Amyris Inc (AMRS) 2022 Q3 法說會逐字稿

Welcome to the Amyris Third Quarter 202 Financial Results Conference Call. This call is being webcast live on the Events page of the Investors section of the Amyris website at amyris.com. As a reminder, today's call is being recorded. You may listen to a webcast replay of this call by going to the Investors section of Amyris website.

I would like to turn the call over to Han Kieftenbeld, Chief Financial Officer of Amyris. Please go ahead.

Thank you, Dave, and good afternoon. Thank you for joining us today. With me on today's call is John Melo, President and Chief Executive Officer; and Eduardo Alvarez, our Chief Operating Officer, who will participate in the Q&A session.

We issued our results today in a press release. The current report on Form 8-K furnished with respect to our press release is available on our website, amyris.com in the Investors section as well as on the SEC's website. The slides accompanying this presentation can also be found on the website and were posted today for your convenience.

Please turn to Slide 2. Please note that on this call, you will hear discussions of non-GAAP financial measures, including, but not limited to, underlying sales, revenue, gross margin, cash operating expense and adjusted EBITDA. Reconciliations of these non-GAAP measures to the most directly comparable GAAP financial measures are contained in the financial summary section slides of the presentation or the press release distributed today.

During this call, we will make forward-looking statements about future events and circumstances, including Amyris' outlook for 2022 and beyond, Amyris' goals and strategic priorities, anticipated transactions and other future milestones as well as market opportunities, growth prospects and fit-to-win actions. These statements are based on management's current expectations, and actual results and future events may differ materially due to risks and uncertainties, including those detailed from time to time in our filings with the Securities and Exchange Commission, including our 10-Q for the third quarter of 2022. Amyris disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise. I'll now turn the call over to John. John?

Thank you, Han, and good afternoon, everyone. Thanks for joining us today. I'll provide an update on our business performance and our expectations for the next several quarters. Han will provide an update on our financial performance, our Fit-to-Win initiatives in our fourth quarter and full year outlook, and I'll recap before turning to Q&A.

Our third quarter was another solid quarter of core revenue growth and operational execution. We delivered on our business objectives and made significant progress advancing our previously communicated Fit-to-Win strategic actions. Demand for several of our brands is higher than anticipated, and we are prioritizing spend and investment to ensure we meet retail channel needs while also delivering on our cost savings initiatives.

Our consumer business grew 98% in the third quarter over the same period in 2021 and has grown 107% during the first 3 quarters compared to the same period last year. Our consumer gross margin was in line at just under 60%. Q3 was our sixth consecutive quarter of record consumer revenue. We have become the leading growth company in health, beauty and wellness markets and are not experiencing a slowdown in demand for our leading brands.

Our Technology Access revenue has also continued to grow as a result of our industry leadership and the production of clean, sustainable chemistry. Our ingredients demand has continued to outpace our capacity. We continue to sell all that we can produce and have a backlog of orders that are shipping in the fourth quarter. Gross margins for our ingredients products have been challenged by higher input costs from contract manufacturing and air freight that has been required for product delivery that meets the needs of our customers.

We expect to see significant gross margin improvement now that we're increasingly making product at our new Barra Bonita precision fermentation facility. We are in process of producing 5 ingredients at Barra Bonita during the fourth quarter. Looking ahead, we expect gross margin expansion in the fourth quarter resulting from increased production at Barra Bonita, the transition to consumer production from third-party contract manufacturers into our own production facility in Brazil, a reduction in packaging costs and reduced dependency on China-sourced components which to date have resulted in significant airfreight charges. We executed most of these changes by the end of the third quarter through our Fit-to-Win agenda and expect much further realization of the cash and the margin benefit into the fourth quarter.

To sum up the third quarter, we delivered strong operational performance. We launched our Fit-to-Win revenue, cost and cash initiatives. We maximized utilization of the production lines that have been commissioned at Barra Bonita and our Interfaces, consumer production facility in Brazil. We also made significant progress with the setup of infrastructure for our expansion in the U.K. and the European markets with our consumer brands.

In a few moments, Han will cover in more detail our financial performance, the Fit-to-Win update and the outlook for the remainder of the year. Before that, though, I would like to transition to our plan and strategy for the next 5 quarters and our long-term outlook.

Let me focus on 4 priorities. We are transitioning from a singular focus on growth in the end markets we serve to a framework of disciplined growth and profitability focused on our 4 priorities: portfolio, growth, liquidity and profitability.

Let me start with portfolio. Our focus is to maintain our leadership in health, beauty and wellness consumer markets underpinned by our best-in-class synthetic biology, process development, scale up and biomanufacturing assets. We continue to be the world leader in making clean, sustainable chemistry and delivering leading high-value and high-impact molecules to the world's fastest-growing consumer brands. No other consumer company in our end markets has the science or integration that we have built and are now executing on. We intend to expand the availability of these molecules to the world's leading companies and brands through partnerships with respective leaders in each of the end markets. We will accomplish this through long-term marketing partnerships where we design, engineer and make the molecules that our partners sell with exclusive marketing rights. We are the only company in our sector that has now generated over $1 billion in value from these strategic transactions. We have a track record of executing significant strategic transactions that enable us to continue the manufacturing while partners grow sales through their leading position in their end markets. As we continue to focus our business model and portfolio, we expect near-term strategic transactions from the continued simplification of our portfolio to generate over $500 million of value. That includes $350 million in upfront cash, of which the net proceeds we plan to reinvest in our technology and consumer business.

Let me now discuss our growth. We expect to continue delivering the leading growth compared to public consumer goods companies in clean health, beauty and wellness. We are transitioning to more prudent spending and adding a significant focus on making our company profitable. The combination of our consumer brands, our science, biomanufacturing and go-to-market strategy is enabling us to provide consumers with what they want and need. We are focused on slowing the rate of investment in new brands while continuing to support our leading brands to meet the strong demand they are experiencing.

Long term, we expect our portfolio to consist of around 12 brands in categories where we can be leaders. These brands will continue to be sold through an omnichannel strategy with our own direct-to-consumer channel leading in revenue contribution and success in retail from partnerships with the leading retailers in their respective geographies like Sephora, Ulta, Douglas in some European markets and our continued deepening of our partnership with Walmart in the U.S., where we now sell Pipette, are launching the 4U brand and are expanding our MenoLabs brand into Walmart stores near you.

Currently, each of our brands that have been in the market for more than 1 year are delivering the best growth in their respective markets. On the Beauty, it's more than doubling this year. Costa Brazil, JVN, and Rose Inc. are all up more than 300% for the year-to-date, and Biossance continues to be the best growing brand in clean, sustainable skin care powered by science. Biossance is also our first brand to exceed $100 million in revenue in a single year. Rose Inc. has just launched in Brazil and is performing in the top 10 color brands at Sephora. JVN is currently experiencing a significant store expansion in the U.S. by tripling the number of doors. Biossance is seeing strong traction in China by delivering over $1 million in sales during a single week recently for the first time in the Chinese market.

We are launching the 4U brand by Tia, into over 2,800 Walmart stores in the U.S. Meanwhile, we are slowing the pace of rollout for Stripes and EcoFabulous to ensure differentiated use of cash. The idea is simple: invest where we have the leading brands and can grow efficiently, spend less on other brands to get to profitability faster and with better predictability.

The third priority for us is profitability. We are focused on ensuring that our growth is profitable and making our company financially sustainable and attractive. We have a clear path to operating profitably. Our goal is to deliver 10% operating income on an estimated $200 million of revenue in the fourth quarter of 2023. We expect this to be our first solid quarter of operating profitability for our core business based on maintaining our current growth rate and delivering on our Fit-to-Win initiatives. We expect over 10% operating income for full year 2024, expanding that to over 20% operating income by 2025 with a goal of more than $1 billion in revenue during 2025.

We have built the fastest-growing consumer company in clean health, beauty and wellness and have proven differentiated business model underpinned by the world's leading science and biomanufacturing platform. We are focused on growth to reach the scale necessary to win. And now we can turn our focus to profitability while continuing to deliver industry-leading growth. We are the leading clean beauty company and the only company in beauty powered by the world's leading science to make clean, sustainable chemistry. We make our own chemistry and formulate some of the best-performing products in health, beauty and wellness markets.

Let me now turn to our fourth priority, which is liquidity. Consistent with the expectations we set during our last earnings call, we have closed on $180 million of term loan financing, a portion of which is secured against future earnouts with our DSM strategic transaction. This funding enables us to continue executing our strategy without any significant dilution to our equity. We expect growth to continue at the current rate for both our consumer and technology access businesses. We also expect over $150 million of annualized 2023 impact from Fit-to-Win that will impact revenue cost and cash.

Our current business performance, current cash and Fit-to-Win improvements provide us with the necessary liquidity to self-fund to the closing of our $350 million of expected upfront funding from our large strategic transaction. Our strategic transaction regarding the marketing rights of 2 molecules for $350 million of upfront consideration and up to $500 million of total value remains on track for the fourth quarter, and the fourth quarter is tracking toward another record revenue quarter. The combination of our current growth and operating performance, combined with our Fit-to-Win actions and the successful execution of the strategic transaction enable us to self-fund our growth and deliver on sustained profitability. We have no current plans for dilutive financing.

Now let me summarize and transition to Han. As I described, we are focused on 4 priorities: our portfolio that enables us to continue delivering the best growth in consumer health, beauty and wellness and is underpinned by a portfolio and a pipeline of the world's best clean, sustainable ingredients. Second, a focus on growth, continuing to deliver the best growth in the categories we operate in and doing it profitable in the near to medium term.

Our third priority profitability, deliver 10% operating income starting in the fourth quarter of 2023 and expanding from there. And our last, our fourth priority is liquidity. We are committed to self-funding based on the current growth rate, delivery of our Fit-to-Win benefits and the execution of our strategic transaction in the near term with no further equity issuance plan. We believe these 4 priorities are underpinned by our leadership in the consumer business and by the best-performing platform in synthetic biology and biomanufacturing. We are prioritizing profitability and sustainable shareholder returns over growth.

Let me now turn the call over to Han.

Thank you, John. Please turn to Slide 10. This afternoon, I will be covering 3 topics as follows: first, discuss our Q3 financial results as it relates to revenue, gross margin, operating expense and cash. Secondly, provide an update on the Fit-to-Win revenue, cost and cash actions, we are undertaking to much improve our financial performance; and third, provide an update regarding our outlook for the fourth quarter and full year.

Now let me start with revenue on Slide 11. As John described, our third quarter was another strong quarter of core revenue growth and a new record in consumer growth. Core revenue, which includes consumer and technology access revenue and excludes strategic transactions and other increased 49% to $71.1 million when compared to the same quarter last year. Core revenue included record consumer revenue of $46.6 million, which increased 98% and also it includes technology access revenue of $24.6 million. We have now completed 6 consecutive quarters of record consumer revenue. Also, we are significantly outperforming the beauty and personal care sector with the peer groups of public companies most recent quarterly revenue performance, ranging from minus 11% to plus [3%] versus the same quarter last year. As I just said, we grew 98% and 81% on a like-for-like basis, meaning based on the brands we are selling in the market at this time last year.

Technology Access revenue growth was due to technology license revenue from the F&F earnout, partially offset by lower R&D collaboration, which was down $4 million due to an increased focus on the development of molecules for our own marketing and formulation. Barra Bonita has planned to use 5 ingredients in Q4, which will help address the supply chain constraints we have experienced and also start to address the negative margin impact we have seen from sourcing product from third-party manufacturers.

As it relates to revenue and despite macroeconomic concerns, we continue to experience strong demand from the market, both for our consumer and ingredients products. Growth in consumer continues to be the best we observe across publicly traded beauty companies and is now 2/3 of our core revenue. This by comparison was only 1/3 at the end of 2019. The creation of demand is driven by 4 factors, namely more brands, new formulations, more stores and doors, and finally, international expansion. We are focused on ensuring that we can meet increased demand with the improvements we are making in our supply chain and to also deliver it with much better unit cost economics.

This brings me to my second item, which is gross margin. Now on Slide 12. At Amyris, we have historically talked about a non-GAAP gross margin measure, which includes direct product cost of goods sold, but not all aspects of making and delivering the product, such as certain freight charges. Inbound freight and particularly airfreight has been a significant cost to us for the year so far. We plan to move to gross profit measure, which includes all elements to make and ship product in the new year, so we can align our disclosures all at the same time.

Non-GAAP core gross margin of $28.5 million or 40% of revenue, increased from $17.7 million or 37% of revenue in Q3 of 2021. Increased gross margin in Q3 2022 reflects a year-over-year increase in consumer and technology license revenue, which was partially offset by lower R&D collaboration and higher ingredient input costs due to unfavorable contract manufacturing unit economics. Additional impacts not shown here, but of note, given that the impact of profitability is the significant increase in freight and logistics expense due to increased inbound airfreight rates and volume to support consumer revenue and imports of ingredients intermediate product. We expect most of these freight and logistic expenses to decline as we transition to Barra Bonita fermentation and to Brazil sourced components and manufacturing for our largest consumer brands. We see this freight expense as temporary in nature, and we expect to see a notable reduction starting in Q4.

Direct cost of goods sold grew by about $12 million and freight grew by about $14 million. A significant portion of the cost increase can be attributed to operating and growing at a fast pace and also the challenged supply chains caused by COVID as well as freight rate increases. The takeaway regarding gross margin is that we have made strategic investments in our manufacturing and supply chain footprint both on the consumer and ingredients side. We intend to take advantage of our scale with cost of goods sold and are certainly revisiting all input costs as part of Fit-to-Win.

I'm on to operating expense next on Slide 13. We are operating 11 brands today, following the recent launch of Stripes and EcoFabulous in October. To support brand development and top line growth, we have significant investments, which have resulted in cash operating expense that have grown to $137.8 million, an increase of $56.4 million versus the same quarter last year. Sequentially, however, operating expense did not grow for the first time in 7 quarters. Marketing expense was actually down sequentially on the back of continued revenue growth. We have slowed the pace of investment in new brands to balance cash management and expense control.

The year-over-year increase in operating expense was due to an increase of $42 million in selling expense, approximately $10 million in G&A expense and $5 million in R&D expense. The increases were driven by a combination of increased headcount, significant investments in existing and developing brands for paid media and advertising and expanded commercial activity in the U.S. and internationally. Also growth-driven consumer order fulfillment and shipping expense and comparatively low prior year travel expense due to COVID-19 restrictions.

Shipping and handling of our consumer goods increased by $5 million versus the same quarter last year due to continued growth in D2C orders. As a result of our elevated expense, our use of cash in the quarter was also elevated principally due to continued investments in brand marketing of both new and existing brands. Additionally, we continue to deploy cash for the construction of Barra Bonita that has been entirely self-funded to date.

We started the quarter with a cash balance of $107 million. We raised $80 million from a term loan that we closed in September and used $162 million during the quarter, resulting in a closing balance of $25 million. The $162 million was $24 million less than the previous quarter, Q2 of this year. The majority of the $162 million related to operations, namely $132 million in adjusted EBITDA and $27 million in capital expenditures, of which $17 million was attributable to the construction of our Barra Bonita plant. We expect to complete capital expenditures for Barra Bonita in early 2023.

Working capital did not increase sequentially as a result of actions taken with suppliers to improve terms and improve the cash conversion cycle. We started to reduce our use of cash in the third quarter, and we expect to continue this trend into the fourth quarter. The Q3 quarter end cash balance of $25 million, combined with $100 million term loan that we just recently closed in the fourth quarter and Fit-to-Win actions are expected to support our needs until we complete the strategic transaction that John has already referenced.

Let me now discuss Fit-to-Win actions that we have taken, on Slide 14. Fit-to-Win is a company-wide series of actions related to revenue, cost of goods sold and SG&A. Because of our portfolio and our scale, we expect to leverage what we have built for a much better cost structure and cash conversion cycle. In the aggregate, we expect Fit-to-Win to result in over $150 million of benefits in 2023, this, at the annualized rate as compared to the cost base we saw in Q2 of 2022.

Firstly, price increases. We have increased prices on selective ingredients as of July 1 and selected consumer products as of October 1. Additional actions are being taken and the first impact is expected in Q4. Cost of goods reductions, we have taken several actions to in-source consumer products into our Interfaces consumer production facility in Brazil. We have also changed the sourcing of packaging and components to achieve both better unit cost and a more sustainable offering.

Secondly, with Barra Bonita producing, we are leveraging our in-house precision fermentation capability to reduce production and shipping costs. Thirdly, we are very focused on our global sourcing network and the reduction of freight in general and airfreight in particular. The latter has been very costly for us this year, albeit necessary to ensure continuity of supply. We have realized $2.5 million in savings in the third quarter on this particular topic.

SG&A reductions. We have implemented a number of actions intended to reduce our paid media and marketing spend as a percentage of revenue. We are reducing the number of agencies and also use different approaches to access new revenue such as micro and nano influencers. We have realized $7.7 million in Q3 cost savings from these actions. Secondly, shipping and fulfillment is a variable cost, particularly related to consumer order activity in our D2C channel. We have already implemented changes with our 3PL providers and parcel service to obtain better rates and a more suitable service model.

Thirdly, we are renegotiating multiple cost components with a view to deliver a more fit-for-purpose cost base. We realized $200,000 in savings in Q3 from this particular effort.

Lastly, cash conversion cycle. As I mentioned already, working capital did not continue to grow into the third quarter. We have taken steps to change our sourcing model and terms with vendors. We have more work to do, but we have started to see early benefits. Collectively, the various initiatives delivered just over $10 million in the third quarter. Due to the timing of sell-through of product from inventory, we did not realize the result from some of the actions taken in cost of goods sold. We expect to see a much greater impact in Q4, along with new actions underway.

Moving to Slide 15. Q3 was our sixth consecutive quarter delivering record consumer revenue, demonstrating significant year-over-year growth.

Let me go to Slide 16 and provide the outlook for Q4 and the full year. Consumer revenue is expected to continue growing at the current rate and ingredients revenue is expected to accelerate based on increased Barra Bonita production output and shipments in the fourth quarter. As a result, Q4 2022 core revenue is expected to be over $100 million. Key success factors in our revenue plan for the fourth quarter include China 11/11 Singles Day, where we expect to see strong results with Biossance in particular. Holiday shopping season for all of our consumer brands at the end of this year. Early traction in the U.K. and Europe markets where we have established our supply chain infrastructure in the U.K. and Netherlands with 3PL providers. Launch of a new brand in Walmart. This is the hair care brand for which we expect to ship the first order before the end of the year.

And lastly, the production output where Barra Bonita is now producing 5 ingredients to increase output and product supply to our customers.

Thank you all for listening today. John has concluding remarks before we open the line for questions. John?

Han discussed a number of opportunities to reduce cost, improve efficiency and improve workflows across the organization. We completed the necessary short-term funding and the strategic transaction is on track to complete in December. We are very focused on creating a path to self-sustaining profitability and cash generation. The priorities are clear: portfolio, growth, profitability and liquidity. We have built a leading consumer brand portfolio and are delivering the best growth in health, beauty and wellness markets.

We have the brands, consumers and retailers want and the products the world needs for all of us and our planet to be healthier. We are tracking toward another record quarter for both our core and our consumer revenue. We expect to deliver our first quarter of over $100 million of core revenue and expect our current growth rate to continue into 2023, while also setting a clear goal of achieving operating profitability. We also understand the need for our investors to win and we'll provide quarterly guidance for 2023 at our Q4 and full year 2022 earnings call. With that, we'll go to Q&A. Dave, can you help us move the line to Q&A, please?

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Colin Rusch with Oppenheimer.

Guys, and this is a specific one for Han. The structure around the molecule monetization. Is this something that you guys can repeat because it looks like you're going to be monetizing multiple molecules on an annual basis and having the flexibility around liquidity would seem a real advantage as you negotiate some of these deals.

Yes, certainly. Thank you, Colin, and thanks for joining today. I'll make a comment, and John can add if he wishes. Yes, I mean the concepts, we've been very successful. John made some comments during his prepared remarks, that we have a track record of actually delivering on these type of molecule transactions. We did it last year, of course, with our F&F portfolio with DSM. We did it with Reb M with Ingredion. And so what we are contemplating here is something similar, which basically means we give an exclusive marketing license for the go-to-market for a set or a single molecule. And basically, we will continue to be the manufacturing partner and supply the product into the future. And typically, there is an upfront consideration and also an earnout over time as well as, of course, the sale of product to our partner.

The only thing I'd add, and thanks, Colin, for being on is we already have started and are pretty well into negotiations for our next deal beyond the one we expect to close in December, which would be another deal for some time in 2023, very much along the same lines, really reinforcing what Han just said, and more than ever, we probably have 3 or 4 other parties in the pipeline for monetization deals around the portfolio. So as you know, we've aligned the portfolio very closely with the end markets we are going into with our consumer brands. That's given us a lot of ability to really drive demand for the molecules, and we've got parties on the other side that are interested in marketing those molecules as well as coming to us for additional molecules that they have that they like us to develop scale and scale where they become the commercialization partner. So I can see this really replicating and I could see it replicating so that every year for the next 3, 4 years, we've got a deal turning around this model of they monetize differently, they market exclusively, we develop scale and produce. Hope that helps.

Yes. That's helpful. And then just thinking about the ability to have a flexible manufacturing facility. Can you guys talk a little bit about the cycle time for switching from one molecule to another and how that process is going and trending in terms of the efficiency of that switchover process?

Look, I think that was a major reason and you've been pretty close to us, Colin, on the development or the design of the current facility, the Barra Bonita facility. And what I can do is I can confirm for you that it's working the way we expect it. So instead of having take the facility down and start all over for the whole facility focused on one molecule, we actually have multiple molecules running at the same time and the ability to isolate individual tanks to run individual molecules. And that's how we're able to do 5 molecules in a quarter, which has never been done before in our company, right? So you're already seeing the benefit of having Barra Bonita and the flexibility we have to do multiple molecules at the same time.

Who's next? Dave, are you there?

I'm going to step in and announce the next questioner. The next question will come from Rachel Vatnsdal with JPMorgan.

First is on housekeeping comment. On 2025, John, you said reaching that $1 billion of revenue in 2025 with a 20% operating income margin. That $1 billion, is that for total business? Or is that referring more to the consumer business?

Yes, I didn't comment. It's actually meant to be for the entire business, most of which is expected to be consumer. And I did say a minimum of $1 billion, right? We actually have expectations to be a bit north of that. But again, majority consumer, and it is meant to be the core revenue of the business. What isn't in there is obviously any transactional or onetime revenue.

Got it. So maybe can you just walk us through the puts and takes there? I believe earlier this year you pointed to expecting to reach $2 billion in 2025. So I appreciate that, that comment is above $1 billion, you'll probably comment above that. But I guess, can you walk us through what's changed really? Are you seeing an underlying shift in demand regardless of some of the supply chain and more near-term headwinds that you guys are facing in the market.

So I would say, when I say north of $1 billion, it's probably $1.5 billion, $1.7 billion, somewhere in that range, okay, which is really not a significantly different outlook than we had. If I connect back to what is different, I would say a couple of things. First, we now see more of these ingredient deals, and we're actually figuring in what is the change to revenue on the ingredients side of the business as a result of some of these deals as they go forward. So that's kind of one part.

I think the other part is, in the short term, much higher prioritization on profitability and efficiency and our use of capital. And as a result, really backing off investment in brands that aren't delivering the kind of growth we expect or the kind of efficiency in customer acquisition that we'd expect. So those are really the 2 changes, right? Other than that, nothing different, especially for our core, right, the brands that are and have been in our portfolio, we don't see any significant change at all from what we said before.

Got it. And then on the guidance for this year. You previously were guiding to greater than 150% growth in consumer and roughly 40% growth in technology access. Now you're pointing to that greater than $100 million of core revenue for 4Q. So net-net, can you just kind of walk us through what you expect that split to be on consumer versus technology access for 4Q and how we should be thinking about that rounding out the year?

Sure. Look, we've said we expect the same growth going into the rest of the year for consumers. So so far, year-to-date, we're at about 107%, I think, and I'd expect that going into the fourth quarter. The real change there is, again, by focusing on profitability and best use of our cash, we've actually slowed down the ramp on some of our new brands. So that's really the shift. But for the established portfolio, we continue to see the same kind of growth, about 107% year-to-date and going into the fourth quarter.

As you think about ingredients, look, the ingredient growth is accelerating pretty significantly going into the fourth quarter as a result of us being able to finally get to the production we needed of some of the backlog, right? So you can expect the growth in the fourth quarter for ingredients to be well over 50%. And that will translate into, again, better growth than we've had year-to-date on the ingredients side.

Got it. And then kind of final one for me here. Just on consumer. You guys flagged that you weren't seeing any slowdown related to macro so far. But just on the sequential growth, you guys grew 24% sequentially during 2Q, and it looks like that stepped down to roughly 8% sequential growth this quarter for consumer. So just wondering, is there anything else in that dynamic? And then in terms of the broader guidance for the year, are you guys contemplating any slowdown going forward, just given the macro environment and pressures on the consumer wallet...

Yes. Thanks for that question, Rachel. I think first, remember that the base for this quarter, for the third quarter is different than the base for the second quarter because in the third quarter of the prior year, we had a couple of new brands that had shipped to trade, which changed the base. So that's an important distinction that even though the year-on-year growth or quarter-on-quarter sequential growth seems slightly slowed down. It's actually because of a different basis. If I look at like-for-like brands year-on-year, we are maintaining the growth rate we've been experiencing through the year. So no change there. And then as we go into the fourth quarter, and we are into the fourth quarter. And I can tell you so far in the fourth quarter, we're seeing consistent growth with what we've seen in the third quarter and, obviously, year-on-year because of holiday playing in and additional doors in some of the geographies we played into, we're seeing very, very strong performance. I think the question for us really is coming up soon, which is how well 11/11 does. And then obviously, we have a big week in the period between Black Friday and Cyber Monday. And those 2 will have a huge impact on the quarter. And again, we see no signs currently on day-to-day of slowing down demand for our brands.

Our next question today will come from Korinne Wolfmeyer of Piper Sandler.

Piggybacking off that last question, Rachel had. Can you just provide a little bit more color on what you're seeing geographically for some of your different consumer brands? I mean you did note that Biossance is doing well in China. But can you just give any further color on what you're seeing, any specific markets that are still experiencing some pretty volatile shutdowns and how you're factoring the volatility in those markets into your guidance?

Sure. And I appreciate you being on. Look, I think let's start with the North American market. It's our biggest market. And the best way for me to discuss our North American markets look at our D2C, which is really our biggest single channel in North America across our brands. And I can tell you, our D2C performance continues to be very solid, no real change there. I think the second way to look at performance in the North American market is how well we're ranked inside the Sephora stores, especially for Biossance, JVN, which both have been great performance inside Sephora. And we've been increasing the rank of our brands inside Sephora. So I'd say strong performance in retail and continued very strong performance in D2C. And I'd say North America stayed steady through the last couple of quarters for us and what we're seeing in the fourth quarter. That is true for Brazil. If anything, we're seeing accelerated demand in Brazil in the second half of the year. We just see a very solid consumer. We see foot traffic increasing in Sephora, and we see our D2C performance increasing in the Brazilian market. I think as it relates to Europe and in the U.K., we've seen super strong performance for our JVN brand in Space NK in the U.K. and for Rose Inc. And we just launched direct-to-consumer in the U.K., so early days. And we've been pretty consistent with Biossance in the U.K. We launched in Germany in the last 3 months or so. I think we launched in Germany around the August time frame. And then we launched in Portugal around the second quarter of the year. In Portugal, we very quickly for Biossance became #3 skin care online for the leading retailer in Portugal and the #5 in store for total skincare brands in Portugal, and we achieved that in about 45 days. And we've seen the demand in Portugal stay pretty constant. And in Germany, we've seen very strong adoption of the brand, and I would not be surprised if the brand becomes top 10 skin care in Germany.

So the critical part to note in all that is we're starting from a pretty small base. If I add China, just to round out the regions, if I add China, what I would say is we had a very small base in China, right? It's like $2.5 million in 2021 in China. So in 2022, I expect us to do about $15 million. And what I would tell you is the demand we're seeing, the activity by the consumer in China is really accelerating with a focus on clean, sustainable and high efficacy products with science being a critical component, right? As I said during the scripted comments, we saw our first $1 million a week for the brand in China. As a matter of fact, we had like, I think it was last month, 1 week where the Chinese retail market was our #1 retail market in the world. And we're just seeing just very strong performance in the Chinese market, especially over the last quarter. I don't want to make that as a market comment. I think that's really our base being small and us actually being able to take a lot of share quickly in that market by having the right influencer, being on the right platform and having a great brand. So I hope that helps give you some color to what we're seeing across geography.

Yes, that's super helpful. And then just quickly on the gross margin expansion plans. I mean I appreciate all the color in the prepared remarks on Fit-to-Win. But can you just provide a little bit more color or explanation on how you're expecting that cadence of gross margin improvement here in Q4 and then the early part of 2023.

Appreciate that, Korinne. I think we have Eduardo on the phone. I'm going to let him take the credit for this one. All I can tell you is you're going to start seeing pretty big step changes in our cost of goods, really across both ingredients and consumer and Eduardo can describe exactly the actions he and his team took in the third quarter and how they flow into fourth quarter and then full year 2023. Eduardo, would you like to take that?

Yes. Thank you. I think, look, in terms of the opportunities that we worked on the third quarter, we looked at this from the consumer side front to back, we talked about the air freight and the reducing the expedited components from China. We did more local sourcing, particularly on paper. We also started to leverage our production facility in Brazil, where we did see a very material cost difference in the production cost compared to what we had done in contract manufacturing in the U.S. And then the final thing that we did implement in the third quarter was a much more efficient pick-pack and ship the back end, the outgoing portion of our supply chain where we really moved to just a better model in terms of footprint, more nodes, and also a far better productivity in terms of the level of automation that we had in the direct-to-consumer channel for consumers. So Korinne, all told, I think we see very, very strong confidence in the Fit-to-Win initiatives against the cost of goods sold for our consumers business.

[Justin], you're being a little (inaudible). So I'll give you a couple of data points, I think, that are important. Just on pick, pack and ship, which is a new supplier model that Eduardo and his team implemented for our D2C business, that is about a 30% reduction for every unit we ship, every order we get. And then if you think about the Biossance products that we're making in Brazil, all in, when you think about the savings in paper, i.e., the packaging, when you think about the savings in group, the bottles and the pumps. And then when we finally get everything implemented and sourced in Brazil, you'll be at 50% reduction in unit cost for Biossance, which is our top producing brand. So those are very material to the cost of goods that we see flowing through starting in the fourth quarter.

Our next question today will come from Steven Mah of Cowen & Company.

So you talked about monetizing your portfolio of 25-plus ingredients. Can you talk about your strategy now given your push to sort of cash and focus resources on more mature brands, how should we think about your prior strategy of developing applications for these 25-plus ingredients first and then partnering or licensing them versus a straight monetization of the assets?

I don't expect you'll see any material change to the strategy. I think what you'll see is the pace to be different. So a good example is we have 3 brands that we're all going to ship to trade and start selling in direct-to-consumer within the last 60 days, right? And what we're doing is spacing those out and ensuring that we actually use our cash more wisely in launching those brands. So no change to strategy but actually being much more thoughtful about the pace at which we invest and really ensuring that every one of the brands is actually really fitting our playbook. So we know that for a brand to be super efficient from a marketing perspective, we need to be present with a top retailer, and we need to have a great online presence. So rather than invest in online presence alone make sure we're actually marrying those things as they go to market and get the timing right. So I hope that helps, Steven. It's not a shift in strategy as much as it is slow the pace and actually be much more thoughtful about where and how we invest.

Okay. Got it. And then for potentially licensing out the marketing rights for these ingredients. So is the strategy to out-license them as just an ingredient or to develop a formulation brand first, that was more what I was asking.

Got it. Look, I think when it comes to personal care and beauty, again, no change. We like platform ingredients. We like packaging them with the brand. We like creating consumer demand and consumer interest and passion for that ingredient and then packaging the marketing rights. That is not necessarily the case when it comes to some of the pharmaceutical or more industrial ingredients where we actually see doing the marketing rights and licensing much earlier. So I would just say that there is a split there, and I don't think we'd ever made that split explicit, okay? That when it comes to personal care and beauty, it is the go-to brands with the platform ingredient and then commercial rights. So when it comes to pharma and industrial, we're actually seeing a much faster track and we don't plan on building a brand around those end markets.

Okay. That's helpful. I appreciate that. And maybe a follow-up to Rachel's question. Could you provide a little bit more color on how you're maintaining your confidence around the total revenue guide of at least $1 billion in 2025, especially given the inflationary environment, pressure on the consumer, given the likely recessionary environment? Are you being potentially too aggressive, especially given the guide down here in Q4 of 2022?

Look, I think the guide down, as I mentioned earlier, is directly connected to the pace of new brands and the investment we make in nonmature activities. When you look at the $1 billion plus for 2025, that's connected to our current portfolio, the established brands and their current growth rate. So I think the downside is if for some reason, we saw a slowdown that we haven't seen yet in the established brands. But assuming the established brands continue to grow and mature at the rate that we're experiencing currently, then we have quite a bit of confidence in the underpinning to that shape, right? And it is a goal, right? We'll keep updating that as if we see anything different. But right now, it's a clear goal that we feel we can get to. And it's really, really, I think, a good way to articulate what's happening with our portfolio, both in ingredients powered by Barra Bonita and our partnerships and the brands really powered by consumer demand.

Our next question today will come from Laurence Alexander of Jefferies.

This is Dan Rizzo on for Laurence. Just kind of following up on what we were just talking about, can you just tell me when it comes to this inflationary environment, how price sensitive your customers are when it comes to the ingredients? Is it not at all? Or is it something that is sort of cropping up or has cropped up in recent weeks and months?

Very good question. I think it's something we're looking at across the portfolio, not just ingredients. On the ingredients side and especially with you guys being as connected to some of the ingredients and specialty chemical markets, it's actually been or said differently, the openness to price increases has been quite good, right? We haven't seen any big surprises, and we've been able to actually push through a couple of very significant price increases on the ingredients side. So -- and I think part of it is because we're seeing it across markets, and we're seeing a lot of the supply side put price increases through. So I don't want to say because I'm sure there are customers right now listening to the call. I don't want to say there's no resistance to it, but I would say that the acceptance of it is actually pretty solid.

Okay. And I don't know if you can answer this question, but along the same tokens, the customers are accepting it now because we're in an inflationary environment that's very unique or hasn't been like this for some time. But is that with anticipation that when things moderate or go down, that there will be some giveback or some sort of, I don't know, rebates or even price concession?

Yes. We're not seeing that, right? We're not having any of those conversations regarding a giveback or concession in the future. And I mean, as you know, most of our ingredients get formulated into end-consumer products. So once they're in the consumer product, it's pretty hard to switch. It's not like there's alternative sources for the ingredients we supply. We are single supply, single technology owner of what we supply, and they're again, formulated in the final customer product, okay.

Our next question will come from Rick Schottenfeld of Schottenfeld Opportunities Fund.

I wondered if you could give us some color on the molecule sale. You said it would close by year-end on earlier calls. Are you still confident that it will close by year-end? And maybe you can give us a little color on the process and how it's going right now.

Yes, Rick. Thanks for being on the call. We are still confident it would close by year-end. We are currently in the process, it's pending Board approval by both Boards, and we expect that Board approval to be really in the coming weeks, call it, early December. So that's where we are in the process. I hope that helps.

(Operator Instructions) Our next question comes from Graham Tanaka from Tanaka Capital Management.

A few surprises today. It sounds like a lot of this is timing. And I just wanted to get, again, a little bit more understanding of why you have made a pivot to slower growth longer term, even intermediate short term and longer term. What could that growth rate be now, say, next 3 or 4 years? And to what extent was this higher focus, greater focus on profitability give you a cushion to be able to self-finance your growth rate?

Thanks for being on, Graham. I mean, first, I think, again, we've reinforced that we don't expect the growth rate to change from what we've been seeing. Again, consumer at just north of 100% and ingredients, as you'll see in the fourth quarter, well over that 40%, 50% level. I think the big difference is really the pace at which we're launching new brands, right? We had said 3 new brands, which we expected to be full on in the last 30 to 45 days. And the reality is we're going to focus on the ones where we've got the greatest efficiency from a marketing perspective, which is really 4U for Tia into Walmart, shipping that out in the fourth quarter. And then as we go into the first quarter or first half of next year, stepping into the new brands with more thoughtful investments. So I don't think that changes at all what the growth rate looks like or what we've been communicating going forward, it does create a short-term disruption to not being at the 150 plus level that we sit in consumer, but more around the 107 level. And then again, as I said, we expect to stay as the fastest growing in consumer going forward. And I would tell you, fastest-growing for us is a minimum of 50%, where if you look at the tables and what our consumer competitors have been reporting the best growth has been in the high 30s, okay? So I don't expect to go below 50, and I expect to stay pretty consistent with where we are now going into next year and then obviously backing down a bit as we go beyond next year, but still north of that 50% level ground. And I hope that helps.

Okay. So it sounds like you're really talking about sequencing brand launches not all at the same time like you did last summer in footfall.

Exactly. It's basic, and by the way, look, if the macro had not changed as significantly as it has and capital has not become so expensive, I'm not sure we would have changed dramatically. But in fact, the fact that we are where we are and the macro is what it is, we're not going to sit here and just keep on a plan of spinning everything we need to, to grow at whatever the number is, we said publicly. I think at this point, we're going to be disciplined. We're going to step back just investing for the sake of growth. We're going to focus on delivering on our goal of profitability. And because of the strength of our brands, we think we can do that and still maintain this north of 100% consumer growth, which is what we've been delivering all year.

Right. The other thing I wanted to get a feel for it might come out later in the queue. But your international revenues as a percent of total or the level of international revenues, say, Q3 to Q4 and next year as opposed to what it has been in the last few years, which is not very large.

Yes. I think Han probably has that. My sense is it's probably going from 90-10 to 80-20 in the short term and continuing to grow, but I'll let Han give you a more detailed answer than that.

Yes. No, I think that's directionally the right way to think about it. The year ago, we were 93% U.S. and Canada versus 7% rest of world. Right now, we're at 89% and 11%. And I think 85-15 will be kind of the next step as we expand into Europe and the U.K. and 80-20 feels about right as we continue to expand over there.

And what would this do to margins?

Well, I mean I think the fact that we're shipping most of our European demand out of Brazil as we go through the fourth quarter and into the beginning of the year, my guess is margins will stay pretty constant. I don't expect a significant change in margin.

It can be said another way, we will incur some extra shipping costs, but we will produce at a lower unit cost level in our new facility in Brazil, right?

Exactly.

Okay. One of the things that came up in your table with your cost saves Fit-to-Win, as that the marketing costs that's a very large component of that. And even [AI] with influencers and now we can understand a little bit more about your acquisitions of Beauty Labs and MG Empower. But I was just wondering if you can maybe elaborate a little bit more on how you can get these kinds of savings because they seem really very large as a percent of consumer sales.

Yes. No. And we're just starting, right? I think getting to USD30 million to USD40 million of savings in marketing expenses where we're headed, right? I think it's a pretty significant part and what we want to deliver. And the way we're doing that is actually interesting. So thanks for asking the question, Graham. The way we're doing that is we've actually, so you got to start with where is the most inefficient marketing spend currently or historically, which has been really what I'll call meta top of funnel. So using the meta brands to try to recruit or acquire new customers is not very efficient. It takes a lot of cash and you don't get a lot of return for it. And I think the other is display ads on the Internet. Neither of those are very efficient use of cash. So what we've done really out of an experiment when we first purchased on the Beauty, we started looking at how could we significantly improve the performance of ondabeauty.com. And so Beauty Labs actually kicked off a project to do that. And in about 6 weeks, we basically increased ondabeauty.com sales by 3x to 4x. And we did it by actually spending like $300. And that started to give us some insight on this technology of writing an algorithm and using artificial intelligence to recruit like communities that are under key influencers, really nano and micro influencers. So the idea of using technology to scan and find the right nano or micro influencer and then providing some reward to that nano and micro influencer so they come and promote our brand has actually been a game changer for us in the economics of acquiring customers. As I said, we basically tripled almost quadrupled ondabeauty.com in 6 weeks with about [$400] of investment, which was completely game-changing for us. And now we're actually starting to deploy that technology. And you can imagine now with having MG Empower on board and the ability to really manage and coach influencers that we can really use that to effectively grow an amazing new channel for us that really changes the economics of acquiring customers, which is really what we're doing in that regard and helping us reduce our total marketing spend.

I'm just trying to understand how different this is. have you seen this being used by others in the cosmetics and beauty industry or in other industries? Or is this just something you've developed with Beauty Labs and MG Empower?

It's something we developed really coming out of our science background. We use data as the way we do marketing and we use a lot of data that then enables us to focus on data science and artificial intelligence as to how we deploy and identify, again, right communities online. I mean, we speak to competitive brands and big companies and consumer all the time. The thing I would tell you is the trend towards focusing on micro and nano influencers is something we're seeing really across industry. What's not across the industry and what I think is very unique for us is applying science and artificial intelligence to do the work and identifying the right nano and micro influencer and then to use them across our brands, right? So that is unique and something we're really excited about and something I think you'll start to see a lot of the benefit come through in our growth rate and marketing spend.

That's great. All right. I'll let somebody go on, I've got further questions, but I'll let somebody else go on. I can come back.

Ladies and gentlemen, at this time, we will conclude the question-and-answer session. I'd like to turn the conference back over to John Melo for closing remarks.

Great. Thanks, everyone, for joining us today and for your continued interest and support. If I did not get to your question, please follow up with our Investor Relations or make sure you reach out to us directly, and we'll be able to get back to you. And we look forward to a continued very strong fourth quarter, closing our transaction, self-funding and really focusing on our profitability. Thanks again, and have a great rest of your day.

The conference has now concluded. We thank you for attending today's presentation, and you may now disconnect.