evolva-holding-ag-elvaf-ceo-oliver-walker-on-q4-2018-results-8211-earnings-call-transcript

Evolva Holding AG (ELVAF) CEO Oliver Walker on Q4 2018 Results – Earnings Call Transcript

Evolva Holding AG (OTCPK:ELVAF) Q4 2018 Earnings Conference Call February 28, 2019 4:00 AM ET

Company Participants

Paul Verbraeken - Head of Investor Relations

Oliver Walker - Chief Executive Officer

Scott Fabro - Chief Operating Officer

Conference Call Participants

Lala Gregorek - Trinity Delta Research Ltd.

Sebastian Bray - Berenberg Bank

Sara Welford - Edison

Operator

Ladies and gentlemen, welcome to the conference call discussing Evolva’s Financial Results of 2018 Financial Year. I am Allis, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Mr. Paul Verbraeken, Head of Investor Relations. Please go ahead, sir.

Paul Verbraeken

Thanks Allis, and good morning, everyone, and welcome to the call. During this call, we will make forward-looking statements about the events and circumstances that have not yet occurred, including projections of Evolva’s operating activities, our strategic plans and the anticipated financial impact on our business and financial results for 2019 and beyond.

Such forward-looking statements are subject to known and unknown risks, uncertainties and other factors, which may result in a substantial divergence between the actual results, the financial situation, development or performance of the Company and those explicitly or implicitly presumed in these statements.

Against the background of these uncertainties, participants in this call should not place undue reliance on forward-looking statements. The Company assumes no responsibility to update forward-looking statements or to adapt them to future events or developments.

In today's call Oliver Walker and Scott Fabro will elaborate the progress achieved in 2018 and will then be available for Q&A. Before we begin, I'd like to note that the press release and the slides are available for download on our website. And the call is being recorded as Allis said.

And with that, I’ll turn over the call to Oliver.

Oliver Walker

Thank you all, and hello, and welcome also from my side. Let's jump right into the presentation deck, following I reference to Slide 4 highlights in 2018. We have made substantial progress since we reported last time. We are very satisfied having completed the transformation process and being on track to build our business.

The foundation is laid for more significant product sales growth in the mid-term, opening new market segments and add a new product. And considering our current financials, we believe to be on track to reach cash breakeven in the 2021 to 2023 timeframe as communicated in August, 2017.

As you can see on the next slide, Slide 5, we track both the exploitation of our current product portfolio and what our well-developed product pipeline is delivering, variance of existing products as well as launching new products over the foreseeable future.

Moving on to Slide 6. It is worth mentioning that besides the significant progress on the commercial front, we are putting in place a full supply chain and network of service providers to enable the ramp up of volumes.

Last but not least and worthwhile to be mentioned, we have received the first royalty payment from EverSweet in Q4 2018 albeit being modest as expected and also communicated it earlier.

Please have now look at Slide 7. As a result of the transformation and restructuring, we have significantly improved the financial profile of our company. The results or expenses in the coming years slower than earlier communicated a line of sight towards significantly lower manufacturing costs achievable step-by-step over the coming years and the total revenue that is lower than earlier communicated to reach cash breakeven.

Before running through more details on our financials, some more details and providing some strategy update. Scott, can you please provide an update on our different businesses? Scott, please.

Scott Fabro

Yes, I can. Good morning, everyone. I am Scott Fabro and glad to do that. So continuing on, on Slide 8, we would like to reference for you a couple of important points. We see continued growth within our Flavors & Fragrances business. This is driven both by new product variations and growth with existing customers with our usual product sales. Evolva continues to train and leverage our distributors and have expanded as well into Latin America and Asia where we are seeing results.

Valencene, one of our other products beyond Nootkatone in this area as well as showing solid good growth and promise for further growth in 2019 as well, 2018 built a solid good pipeline for additional sales in both of these areas of Nootkatone and Valencene.

Moving on to our next slide, which is Slide 9, our Human Health business, which is Resveratrol today. This is a very similar story as we heard with flavors and fragrances, with good growth rates as well as building with numerous new customers, and working on expansion to new market applications.

We will see a new product forms came to market in 2018 and expansion into additional geographies is building sales volume and revenue as well as our pipeline continues to build with these customers who have been working with our products for quite some time.

Moving on to the next Slide, Pest Control. The Environmental Protection Agency of the United States approval of Nootkatone was delayed by the U.S. government shutdown, which I'm sure all of you are familiar now that that has been resolved. It is back on track and we expect approval in the next few months.

We have nearly 100 opportunities that we are active, highly active with our customers, we were working and they are formulating with and we looked forward to seeing good growth continuing into 2019 for this product area.

Moving on, as Oliver's comment to the EverSweet that they are commercially producing EverSweet and selling it, and we received our first royalty payment, although it was modest as expected for 2018.

As you are aware, Cargill and DSM have announced the new joint venture and they will combine technologies to produce EverSweet, all of the products will be marketed under EverSweet and Evolva’s royalty rates on EverSweet sales and the existing agreement between Cargill and Evolva remain unchanged.

And from my side, that is it, back to you Oliver.

Oliver Walker

Thank you, Scott. Let me provide you now with some additional comments on our financial performance that I’ve already mentioned. For that let's jump to Slide 14 directly, titled, streamlined customer facing activities. As you can see, operating expenses have lowered significantly even though for the activities who want to pursue, as they truly contribute in a relevant manner to build our business. We have more resources available than before the restructuring. This is the result of not only saving costs, but vigorously focusing our Company's activities.

Third, we have created a healthier distribution of resources between R&D and commercial activities, as you can see as of the slide. As a result of the restructuring, operating cash outflow has significantly lower to two. You can find this on Slide 15, titled, cash flow. Growing sales and lower product manufacturing costs will be the main leaders as already mentioned to bring this valley to breakeven in the 2021 to 2023 timeframe.

Let's move now on to the strategy update slide that you want of our presentation, beginning with Slide 16. We take a pragmatic approach developing our Company by building on our core capabilities. However, even though being a small company in size, we integrate all the necessary disciplines to develop, but eventually also scale up and launch new products.

We often call this to take an idea from a blank sheet of paper to commercial product. Besides exploiting the potential of our already launched products, we focused over the midterm on bringing products to the market that are either in late development stage or even finished and ready to be scaled up.

For that purpose, we have assessed our large IP portfolio and classified it. As a result, because a well developed product pipeline that should be the labor want potentially three new compounds over the foreseeable future, all of these compounds being already in late development stage or as I mentioned, asking already finished from an R&D perspective.

In order to meet the needs of our customers, we build ingredients, systems and where applicable, we also develop applications and formulation. For example that's been the case in Pest Control. The focus on our core capabilities is also reflected in our principal to find strategic partners where we cannot become the leader or expert.

This does apply not only to our manufacturing approach, relying on a network of service providers, but as well through our commercial approach leveraging distributors or market leaders in their segments. Current example for this is our approach to build the Pest Control business.

Finally, with the predominant part of our R&D resources is deployed to work on our own products. We take onboard R&D projects from partners if they have relevant experience or technology and provide a commercial upside. So these are the main elements today of our strategy, and especially on what we execute on.

Before we conclude our opening speeches with the financial outlook for 2019, let me show you on Slide 17 an updates of our products and market pipeline. This overview includes our already launched products, including products commercialized by partners as well as our potential new compounds and shows the stage in which a product is in terms of its market launch.

As you can see more and at the same time more relevant market and consequently as well more revenue potential is being opened up over the foreseeable future. This is applicable to own distributed products, most prominently Pest Control, product commercialized by partners such as EverSweet offering a substantial potential as well for Evolva and new products. All the ones mentioned in this presentation as I already mentioned are in late development stage and used in market segments in which we already operate and therefore already has customer access.

To summarize, we are excited about our prospects going into 2019. With this, we have come to the financial outlook for 2019 on Slide 18. As we have already spoken about the different items over the past 10, 15 minutes, I will not repeat them again, but want to rather start providing you the possibility to ask questions.

For this, I actually will hand over to our operator. Please.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Lala Gregorek, Trinity Delta. Please go ahead.

Lala Gregorek

Good morning, gentlemen. I had a question about EverSweet and switch a little bit Cargill and DSM joint venture. To my understanding, I guess Evolva was the brains of the collaboration with Cargill, but also DSM has got a strong [east R&D competency]. So would you be able to I suppose provide a little bit more information as to what DSMs role would be and does this also mean that Evolva’s role in the project with Cargill is complete?

Oliver Walker

Thank you for that question. That's an important one. And I think this will show also actually the added values of having Cargill and DSM in a joint venture. So you called off being the brain or having been the brain developing Stevia and EverSweet. I think that's something I can absolutely follow. And using the example, I would say your analogy I would call DSM probably the muscle now in the whole equation of making sure that eventually EverSweet will have also very low production costs.

As I mentioned earlier on our own products that we sell ourselves and get produced to lower manufacturing cost is a very important task and the same applies actually to anyone else, so including also EverSweet. And I think DSM has just much more resources than we have available to do this task of improving manufacturing costs.

So in this respect, I like your analogy, I well accept it us being the brain and DSM definitely being a very intelligent muscle. They certainly are also having a lot of brain, but in this equation here, they are definitely the muscle which is important. For us, for the moment at least, the work is done. So that's the second part of your question to be answered.

For us at this point in time to work is in this time, we may see how that will continue. We have also mentioned one-year ago that we have a collaboration agreement entered into beyond simply EverSweet. But that’s far away actually from now, I think now the priority is for the two companies’ Cargill and DSM to not only launch which Cargill has already done, but to scale ups and to really reap the benefit of the potential that EverSweet has.

Lala Gregorek

Thank you very much. That’s a really useful clarification.

Oliver Walker

Welcome.

Operator

The next question comes from the line of Sebastian Bray with Berenberg. Please go ahead.

Sebastian Bray

Hello. Good morning, and thank you for taking my questions. So I would have three please. The first is on EverSweet. Where was the first sales booked in the P&L? I’ve had a quick look for your annual reports, but I can't find, so my guess is that somewhere within financial income, but could you tell me the line where this is located?

My second is on the comments around cash flow breakeven. Oliver, you mentioned that the level of sales required to hit cash flow breakeven is lower than previously guided, but for the year for which cash flow breakeven is expected has remained unchanged. This means that the previously communicated 40 million the 60 million sales ambition by the early 2020 no longer stands.

And finally, last question on the one to three compounds that are currently in development. Obvious in any way related to the old Agarwoods and Saffron projects that Evolva previously was working on? Thank you.

Oliver Walker

Thank you, Sebastian. Great question. To tackle perhaps the last first. No, they are not related to Agarwoods or the other one that you have mentioned. It’s a different compound. The cash breakeven topic is different. The interpretation should be that if the revenue that we need to turn cash breakeven is slower than earlier, this means that our business is significantly de-risked as we are getting earlier into the cash flow zone.

Our revenue ambitions, however they are certainly still up, I would say whether 40 or 60 and what the exact amount we will any way see, we are still in the earlier stages as you can see – and out of the Slide 17, the strategy slide or the products pipeline slides as well as market pipeline and it is building now quite significantly. Therefore, I think we have high ambition on the topline front, but certainly wanted to de-risk, let's say the whole company in terms of what we need in order to get cash breakeven.

Then the last part, the first part actually or the first question you have was where we have recognized this small income from royalties on EverSweet. That's actually up in product sales where it also somehow belongs.

So because it is really generated out of realization of sales, even though it is a royalty income and dictates anyways at this point in time, not yet really relevant. So would have not been or if not the visible ones that has hell to say sort of moves the needle at all in terms of product sales. So what you have seen on the product sales front has been generated by Resveratrol and Nootkatone, that's the 99.9% contribution.

Sebastian Bray

Can I just ask where will EverSweet books going forward then, will it remain in sales or will it fall into the financial income line?

Oliver Walker

No, it will remain in sales because it's part of the operating. And the cost we have on R&D line will now have finally an income on the topline. So it has nothing to do actually really with the financial income.

Sebastian Bray

[Indiscernible] basically when it does arise, it's not as financial income, but has very high margin sales in the sense that’s not really a cost for your servicing.

Scott Fabro

That's correct. There is only amortization of some intangibles that have been capitalized as we have commented since we have entered into the first, a collaboration agreement with Cargill. So in this respect on an EBIT level, there will be some costs respectively, some amortization, which is no cash item certainly going against the income. But on the gross profit level, you're absolutely right. It's like R&D partnership income, which has also an income on the topline while actually no expense within cost of sales, absolutely correct.

Sebastian Bray

Thank you.

Oliver Walker

Welcome.

Operator

The next question comes from the line of [indiscernible]. Please go ahead.

Unidentified Analyst

Good morning, Oliver. Good to hear from you again. Can you spend maybe a little more time on the Slide 17 with all products and pipeline, and if you can elaborate a bit on the drivers in 2018 for Resveratrol and Nootkatone, a bit more granularity also in Vanillin where you’re successful, in which areas are smaller counts, bigger counts to see a bit the big and the smaller maybe?

And also for 2019 when you talk about doubling product sales is also here. Valencene playing role just looking at the color with all commercial phase for this year and [indiscernible] drivers behind maybe last year, this year, 2020 and of course you talk about small numbers here of course, and I know the 0.5 million or 1 million can move the needle quite dramatically. But yes, I think you understand what I want to get. Thank you.

Oliver Walker

Welcome. So the 2018 numbers as already mentioned has been predominant, actually the vast majority was influenced by Resveratrol and Nootkatone. These were the two main drivers Scott elaborated where we made great progress with different customer accounts.

I think the – thing that we have moved a little bit is from creating demand. Also going into actually playing a role within the existing demands for a Resveratrol, the market for existing demand that somehow of a shift, but on top of it actually it is really various customers that we have sold Resveratrol to Nootkatone F&F is an industry that is pretty consolidated.

We are already having business with good maturity of these relevant accounts. We are very happy to be able also to satisfy the needs of our customers and which is certainly a driver for this Nootkatone sales and then going into 2019, a balancing actually is an opportunity that we decided to follow-on actually that was last summer.

We have taken that decision and we see already a very good success building customers and [indiscernible] so besides actually Resveratrol and Nootkatone will be an additional driver for the 2019 product sales growth.

Pest Control to carve out actually with the Nootkatone, the Pest Control segments will contribute little to not really a lot at all, especially with this delay from the government shutdown in the U.S. and therefore the later registration confirmation of Nootkatone for Pest Control.

It will take some time actually until the end use products will be also registered, which can only start after confirmation of registration of the active ingredient, which we expect the next two months as already mentioned. So which means that sales are definitely probably more starting in 2020 and even late 2019.

Nevertheless, as Scott already mentioned, we have more than 100 customer opportunities and it takes certainly these customers sometime to think of in which product they want to use Nootkatone, which kind of Pest Control products and we are very happy to have – how to say more and more solid relationship with these customers and really helping them contributing to their, how to say it, not only assessment of Nootkatone [indiscernible] now to Boards, really how to say developing product in which Nootkatone in the future will be – but that will be more relevant for 2020.

And then Vanillin, as you mentioned, Vanillin is pretty remote from us that’s IFF, but this doing the commercialization. It's similar setup like – with Stevia where Cargill is actually doing the commercialization, but also the production that also applies for Vanillin.

And while actually it has started earlier then with the Stevia, I think it's a little bit of a different situation. IFF uses a Vanillin in these days more for their own internal purposes and therefore, let's say the potential is rather limited compared to let's say the size actually, the big size of the Vanillin market.

We will have in both of these opportunities Stevia and Vanillin royalty income, slightly different structured between Stevia and Vanillin. Stevia I think we already talked about sufficiently. Scott also commented on everything else we were going to see in the second half of 2019 especially and Vanillin will actually find it slow start and then sort of slowly, but steadily increase.

The new compounds you see here and there may be still some changes in terms of the launch schedule. That's the very nature of bringing new compounds to market. But in the end, you see that in segments in which we already operate. I think that's important. So it's sort of like bolt-on acquisitions. You can call it bolt-on product.

We can use exactly the same discussion with the same customers to also talk about this new product. One, going through into Human Health. There are sometimes also some new customers that we can absolutely address, which eventually maybe also become an opportunity for Resveratrol.

So which is perhaps even synergetic, but in any case it is pretty much the same sort of set of customers, which means we can throw a lot of synergies out of the launch of these products. That was one of the criteria and as they are almost one actually is already definitely develop to its final stage and the others are very, very progress.

So there is little to no costs, but are a little or limited cost actually, that will be encouraged and which will nicely fit within the guidance that we have given now in terms of operating expenses and cash flow.

So I don't know if that helps, but in the future, you will get an updated slides of this actually regularly in order to for us to have to say keep track with you also on the communication. On that pipeline, I think it shows also a little bit the maturity of our company that is progressing and becoming really a commercial company, that is definitely developing and building its business.

Unidentified Analyst

That’s great. Thanks. And just a little add-on on the three new compounds, so that means it will not be in Flavors & Fragrances, do you lag with Vanillin, IFF where you as you said have more remote controls of it, you will have a control rather like in [indiscernible], is that correct?

Oliver Walker

Yes. That's a safe assumption that actually all the three compounds that we will sell ourselves. As I said, we have already the necessary setup.

Unidentified Analyst

Okay, great. Super. Thanks.

Oliver Walker

Welcome.

Operator

[Operator Instructions] The next question comes from the line of Sara Welford with Edison. Please go ahead.

Sara Welford

Hello. I have two questions, please. First of all, on Pest Control, you mentioned in the press release that you will have scale-up costs. Can you give us any further sort of numbers around that? And when these will fall is still be in 2019 or if you expect them to be in 2020?

And secondly, more general question, I wondered if you could give us a feel for the competitive landscape for your main product. I think around EverSweet. That's pretty well understood, but if you could talk about the other products such as Resveratrol, Nootkatone, et cetera? Thanks very much.

Oliver Walker

Very much welcome. So the scale-up costs that – I cannot become, let's say too explicit on that for various reasons. It is also pretty complex equation. But I think that is clear, it fits within the guidance that we are giving for our company for 2019. And what is also important to be mentioned is that these costs are quite part of these cost are actually financially supported by the U.S. government.

That's part of this CDC/BARDA agreement that we entered into in 2017, which we certainly greatly appreciate having really a nice teaming up in terms of the efforts, but also in terms of financing, which makes it easier for us. In terms of the competitive landscape, I think in order to not only for me to talk, Scott, if you want to spend some words on the competitive landscape for Resveratrol and Nootkatone.

Scott Fabro

Yes. I can make a couple of comments. Let's start maybe on the competitive landscape. The value for our product in Resveratrol and Human Health is driven by one, the quality and purity.

Product is pure as a pharmaceutical grade product. And as a result, it gives customers great confidence in its reliability and performing exactly as it should, time after time after time. Many of the other sources of Resveratrol in the market today actually do not come from such a place.

They actually come from a weed known as Japanese knotweed or Polygonum. And a lot of that is sourced out of different reasons in Asia, and oftentimes we have found quite a few of these have some contamination from [indiscernible] in them as well as some other ingredients that have a laxative effect of the people.

And our product is not heavy since it is extremely pure. It does not have these trace elements. And so for us it creates somewhat of a unique value proposition to our customers, so that they can feel really good about it going to the consumer.

Moving on to the Flavors and Fragrances area, Nootkatone and Valencene compete with their counterparts derived from the highest purity citrus. And from a price perspective it becomes a very difficult in many applications to be able to use the ultra high-purity from citrus because of its costs expense in different products.

And so we fit very nicely again delivering an ultra pure product at a very competitive price and that is as you can see driving our business and growing, our customers appreciate that. Thank you.

Oliver Walker

Thanks Scott.

Sara Welford

Okay. Thank you.

Operator

Gentlemen, there are no more questions at this time.

Oliver Walker

Great. Then I would say thanks a lot to all the participants for listening into our call. The next call will be with the half year results. Most probably, and I think in the meantime, we hope to provide you with some good news then also on the registration of Nootkatone for Pest Control. In the meantime, have a good time, have a good day and talk to you later. Thanks. Bye-bye.

Scott Fabro

Thank you much.

Operator

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.

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