Origin Materials, Inc. Q1 FY2024 Earnings Call

Thank you for standing by. This is the conference operator. Welcome to the Origin Materials First Quarter 2024 Earnings Call. 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.

Thank you. Good afternoon, and thank you for joining us, everyone. Speaking first today is Origin's Co-CEO, Rich Riley. He will be followed by Co-CEO and Co-Founder, John Bissell; and CFO, Matt Plavan. After that, 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 first 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 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 views as of today, should not be relied upon as representative of 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 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. 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.

Thank you, Ryan, and thank you, everyone, for joining us. Today, we are reaffirming our path to profitability, which is entirely independent of the scale-up of our biomass conversion technology and related manufacturing plant construction. We are reaffirming that as we execute our business plan to achieve sustained profitability, we believe our cash runway is sufficient to eliminate the need for an equity capital raise. Origin ended the first quarter with just over $146 million in cash and cash equivalents and marketable securities. Consistent with our prioritization of revenue-generating projects with the greatest contribution to near-term cash and our continued deferral of research expenses or other programs targeting longer-term paybacks, today we are reaffirming our expected 2024 net cash burn of between $55 million and $65 million. We continue to make strong commercialization progress with Origin's caps and closures business, which we expect will begin to generate revenue within the next 9 months 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 sustained profitability and hence the expectation that we will not require additional equity capital. During the first quarter, we made strong progress in our journey to profitability, led by our groundbreaking PET caps and closures business. We announced a few of our caps and closures manufacturing partners, including PackSys Global and IMDvista, and we continued to make good progress with prospective and yet unannounced customers who are excited about our revolutionary cap offerings and the benefits it brings for recycling circularity and performance. Today, we are announcing that we have accelerated the procurement of multiple additional high-throughput caps production lines to complement the initial line, which we have already purchased. We aim to bring our first manufacturing system online during the fourth quarter of 2024. At full capacity following ramp-up, our initial systems are expected to generate between $45 million and $65 million in annual revenue. The Caps and Closures opportunity is massive and over a $65 billion market with currently engaged prospective customers alone, consuming tens of billions of caps per year. We look forward to rapidly standing up additional lines addressing multiple product types, including tethered beverage caps and caps for non-beverage home goods applications. Today, we are also announcing the caps and closures technical milestone with the completion of a successful capping trial on a commercial bottle line, applying Origin's PET caps. In fact, Origin caps made from 100% recycled PET have been applied to thousands of filled beverage containers. I'll let John speak to that in greater detail. We also announced the initial product lineup of our PET caps and closures manufacturing platform. We are starting with the world's first carbonated soft drink PET cap, the lightest of its kind ever produced at commercial scale. There are hundreds of different kinds of caps and closures in container packaging, but the PCO 1881 neck finish is considered a leading standard for carbonated soft drinks and is often used for other products such as juices or even still or sparkling water. Because of the ubiquity of bottles using the PCO 1881 finish, it's an area where our PET cap can make a tremendous difference by improving recycling and circularity and product performance in a massive addressable market. We followed that initial product announcement by introducing the first-ever tethered PET cap. Cap tethering mandates are coming into effect later this year in Europe through the EU single-use plastic directive. Tethered caps are designed to stay connected to the container, thereby improving cap collection rates for recycling. We look forward to our 1881 compatible caps being available in Q4 later this year, with ramp-up to follow throughout 2025. Apart from our caps and closures business, we continue to grow the long-term value of the Origin platform by engaging 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. Other technologies with near-term revenue generating potential are also in development at Origin. Like our PET caps and closures, these new applications enabled by Origin technologies are not dependent on Origin 1 or Origin 2 for production and sale, but are capable of using materials these plants are designed to produce. We look forward to providing more detail on these initiatives in the future.

Thank you, Rich, and good afternoon, everyone. As Rich indicated, we're incredibly excited about the progress we're making in Origin, particularly our caps and closures business is driving us toward profitability, and we are pleased with its progress, both technical and commercial. As a recap of the value of this business, we anticipate that our PET caps and closures business will be transformative for packaging. We announced this initiative in August 2023 after quietly developing the program for several years as a natural outgrowth of Origin's polymer expertise and platform development efforts. This initiative is squarely on mission for Origin as we are transitioning a hard-to-recycle material into an easy-to-recycle one in support of the global transition to sustainable materials. We are positioned to be the first to market with a commercially scalable PET cap, something the industry has long sought but never achieved. Notably, Origin's PET caps and closures are expected to be cost-competitively produced with any type of PET, making production with 100% recycled PET possible from cap to container. They perform better than today's HDPE and polypropylene caps in ways that can improve product shelf life. They can be made from recycled PET or rPET, and they 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. We are working with world-class manufacturing partners to bring this technology breakthrough to market. This quarter, we announced a few of them. We announced our partnership with PackSys Global, the leading packaging machine producer for plastic closure splitting machines, to produce the world's first PET cap and closure manufacturing system. PackSys Global is a respected leader in packaging machines for the cosmetics, beverage, pharmaceutical, and packaging industries, with facilities in North America, Europe, and Asia. It has operated for over 50 years. We announced our partnership with IMDvista, a global leader in high-speed testing systems, headquartered in Switzerland, with locations around the world, including the United States, Germany, and Taiwan, with systems in use on every continent. IMDvista manufactures advanced camera systems that inspect thousands of closures per minute, and which in the future are expected to give Origin the ability to inspect billions of caps per year. As Rich alluded to, today we are announcing another technical milestone with the completion of a capping trial on a commercial bottling line, applying Origin's rPET caps to thousands of filled beverage containers. A trial like this, where we use a commercial bottling line to apply our caps to thousands of bottles, is a great opportunity to not only collect data but also observe and learn how our product performs in the context of a high-throughput commercial bottling line. The trial went well, and we look forward to parsing the data in the weeks ahead to inform and fine-tune our design for future production runs. For our trial run, we used Origin caps made with recycled PET, a material that performs just the same as virgin PET for this application. The recycled PET is off-the-shelf, meaning we don't use any additives to modify the PET polymer for our process. Shifting to the scale-up of our biomass conversion technology beyond Origin 1, for Origin 2, we continue to engage customers as part of our asset-light strategy for technology scale-up. As we indicated last quarter, timelines and economic forecasts will depend on the partner and the deal structure, which can explore a range of scenarios and locations, including Geismar, Louisiana, and Asia brownfield scenarios, with updates to be provided as we finalize those partnerships. Despite near-term macroeconomic challenges, to which we are adapting through less capital-intensive revenue-generating initiatives, customer demand remains strong, as reflected by our total offtake agreements and capacity reservations in excess of $10 billion. We continue to engage with multiple parties to explore a variety of plant designs and evaluate potential brownfield sites. We continue to perform development work, including testing and optimizing various feedstocks to generate information that could influence our scale-up strategy. As we deliver samples and testing data to partners, we continue to gain market feedback, including that our carbon black derived from our HTC intermediate is currently the most promising alternative to fossil carbon black for rubber reinforcement, such as for tire applications. The reason is simple. The performance of Origin's carbon black sets it apart from other sustainable rubber reinforcement alternatives that are being considered for making renewable tires. Origin 1, our plant in Sarnia, Ontario, Canada, continues to provide valuable insights into the scale-up of our biomass conversion technology. We achieved a major milestone this quarter by converting sustainable wood residues at our plant into versatile chemical intermediates. The introduction of wood residues marked an evolution from the cornstarch-based production we had employed since the commencement of plant operations in October of last year. We are using locally sourced Forest Stewardship Council (FSC) controlled wood residues produced by a sawmill as a byproduct of lumber and wood flooring production. From that mill's wood chips, shavings, and sawdust, we produced our sustainable intermediates, which can be used to make a wide variety of products that normally would be made from petroleum. As we operate the plant, we continue to get confirmation of the expected operating parameters for items such as reactors, pumps, and heat exchangers. Our early batch runs have been very helpful in determining wood handling and transfer parameters, biomass slurry transfer behavior, reactor batch loading sequence optimization, and reactor thermal performance, just to name a few. To share an example of the kind of typical process adjustments we make during this part of running the plant, we recently adjusted how we control the airflow in the woody biomass conveyance system, achieving the design performance of the wood mill. This is exactly the kind of learning we expected to gain by operating Origin 1, and we will incorporate this valuable information into future plant design. The plant is first and foremost an asset used to support Origin's market development, including customer materials testing and formulation in preparation for Origin 2 scale-up. Strategic partners remain engaged as we collaborate in market development activities. All of this is exciting progress for our customers and our team as we continue to execute our mission to drive the transition to sustainable materials.

Thanks, John, and good afternoon, everyone. We've provided the quarter results in the tables of the earnings release, so I will focus my comments on a couple of key financial highlights. We ended the quarter with $146 million in cash and equivalents and marketable securities for a net burn of approximately $12 million. On a quarter run rate basis, this is in line with our net cash burn guidance for the year of between $55 million and $65 million. Origin's first quarter revenue was $6.8 million, up substantially from the $1.7 million in the prior year quarter and also on a quarterly run rate basis in line with our revenue guidance for the year, which is between $25 million and $35 million. Also, as expected, these revenues are primarily comprised of what we refer to as supply chain activation revenue, generated in conjunction with the initiation and initial scale-up of Origin 1 operations. Looking ahead, as just highlighted by John and Rich, we expect the onset of new revenue from our caps and closure initiatives to be within 9 months from now. And to provide investors with additional context as to the quantum of revenue we expect, Rich indicated earlier in the call that our initial cap manufacturing lines are projected to create an aggregate capacity at scale production for between $45 million and $65 million in annual cap and closure revenue, depending upon product mix. Furthermore, in order to fully serve our expected caps demand in 2025, we'll need to expand our production capacity beyond that of our initial lines, and therefore intend to acquire additional equipment lines before year-end. We believe the equipment is highly financeable with attractive return on invested capital cycles, and we are in active discussions with both customers and a number of well-established equipment financing companies. The associated debt servicing costs for these lines are baked into our existing forward cash flow and profitability guidance, the specifics of which I will reiterate in a moment. Before I do, however, I'd like to highlight what a positive quarter we had engaging with our investors. As outlined in the earnings release today, we announced several fundamental milestones during the quarter revealing proprietary and compelling aspects of our products, our partners, and strategies for near-term growth and prosperity through the caps and closures market. During the quarter, we seized the opportunity to proactively engage with numerous new institutional investors, research analysts, and our broad base of retail investors to discuss these advances in greater detail and to answer the many thoughtful questions along the way. We believe our efforts were a big success. We look forward to more of the same with continued progress, and we thank our investors for their sincere engagement and dedicated support, especially the support we've seen across forums like LinkedIn, X, formerly known as Twitter, Discord, and various message boards. With that, I'd like to reiterate and reaffirm our financial guidance, starting with 2024 specifics, including revenue of $25 million to $35 million and net cash burn between $55 million and $65 million. 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 sustained profitability. Now I'd like to open the call for questions.

Today's first question comes from Frank Mitsch with Fermium Research.

Yes. First off, I want to offer my congratulations to Ryan Smith, who I haven't met yet, but you're a great interviewer, Ryan. I really appreciate the interviews that you posted on the website; I thought that was very helpful. So, Matt, if I understand correctly, the cap and closure lines that you are purchasing, which will lead to over $45 million in sales in this first round, are primarily going to be financed through equipment, and won't significantly impact the cash burn?

That's a correct assumption, yes.

Can you provide more details about government funding? I noticed in your financial statements that you received $8 million from the Canadian government, but it also increased your liability, so I assume there is an expectation that you would need to pay that back. Additionally, regarding the Canadian government and potential funding for Origin, what progress has been made here in the U.S.?

So, yes, the funding that you referred to is in connection with OM1, and it is associated with the company building that plant, something we've been working on for a while, so we're very pleased to receive those funds. And there is a very generous debt servicing that goes along with that, which is really tied to your path to profitability and your ability to pay, which is over-extended periods of time. So we think that is very helpful with regard to managing our cash and managing it effectively.

There is an expectation that the $8 million you received must be paid back, so this is not a grant.

It's not a grant. That's right.

Okay. Great. And then to that end, what's going on here in the U.S. in terms of potential government funding?

Well, we continue to pursue such for potential of OM2, that's still available to us, as well as there are Title 17 funds available to assist in the caps and closures ramp-up in time. And we are in line for an application for some of that funding as well.

Okay. Great. Any thoughts on orders of magnitude?

Well, there are $60 billion in funds available, and there are a number of companies that are applying for it, but we feel really well positioned with the sustainability profile of caps and closures to be a contender for those funds. It would likely take at least a year from now before those would be made available to us though.

We will now take the next question.

Yes. I'd like to better understand that $45 million to $65 million revenue target. How many lines does that require you to purchase? The first line that you would have would be just for the fourth quarter revenue, I assume. Can you provide any more disclosure on how many lines are involved in that $45 million to $65 million? What kind of revenue do you think you could actually generate in the fourth quarter and in 2025?

Yes, that's a great question. Thank you. Sorry. John, do you want to take that?

Thanks, Steve. It's good to talk to you. Regarding the lines, we aren't disclosing the exact number due to specific commercial reasons. To give you an idea, we are not talking about dozens of lines to reach that revenue, but it's also not just one or two. We believe it's manageable operationally, and we're excited about it. There is some variability as well, depending on specific factors like whether the cap is tethered or not, and the size of the cap. Different caps have different pricing and revenue implications per line, so not all lines are equal in this case. Does that help?

Yes, it does. And I guess I'm still struggling with is the best path forward for you to purchase these manufacturing lines and get into the business of making caps versus licensing the technology to existing companies that already have this equipment. What's your view on that?

Yes, that's a good question. We regularly discuss the best order, sequencing, and balance of our portfolios regarding these matters. Our perspective on this topic gets shaped by the market consistently. We always aim to control our own destiny to the greatest extent possible, which means we need to be ready to navigate this independently if necessary. However, the situation is not simply about buying all the machines and managing them ourselves. The industry is quite open to adopting this technology, and there’s significant enthusiasm about creating this product. We see several ways to engage with the industry. One possibility is collaborating with other manufacturers of plastic parts, where we use our equipment in their facilities to produce caps. Another option is to provide the technology and systems for cap production while allowing a major player in the caps and closures industry to operate it. All these approaches are feasible and not mutually exclusive. Therefore, we are simultaneously pursuing all of them to ensure we can deliver the product in the way we are most excited about.

And maybe just one more for you, John. You mentioned the use of HTC in the carbon black and so forth. What about all of the myriad products that have been explored with CMF? Is the interest in going down that pathway of developing these purine-based products? Has that diminished any? I mean, this $10 billion of capacity reservations, I think you hit that in 2022. Is there interest out there in helping you finance OM2?

Our interest in purine-based products and CMF-derived products remains strong. One of the ongoing discussions we've had revolves around the opportunities available in purine products across various sectors, including specialty and performance chemicals, as well as para-xylene. Our customers continue to express significant interest in para-xylene. We've mentioned before that discussions are ongoing to determine the best approach for the OM2 project in terms of location and development. These are complex conversations, and while we are cautious about making specific forecasts, the specialty and performance aspects of CMF molecules are becoming increasingly intriguing. This trend has been evident for the past couple of years and continues to grow. We look forward to sharing more details about these molecules with the public in the near future, although we are not quite ready to do that yet.

Thank you. And this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any closing remarks.

Thank you, operator. So, 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. We received a lot, and you asked some really 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. In this session, we will generally be answering the first submitted questions first. And for the questions we couldn't get to today, we plan to release an investor Q&A video addressing them. So please stay tuned for that. But in the remaining time, our first questions are for John. I'm going to ask you. An investor asks about the caps and closures program, asking at a high level, could you explain what enabled Origin to figure out PET caps? Was it a mechanical engineering breakthrough that created a new manufacturing process or machine, or was it a chemical engineering development that slightly modified PET to make it a viable material for caps?

That's a great question, and it's very reasonable to ask as we receive this inquiry frequently. The answer is quite straightforward and somewhat related to the previous question about unique molecules produced from CMF. We have been exploring applications for CMF-derived and especially unique CMF-derived molecules for some time now to understand their value and how to market them effectively. This involved creating a skilled team focused on polyesters, particularly PET, as well as polyesters from FDCA and other purine molecules. Our team identified that producing a PET cap was a long-standing goal in the industry but was complicated due to specific material science issues. We believed that our unique purine molecules might help modify PET to create a cap while keeping its recyclability intact—something that is often lost with typical modifications for cap synthesis. However, as we progressed in developing the application, we discovered that we could effectively create the cap without our unique molecules, using only standard PET. This realization led us to pursue this business opportunity without being constrained by the scale-up of our materials, even if they could eventually provide a strategic use later on. Our polyester team is impressive, with Jay Hanan, the technical lead, having served as Chief Scientist at some of the largest and most renowned bottle companies in the world, making him an expert in this field.

Great. So the next question kind of builds on that and is about intellectual property and asks, does Origin have patent protection on its tethered PET beverage caps?

We file intellectual property for many of these matters. We don’t discuss details of filings that haven’t been made public yet, so I won’t elaborate on that. Additionally, the strength of a particular patent can sometimes be determined by real-world conditions rather than our perceptions. That being said, we have a robust portfolio of intellectual property, which is central to our operations. When we develop technology, we aim to derive economic value from it, but the capacity to protect it through intellectual property, including patents and trade secrets, is essential for us. We have strategies for nearly everything we disclose publicly, although some of these strategies are more easily discernible from the outside than others. Nonetheless, we always have a plan in place.

Great. Okay. So this next investor had sort of a three-part question or a couple of part question on caps and closures as well. And I'm just going to read the first part to you here. The investor says, I understand that the plan is to produce PET caps for the business to breakeven and be profitable. What percent of Origin 1 capacity will be focused on PET caps, and what will the rest be used for?

Yes, so this is a common misapprehension in the market. And again, I can understand why, especially considering our path to getting involved in caps. But in actuality, the material produced by OM1 is not directed at making caps. So the caps business is interesting in part because it doesn't require any material from Origin 1 or from an Origin chemical process at all, even though that was how we got involved in it, was that we thought that it would. It doesn't. So we can scale that independently. Origin 1, on the other hand, as we've talked about a lot before, is a plant that can produce our intermediates at large scale, which enables us to do application development on our unique materials. And so we think that Origin 1 will give us the opportunity to develop and identify more things like caps, but there is actually not an explicit linkage of materials between Origin 1 and our caps business.

Great. Perfect. So the next part of the question then asks, what percent of the market share will Origin be expected to capture with Origin 1, or if it's not Origin 1, plan to capture with the caps business?

Yes. I assume they are talking about the caps business specifically. We believe the market for caps is substantial, valued at $65 billion. There is considerable opportunity here, driven by the demand for circular solutions in packaging, especially for caps and closures, and the ongoing growth in that sector. We're eager to bring our products to market. Based on current market conditions, we anticipate being supply-limited for a significant period. These are the kinds of markets we prefer—those that are supply-limited rather than demand-limited. While I can't predict the exact market share percentage at any specific time, I do expect that we will be very busy manufacturing as many caps as possible for the foreseeable future. We're enthusiastic about this potential.

Great. And then just to round out the question, and this was addressed a little bit in the analyst portion earlier, but I just want to call it out specifically. They ask, will the tech be licensed or manufactured to scale up? Will there be partnerships to build other plants to ramp up production of PET caps? If you want to speak a little bit more to that.

Excuse me, sorry. The answer is, as I said earlier, it's kind of all of the above. I think our view is the more asset-light we can be, the better. That's obviously attractive for a variety of reasons. But we don't need to be limited to that. We see opportunities for partnership in a lot of different ways with several different segments of the industry. There's going to be a couple of ways of engagement.

Great. All right. Now, this other question is comes back to the present day on the caps program. How many caps have you produced so far?

So, as we mentioned in the press release, there were a couple of hundred thousand caps in the capping trial, maybe 100,000 or more. We've produced tens and hundreds of thousands of caps before that. As you can imagine, we didn't keep track of every single cap we've ever made for that one capping run, since we've done many iterations on process and design. I'd be surprised if we've exceeded a couple of million, but I believe we're well into the 100,000 plus range.

Great. All right. With that, I'm going to turn over and have a question for Matt. The question came in asking about the delisting and asking what is management doing to address the potential NASDAQ delisting. If you can speak a little bit about that, Matt.

Yes, sure. I think it makes sense to maybe start and reiterate what the delisting process looks like. A company, if the stock price falls below $1 for 30 consecutive days, triggers an initial grace period with NASDAQ whereby you need to remedy that situation to get the stock above $1. We are actually in the first of the two grace periods that you get. Ours began in January. We actually have through July as our first grace period to get the stock above $1 for 10 consecutive days. I'll note that as of the end of the day today, the close today, we're at 6 days consecutively above $1. So we have 4 more days that we need to close above $1 to regain compliance. If, in the case we weren't able to do that, then you could get a second grace period of 180 days that would begin in July, which would get us through the end of the year. And at that point, I think the main criteria NASDAQ has for giving you that second grace period is that you would need to agree that if for some reason after almost a year you weren't able to get the stock above the $1 for 10 consecutive days, that you would do a reverse stock split, which would immediately make the stock, the conversion on a reverse stock split would definitely get the stock above $1 and remedy that issue. So we do not see that as being a meaningful probability for us. We're going to continue to execute on the caps and closures plan and expect continued positive reception to our successes with caps and closures. We're looking forward to remedying the delisting and regaining compliance organically, as we like to call it.

Great. Thank you, Matt. All right. Well, I'm going to put this last question to Rich. It's about something that you've mentioned in previous earnings calls. You said that there are other technologies in addition to caps with near-term revenue-generating potential and development at Origin. The question is, are these technologies that have already been released and are part of Origin's product portfolio that you're expecting to generate revenue in the near term?

Thanks for the question. We are very much innovators at heart. I think I would answer that by saying that we think as exciting as our caps business is and as big as it can be, there are additional caps-like businesses within our platform. The characteristics of these are highly differentiated functionality in addition to sustainability, big markets, high margins, consistent with but not dependent on OM1 or OM2, highly capital efficient, and a short time to market and cash flow generation. We have several of these in various stages of development and we're managing these initiatives very thoughtfully and look forward to announcing them as appropriate.

And I can't agree more with that. So thank you, Rich. I appreciate that. And thank you to everyone who joined and everyone who sent in the questions. We're looking ahead with confidence and excitement for 2024, and we look forward to our next update. For the Ask Origin questions we couldn't get to today, we look forward to releasing an investor Q&A video addressing those specifically. And this concludes our call for the day. Thank you.

Thank you, ladies and gentlemen. You may now disconnect your lines and have a wonderful day.