Origin Materials Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 10 speakers on the call.

Operator

You for standing by. This is the conference operator. Welcome to the Origin Materials Second Quarter 2023 Earnings Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

Operator

I would now like to turn the conference over to Ashish Gupta, Investor Relations. Please go ahead.

Speaker 1

Thank you, and welcome, everyone, to Origin Materials' 2nd quarter 2023 earnings conference call. Joining the call today from Moragen Materials are Co CEO, Rich Treile Co CEO and Co Founder, John Bissell and CFO, Nate Whaley. Ahead of this call, Origin has issued its 2nd 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.

Speaker 1

These statements reflect our views as of today and should not be relied upon as representative about views of any subsequent date, and we undertake no obligation to revise or publicly release that could cause actual results to differ materially from expectations. For further discussion on the material risks and other important factors that could affect our financial results. Please refer to our filings with the SEC, including our quarterly report on Form 10 Q filed on August 9, 2023. In addition, during today's call, we will discuss non GAAP financial measures, which we believe are useful as a 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.

Speaker 1

You will find additional disclosures regarding the non GAAP financial measures discussed on today's call in our press release issued this afternoon and our filings with the SEC, 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 John.

Speaker 2

Thank you, Ashish, and thanks to everyone joining us. Today, we will be referring to the slides that were posted in the Investor Relations section of our website related this afternoon. I will begin with a discussion of OriginOne startup, provide an update on OriginOne and discuss product development. Rich will then review our Q2 highlights and provide a commercial and regulatory update. Nate will conclude with the financial overview.

Speaker 2

Regarding OriginOne and the continued progress made by our team, I would like to point you to a new video that we posted today in the Investor Relations section of our website providing a closer look at plant startup. I will begin on Slide 5 with an update for OriginOne. In late June, we announced that OriginOne, the world's 1st commercial scale plant to produce Origins Intermediates, CMF, HCC and oils and extractives, and initiated start up in line with prior guidance. This is a tremendous milestone in our journey to de harmonize the world's materials. It is also a testament to the strength of our team, which faced considerable COVID-nineteen and other related supply chain headwinds.

Speaker 2

OriginOne, located in Sarnia, Ontario, Canada, scales up our core technology platform for converting sustainable wood residues into intermediate chemicals, and we expect the power of our platform intermediate transformative for the chemical industry and how the world makes physical goods. OriginOne is first and foremost a strategic asset to qualify applications of our intermediates. Apart from paraxylene and Bio PET, using product from Origin 1, we plan to explore or qualify FDCA, epoxies, resins, We remain confident that we'll be able to meet our production goals to support our revenue guidance. OriginOne enabled the commercial scale production of CMF, a versatile chemical building block that can be used to make numerous downstream products, including paraxylene, which is a precursor to PET plastic and SCCA, which can be used in numerous sustainable products and materials such as the next gen polymer PEF. The commercialization of a molecule like CMF is historic, on the order of the commercialization of the ethylene molecule.

Speaker 2

After working with CMF for over a decade, we couldn't be more enthusiastic. Turning to Slide 7. We say that CMF is a new chemical building block. But what do we mean by that? An important chemical building block has a low cost of production, high versatility across applications and differentiated performance.

Speaker 2

What we've seen historically is that when you combine those three qualities, you have a high impact building block. Throughout history, a relatively small number of key chemicals have unlocked and transformed The most recent ones, polycarbonate, acrylate, and urethanes were commercialized in the 1980s. Introducing a new building block chemical, it's hard and takes time, But it's worth the effort. In 1942, ethylene reached a major milestone, the first production of ethylene through the catalytic cracking of ethane. What followed was decades of process improvements, market penetration and the rise of ethylene to $125,000,000,000 market.

Speaker 2

CMF is a similarly powerful molecule due to its low cost production, high versatility and differentiated performance. In the case of CMF, The differentiation is the low carbon intensity when it's produced from biomass using the origin process and the performance advantages of some of its applications. Over the next decade, growing CMF will be analogous to growing an oak tree.

Speaker 3

For the 1st few years, most of

Speaker 2

an oak's growth occurs underground as the root system is established. Only then does the tree get taller, stronger, grow branches and become a mature oak. Similarly, in the chemical building block business, the first phase is to establish a foundation for long term growth. We are engaged in these foundation building activities every day, and we are excited about and committed to the journey ahead of us. Turning to Slide 8, we see CMF's versatility and transformative power.

Speaker 2

Here, a simplified chemical product manifold describes some of the chemistry that CMF makes possible on an industrial scale. From CMS, we can develop new classes of diols, amines and diacids in addition to drop in molecules like paraxylene, which you're familiar with the precursor to PET plastic. Those chemical families in turn can be used to produce a range of surfactants, epoxies, polyurethanes, polyamides and more. Growing and cultivating the branches of our CMF tree is the job of R and D and the work we do in collaboration with our partners. Turning to Slide 9, we are excited to announce the mass production of FTCA, a high value downstream application for CMF Now we'll move forward to Origin 2 rather than Origin 3 as initially planned in April 2021.

Speaker 2

We're bringing FTCA forward for several reasons. First, we've seen stronger FECA commercialization progress than we anticipated 2 years ago. 2nd, FECA applications tend to be performance advantaged and not to offer higher margins than terazimic PET. 3rd, we have validated the drop in deployment of FPCA within the PET market, providing a clear path commercialization that is on strategy for us and our customers. 4th, we are excited for the potential of FTCA in other polyester and nylon applications, and we look forward to providing updates on these as appropriate.

Speaker 2

In summary, we are seeing broad support and momentum for FTCA commercialization. Indeed, the U. S. Department of Energy has previously shortlisted FTCA as one of the most promising biochemicals of the future. Turning to Slide 10, our FECA go to market strategy is to begin with drop in applications before moving into higher margin applications requiring additional development work.

Speaker 2

These drop in applications are not expected to require meaningful retooling of existing methods of production. We expect to develop FTCA within offering performance advantages compared with traditional PET 2, commercialize the advanced polymer PEF, which also offers performance advantages compared to traditional PET. Today, we are providing an update for Orkin 2, our 2nd commercial plant to be built in Geismar, Louisiana. As just mentioned, we continue to make progress developing products and applications related to the design of Origin 2, including FDCA, PEF and liquid biofuels derived from our oils and extract While Origin 2 will focus primarily on FPCA production and some of our PET customers have already begun expanding their orders to include FPCA, We remain committed to providing paraxylene for our Bio PET customers and plan to bring commercial quantities of paraxylene to the market before 2,030. While our current plan is a rational prioritization of Origin's resources towards more profitable, typically performance enhanced chemical applications at Origin 2, We also see massive demand for our drop in bioparaxylene.

Speaker 2

We believe that the best way to meet this demand will be through collaborations with others. We've been in active discussions with multiple strategic partners who are interested in licensing or co developing low carbon bioparathyroidism plants using Origin's technology, both in the U. S. And across the globe, and most of which are large, well capitalized industrial producers of Petro PTA, PET and other downstream products to recognize the need for more sustainable products. We are also updating our previously disclosed capital budget and construction timeline for Origin 2.

Speaker 2

As we first indicated in May 2022, we are facing a higher cost capital project environment than in early 2021 when we announced the initial plan for Origin 2. As such, we are revising the plant's outlook and introducing a phased approach to construction. Adapting in this manner to the high cost environment helps to reduce project risk as we move forward on the path of profitability. Turning to Slide 11, since Origin became publicly traded into 2021, we have witnessed profound market shifts presenting both opportunities and challenges. Factors influencing our updated plan include significantly higher than anticipated demand for higher margin products, including FPCA, DEF and liquid biofuels increased cost of labor materials, process inputs and metallurgy due to volatile global market material markets requiring and sharing rework, inflation and higher interest rates and higher costs due to COVID related supply chain constraints and additional value and have extended project timeline.

Speaker 2

Turning to Slide 12, we now expect Origin 2 to be completed in 2 phases, with Phase 1 estimated to be completed in late 2026 to 2027 and Phase 2 estimated to be completed in 2028, compared with our initial expectation for a mid-twenty 25 completion. During Phase 1, the company expects to achieve profitability from its oils and extracted stream. From this stream, Origin plans to produce a drop in biofuel with potential applications including marine fuel and heat and power generation. Potential benefits include improved energy density compared with existing renewable alternatives and the sustainability benefits of increased biocontents. Value proposition is expected to be in high demand given among other things the decarbonization goal set out by the International Maritime Organization, a body of the United Nations.

Speaker 2

Phase 2 will expand production to include the mass production of Platform Chemicals, CMF and HTC. Phasing the plant intended to enhance overall efficiency while improving short term and long term economics. The capital budget for Phase 1 of Origin 2 is expected to be up to $400,000,000 The capital budget for Phase 2 is projected to be up to $1,200,000,000 This compares to the original $1,070,000,000 aggregate capital budget estimate first provided in February 21. As Nate will discuss in more detail, we are exploring multiple opportunities to finance Origin 2, including a combination of existing cash, previously indicated traditional project financing, federal and state government programs, licensing agreements and strategic partnerships. We expect capital expenditures of up to $50,000,000 for 2024 with the majority of Origin 2 capital spend to occur following the project's final investment decision or FID in 2025.

Speaker 2

In summary, the Origin 2 project represents a significant scale of our technology, core processing capabilities. This scale up will be instrumental in enabling Origin to execute on its mission and greatly expands our ability to deliver product and address customer demand. We remain deeply committed to the project and we will do the work, make the investment and build the relationships to make Origin 2 a success. With that, I would like to turn it over to Rich, who will review our Q2 highlights and provide a commercial and regulatory update.

Speaker 4

Thanks, John. Moving to Slide 13, customer demand remains strong with offtake and capacity reservations now exceeding $10,000,000,000 up from $9,300,000,000 in February 2023. We are excited to have crossed this significant milestone and to highlight that the majority of the growth in demand was for FTCA, which is where our team has been focused. As mentioned in prior calls, we do not plan to provide updates on this number every quarter, but we'll provide updates as appropriate. We are maintaining 2023 guidance for revenue of $40,000,000 to $60,000,000 and adjusted EBITDA loss of $50,000,000 to $60,000,000 We're also pleased that revenue generated by joint development agreements and our supply chain activation program continue to grow in the 2nd quarter in line with guidance.

Speaker 4

We continue to see strong positive tailwinds for our technology and business model. Origin continues to explore several programs funded by the IRA or Inflation Reduction Act, including the Department of Energy's Advanced Industrial Facilities Deployment Program or AIFD, which we expect to hear feedback on by the end of the year, and the Section 48 Advanced Manufacturing Tax Credit. We remain optimistic that these programs could provide meaningful support for the construction of Origin's plants. Turning to Slide 14. In early August, we were excited to announce a strategic partnership with Sustania Bioglycols, A joint venture between Braskem, the largest thermoplastic resin producer in the Americas and a global pioneer in biopolymers and Sogits Corporation, A Japanese global trading company with wide ranging market networks and a strong presence in Asia.

Speaker 4

Our partnership centers on advanced bio based Materials and as part of the partnership, Sustania signed 2 multiyear capacity reservation agreements to purchase renewable chemicals from Origin, including bio based BTA and bio based SCCA. Turning to Slide 15. In late July, we were pleased to announce that Origin and Husky, A pioneering technology provider of injection molding equipment and services to the food and beverage packaging and consumer products industries and achieved a milestone in the commercialization of PET incorporating the sustainable chemical FDCA for advanced packaging and other applications. Specifically, Origin successfully polymerized the bio based sustainable chemical fpca into the common recyclable plastic PET. Husky then molded the resulting PTF hybrid polymer into preforms that were then blown into bottles.

Speaker 4

The company has used Husky's injection molding technologies and manufacturing equipment, a commercial manufacturing scale level of processing demonstrating the ability of PTF, Polymer made with FDCA to be integrated into existing PET production systems. This innovation demonstrates a pathway for the drop in market adoption of FDCA to produce superior polymers cost effectively from biomass using Origin Technology. Our PETF polymers offer improved performance compared with traditional PET plastic, with properties like enhanced mechanical performance and superior barrier properties controlled by adjusting manufacturing conditions and the quantity of the FDCA copolymer. Turning to Slide 16. In early August, we announced a strategic partnership with Terfane, A global leader in specialty PET polyester films to produce sustainable high performance biopolymer films.

Speaker 4

As part of the partnership, Turfane signed a multiyear capacity reservation agreement to purchase the advanced biopolymer, PEF, for use in film applications, including food and beverage packaging and high value industrial applications. Turning to Slide 17. In early August, we announced a strategic partnership with ProMed, A leader in natural gas derived products and one of the world's leading producers of methanol, centered on low carbon biofuel production, utilizing Origin's technology platform and Promen's worldwide fuels capabilities and expertise. As part of the partnership, Promen and Origin Materials signed an agreement to explore the production and global distribution of low carbon biofuels. Low carbon intensity biofuels made from wood waste reflect the future of biofuels as the industry moves aggressively towards decarbonization.

Speaker 4

Origin's technology platform is uniquely positioned to deliver these renewable fuels using our oils and extractives intermediate stream. We are excited to partner with Proman, a company that brings significant expertise across engineering, procurement and construction related to world scale sustainable technology development. Over the long term, we see the potential for biomass derived low carbon intensity fuels to be used in marine and other transportation fuels, industrial applications, Heat and Power Generation and more. Turning to Slide 18, in early August, we announced And new product line with Origin's all PET bottle caps and closures. In 2021, the global caps and closures market was $65,000,000,000 This market is expected to grow to approximately $100,000,000,000 by the end of the decade.

Speaker 4

Today, caps are typically made from a different material than bottles, presenting challenges for recycling and separating material streams and putting a ceiling on the amount of recycled content that can go into a bottle. The industry has long sought a mono material solution for caps and bottles. So we are thrilled to have launched our all PET bottle caps and closures business. Apart from improving post consumer recycling, our design and manufacturing innovation makes made with 100% recycled PET possible from cap to bottle. Origin's PET caps may be cost competitively produced with any type of PET from recycled PET to Origin's 100% bio based carbon negative virgin PET.

Speaker 4

Notably, PET performs better than HDPE and PP common cap materials offering improved oxygen and CO2 barriers. With our PET caps business, we identified a global sustainability challenge and an opportunity to solve it. An all PET bottle cap enclosure system is an obvious necessary next step in beverage packaging and recycling. We are proud that our team's expertise in PET led to this tremendous advancement for recycling and we look forward to providing updates on this new business line. I'd like to take a moment to spotlight how our platform is stronger today When we first became public and provide a look ahead, turning to Slide 19, over the last 2 years, our platform evolution can be summarized in one word, performance.

Speaker 4

When we first listed on the NASDAQ, we called ourselves the world's leading carbon negative materials platform, emphasizing our competitive cost of production and powerful carbon advantage. Since then, we've developed higher margin, higher performance products such as carbon black for automotive tires and products such as FPCA, PEF and our hybrid polymer PETF. Reflecting the strong pace of innovation, we now own intellectual property across 31 patent families, more than a 50% increase since February 2021. Our Performance Advantage products carry all the benefits of our platform in terms of competitive cost of production and low carbon footprint, but include additional benefits specific to their applications. Because of our success in these developmental efforts, today we are proud to say high performance, Low carbon, better materials, start with Origin.

Speaker 4

Turning to Slide 20, the Origin platform stands apart from other technologies by offering the best value uplift for biomass. Origin is fundamentally economically advantaged compared to other biomass conversion technologies. This is because of the simplicity of our technology, which is able to chemically convert woody biomass into chemicals, a more direct means of producing intermediate chemicals than alternative processes like pyrolysis with almost 0 carbon loss during the conversion. Our products can command a premium for their sustainability and performance characteristics across a wide array of applications. The result is that our platform, which acts something like a petrochemical refinery, which utilizes biomass as the key feedstock instead of oil, is able to deliver several times the margin of competing technologies.

Speaker 4

Turning to Slide 21, we expect the gross margins of our intermediate streams to grow stronger with time. Product development, the versatility of our intermediates and economies of scale will drive long term value creation. For those who have followed our story, You've already witnessed our platform evolve to take advantage of higher margin opportunities, most notably with the acceleration of FDCA to Origin 2. This is just one example of our strategy of pursuing the highest value, most impactful opportunities for our Versatile platform. Turning to Slide 22, often we are asked who our competition is.

Speaker 4

The answer is simple, capacity is our competition. The chemical industry, our supply chain partners, consumer brands, all of us are working together to achieve the same goal, better materials that help fight climate change. Our ability to grow our business is not limited by competition, it's enhanced by cooperation. The way we win is to bring on additional capacity as quickly, intelligently and safely Our strategy is twofold, build and license. While we plan to build, own and operate Origin 1 and Origin 2, Licensing is key to our ability to scale rapidly.

Speaker 4

Last quarter, we announced our first potential licensing agreement with SCGP. We continue to explore other licensing agreements with many of our customers and we are well positioned to take advantage of a host of strategic opportunities around the world to increase production strategically in a way that plays to local strengths, whether it's feedstock availability, government incentives, gilt industrial talent, converting existing facilities or other opportunities. Turning to Slide 23, in early June, we were thrilled to announce the appointment of Jim Stefano to the Origin Board of Directors. Jim's proven track record leading manufacturing and technology initiatives for global companies is highly complementary to the skill set of our Board and will prove invaluable as we ramp up OriginOne operations throughout the year and begin commercial production. Jim brings to Origin over 30 years of experience in the manufacturing, operations and engineering, including his current role as CEO of Integrated Project Services, an engineering and construction services provider to the life sciences sector.

Speaker 4

With that, I will turn it over to Nate to discuss some of the financial details.

Speaker 3

Thanks, Rich. I'll begin with a commentary on our Q2 results, then provide our financing expectations for Origin 2 and finish with an update on our 2023 outlook. Speaking to Slide 24, we reported quarterly revenue for the Q2 of $6,900,000 associated with JDA's and Origin's supply chain activation program compared to no revenue in the prior year period. 2nd quarter operating expenses were $14,400,000 compared to $8,700,000 during the same period in the prior year. Net loss was $6,300,000 for the Q2 compared to net income of $46,900,000 in the same period in the prior year.

Speaker 3

Adjusted EBITDA loss was $11,700,000 2nd quarter compared to a loss of $6,900,000 in the same period in the prior year. Turning to our balance sheet, Origin ended the 2nd quarter with We announced that the Louisiana State Bond Commission unanimously passed a resolution granting its final approval of the issuance of up to $1,500,000,000 of tax exempt bonds to support the construction and commissioning of the plant. This amount is inclusive of and builds on the strong foundation of the previously announced expected $400,000,000 in private activity bond volume cap allocation. Bank of America has been engaged by Origin to underwrite the bonds and market them to investors. We continue to believe that debt financing of Origin II could be achieved using entirely tax exempt bonds.

Speaker 3

Origin continues to work with leading financial institutions on other forms to traditional private financing and federal loan programs, including through the United States Department of Agriculture and Department of Energy to pursue other local, state and federal incentive programs to optimize the financing of Origin 2. These include certain 2021 Infrastructure Investment and Jobs Act and 2022 Inflation Reduction Act provisions, including the Department of Energy's Advanced Industrial Facilities Deployment Program or AIFD and the Section 48C Advanced Manufacturing Tax Credit. Finally, given Origin's ongoing global technology licensing effort and an active governmental affairs team, we anticipate strategic partnerships as well as state and federal incentive programs to play a meaningful role in the financing of Origin 2. I will wrap up with our 2023 outlook. We are maintaining our guidance for revenue of $40,000,000 to $60,000,000 and an adjusted EBITDA loss of $50,000,000 to $60,000,000 And with that, I will turn it back to Rich for closing remarks.

Speaker 2

Thank you, Nate. In closing, I would like to

Speaker 4

thank our customers, our team and our partners for their contributions to our company's success and our shareholders for their support. With that, I will ask the operator to open the line for questions.

Operator

Thank you. We will now begin the question and answer session. The first question comes from Steve Bryan with Bank of America. Please go ahead.

Speaker 5

Yes, thank you. A couple of questions here on Origin 2. Is any of the delay in the cost increase because of shifting the focus away from paraxylene over to the FTCA? I kind of suspect not, but wondered if that was part of it. And maybe more importantly, when you first rolled out your financials For Origin 2, you were targeting 1,000,000 tons of biomass feedstock into that plant.

Speaker 5

Is that still the design? But more importantly, you were targeting $0.16 a pound of margin from this PET pathway As you move towards more of a FDCA pathway, what would you suggest is a more reasonable margin that that plant You think is going to be able to produce?

Speaker 2

Hey, Steve. Thanks for the questions. Good questions. So first, I'll go through each one in order. So first, you asked, is FTCA and shipping towards that kind of product base Part of the capital increase and schedule shift.

Speaker 2

And the answer actually is In part, yes. It's not the only thing, but it's meaningful. So looking at these other products, One, it takes more time, right? So we obviously didn't expect to be producing those kinds of products off of OM2 when we originally provided our estimates on schedule and cost. And so there are changes that get made.

Speaker 2

I'd say, generally speaking, if you're looking at FTCA, That has more of a schedule impact than it does an overall cost impact. And then for things like carbon black and other higher value HDC products, That has both a schedule and a cost impact. So those are a part of it, although again, they're not the only thing. They're not solely responsible for that. From a scale perspective, one of the things that's somewhat unusual for Origin Specifically as a chemical company is that we tend to be more capital constrained than the typical chemical company that's going after the kinds of plants and projects, Frankly Technologies that we are.

Speaker 2

And so consequently, we have to adapt to increase cost environments By also reducing the scope of the plant, not just by raising additional capital, right? We need to be Disciplined with the way that we approach these kinds of projects. And so consequently, in a higher cost environment where we're going in general, right, which includes some of the things that we enumerated by things like higher materials prices, obviously higher labor costs, energy, all sorts of things like that. As a consequence of those, we need to adjust by scoping down the scale of the plant. And so we expect that we're going to have a smaller scale plant than the 1,000,000 tons of biomass fed originally.

Speaker 2

And we provide a summary of that on one of the appendix slides in our earnings presentation. But generally speaking, we're expecting by the time we're done with this plant to be at about 500 KTA of feedstock rather than $1,000,000 Sorry, and then margin. So For margin, we haven't given an explicit margin as a result of all of those things. What you can see is if you on that same slide that I just referenced, which is in the appendix portion of the presentation. What you can see is 500 ks of feedstock and we're expecting just under $300,000,000 per year of EBITDA on

Speaker 6

Thank you.

Operator

The next question comes from Frank Mitsch with Fermium Research. Please go ahead.

Speaker 7

Good afternoon. Good afternoon, folks. Yes, it seems like a pretty big pivot on Origin 2, Particularly when you're going after biofuels, can you talk about the risks associated With that, given the fact that you have all these capacity reservations on paraxylene, that was the kind of the first thing in hand. And also in terms of the capacity reservations and so forth, how now that you're pivoting and delaying Pretty meaningfully, what are the chances that some of those capacity reservations go away? But yes, if you could talk about the timing delay, the pivot and why is the FID in 2025 not in 2024?

Speaker 2

Yes. So thanks, Frank. Appreciate the questions. So first one is On market demand in general, so for both the biofuels product and also for FPCA and some of our HTC related products, I think we see very, very strong demand for each of those 3 product categories. I think It's worth saying that that was a very significant contributor to our view of the new hot slate and the new scope for Origin 2 and absolutely not to be underestimated.

Speaker 2

That said, of course, a huge proportion of our Capacity reservations and optic agreements are, as you said, for paraxylene. We have seen so far customers are very committed to the long term of paraxylene with us. And we, of course, are no less excited about paraxylene than we have ever been. And in fact, as we mentioned, I think during the earnings script, We really see a very attractive pathway forward for paraxylene that takes advantage of Working with strategic partners of various sorts who have lower cost of capital for these sorts of things in general as compared to Origin right now. So we're excited about paraxylene.

Speaker 2

We remain excited about it. Our customers remain excited about paraxylene. And frankly, a huge part of the Look towards products such as the FTCA and the Spiroseal product are the result of demand, very strong demand from customers for those products.

Speaker 7

Got you. And as you indicated, capital constraints were also a part of this decision. Just curious, let's assume, let's hypothetically say that 9 months from now we've got really Smooth operate we've had really smooth operations at OriginOne. And so let's say that would have attract A strategic or another party that would be willing to make a very large capital commitment, Capital injection, would that accelerate the timeline? How do you think about taking on a strategic financial partner, As I said, sometime in 2024.

Speaker 2

Yes, I think it's a really interesting question. I think we tend not to think in hypotheticals around these sorts of things, but I will say just generally as a company that is It's small relative to some of the chemical majors out there. There are limits to the number of things that we can do in parallel. And so anytime that we have access to additional resources, that can have an impact on schedule.

Speaker 7

Have an impact on schedule. All right. Hey, thanks so much.

Operator

The next question comes from John Roberts with Credit Suisse. Please go ahead.

Speaker 8

Yes. Thank you for Slide 27 with the Origin 2 economic summary. If I just divide EBITDA by CapEx, The return on Phase 1 is 20% and the return on Phase 2 drops a little bit to 17.5%. Why is Phase 2 Not higher than Phase 1.

Speaker 2

Yes, it's an interesting question. I think our view there is that, 1, Because it's a little bit further out, we have frankly a different level of specificity around some of the Phase 2 elements. And so That just inherently we're going to give that a little bit more of a discount from our view. I think the other is there are Significant parts of Phase 1 and Phase 2 that you could argue are sort of arbitrary as to whether we count them as part of Phase 1 or Phase 2. We didn't try to load balance too carefully between the 2.

Speaker 2

But a lot of benefits are realized with Phase 2 beyond just the fact that we're getting access to larger markets for those products, We're getting access to all kinds of sort of mission driven sort of objectives with Phase 2 as well. So We do see them as relatively well and synergistically linked. But to your point, Phase 1 standalone is an attractive project all on its own.

Speaker 1

And then do you think

Speaker 8

you'll have a new CFO in place by September 1st or what's the backup plan there?

Speaker 2

Go ahead, Rich, sorry.

Speaker 4

I was going to say we're active. We've retained a large leading executive search firm. We've got an exciting pipeline of candidates. And so We're very much in the process. Don't yet have a start date planned, but we've got Nate with us through September 1 and got an advisory role Through the end of the year, so we're confident that we will have a smooth transition.

Speaker 2

Thank you.

Operator

The next question comes from Eric Stine with Craig Hallum. Please go ahead.

Speaker 6

Hi, everyone. Maybe I'll just start with the order book. I know $10,000,000,000 plus. As you just said, I mean most of that's paraxylene and I know those customers are committed to the long term, but I mean this means with this Change of the timeline that they're waiting quite a bit. I mean, is there any are there any mechanisms within that that if it's a customer that Would have a need for FDCA, I mean, what's the how does that work?

Speaker 6

Or I mean, is there the potential that you hand off some of this order book to A potential licensee or I mean just trying to think about that dynamic from the customer's point of view.

Speaker 4

Sure. Well, we're excited to cross the $10,000,000,000 milestone and a lot of the Recent growth was from FDCA, which has been a large focus of ours in recent quarters. And many of our paraxylene customers Do also have an interest in many cases a capacity reservation with us for FECA. So there are certainly are Synergies in those two materials for many of our customers. But we do have a large order book for paraxylene in PET and we are very committed to delivering against that order book and are optimistic that we'll be able to Deliver those materials in the timeframe that those customers want and largely in partnership with other companies.

Speaker 4

And if you think about We talked about SEGP recently. We've talked about our Indorama relationship. There are multiple Partners that we're working with that have the potential to help us deliver bioparaxylene At large scale and a relevant timeline for those customers and those customers very much want those materials. There Really aren't any other ways of getting them. And so we are very optimistic that they'll continue to work with us to deliver those materials.

Speaker 6

Got it. And then just as we think about the change in the timeline, I can appreciate Higher obviously higher interest rates, but I mean that's a new dynamic since this all got started and you first Gave that number for Origin 2 back in 2021, but it's not again new here over the last Number of quarters. So I'm just trying to kind of think about how much of this can be ascribed to That a higher environment higher rate environment versus as you said, it's FDCA, you just need more time needed on the development side?

Speaker 2

Yes. So really, I think the first thing that's worth thinking about is and keeping in mind is how long it takes to turn a new engineering assessment. And so as we have made adjustments and thought about sort of how to put both the opportunities that have been presented and the challenges that have arisen into a sort of bucket and then What's the best way to navigate through those sorts of things? Generally speaking, it can be very difficult to understand what the impact of those is going to be on Something like a final cost or revenue number or even a schedule, frankly, until you churn that through tens of thousands of hours of engineering time to convert that into a new scenario, right. And in our case, we were actually running multiple scenarios.

Speaker 2

You put them in, So all that recently that it made sense to take a different scenario approach to this. I think it's also worth mentioning that it's not just rates, Right. So rates are one part of it and they are a meaningful part. But there are other things as well that have an impact. Again, I mentioned sort of labor rates, Materials costs, even energy volatility and volatility around some of these things can have a pretty significant impact in the way that you have to structure The risk management around plans like this.

Speaker 2

Okay. I'll

Speaker 6

take the rest offline. Thanks.

Operator

The next question comes from Pavel Molchanov with Raymond James. Please go ahead.

Speaker 9

Thanks for taking the question. And as one of the earlier speakers said, appreciate the clarity on the Origin 2 Economics. Yes, my question about that is, given that you'll be selling into the Biofuel market where policy incentives, RINs and LCFS, etcetera, plays such a pivotal role. What are your assumptions about what kind of Federal tax credit or carbon credits or anything along those lines, what's embedded in those EBITDA metrics?

Speaker 2

Yes. So we haven't put a significant amount of Credit value into our product values there. A lot of it has been driven by the customer application value and then specific Off take, conversations and negotiations with specific customers. So Generally speaking, now of course, they are very tightly tied to the regulatory and policy measures around these sorts of things. But we have tried to be very customer centric in the way that we're approaching the value there, not really looking to the regulatory aspects nearly as much at this point.

Speaker 9

Okay. So you highlighted the marine market as kind of one of the prime Verticals where you hope to be selling, I guess, why marine versus, let's say, Sustainable aviation fuel.

Speaker 2

Great question. It has to do with the technical components of the fuel that we're producing. And so that fuel in particular, while it has it is a somewhat, let's say, flexible kind of Fuel, it has some real particular benefits in the marine market. And That's part of the reason why Proman, who we announced today, is a very interesting and relevant partner for us.

Operator

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

Speaker 1

Thank you, operator. As has become custom on our earnings calls, we invited all investors to submit questions Our Q2 call as part of our Ask Origin campaign. In the interest of time, we will be taking the most commonly asked questions. Our first question is for John. When Origin is producing its first CMF, When is Origin producing its 1st CMF made from waste?

Speaker 1

How long does it take to produce a batch of CMF from feedstock?

Speaker 2

Yes. So thanks for the question, Ashish, and whoever submitted it to ask Origin. So we expect to produce the 1st batches of CMF from wood waste from Origin 1. We expect that to be a matter of really Weeks for 1st CMF production and not too much longer than that for 1st CMF from wood waste specifically. So we're quite close now and we're pretty excited about it.

Speaker 2

Generally speaking, there's we often get the question of what's the characteristic Reaction of process time associated with converting feedstock into our intermediate products. Often that can be a useful way for people to think about differentiating A very slow and capital intensive process from one that's quicker and generally less capital intensive. And our characteristic sort of process times are on the order of sort of minutes, maybe up to as much as an hour if you include all of the residence times in the various pieces of process equipment beyond the reactor. So it's pretty quick. You put a chip in one side and you get a chip's worth of CMF out the other side in about Yes, half an hour to an hour, something on that.

Speaker 1

Great. Thanks for that, John. Just turning to Carbon Black, Is Origin Materials partnering or running any research for expanded commercial uses of Carbon Black at this time?

Speaker 2

Yes, we're really excited about Carbon Black. So we've mentioned it quite a few times. We've mentioned it all the way back to since 2021. But when we talked about it, then we thought of it as a sort of far future sort of post OM2, maybe a little bit in OM3 and sort of Progressively getting a lot becoming a larger proportion of the product mix. We as I mentioned earlier, alongside FTCA, we've seen Carbon Black A really much more meaningful part of the demand now.

Speaker 2

And what's really interesting about our Carbon Black in particular is that It starts with a very different surface chemistry than traditional carbon black made from fossil sources like natural gas or fuel oil, something like that. And that gives us An interesting cost and performance advantage in a lot of the areas of carbon black that are considered specialty carbon black. So in many ways, our material Starts as a very high value specialty type material compared to the existing market. And then as we do additional processing, somewhat ironically, We actually bring it down closer to the performance of the commodity carbon blacks. Whereas if you look at The traditional processes for making carbon black, it's the inverse, right?

Speaker 2

So they start with something very close to a commodity carbon black and then they do a bunch of work and put a bunch of money in in order to get them to the specialty end. So that sort of unusual position has made us a lot more bullish on Carbon Black in the near term and at high value. So we're really excited about it. We do work both with other experts and producers in the carbon black industry and with end customers. So we do a lot of application development work with customers in general across all of our platform molecules, but that's still true with HTC.

Speaker 2

And by the way, that kind of application development work is what leads to things like the caps business that we described earlier. So it's that working very closely with customers to solve Very specific products and technical problems that we think really gives our platform an edge in getting into All of these different markets and getting the value that our platform intermediates really deserve.

Speaker 1

Thanks so much, Sean. With that, we'll turn some questions for Rich. Speaking of caps and closures, Rich, why is Origin pursuing the all PET bottle cap opportunity when you already have $10,000,000,000 in customer demand?

Speaker 4

Yes, it's a good question. And we really got into this business through serendipity that comes from being very close to our Very large customers and their R and D teams and then having world class polymer scientists on our side. And what ended up happening was we Figured out how to solve a real problem in this form of packaging and that we could solve it with PET. So today's caps are made from HDPE Or polypropylene, which are harder to recycle and cause reduce the amount of recycled content you can put into a bottle and cause issues in the recycling chain. We figured out how to do it and secure the IP to do it with PET and really any form of PET, Recycled PET, our PET.

Speaker 4

And so we're excited that we have this very big and growing market opportunity, A product that is performance enhancing and solves a major sustainability challenge that we can do at cost competitively with the legacy products. And this business is unconstrained by our construction schedule. So we can be in market very, very rapidly. So We're excited about this very complementary and very on mission business line.

Speaker 1

That is very exciting. If we could move to JDAs, can you get into more detail on the JDAs and give us More color on the goals and parameters of these types of arrangements?

Speaker 4

Yes. So JDA stands for Joint Development Agreement. And the way to think about it is that we are an upstream manufacturer of really 3 principal intermediates, CMF, HPC and oils and extractives. And those intermediates go on to make a very wide range of applications, some of which we put into the earnings presentation today. And so what makes sense for us to do is partner with companies that have very deep expertise in getting from our intermediate all the way to a final application.

Speaker 4

And so, an example is of Carbon Black, which was talked about earlier. So, we are Talking to multiple Carbon Black companies that have incredible expertise in Carbon Black R and D. And so we view them all as potential partners, Not competitors and it makes a lot of sense for us to leverage their technical expertise with our expertise at the intermediate level And get to higher value applications, get to market faster and prevent us from having to have deep technical expertise that goes all the way to application when we can find partners that have decades of experience in many situations. Another example is the announced partnership with SCGP. And that's a joint development agreement where we're working with a leading company that wants to explore using A specific feedstock, in this case, eucalyptus, to go through our process to come out with bioparaxylene as the primary target on the other side.

Speaker 4

And so that's a great chance to partner with someone who has a proprietary feedstock access, a lot of expertise in the space. And so that's another example

Speaker 1

Great. Thanks so much, Rich, and John, of course, as well. That will conclude today's Q and A portion of the call. I'll now turn it back to Rich for closing remarks.

Speaker 4

Thanks, Ashish, And thank you all for joining us today. This concludes the call.

Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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Earnings Conference Call
Origin Materials Q2 2023
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