ORGN - NASDAQ

Welcome to the Origin Materials Third Quarter 2022 Earnings Conference Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to your host Ashish Gupta, Investor Relations. Ashish, you may begin.

Thank you and welcome everyone to Origin Materials' third quarter 2022 earnings conference call. Joining the call today from Origin Materials are Co-CEO, Rich Riley Co-CEO and Co-Founder, John Bissell; and CFO, Nate Whaley. Ahead of this call, Origin issued its third 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 on this call, 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 our 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 of 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 dated August 3rd, 2022. In addition, 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 and our press release issued this afternoon and our filings with the SEC each of which is posted on our website. The webcast of this call will also be available on the Investor Relations section of our company website. With that, I'll turn the call over to Rich.

Thank you, Ashish and thanks to everyone for joining us. For today's presentation, we will be referring to the slides that are posted to the Investor Relations section of our website earlier this afternoon. I will start by reviewing Q3 highlights then provide a commercial and regulatory update. I will then turn it over to John who will discuss our recent Alternative Fuels & Chemicals Coalition award and construction progress on Origin 1 and Origin 2. Nate will wrap up with the financial overview. We will begin on slide three. We continue to execute on our plan and make progress on our mission to enable the world's transition to sustainable materials. First we have seen a more than nine-fold increase in our customer demand since our announcement to become a public company in February 2021 with offtake in capacity reservations increasing to $9 billion today. Second, we remain well capitalized and on track for completion of Origin 1 by the end of 2022 with preparations for commissioning and start-up now well underway with plant commissioning to be complete by the end of Q1 2023 and start up beginning shortly thereafter. We are also maintaining our previously disclosed capital budget for Origin 1 of $125 million to $130 million. For Origin 2, the previously disclosed capital budget construction timeline and financing assumptions are unchanged. As reported previously, the State of Louisiana pending finalization is expected to award a private activity bond volume cap allocation to Origin in the amount of $400 million. We also expect to receive more than $100 million in pending state and local incentives. As discussed on prior calls, front end design of Origin 2 is underway with detailed engineering set to begin in 2023. And third, we remain well-capitalized with approximately $362.2 million in cash and cash equivalents on hand. We maintain our expectation that the capital projects for Origin 1 and Origin 2 can be fully funded from our existing cash on hand and previously indicated traditional project financing sources. Now, turning to slide four, I'd like to provide a brief overview of Origin for those who are new to the story. Origin was founded with the mission to help solve climate change by enabling the world transition to sustainable materials. Our patented drop in core technology, attractive unit economics, and carbon impact have gained the support of a growing list of major global brands and investors and in an increasingly diverse range of consumer and industrial end markets. Our list of strategic partners includes industry leaders such as Danone, Nestlé Waters, PepsiCo, Ford Motor Company, Mitsubishi Gas Chemicals, Kolon Industries, PrimaLoft, Solvay, Mitsui & Co. Minafin Group, LVMH Beauty, Revlon, Mitsubishi Chemical Group, Kuraray, Intertex World Resources, and ATC Plastics. Our CPG partners have publicly disclosed their intent to migrate 100% of their current petroleum-based PET consumption to decarbonized and recycled materials. After extensively evaluating our technology and testing our products, these market leaders have made significant financial contributions to Origin both as investors and customers, demonstrating their environmental commitment and confidence in our technology and products. They have signed multiyear off-take contracts worth hundreds of millions of dollars. This year's escalating geopolitical tension and energy-rich portions of the globe have provided a reminder of the urgency in which the world needs to transition to more sustainable and less volatile energy solutions. The carbon-inventive nature of the plastic industry, where over 99% of product is made from fossil fuels, has placed the industry under considerable pressure to dramatically transform the way it produces and uses plastic both for environmental and economic considerations. Origin operates an entirely circular plastic solution carbon-negative recyclable PET, which the world's plastic recycling infrastructure is already designed to collect sort and reuse with the critical added benefit of removing CO2 from the atmosphere. Beyond plastics, we note that while there's been some progress made in reducing greenhouse gases from shifts to renewable energy sources and electric vehicles, it is clear that reducing emissions from energy use alone is insufficient to achieve the goals and commitments established by companies and governments. As a result, in the near-term, we believe that these companies will need to integrate decarbonized materials into their supply chain. As such we expect demand to remain well ahead of our projected supplies for the foreseeable future. Turning to slide five, we continue to see strong favorable tailwinds for our technology and business model with some of the world's largest public companies committing to zero carbon mandates and governments increasingly enacting regulations and funding investments to tackle climate change. The recently passed Inflation Reduction Act or IRA is expected to provide approximately $369 billion in direct investment related to climate solutions. We are excited by the support the bill has received and see multiple meaningful funding opportunities that we plan to provide more detail on as the legislation is finalized. For one, the IRA is expected to significantly expand the Section 48C Advanced Manufacturing Tax Credit available for investments in manufacturing facilities for clean energy technologies. Origin is currently exploring several paths of eligibility in order to qualify for a discretionary tax credit for a significant portion of Origin 2's capital expenditures, providing benefits toward the financing of the plant. Second, while we are still evaluating the details of the program, we see the potential to benefit from the IRA's Advanced Industrial Facilities Deployment Program. This Department of Energy run program created under the Office of Clean Energy Demonstration will provide $5.8 billion in competitive funding such as grants, rebates, direct loans, and cooperative agreements to advance industrial facilities aimed at reducing greenhouse gas emissions from historically energy-intensive industries. We’re optimistic that our pilot facility in West Sacramento, our Origin 2 plant in Geismar, Louisiana, as well as future plants that we build in the US could qualify for this competitive financing. Finally, in addition to the IRA, Origin is exploring opportunities for funding and financing under last year's Infrastructure Investment and Jobs Act, or IIJA. Origin has identified more than a dozen IIJA initiatives that may potentially assist in financing a variety of Origin investments, most notably Origin 2 and infrastructure improvements in and around the Geismar, Louisiana site. Turning to slide 6, we continue to make steady progress commercializing the business, and have grown customer demand to a total of $9.0 billion dollars today, made up of offtake agreements and capacity reservations. This represents a more than nine-fold increase since we announced our intent to go public in February 2021. As a refresher, capacity reservations are signed agreements designed to lead towards take-or-pay contracts and revenue once our plants are complete. They give us and our customers more time to negotiate a take-or-pay offtake agreement, which typically is a much longer document that meets the requirements for project financing. As previously mentioned, we continue to expand the breadth of industries and end-markets that we serve, from global CPG brands like Pepsi, Danone, and Nestlé Waters to automotive leaders like Ford and specialty chemical innovators like Solvay and Mitsubishi Chemical Group, to ultra-luxury brands like LVMH Beauty and iconic cosmetics brands like Revlon. Our sales pipeline remains strong. We continue to make inroads into new industries and have numerous active discussions with existing customers to expand their current agreements and with prospective customers to adopt our sustainable products. We also see significant opportunities to expand into high margin product categories. This year’s new strategic partnerships with Mitsubishi Chemical Group, Intertex, and ATC Plastics, for example, have provided us with significant momentum in carbon black, a promising new product category for Origin. Our carbon black, made from Origin’s hydrothermal carbon, is a versatile 100% bio-content filler and pigment. Like traditional petroleum-based carbon black, it can be used in a wide variety of applications including automotive components and tires, belts and hoses, mechanical rubber goods, plastic masterbatch, and toners. We expect our sustainable carbon black to be deployed across a diverse array of applications to decarbonize the rubber and automotive supply chains, end-markets which have very favorable growth prospects. In light of strong customer demand, we are pleased to announce that we are substantially committed for our Origin 2 para-xylene and PET capacity. Going forward, our sales and marketing team will be primarily focused on high margin products such as carbon black and advanced CMF-derived products for Origin 2 and beyond. As we’ve previously mentioned, our customers require more development and testing for these products than for drop-in ready para-xylene and PET. As we approach the start of Origin 1 operations, we anticipate being able to deliver larger quantities of samples to our customers. We look forward to updating everyone as we embark on this evolution in our sales efforts. In addition, we are very excited to tell you about new strategic relationships with a major Japanese chemical company and a major Asian chemical company. We continue to see considerable opportunities to expand into new end markets and applications, and we look forward to providing more detail about these partnerships, as well as others, when appropriate. With that, I would like to turn it over to John, who will discuss our recent Alternative Fuels & Chemicals Coalition award and provide an update on Origin 1 and Origin 2.

Thanks, Rich. In early October, Origin received the 2022 Alternative Fuels & Chemicals Coalition Global Biobased Economy Performance Award. The award, which is sponsored by the Industrial Biotechnology Journal, is given annually to recognize companies that are advancing science and contributing to the production and commercialization of industrial biotechnology products. Origin was selected for outstanding performance and achievements in the commercialization and scale-up of our patented technology platform which, as many of you know, turns the carbon found in sustainable wood residues into useful carbon-negative materials for a wide range of end products, including clothing, textiles, plastics, packaging, car parts, tires, carpeting, and toys. Turning to slide 7, I am going to provide a construction update for Origin 1 and Origin 2. For those interested in the Origin 1 story, and the continued progress made by our team, I would like to point you to a new construction update video that we posted today to the investor relations section of our website. For Origin 1, our first plant, located in Sarnia, Ontario, construction is progressing well and we remain on track for mechanical completion by the end of 2022, a considerable achievement despite the pandemic and supply-chain related headwinds. We expect plant commissioning to be complete by the end of Q1 2023 with start-up beginning shortly thereafter. We are maintaining our previously disclosed capital budget for Origin 1 of $125 million to $130 million. During the third quarter, we further strengthened our Origin 1 operations leadership team and support staff. I’m very proud of how our team has executed against our construction milestones as we draw closer to commercial production. This is a large manufacturing plant with a lot of moving parts, and what we’ve been able to accomplish to date, despite COVID and macro supply chain issues, truly shows the capability, efficiency, and efficacy of our capital projects team. In our slides and in our construction video, you can see the progress we’ve made since our last update in August. All major equipment has been delivered onsite. Since our last call, we have further progressed the assembly of the piping and electrical systems. The piping modules both interconnect our core chemical process modules and connect the Origin 1 plant with the utility supplied by the neighboring site. As we have discussed before, the modules were fabricated offsite using a modular construction approach and shipped in, minimizing the work that was required to be done in the field. We also completed the construction of our biomass building, which is where we will store sustainable wood residues entering the plant prior to processing and conveying to the reactor system, as well as substantially completed our HTC building, which is where we will separate HTC, a solid material, from the liquid aqueous phase of our core chemical process. Notably, both the biomass building and the HTC building feature a significant amount of steel and a number of components and pieces connecting together. HTC is a carbon-rich, highly structured and flexible raw material that can be converted into a wide range of applications, including carbon black and activated carbon for the automotive industry and material handling industry. We’ve recently received and installed our second filter press, an important part of how we handle HTC at Origin 1. The filter presses will use the same HTC separation technique that is currently used at our pilot plant in California, but are about 100 times the size. The control room building, which houses our distributed control system, and the power distribution building both arrived onsite during the quarter. The distributed control system is the brain of the plant, controlling every powered system onsite. Finally, we’ve delivered several new tanks onsite that will contain product as well as solvent that will be used, and recycled, as part of our core chemical process. Our site will have lots of integrated storage, which gives us the ability to manage our chemicals and materials. New equipment includes a storage tank, which will contain unrefined CMF before its distillation step, as well as brine tanks, brine recovery tanks, HCl tanks, and several tanks for storing finished CMF. Due to its large size, our distillation feed tank was assembled onsite rather than delivered by road. Today, we are thrilled to tell you that we are closer than ever to the mechanical completion and operation of Origin’s first commercial plant. Of course, this is a testament to the amazing level of talent that we’ve been able to attract to our company. The Origin 1 team has done an incredible job creating a great safety culture while executing this project, and we will very much take what we’ve learned and the culture we’ve developed to Origin 2 and beyond. At Origin, we recognize that our team is the critical differentiating factor that will enable our success and the execution of our vision. Over the past year, our ability to attract high-caliber technical talent with a deep commitment to our sustainability-focused values has far exceeded even our most optimistic expectations. And, it’s become clear to us, following recent conversations with investors, that the pace at which we are adding depth to our team, and the truly remarkable quality of our people, is something worth highlighting. So, we decided to use a portion of today’s call to discuss some of the great recent additions to Origin. Beginning on slide 18, it will be hard to overstate how enthusiastic we feel about the future, specifically our ability to commercialize our technology and products. I'd like to highlight just a small sampling of the world-class talent that has joined our team. Matt Perkins, Origin's Engineering Director for Capital Projects, has deep experience in project execution, which he developed over a 20-plus year career working with Fortune 500 owner operators and EPC company. He is highly experienced in the design, procurement and construction of industrial assets, including petrochemical technologies. Dr.

Thanks, John. I will begin with some commentary on our third quarter results, then our financing expectations for Origin 1 and Origin 2, and finish with an update on our 2022 outlook. Speaking to slide 23, third quarter operating expenses were $9.7 million compared to $7.1 million during the same period in the prior year. Adjusted EBITDA loss was $8.4 million for the third quarter compared to a loss of $5.7 million in the same period of the prior year. And finally, net income was $8.3 million for the third quarter compared to a net income of $27.9 million in the same period in the prior year. Turning to our balance sheet, Origin ended the third quarter with $362.2 million in cash and cash equivalents and marketable securities. We maintain our expectation of fully funding the construction of both Origin 1 and Origin 2 using our existing balance sheet cash and cash equivalents and previously indicated traditional financing sources. With regard to the financing of Origin 2, as we’ve discussed on prior calls, the State of Louisiana, pending finalization, is expected to award a Private Activity Bond, tax-exempt bonds authorized by the state and local governments for the financing of qualified projects with private capital, volume cap allocation to the company in the amount of $400 million. We also expect to receive more than $100 million in pending state and local incentives. As Rich discussed, we anticipate various federal tax credit, grant, loan, and other programs targeted towards promoting advanced manufacturing from the IRA to be incrementally beneficial for the financing of Origin 2 once the details of those programs are finalized by the relevant government agencies. We maintain that our financing assumptions for Origin 2 remain reasonable and achievable, with Origin 2 fully funded from existing cash on hand and previously indicated traditional financing sources. The $400 million Private Activity Bond allocation from the State of Louisiana provides a strong foundation for the financing of Origin 2 and, in combination with certain 2021 Infrastructure Investment and Jobs Act provisions and other non-volume cap tax-exempt financing, could enable the debt financing of Origin 2 using entirely tax-exempt bonds. Origin also continues to work with leading financial institutions on other forms of traditional private financing and federal loan programs, including through the US Department of Agriculture and Department of Energy. As we've highlighted, on our previous earnings calls inflationary pressures remain an area of focus. However as John discussed, at this point we are not adjusting our overall capital budget for Origin 2. We acknowledge the situation remains fluid and we continue to closely monitor our cost estimates such that we can communicate any changes to the market, at appropriate times as we progress through the project. We'll now close with an update on our 2022 outlook. We are maintaining our prior outlook for an adjusted EBITDA loss of up to $36 million and capital expenditures of up to $175 million. We look forward to providing full year 2023 guidance for revenue EBITDA and other financial metrics on our next earnings call in early 2023. With that, I will turn it back to Rich for closing remarks.

Thank you, Nate. In closing, I'm incredibly proud of our team's continued execution as we draw closer to the commissioning and start-up of Origin 1 and encouraged by the strong momentum that we continue to see for our industry-leading technology, as the world moves aggressively to a zero-carbon future. I would like to thank all of our customers for their commitments to Origin, our team and construction and engineering partners for their contribution to our company's success and our shareholders for their continuous support. And with that, I would like to ask the operator to open the line for questions.

[Operator Instructions] And our first question comes from Steve Byrne from Bank of America. Please go ahead, Steve.

Yes. Thank you. You indicated that there's a fraction of the CMS that you're going to produce at Origin 2 that has already been allocated to produce para-xylene and the derivatives PET. I'm curious, what fraction of the CMS capacity at that plant are you allocating to that pathway? And so therefore, what fraction are you going down another path, which I would assume would be the furan based chemistries like PEF. And why did you come to this conclusion? Do you have a view that the furan chemistries could potentially create more value, than going down the path of PET?

Yes. Thanks, Steve, great question. So we're not disclosing the specific allocations of our CMF from Origin 2 at this time. But we've always talked about and planned for a portion of the CMF to go to those higher-value applications. You mentioned PEF, I would call out surfactants is another one. And CMF is this incredibly flexible molecule, that can go on to be a lot of things. And we've talked a lot about para-xylene and PET and have seen enormous demand for that. And we're excited to continue engaging with customers and potential customers, around additional even higher value applications of our CMF. And it's one of the great things about Origin 1 coming online, is it enables us to produce large-scale samples to those development partners as we build on the CMF platform.

And you picked up almost another $1 billion in offtake agreements. Is it fair for us to assume that those are mostly PET-based? And if not, what else are you getting in there now? And maybe more specifically do you have any offtake agreements yet for the carbon black or the HTC or do you think you need product from Origin 1 to deliver to your partners before you could really establish some offtake agreements for the HTC?

Yes. So it was another very strong quarter for demand, and a meaningful part of that is from our sort of flagship para-xylene and PET offerings but for other materials as well. And we've previously announced some offtake agreements for HTC, going to the carbon black application. And again, we are excited for Origin 1 to come online and provide larger scale samples, as we work to get even more carbon black offtake agreements. And the carbon black is not quite as drop-in as our para-xylene offering. And so, being able to provide meaningful samples is important to continuing to advance that business.

Very good. Thank you.

Thank you.

And our next question comes from Frank Mitsch from Fermium Research. Please go ahead, Frank.

Hi. good afternoon, folks. I wanted to talk about the time line on Origin 1 and the capital spend associated with it. You're maintaining the 125 budget – 125, 130 budget. And you also indicated that you're going to spend this year up to $175 million in CapEx, but it looks like year-to-date you guys have spent $58 million for the first three quarters. So can you just kind of walk us through the spending to get to that $125 million $130 million over the next couple of quarters, please?

Yes, sure. So we laid out the capital. And by the way, thanks, Frank. Appreciate the question. [indiscernible] We laid out that CapEx expectation at the beginning of the year and it was really anticipating that we might need to place some early orders for a large-scale equipment for Origin 2. We expect that $125 million to $130 million budget that we laid out for Origin 1 is, we're still expecting mechanical completion by the end of this year. So I think, we'll likely hit that pretty cleanly. But I think that, what we're seeing right now is that we probably don't need to have quite as many orders for Origin 2, but we want to leave space for that and make sure that we have the sort of right capital allocation there. And in particular, we want to make sure that we don't exceed it. And so that was sort of the general thinking alongside that. But in any case, if it isn't spent this year on Origin 2, it will be spent sometime next year. We would expect all of that would be timing issues associated with CapEx, not a guidance up down in general for the project.

All right. And it makes some sense, given the fact that you're anticipating steel costs, et cetera. So the cost of the equipment to come down. And if we're looking at 2025, there's no rush to get the equipment right now. Is that the right way to read that?

Exactly, the right way to read that, Frank.

All right. Great. And then, I mean congrats on the ever-rising upward capacity reservations offtake agreements getting to $9 billion. As you think about that, and let's make the assumption that much of that comes to fruition. What does that get us up to in terms of origin numbers? I mean are we past two? Are we past three? Are we past four, in terms of that very large number?

Yes. Thanks, Frank. We are taking orders across all three plants for a variety of products and some products are more sold out than others. But yes, we've been taking orders on Origin 3 to be specific.

All right. Implying that Origin 2 is probably booked up at this point?

So Origin 2 is substantially committed for para-xylene and PET.

And so as we said in the script, our sales efforts are evolving to what we've talked about in the past of focusing on advanced CMF derivatives, carbon black and other high-margin products.

Got you. All right. Thank you so much.

Thank you.

[Operator Instructions] And our next question comes from Eric Stine from Craig-Hallum. Please go ahead Eric.

Yeah. Hi, it's Aaron Spychalla on for Eric. Thanks for taking the questions. First, maybe on just testing and sales cycle. Can you talk about the evolution there over the past year plus as customer demand has grown and the outlook there as Origin 1 comes online?

Yeah. So our sales cycle tends to be a relatively small number of relatively large deals, and they can take a variety of time to come to fruition. Some move really fast, some require more R&D engagement and things like that. So there's not really a number of months or things like that that I could point to, but I would say demand continues to be very strong, continues to be strong across applications and geographies, as well as strong across our product portfolio.

All right. And then, can you just give an update on the feedstock strategy? Any update there, pricing economics, margins as the market is developing and you're moving forward?

Yeah, sure. So feedstock strategy that we're expecting to use for both Origin 1 or Origin 2 is residuals from the timber and lumber processing industry. There are other feedstock that are available in the region of Origin 2 that we may also incorporate into that feedstock strategy everything from agricultural residuals to even things like post-consumer recycled corrugated cardboard or paper products, mixed paper, et cetera. So that's the feedstock strategy. Our interest in that is both economic because those kind of feedstock tend to be lower value to other industries. And so, of course, that means better economic value to us. But also there's a driver from a mission side too. Those feedstock often are used or not used in such a way that they release significant CO2 and methane emissions those biogenic or biologically derived feedstocks when they get put into a landfill for example, they will often decompose anaerobically in the landfill and generate methane emissions, which are really a very potent form of greenhouse gas, and so intercepting those kinds of biologically generated feedstocks even cardboard of course originally came from a tree somewhere and preventing them from going to the landfill and instead using them in our technology, which can ultimately lock it into a -- lock the carbon into a material is a particularly powerful way of avoiding and mitigating greenhouse gas emissions to using our technology in addition to as I said the economic benefits of using feedstock right there.

Right, right, understood. Thanks for taking the question. I’ll hop back in.

That concludes today's live Q&A segment. I will now turn it over to Ashish Gupta, Investor Relations to conduct the next segment of our investor Q&A.

Thank you Ross. As we've done on our last two earnings calls we invited all investors to submit questions for our third quarter call as part of our Ask Origin campaign. Once again we were pleased to see such a high level of participation and want to thank everyone who submitted a question. In the interest of time we'll be taking the most commonly asked questions. Our first question is for Rich. Rich, what are some customers in the investor presentation order book page unnamed, excuse me, why are some of the customers in the investor presentation order book unnamed? And when will you name them?

Yeah. So as you can see from the order book increase demand is very strong and we continue to see significant sales traction, and when it comes to actually press releasing these customers that's in close coordination with these customers. And sometimes, we don't announce some right when deals are signed or released their names for a variety of reasons. A notable example would be that some customers want to wait and announce their relationship with us in conjunction with their own broader ESG announcements. So we really defer to customers on when making our relationship public works best for them.

That makes a ton of sense. I appreciate the color there. John, since you did such a great job covering feedstock and our focus on sustainability of the biomass feedstock. I just wanted to see if there's anything else you wanted to touch on there or if we thought it was best to move on to the PFAS question?

Sure. No. Look we continue to consult with the leading financial institutions specializing in financing capital projects exactly like this. And we're pleased to reaffirm our financing assumptions for Origin 2 remain reasonable and achievable. I'll remind you that $400 million private activity bond allocation from the state of Louisiana we announced earlier provides a strong foundation for the financing of Origin 2. Again in combination with some of the non-volume tax-exempt financing structures this could enable the debt financing of Origin 2 using entirely tax-exempt bonds. We're continuing to work with the state and local agencies in Louisiana on our bond financing and we're pleased to report that Origin 2 financing remains on track. We're also continuing to work with financial institutions on other forms of traditional private financing, federal loan programs including through the USDA and the Department of Energy. I should also just reiterate that some of the federal programs that Rich mentioned earlier including the recently passed Inflation Reduction Act which can also provide incremental sources of funds for Origin 2.

Great. Really appreciate all of that extra color Rich, Sean and Nate. That will conclude the Q&A portion of today's call. I'll now turn it back to Rich for closing remarks.

Thanks, Ashish, and thank you all for joining us today and we look forward to keeping everyone updated on our progress. This concludes the call.