Evolva Holding SA (OTC:ELVAF) Half Year 2022 Earnings Conference Call August 25, 2022 4:00 AM ET
Company Participants
Christian Wichert – Chief Executive Officer
Carsten Daweritz – Chief Financial Officer
Conference Call Participants
Andrés Castaños – Berenberg
Daniel Bürki – Zürcher Kantonalbank
Christian Wichert
Good morning, ladies and gentlemen. Welcome to our Half Year 2022 Results Presentation. My name is Christian Wichert. I’m the CEO of Evolva. And in the room with me are my colleagues, Doris Rudischhauser, Head of Investor Relations and Corporate Communications; Philipp Frech, our new General Counsel and Secretary of the Board; and Carsten Daweritz, our CFO. Carsten and I will lead you through the presentation today.
I would like to quickly draw your attention to our standard disclaimer. And now let’s have a look at today’s agenda. We prepared for you 22 content slides overall. In the first section, I will give an overview on the most important business highlights of the first half of 2022 with seven slides. As promised in March, I will also provide some insights into our new mid-term plan, which we call MTP 2025, which is the product of our strategy review over the last weeks and months. For that we have nine slides prepared. Carsten then will lead you over five slides through our first half 2022 financial results in more detail. And after giving an outlook for 2022 and beyond, we will have a Q&A session at the end.
Let’s jump right into the business highlights. I’m very happy to report a strong increase in total revenues of 28% over previous year to CHF8.1 million and a gross contribution margin of 10.9%, having turned positive and double-digit already now after the first six months of this year. The entire team has done a fantastic job across the board, and we are well on track to reach our revenue guidance of CHF15 million and the position – sorry, and a positive double-digit gross contribution margin in 2022. Especially, we can be proud of the development of adjusted EBITDA, which is with negative CHF7.5 million, CHF4.5 million significantly improved.
For the next two slides, we will look a bit more specific to product-related revenues. You might recognize this slide from our March presentation when we showed you that the transformation from an R&D boutique to an early-stage commercial company resulted in a 46% CAGR from 2017 to 2021. The now achieved CHF7.8 million in the first half of 2022 are an increase of 30% over previous year’s first half, driven especially by vanillin, but also valencene and nootkatone. Sequential growth over second half of 2021 even accounts for 148%. This shows that our plan to set the initial focus on Flavors & Fragrances has paid off. This focus will now turn also to Health Ingredients.
With CHF7.8 million in the first half, we are well on track to reach our full year guidance of CHF15 million. Our gross contribution margin turned positive and with 10.9% double-digit already now after the first half of this year, which we expect to further increase. This very positive development is the result of the hard work of our operations colleagues, having strengthened our relationships with key CMOs and having developed and implemented important process technology improvements. In addition, our commercial team has started to better capture the value we create for customers and consumers with value pricing initiatives.
As started in March, we provide more transparency on our core business units active today, this is on the left, Flavors & Fragrances, F&F, with the active revenue drivers, valencene, nootkatone and vanillin; and Health Ingredients, HI, next to it with resveratrol and EVERSWEET. L-arabinose is a new product development for which we are planning the preparation of a market launch and has possible applications in both business areas, F&F and HI. On the right, you see our developing business with NootkaShield, addressing solutions for Health Protection, HP, which, for the time being, is being reported under HI. With that, Evolva capitalizes on global megatrends of health, wellness and sustainability.
We put our initial focus to boost our commercial performance on Flavors & Fragrances and this paid off. Sales are up by 247% over first half of 2021 to now CHF 5.5 million and even 308% compared with second half of 2021. Key to this outstanding performance was the successful delivery of the first commercial batches of Vanillin to global customer, while both Valencene and Nootkatone were ahead of plan.
For the second half of this year, we expect the positive momentum to continue. Sales of Valencene and Nootkatone to further pick up and Vanillin to become an important additional revenue pillar in F&F. Our value pricing initiatives are expected to further enhance F&F’s gross contribution profile.
The performance of Health Ingredients needs to be seen in a differentiated way. First half of 2021 was characterized by overstocking behavior of customers as a consequence of production issues in 2020, which are now fully resolved. So comparison to such a higher base would be misleading. Compared to the second half of 2021 though Health Ingredients shows a sequential growth of 28% to now CHF 2.3 million in the first half of 2022. Despite the fact that the start into the new year was very slow. We see significant global market interest in new product development with our Veri-te™ resveratrol and often interlinked with co-branding requests from customers.
Anne De Vos started in July last year with Evolva as Head of F&F and she did a fantastic job in accelerating our commercial performance in her area. She was now appointed last month as Chief Commercial Officer and assumed now also the responsibility for Health Ingredients. Anne will now extend the focus to boost our commercial performance of Health Ingredients, including value pricing for margin improvement.
EVERSWEET our stevia product development with Avansya, the JV of DSM and Cargill performed below expectations. While we still believe in the potential of EVERSWEET, the expected market uptick seems to be slower and taking longer.
With NootkaShield, we have taken now an important next step. We successfully started pilot launches with business partners in Southeast Asia with small initial revenues. These experiences will be important for our future entry in the U.S. market. Overall, I’m very pleased with the achievement so far.
Let’s look at the three immediate focus levers we had introduced in March. First, boost commercial performance with the model focus and deliver. Supply chain issues have been resolved, Vanillin has started successfully as a new business, and we signed with Tovani a new distribution agreement for South America as a new market. Second, cost discipline with a motto run at tight shift. We have shaped a more efficient and effective organization. We identified cost improvements of CHF 2 million with no negative impact on the business expected and continue to put our funds to the most effective use. And let me say here also that I’m very impressed how the organization has responded positively and constructively to the challenges given.
And third, culture as an enabler with the motto all hands on deck. We are working in teams cross-functionally and overlapping groups. We spend a lot of time on communication, for example, in town hall meetings, to make sure that our strategies are understood by everyone in the organization with clear priorities set and focusing on pragmatic execution. We will continue to increase our organizational productivity as a foundation for future profitable growth.
Let’s now move over to the next chapter, for me to provide you more insights into our midterm plan 2025 as a result of our strategy review over the last weeks and months. We expect to accelerate the positive trend with revenues growing by 40% to 60% per year from CHF 15 million over CHF 20 million and CHF 30 million towards CHF 45 million to CHF 50 million in 2025. We expect our gross contribution margin to continuously increase and are targeting EBITDA and cash breakeven for 2025.
We conservatively planned largely based on our existing product portfolio with new developments being mostly an upside. The teams have developed strategic initiatives with pragmatic action plans to ensure on-time execution. The leadership team is on a mission to develop the new Evolva into a biotech leader providing solutions around natural ingredients based on fermentation. The foundation for that is our precision fermentation platform with leading proprietary technology.
With everything what we do, we are addressing global megatrends, wellness, health and sustainability. And our ambition is to help make this world a little bit of a better place by resolving bottlenecks of nature in a more sustainable way, with quite a compelling purpose.
Evolva’s key capabilities and competence areas are threefold: one, developing new molecules based on leading R&D capabilities; two, upscaling of molecules and concepts for our own development as well as becoming a partner of choice for other companies; and third, commercialization – commercializing products, existing and new ones, in form of ingredient sale or ready-to-market concepts, even formulations in current and new markets.
This concept slide tries to summarize our strategy on one page and should serve you over the next six slides in the upper right corner as a structure where to place the following content, as we selected four spotlights for you as examples for important key components of our strategy and our midterm plan in the following slides.
Here’s spotlight one. We spent recently a lot of time on identifying new candidates for our innovation pipeline and to decide which ones to further progress through the different stages of the innovation funnel from proof of concept to development, through scale-up, to market launch and full commercialization. As there are quite a number of candidates for both Evolva F&F as well as Evolva HI in different stages, our innovation pipeline provides existing – exciting potential for future growth from a short, mid- and long-term perspective.
Spotlight two. Vanillin is an exciting success story, which demonstrates our strong capabilities along the entire value chain, especially regarding strain engineering and R&D, joint development between R&D and operations and leading upscaling capabilities of our operations team.
Vanillin is a top ingredient in the F&F market widely used with significant potential for us and our key global customer. The natural supply is limited and subject to volatility in quality, quantity, and price. The synthetic alternative is not in line with consumer preferences who are looking for natural flavors and not artificial ones.
So Evolva’s Vanillin is a great product with the superior value proposition. Natural declaration, no artificial flavors, cost competitive, superior sensorics, consistent high quality and providing our customer with a European source and abundant product availability. Especially exciting is to see the way we correct the nut this time, the right people working in cross functional overlapping teams, supporting, challenging, pushing each other towards the best possible solution or and with the customer gather with the right CMO partner, seamless teamwork of a high performing team.
Not only does this represent a major revenue opportunity in our mid-term plan, it also further serves as a case study for future R&D strain development and upscaling projects for potential customers in the near future.
Spotlight 3, our natural Nootkatone development is currently being launched, addressing naturality and sustainability with a strong value proposition. Current Nootkatone market consists to similar parts of synthetic Nootkatone and natural Nootkatone from bioprocess and ex-citrus. Today, we are present as one of three market leaders in only one segment. And now with natural Nootkatone, we can attack the natural Nootkatone market ex-citrus and access new market segments and approach new customers, aiming for about 20% market share in the overall Nootkatone market by 2025. Further accelerating our commercial growth in F&F from a mid-term perspective.
Our last and prominent example, Spotlight 4 is Resveratrol. Resveratrol is a very powerful antioxidant with holistic benefits and therefore ideal for modern consumer health products. Our Veri-te Resveratrol has proven health benefits backed up by scientific studies for mental health and cognitive performance, eye health and protection, skincare and anti-aging, blood glucose regulation, oral health, cardiovascular health, gut and digestive health, and bone strength.
Just imagine how many applications could be addressed not only in our core market segment Dietary Supplements, but also in Cosmetics, Functional Food and Beverage, Pet Animal Health and Pharma offering significant potential.
In addition to the holistic benefits of Resveratrol, our Veri-te trends Resveratrol has a strong value proposition. It is a natural alternative to synthetics with a superior cost to value. Opposite to the plant extracted powder, our Veri-te is highly pure and free of contaminants like Emodin and PAH, and we are cost competitive able to offer consistent quality, abundant quantities out of European source.
Evolva is the sole supplier of fermented biotech trends Resveratrol expected to grow its overall market share from about 5% today to 15% by 2025, replacing synthetic and plant extracted alternative step by step. When thinking of entering new markets, we have spent a lot of time to develop an enhanced market segmentation for Resveratrol. We plan to expend with immediate focus our market activities in our today’s core market of dietary supplements and leverage our capabilities to enter pet dietary supplements in the fast growing animal health market.
At the same time, we are targeting the highly attractive cosmetics market where we expect strong growth as Evolva’s Veri-te Resveratrol has favorable value proposition here. For 2023 forward and beyond, we plan to also enter functional food and beverage as new and fast developing new territory and pharma and pet veterinarians as new high value markets with long-term focus. We will enter such new markets with segment specific go-to-market strategies, offering consumer oriented and ready to market concepts, which will boost Resveratrol sales significantly going forward.
Leadership team is very excited about the full potential of the new Evolva, which we have identified during our strategy review along the last weeks and months and we are committed to develop Evolva to its full potential. To do so, we see three phases of development along the timeline. Phase number one, over the next six to 12 months, actually having started last February. First phase is about further building our foundation for commercial success, go-to-market strategies, value propositions, value pricing have been worked on to boost our F&F business as well as Resveratrol from now on.
Our gross contribution margin already turned positive and we are aiming to further increases while shaping a more efficient and effective organization. We’re actually ahead of our time plan here. Looking at the X – so I’m actually pleased with the progress so far.
And now looking at the second phase along 2023 and into 2024 is all about accelerating our growth, which happens over entering new markets with Resveratrol further growing our Vanillin business and broadening our product portfolio with natural Nootkatone and L-Arabinose. We target to start commercializing our new business activities around NootkaSHIELD on broader scale.
Before we then enter into the third phase, along 2024 and into 2025 which describes the evolution to the next level. And that is further strategic initiatives on commercialization, product portfolio, our service offering, potential new business models and further internationalization and geographic footprint. As previously communicated, we are also in discussions with potential strategic partners to further strengthen our business model on both operational and commercial level. And all this will enable boosting our performance to the levels as described on Slide 12, which is our midterm plan.
And with that, I hand over to Carsten.
Carsten Daweritz
Thank you, Christian. Good morning, and welcome to the financial results section of our presentation. First, a short recap of our financial highlights. As Christian already outlined, we saw a strong increase in total revenues with a 28% growth and in product related revenues with a 30% growth versus prior year. Gross contribution margin increased from a highly negative figure in 2021 to plus 10.9% in the first half of this year, resulting in an improvement of adjusted EBITDA of CHF4.5 million to minus CHF7.5 million.
Our financing is secured for the next 12 months with a cash position of CHF7.4 million and available financing lines of CHF20 million.
Turning to the next slide, looking at our P&L in more detail. As mentioned 30% product related revenue growth, which is even the 148% growth versus the second half of last year combined with the first time positive gross contribution margin of 10.9% is turning a highly negative minus CHF4.4 million gross contribution into a positive CHF0.9 million gross contribution. Taking depreciation and other operational expenses into account, the result in gross profit substantially improved to minus CHF1 million.
While recurring operating expenses remained almost flat, extraordinary expenses amounted to CHF19 million and relate mainly to an impairment of our EVERSWEET royalty and license asset, which is caused by a slower than expected market uptake. As a result, the adjusted EBITDA also significantly improved by CHF4.5 million to minus CHF7.5 million. Our total assets decreased by CHF60 million, which is mainly driven by the mentioned extraordinary impairments resulting from our strategic review performed in the second quarter of this year.
Networking capital increased mainly due to the CHF4.3 million build up of finished products. This is driven on the one hand by our front loaded production schedule this year and on the other hand, by new products, both supporting our targeted growth. Our cash position stands at CHF7.4 million at the end of June, and we have additional financing lines of CHF20 million available from Nice & Green.
Now let’s take a look at the other side of our balance sheet at our equity and liabilities. Equity increased through a replacement of CHF6.4 million to several long-term oriented institutional shareholders. I would like to highlight that members of the Board and management participated with CHF1 million in displacement demonstrating our commitment and confidence in Evolva. In addition, we had CHF5.8 million of equity increase through subscriptions with Nice & Green. As Christian mentioned, discussions are ongoing with potential strategic partners that can entail an equity of financing component.
Last but not least, our cash flow was impacted by the following components: While the cash flow from operating activities overall remained at prior year level with minus CHF13.5 million, we substantially improved the underlying operational cash out by spending about CHF4 million less than last year. This CHF4 million were upset by the already mentioned increase of networking capital. However, this sets the basis for gradually lower cash needs for the next years. Investing activities mainly include product and process development costs and the cash in from financing activities remain similar to the first half of last year. This overall results to a cash position of CHF7.4 million at the end of June.
With this I’d like to hand over to Christian for a short and midterm outlook.
Christian Wichert
Yes, thanks Carsten. As a final slide, we – let me summarize our presentation of today confirming that we are well positioned to unlock attractive expansion potential for future value creation. Short-term is our outlook for 2022, we expect an ongoing positive business momentum and are well on track to reach our guidance of revenue growth of more than 50% to CHF15 million and the positive double-digit cross contribution margin in 2022.
Mid-term, we target 40% to 60% revenue growth, mainly driven by existing products to reach CHF20 million in 2023, more than CHF30 million in 2024 and CHF45 million to CHF50 million in 2025. With significantly improving gross contribution and gross profit, we target EBITDA and cash break-even by 2025.
Now, I’m handing back to the operator for our Q&A session, and we are happy to answer your questions now.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We will take our first questions from Andrés Castaños [Berenberg]. Your line is open. Please go ahead.
Andrés Castaños
Good morning, everyone. Thank you for letting me ask questions. My first question is on revenues growth 28%. How much of this is pricing? How much of this is volume increase in particular in Vanillin? Have you been able to increase pricing? Or raise volume size that is driving it? Thank you.
Christian Wichert
Yes, Andrés thank you for your question. I think it is mostly driven by volume increase, which is as we stated mostly driven by Vanillin, but there’s also a lot of improvement already happening in regards to value pricing in the F&F segment mostly relating to Vanillin and – sorry to Valencene and Nootkatone. And as we are also starting to implement our value pricing activities towards Resveratrol.
Andrés Castaños
Thank you very much. If I can ask a second one this time on the direct production cost, a big improvement since last year. What the change we’re seeing here? Is it something structure that has changed or is so, yes, what is driving the changes here? It’s I mean, 2021 was little dump year, but would like to understand better.
Christian Wichert
Yes, I think there’s a bunch of things to mention here. I mean, first of all, I think Gerhard Lobmaier and his operations team have done a fantastic job in further developing our process technology and working hand in hand with all our CMOs, which are also hand selected. And also here, I think the team has done a fantastic job in further improving our relationships with our key CMOs. And for that reason I see strong improvement across the board in regards to how we produce our products, not only from a quality perspective, but also from a cost perspective.
Andrés Castaños
Okay. Thank you. I will jump back to the end of the queue now after two questions. Thank you very much for your answers.
Operator
[Operator Instructions] We will take our next questions from Daniel Bürki. [Zürcher Kantonalbank] Your line is open. Please go ahead.
Daniel Bürki
Yes, thank you. Good morning, gentlemen. I would also have some questions. Maybe the first one on financing. You said you would have enough cash for another 12 months. Could you elaborate a little bit at what – at moment in time you would need more, you probably have to announce it already in 2022 about the financing situation. Then maybe a question for Carsten, you mentioned adjusted EBITDA, could you also say how much the reported EBITDA was and where you – which adjustment did you take into account? And then, sorry, a third one and last one [ph] regarding possible further amortization. You had these note from the Swiss Exchange Regulation. What possible new amortizations do you have to consider in the future? Thank you.
Christian Wichert
Dan if you allow, I let Carsten answer all three questions. Carsten?
Carsten Daweritz
Yes. Thank you for the question, Daniel. On the financing question, we do have enough financing for the next, as I said, at least 12 months with obviously now gradually reducing cash needs as we make these operational improvements towards break even in 2025. We need overall, I guess this is what you are aiming at another around 20 million until we reach break even beyond the 20 million financing line with Nice & Green.
On your second question, adjusted EBITDA which improved significantly. The reported EBITDA stands at minus 9.5 million for the half year compared to minus 13 million last year. So that’s also an improvement.
Leading to the last question on possible further authorization. Obviously, we have done in depth strategic review and all adjustments that we see necessary have been made. So we don’t see any further amortization charges. If we look at this SER announcement from Tuesday, obviously, as we commented, we don’t think that the main allegations uphold. So we don’t see that another amortization or impairment would be necessary after conclusion of the investigation or respectively the decision by the Sanction Commission.
Daniel Bürki
Thank you.
Carsten Daweritz
Welcome.
Operator
We will take our next questions from Andrés Castaños. [Berenberg] Your line is open. Please go ahead.
Andrés Castaños
Hello. Following up on the write-offs as well. So I see an inventory write-off, can you explain why? And also on the EVERSWEET related environment, what you expect going forward? What is the outlook for this product? And shall we assume that a cash impact for the company going forward will be only positive given the, yes, the royalty model that you have? Thank you.
Christian Wichert
Yes. Maybe the write-off on inventory maybe you take Carsten and then I’ll take the EVERSWEET.
Carsten Daweritz
Okay. So yes, we have three components of this write-off. First being the write-off on the patent and patent application. This is the product candidate that out of the strategic review, we don’t see longer strategically relevant for us with our pipeline on innovation. And on the third one, the inventory write-off this relates to various products with one product in specific where we had adjustments to market pricing due to the higher production cost of initial production campaigns.
And for the EVERSWEET impairment, I hand back to Christian,
Christian Wichert
Yes. Andrés, I think in regards to EVERSWEET as we developed the strain and looking at the product itself, we are super excited about this business and did not necessarily change our excitement around it. But as our strategic partner here with Avansya or as the joint venture of DSM and Cargill are in the driver seat to bring this to the market. We can only observe and so what we see is that this market uptake takes longer than expected, it’s slower than expected. And so from that perspective, I think we have done our homework and from a more realistic and conservative perspective taken some measures to make sure that we – although we believe in the story long-term we have changed our assumptions going forward to display this slower and longer necessary uptake in the market.
Andrés Castaños
Understood. Okay, second question to see if I may on the reduction of CapEx and R&D, but I guess a little bit so significant reduction in CapEx, a little, small reduction in R&D. What is the guidance going forward?
Christian Wichert
Carsten, you want to take that?
Carsten Daweritz
On CapEx, CapEx mainly relates to product and process development expenses. So since we have particularly last year’s spent a lot with the on-boarding of new CMOs, introducing new products this basically reduced now, and this is not a temporary reduction. We will continue to have such expensive CapEx, but at the lower level than last year.
On the second, sorry, what was the second?
Andrés Castaños
R&D?
Carsten Daweritz
On R&D, we do see a reduction in depreciation on the one hand and we see also first results of our cost saving, cost efficiency initiatives. We do see while we project a slight increase in the second half of R&D expenses as we focus now on new products for our innovation, from our innovation pipeline, and also going forward R&D plays a major role. So we will continue to invest and build from that basis, rather with a slight growth in expenses. On the other hand taking expenses off the administration area, so that we put our funds in the most promising and important areas.
Andrés Castaños
Understood. Thank you very much. This is very helpful.
Operator
We will take our next question from Daniel Bürki [Zürcher Kantonalbank]. Your line is open. Please go ahead.
Daniel Bürki
Yes, thank you. Yes. Hello it’s me again. Sorry, I have purely financial questions regarding your guidance 2025. You would like to get an EBITDA breakeven, but also a cash breakeven so which one is it? Is it EBITDA or is it free cash flow? That’s the first and then maybe you get a feeling for your contribution margin in the second half. Do you expect it to be higher in the first half? So let’s say the area of 20%, or is it even possible in the second of that you even have a, let’s say a positive gross profit, not only a positive gross contribution.
Carsten Daweritz
Yes. Thank you for the questions. On the first one cash or and EBITDA, it’s actually both EBITDA and cash breakeven in 2025. The reason being, that we have see more investment in CapEx and in networking capital in the next two years, and then we have the ability to gradually decrease that networking capital position. So this might even kick in earlier, but we currently see both breakeven in 2025.
On your second question with the gross contribution margin, we only see a very small increase in the second half but then a gradual, continuous increase as we move into 2023 and beyond.
Christian Wichert
Danny reason being here is that any, change related activities, take some time and as we have started to communicate in March and also this time, we rather want to plan conservatively and start a track record of delivering on our promises.
Daniel Bürki
Just – if I may regarding the products, to get a feeling which of product in your portfolio, they get the best contribution margin, if it goes smoothly. So where do you have the biggest let’s say trigger there?
Christian Wichert
Yes, let us do our homework first. If you allow and I mean, besides the fact that we don’t report on single products, I think it would be a little bit too early to really analyze any kind of profitability profile because we are at the start of our strategic initiatives. And give us a little bit more time on that, please.
Daniel Bürki
Absolutely. Thank you.
Operator
It appears there are no further questions at this time.
Christian Wichert
Yes. Thank you very much. Before we close, may I draw your attention to the financial calendar which is showing three items Investora Zurich on 21 September this year, and then our full year 2022 results presentation planned for the 9 of March next year and the AGM planned for 18 of April 2023. There’s also an appendix this time where we put some slides in for you to get some further information around Evolva and our presentation today had a little bit of backup for it.
And to close, I want to thank you for the opportunity to present our strong first half 2022 results and your attention and interests into our exciting journey to build a new Evolva with a strong midterm plan now in place, which will bring Evolva to the next level. Thank you and looking forward to continuing our conversations around this topic.
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