Origin Materials, Inc. (NASDAQ:ORGN) Q2 2023 Earnings Call Transcript

Origin Materials, Inc. (NASDAQ:ORGN) Q2 2023 Earnings Call Transcript August 9, 2023

Origin Materials, Inc. misses on earnings expectations. Reported EPS is $-0.05 EPS, expectations were $0.14.

Operator: Thank you for standing by. This is the conference operator. Welcome to the Origin Materials Second Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Ashish Gupta, Investor Relations. Please go ahead.

Ashish Gupta: Thank you and welcome everyone to Origin Materials’ second quarter 2023 earnings conference call. Joining the call today from Origin Materials are Co-CEO, Rich Riley; Co-CEO and Co-Founder, John Bissell; and CFO, Nate Whaley. Ahead of this call, Origin issued its second quarter press release and presentation which we will refer to today. These can be found on the Investor Relations section of our website at originmaterials.com. Please note on this call, we will be making forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. These statements reflect our views as of today, should not be relied upon as representative about views of any subsequent date, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For further discussion on the material risks and other important factors that could affect our financial results, please refer to our filings with the SEC including our Quarterly Report on Form 10-Q filed on August 09, 2023. In addition, during today’s call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of Origin Materials’ performance. These non-GAAP measures should be considered in addition to, and not as a substitute for, or in isolation from GAAP results. You will find additional disclosures regarding the non-GAAP financial measures discussed on today’s call in our press release issued this afternoon and our filings with the SEC, each of which is posted on our website.

The webcast of this call will also be available on the Investor Relations section of our company website. With that, I will turn the call over to John.

John Bissell: Thank you, Ashish, and thanks to everyone for joining us. Today, we will be referring to the slides that were posted in the Investor Relations section of our website earlier this afternoon. I will begin with a discussion of Origin 1 startup, provide an update on Origin 2, and discuss product development. Rich will then review our Q2 highlights and provide a commercial and regulatory update. Nate will conclude with a financial overview. Regarding Origin 1 and the continued progress made by our team, I would like to point you to a new video that we posted today in the Investor Relations section of our website, providing a closer look at plant startup. I will begin on Slide 5 with an update for Origin 1. In late June, we announced that Origin 1, the world’s first commercial-scale plant to produce origins intermediates, CMF, HTC, and oils and extractives, had initiated startup in line with prior guidance.

This is a tremendous milestone in our journey to de-harmonize the world’s materials. It is also a testament to the strength of our team, which faced considerable COVID-19 and other related supply chain headwinds. Origin 1, located in Sarnia, Ontario, Canada, scales up our core technology platform for converting sustainable wood residues into intermediate chemicals and we expect the power of our platform intermediates to be transformative for the chemical industry and how the world makes physical goods. Origin 1 is, first and foremost, a strategic asset to qualify applications of our intermediates. Apart from parasailing and bio-PET using product from Origin 1, we plan to explore or qualify FDCA, epoxy, resins, surfactants, sustainable carbon black, bio-asphalt, and biofuels.

We expect to gradually ramp up origin one operations and we aim to optimally fulfil customer demand, while we produce samples and qualify materials. We remain confident that we will be able to meet our production goals to support our revenue guidance. Origin 1 enables the commercial scale production of CMF, a versatile chemical building block that can be used to make numerous downstream products, including paraxylene, which is a precursor to PET plastic, and FDCA, which can be used in numerous sustainable products and materials such as the next-gen polymer PEF. The commercialization of a molecule like CMF is historic, on the order of the commercialization of the ethylene molecule. After working with CMF for over a decade, we couldn’t be more enthusiastic.

Turning to Slide 7, we feel that CMF is a new chemical building block, but what do we mean by that? An important chemical building block has a low cost of production, high versatility across applications, and differentiated performance. What we’ve seen historically is that when you combine those three qualities, you have a high-impact building block. Throughout history, a relatively small number of key chemicals have unlocked and transformed the chemical industry. The most recent ones, polycarbonate, acrylate, and urethanes, were commercialized in the 1980s. Introducing a new building block chemical is hard and takes time, but it’s worth the effort. In 1942, ethylene reached a major milestone, the first production of ethylene through the catalytic cracking of ethane.

What followed was decades of process improvements, market penetration, and the rise of ethylene to a $125 billion market. CMF is a similarly powerful molecule due to its low cost of production, high versatility, and differentiated performance. In the case of CMF, the differentiation is the low carbon intensity when it’s produced from biomass using the origin process and the performance advantages of some of its applications. Over the next decade, growing CMF will be analogous to growing an oak tree. For the first few years, most of an oak’s growth occurs underground as the root system is established. Only then does the tree get taller, stronger, grow branches, and become a mature oak. Similarly, in the chemical building block business, the first phase is to establish a foundation for long-term growth.

We are engaged in these foundation building activities every day, and we are excited about and committed to the journey ahead of us. Turning to Slide eight, we see CMF’s versatility and transformative power. Here, a simplified chemical product manifold describes some of the chemistry that CMF makes possible in an industrial scale. From CMF, we can develop new classes of diols, amines and diacids, in addition to drop-in molecules like paraxylene, which you’re familiar with as the precursor to PET plastic. Those chemical families, in turn, can be used to produce a range of surfactants, epoxies, polyurethanes, polyamides, and more. Growing and cultivating the branches of our CMF tree is the job of R&D and the work we do in collaboration with our partners.

Turning to Slide 9, we’re excited to announce the mass production of FTCA, a high-value downstream application for CMF. We’ll move forward to Origin 2, rather than Origin 3, as initially planned in April 2021. We’re bringing FTCA forward for several reasons. First, we’ve seen stronger FTCA commercialization progress than we anticipated two years ago. Second, FTCA applications tend to be performance-advantaged and thus offer higher margins than paraxylene and PET. Third, we have validated the drop-in deployment of FTCA within the PET market, providing a clear pathway to commercialization that is on strategy for us and our customers. Fourth, we are excited for the potential of FTCA in other polyester and nylon applications, and we look forward to providing updates on these as appropriate.

In summary, we are seeing broad support and momentum for FTCA commercialization. Indeed, the U.S. Department of Energy has previously shortlisted FTCA as one of the most promising biochemicals of the future. Turning to Slide 10, our FTCA go-to-market strategy is to begin with drop-in applications before moving into higher-margin applications requiring additional development work. These drop-in applications are not expected to require meaningful retooling of existing methods of production. We expect to develop FTCA within existing PET markets with the following phase approach. One, commercialize drop-in next-gen hybrid PETF polymers, offering performance advantages compared with traditional PET. Two, commercialize the advanced polymer PEF, which also offers performance advantages compared to traditional PET.

Today, we are providing an update for Origin 2, our second commercial plant to be built in Geismar, Louisiana. As just mentioned, we continue to make progress developing products and applications related to the design of Origin 2, including FTCA, PEF, and liquid biofuels derived from our oils and extractive stream. While Origin 2 will focus primarily on FTCA production, and some of our PET customers have already begun expanding their orders to include FTCA, we remain committed to providing paraxylene for our bio-PET customers and plan to bring commercial quantities of paraxylene to the market before 2030. While our current plan is a rational prioritization of Origin’s resources towards more profitable, typically performance-enhanced, chemical applications at Origin 2, we also see massive demand for our drop in bio-paraxylene.

We believe that the best way to meet this demand will be through collaborations with others. We’ve been in active discussions with multiple strategic partners who are interested in licensing or co-developing low-carbon bio-paraxylene plants using Origin’s technology, both in the U.S. and across the globe, and most of which are large, well-capitalized industrial producers of petro-PTA, PET, and other downstream products who recognize the need for more sustainable products. We are also updating our previously disclosed capital budget and construction timeline for Origin 2. As we first indicated in May 2022, we are facing a higher-cost capital project environment than in early 2021 when we announced the initial plan for Origin 2. As such, we are revising the plan’s outlook and introducing a phased approach to construction.

Adapting in this manner to the high-cost environment helps to reduce project risk as we move forward on the path of profitability. Turning to Slide 11, since Origin became publicly traded into 2021, we have witnessed profound market shifts, presenting both opportunities and challenges. Factors influencing our updated plan include significantly higher-than-anticipated demand for higher-margin products, including FDCA, DEF, and liquid biofuels, increased cost of labor, materials, process inputs, and metallurgy due to volatile global material markets requiring engineering rework, inflation and higher interest rates, and higher costs due to COVID-related supply chain constraints and additional value engineering requirements that have extended project timelines.

Turning to Slide 12, we now expect Origin 2 to be completed in two phases, with Phase I estimated to be completed in late 2026 to 2027, and Phase II estimated to be completed in 2028, compared with our initial expectation for a mid-2025 completion. During Phase I, the company expects to achieve profitability from its oils and extractive stream. From this stream, Origin plans to produce a drop-in biofuel with potential applications including marine fuel and heat and power generation. Potential benefits include improved energy and density compared with existing renewable alternatives and the sustainability benefits of increased biocontent. Value propositions expected to be in high demand, given, among other things, the decarbonization goals set out by the International Maritime Organization, a body of the United Nations.

Phase II will expand production to include the mass production of platform chemicals, CMF, and HTC. Phasing the plant is intended to enhance overall efficiency while improving short-term and long-term economics. The capital budget for Phase 1 of Origin 2 is expected to be up to $400 million, while the capital budget for Phase 2 is projected to be up to $1.2 billion. This compares to the original $1.07 billion aggregate capital budget estimate first provided in February 2021. As Nate will discuss in more detail, we are exploring multiple opportunities to finance Origin 2, including a combination of existing cash, previously indicated traditional project financing, federal and state government programs, licensing agreements, and strategic partnerships.

We expect capital expenditures of up to $50 million for 2024, with the majority of Origin 2 capital spend to occur following the project’s final investment decision, or FID, in 2025. In summary, the Origin 2 project represents a significant scale of our technology, core processing capabilities. This scale-up will be instrumental in enabling Origin to execute on its mission and greatly expands our ability to deliver product and address customer demand. We remain deeply committed to the project, and we will do the work, make the investment, and build the relationships to make Origin 2 a success. With that, I would like to turn it over to Rich, who will review our Q2 highlights and provide a commercial and regulatory update.

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Rich Riley: Thanks, John. Moving to Slide 13, customer demand remains strong, with offtake and capacity reservations now exceeding $10 billion, up from $9.3 billion in February 2023. We are excited to have crossed this significant milestone and to highlight that the majority of the growth in demand was for FTCA, which is where our team has been focused. As mentioned in prior calls, we do not plan to provide updates on this number every quarter, but will provide updates as appropriate. We are maintaining 2023 guidance for revenue of $40 million to $60 million and adjusted EBITDA loss of $50 million to $60 million. We are also pleased that revenue generated by joint development agreements and our supply chain activation program continue to grow in the second quarter in line with guidance.

We continue to see strong, positive tailwinds for our technology and business model. Origin continues to explore several programs funded by the IRA, or Inflation Reduction Act, including the Department of Energy’s Advanced Industrial Facilities Deployment Program, or AIFD, which we expect to hear feedback on by the end of the year and the Section 48C Advanced Manufacturing Tax Credit. We remain optimistic that these programs could provide meaningful support for the construction of Origin’s plans. Turning to Slide 14, in early August, we were excited to announce a strategic partnership with Sustainea Bioglycols, a joint venture between Braskem, the largest thermoplastic resin producer in the Americas, and a global pioneer in biopolymers, and Sojitz Corporation, a Japanese global trading company with wide-ranging market networks and a strong presence in Asia.

Our partnership centers on advanced biobased materials and as part of the partnership, Sustainia signed two multi-year capacity reservation agreements to purchase renewable chemicals from Origin, including biobased PTA and biobased FDCA. Turning to Slide 15, in late July, we were pleased to announce that Origin and Husky, a pioneering technology provider of injection molding equipment and services to the food and beverage packaging and consumer products industries, had achieved a milestone in the commercialization of PET incorporating the sustainable chemical FDCA for advanced packaging and other applications. Specifically, Origin successfully polymerized the biobased sustainable chemical FDCA into the common recyclable plastic PET. Husky then molded the resulting PETF hybrid polymer into preforms that were then blown into bottles.

The companies used Husky’s injection molding technologies and manufacturing equipment, a commercial manufacturing scale level of processing, demonstrating the ability of PETF, a polymer made with FDCA, to be integrated into existing PET production systems. This innovation demonstrates a pathway for the drop-in market adoption of FDCA to produce superior polymers cost-effectively from biomass using Origin technology. Our PETF polymers offer improved performance compared with traditional PET plastic, with properties like enhanced mechanical performance and superior barrier properties controlled by adjusting manufacturing conditions and a quantity of the FDCA copolymer. Turning to Slide 16, in early August, we announced a strategic partnership with Terphane, a global leader in specialty PET polyester films, to produce sustainable, high-performance biopolymer films.

As part of the partnership, Terphane signed a multi-year capacity reservation agreement to purchase the advanced biopolymer PEF for use in film applications, including food and beverage packaging and high-value industrial applications. Turning to Slide 17, in early August, we announced a strategic partnership with Proman, a leader in natural gas-derived products and one of the world’s leading producers of methanol, centered on low-carbon biofuel production, utilizing Origin’s technology platform and Proman’s worldwide fuels capabilities and expertise. As part of the partnership, Proman and Origin Materials signed an agreement to explore the production and global distribution of low-carbon biofuels. Low-carbon intensity biofuels made from wood waste reflect the future of biofuels as the industry moves aggressively towards decarbonization.

Origin’s technology platform is uniquely positioned to deliver these renewable fuels using our oils and extractives intermediate stream. We are excited to partner with Proman, a company that brings significant expertise across engineering, procurement, and construction related to world-scale sustainable technology development. Over the long term, we see the potential for biomass-derived low-carbon intensity fuels to be used in marine and other transportation fuels, industrial applications, heat and power generation, and more. Turning to Slide 18, in early August, we announced a recyclability innovation and new product line with Origin’s all-PET bottle caps enclosures. In 2021, the global caps enclosures market was $65 billion. This market is expected to grow to approximately $100 billion by the end of the decade.

Today, caps are typically made from a different material than bottles, presenting challenges for recycling and separating material streams and putting a ceiling on the amount of recycled content that can go into a bottle. The industry has long sought a monomaterial solution for caps and bottles, so we are thrilled to have launched our all-PET bottle caps enclosures business. Apart from improving post-consumer recycling, our design and manufacturing innovation makes made-with-100% recycled PET possible from cap to bottle. Origin’s PET caps may be cost-competitively produced with any type of PET, from recycled PET to Origin’s 100% bio-based carbon-negative virgin PET. Notably, PET performs better than HTPE and PP, common cap materials, offering improved oxygen and CO2 barriers.

With our PET caps business, we identified a global sustainability challenge and an opportunity to solve it. An all-PET bottle cap enclosure system is an obvious necessary next step in beverage packaging and recycling. We are proud that our team’s expertise in PET led to this tremendous advancement for recycling, and we look forward to providing updates on this new business line. I’d like to take a moment to spotlight how our platform is stronger today than when we first became public and provide a look ahead. Turning to Slide 19, over the last two years, our platform evolution can be summarized in one word, performance. When we first listed on the NASDAQ, we called ourselves the world’s leading carbon-negative materials platform, emphasizing our competitive cost to production and powerful carbon advantage.

Since then, we’ve developed higher-margin, higher-performance products, such as Carbon Black for automotive tires, and products such as FDCA, PEF, and our hybrid polymer PETF. Reflecting this strong pace of innovation, we now have intellectual property across 31 patent families, more than a 50% increase since February 2021. Our performance-advantaged products carry all the benefits of our platform in terms of competitive cost of production and low-carbon footprint, but include additional benefits specific to their applications. Because of our success in these developmental efforts, today we are proud to say high-performance, low-carbon, better materials start with origin. Turning to Slide 20, the Origin platform stands apart from other technologies by offering the best value uplift for biomass.

Origin is fundamentally economically advantaged compared to other biomass conversion technologies. This is because of the simplicity of our technology, which is able to chemically convert woody biomass into chemicals, a more direct means of producing intermediate chemicals than alternative processes like pyrolysis, with almost zero carbon loss during the conversion. Our products can command a premium for their sustainability and performance characteristics across a wide array of applications. The result is better platform, which acts something like a petrochemical refinery, except utilizing biomass as the key feedstock instead of oil, is able to deliver several times the margin of competing technologies. Turning to Slide 21, we expect the gross margins of our intermediate streams to grow stronger with time.

Product development, the versatility of our intermediates and economies of scale, will drive long-term value creation. For those who have followed our story, you have already witnessed our platform evolve to take advantage of higher margin opportunities, most notably with the acceleration of FDCA to Origin 2. This is just one example of our strategy of pursuing the highest value, most impactful opportunities for our versatile platform. Turning to Slide 22, often we are asked who our competition is? The answer is simple. Capacity is our competition. The chemical industry, our supply chain partners, consumer brands, all of us are working together to achieve the same goal, better materials that help fight climate change. Our ability to grow our business is not limited by competition.

It’s enhanced by cooperation. The way we win is to bring on additional capacity as quickly, intelligently and safely as we can. Our strategy is twofold, build and license. While we plan to build, own and operate Origin 1 and Origin 2, licensing is key to our ability to scale rapidly. Last quarter, we announced our first potential licensing agreement with SCGP. We continue to explore other licensing agreements with many of our customers, and we are well-positioned to take advantage of a host of strategic opportunities around the world to increase production strategically in a way that plays to local strengths, whether it’s feedstock availability, government incentives, skilled industrial talent, converting existing facilities, or other opportunities.

Turning to Slide 23, in early June, we were thrilled to announce the appointment of Jim Stephanou to the Origin Board of Directors. Jim’s proven track record leading manufacturing and technology initiatives for global companies is highly complementary to the skill set of our board and will prove invaluable as we ramp up Origin 1 operations throughout the year and begin commercial production. Jim brings to Origin over 30 years of experience in the manufacturing, operations and engineering, including his current role as CEO of Integrated Project Services, an engineering and construction services provider to the life sciences sector. With that, I will turn it over to Nate to discuss some of the financial details.

Nate Whaley: Thanks, Rich. I’ll begin with a commentary on our second quarter results, then provide our financing expectations for Origin 2, and finish with an update on our 2023 outlook. Speaking to Slide 24, we reported quarterly revenue for the second quarter of $6.9 million associated with JDA’s and Origin’s supply chain activation program, compared to no revenue in the prior year period. Second quarter operating expenses were $14.4 million compared to $8.7 million during the same period in the prior year. Net loss was $6.3 million for the second quarter compared to net income of $46.9 million in the same period in the prior year. Adjusted EBITDA loss was $11.7 million for the second quarter compared to a loss of $6.9 million in the same period in the prior year.

Turning to our balance sheet, Origin ended the second quarter with $217.7 million in cash, cash equivalents and marketable securities. A meaningful portion of Q2 cash expenditures were related to the completion of Origin 1 and are, therefore, non-referring. Regarding the financing of Origin 2, in early January, we announced that the Louisiana State Bond Commission unanimously passed a resolution granting its final approval of the issuance of up to $1.5 billion of tax-exempt bonds to support the construction and commissioning of the plant. This amount is inclusive of and builds on the strong foundation of the previously announced expected $400 million in private activity bond volume cap allocation. Bank of America has been engaged by Origin to underwrite the bonds and market them to investors.

We continue to believe that debt financing of Origin 2 could be achieved using entirely tax-exempt bonds. Origin continues to work with leading financial institutions on other forms of traditional private financing and federal loan programs, including through the United States Department of Agriculture and Department of Energy, and pursue other local, state and federal incentive programs to optimize the financing of Origin 2. These include certain 2021 Infrastructure Investment and Jobs Act and 2022 Inflation Reduction Act provisions, including the Department of Energy’s Advanced Industrial Facilities Deployment Program, or AIFD, and the Section 48C Advanced Manufacturing Tax Credit. Finally, given Origin’s ongoing global technology licensing effort and an active government affairs team, we anticipate strategic partnerships, as well as state and federal incentive programs, to play a meaningful role in the financing of Origin 2.

I will wrap up with our 2023 outlook. We are maintaining our guidance for revenue of $40 million to $60 million and an adjusted EBITDA loss of $50 million to $60 million. And with that, I will turn it back to Rich for closing remarks.

Rich Riley: Thank you, Nate. In closing, I would like to thank our customers, our team, and our partners for their contributions to our company’s success, and our shareholders for their support. I’m proud of our team’s continued execution as we draw closer to commercial production and take the next step in the world’s once-in-a-planet transition to sustainable materials. With that, I will ask the operator to open the line for questions.

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Q&A Session

Operator: [Operator instructions] The first question comes from Steve Byrne with Bank of America. Please go ahead.

Steve Byrne: Yes, thank you. A couple questions here on Origin 2. Is any of the delay in the cost increase because of shifting the focus away from para-xylene over to FDCA? I kind of suspect not, but wondered if that was part of it. And maybe more importantly, when you first rolled out your financials for Origin 2, you were targeting a million tons of biomass feedstock into that plant. Is that still the design? But more importantly, you were targeting $0.16 a pound of margin from this PET pathway. As you move towards more of a FDCA pathway, what would you suggest is a more reasonable margin that that plant, you think, is going to be able to produce?

Rich Riley: Hey, Steve. Thanks for the questions. Good questions. So first, I’ll go through each one in order. So first you asked, is FDCA and shifting towards that kind of product base part of the capital increase and schedule shift? And the answer actually is, in part, yes. It’s not the only thing, but it’s meaningful. So looking at these other products, one takes more time, right? So we obviously didn’t expect to be producing those kinds of products off of OM2 when we originally provided our estimates on schedule and cost. And so there are changes that get made. I’d say, generally speaking, if you’re looking at FDCA, that has more of a schedule impact than it does an overall cost impact. And then for things like carbon black and other higher-value HTC products, that has both a schedule and a cost impact.

So those are a part of it although, again, they’re not the only thing. They’re not solely responsible for that. From a scale perspective, one of the things that’s somewhat unusual for Origin, specifically as a chemical company, is that we tend to be more capital constrained than the typical chemical company that’s going after the kinds of plants and projects, frankly technologies, that we are and so consequently, we have to adapt to increased cost environments by also reducing the scope of the plant, not just by raising additional capital, right? We need to be disciplined with the way that we approach these kinds of projects. And so consequently, in a higher-cost environment where we’re going in general, right, which includes some of the things that we enumerated, but things like higher materials prices, obviously higher labor costs, energy, all sorts of things like that.

As a consequence of those, we need to adjust by scoping down the scale of the plant. And so we expect that we’re going to have a smaller-scale plant than the million tons of biomass fed originally. And we provide a summary of that on one of the appendix slides in our earnings presentation. But generally speaking, we’re expecting by the time we’re done with this plant to be at about 500 Kta of feedstock rather than a million. Sorry, and then margin. So for margin, we haven’t given an explicit margin as a result of all of those things. What you can see is, on that same slide that I just referenced, which is in the appendix portion of the presentation, what you can see is 500 kTa of feedstock and we’re expecting just under $300 million per year of EBITDA on that.

Operator: The next question comes from Frank Mitsch with Fermium Research. Please go ahead.

Frank Mitsch: Good afternoon. Good afternoon, folks. Yeah, it seems like a pretty big pivot on Origin 2, particularly when you’re going after biofuels. Can you talk about the risks associated with that, given the fact that you have all these capacity reservations on para-xylene, that was kind of the first thing in hand. And also in terms of the capacity reservations and so forth, now that you’re pivoting and delaying pretty meaningfully, what are the chances that some of those capacity reservations go away? But, yeah, if you could talk about the timing delay, the pivot, and why is the FID in ’25, not in ’24?