Origin Materials, Inc. (NASDAQ:ORGN) Q3 2024 Earnings Call Transcript

Origin Materials, Inc. (NASDAQ:ORGN) Q3 2024 Earnings Call Transcript November 16, 2024

Operator: Good afternoon, everyone. Thank you for standing by. This is the conference operator. Welcome to the Origin Materials Third Quarter 2024 Earnings Call. As a reminder, all participants are in a listen-only mode. The conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Ryan Smith, Co-Founder and Chief Product Officer. Please go ahead.

Ryan Smith: Great. Thank you. Good afternoon, and thank you for joining us everyone. Speaking first today is Origin’s co-CEO, Rich Riley; co-CEO and Co-Founder, John Bissell; and CFO, Matt Plavan, will speak next. Then, we’ll open the call to questions from analysts and discuss questions submitted as part of our Ask Origin campaign. Ahead of this call, Origin has issued its 2024 third quarter press release and presentation. These can be found on the Investor Relations section of our website at originmaterials.com. Please note that during our discussion today, we will be making forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. These statements reflect our view 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 revisions 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 today. 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, which will be posted to 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 Rich.

Rich Riley: Thank you, Ryan. Good afternoon, everyone. With our caps and closures business, we have achieved product market fit. Customer demand is strong and our ability to produce Origin’s premium PET caps is largely what will determine our rate of growth. Because of the recent success of our first CapFormer System and its completed Factory Acceptance Test, we are now able to execute our scale-up plan for building additional systems more aggressively and with higher confidence to meet pent-up demand. We expect to see healthy growth exiting 2025, and we anticipate that Origin will be EBITDA positive on a run rate basis in the first half of 2026. Now, let’s talk about how we got to this moment. First, this quarter, we achieved a milestone on our journey to profitability, the successful Factory Acceptance Test of our initial CapFormer System.

In the course of this test, we produced several million fully functional PET caps. Our CapFormer subsystems ran as expected, including quality systems such as visual inspection as well as our finishing systems, everything necessary for turning recycled PET sheet into fully formed caps. This isn’t the test system, it’s our first commercial line and the success of this test means that Origin’s proprietary system is performing as envisioned with over 98% efficiency during the acceptance test. As most of you listening know, Origin’s CapFormer System offers the world of breakthrough for recycling circularity and packaging performance. In this quarter, we revealed some of its secrets; the novel applications of thermoforming, finishing and post processing and other design elements, which you can see in the video released in September.

Our prospective customers and partners visited us and witnessed our CapFormer System producing PET caps at commercial speeds first-hand. The prospective customers attending, whose total cap consumption is in excess of 100 billion caps per year, saw the validation of our production approach with their own eyes. Simply put, our manufacturing system works and along with our current and prospective customers and partners, we couldn’t be more excited about it. Furthermore, our commercialization plan centered on launching our caps and closures business and going to market with the world’s first commercially viable PET beverage closures is on track. Commercial production remains on track to begin this quarter at which time we will continue to engage in customer qualification as we scale our caps output.

Our caps and closures revenue expectations are on track. We expect initial caps and closures revenue generation during the first quarter of next year, with significant gross profit generation projected to begin in 2025 and a healthy growth trajectory thereafter. Customer momentum, as I’ve alluded to, remained strong. Alongside our announced $100 million MOU for PET caps, our caps are now in the hands of multiple potential customers engaged in testing and qualification, offering a strong pipeline of potential buyers who can purchase billions of caps as our systems come online throughout next year and beyond. I know many of you want to know more details about our prospective customers. Let me tell you why we aren’t talking about them yet and what would cause us to talk about it more.

Presently, multiple prospective customers are engaged in a qualification phase. That means we’ve delivered caps to them and they are performing their own testing. Many of them have attended our trials and tests, and we’ve explicitly discussed geographies, volumes, ramp-up timelines and economics. This qualification period will extend through the start of commercial production, which is slated for the fourth quarter of this year. Once we have completed the qualification period with each customer, including the delivery of caps following the commencement of commercial production, we will be in a position to sign definitive purchase agreements at which time we expect the rate at which we announce customers to increase. We will continue to qualify new customers on an ongoing basis as we expand production capacity and develop new cap formats and features.

We believe we can sell every cap we can produce, and our prospective customers can’t wait to begin accepting shipments. With customer demand as strong as it is and with commercialization progressing as planned, we are in a great position to scale our production capabilities. For more on this topic, I will turn it over to John, who will share details about our plans for growing the business in the quarters ahead.

John Bissell: Thank you, Rich, and good afternoon, everyone. Today, we’re excited to announce that our current manufacturing plan calls for bringing eight or more CapFormer Systems into production by the end of 2025, and we believe these eight CapFormer Systems alone could be sufficient to enable Origin to achieve positive EBITDA. This is a significant milestone in our plan to achieve positive EBITDA on a run rate basis during the first half of 2026. Further, we expect these assets and the revenue they generate to enhance our ability to invest in additional CapFormer Systems to meet demand and deliver profitable growth. To give you a sense for the growth trajectory of our caps business, we estimate the initial eight CapFormer systems will produce in total between 8 billion and 12 billion caps per year when fully operational, and we believe this capacity will exceed that required to service our previously announced MOU.

The majority of our volume produced during 2025 is expected to be of the 1881 format, and the production volume will depend on factors such as line throughput and efficiency, both of which we expect will increase significantly as we maximize production and product mix as additional SKUs come online. This quarter, our Factory Acceptance Test demonstrated we can make Origin PET caps at full commercial speeds with high efficiency. This was a technical feat and represents a true breakthrough. We shared a video showing the system operating. And for those who haven’t seen it, I encourage you to check it out. It follows the journey of an Origin cap from start to finish. What you’re seeing really is advanced materials knowledge in combination with precision thermoforming and processing to enable a breakthrough in product circularity.

First, a roll of 100% recycled PET is fed into the thermoforming unit of our CapFormer System. In the world of thermoforming, this is sophisticated technology. These are amazing machines operating at high speeds and cycle times. And we’ve taken this technology to the next level. Our caps undergo heating, forming, cooling and trimming, and we follow it with the finishing portion of our system where we perform various forms of post-processing, optical inspection and deliver the caps to the container at the end of the line. As Rich mentioned, multiple prospective customers representing consumption of over 100 billion caps per year attended our Factory Acceptance Test. I believe this was a powerful moment for everyone who attended, from the Origin team to our manufacturing partners to our prospective customers who could see the reality of our system coming to life first-hand.

Not least, they witnessed that the subsystems integrated seamlessly, a critical aspect of running a high-speed, commercial system combining multiple components in novel ways. We believe our caps business is highly scalable. Our product requires minimal changes to our customers’ operations, most notably exchanging a part on their bottling line called a chuck, which is a straightforward and minor adjustment. Growing our capacity at the risk of oversimplifying is essentially a copy and paste operation. We will expand capacity largely by standing up more systems and incrementally and continually improving the design of our systems over time. In support of our CapFormer expansion plan, alongside our existing partners, we have already identified multiple, additional potential partners with excellent PET processing capacity and capabilities.

This is part of the groundwork for ensuring a relatively steady process for bringing new systems online. After the initial eight CapFormer Systems come online, which, as we said, we expect to occur during 2025, we plan to continue to add systems for the foreseeable future to keep pace with the steep growth curve of the indicative market demand. We believe we can sell as many caps as we can produce once commercial production is online. Our caps are premium products, and we are proud to lead the now commercially viable category of PET closures, enabling superior performance and sustainability. We are also pleased to share the latest R&D progress for our caps and closures. In the spirit of continuous improvement, the team is working on equipment and tooling upgrades that could more than double the throughput of our CapFormer Systems with relatively minor modifications.

The team has also launched a rapid prototyping system, including 3D printing and other testing capabilities, which will assist in the development of new formats and features. Improving in-house testing capabilities generally helps us move faster, and we look forward to sharing more details in the future about the results of these efforts. This quarter, with Reed City Group, we began preparing what will become the home for our first CapFormer System. Together, we are finalizing the start-up and commissioning plan and schedule, arranging for the shipment of equipment to our Michigan site, engaging with suppliers to qualify materials used in our production process, and coordinating with logistics partners to plan the delivery of finished products.

Lastly, this quarter, we progressed multiple patents through the various phases of application and prosecution. We expect to advance and maintain both the domestic and international patent portfolio to protect our proprietary process and products, and we see the work this quarter as part and parcel to that process. In sum, with our leading PET cap technology and proprietary manufacturing systems, we are extremely well positioned to address the $65 billion caps and closures market that consumes billions upon billions of caps per year, which today cannot be effectively recycled into new caps, only downcycled. Our cap offers a fully circular, mono-material packaging solution the market desperately needs and has needed for some time. We’re pleased with our progress and looking forward to the start of commercial production later this year.

For furanics and Origin’s biomass conversion technology, we continue to advance the products and process technology. Although we expect the focus of Origin investor communication to be Origin’s path to profitability, namely our caps and closures business, we will provide investors with furanics update as appropriate when we have substantive news to report. As previously announced and consistent with the company’s focus on becoming EBITDA positive in the first half of ’26, we are operating Origin 1, our biomass conversion plant in Sarnia, Ontario, on demand with somewhat reduced staffing. This approach preserves our ability to generate product at volumes sufficient to explore scale-up with strategic partners while reducing our current overall cash burn.

As we establish a strong economic foundation through our PET caps and closures business, we expect to be ideally situated to drive deals regarding our biomass conversion technology and furanics platform. And now, I’ll hand it over to Matt.

Matt Plavan: Thanks, John. Good afternoon, everyone. We provided the third quarter results in tables of the earnings release, so I will focus my comments on a couple of key financial highlights. We ended the quarter with $113 million in cash, cash equivalents and marketable securities, $45 million less than December 31, 2023. As a run rate for cash burn at the three-quarter point this year, this amount is within our cash burn guidance range of $55 million to $65 million. Origin’s third quarter revenue was $8.2 million compared to $7.1 million in the prior year quarter and also trending in line with our revenue guidance for the year, which is between $25 million and $35 million. Also, as expected, these revenues are comprised of what we refer to as supply chain activation revenue.

Looking ahead, as just highlighted by John and Rich, we expect the onset of new revenue from our caps and closures initiative to begin in Q1 of 2025. And to reiterate our prior guidance, we anticipate caps and closures revenue in 2025 to be significant, recurring in nature, and with a margin growth profile that will drive us to EBITDA positive on a run rate basis in the first half of 2026 without having to access the equity capital markets. Now, I’d like to open up the call for questions. Operator, may we have the first question, please?

Q&A Session

Operator: And ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Frank Mitsch from Fermium Research. Please go ahead with your question.

Frank Mitsch: Thank you so much, and good afternoon. I wanted to — the $100 million customer that you have right now, you mentioned that you expect a significant ramp in year two. That $100 million covers two years, correct? So, a significant ramp. Are you looking at like $25 million, year one; $75 million, year two? How do we think about the ramp with that customer? And then, I know that you said you had 100 billion cap customers watching over, but is this still the only MOU that you have signed right now on caps and closures? Thanks.

Rich Riley: Yeah. Hey, Frank, this is Rich. Appreciate the question. Yeah, so we’ve announced the $100 million MOU that you referenced, which does have an initial two-year term, and we do expect it to ramp fairly aggressively into year two. I don’t think you’re wildly off, but we’re not giving that precise of guidance at this point. And we did have customers representing over 100 billion of annual caps at the Factory Acceptance Test with us and in various stages of their own qualification processes. So, we hope to have more customer news in the coming months.

Frank Mitsch: That’s very helpful. And yeah, I guess looking at the 10-Q, obviously, Geismar, we’re saying goodbye to Geismar, but you did indicate that the timeline and deal structure, et cetera, on Origin 2 will depend on — well, yeah, the timeline will depend on deal structure and potential partners, but it — and where the location is, but you specifically called out an Asian brownfield facility, which begs the question, have there been discussions on Origin 2 taking place in Asia? Any color that you could give there would be very helpful. Thank you.

John Bissell: Hey, Frank, this is John. Yeah. So, I think the key thing that we’re focused on right now is just that Geismar doesn’t seem like the likely spot or at least not sufficiently likely that it’s worth sinking a reasonable amount of our capital into holding that site right now. And so that’s sort of the approximate decision. I think certainly, we have quite a few relationships that we think could bear fruit over time with an Origin 2-like plant, but I don’t think we’re ready to give a lot of detail beyond what we have before, which is, Asian brownfield scenario seem like a really appropriate and sort of efficient way to proceed with a plant like that, but I don’t think it’s exclusive to those. And I don’t think we have a lot more information to provide on it at this point.

Frank Mitsch: Great. Looking forward to updates as we go along. Thanks so much, folks.

John Bissell: Thanks, Frank.

Operator: [Operator Instructions] Our next question comes from Steve Byrne from Bank of America. Please go ahead with your question.

Steve Byrne: Now that this technology has been demonstrated effectively full scale and you describe it as manufacturing is now working, is another path forward to just outright sell all the technology to any of these prospective customers? Are any of them expressing an interest in acquiring it either exclusively or licensing it? Just curious whether you view that the value proposition of what you’ve discovered here to be greater by you going down this path of becoming a caps producer?

John Bissell: Yeah. I think it’s a really — it’s an excellent question. Our view is that it’s important for us to — the Factory Acceptance Test is obviously a critical one. I think there are additional milestones that are going to be useful, although maybe not strictly necessary to have those kinds of conversations here, I’m just talking about in terms of actually producing caps, shipping caps, having them in the commercial market, et cetera. But I think that maybe the more important point is we have had interest in licensing of various sorts of this technology. I think that’s something that we’re open to and we think could make a lot of sense. There are ways to structure a license there that we think is sort of win for all the parties involved.

We also think that it makes sense for us to continue building out capacity until that’s sort of the most straightforward way to monetize and access the value of this technology until there’s some other alternative for us to pour our resources into that might be a better and more efficient way to monetize it. So, I think for us, all options are on the table there. And we’ll see what shows up, but for now, it’s drive it and pursue it on our own and with our production partners and customers.

Steve Byrne: And just a question about the Sarnia plant, what’s the operating rate of that plant been in recent months? And is that a reflection of the level of interest that you’re still seeing out there in either the furanics or the HTC?

John Bissell: Yeah. So, the operating rate of the plant isn’t something that we’re ready to publish right now, but it is lower in the last couple of months than it was prior. And I would say that’s more a reflection of our reallocation of resources towards the caps opportunity than it is a reflection of sort of market interest in CMF and HTC. I think generally speaking, we see still quite a lot of interest in CMF and HTC. And I’d say the change, sort of if there’s a delta or a rate of change in interest, I’d say the rate of change is slightly positive on HTC whereas I think it’s pretty — the interest level is consistent on CMF, but that’s probably more because CMF was more interesting to more players and more accessible earlier on than HTC was.

So, I think we’re seeing a little bit of a mild pickup in interest on HTC. But in both cases, we have accumulated products that we can use. And so, our view is let’s make sure that we’re deploying that product to customers usefully and we can really focus as many of our resources as we can on getting caps and closures up running and cash flowing as soon as we can.

Steve Byrne: Maybe just one more on that last comment, John, and that is, is this interest in HTC as a carbon black alternative, or are you seeing anything new in terms of a new opportunity or new application of HTC?

John Bissell: Yeah. I think a lot of the HTC interest tends to be around carbon black, and I think that often is the nearest term from our perspective without trying to put a specific bound on what term would be. But I think we — what we do see is more discussion around applications that we had discussed — that we’ve already talked about before, but which may be felt nascent when we were — when we talked about them originally, because we were excited about them, but we didn’t necessarily have other parties that were interested in those things. So, we were in a little bit — we were sort of pushing those applications more so than feeling pulled from them, but I think we’re starting to see a little bit more interest in some of those other applications that varies from everything from battery materials over to agricultural products.

So, I don’t want to get into sort of exactly what those — what applications those are, but I’d say, some of the ones that we thought of as further out we’re starting to see some interest in from other parties.

Steve Byrne: Okay. Thank you.

Operator: Thank you. And now, I’d like to turn it over to Ryan Smith, Co-Founder and Chief Product Officer for a Q&A section answering Ask Origin questions submitted by investors prior to today’s call.

Ryan Smith: Thank you, operator. Prior to our earnings call, we invited all investors to submit questions as part of our Ask Origin campaign. So, thank you so much to everyone who participated. You asked some great questions. And these questions were, of course, submitted before our call today, and we answered many of them thoroughly with our prepared remarks and our analysts’ Q&A. We’ll generally be answering the most relevant questions today during the time we have with a focus on Origin’s path to profitability, our caps and closures business. But first, I want to acknowledge that we’ve received a few questions about management’s purchase and sale of stock. I’ll say, at a high level, you should be aware that a 10b5-1 stock purchase orders are subject to timing constraints.

Therefore, the time between the filing and the actual transaction can be quite long. So, 10b5-1-driven triggers may be decided well in advance of when they could take effect. Additionally, as stock vests, a common practice is to sell shares sufficient to cover tax withholding. So, with that said, I’ll direct my first question to Matt, and it pertains to the margins around our caps. And so, Matt, in the past, we’ve said that they’re attractive, but what else can you tell us about what we learned about our caps’ margins and unit economics?

Matt Plavan: Sure. I’ll answer that question. There’s different margins, gross margin, operating margin. I think what I tend to hear a fair amount is inquiry around gross margins because often people think that’s an important metric with regard to the leverage of the business. And as you might expect, during our manufacturing scale-up in 2025 and even in 2026, our gross margins per line will be dynamic as we move from the inefficiencies of startup operations to achieving economies of scale and ultimately reaching a run rate positive EBITDA in the first half of 2026, which we said a few times on this call because that’s really our North Star, if you will. We’re not giving specific guidance in the very near term around gross profit per product, but I think what we can say that is important to understand is that our 100% PET caps are premium products.

And therefore, we’re experiencing favorable leverage in pricing discussions. And when you think about costs as a manufacturing platform, thermoforming produces caps and closures at a very effective cost versus injection molding per se, which is the industry incumbent technology and that’s due to the time it takes to basically stamp out a cap versus inject plastic into a mold. And this advantage translates to a lower cost of production that, as you can imagine, amplifies the bigger the cap format size. So, said in another way, the larger the cap size, the more cost-effective we become as compared to injection molding. And hence, the reason we’re excited about bringing additional product SKUs online, which John referred to earlier. So, it’s really the combination of these factors that give us confidence that our caps will generate attractive margins.

And I think at the point we’ve got operations up and running and have better visibility into those specifics, we’re probably going to be more likely to be able to share what we think those are going to — how they’re going to behave over time, but for now, I think that’s what we’re comfortable sharing.

Ryan Smith: Great. Thank you, Matt. Now, I’m going to switch over to John and ask a couple of questions. John, we continue to have investors with a lot of enthusiasm about the long-term potential of Origin’s furanics platform and asking questions about OM1. So, I think more specifically asking about OM1, once caps is up and running, can you tell us what we could expect there?

John Bissell: Yeah. So, I think we continue to be excited about the furanics technology broadly. And I think OM1 is obviously our most substantial asset associated with the furanics technology. We’re learning a ton of stuff from it, both from the operating time that we’ve had already, even just analysis of the data from that — those operations, and then, of course, ongoing work that we’re doing at OM1. So, I think by the time we can bring our focus back to the furanics technology after we’ve achieved profitability with caps and closures and have that business sort of growing nicely and doing what we want it to do, then I think we can take what we learn or have learned already from OM1 and what we’ll learn between now and then and we can put together some really interesting things to do with OM1.

I’m not sure if the plan for OM1 at that point — it’s hard to predict what the plan would be that far out, but I think the plan may not be exactly what we thought we would do with OM1 a couple of years ago, but I think it’s a very flexible asset that can do a lot of things related to our furanics technology by design. And I think there’s some really exciting things to do with it once we have the ability to focus and match resources on it appropriately again.

Ryan Smith: Great. All right. And then, for my last question, John, I’m going to come back to you, and an investor, I’ll just quote them directly, they asked, “What do I have to get excited about before the next earnings call?”

John Bissell: Yeah. I mean — so some of the stuff that I’m excited about is we’re going to be shipping a lot of our equipment to Reed City. We’re going to be landing it there. We’re going to be starting to produce caps with that system that we’ve already tested at the location. We’re going to be shipping those caps to customers. All of that is happening in sort of between now and roughly the next earnings call, give or take a little bit. And so, that’s the stuff that we’re excited about. I think we have — as I said, we have new technology, let’s call it, technology advancements even in the works already around caps and closures. I think that’s incredibly exciting. We expect to be able to deploy that kind of technology advancement quite quickly in this caps and closures business, just again because of the shorter cycle of the capital investment required and the engineering cycles.

So, that’s incredibly exciting. And then, of course, being able to announce new customers, as Rich mentioned earlier is, it’s going to be really, I think, gratifying for not just us, but everybody else as well. But we need to get through the appropriate qualification cycles and all those kinds of things as well. So, it just depends on customer by customer on — to what extent they want to announce things prior to getting us things done or not. So, I think there’s a lot to be excited about. We’re certainly really looking forward to all of these things. And I think what’s maybe the most exciting part is that it’s right around the corner. The cadence of the chemicals business is quite long. And it’s really, really fun, frankly, to be doing the caps and closures work, which is a much shorter cycle, shorter cadence business.

Ryan Smith: Great. Thank you, John, and thank you to everyone who joined and to everyone who sent in questions. We look forward to our next update. And this concludes our call for the day.

Operator: Ladies and gentlemen, with that, we’ll conclude today’s conference call and presentation. We do thank you for joining. You may now disconnect your lines.