LNZA - NASDAQ

Good day, and welcome to the LanzaTech Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I now hand the conference over to Omar El-Sharkawy, Vice President of Corporate Development. Please go ahead.

Good morning, and thank you for joining us for LanzaTech Global, Inc. Second Quarter 2023 Earnings Conference Call. On the call today, I'm joined by our Board Chair and CEO, Dr. Jennifer Holmgren; and our CFO, Geoff Trukenbrod. Earlier this morning we filed with the SEC our quarterly report on Form 10-Q for the quarter ending June 30, 2023, and issued a press release with our second quarter 2023 financial and operating results as well as an investor presentation summarizing the company's performance and key operational highlights for the quarter. Both our press release and results summary investor presentation can be found in the Investor Relations section of our website at www.lanzatech.com. Before we begin, I'd like to direct you to the disclaimers and the front of the company's investor presentation and remind you that today's call may include forward-looking statements. Any statements describing our beliefs, goals, plans, strategies, expectations, projections, forecasts and assumptions are forward-looking statements. Please note that the company's actual results may differ from those anticipated by such forward-looking statements for a variety of reasons, many of which are beyond our control. Please see our recent filings with the Securities and Exchange Commission which identify the principal risks and uncertainties that could affect our business, prospects and future results. We assume no obligation to update publicly any forward-looking statements. In addition, we will be discussing and providing certain non-GAAP financial measures today, including adjusted EBITDA. Please see our earnings release and filings for a reconciliation of these non-GAAP measures to their most directly comparable GAAP measure. Today's call will begin with remarks from Jennifer providing an overview of and update on our 2023 execution priorities, including our recent financial results. Geoff will then review in greater detail our financial results from the second quarter and provide additional insight into our business model and growth of the business. At the conclusion of these prepared remarks, we will open the line for questions. With that I'll turn the call over to Jennifer.

Thank you, Omar. And thanks to everyone for joining us today. As we continue our mission to recycle the world's waste carbon supply, the urgency of acting on climate change and creating a safer carbon economy is becoming increasingly evident. In the second quarter alone, the effects of climate change, exacerbated by the early return of El Nino have impacted countless lives and caused vast commercial disruption globally. According to the U.S. National Oceanic and Atmospheric Administration, NOAA, the cost of climate and weather disasters in the United States alone last year totaled more than $165 billion. This data demonstrates how important it is to advance sustainable business models that align commercial, social and environmental strategies. Our work is centered around reorienting how the world uses waste carbon in a way that creates value. LanzaTech's performance this quarter demonstrates that we're continuing to make progress. Within this fiscal year, the annual installed production capacity enabled by LanzaTech's technology will capture roughly twice the amount of carbon as it did last year. We're doing this not by the old paradigm scaling up, but by numbering up which means local execution on a global scale. This approach translates into the utilization of locally sourced raw materials so that every country can secure and benefit from its own domestic supply chain. Turning now to our results, and with the first half of the year completed I'd like to share our second quarter results within the framework of our 2023 execution priorities as outlined on Slide 5 of the presentation. First and foremost, safety. In the second quarter, we had 0 lost time injuries and 0 recordable injuries across our global operations from our offices and laboratories to our commercial scale plants. Second, global production. We are on target to grow a cumulative installed [Technical Difficulty] capacity by over 100% over 2022 capacity to more than 300,000 tons per year or approximately 100 million gallons per year by the end of 2023. You can see this on Slide 7. Importantly, this capacity growth includes expansion of the geographic footprint to include India and the European Union. In India, alongside a partner, Indian Oil, we continue to make progress towards full production of our 33,500 tons per year commercial facility that will convert carbon dioxide rich refinery off gas [Technical Difficulty] ethanol. This is the first commercial deployment of our technology in a refinery using a refinery off gas. In Europe, with our partner ArcelorMittal, initial samples of ethanol were produced at the 64,000 ton per year facility in late May. Commercial scale ethanol production from the bio reactors is expected to follow in the fourth quarter. In China, a 60,000 ton per year facility at a ferroalloy mill successfully started up in the second quarter. This project marks our first facility where joint venture partners are being and it is currently ramping up to full scale commercial production. Once these 3 additional commercial plans are fully operational, the cumulative installed nameplate capacity of our existing and new commercial scale facilities will equate to removing over 500,000 tons of carbon dioxide from the atmosphere every year. This is what gives me the confidence that LanzaTech will be a gigaton scale solution for carbon abatement, something that the planet urgently needs. Turning to sustainable aviation fuel, or SAF, LanzaJet continues to make progress towards the 2023 completion of the world's first ethanol based alcohol to jet SAF plant at the LanzaJet Freedom Pines Fuels facility in Georgia as you can see on Slide 8. Once operational in 2024, this plant will produced 10 million gallons per year. In addition to the development at Freedom Pines Fuels, LanzaJet has made tremendous progress and continues to be extremely well positioned in the SAF market. Earlier this year, LanzaJet entered a memorandum of understanding with Indian Oil to explore the development of SAF production in India. And in March, they announced a collaboration with Jet

Thank you, Jennifer, and good morning. Thank you to everyone joining us. I'll first start with a recap of our second quarter results and then provide some incremental color on our business model and how to think about forecasting our growth. As seen on Slide 12 of the presentation, second quarter revenue from our biorefining carbon capture and utilization category grew 64% year-on-year reaching $9.7 million, driven mainly by ongoing and recently initiated engineering services work on several projects. Research and development revenue, which includes our joint development and contract research work, reached $2.2 million in the quarter and CarbonSmart revenue totaled $1 million. Total revenue for the first half 2023 of $22.6 million was in line with our forecast. As we have previously suggested, we have consistently anticipated a significant back-end weighting to revenue generation this year and are targeting more than 70% quarter-on-quarter growth on average during the second half of the year as more projects progress through the biorefining pipeline and additional CarbonSmart campaigns are filled. Cost of sales in the second quarter increased 46% over the same period last year, reflecting 31% higher revenue year-over-year for the quarter and the significant cost of engineering and other services on our integrated waste-based ethanol to SAF project in the U.K., which we call Project Dragon. The lower year-to-date gross margins and the quarter-on-quarter decline in gross margin is largely attributable to this project, one of our biggest revenue sources for the year. The revenue contribution from Dragon in the form of engineering services will continue to be realized over the course of this year and into next. However, given our 20% cost share obligation associated with this government contract, we record negative gross margin from a project. Still, this is a great opportunity for us as we have a contract and committed revenue source to develop this flagship integrated facility, which combines gas fermentation and alcohol to jet technologies while continuing to own the development rights for the project. We do anticipate gross margin improvement in the second half of the year, as we expect several projects to commence engineering services, adding higher-margin revenues to the sales mix in the coming quarters. With regards to the year-over-year increase in operating expenses, the SG&A component of operating expense expanded mainly as a result of the growth in our overall headcount going from approximately 340 people to over 400 people in the last 12 months, expedited expansion of key teams critical to our strategic growth objectives, increased compensation to prioritize talent retention as well as higher professional services expenses and certain ongoing public company costs. The investments in our engineering and strategic projects teams reflect, in part, an exciting pace of progress in project development with our Brookfield partnership. The research and development component of operating expenses increased $5.7 million year-over-year in the second quarter, consistent with our forecasted cost and reflecting our ongoing investment in people, innovation and process improvement in our gas fermentation platform and micro commercialization activities beyond ethanol producing microbes. The latter efforts, one of our 2023 execution priorities, are progressing well on those commercialization efforts have increased our costs in 2023 as we bring more of that work into 2023 as compared to 2024. We expect operating expenses in the second half of 2023 to be less than the level in the first half as we experienced several onetime expenses in the first half, mainly from professional services associated with the closing of the business validation, accelerated vesting of restricted stock awards and various compensation-related expenses associated with transitioning employees. Net loss in the quarter was negative $26.8 million and adjusted EBITDA was negative $23.8 million. Turning to adjusted EBITDA loss for the first half of 2023 of negative $47.3 million, we recast the adjusted EBITDA loss in the first quarter from negative $27.6 million to negative $23.5 million. We previously did not exclude from adjusted EBITDA certain onetime costs related to the business combination and initial securities registration that occurred during the first quarter. We believe that excluding these onetime costs, mostly related to professional services, provides a more accurate picture of the company's operating performance. With today's updates to our full year 2023 revenue and adjusted EBITDA guidance, we want to reiterate the importance of viewing our business over the long horizon due to significant impacts that will result minor timing shifts in our large-scale projects. Said another way, today's guidance updates mainly reflect our updated view of project timing, not a net change in our growth opportunities nor our path to positive adjusted EBITDA between now and the end of 2024. Taking into consideration this onetime expense in the first half of the year and the investments in 2023 to accelerate multiple aspects of our planned business strategy, the medium-term outlook for the business shows a faster execution of our planned strategy, gross profit growth and lower normalized future expense run rates. In short, we're extremely pleased with where we are headed and believe our business plan is stronger than ever. Turning to the balance sheet. We exited the quarter with cash, cash equivalents, restricted cash and investments in U.S. Treasuries totaling approximately $161.1 million. Cash burn in the quarter was approximately $33.8 million, of which $5.5 million was onetime in nature associated with our participation in the LanzaJet shareholder loan alongside our other LanzaJet shareholders. We expect cash burn to reduce in the second half of the year. With our current liquidity, combined with our confidence in achieving positive adjusted EBITDA in late 2024, we continue to believe that we are well capitalized with adequate financial flexibility to achieve our growth objectives. I'd now like to turn to a discussion on how to think about forecasting our growth. Over the last several months, we've engaged extensively with the investment community. Many of them expressed interest and more clearly understanding how neutral projects advance through the development pipeline and contribute to our financial results. With this feedback in mind, we've laid out some of the key financial drivers and forecasting principles on Slide 14 of the presentation. For our biorefining business line, where we license our core technology platform to customers, I'd like to provide some incremental color on how we think about the financial contribution of the typical plant with its development cycle. We think about the prominent lifestyle in 2 distinct buckets for a series of stage gates, which you can see represented on Slide 15. First, the development stage and second, the operating stage. We generate revenues through our services and licensing model in each of these stages where you want to unpack it a little further here. First, the development stage is broken up into 3 main categories, A, early-stage engineering; B, advanced engineering; and C, construction. During this stage, we realized revenues associated with our engineering and start-up services as well as revenues from the sale of equipment. While we do not typically provide all the equipment for a project, we provide key components to equipment package, especially those that are based on our proprietary results. During the second stage, the operating stage, we begin to realize a variety of high-margin recurring revenues, including a running royalty typically tied to the gross revenue of the plant's output, the ongoing sale of microbes and media effectively consumables in the process, as well as software, monitoring and analytics services designed to help our licensees optimize the operations to their facilities. I'll now turn to how projects progress through our pipeline and over what periods of time. Prior to entering our forecast pipeline, each opportunity includes the preliminary technical economic analysis or TEA, which upon yielding positive economic results will likely advance the opportunity along in the first stage, early stage engineering. We see approximately 50% to 60% of projects with positive TEA results advance to early stage engineering. We believe that is an appropriate probability factor to apply to our pipeline of projects at that stage. In early engineering, the customer engages in a paid feasibility study, generating additional engineering detail [indiscernible]. A recent example of a project under this stage is in commercial pipeline is with our integrated SAF project with [indiscernible]. We forecasted approximately 70% to 80% of projects completing a feasibility study will ultimately move forward to the advanced engineering stage. It is in these engineering stages where LanzaTech begins its risk moving to substantial engineering services revenue, typically between $1 million and $5 million, and both of which is realized in the advanced engineering stage through our basic engineering package or BEP. The contracting of the BEP marks an important milestone in the project development and is a significant predictor of the progression of our long-term finance performance. Examples of projects in our current commercial pipeline at this stage include our project in Rome with partner NextChem as well as our recently added project with partner Bridgestone. Approximately 80% to 90% of projects that have completed a BEP have earned a positive financial investment commitment by the customer and will enter the next portion of the development stage, the construction phase. Once in construction, we generally expect a near 100% probability that a project will complete construction and startup. During this construction stage, LanzaTech realizes revenues through 2 streams; first, the sales of key proprietary componentry and equipment packages typically in the range of $15 million to $20 million depending on several factors including but not limited to capacity, integrations and geography; and second, start-up services and operational training typically ranging $1 million to $3 million. From TEA to construction completion, we anticipate the time line to be approximately 24 to 36 months, approximately 12 months in the preconstruction basis and 12 to 24 months in the construction phase. Once construction is completed, the project enter start-up and full scale operations. It is in the operating stage that the project generates recurring revenues for LanzaTech through the licensing loyalties, the ongoing sale of microbes and media, and the ongoing sales of software monitoring and services. Our licensing royalty is typically structured as a percent of gross revenue on the sales of products from the facility with royalty rates typically in the high single-digit percentages. We believe that the anchor KPI for estimating the long-term buildup of revenues in the biorefining business line to be the number of BEP starts each year. Once the project has commenced on BEP, the significant engineering services revenues begin to contribute to our results. And once completed, there's a high probability of the project advancing through the construction and then onto operations. Given the time lines involved in our project deployment, we believe it helps to think about our business on an annual basis revenue quarterly. These biorefining projects are large capital investments on the order of several hundred million dollars depending on the size and integration of location. These investments are made by our licensee customers and the projects we developed and constructed over multiple years. Therefore, it is not uncommon to face delays associated with project decision-making by customers. This dynamic can result in a shift of product milestones, which can contribute to some challenges in forecasting quarterly results with precision. Slide 16 outlines the number of projects we target commencing a BEP in 2024 and 2025 on a probability-adjusted basis based on the current project pipeline. The illustrative economics to LanzaTech of a 50,000 ton per annum facility from each of the development in operating stances are also shown on Slide 16. As you would expect based on the pipeline progression demonstrated, our near-term revenues will be dominated by onetime revenues earned during the development stage, while we are building up a base of licensed operating assets with long-term recurring revenue streams at extremely attractive margins for LanzaTech. Jennifer discussed earlier our new partner facilities opening this year. But I also wanted to expand a bit on the revenue dynamics of these projects. It's important to remember that many of these are first of kind plants. For example, the first LanzaTech biorefinery in Europe and simultaneously the first plant in India, which is the first LanzaTech facility utilizing refinery off-gas. Our third new project is our fourth plant in China and is held through a joint venture structure with our partner Shougang. Therefore, the recurring revenues associated with the licensing royalties from these plants look different and are not indicative of the plant in current of our pipeline. As mentioned back on Slide 14, we expect joint development and contract research to grow modestly year-on-year and be a smaller component of overall revenue in the medium term. This work will continue to help prioritize our roadmap for new microbes and drive process optimizations. We expect CarbonSmart revenue to significantly improve year-on-year over the medium term as more plants come online and LanzaTech secures offtake supply from these plants to place into our customers and partners CarbonSmart supply chains. I'll now turn the call back over to Jennifer for some closing remarks before we open the call for Q&A. Jennifer?

Thank you, Geoff. In summary, we had another strong quarter with continued growth across our business. Our first half 2023 revenue grew 27% year-on-year compared to the first half of 2022. Our focus is squarely on business execution and delivering the results we guided the market to for the rest of the year. We continue to deliver solutions that can help us make a paradigm shift in treating carbon as an opportunity rather than as a liability. Customers ranging from heavy industry to personal care companies and airlines are becoming carbon champions as they see the value in turning carbon from a cost to a profit center while creating a more sustainable future for all. I am proud to represent a team and partners across multiple sectors who share our vision of the circular carbon economy. And I look forward to continuing to deliver positive results as evidenced by LanzaTech recently being named one of the Time 100 most influential companies alongside other audacious companies changing the world. Thank you for joining us and to so many of you for your support. Operator, we can now open the lines for Q&A please.

[Operator Instructions] The first question comes from Leo Mariani from ROTH MKM.

I was hoping we could get a little bit more detail on the revenue growth expected in the second half of the year. Looks like you guys need to do around $67 million to kind of hit the midpoint of the revised guidance. Just trying to get a sense of what are the major projects that contribute. You mentioned Dragon on the call. Presumably, you're going to see also just ramping revenues from the Indian Oil plant here as well as the ArcelorMittal plant in Belgium. But maybe can you talk about some of the other key plants that sort of drive that ramp here in the second half?

Thank you for your question, Leo. I'm going to pass this one over to Geoff to address. Geoff, can you please provide more detail?

Sure. So in terms of revenue growth for the year for the back half, I mentioned a little bit in our prepared remarks some of the plants that are coming online, but largely it's a function of the plants that are in the development stage that are -- or the projects that are in the development stage that are coming along. We mentioned a couple of them that we've announced already, increasing work with partners Woodside, Bridgestone, NextChem, Gale, et cetera. So, we expect to see expansion of our engineering services and equipment revenues in the back half of the year, which will also be kind of positive gross margin improvements over some of the work we did in the first half, as we mentioned, Project Dragon and others.

Okay. And then with respect to 2024, you guys have previously spoken about greater than 2x revenue growth next year on a year-over-year basis. Do you guys still feel confident that that's kind of the right number to be thinking about in light of the fact that you reduced the '23 guidance a little bit here on revenues?

Yes, we do. In fact, we think the revenue that has kind of slipped out of 2023 into 2024 sets us up nicely for that type of revenue growth. And we do continue to believe that it's going to take that type of revenue growth to get to that EBITA a break -- even EBITDA positive number by the end of next year, but we're continuing to [indiscernible] from that.

Okay. And then you spoke briefly about gross margins. I wanted to see if we can get a little bit more color in terms of the progression in 3Q and 4Q of '23. I mean, your gross margins have fallen. It looks like the last 3 quarter, it was 26%, in the third quarter 22%, 16% in the second quarter here of '23. So how should we be expecting that progression unfold here in the second half? Can you help us out with maybe some numbers here on this?

Yes, absolutely. So we expect it to revert to some of the gross margins you've seen previously. This quarter and the first quarter this year were dragged down pretty significantly from a gross margin standpoint just based on the revenue mix, the revenue mix being heavily weighted to Project Dragon and some of our contract research work in the first half -- sorry, Contract Dragon -- sorry, the Project Dragon being kind of the most significant component of our revenue mix in the first half runs at a negative gross margin. It's work that we're doing with funding that's provided from the U.K. government. There's a cost share component of that and the cost share component part of that actually results in effectively a negative gross margin. So all of that work is actually bringing our gross margins down. Again, it's a great project, and we're really excited about doing it. We think it sets us up for important milestones in late '23 and 2024. We continue to own the development rights of that project. And so again, we're very excited about it. But it is a drain on gross margin in 2023. That will be diluted by these additional revenue sources that are coming online in the back half of the year, and that's why we'll see some inversion to some of our [indiscernible] models.

Okay. And then just on R&D expense, looks like that's gone up a fair bit in the last couple of quarters. I think you guys are running kind of $13 million to $14 million per quarter in the back half of '22. It was $16 million in the first quarter, now it's $19 million this quarter. You guys did talk about some kind of onetime start-up costs. I wasn't sure if some of those were going into the R&D expense number. It wasn't crystal clear to me. So I'm just trying to get a sense. Do you expect that R&D falls from this $19 million quarterly run rate in the second half of the year? Is that going to go down here?

So we think it's going to be fairly consistent. Largely, our -- the biggest component of our OpEx is people, and the biggest amount of our people has historically been, although it's declining as a percentage, our R&D staff. And so the R&D staff did increase year-over-year. So that's largely what's driving that as well as some noncash stock comp expense as we have deployed [ dotcom ] pretty significantly this year as an incentive for our people and attention to [indiscernible] term. And so that combination actually makes up the majority of the increase in these R&D expense. There was some additional -- we spent some money on improving some of our facilities and just some basic non-CapEx maintenance associated with it as well as associated with some of the work that we're doing to accelerate our non-ethanol microbe development. There have been some third-party contract expenses associated with that as well, so.

Okay. So, I mean it sounds like you're saying second half of '23 R&D is pretty similar to the first half, if I'm hearing you right.

Pretty steady state for us [ here ].

The next question comes from the line of Thomas Meric from Janney Montgomery.

Just wanted to dig in on Brookfield a little bit with a few questions. How many pipeline projects are attributable to Brookfield and where are those projects in terms of stage of development, especially relative to FID?

Thank you for the question. On Brookfield, we have quite a number of projects and we expect to -- and we haven't named them yet. They are all in Europe or North America, and we expect to get a couple of them to FID by the first quarter of next year. We've made quite a bit of investment. We've hired a leader for that group. As you know, Aura comes to us from Shell. And she is leading the Brookfield pipeline work and that team is focused on getting at least one project to FID either by the end of this year or early next year.

And stepping back a little bit, with the Brookfield partnership, do you think it's a blueprint for other potential arrangements to do something similar or is this maybe more oneoff in nature? And kind of a follow-up to that is, do you think there are other types of commercial or financing partnerships coming in the next few years?

So absolutely, I believe Brookfield is just the first of multiple partnerships that are focused on investment in infrastructure, i.e., helping us build out plants. And so we do have multiple such discussions in the pipeline and I think you'll see more of such partnerships across the globe. As you well know, Europe and North America is what Brookfield is focused on, and we are looking, of course, to scale in other parts of the world. So having other partners across the world is going to be quite important for us and we are working on that. I do think it's worth, since you asked about multiple types of partnerships, there is the financing and infrastructure partnerships that we've just discussed in relation to Brookfield. And we've also been building our channels to market. I think you saw an announcement with Technip. They are going to help us create demand in the petrochemical sector. You also saw a partnership with Primetals Technologies. They're working with us to create a pipeline, a stronger pipeline in steel and ferroalloy. And NextChem, who's one of our partners in the municipal solid waste space, is also a channel to market to municipal solid waste projects. So we're creating multiple types of channels to market, one which is the financing side, but the other which is actually the people who are actually embedded in those industries pulling us along.

Just 2 quick ones on Freedom Pines. I wonder if you could update us on what's needed for mechanical completion this year specifically. And then going forward as it's operating, what milestones do you need to hit to increase your equity stake if you want to?

Great question. So the -- let me tackle the milestones first. So the milestones for our equity stake depend on other investors taking up a license. So as Freedom Pines Fuel comes into play and as you know, LanzaJet is already developing projects with their current investors. The Dragon Project as an example with LanzaTech. They're working also with Mitsui British Airways and Shougang developing a pipeline of projects. When those investors pick up a license, that is when LanzaTech's equity investment goes up. For every license that one of the investor takes for the first licenses that they take, our equity shareholding goes up. And that will be happening over the next 6 to 9 months. The second part of the question is what's required for mechanical completion. Right now, LanzaJet is fully funded through mechanical completion and start-up. So no cash will be required. And much of the -- all of the inside battery limits, the actual alcohol to jet plant, is already in modules and being installed. We're in the last stages of installing that. And then the rest is the additional work, the outside battery limits, so the 10 gauge, et cetera, that's also being installed. There should be no -- there should be nothing to stop that plan from being mechanically complete by the end of this year. All the contracts are in play, all the construction is in play, tremendous progress by the LanzaJet team.

The next question comes from Pavel Molchanov from Raymond James.

Maybe kind of zooming in on the steel and oil project in Belgium, pretty high profile projects for you guys. First, can we just get an update on kind of where the facility is in the commissioning process and what's going to happen between now and the end of the year?

Yes, that's a high-profile project sitting in Europe and also because ArcelorMittal is the largest Western steel company. We have completed the construction of the plant. So it's in the hot works commissioning stage and that's really the last stage. In fact, we started the inoculator and produced ethanol in June. So we know all of that part of the plant is working quite well. We expect to complete all the hot commissioning work in the next, I would say, 30 to 60 days max and then start up the bioreactors. So we will certainly be -- should be operating in the fourth quarter of this year.

And financially, in terms of LanzaTech actual income statement, what changes as the projects move into production as you said in Q4?

Right. The key change will be that we will be receiving licensing revenues from the production of ethanol. That would be the biggest change that you will see. Do you want to add anything to that, Geoff?

No, I was just going to say, yes, in addition -- as Jennifer mentioned, ArcelorMittal was set up in kind of hinted my remarks. It is a first-of-a-kind plant being placed in Europe so the royalty economics are slightly different than what we see in the rest of our pipeline, but we'll start seeing royalty revenues associated with production of that plant. Again, it's starting up closer to the end of the year, so they won't be particularly material this year until the material volumes coming off that plant. But there are also the consumable side, the microbes and media, and then we do have some of our other recurring revenue products like our software and services.

Okay. Maybe just kind of zooming out for a moment. The whole green steel space is pretty nascent. Obviously, I mean, you guys have been involved with Shougang in China for quite a while. When do you think steel production in the U.S. will kind of jump on this bandwagon? Because it feels like it's very Europe-centric with maybe a handful of Chinese companies doing that as well.

I think when I think about green steel, there has already been a major transition in the U.S. steel sector towards recycling scraps, et cetera, versus actually running electric arc furnaces and such. I think you know this area quite well, Pavel. So the fact is there's only a couple of coke-oven type linked steel plants in the U.S. and so decarbonizing those is going to require something like our technology, something like carbon capture and sequestration or what they're doing in other parts of the world, which is transitioning to hydrogen. But so much of the steel sector in the U.S. is based on technologies which don't quite produce carbon monoxide-carbon dioxide directly because of the type of steel that they do produce. So it's quite a different landscape. I'd love to hear your views on that because I know you've been looking at green steel.

Well, you guys are involved with Arcelor, which is by far the most active globally in the transition. So good, we'll look forward to getting updates on Belgium over the next 6 months.

The next question comes from Tom Curran from Seaport Research Partners.

Just 2 follow-ups on LanzaJet. First, would you provide us with a progress update and some color on offtake agreements or other anchor SAF buyers for the Freedom Pines plant? Just how much of that 10 million gallons per year of capacity is already contracted?

All of it. The investors in LanzaJet took all the fuel. So there was nothing left to provide to anybody else. It's 100%.

Yes. That's -- I'm not surprised to hear that, which is kind of a nice segue into my next question, which is for SAF, there seems to be a lot of consternation about the availability dilemma. The idea that the drop in supply side remains resource constrained when it comes to economically viable options or making drop in SAF and therefore, global SAF production is stated to continue to fall well short of the aviation industries ambitious consumption targets. Given the abundance diversity and lack of human need for the potential feedstock for LanzaTech's waste-based ethanol technology, it seems as if combining a license for a LanzaTech biorefining plant with a license for LanzaJet ATJ process could take a lead role in solving for availability. What do you think are the main governing factors in determining how fast such a biorefining plus ATJ combination could grow? Where are you focused for maximizing that potential growth rate?

Absolutely. That's the next stage is in our pipeline. As you will know, the combined waste-based ethanol plus the alcohol to jet technology. And I think you saw the announcement that Air New

The next question is from the line of [ Sean Ernes ] from Stifel.

For my first one, as you near the expected start-up of 3 additional facilities this year, could you offer any high-level commentary on some of the learnings in terms of cost savings and reducing build times that you've achieved as you move from the first commercial plant in 2018 to these facilities slated under operations this year? And could you perhaps characterize whether engineering improvements and/or changes to bacteria design are driving any efficiencies?

So in the replication, which is what we're doing right now, the efficiencies come from being able to work with equipment vendors and EPCs that understand our technology can go faster and kind of offer reduced costs because they know that we're replicating, right? They're not going to sell one compressor, they are going to sell multiple because they know we have a pipeline. So a lot of the costs that we're seeing where we're coming down right now are just based on simple replication. Now as we've also announced, we have worked on our second-generation bioreactor. We have demonstrated that at Suncor in the field and that will give us significant savings because it will improve not just the cost of the plant -- they'll reduce the cost of the plant, but it will also, at the same time, improve yield. And so that combination will improve the total IRR of the plan. So you'll see that our improvements come from the combination of technology like the second-generation bioreactor and fundamentally just from replicating. The more you build, the cheaper everything gets, right? Just like you saw in solar, right? It's that part of the model and that part of the business that really helps.

Makes sense. And for my follow-up, you highlighted in your prepared remarks that you are ahead of schedule in demonstrating the production of isopropanol microbes at scale, and there is certainly a large end market opportunity that you highlighted. Maybe using Slide 15 as a basis, could you frame how you are looking at the time line of progressing these microbes from the demonstration stage to commercial operation?

Absolutely. And actually, we jumped in on opportunity. The plant at Suncor, the plant that we were testing with Suncor, our 2G -- our second-generation bioreactor, we had completed all the ethanol work that we were doing there with that reactor ahead of schedule, which is what allowed us to jump on testing our isopropanol microbe there. The isopropanol microbe has done very, very well in our lab and our pilot. It is looking quite good at the second-generation bioreactor as well. If things continue as expected, we should have that microbe ready for commercial use next year. So that is the timeline we have for that microbe. Quickly on the heels of that will be our acetone producing microbes, which, as you know, will be very useful in acrylics and other applications. And so that's what's next in the pipeline. That, again, is in the 18 to 24 commercial timeline.

Thank you. This concludes our question-and-answer session. I would now like to turn the conference back to Jennifer Holmgren for any closing remarks. Thank you and over to you.

Thank you so much to everybody for joining us and for supporting our journey to create a different carbon economy. I really appreciate you taking the time, especially during the first year of our public presence. So thanks again for joining us.