our initial focus area to boost our commercial performance and that has clearly paid off. Vanillin is the main contributor here where we delivered continuous commercial batches to our global partner. Valencene and nootkatone also continued to grow profitably and further contributed to the strong revenue growth. We expect continuous positive business momentum in 2023 with vanillin volumes expected to further increase with deliveries planned for the second half and valencene and nootkatone to further benefit from a poor harvest this year.
With our new product, natural nootkatone, successfully introduced at the end of last year to select key accounts, we now aim to expand our reach. The new natural nootkatone Evolva is now able to target additional customers, especially in Europe, which demands natural bioprocess or currently purchase ex-citrus derived nootkatone, which we so far were not able to serve. This addition to our natural nootkatone portfolio offers a fully natural and sustainable solution to exciting new customers for us to capture broad opportunities in food and beverage as well as perfumery applications. First evaluations and feedback from key customers are planned for the first quarter the full promotional campaign for Q2 and Q3 so that we expect first sales in Q4 of this year.
Health Ingredients shows sales decrease of 32% in 2022 over 2021. However, I’m very pleased that Anne De Vos, our new Chief Commercial Officer, has managed our customer portfolio for increased profitability already very successfully. And thanks to our operations team, having realized tremendous process cost improvements, we have turned a deep red negative margin to double-digit positive. This puts the sales decline in a much more positive perspective as we have laid out the basis for profitable growth this year and for the years to come.
In 2022, we started to work on market segmentation, refined value propositions and go-to-market strategies per segment and implemented pricing strategies. This year, with the new commercial team in place in the U.S. and Europe, we aim to grow our business with direct customers, as well as managing our distribution partners for performance. I am very excited to see the new commercial team developing segment and customer-specific strategies providing value-add to our customers and business partners with ready-to-market concept.
As promised, we are entering with resveratrol into new market segments to boost its sales. There is still lots of potential to grow in our core market of human dietary supplements. And we have recently approached the pet animal health market with more focused and targeted offerings. This month, we are now entering the very attractive personal care market with resveratrol and L-arabinose.
So here for you a little sneak preview today. Evolva goes personal care, we call it responsible care. Debottlenecking nature, the Evolva way brings natural molecules to purchasers in the personal care industry, helping them to source more responsibly and to achieve their sustainability targets more easily, at the same time, to avoid potential supply chain disruptions as our products are produced in Europe and not in China. Our resveratrol-based solution for skin and hair care applications is the beauty powerhouse. Larally, the skin microbiome influencer as natural and pure as it can be.
From yeast to yeah, we at Evolva think in end consumer applications from the outside in, starting with the consumer needs, trends and preferences and translate it back to customer needs. We offer our creativity to develop jointly with our customers’ exciting concepts, even ready-to-market as Evolva alone or together with network partners. Imagine all the claims, resveratrol and Larally offer multiple benefits for claim support backed by proven science and clinical studies. The Evolva team will go responsible care at the in-cosmetics in Barcelona on the 28th to 30th of March, and we are excited to see as many customers as possible.
Also on the Health Protection business development area, we can report good progress. After the successful approval of the NootkaShield concept for use as insect repellent in Hong Kong and Singapore, we are conducting a pilot launch with test markets in Southeast Asia, together with selected business partners. We expect consumer feedback for June, which will serve as valuable input for our further expansion plans in Asia as well as our market entry in the U.S.
In the U.S. now, we are proud to have received prominent support from the CDC, the Centers of Disease Control in Atlanta, with a grant of $540,000 for the development of modern, easy-to-use and effective nature-based products using NootkaShield for the U.S. market. With the new team recruited for the U.S. now, I am confident that we will also accelerate our activities going further. Evolva also goes responsible agriculture. The nitrogen-based fertilization market is estimated at $118 billion, while nitrogen fertilizers are responsible for 2.4% of global CO2 emissions. There’s an increasing pressure to find natural alternatives due to consumer awareness, tightening regulations and geopolitical conflicts.
Evolva and Grace Breeding have entered now into a strategic partnership, as you have seen earlier this week, to replace chemical fertilizers with a nature-based alternative, leveraging existing technologies from Evolva’s precision-fermentation platform, enabling Grace Breeding’s nitrogen-fixation technology to be eco-friendly and cost effective. Farm scale studies have proven effective, boosted farm yields, increased resistance of plants regarding extreme climate changes with a favorable ecological footprint with reduced air pollution and water and soil contamination. Along 2022, we completed our first phase of the 3-year transformation program to bring Evolva to its full potential. We built a solid foundation for commercial success with the activities as presented before. We now focus on the second phase to accelerate profitable growth with strategic initiatives over the next 9 to 18 months to reach and overachieve our midterm plan targets.
With our 2022 guidance achieved, we are confirming that we are on track to reach such midterm targets, accelerating the positive trends, targeting sales of more than CHF30 million in 2024 and CHF45 million to CHF50 million in 2025 with a continuous increase of the gross contribution margin, targeting EBITDA and cash breakeven in 2025.
And now, I hand over to Carsten for the financial details.
Carsten Daweritz
Thank you, Christian. Good morning and welcome also from my side to the financial results section of our presentation. First, a short recap of our financial highlights, which we track in the three categories: revenues, profitability and liquidity. As Christian already outlined, in 2022, we saw a strong 57% increase in total revenues and even 62% in product-related revenues versus prior year. Our gross contribution margin increased from a highly negative figure in 2021 to now first time positive 16% in 2022, which results into a CHF9.3 million improvement of our adjusted EBITDA. Last but not least, our cash balance stands at CHF5.1 million, with available financing lines of CHF16 million.
Looking at our P&L in more detail. The mentioned 62% product-related revenue growth, combined with the first time positive gross contribution margin of 16%, is turning a highly negative gross contribution of minus CHF5.4 million into a first time positive CHF2.4 million gross contribution. Taking depreciation and other operational expenses into account, also the resulting gross profit improved substantially by CHF7.4 million to now minus CHF1.5 million.
Recurring operational expenses reduced by CHF2.5 million as a result of our cost efficiency initiatives. In 2022, we had extraordinary expenses of CHF19 million, resulting from our strategic review that we performed in the second quarter last year. The main impact comes from an impairment of our EverSweet royalty and licenses assets, which is caused by a slower-than-expected market uptake. As a result of this combination, revenue growth, margin increase and reduced operational costs, the adjusted EBITDA significantly improved by almost CHF10 million to now minus CHF13.3 million.
Turning to our balance sheet. Our total assets decreased by CHF25 million, which is mainly driven by the earlier mentioned extraordinary impairment. The CHF2 million buildup of inventory was driven by, first a CHF4 million increase in the first half of the year for new products, supporting our targeted growth. This was then followed in the second half of the year by a decrease of inventory in the amount of CHF2 million and we plan to further decrease inventory going into 2023. Our cash position stands at CHF5.1 million at the end of the year with additional financing lines of CHF16 million.
Taking a look at the other side of our balance sheet, at our equity and liabilities. Equity increased through a placement of CHF6.4 million to several long-term oriented institutional shareholders. I’d like to mention again that members of the Board and Management participated with CHF1 million in this placement, demonstrating our strong commitment and confidence in Evolva. In addition, we had CHF10 million of equity increase through placements to Nice & Green.
Last but not least, our cash flow. Our cash flow was impacted by the following components. We substantially improved the cash flow from operating activities by spending about CHF11 million less than in 2021. This is, of course, driven by the underlying operational improvements as reflected in the improved EBITDA, but also already by the net working capital reduction that we started in the second half of the year.
Investing activities mainly include product and process development costs. And as a result, considerably less cash was needed, reducing the cash flow from financing activities by CHF11 million down to CHF14.8 million for the year 2022. This leaves us with a cash position of CHF5.1 million at the end of the year and the already mentioned CHF16 million open financing lines. With this, I would like to hand over back to Christian for a view on our short and midterm outlook.
Christian Wichert
Yes. Thanks, Carsten. Providing that outlook now for 2023 and beyond, Evolva is on track to further grow its revenues and profitability. And we expect for 2023 an ongoing positive business momentum with continued revenue growth to more than CHF20 million at constant currencies and a gross contribution margin of about – of above 20%. Our midterm targets are more than CHF30 million revenues in 2024 and CHF45 million to CHF50 million in 2025 with a continuous improvement of gross contribution and gross profit and EBITDA and cash breakeven in 2025.
Here with our last page, we would like to summarize the investment case of the new Evolva, Evolva debottlenecking nature. First of all, capitalizing on global megatrends, health, wellness and sustainability, having a unique precision fermentation platform with proprietary technologies, mid-term plan as presented in August based on existing products in a conservative planning form, which provides at the same time upside potential from a field innovation pipeline and business model expansions, and finally, a foundation which we have built for further future profitable growth.
We are now happy to answer your questions in our following Q&A sessions. And if I may ask the moderator to open the line, please.
Question-and-Answer Session
Operator
Yes. Thank you very much. [Operator Instructions] And the first question comes from Henrietta Rumberger from awp. Over to you.
Henrietta Rumberger
Yes. Good morning. Two questions, please. EverSweet, I think that’s a bit of a never-ending story. So when do you actually expect something to change with – in terms of disappointment? I mean you mentioned yourself that sales are not really moving the way you want them to move. And secondly, your financing situation, what does it look like in light of rising interest rates? Thank you.
Christian Wichert
If I take the first question and give the second to Carsten, Henrietta. Thanks for the questions. So on EverSweet, as you know, we are not in the driver seat. It’s a royalty stream. We are not responsible for the go-to-market strategy that is Avansya. I think there is some reorganization and resetting – hitting the reset button, which happened in 2022 with a new CEO coming on board from Cargill. I think as of 1st of July. We are in constant exchanges in regards to trying as good as possible to see the future. But due to the fact that such companies like Cargill and DSM also listed companies. Also, we do not have further transparency in regards to what to expect in the future. I can only share with you that we are together with Avansya, Cargill and DSM, excited about the potential for the future. This is – has not changed. I think there is a timing of probably 2 to 3 years on the EverSweet business due to the pandemic and several other reasons. But I think they have great plans in place and we are confident that we will see EverSweet – the EverSweet business maybe in the second half and also then for 2024 going forward, at a higher level. But this is only our expectations and this is only our personal opinion. Obviously, you would need to ask Avansya as well as Cargill and DSM to go further into detail, because we don’t have those kind of details.
Carsten Daweritz
On the financing question, we do not have direct debt components. We do have convertible notes with Nice & Green, our partner. And there, we have a small interest component, which is not impacted now by the rising interest rates as such. In terms of mid-term and long-term additional financing, we obviously, as communicated, still are in discussions with strategic partners along the value chain and with institutional investors to fund the remaining couple of millions that we need until breakeven. But in terms of interest rates, the direct – most direct impact was seen basically on the impairment with the increased WACC of the company. Also, our valuation of the intangibles had a small interest rate component as part of the mentioned impairment. But we do not see any other direct impact from rising interest rates.
Operator
The next question comes from Laura Pfeifer from Octavian. Over to you.
Laura Pfeifer
Yes. Hello, good morning. So maybe just as a follow-up to the financing question, I think with this CHF5 million cash at hand and the CHF16 million available financing line, you had previously said that you need a couple of more million. But maybe can you give us the total amount you expect from today until you reach breakeven? And also maybe what are your preferences kind of try to give us a little bit more flavor on that? And then secondly, on the sales target of more than CHF20 million revenues in ‘23, please, could you give us here also a little bit more details on the different building blocks. For example, when I look at Health Ingredients, should I expect this to strongly bounce back maybe to ‘21 levels, or will it still be below that? And also on vanillin, I understand this is back-end loaded to the second half, but does it also mean that for the full year, you will still have higher sales compared to this year? And also lastly, also if you could tell us a bit more on the strategy for R&D revenues and how much of this will be included in this ‘23 sales target?
Carsten Daweritz
Maybe I will start with the first question, with the easiest question and leave the others for Christian to answer. We do need around CHF30 million until breakeven. So, with the available CHF16 million, obviously, then we need another around CHF14 million plus/minus until breakeven.
Christian Wichert
Yes. And obviously, we are always keen on – especially in March, April and May timeframe to go through our books and turn over every single stone. So, those about CHF30 million, I am obviously keen to optimize as much as possible and especially finding also the right financing possibilities out of a shareholders’ perspective to optimize our current setup. So, in regards to your second question, sales target of above CHF20 million, the building blocks are obviously, as you have seen, vanillin, but also now more and more resveratrol. And you asked in regards to resveratrol whether we would bounce back to 2021 levels. I would put it the other way around. And I think we have now laid out the basis in 2022 with a clear market segmentation, segment-specific strategies, the full loaded – yes, value proposition package for segment-specific targeted offerings, not only managing our distributors to a higher performance, but also going towards direct business with a new team in place. So, I think also with resveratrol, we will see a much improved performance during 2022. However, just managing expectations, you know how long it takes in regards to lead management or lead time to convince customers to replace Polygonum with our resveratrol Veri-te, as well as when you go into new business where there is new product development formulations necessary that might even take longer. So, lead times are somewhere between 6 months to 12 months to 18 months sometimes. So – but I am confident that we will see also with resveratrol already some important impacts during 2023. But obviously, the full swing of the resveratrol hitting the – having hit the restart button, I think this will be mostly visible in 2024 and ‘25 to take the full harvest from our seeds which we have placed in 2022. And I think vanillin H2 is just because of production specifications or improve – optimizing our production setup and the production requirements are the reasons why vanillin will mostly happen in the second half of this year. Obviously, fully in line with our global partner. And whether full year is higher than 2022, that is the idea. And obviously, we are working hard with our partner to overachieve our targets. And in regards to R&D strategies, we are currently talking to several partners as we have communicated to find strategic partners along the value chain. There are exciting projects, which we will report on whenever they materialize. And I am not sure, Carsten, if we give details on the specific number of R&D versus others, I think we don’t. So, I hope, Laura, you can live with that.
Laura Pfeifer
Yes, sure. Thank you.
Christian Wichert
Thank you.
Operator
At the moment, there are no further questions. [Operator Instructions] And we have a question coming from Jonathan Herbert from Cologny Advisors, over to you.
Jonathan Herbert
Yes. Hi. I just want to understand on the production side. Are there any constraints from your CMOs, meaning if you were to see higher demand, could you easily meet that demand?
Christian Wichert
Hi Jonathan. Thanks for the question. Yes, we can. So, restrictions from the past are not part of our reality anymore. That was in 2019-2020. The new operations team around Gerhard Lobmaier have done a fantastic job in establishing a much more reliable network and also relationships to our CMOs, that is, thanks to the operations team, not a limitation for us going forward. Obviously, always taking into consideration that our mid-term plan as well as any kind of upsides, which we are heavily working on.
Jonathan Herbert
Great. Thanks.
Operator
[Operator Instructions] I am sorry, there is a follow-up question coming from Laura Pfeifer, over to you again.
Laura Pfeifer
Yes. Hi. I just have two follow-on questions. So first, maybe on the gross contribution margin, I think you have said you reached 22% in the second half. And I assume this was maybe helped by the vanillin contributions. Still, I am a bit struggling to understand why your guidance for the current year is, let’s call it, only above 20%. Is this due to product mix effect, or should it – or could it also be significantly higher, let’s say, 25% to 30%? So, that’s the first question. And then maybe the second is on your recently announced new collaboration with Grace Breeding for a new biologic fertilizer. Can you please help me to understand which compound you contribute here? I was struggling to find out exactly how the system works and what you – or what compound you contributes to the system? And also what could be the timelines and potential financial implications for Evolva?
Christian Wichert
Yes. Thanks Laura for the follow-up questions. So in regards to the gross contribution margin being only above 20% in comparison to that, we already achieved 21.6% in the second half. Yes, you are right. There is some product mix, but there is also our track record which we want to build and I hope you can accept that or respect that, that we rather want to under-promise and over-deliver than the other way around. And so I think we have established, hopefully, this track record now along 2022 and we don’t want to put ourselves under pressure in this regard. I think we have many, many initiatives going on, which we obviously are conducting to bring our gross contribution margin as well as gross profit towards higher levels as quickly as possible. And obviously, we always try to overachieve the targets which we have externally communicated. I am not – you were thinking of vanillin, I think I wouldn’t go so far and I also don’t want to differentiate between the different products. This is not our policy for the time being. But I think we especially have made tremendous progress with resveratrol to bring resveratrol from a deep red contribution margin towards a positive double-digit. I think this is probably the main contributor here, which I also see as a very strong foundation as of now going forward. So, I hope that is enough color for you to – for your question. And the second, in regards to Grace Breeding, we would not like to clarify which compound. It’s an existing compound based on the existing technology, so readily available. This is why we are currently already with that existing molecule supporting those farm tests. And we obviously have signed confidentiality agreements and therefore, I would like to not further comment on any kind of details. In regards to timelines, those farm tests obviously need to be completed and we expect earliest 2024, but especially ‘25 going forward, a very exciting business with huge potential. And please allow us more time to do our homework together with our strategic partner, Grace Breeding, to calculate this through. And whenever we are sure about the potential and also ready to communicate this, we will do so.
Laura Pfeifer
Yes. Thank you. Well understood.
Operator
There are no further questions. And with this, I hand it back to Christian.
Christian Wichert
Yes. As a final slide, I would like to draw your attention to the financial calendar of Evolva, which is showing the Annual General Meeting to happen in Reinach on the April 18, 2023 and our half year 2023 results planned for the August 24 of the current year. And with that, we thank you for your time and your interest in Evolva and see you soon.
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Evolva Holding SA (ELVAF) Q4 2022 Earnings Call Transcript