Origin Materials Inc

NASDAQ:ORGN

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Origin Materials Second Quarter 2024 Earnings Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. [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, executive]

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 will 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 second 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 our 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 a 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's materials performance. These non-GAAP measures should be considered in addition to and not as 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.

[John Bissell, executive]

Thank you, Ryan, and thank you, everyone, for joining us. I will begin with the commercialization update as our caps and closures business is making significant strides, and we are closer than ever to producing and selling products in significant volumes. Today, we are announcing our first signed customer for our PET caps and closures. We anticipate delivering multiple billions of caps to this customer, which we expect will generate over $100 million in revenue in the initial 2-year term, with revenue ramping from 2025 to 2026. Therefore, to fulfill demand for this MOU as well as anticipated demand from other customers, we expect to build capacity well beyond our initial system purchases, which we previously announced that have an expected capacity to generate between $45 million and $65 million in annual revenue. We plan to announce future customers as appropriate, taking into consideration context such as the timing of our prospective customers' product launches involving our caps and our customers related marketing activities.



Concurrently, we are negotiating potential licensing agreements with key players. We anticipate that licensing our technology, in addition to selling the caps we produce with our world-class manufacturing partners will drive explosive growth for our PET caps business. This will further catalyze the revolution in recycling, circularity and product performance that we are bringing to beverage packaging, food packaging and home goods. We expect to be first to market with PET caps. We expect to produce them cost competitively. We can make them with any type of PET, making the use of 100% recycled PET possible from cap to container for the first time ever. Our caps performed better than today's HDPE and polypropylene caps in ways that can improve product shelf life and our caps are designed for circularity with no additives used to modify the polymer. For a wide variety of containers, our technology enables the lightest cap, reducing plastic waste and improving sustainability. Demand for these products has been incredibly strong and some have called PET caps, the Holy Grail for packaging circularity.



Today, we are reaffirming that caps commercial production is on track to begin during the fourth quarter of this year, with revenue generation expected to start ramp up during the first quarter of 2025. This past quarter, in Switzerland and Germany, we've tested all manufacturing line subsystems at full speed, and we are pleased with the systems performance. We also passed the milestone of over 1 million caps produced to date, which puts us well on our way to launching the strategically important business. We are also reaffirming our path to profitability, requiring no additional equity capital. Our path to profitability is entirely independent of the scale-up of our biomass conversion technology and related manufacturing plant construction. We believe our cash runway with over $130 million on hand is sufficient to eliminate the need for an equity capital raise, given the revenues we expect to generate in the quarters and years ahead, led by our and business.



Today, we are maintaining our expected 2024 net cash burn of between $55 million and $65 million. We anticipate our caps and closures business will begin to generate revenue during the first quarter of next year with significant gross profit generation beginning in 2025 and a healthy growth trajectory thereafter. As such, we continue to forecast a solid minimum cash floor on our way to sustain profitability. Apart from our caps and closures business, we continue to grow the long-term value of the Origin platform. We anticipate captive closures will enable us to reach profitability and will be a strong business on its own terms. But the Origin technology platform is more than caps and closures, with significant upside due to the extreme flexibility and low cost of the sustainable molecules produced by our technology for converting biomass to sustainable intermediates. Growing the long-term value of the Origin platform means continuing to engage potential strategic partners around the scale-up of our biomass conversion technology, including exploring high-value application development initiatives that could generate near-term revenue.



Some of these applications are capable of using materials that Origin 1 and Origin 2 are designed to produce but are not dependent on those plans for production and sale. We're managing these initiatives thoughtfully and we'll announce them as appropriate. Looking ahead, we are positioned to vigorously grow our business led by caps and closures and to continue to cultivate our broader technology platform in the quarters and years ahead with a strong financial position, strong IP moat and a highly innovative and creative team. With that, I'll turn it over to John.

[Matthew Plavan, executive]

Thank you, Rich, and good afternoon, everyone. This quarter, we announced a European PET cap mass production partnership with Bachmann Group, a respected Swiss packaging production and logistics company. Bachmann Group will assist in the end-to-end operation and automation of our PET cap mass production lines, helping us produce billions of caps by taking pellet or flake, including recycled material, all the way to finished closures using Origin equipment. Earlier this month, we announced a North American PET cap mass production partnership with Red City Group. Reed City Group is a full-scale injection mold builder, injection molder, hydraulic press maker and automation solutions company. This partnership enables a geographic expansion complementary to our European manufacturing capability. We look forward to operating cap lines with the Reed City Group team, which includes skilled machinists, mechanical engineers and operations professionals with impressive capabilities in toolmaking and clean room manufacturing.



Bachmann Group and Reed City Group are joining us alongside our previously announced world-class partners in PET cap manufacturing, PackSys Global and IMDVista. In the past several quarters, you have seen us assemble this incredible team, and we couldn't be happier with how the manufacturing, technology and people are all coming together. We remain on track to begin commercial production later this year. This quarter, we achieved multiple caps and closures manufacturing milestones. We crossed the milestone of over 1 million caps produced. The testing and scaling of our cap production technology and manufacturing system has been going very well in our manufacturing partners, prospective customers and team are energized by the success.



As mentioned last month in Switzerland and Germany, we ran each subsystem of our manufacturing line at full speed, including industry-standard high-speed camera systems with the system operating as expected. We validated QA/QC indicators that operators can use to assess quality such as stable cap weight interventions. Earlier this month, we unveiled engineering and design innovations in the manufacturing of our tethered PET caps, the world's first tethered caps made with PET. These tethered caps are a breakthrough in circularity designed to improve cap collection rates for recycling and offer an excellent user experience while enabling leading brands to respond to the EU single-use plastic directive. The EU single-use plastics directive, which came into effect last month, mandates that caps stay connected to bottles throughout the European Union. Our PET cap innovations are perfectly suited for that regulatory environment and, frankly, any environment.



If you're going to keep caps connected to bottles, the logical thing to do is to make the cap and the bottle from the same material, PET. Otherwise, recycling centers have to deal with separating the material streams. With our solution, it's all one high-performing recyclable material connected via a tether offering a real breakthrough for circularity. Our tethered cap design is simple, clever and user-friendly. We use the threads of the PET cap and bottle to lock the cap into place angled away from the mouth not toward it. With this product, we are combining the performance and sustainability advantages of our PET caps, recyclability, shelf life extension, lightweighting, ability to use recyclable PET and enablement of mono-material packaging with an excellent user experience for tethered applications. We have already seen extremely strong interest in this welcome addition to our PET cap product line.



With our leading PET cap technology and manufacturing systems, we are extremely well positioned to address a $65 billion capsanclosures market that consumes billions upon billions of caps per year, which today cannot be recycled into new caps, only down cycle. We're very pleased with progress and excited to begin commercial production later this year. Regarding our biomass conversion technology, we continue to execute on what has been our thesis from day 1, make molecules that are chemically flexible and low cost and build businesses around those sustainable molecules to have as great an impact as possible. To that end, we continue to perform development work with multiple partners. Right now, multiple origin partners are actively engaged in development of work using our samples of CMF and HTC. For this kind of work, typically, we crystallize our CMF and carbonize our HTC before delivery to our partners. Our partners continue to impress us with their application development capabilities, and we are growing our expertise in CMS and HTC as we are producing them on a scale that wasn't possible before the operation of Origin 1.



Origin 1, our biomass conversion plant located in Sarnia, Ontario, Canada, continues to support market development activities. We are producing materials, shipping them and collaborating with supply chain partners on logistics, joint development activities and customer materials testing and formulation. For Origin 2, we continue to engage partners as part of our asset-light strategy for further biomass conversion technology scale up. Time lines and economic forecast will depend on the partner and deal structure, which consider a range of scenarios and locations, including Geismar, Louisiana as well as Asia brownfield scenarios. We are exploring a variety of plant designs, evaluating potential brownfield sites and performing development work with partners, including testing and optimizing various feedstocks to generate data that could influence our scale-up strategy. We will provide updates as appropriate.



Scaling up a new fundamental materials technology is challenging and takes time, but the reward is worth the effort. In the history of chemicals and oil and gas, it has never been fast or easy to make a fee change in the basic building blocks of our material economy. But we are fortunate to have a brilliant team that is leading us to profitability by way of application development, specifically through the innovative engineering, design and manufacturer of PET caps and closures. It is not unusual for a platform whether in chemicals or the software industry or otherwise, to be pulled to the market for a specific application, whether it's a specialty chemical, performance material or something else that enables a scientific breakthrough to achieve significant revenue and profitability.



Our caps and closures business is Origin's first application expected to reach truly mass production. We expect it to enable near-term cash flow and profitability and the long-term flourishing of our broader technology platform and thus, with the widespread application of sustainable performance enhanced materials and products, a better planet. We are encouraged that in the short term, we have a winning business true to our mission of sustainability and that in the long term by staying true to our vision, we can transform the world. And now I'll hand it over to Matt.

[Matthew Plavan, executive]

Thanks, John. Good afternoon, everyone. We've provided second quarter results in the tables in the earnings release, so I'll focus my comments on a couple of key financial highlights. We ended the quarter with $132 million in cash, cash equivalents and marketable securities, $26 million less than at December 31, 2023. As a run rate for cash burn at the halfway point in the year, this amount is slightly below the low end of our cash burn guidance range of $55 million to $65 million. However, we remain confident and comfortable in maintaining that range as our guidance for the full year. Origin's second quarter revenue was $7 million compared to $6.9 million in the prior year quarter and also trending in line with our revenue guidance for the full year, which is between $25 million and $35 million. Also, as expected, these revenues are comprised of what we referred to as supply chain activation revenue generated in conjunction with Origin 1 operations.



Looking ahead, as just highlighted by John and Rich, we expect the onset of new revenue from our caps and closures initiative to be as of Q1 2025. Beyond 2024, 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 overall cash positive operations within our existing cash resources, eliminating the need for an equity capital raise on our way to sustain profitability. Now I'd like to open the call for questions. Operator, may we have the first question, please?

[Operator]

We will now begin the question and answer session. [Operator Instructions] The first question is from Stephen Byrne with Bank of America.

[Steve Byrne, analyst]

Yes. Thank you. Where are you seeing the most interest in the products coming out of Origin 1? Is there still interest in a bio-based PET? Or is this really moving more towards these fewer and based derivatives or the variety of products you can produce from HTC, has there been a change in the level of interest of these products?

[John Bissell, executive]

Nice for the question. Yes, I think we have focused ourselves more on the Furfural and HTC. We see HTC really as a subset of peramics more broadly. But on Furfural specific products, that's for a couple of reasons. One is because we are seeing real performance improvements and pretty unique functionality in some of those pure based products. So we think that's interesting, especially in a more capital-efficient environment that we need to be operating in. Performance is going to drive margin or differentiated performance, I should say, is going to drive margin and margin is a lot easier to manage in a more capital-light environment. So that's been really our decision. I think we have seen in the broader market, still a lot of pull on biobased and lower carbon polyester and I'd say polymers more broadly. But our view is, we have a lot of demand for that. We've demonstrated that demand. We don't think incrementally demonstrating more of that demand really changes the picture very much. But what we think is new and differentiated is for us to bring furfural, I'll say, specific in some cases, even unique functionality to these applications that people can't get anywhere else. We think that's a place where we can really show the breadth and strength of the platform.

[Steve Byrne, analyst]

Okay. Got it. And now that you've been running Origin 1 using cellulosic materials and so forth. You run a lot of things through there. Do you think that you would design a new plant, whether it's Origin 2 or something in between, would you design it differently? Have you learned anything about this process from Origin 1 that could help you reduce the capital cost of building another plans and/or what about just doubling the size of Origin 1? Is that an opportunity? Or do you have the infrastructure at that site? Could you expand that site as kind of a lower-cost approach to getting more capacity of the CMF and HTC.

[John Bissell, executive]

Yes. No, man. Asking an engineer if they would do things differently on a plant is that's a deep well, Steve. I think, of course, there are lots of things that we would like to do differently for the next plant. That's not necessarily because we we have regrets or something like that about one. But of course, we've got not just some data from on, but also just our own ideas about what are things that we can improve as we go to next generation. And of course, when you're developing a technology like this, you're going to see improvements in the plants item by item or plant by plant for a long time. So I think that's the long version, the short version. And yes, definitely, there things that we would do that we think for the next plant that we think could improve it. I think in terms of expanding 011 at the Sarnia site, we have some really interesting ideas, I think, around what we can do to expand the functionality of that plant over time or adjust the functionality of that plant over time. And some of that is going to depend on not just our own thoughts on it, but as we talk to partners for the next phase or the next step of this technology, what those partners want and how they want to deploy this technology with us is going to inform the way that we operate and perhaps even make adjustments to the operation of 011, which could be expansion, it could be other things, too. So I think those 2 things are things that we would expect to be in pretty close lockstep going forward.

[Operator]

Now I'll 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, executive]

Thank you, operator. Prior to our earnings call, we invited all investors to submit questions as part of our "Ask Origin" campaign. And thank you so much to everyone who participated. We received the lots, and you asked some great questions. These questions were, of course, submitted before our call today, and we answered many of them thoroughly with our prepared remarks and our analyst Q&A. We will generally be answering the most popular and relevant questions during the time we have. And for the questions we couldn't get to today, we will look to cover them in our mid-quarter update. Our first questions are going to go to you, John. And it pertains to the biomass conversion technology and scale up, and this is a multipart question, so I'm going to give you the whole thing here. Can you provide any additional color on Origin 2 related discussions and progress on Origin's capacity expansion strategy? For example, will it progress beyond O1 in the next 5 years. specifically, can we get more insight as to what stage we are with partners and their decision making? Are we already negotiating the manufacturing plant partnership, our partners working on further application development and testing. Are they waiting for macro conditions to become more favorable before pulling the trigger? What can you tell us about the state of play on the expansion strategy?

[John Bissell, executive]

Yes. Well, I think to your point, these questions got committed before the comp system we just had. So I think Steve sort of front ran some of that question on questions. But I think the short version is that we see a variety of different directions for the Origin furfural platform to go from here. And I think the commercial drivers for that are really going to drive that direction. It's the same core technology. It's a lot of the same applications, but geographic location, scale, partner, even potentially feedstock are things that could meaningfully change the way that we expect that next step. And so I think we're reading off of the commercial environment and the partners that we've been talking to. I think that's the big lesson there.

[Ryan Smith, executive]

That's great. And I think there's a follow-on question here, and you're partially answering it, I think, but let's explicitly touch it, which is they ask, is the 2 Phase OM2 plan as presented last August, is that still the current plant design strategy?

[John Bissell, executive]

Yes. That's a really interesting question because we view the Origin platform technology -- the Ferenc platform technology as sort of like a refining technology in that they're -- of course, we've always talked about the feat that you can put in and how that can adjust the ratio of products at the other side. But of course, when we talk about the 2-based approach, that's also a way to sort of instantiate the core technology in a way that is -- that performs slightly differently than if you were lumping it all together. And so -- and that's not the only way that you could adjust some of those parameters. And so in the same way that we're really waiting for the commercial side to lead what direction we take for OM1 on Pure technology. I think we're also -- we have a variety of options for how you could configure the Ferenc technology. yes, as you said, I was -- I sort of mentioned the feedstock and scale. But some applications or commercial partnerships could really drive it towards that 2-phase sort of biofuels first architecture of the technology, but there are others which look different. Some which are closer to sort of our original vision for the way that, that process architecture would work and some that are not ones we've talked about yet. So I think it's going to be interesting to see how that turns out. But yes, I think commercial leads the way.

[Ryan Smith, executive]

That's great. A kind of menu of plant designs. This next question, I'm going to take it over to Matt. It pertains to caps and closures. And Matt, the investor asked previously, it was said that caps and closures manufacturing will have higher operational costs at the beginning. Will, that have a significant effect on margins? And if yes, will we see that normalizing in weeks, months, quarters or years.

[Matthew Plavan, executive]

Yes. Thanks, Ryan. That sounds kind of like a question that involves giving some guidance around 2025. And I think I'd like to speak to that, but maybe dial the lens back a little bit and reiterate and maybe provide a little better clarity on the guidance that we've given to date and start with this announcement that we made today, which we're pretty excited about. There is a commitment -- initial commitment for 2 years that in total is over $100 million in revenue. We wanted to share that to provide visibility into a few things. One, kind of the quantum of revenue per customer that we could see in this business and really illustrate that when we think about rolling into 2025, we expect a number of additional customers beyond the one that we announced here, and that together, they give us great confidence that our EBITDA loss will decline significantly during 2025. And it would be our expectation if things unfold on plan that we would be crossing over to positive EBITDA territory on a monthly basis, somewhere between 18 and 24 months between now and the future.



And so gives us great confidence in our plan and the guidance that we do have out there with regard to being able to achieve sustained profitability on our own capital and that the trajectory, if you think about it over the 2 years is a significant decline in EBITDA loss of 25, the likely profitability in '26. Hopefully, as early as possible. It will all depend on how quickly we can ramp capacity to serve what is an increasing and very attractive demand for the product. So that is our expectation at a high level. And I think as we close out some of these customer agreements and continue to execute operationally, we expect to be able to share more specifics around our 2025 financial expectations in the coming months, and we look forward to doing that. But for the moment, I think I just want to kind of restate what we said with regard to kind of overall guidance and express our confidence that the strength of that guidance continues to grow.

[Ryan Smith, executive]

Great. And I'll take these last few questions over to you, Rich. If Matt, John want to chime in, that's fine as well. But the first one the investor asks, and again, this was before today's earnings, of course, in some of the news, but they asked, has a buyer been lined up for the caps? Why haven't any offtake agreements been executed, Rich was saying they had letters of intent since Q4 earnings 6 months ago?

[Richard Riley, executive]

Yes. Well, we're very excited to announce our first big caps customer today, and I can add that we have a robust pipeline of potential customers, including potential licensing partners lined up. And this pipeline represents a fairly overwhelming demand in terms of our challenge will be to satisfy it, not to get more. But we, of course, continue to engage new customers. And there are various stages of the sort of buying process. Several of them are highly engaged, including traveling to join us on some of the scale-up trials and testing and things like that. And so they're very much deep in the process and looking to modify their own product plans and things like that to incorporate our caps. So we feel great about the demand picture. And like I said, we're very excited to announce our first customer today.

[Ryan Smith, executive]

All right. Now this next question sort of gets right at it and ask what do I have to look forward to in the next 6 months? So a big question there.

[Richard Riley, executive]

It's going to be a really exciting 6 months. I would say we have a high degree of confidence, one that we'll have additional customer announcements over the next 6 months. And that's certainly going to be exciting. We expect to be commercially producing caps, which is a very major milestone in terms of once we're commercially producing caps, then we're effectively just adding more equipment to do the same thing. And so we sort of will have started our ramp. And what comes with that ramp is revenue. And so if we can start that revenue ramp really going in Q1, which is within 6 months, then we feel like we can really be showing a great trajectory and continuing to accelerate it. So next -- we're really excited about the next 6 months and I hope you all are as well.

[Ryan Smith, executive]

That's great. That's exciting. And then the last question, the investor asks, why should I continue to hold this stock despite the performance over the last year of the stock?

[Richard Riley, executive]

Yes. Well, I think you don't have to do too much valuation math to see that there is -- the current stock price is placing very little value on our technology and our talent and our possibilities. I personally was disclosed in the 10-Q today placed in order to buy 300,000 more shares in addition to the shares that I already have. So I can't really give stock advice, but I can tell you what I'm doing.

[Ryan Smith, executive]

That's great. All right. Thank you, Rich, John and Matt, and thank you, everyone, who joined and to everyone who's sending questions. We're looking ahead with confidence and excitement for 2024, and we look forward to our next update to the Ask Origin questions we couldn't get to today. We'll be looking to address them in our next mid-quarter update. So thanks again, and this concludes our call for today.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.