Origin Materials, Inc. Q3 FY2024 Earnings Call

Good afternoon, everyone. Thank you for joining us. This is the conference operator. Welcome to the Origin Materials Third Quarter 2024 Earnings Call. Please note that all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity for questions. Now, I would like to turn the call over to Ryan Smith, Co-Founder and Chief Product Officer, for opening remarks and introductions. Please proceed.

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.

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 a breakthrough in 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.

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 is really 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 firsthand. 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, in a simplified view, 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 updates 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 2026, 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.

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?

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

Thank you so much, and good afternoon. I wanted to ask about the $100 million customer you mentioned. You expect a significant ramp in year two, and that amount covers two years, correct? So, are we looking at something like $25 million in year one and $75 million in year two? How do you see the ramp with that customer? Also, you mentioned having 100 billion cap customers, but is this the only MOU you have signed regarding caps and closures? Thanks.

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.

That's very helpful. I see that regarding Geismar, we are moving on from that location, but you mentioned that the timeline and deal structure for Origin 2 will depend on various factors, including potential partners and the location. You specifically mentioned an Asian brownfield facility, which raises the question of whether there have been discussions about Origin 2 being located in Asia. Any insights you could provide would be greatly appreciated. Thank you.

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.

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

Thanks, Frank.

Our next question comes from Steve Byrne from Bank of America. Please go ahead with your question.

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?

I think that's an excellent question. We believe it's important to conduct the Factory Acceptance Test, which is critical. There are additional milestones that could help in discussions, though they may not be strictly necessary at this point. I'm referring to the actual production and shipping of caps, and their entry into the commercial market. More importantly, we've received interest in licensing this technology in various forms. We're open to that, and it seems like a sensible route. We see opportunities to structure licenses that benefit everyone involved. We also believe it's wise to keep expanding our capacity until we find the most straightforward way to monetize this technology, considering alternative approaches might emerge that could provide more effective monetization. So, we're keeping all options open. For now, we'll focus on driving forward and collaborating with our production partners and customers.

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?

The operating rate of the plant isn't something we're ready to disclose at this time, but it has been lower in the past couple of months compared to before. This change is more about our reallocation of resources towards the caps opportunity rather than a decrease in market interest for CMF and HTC. Overall, there remains significant interest in CMF and HTC. If we were to assess the change in interest, I'd say it's slightly improved for HTC, while interest in CMF has remained consistent. This consistency is likely because CMF attracted more players and was more accessible earlier than HTC. Thus, we see a mild increase in interest for HTC. In both cases, we have accumulated products available for use. Our perspective is to ensure that we effectively deploy these products to customers while focusing our resources on getting caps and closures up, running, and generating cash flow as quickly as possible.

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 applications of HTC?

I believe a significant portion of the interest in HTC is related to carbon black, and it seems to be one of the more immediate focuses for us. We are noticing increased discussions about applications that we have previously mentioned, which may have seemed underdeveloped at the time, as we were enthusiastic about them but lacked external interest. Initially, we were more proactive in promoting these applications rather than being drawn to them by demand. However, we are now beginning to see a greater interest in various applications that range from battery materials to agricultural products. While I won't specify what those applications are, I can say that some that we considered to be further down the line are now attracting attention from other parties.

Okay. Thank you.

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.

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?

Sure, I'll address that question. There are different types of margins, including gross margin and operating margin. I often hear inquiries about gross margins since they are seen as a crucial metric for business leverage. As we anticipate, during our manufacturing scale-up in 2025 and 2026, our gross margins will fluctuate as we transition from the inefficiencies of startup operations to achieving economies of scale, with the goal of reaching a positive EBITDA run rate in the first half of 2026. This is a key focus for us. While we are not providing specific near-term guidance on gross profit per product, it's important to note that our 100% PET caps are premium products, which gives us an advantage in pricing discussions. In terms of manufacturing costs, thermoforming produces caps and closures more effectively than injection molding, which is the traditional method. This is due to the efficiency of stamping out a cap compared to injecting plastic into a mold. The cost advantage becomes even more pronounced with larger cap sizes, making us more competitive compared to injection molding. Consequently, we are excited about introducing additional product SKUs, as mentioned by John earlier. The combination of these factors gives us confidence that our caps will yield attractive margins. Once operations are fully underway and we have more visibility into the specifics, we will likely be able to provide more detailed insights on how these margins will develop over time, but for now, that's what we are comfortable sharing.

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?

We are really enthusiastic about the furanics technology. OM1 is our most significant asset related to this technology. We are gaining valuable insights from our operational experiences and the data analysis, as well as from our ongoing work at OM1. Once we achieve profitability with our caps and closures business and it's growing as we want it to, we will be able to apply what we've learned from OM1, both what we know now and what we will discover in the meantime. We can then explore some exciting opportunities with OM1. While it's difficult to predict exactly what our plans for OM1 will be in the future, I believe they may differ from our earlier expectations. However, OM1 is designed to be a versatile asset that can adapt to various applications related to our furanics technology. There are many promising possibilities ahead once we can focus our resources on it effectively again.

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?'

I'm excited that we will be shipping a lot of our equipment to Reed City and starting production of caps with the tested system at that location. We'll be sending those caps to customers between now and the next earnings call. We're also working on new technology advancements in caps and closures, which is very promising. We expect to deploy these advancements quickly due to the shorter capital investment and engineering cycles. Announcing new customers, as Rich noted, will be satisfying for everyone involved, but we need to complete the necessary qualification processes first. The extent of announcements varies by customer based on their preferences for communication. Overall, there is a lot to look forward to, and what's particularly exciting is that these developments are just around the corner. The chemicals business has a long cycle, so it’s refreshing to be engaged in the caps and closures work, which operates on a much quicker timeline.

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.

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.