Q1 2023 Origin Materials Inc Earnings Call
The value of this tune ability is it it allows us to tailor our material can meet the needs of customers and to deliver product for a wide range of carbon black specifications, such as for tires mechanical rubber goods as well as developed products for applications like inks and paint pigments.
HCC has two characteristics, which can be readily chip first we can control in surface chemistry origin to HD can you start out with a level of surface functionality that fossil carbon black can obtain only with great difficulty in expense typically carbon black from petroleum starts out hydrophobic with few functional groups and expensive treatment is required to make.
More hydrophilic to attain the desired performance.
Furthermore, the treatment of fossil based carbon black has a limit and fossil based carbon black cannot practically attained the hydro for let's see the HCC naturally.
In contrast by treating HTC, we can remove functional groups to vary the hydrophobic of hydrophilic behavior.
Second we can change the morphology of HTC. This is valuable for carbon black where do you believe you need different specifications and performance criteria determined in large part by particle size shape and structure, we can affect both the micro morphology and macro mythology, the HTC clusters micro morphology by the process conditions that are of a reaction and macro morphology.
Great.
Putting it altogether the tune ability of HCC gives us the ability to address surface chemistry, and morphology, thus, providing us with tremendous power over the materials performance, having established this context I'd like to tell you about our recent H D C milestone.
Turning to slide 15, we were excited to provide an update in March on our continued strong progress on carbon Black's element, specifically, we produced a carbon black that when blended with fossil based carbon black's performed better than existing possibly its carbon black specifically and 660 are widely used in technically demanding performance specification for automotive tires and mechanical rubber goods.
The achievement validates the potential for our sustainable biobased low carbon carbon black to be used broadly in the large rapidly growing carbon black market. The <unk> 60 specification represent the gold standard, which origins practice achieved indicating the potential for widespread adoption of our carbon black not only in 660 application, but in less technically demanding specifications.
<unk> as well.
We look forward to bringing a host of benefits to this application space. One our material is a sustainable replacement for fossil carbon black with up to 100 per cent bio content and low carbon intensity.
Two our material shows no detectable levels of piling cyclic aromatic hydrocarbons or ph is three.
Three our material is expected to provide stable pricing largely decoupled from the petroleum supply chain, which is exposed to more volatility and supply chain based on sustainable wood residues.
We can expect our carbon black to be an attractive alternative to reclaimed carbon black since it does not suffer the same performance limitations and as we have shown can even exceed the performance of fossil based materials. Five we don't expect the production of origins carbon black to be affected by the same regulatory limitations in the United States, It's fossil based carbon black and six.
Finally, our studies have demonstrated that we can achieve superior dispersion and 10 delta quality, which offer performance advantages in tires related to durability and fuel economy.
Now having made several carbon black plants that exceed the performance of them took 60 highly technical carbon black specification, we look forward to further increasing the proportion of our material and similar plans in the future typical of carbon black development programs for tires and other applications.
Turning to slide 17, our HTC team has done an incredible job getting us to this point, we have a spectacular group of scientists engineers and commercial folks that specialize in carbon black in a carbon products everything from application development process, ensuring materials engineering materials analysis, and regulatory management represented the highest level in our team.
And we're tremendously excited about this group of people and what they can accomplish regarding.
Regarding origin to our second plant to be built in Geismar, Louisiana, We continue to advance frame design construction planning and financing we continue to make progress developing new products and applications, which may be incorporated into the design of the plant such as <unk>, which can be can predict D E F and carbon black in Biofuels, we expect to provide an update on new product offerings and construction plans for that.
In August 2023.
Summarizing I'm proud of how our team continues to execute against our origin won an origin to milestones approaching startup of fortune. One it is an exciting milestone in our mission to enable the world's transition to sustainable materials, we continue to advance our product development and commercialization roadmap create valuable new strategic partnerships and deepen our existing relationships to carry out our shared vision.
Or a more sustainable better performing chemicals materials industry.
With that I will turn it over to Nate to discuss some of the financial details.
Thanks, John I'll begin with a commentary on our first quarter results, then provide our financing expectations for origin to finish with an update on our 2023 outlook speaking to slide 18, we reported quarterly revenue for the first quarter of $1 $7 million associated with J D. A's and origin supply chain activation program compared with no revenue in the prior year period.
First quarter operating expenses were $13.0 million compared to $7 $6 million during the same period in the prior year.
Net income was $9 8 million for the first quarter compared to a net income of $7 $3 million in the same period in the prior year adjusted EBITDA loss was $9 $7 million for the first quarter compared to a loss of $6 $5 million in the same period of the prior year turning to our balance sheet origin ended the first quarter with 263.
$9 million in cash and cash equivalents in marketable securities a meaningful portion of Q1 cash expenditures related to the completion of origin won and are therefore non recurring.
Regarding the financing of origin to in early January we announced Louisiana State Bond Commission unanimously passed a resolution granting its vibrant.
<unk>.
The issuance of up to $1 5 billion of tax exempt bonds to support the construction and commissioning of the plant.
Mt is inclusive of and builds on the strong foundation of the previously announced expected $400 million in private activity bond volume cap allocation.
Fortunes use of solid waste feedstock to produce carbon negative materials enables the company to use these tax exempt bonds toward the financing of the origin to project Bank of America has been engaged by origin to underwrite the bonds and market them to investors, which could enable the financing of the debt of origin to using entirely tax exempt bonds.
Oregon continues to work with leading financial institutions on other forms of traditional private financing at the federal loan programs, including through the United States Department of Agriculture, and Department of energy and as we previously discussed we also anticipate various state local and federal tax credit grant loan and other programs, including those promoting advanced manufacturer.
From the inflation reduction act to be incrementally beneficial for the financing of origin to.
As rich mentioned, we continue to expect that origin to can be fully funded from a combination of existing cash on hand, previously indicated traditional project financing and potential strategic partnership given the origins ongoing global technology licensing effort and an active governmental affairs team, we anticipate strategic partnerships and federal incentive programs play a meaningful role in the financing of.
Oregon too again, we expect to provide an update on origin to an August 2023.
I will now wrap up with our 2023 outlook.
Maintaining our guidance for revenue of 40 million to $60 million and an adjusted EBITDA loss of 50 million to $60 million and with that I'll turn it back to rich for closing remarks. Thank you Nate in closing I would like to thank our customers our team and our partners for their contributions to our company's success and our shareholders for their support I'm incredibly proud of.
Our teams continued execution as we draw closer to commercial production and taking the next step in the world wants to know planet transition to sustainable materials.
And with that I'll ask the operator to open the line for questions.
Thank you well now begin the question and answer session.
A question you May Press Star then one on your telephone keypad.
Here tone and knowledge in your request.
So he is in a speakerphone please pick up your handset before pressing in any case.
Jay a question. Please press Star then two.
Pause for a moment as callers in queue.
The first question comes from Frank Mitsch from Fermium Research. Please go ahead.
Thank you so much and congratulations on the numerous partnerships that you formed I'm curious about into Rama given that it's the largest P. T company out there and obviously that's a natural.
Outlet for CMS into para xylene.
And you know obviously you have relationships with the brand owners the Pep season, Dan ons over the last couple of years, but in the Rama is kind of a Johnny come lately into the into the partnership how did that come about was that a was that a push from the brand owners or any sort of color that you could talk about the relationship that you have within drama and you know where do you think that that can go.
Yes, hey, thanks, rich thanks, Thanks for asking.
Yes, <unk> is an incredibly strategic partnership for us.
The world's largest producer of BT and for some of our other listeners.
Para xylene that we make.
80% of what goes into <unk>, so in terms of partnering with the.
Absolute global leader in the market to convert our para xylene into <unk> for our customers around the world.
Couldn't have a better partner than drama, we also lineup very well with their stated.
Sustainability goals that they called vision, 2030, and where they've committed to invest $8 billion into this initiative and really have sustainability of the top of their agenda. So you have incredible strategic alignment.
And it's a multifaceted partnership that we think will continue to to grow but initially we're evaluating using into Rama <unk>.
Facilities in the U S too.
The conversion and to produce bio based materials and then secondly to work together on creating a bio based samples.
Like kind of like smaller scale in the near term so that we can get those in the hands of our mutual customers. So a lot of a lot of ways to watch work together.
Fantastic Fantastic and then if I could ask a in your in the press release, you talked about hiring a financial firm too.
Two.
The underwrite the bonds and so forth for the Louisiana State tax.
Tax exempt bonds, just curious as to what you know roughly what what.
Thoughts you have in terms of a timeframe that you might be coming to market with those bonds understanding that origin to as a 2025 startups. So we are a little ways away from that.
Yeah.
Sure Frank the snake.
Yeah, So first I as we announced that.
Back in February we have hired bank of America to to help us bring that financing to market.
Really as far as far as timing like we said earlier in the call. We are going to have a full update on an origin to at all of our expectations around that in August so I'm one of them.
Hold on that until the until our full update at that point.
Understood. Thanks, so much.
[noise].
The next question comes from Steve Byrne from Bank of America. Please.
Go ahead.
Yes. Thank you.
The chemistry of what you guys are developing is.
Is continually evolving.
I just wanted to really fascinating every time, we get on a call with you your youre going down a new path.
And and.
Putting the interested in chemistry aside can you talk a little bit about your view of the potential value of these different pathways. I mean, if we think about where you know this process initially started as a way to produce P. T.
And now you can go down the spca pathway and maybe produce P. Yes for any of these other pure in derivatives.
How would you characterize the potential value of those versus P. T.
And then now you're going down this path of being able to convert HTC into effectively.
Carbon black.
You know derivatives for carbon black Conative, perhaps is a better way to describe it.
The value proposition here seems to continually evolve can you can you characterize it in your own view of of the the size of the value proposition versus.
The way you look at it now versus where it was previously it was just.
Our PBT, our bio based P T.
Yeah, Hey, Steve.
John Thanks for the question really appreciate it.
So I think I think if you zoom all the way out what we're really doing is developing a platform upon which you can build lots of other products in chemistry, and I think what you're referring to in this sort of evolution.
Additional products is we're exploring and discovering the highest value places to put the intermediates that come off of our platform.
I think when you look at the at the value proposition as you said of each of these individual products and end markets.
I think generally speaking and I am speaking quite generally when we talk about things being performance advantage that usually mean.
Better margin.
Higher value for the individual product itself, but then also.
When we when we go look at our new products, we are usually saying, okay well.
This is something that isn't in the industry right now it's performance advantage to it feels justified to do the additional work with a partner to develop that new product and the reason why we look at that is usually both because of the higher value products and because it is sort of easier lower cost materials.
Real to make off of our platform than just a drop in sort of incumbent so you were sort of getting it on both sides and a nice way.
On the price side and the cost side, usually when we're looking at the sort of new performance advanced materials and that's one of the reasons why we get so excited about them.
The other side is obviously the world uses an enormous amount of PDP right. Now we don't have to do a bunch of product development around TEP to understand that there is an enormous amount of demand for it so from an impact perspective products like PTT are just so important for us.
For us because we know we can scale.
I would say almost arbitrarily into that market relative to our ability to bring online capacity in the near term, but the more we can get into the performance advantage higher value kinds of products and believe that we can actually penetrated into the market reasonably.
The happier we are.
The short I guess, that's maybe a longer answer there I think the other side you asked about HCP I think the theme generic principles apply to our <unk> products, what's been really interesting with carbon black.
From HTC is we're finding as we get more sophisticated in our integration of that product into its applications in rubber.
We're finding that not only performs better than <unk> 60, which is the data that we published recently, but it did better without reformulating, the Robert and a critical part of a lot of these applications. How do you actually formulate the material into the end product right. So what are the other.
Components are added putting in with the rubber alongside the carbon black to make that carbon black performed just as well.
Generally speaking if you're willing to do a little bit of reformulation, youre going to get a higher value.
So we think about the <unk> Blanco surplus same way in all these cases, where we're talking about fulfillment of advanced materials and bringing it forward, we think of that as higher value lower cost kinds of that kind of materials as compared to RPX going into it.
And in addition to the higher value and lower costs. It would seem to me that there's this new pathway that you're pursuing with HTC going down and becoming a carbon black alternatives. The other.
Benefit it would seem would be.
The significant reduction in the CTO to emissions.
Maybe you would have some data on that my understanding is carbon black is.
Generates a significant cotwo emission.
Source and I'm, just curious as to whether this might be.
The end product.
Might enable you to get more funding if the Doe is looking for products that reduce the cotwo emissions.
<unk> C product versus carbon black could be pretty compelling.
For just the Cotwo footprint.
Yeah, I mean, we see a huge opportunity to reduce this year.
<unk> footprint as carbon black and that of course.
One of the major markets that carbon black is using which is tires and of course tires are a really significant part.
Materials consumption for for automobiles right. So I think huge industry lots of opportunity for positive impact I think we're pretty optimistic about.
Sort of our ability impact.
Tier two footprint broadly and so we think there's lots of lots of opportunities for us to get various incentives and things like that for for our work there without being specific about exactly which one but I think theres actually another interesting dynamic in their carbon black world and Thats. It in carbon and the current macro out there says C O two emissions which of course as.
We just discussed I think we have a big opportunity to improve that but they are actually just general pollutant emissions associated with carbon black production, as well, which especially in North America has really limited the ability to bring online economically new supply using older property.
Because of the way, we make our carbon black from HTC.
We don't think that we will be subject to those same kinds of constraints and bringing online supply and so we think there is actually sort of another.
Layer to the opportunity in <unk>.
Carbon black where we can really we can expand production capacity in North America in a way that other players may be challenged to do in the future.
Thank you.
Your next question comes from Eric Stine from Craig Hallum.
Go ahead.
Hi, everyone.
Yeah.
Eric Hi, Greg, Hi, Hey, Hey, Brad.
Nowhere it happens all the time.
So I can I can appreciate the strategy.
Our strategy changed a little bit.
Look more at the revenue generation and higher margin products.
Given the.
Given where demand is or the octane value has moved now and I think that probably fills plants three or four against close and you've got the scarcity value I'm. Just curious I mean, how is that driving interest on the licensing side companies didn't seem like maybe they can get to market faster if they go that route.
Yeah, Eric It's a great question. So we.
We were excited to announce our first.
Licensing exploration partnership this quarter with CGP.
As an example.
Of a company that has a lot of different assets, including a lot of eucalyptus and a need for sustainable packaging and a lot of other capabilities and so working with them to explore.
In Asia based facility.
As an example of our licensing efforts.
We do continue to receive inbound interest and sort of.
The announced share those as appropriate but.
Yes, I would say more and more.
Companies with various feedstocks and obviously with origin, one being mechanical candidly complete an online soon I think will only increase the interest and that's also the kind of thing that we can use origin wanted to do is test yields and do various tests for some of these various licenses license in scenarios that our partners want to.
Explorer.
Got it and I guess, good segway to origin, one I mean, I know that this plant obviously smaller than what you envision for Oregon, two and beyond.
Just curious how that plays into things, obviously, making a lot of different products getting those out into the market increasing your reach do you think that other companies go the route.
What you just disclosed about Pepsi in terms of amending agreements to get into some other areas.
Yes, I think.
We continue to have a lot of customers, who want access to multiple materials.
We recently announced a deal with Tsi and they are interested in.
And PDF and HTC.
To go into a really wide range.
Markets and there's a lot of our customers are chemical companies and companies that can.
Take these materials in a lot of different directions, we think that'll continue to be the case and on the polyester side alone. We do think there are a lot of companies that need a lot of ped and will need a lot of ped for a long time, what I'm really interested in the value propositions around PCF and PDF and certainly excited.
Excited too to explore those sort of next generation polymers.
Got it I mean do you think you kind of what he is doing is kind.
Kind of tip of the iceberg in that more companies.
Go that route or I mean at this point do you kind of view that as a one off and you will see how things progress going forward.
It's hard to say I would say.
I think.
There's obviously an enormous demand for <unk> and I don't think that that's only going to continue to grow but there is interest from multiple of our customers and FPGA and <unk> and so that's a.
But the newer.
All of them are for them and I think there to that.
And I do think we'll continue to grow as they.
Learn more about it and.
Test it and develop on top of it so sorry, I think we'll continue to see more of those.
Okay. Thank you.
Thank you.
The next question comes from John Roberts from Credit Suisse. Please go ahead.
Thank you.
Revenue capacity for Oregon, one still a $120 million.
Do any of these new contract pull that forward from 2025 target that you had before.
Yeah.
Yes, Hi, John .
This is rich I think.
We reaffirmed our revenue guidance for this year.
Haven't.
Even at four for next year, yet, but as origin won.
It comes online.
This quarter and continues to ramp.
And we continue to use it as a strategic asset to get.
Large scale samples in the hands of customers and do joint development agreements around those samples and explore licensing arrangements and those kind of things I don't think there's any reason to think our outlook on on one.
Has materially changed.
Okay, and then secondly origin, one have any HTC sold commercially.
660, carbon black and blends and fossil and click through.
[laughter].
It's a great question.
I think that it's pretty clear that we'll be making some material from origin, one off of the <unk> that's going to be.
I'm not sure that we're ready to call. It 60 centric teams to perform a little better than <unk>, but.
But I think we will be making a carbon black grade that will be using this application can't speak to the volume.
We are ready to talk about the volume that will specifically be allocated to that application at this point, but I'd say it'd be.
I'd be surprised if we weren't making some pretty meaningful volumes of that off of our Oman.
Thanks, and congrats on the progress.
Thank you.
Yeah.
Yeah.
The next question comes from Pavel <unk> from Raymond James.
Go ahead.
Yeah.
Thanks for taking the question.
The press release that after this quarter you will no longer be.
Reporting the off takes and capacity of reservations what led to.
The decision to stop.
Disclosing that number.
What is quite quite quite useful over the years.
Yes. Thanks, Paul This is rich we felt like that number has grown nine X.
In a relatively short period of time and the reason we were focused on that was to prove that we had a lot of demand beyond packaging and so that number grew very rapidly and in fact I would say it grew kind of more rapidly than we would've expected and we talked about a couple of quarters ago that we really feel like we've proven that demand.
And we've got demand for several.
All of them to scale plants, and so continuing to just keep growing that demand.
It wasn't really the right focus and instead, we would focus on joint development agreements and.
Licensing relationships and revenue generation and some of Thats, what you even here in our product advancements like we've been talking about.
Some of that stuff comes from working with other companies closely and spend in our partnership resources on developing deeper relationships for example, with companies that make carbon black or tires or things like that in the case of HTC. So we think it's going to keep growing we will continue to update that number as appropriate, but we just thought it increased.
Sort of.
Wasn't super helpful and we generally get the feedback from investors that they have really no doubt that there's massive demand for our materials.
And that will be supply constrained for a long time, so that's some of the rationale.
Understood, but let me follow up on Orange.
So you're obviously right on the cusp of startup.
Have your thoughts changed about how long it will take.
For origin, one to reach steady state operation I think 36000 pounds.
A quarter of production something like that or are we still looking at a 12 month kind.
The timetable for that or what's the latest.
Yeah, Thanks, Bill I think.
Generally speaking our view Hasnt really changed there.
A meaningful part of that is is really not looking at it and saying, Okay. We're going to make sure that there is exactly this increase in percentage ramp up capacity ramp up on a month by month basis, but more reflecting that generally speaking both the demand for specific kinds of customers.
For specific kinds of materials from customers.
Is a little bit uncertain, and probably a stronger driver for us than just maximizing capacity at fab.
As we can and then the second is sort of reflecting our recognition that theres always some uncertainty around exactly how fast we get these things up the scale and we want to try it out.
Under promise and over deliver to the extent that we can for those kinds of things. So I think.
It's not to say that we haven't learned anything at all from from <unk> at this point since the last time, we talked about this but I think we haven't learned something that would materially change our view of the sort of time scale.
Bringing on one all the way up.
Yes, no that's clear appreciate it guys.
Thanks, Thanks, Mike.
Ill.
That concludes today's Q&A segment, I will now turn it over to his group that Investor Relations to conduct the next segment offer investor Q&A.
Thank you operator, as we've done our last four earnings calls.
For today's call we invited all investors systemic question as part of our ask origin campaign. Once again, we were pleased with a very high level of participation and want to thank everyone who has submitted a question in the interest of time, we'll be taking the most commonly asked question.
Our first questions are for rich.
Rich.
What is the origin developing what's S. CGP is retrofitting a factory can you talk about the terms or possible revenues from future licensing.
Yes, it's a great question and <unk> is a really interesting company as I discussed previously.
And what we're really doing is working with them to explore the feasibility of being able to make large commercial quantities of of <unk>.
In Asia, using eucalyptus is a feedstock and so we were excited to have received eucalyptus from them.
That said in our <unk>.
Plants and to have proven out the debt yields on eucalyptus are attractive and that that seems like a very feasible feedstock.
Foreign origin plant and so we will continue working with them on the feasibility assessment and look forward to working with other companies.
On similar sort of.
Projects.
Do you think licensing could be a significant source of revenue over the next few years.
I do.
Certainly a source of some revenue as we will we will likely be able to be compensated for some of these explorations that we do with with various partners.
How serious and the timing is still not not all that clear but.
It is clear that a lot of companies need an entire origin to scale plant.
Or more for their own needs, which quickly leads us to a licensing kind of conversation in terms of it would make sense for us to build a plant for a for a single customer.
Part of our initial plants and so.
I think that could lead to up to a pretty meaningful.
Revenue.
In the relatively near term, it's just really hard to say, how much and by web, but we continue to make a I would say a lot of progress on the licensing front.
Great really appreciate that color rich with that we'll now turn to some questions for John .
Question for John John .
Are there any key learnings from all of them one.
Building commissioning process that.
Thank you want to take into consideration for two and beyond.
Yeah sure I think.
There are quite a few things.
We have been learning I think probably the most important set of Ben I think that we've learned are around the way that we specifically, we'll do capital projects execution.
I remind investors pretty regularly.
But we're really doing two things we're both.
Scaling a technology, but we're also scaling the organizational capabilities of origin with these kinds of projects and so.
When it comes to our capital projects like well boy, it's a good sized project, where you really have to test.
Our our sort of fit in form of our processes and the way that we execute that and I think we've learned quite a bit about how to do that right and what was what did we have to end at muscle our way through it because we frankly didn't do it as efficiently as we could have and what are the things that man that really just worked fantastically and we'd like to make sure. We do that in the future every single.
And so I think that's been that's been pretty significant in terms of the number of things one there I think a lot of that is.
He is going to be very transferable to <unk>.
And.
The other thing is that we are well along that same line as we brought together a lot of spectacular people from a lot of different organization each of which is.
Individually are capable at a capital project execution engineering design.
And manufacturing and so across each of those areas. We're trying to understand what are the pieces.
The way that some of those great companies that people from those great companies.
Do each of the parts of the capital project confusion and meld that together.
It really clear waved.
That is sort of done.
You get a great some of the parts in terms of our organizational capabilities. So I think theres been quite a bit there I think on the technology side. There are some small things, where we say boy I think we'd rather do that a little differently or maybe we want to change the stack of.
Particular components in the process, but I would say at this point.
So quite modest I would say sort of nothing that really jumps out for us but of course as we.
We started up and ramp up capacity on all of them on we're going to learn a different set of things about the technology and organizational capabilities. So I think we're all looking forward to that.
That's fantastic really appreciate all the detail there John .
It sounds like we can take a lot to Oh, I'm two and beyond.
And with us to both rich and John .
Absolutely not.
To conclude the Q&A portion of today's call.
Turn it back to rich for closing remarks.
Thank you Jason and thank you all for joining us today for all the great questions and for your interest in origin. This concludes today's call.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
[music].
Yeah.
[music].
Okay.