SECOND QUARTER 2019 CONFERENCE CALL
Jess Jankowski, President & CEO
Thank you, Sara. Good morning to all of those listening live, and welcome to those who choose to listen later online. I’m glad you could join us for our second quarter 2019 conference call. Today, I’ll briefly discuss current results, and the current state of the business.
I’m on my own again today, with an expectation that we should have a new senior finance person in place the next time we talk. Unless identified otherwise, all numbers will be stated in approximate terms. Today, I’ll discuss the growth we continue to drive with our Solésence products, touch lightly on some temporary setbacks within our Personal Care Ingredients business, and, most importantly to all of us, I want to make clear that the demand for minerals-based sunscreens, and skin health products, continues to grow. The way the markets are moving, and the way consumers are beginning to respond, tells us that our strategy of focusing on skin health, within our Personal Care Ingredients portfolio, and our Solésence products, of course, puts us at the right place at the right time.
Our Q22019 revenue was down when compared to 2018, much of which related to the burst of orders we received last year from our largest customer in late Q1 of 2018, and in to Q2. In 2018 this was driven by some “spot-buys,” and some inventory building that is not expected to be repeated in 2019. This was what I referred to in the press release, in terms of an inventory adjustment by our largest customer in 2019, that impacts the 2019 year-over-year revenue comparison. This was all due to a combination of customer-specific events, none of which we can tie to market weakness.
Year over year, we saw sales within our Personal Care Ingredients product category go down more than $1M, while our Advanced Materials product category was up about $300K. That said, you have probably all noticed that our six-month revenue stayed flat at $7million, even after this anomalous $1million hit.
Yet again, the best part of the story is in our revenue mix. The major positive difference year-over-year was within our Solésence product category, where sales were up by more than $800K. This puts six-month volume for Solesence at about 90% of full year 2018 volume, and growing. And, yes, we continue to expect 2019 revenue to be more than double what we saw in 2018. A good indication of this, is that through June, we’ve completed a dozen new product launches, with more coming through year-end.
As I have mentioned, I am happy with our progress toward more Solesence growth, but not with the margins we’ve been able to enjoy thus far. Product development and scale-up are challenging things to do, with initial inefficiencies creating P&L pressure. One serious way to combat this, has been to eliminate some of the outside contractors we initially relied on to get our Solesence products up and running. We’ve been working to bring most of our filling in-house this year, and continue to make good progress.
In the first quarter, and much of the second, we have focused on getting our filling processes up-and-running, smoothing out any bumps, and reorienting some of our process flows to accommodate the related changes to our business. While the rapid growth we’ve been experiencing is phenomenal, it has made the commissioning of our new process scale-ups, and the expected related margin improvements, move slower than we had planned. Much of this is due to our primary focus on delivering products to customers to meet new product launch dates. We haven’t been able to finish the build-outs, and meet important customer requirements, simultaneously. When faced with this choice, we’re going to choose taking care of the customer almost every time.
The impact of all of this has been amplified by the drop-in demand from our largest Personal Care Ingredients customer between 2018 and 2019. Coupled with our expectation of continued growth, particularly within the Solésence Product Category, working capital management remains a top priority too. All that said, I’m expecting the second phase of our scaling process, which is focused on a higher degree of automation and throughput, to begin to show benefits in the fourth quarter. Capturing more margin is our top focus today.
Now I’d like to touch on our key markets, and our relative strengths in them, both as an ingredient supplier, and through Solésence finished products.
The first one I’ll mention relates to the recent Joint Development Agreement we closed with Sumitomo Corporation of America. Within this relationship, we are focused on creating new minerals-based ingredients, which are outside our current class of offerings. These will relate to other beauty-science-related markets, markets that are outside of the sun care space. We expect this to be a durable relationship that will build over time, to represent an important part of our Personal Care Ingredients business in several years. This is the type of diversification, that is so well-aligned with our existing production and markets, that we expect to leverage our equipment, and our knowledge, without negatively impacting our existing Personal Care Ingredients business. Speaking of that, minerals-based sunscreens continue to see good demand growth, and we feel great about our strategy.
In addition to the high quality of our products, and their good performance in protecting and enhancing skin health, there are a series of external things happening in the marketplace that we continue to leverage in expanding our market advantage. You may recall that over the past few years, some of the most common chemical sunscreens have been banned, due to their environmental impacts. They are not considered safe for use near coral reefs, and consumers well away from the reefs, don’t like the thought of endangering themselves or the environment either.
Additionally, the Food and Drug Administration’s recent announcement on sunscreen ingredient safety, the 1st new proposal in decades, continues to pressure the industry to either prove the safety of chemical sunscreens, or eventually withdraw them from the market. There are 16 active ingredients currently listed on what the FDA calls the “Monograph,” or the list of active ingredients currently allowed to be used in human sun care in the United States. Of the fourteen chemicals-based active ingredients on this list, the FDA has declared two of these ingredients unsafe for humans, and the other twelve to require much more data to be submitted to prove them safe for use on humans. Combined, those fourteen active ingredients represent all of the ingredients currently allowed in the monograph that we refer to as “chemicals-based sunscreens.” They also represent our most significant market competition, and they make up fourteen out of the sixteen total ingredients included in the monograph. Zinc oxide and titanium dioxide, the two remaining options in the current monograph, are the only two that the FDA has deemed to be safe for human use. That’s what we make, and that’s what we sell. While the industry is pushing back, the FDA has gone to atypical lengths to hold the chemicals-based manufacturers accountable for proving the safety of their products, or pulling them from the market. This will unfold over the next year or so, and we expect this to continue to be a positive for us in the marketplace.
Our technologies and our expertise, developed over the years, and every day, are allowing us to make enabling materials and products. Products that people are demanding. Now is the time.
Although most of our investors listen to the webcast, or review the transcript, after the live call, I’d like to invite those participating in today’s call to ask any questions you may have, or to share your comments.
Sara, would you please begin the Q&A session?
Thank you, Sara.
I wanted to mention, again, that I have received several calls from our fellow investors over the past weeks that coincided with our “blackout” period. I want to remind you that I don’t respond to those. I can’t address questions between the close of the quarter, and the time we issue the press release and have this call. We’ll have more to share once we’re in Q4, as we have the expectation of several customer launches in Q1 of 2020 that we will be supporting through Q4 2019, and early Q1 2020 shipments.
In the meantime, in addition to following us on Instagram and Twitter, I suggest that you visit the Solésence website. We’re at: www.solesence.com
We have made some videos explaining the technologies and, more importantly, the product benefits. It’s a nice place to get either a primer on Solésence, or a refresher. Solésence is our new growth engine, and our minerals-based ingredients business continues to expand as well. While we certainly have our challenges, we are in the right markets, with the right strategy, at the right time. We expect 2019 to continue to reflect the excellence of our Solesence product line, and the growth it will enable, and I’m looking forward to the opportunity to discuss the business with you soon.
Thanks again to all of you for taking the time to listen, and to support our exciting companies.
Have a solid day everybody.