Agilyx ASA (AGLX) Earnings Call Transcript & Summary

Hi everyone, and welcome to this Agilyx half year webcast hosted by Arctic Securities. My name is Ivar Ryttervold, equity analyst here at Arctic, and we moderate this session. With me today, I have the CEO, Tim Stedman; and CFO, Russ Main, who will soon take you through the presentation. After the presentation, we will move on to Q&A. So I urge you all to use the chat function on the screen to submit questions. With that, I think we are ready to begin, and I'll leave the word to Tim.

Thanks, Ivar. I appreciate it, and welcome everybody to this call. Really pleased that I can be with you today to walk you through our first half results and highlights. I think the key things to take away from this is one of continued growth and development. What we're going to show you is a step change in revenue largely driven by the success of moving forward the project with Toyo but also with the build-out of Cyclyx, something that we've talked a lot about, but now you're beginning to see the real facts within that. I also want to highlight though that there's the booked revenue, which is already a substantial step-up. But keep an eye on that deferred revenue as well. It's a substantial number in our results, and we'll talk more about that later. The other thing that's very exciting in terms of the development is really to build out and validation of the business model. There are a number of signposts within this report about that. But let me just pick out a couple. Firstly, the Technip announcement. This is a huge point of validation and one that I'll expand upon later, providing the basis for real acceleration of the business as we access more markets through a very, very big and substantial partner. The second thing in terms of validation of the business is everything that's happening in Cyclyx. But let me pick out the Cyclyx Circularity Center. This real state-of-the-art unique processing center that was designed for chemical recycling, 2.5x larger than what we had previously said it was going to be and linking in that to substantial accessing to material through takeback programs. We're also continuing to grow our Agilyx business development pipeline. You'll see within that, that there's real momentum happening there. And we're seeing incredible, more and more incredible companies coming into that as well as important partnerships like Technip. And finally, in terms of our development, we'll be getting ready for up-listing. We'll give you an update on where we are there. But again, very positive movement as we continue to develop. So a step change in revenue, building out the business model, pipeline growth and up-listing, all the things that we think are the highlights of this first half. So let me just move on -- and maybe just take a step back, first of all, because I think it's good to just reconnect with, yes, the first half has been good. There's lots of really credible things happening. But let's also keep an eye on where we're going. I think it's important to keep in mind the huge, huge opportunity that is created by the significant challenge of waste plastics. And that's what's captured on this page. I'm not going to go through it all because I think a lot of people recognize it, but our integrated solution is the key to maximizing the opportunity for us as Agilyx and Cyclyx. What does that mean? Well, I'll build it out a little bit more as we go through the presentation. But the reality is that you need to do four things to make chemical recycling a reality. You need to be able to source material, you need to be able to process material. That's what's exists within the Cyclyx. Then you need to be able to convert the material that comes out of that and purify it. That's Agilyx. We believe we are unique in having an integrated solution, all four of those elements as part of our offering. And the proof points that we've been developing under over the past months is just further endorsement of that with partners, with significant kind of contribution and engagement, we believe now we are at that point of entering significant growth. So when you think about this issue of waste plastic, the question is, well, why isn't everybody else doing that? And what you've seen in the industry over the past really couple of years as this has gained momentum, is a point where everybody is focused on the third one of those stages, the convert, but I have to have a technology that converts waste because, of course, this waste is readily available, and it's free and we'll be able to get at it. The simple reality is that whilst we've been developing over the past period, but especially in the last 6 months, the industry as a whole has come to the recognition. Some would say belatedly, others got there earlier. That actually this been about easily getting access to waste is slightly more complicated. This picture is trying to capture that because the reality is the existing waste industry today is really only accessing about 10% to 15% of plastic waste. That materially is being processed through existing facilities, but really those being focused predominantly on mechanical recycles. And some of that material is they're being competed for, especially by customers, conversion customers who need cleaner waste. And so we're seeing this kind of challenge going on. The material is theoretically there but I can't access it at the right price in the right quantity and competing with mechanical recyclate, something that chemical recycling cannot win at. So what Cyclyx and Agilyx are really to do with our customers, and this is the piece that Exxon saw is we're trying to get after the 85% to 90% of waste that is not being captured. That's what we're after. That creates the opportunity, that creates the economics and the availability. So how are we doing that? Well, what I'm trying to lay out here with this slide is what I now pull our road map for integrated recycling because, again, you've got to have all of these various stages. If you only focus on one then you're unable to optimize the whole, and you will struggle either with availability or with cost, getting the right material and actually being able to make it happen. So let me walk you through this page. As it starts with what's happening on the left-hand side. If you can't get access to the material, if you can't source the material, then you're always going to struggle. So what Cyclyx is doing is focusing on 10 to 90 as our mission brand to drive availability of material to get all plastics into the system. Too often existing systems are focusing on certain types of plastics. Now, we want all of it. And so we're focusing on developing new waste plastic diversion programs, whether it's at the corporate level, the retail level, residential, residual, access that material, bring it into the system. But you can only do that when on the right-hand side, you've actually got credible customers and partners who can take that material and that's what we built out with Cyclyx. You've got to have that consortium enhanced with the likes of Exxon now. Exxon needs a clear feed. It's in that top right-hand box. But what they bring is scale. They bring the capability along with our consortium members to go to places like the City of Houston and say, "okay, we want to do this new waste diversion program." And so whether those customers are the likes of Exxon or others of our consortium members or whether they're customers of Agilyx conversion technology, they all have a role to play in supporting what's happening on the left-hand side of this diagram. Now as you start bringing those two pieces together, then what you need is the centerpiece, the Cyclyx Circularity Center. You need something that is big enough, is efficient enough and is designed for really enhancing moving the plastic to its right optimal location, whether that's mechanical recycling, whether it's the cleaner end of the chemical recycling sphere, people like Exxon, whether it's programs or customers of arms in our conversion technology, even down to specific plastics like polystyrene. These systems will be super efficient, super tailored to anchor customers and allow us to get the right material at the right quality, at the right specification, at the right price to enable chemical recycling to thrive and grow at the kind of scales you're going to be seeing in that. So okay, that's the road map. Well, a road map if it's going to become real needs signposts. So these are some of the signposts that we have been laying out over the past months. And I know that sometimes when there's announcements coming out is sort of in absence of context, it's difficult to see that wholly, this model is going to be helpful to you to be able to understand as these signposts come in others, you can start seeing how this now builds the credibility and the reality of the opportunity around this integrated model. Let's start on the left-hand side with one of the most recent ones. Virgin Red, what is Virgin Red doing stuck in here? This is an established significant rewards program. Well what Virgin Red is seeing is the opportunity to work with us and our consortium members in Cyclyx to drive behavioral change to incentivize behavioral change in terms of driving this access to material. So you're going to hear some more about takeback programs and various things in the coming pages. But what Virgin Red is it gives us a sort of turbocharger, turbocharger it with their substantial brand presence, with their capability existing applications. We're not developing something new or leveraging something existing here. But it also creates opportunity to look at how do you generate revenue from this because these programs have substantial revenue generation capability in terms of the reach that they have, how many people you can touch and how you can actually bring it, whether it's sponsorship programs, whether it's paid to discard programs, all kinds of other segments that allow you to explore revenue generation, to help build out the system and drive the next stage of growth. In the middle, I'm going to talk more about the circularity center in the coming pages. But this is a real statement of faith with our -- by our sponsors for this that we originally looked at this being a 60,000 ton-per-year system and it's now 150,000 tons per year. This is huge. This will be one of the biggest advanced plastic processing facilities, if not the biggest anywhere. But it will be unique in that it's purposely built for anchor customers to be super efficient for them to drive volume growth and to be able to access the maximum amount of material to put into recycling to drive 10 to 90. The last one I wanted to mention on here was the launch of TruStyrenyx. And I think there may be a little bit of confusion here around what this means. So let me just talk to you about Technip for a moment. Technip Energies is by far the leading company in the space of styrene licensing. Now what does that mean? The global styrene market is somewhere in the region of 35 million tons of installed capacity. Technip has 35% of that. If you look at key geographies, they are over 60% in countries like the U.S.A. and in North Korea -- I'm sorry not North Korea, that's South Korea. The importance of that cannot be understated because it -- or cannot be overstated because they have huge access. They have huge credibility. Their opportunity to be able to go to the market, they've got in many, many times the number of people we have and put their stamp on this to say we believe it, this is our integrated solution. TruStyrenyx is their brand name that has huge potential, not only for enhancing our existing pipeline, where customers will go, my goodness, Technip is bringing this but also in terms of future growth in the pipeline. Part of that is because they integrate together. I said four steps: source, process, convert, purify. In polystyrene, we are now unique in that we have all four of those steps. That allows us to go after material that nobody else can touch in the recycling world. Claim retirement labor, building and construction firms, this is a reality, you can take it and take it back in one plant to pure styrene going after all the derivatives. So the fact that they are putting their name on this, they are going to be launching it at the conference in Barcelona in 3 weeks' time. This is a hugely impactful step and one which we believe we are only just at the very beginning of seeing the opportunity from. Let me move on. Let's talk about takeback programs and the 10 to 90 accessing that material. So a few months back, we talked about the City of Houston program, and we had some initial companies involved. So obviously, the city itself, we have ExxonMobil, LyondellBasell, so two of the largest plastic producers in the world, FCC Environmental Services is a waste company saying we are going to work together with Cyclyx as the program management to drive recycling in the City of Houston. City of Houston probably recycled somewhere in the region of 4% to 5% of the plastic today. So that model I gave you earlier, actually, this is -- let's say, there's a bigger opportunity here, 5-plus million people, so really significant numbers and very closely tied to the petrochemical industry. The whole concept here is build it, demonstrate it and then replicate it. Once you've done it here, we already have significant interest from other significant cities across the U.S. So what are we going to be doing? Well, corporate takeback programs. Again, all of this can be driven and supported by the Virgin Red program, but you're linking with local companies. Companies like ExxonMobil, LyondellBasell and others. Our current Cyclyx membership actually has over 400,000 employees within it. So let's leverage them. That's the whole concept. Work with them to be able to access plastic to be able to incentivize with the Virgin Red and drive that step upwards. Retail Programs, obviously, working with the big retail outlets. One of the most exciting things here is working, getting access to the Houston Independent School District. That's 280 schools. We're trying to access plastic, but we're also trying to change behavior. This is super important. The other one I just wanted to mention was Kingwood. So for those of you who know Houston, Kingwood is a city within a city. It's a fairly affluent part of Houston. And effectively, what the City of Houston has done is looking Kingwood, try everything, use it as the sandbox that we can play in together to actually really drive this experiment and expand, bring it out to other places. So we've been given unique access in this very, very important and now very forward-looking city with a political leadership that is wanting to make changes in an industrial heft behind that, that is prepared to make it happen and all of that being enabled by Cyclyx. On the Circularity Center, some of this came out the other day. But this is a very important step. We have been provided advanced funding to drive through the engineering design and kind of acquisition of some of the long lead time equipment to the tune of just under $15 million. Just under $2 million of that has already been received. This is all about driving this project forward, getting it into construction, getting that capacity set for 150,000 tons. Now some people point here, jumped on the fact that actually it's going to take a little while longer. Well, this is now a big project. When you start thinking about that scale and you start thinking about the number of truck movements that need to happen to make it work, yes, this is complicated, but none of it is actually kind of a technology risk. So we're going to be working through that with our partners who are financing this. But in the meantime, we've actually set up dedicated tolling to actually, if you like, mimic the first stage of that and get us moving into the right direction, building the scale up that will then eventually move into the circularity center. Critically, this will take all plastics, and it will provide a compounded output for those people that need it in order to enable that chemical recycling. Now the precise breakdown of what it will provide is going to be subject to the work that we're doing on things like that Takeback program that we were just talking about. But we anticipate that the split is going to be somewhere in the region of 30% being available to mechanical recyclers, so in other words, boosting the mechanical recyclers available within the Houston area, which opens up further partnerships and opportunities and 70% going to advanced or chemical recyclers. It's a different type seen. So people taking different qualities. Now on the Agilyx side, we're continuing to build out our project pipelines. We've got a snapshot here of the pipeline broken down between scoping, feedstock testing and development, construction and licensing and operational on the left-hand side. We continue to see huge interest in these projects. And we're doing a huge amount of work around really focusing on the prioritization now on where do you go to drive projects as rapidly as possible into construction and licensing. Let's recall, our job is not to develop projects in terms of the early stage of engineering. I mean it's interesting, it's good. The real fun starts when you get licenses, which are super high margin and construction, when you get the revenue from construction projects and the margins associated on that. And so we've now built out this pipeline that is allowing us to truly focus in on where are the things that can drive that. That's what we're doing. But there's a huge potential beyond that. You can see the project capacity increase, I mean, up 1.8x between now and a year ago. And of course, all of this is largely before we've started leveraging TruStyrenyx. Now that's not to say that technique is not already working with us on some projects, and that has been enormously impactful. But the TruStyrenyx things, leveraging Technip sales organization to actually drive this and leveraging these initial projects that we've done to be able to go out and go fast that's still for the future. And that is really, really exciting, and that's something that we're very, very focused on. Let me hand it over to Russ to talk about the financials over the next couple of pages.

Thank you, Tim, and good morning, everyone. I'm excited to be here today and thank you all for joining. I just wanted to give a couple of highlights from our first half financial results and also just reiterate that our results are now under the IFRS standard. So our half year report for the half year results as well as you'll see in the appendix in our report that we've included the restated IFRS results for 2020 and 2021. So we are now well prepared to report under IFRS going forward, and the team is really excited and we've been through a large process to get here. So also to reiterate that our prior year's results have been audited by RSM. And the half year report you're seeing here for 2022 was reviewed by RSM but not audited. So I just want to make that clear to everyone. So let's get to the highlights. As Tim mentioned, we had a good step-up of our revenue year-on-year for the first half of 2022, getting to a revenue of $7.8 million. The composition of that revenue was $5.1 million of that was due to our sale of feedstock to our consortium customers. We also, in our construction sales of Toyo Styrene, $2.1 million and then various project revenue of $0.5 million. One of the things I'd like to iterate here is that on the project development revenue of $0.5 million, you'll see and you've seen in the past that project development revenue can be quite lumpy over time. In the first half of this fiscal year, we have finished up various projects in various phases of development, and we are now kicking off some of those new phases and there is a little bit of lag time in between the [ FEOs ] as we've explained before, where customers are getting prepared to go, they look at our report and then we go into the next level of developments, which you'll start to see in the second half of the year. So that is always quite lumpy but we feel very confident that everything is on track. As you saw in the previous screen, where our project development pipeline is quite robust, and those you'll see moving into various phases in the second half and into next year. Also, I want to reiterate, as Tim mentioned earlier, we do have a solid amount of deferred revenue on our balance sheet, $7.5 million. So that is commitments made by customers to move forward. So that revenue will come in and be recognized in the future. And what is important to note here of that $7.5 million, $5.1 million of that is Toyo Styrene. So that will continue to be rev rec during the course of this fiscal year, which is quite positive. One thing I want to mention, too, is I'm sure a lot of folks have questions, and we've already seen some questions on the negative margin that we booked in the first half of this fiscal year. And it's due to several things. One, let's talk about Toyo Styrene. First of all, when we start that project, some of the initial rev rec is on long lead equipment that is very low margin. It's the smaller things that we have to order right away so that we meet our time lines. As this project moves on, we have very healthy margins with this project. And as we get into the core equipment, the pyrolysis unit and other things like that, we have really solid margins on that. And good news that I want everyone to understand, if we do have cost overruns and that is with this current environment with the supply chain being so volatile, in our supply agreement with Toyo, we can charge back any cost overruns. So we have our margin protected in our agreements with them, and we'll continue to monitor that as we move forward over the next year in this construction phase. So a lot of good work here, and I think you'll see a lot of improvements there. Also on the Cyclyx side, a lot of the negative margin is due to the fact that as we're looking at various sources of feedstock for our consortium customers, we incur a lot of costs upfront to, one, have our sourcing team out there identifying sources, testing those sources, doing the chemical characteristics and testing of that source to see if it's even something we can use for our customers. So that burden cost is hitting our P&L currently. But as we continue to drive sales in the Cyclyx organization, that will start to be offset in the future and start to even out. So you're seeing a lot of negative margin currently, but we believe that investment will pay dividends over the course of the next few months and half years as we start to recoup those costs and start to sell feedstock at a cost plus as we've always talked about to our customers. So that is part of the reason why you're seeing some of the margin deterioration in the first half of this fiscal year, which we believe will start to even off going forward. And on a cash perspective, you can see we're starting -- we started the year at $19.5 million. In March, we were at about $13.1 million, and in June, it's kind of leveled off. You're starting to see the impact of our cash burn being reduced by good internal cash being generated by construction and other projects. So we feel -- still feel very confident that our liquidity is strong, and we're in good shape for the up-listing. So just wanted to get that point out to everyone. And the business is continuing to monitor our cash balances and spend as we move forward. And lastly, I'd just like to reiterate that we are clearly focused on revenue growth and margin growth. And how we're going to get there is, as Tim said, selling project licenses, which are very high margin, driving projects into construction, which gets us to this really pinnacle point where we start to have significant revenue at great margins and then also continuing to build out the Cyclyx organization for success, as Tim just went through in the various slides. A quick update on the up-listing. The business has been going through a lot of preparation to meet our target to up-list in September. A couple of the milestones, we were able to convert the business to an ASA, that is really a key first step for us to be up-listing ready. We've been through the audits of our IFRS financials, which you've seen. We've filed our first draft prospectus with the NFSA and we received the first comments back from the NFSA and we're about to submit our second submission to the prospectus by the end of this week. So well on our way to success there. And then it's just a matter of getting through the final reviews with the NFSA. We've gone through the legal and financial due diligence. That's completed. So we are still believe we are on target to up-list during the month of September.

Okay. Thanks, Russ. So maybe just to sort of wrap this up. So first of all, we are restating, we're sticking with our revenue target of $200 million to $300 million by 2025, 2026. And you see at the bottom of the page, the breakdown of what that means sort of operationally. But maybe it's best to focus back on what are we trying to do this year? What is the focus this year? Well, first of all, it's continuing to deliver one new project into development per quarter on average, so four in 2022. As we talked about, one of the key things we are really laser-focused on is picking the projects that we believe we can drive into licensing and construction. And of course, doing that now in conjunction with Technip and TruStyrenyx, which gives us a huge additional lever. But we're not done on that side. We're looking at where else we can build technology type relationships that can further enhance our broader offering. We're also looking at how do you develop alternative sources of funds to accelerate projects. And really what I mean there is around the construction phase. How do we bring in things like infrastructure investors to actually help us develop these projects into construction in a much more rapid way and predictable way. On the Cyclyx side, well, we delivered a step change in volume and we've expanded membership. But actually, we're still at the beginning. I mean when you look at the long-term potential, there is so far to go on Cyclyx just in terms of the capability we've got with this first circularity center, and I emphasize that. First, we have absolutely no intention of this being the only, and Exxon and our other partners are wanting us to drive more. So this is a super exciting first step to have the circularity center. But it's the first of what we want to be many because this will drive the dedicated processing facilities that will drive the efficiency, that will allow us to drive the volumes, that will give us the capability to extract revenue, whether that's from developing these systems because they're a little bit analogous to the Agilyx ones, slightly different, but not too far away, but also deriving revenue from the 10 to 90 type initiatives. And of course, just lowering feedstock means that Agilyx gets those royalties, which are obviously super high margin. So a very exciting prospect for the rest of this year and beyond, built off what we believe is a really substantial first half, delivering those step changes on revenue and volumes with Cyclyx, building out improving the business model, developing the pipeline of Agilyx business, and so we can now focus and prioritize and leverage TruStyrenyx and getting ourselves set for up-listing. So with that, thank you very much for your attention, listening to us present. And what I'd like to do now is hand it back over to Ivar so that we can go to Q&A.

Thank you guys for an interesting presentation. I think it's time to move over to Q&A. So we can start with the first question here. With regards to the announcement on Monday, where you announced that Cyclyx has secured $15 million in funding for its first plastic recovery facility. Can you say anything about how much this is a total CapEx for the project?

Yes. So we're not going to give the total number, but it is a substantial what is referred to as an advanced approval to cover both the full engineering. So if you like, what we talk about with the Agilyx model, the [ FEO ] 1, 2 and 3. But also going beyond that, and that's what's really important is the willingness of our partner to actually put money down now to allow long lead time equipment to be ordered. So that gives you a sense of their -- they've got to follow that process, they're a big petrochemical companies, so they have lots of process, but the fact that they've made that step is very, very significant. So let's just say it's a substantial contribution to the whole amount, but that whole amount, we anticipate being able to say more about in the not-too-distant future.

Over to the next one. Will offtake partners take CapEx or should we expect to see other sources of funding as well, such as infrastructure funds? I guess it's for the PRF.

Yes. Well, I think actually it can be more general. So I think it's an excellent question, and it's one that we believe has significant opportunity. Because the answer is both. I know that it might not be very helpful, but let me explain more. There will be situations where the strategic partner beneficiary, if you like, is the one that wants to leverage their capital. There's a number of them that have a lot of cash at the moment. And so they want to do it themselves because the returns are such that, that makes more sense for them. But it's very clear to me as well that there are others in different parts of the value chain where capital allocation is a challenge. And therefore, where there is an opportunity, whether it's the circularity center or in conversion projects for infrastructure dollars to play a role because some of those strategic partners would rather sign an offtake agreement, and we've certainly seen plenty of them do that. They'd rather sign an offtake agreement than actually spend capital over a project, whether it's circularity center or whatever. So I think the reality is that it's going to be a mixture. What I see is, as this starts developing, then the speed is going to become like a sort of stone rolling downhill. It's going to build momentum. It's going to build an approach. And actually, I think it will probably continue to be a mixture of both. And don't forget, they're not in this presentation, but in one that I released just a few weeks ago, there was a number in there from McKinsey on a study that they've just done that said that something in the region of $40 billion needs to be spent on advanced recycling before 2030. And actually, there's another report that they've done, which wasn't in that release. They said there's probably another $5 billion that needs to be spent on something, which is basically the Cyclyx Circularity Center. They couldn't call it that, but that's what it was. So there is vast amounts of money that need to go in there. And so of course, it makes sense to be looking at every single source, and we are actively doing that to enable that. Going to those kind of sources with Technip and TruStyrenyx, is huge. It's absolutely huge because everybody in this industry knows who Technip are. So hopefully, that's a long answer, but hopefully, it's helpful.

They increased size of the PRF from 60,000 to 150,000 tons. Is it due to increased demand from one of the offtake partners or new offtake partners?

So we haven't -- let me be careful because there's only so much we're not allowed to say. I would just say that there is increased interest from pretty much everybody. And people are wanting a part of this, but you know who our major partner is and their objectives are extremely significant. I think they talked about 500,000 tons in just a very short number of years' time. So this is the beginning step of many and it has the credibility of the Cyclyx consortium behind it, but anchor members who are really driving this. And they are basically seeing Cyclyx as the sort of linchpin, if you like, for developing not only the circularity centers, but also how do you get the ways to feed them and how do you then program them to get the right waste to the right customers. So this is a very substantial first step, but it's just the first step.

Should we expect to see meaningful royalties from the first PRF?

Well, I mean, royalties are tied to volume. So yes, as the volumes go up to what we're talking about, then you're going to see the impact of those royalties in there.

Do you see yesterday's announcement as a step change in the collaboration with the Technip? And can you elaborate a bit around the importance of this partnership?

Yes. I mean this is absolutely a step change. I mean this is Technip who are, as I laid out earlier, the global leaders in styrene technology, I mean they have instant name recognition in all of that industry and beyond. That then going to their kind of preeminent event, global event and basically saying TruStyrenyx is our techniques integrated solution for polystyrene to styrene recycling, put it a different way. It's the first new way of making styrene that's been developed in 40 to 50 years, and they're putting their stamp on it to say we're backing it, we're behind it. Oh, by the way, we're branding it and we're selling it. So yes, it is huge, and it's just the beginning. So yes, if I'm excited about it, with reason, I would say, because they have thousands and thousands of people. They have huge brand recognition and they're now developing and pushing TruStyrenyx as the integrated brand. And we will be pulled along with that and supporting that, providing the core conversion equipment and the support from Cyclyx and they provide the purification and the capability that, that then allows back through the system. So it's a very, very powerful story, which maybe because this technology isn't always obvious to scale to these guys. I mean, more than 60% share of the capacity in the U.S.A. alone, and it's just, it's huge.