Origin Materials, Inc. (ORGN) Earnings Call Transcript & Summary

Hi, everyone. Welcome to our mid-quarter investor Q&A video. As usual, we are focusing the Investor Relations conversation on Origin's path to success through our caps and closures business. We want a productive discussion. So while we are going to answer most of the questions we received, we're not attempting to be exhaustive here. The results should be informative and focused on the topics that are most relevant to Origin's investors.

So I want to start, John, with you and just kind of zoom out big picture. Today, Origin is in the midst of an exciting transformation, turning itself into a manufacturing organization for PEG caps. And what investors have seen over the last couple of months include a press release that mentions an MOU. We've learned about numerals and what that means. We're working with customers to qualify product. There was a chain of social media posts over the holiday, showing us shipping equipment from Europe to Reed City, Michigan. And then this morning, I just saw a post of you guys putting all that equipment together. So help us stitch that together in the broader context of what Origin is doing, how we're poised for the new year. And can you kind of set the stage for what this is going to look like.

Yes. Well, I think, first, it's probably worthwhile zooming out. We see ourselves as a chemicals materials and applications company. And I added the applications part because I think that's something that was always in sort of always in the plans, but it didn't take the forefront in the way that it has now. Applications, what do you do with the materials. And our caps and closures program is really a specific instantiation of that application work. And it turns out -- and this is -- there are lots of historical precedents here that the applications are really important and applications can, in fact, be as important from an economic perspective as the materials themselves or the chemicals that are going into them. And so we're working on -- it's -- we still think about the role as chemicals and materials, but also now the specific application program around caps and closures, we're excited about the caps and closures program for a lot of reasons. But one of the biggest reasons is because we really do see it as an application platform. So platform is a term that gets thrown around a little bit. And I think our view of our platform is, is something where if you figure out useful, novel, differentiated things with a particular product, if it's a platform technology, then that means that many -- maybe not all, but many of the things that you have figured out for that one product are going to apply to other relevant products. So you get this sort of accretive cascade of snowballing benefit, knowledge, differentiation, et cetera. One of the most exciting things about caps and closures is that we really do see it as a platform. So we're going to market with an 1881 product. We've released some of the specs around that product recently. We're -- 1881 is a very large market. It goes into -- it's very well understood or experienced by consumers. It goes on CSD, consumer soft drink -- carbonated soft drink beverages, we can cut that out. It goes on CSD or carbonated soft drinks. It goes on water. It gets used in a huge variety of different applications. But 1881 is not the only large market closure for that. There are lots 2025, 1810, they're 38-millimeter, they're larger. And all of those have different interesting characteristics, market characteristics, product characteristics. We are excited to go after a whole host of different formats over time. And every time we go to a new format, we're going to be bringing a lot of really important things that we learned from all the other formats that we've developed, again, starting with 1881. So I think that platform element of the technology that we're using for caps and closures is really what makes it so exciting. We see a lot of running room in our technology, penetrating deeply into the closures market at large, not just 1881, which is where we're starting. So I think that's really exciting. Obviously, we're at the very beginning of that journey. So the first cat forming machine just landed Reed City, as you said, we're putting it together. We have run it before when it was all assembled together back in Europe, where all the pieces came in, that was the factory acceptance test. Now it's in -- we took it apart. We're putting it back together in Reed City. Ideally, nothing has changed. We'll find out when we try to turn it on. If something has changed, then we'll fix it, we'll make it work. But ideally, nothing's changed. We make caps. The caps perform exactly the same way as the caps that we saw during the factory acceptance test. And from there, we really learn how to ride this cap forming machine. It's got to not just make product, it has to make product consistently. We saw that in the factory acceptance test, but it's another thing to do it over weeks and months. And we've got to ship a bunch of product to customers, and we're excited about all those -- the business elements of that, too. But so I think what I get so excited about is seeing us both bring a platform technology to market, seeing us develop the internal capabilities to operate that platform technology at scale. And then already, I think we're starting to see some of that accretive knowledge gain help us develop more quickly, more effectively additional cap formats that we see coming in the years ahead. So really exciting, big technology arc, and we're just at the very beginning of it.

That is exciting. Okay. That's good. And that -- as you're describing that, I'm realizing that a lot of the questions that came in from investors are going to sort of take us into many points inside of what you just described. So that will be good. Let's start -- let's zoom in specifically on numerals. We had a press release around the effort to add the numerals. And an investor asks a couple of parts to this. First, numerals are the little ridges that would go around the of the cap. And the investor asks, first, what was the thinking behind starting customer qualifications without numerals? Are the margins expected to be lower with them? And will the numeral link feature impact your ability to double throughput of the CapFormers in the future?

Yes. So good questions. So I think one of the things we talk about internally is the features, right, on the cap. And there's an 1881 cap and then that 1881 cap can have a variety of features like tethered. Tethered or an untethered 1881 cap and like numerals. Some of those features are required. You have to have a certain level of seal for the cap to function like a closure. There are a completely unsealing cap is a cap that is lacking what is probably a necessary feature for it to be usable as a product. Our hypothesis initially through consumer testing was that numerals would not be specifically required. We always knew that we wanted to get to numerals. But there are lots of features that we would like to get to over time that we don't think are required. And maybe they're not even worth doing in the first year or 2, right? Who knows? There are lots of those kinds of features. We thought numeral-ing was -- it was high on our list. We thought it was probably something we would do pretty quickly, but we didn't think it was strictly required for us to deploy the very first cap. And we want to -- obviously, we want to do things that are good enough and not too much more in the very beginning. And so numeral-ing was on that list. What we found was that numeral-ing, yes, it is important for consumer acceptance. It's also important for some of the other elements of cap usage. For example, you got to put the cap on the bottle and the capping machines like numeral-ing. It makes it a lot more consistent. That was something that we really didn't get a chance to explore deeply until we had done numerous capping trials and spent more time in the market, qualifying with customers, working with customers to get that feedback that no, numeral-ing is something you've got to have. And what was interesting about that, too, is it wasn't just our opinion that numeral-ing might not be strictly required sort of on paper in many of our customer discussions, people didn't think it was either. It was only when we started to see the qualification work getting done, the testing getting done, that it became pretty clear that we were going to need to have numerals right away. And so we had our future solution, expected solution on the shelf. We pulled it forward. We sort of drawn it out, pulled it forward and said, no, we actually have to do it right now.

Makes sense. So then the question turns to, does that affect margins, number one? And then also, is that going to affect the potential for throughput performance in the future?

Yes. So numeral-ing shouldn't have any impact on the margins. Nominally, I suppose it means the machine is slightly more expensive than it would have been, but it's such a small -- it's a routing error. It doesn't really make much -- for us, it was mostly -- and in fact, this is true for a lot of features. It's mostly a function of having the time to implement the feature early enough that it doesn't delay other things that are going on as you saw with numeral-ing, it does take time to do that. It did have an impact on the way that we rolled some of these things out, but the speed that we rolled out with payment. And so it's -- for most of the product features, it's not so much about margin or even rate of production throughput. It's mostly just about do we have time to implement that feature on.

Makes sense. And then in terms of throughput.

No impact. So at least -- I mean I'm sure with all these sorts of features, at some point, it could conceivably have an impact as we start to push the limits on throughput for a bunch of this stuff. But there's nothing sort of special about numeral-ing, that says that it should have some sort of meaningful impact sort of on paper. It shouldn't and we haven't seen it yet at the rates that we're running right now.

Great. All right. So I want to move to, I think, a really useful question that an investor asks around Origin PET caps and how they're advantaged. So kind of comparing them versus incumbent, the investor is asking like are there particular markets or market segments where you see Origin's PET caps being particularly advantaged relative to what's in the market already today?

Well, there are a couple. And there's in-application elements. So what I mean by that is, does it make the bottle perform better or the package perform better. And then there are the end-of-life elements that we care about a where it improves the recyclability, it improves the quality of the recycling stream and it makes a lot of material. Then there are, of course, the procurement and risk management elements for the customers. If they can -- for example, if they can use PET instead of another material like a GPE, it may allow them to simplify and reduce their exposure to a variety of different commodity cost risks, right? So I think let's set aside for a moment, though, the end of life and the beginning of life risk elements that I think our cap helps with quite significantly. Let's just talk about the in-application parts, which is how do the PET caps improve the performance of the beverage packaging or maybe it's not in the beverage, right? It could be medical, it could be something else. But in the packaging that is including the closure. And I think the first thing that jumps out always to me is barrier. So shelf life and in turn, frequently, the availability of using a package like a plastic package instead of a bottle or a metal package is driven by the permeability of the package as a whole to oxygen, CO2. And PET has much, much better CO2 and oxygen barrier properties than HDPE and polyolefins in general. So I think that's one of the most exciting places. As you look at beverages like teas, juices, milk, dairy, all these kinds of things, the oxygen sensitivity is really very high. And if you have an HDPE cap, you really have to heavyweight the cap, you have to put additional liners in the interior of that HDPE cap to get the barrier that you need. And when you do that, cost goes up significantly. And so we think that places where barrier is valuable, we have a dramatic cost advantage. And so that's really exciting.

So right now, go buy my protein shake has got a bunch of stuff, Little foil inside, all of that could potentially be reduced or go away with...

All expensive. all expensive. And I think one of the interesting things about closures is the closure itself is usually a trivial part of the COGS for the beverage, right, especially as you're trying to talk about something like a protein drink or something, right, something that's not just water or something. And so there really is -- there's a lot that gets spent on these composite caps to deliver the performance you want. We think that, that cost, that significant cost going into those caps is our opportunity.

Makes sense. All right. So this is pretty straightforward. An investor asks about this first product and says, what is the weight of the origin bottle cap because one of the properties of PET is that it's stiffer, it's more rigid than polyolefins. So there's some opportunity for lightweighting. Do you know what the weight is coming?

Yes. So we actually just published recently a spec sheet for our cap, our first cap. We're excited about it. You can go look. We look at it as more than 1.5 gram, not too much more than 1.5 gram for the wave of this first cap going out. That puts it on the lower end for cap weights pretty dramatically on the lower end. It doesn't make it the lightest cap out there. There are some very lightweighted caps that really don't have to perform very well. They're in sort of a still water that is not a premium beverage, something along those lines. And so there are some caps that are lighter than that. But you'll notice the look, fit and finish, the feel of our cap at 1.5 grams is far more premium than even much heavier caps that are out there. And especially if you compare it to a 1-gram circa cap. I mean the 1 gram cap feels like it's barely bigger. You can hardly tell it's a cap, right? And then if you compare that to our 1.5 gram cap, it has a super premium feeling cap. So I think there's large form and function differences between our 1.5 gram cap and any cap that is an HDPE cap that's any lighter than that. I'm pretty excited about our cap. I think we think we've got it -- I mean you know this, right, we think we've got it really light and looks great and performs great. So we're excited. We think it's one of the lightest caps out there.

Yes, particularly for any given format, right now, it's in this 1881 format, and it is both -- it sort of like bridges this like premium quality aspect with sort of the lightness that customers look for. So it sort of is checking both those boxes in a way that other products can't.

Yes. Bill, if you're looking at performance for performance, it is so much lighter than an equivalent performance HDPE cap. It's just shockingly better. We're pretty.

And it can be clear.

And it can be clear. Just looks better, but I'm not biased.

So let's move past the specific product and sort of zoom out and talk about Origin at a more strategic level. Investors ask, what's the vision for Origin's long-term future looking 5 to 10 years, where do you see the company over that span?

I mean it's always hard to predict 5 to 10 years out in any level of real granularity. What's the -- predictions are hard, especially about the future. And -- but I think we have a pretty clear vision for ourselves. Whether that is as obvious to others, I'm not sure. But for us, it's -- we think the core of our capability comes from our fundamental understanding and technical capability in science engineering. That's the deal, right? Everything that we do grows from this really, really strong foundation, and that comes from our people. And I think that's -- no matter what we do, that's going to continue to be true, 5 years, 10 years out. We've seen it over the last 15 years. It's always the case that that's the primary foundation of value creation and activity and all those kinds of things for us. So I think that's still going to be true. I think we see the caps and closures business ramping quite quickly. A couple of years, and it's really going to be roaring. It's going to put us on a financial footing that we think is much more sound and lets us do what we want to do. Now obviously, at that point, we have a variety of different opportunities to continue to grow the business using that technical foundation. As I just said, there's lots of stuff we can do in caps and closures. We continue to be excited about the Furanics business, even though we aren't specific commitments about timing for a lot of that. But having that strong financial footing, continuing to develop the Furanics business, continue to develop the caps and closures business. And as I've said before, we have some other stuff in the -- waiting in the wings that's certainly incubating that we think could be interesting technology platforms also. I think we'll just keep going.

Great. Okay. So I'm going to have one more question for you, John, and them I am going to call you into this, Matt, as well. And this question, I think, is sort of scratching a particular point of potential confusion. So I'm going to read it verbatim, I think it's very useful. It's -- the investor says, John, I view for a long time, caps and closures like a copy paste business, which the strength was scale and efficiency on a few ubiquitous SKUs. I can't help but compare this to paraxylene and OM2 in the original plan, which Origin straight away from, prioritizing low product risk to not allow for sufficient margins to cover other types of risks. How do you evaluate the efficiency versus innovation strategy regarding caps and closures based on lessons learned? Are 1881 margins more forgiving than paraxylene maybe?

Yes, it's a great question. So one, our view of our 1881 margins are that they can be very good. So we think that's a good way to go. But I think the point is still a really relevant point. We think that it's important to balance the scale of the opportunity that you're demonstrating initially with also higher-value specialty applications. Some of the cap and closure applications are -- we are -- our technology is quite differentiated. In particular, as the format gets wider, so the larger the radius on the closure, the more cost differentiated our technology is. It sets aside all the performance stuff we were just talking about. And that's because the rate at which you form a cap using our CapFormer system doesn't change as you get larger radius, but of course, it does when you're injection molding and you have further for the molten polymer to travel for the mold. And so there's really a real differentiation as you get to larger cap sizes. And then, of course, vice versa is true. The smaller the cap size and the less material that's required on the injection molding side, the less sort of fundamental cost differentiation there is. We think 1881 was a good starting place for a lot of reasons, but it's trying to balance all these things. One is it's a large enough market that we think it really forces or allows maybe the larger customers to take notice and just solve a real problem for them. We also think that 1881 is not a terribly difficult format in a lot of ways. And we thought that we could learn a lot of really key elements of the -- like how do these features perform? What do we need to do to make sure that we tweak the caps the right way? How do we qualify different kinds of features. There's hot fill, there's CSD or carbonated soft drink pressure seals. There's still water pressure seals, there's tamper evidence bands. We really -- we get to see a lot of these different elements with 1881, and there's a clear path that we have internally for what are the next formats that we do? How do we go from what we've learned on 1881 into new formats that let us step into both additional capability, but also higher value. And so we think that's the right arc and the right path, but it's not just the highest value one, obviously. It's also not the cheapest and the lowest value one. There are certainly cheaper caps out there. We thought it was a good balance. But that comment on uber commodities like paraxylene, believe me, that's something that is front and center for us all the time.

Yes. Makes sense. All right. Matt, I'm going to pull you in here. So to be clear, there were a number of questions that I think were sort of prompting for guidance. So -- and I know we're not giving financial guidance in this Q&A. So you might want to say something about that. And then I want to -- then I have a question sort of regarding the role of debt and our debt stack. But maybe you want to talk a little bit about sort of where we are in terms of guidance, what we can expect?

Sure. So as a public company, we have obligations, disclosure obligations that we have to conform to. And when you think about how much change is occurring for us as an organization as we grow, there's a lot of information flowing in and out for us as we think about our business and what's a material disclosure or not. So to make sure that when we go out to guide investors around how we see the future unfolding or any other information that would be considered to be material from the standpoint of deciding your investment strategies, we've got to make sure that when we disclose something material that we disclose it to all investors at the same time. And to do that, in our environment, we think it's best to provide guidance on a quarterly basis. So we do this when we do our earnings calls. And we make sure that we're clear that at the point in time we give guidance, that's our guidance until you hear otherwise, which will be the next quarter's earnings call. So that's been our approach. And I understand we're all anxious to get updates and more information about our progress, and we're anxious to get it. So in the case where there is something that's material that we want to communicate, and we'll put a press release out. And that will be -- we may update guidance in between quarters if we have information that we feel that it's appropriate. But otherwise, responding to e-mails or calls to individuals on with questions that in their essence, are material, we have to be careful. So we hope that we can help investors better understand that's what we're trying to accomplish is fulfilling our duty to have fair and balanced communication to all investors. And so that's why we're trying to accumulate the information we can and decipher what's material and what's not, and that's what we're to do here is talk about things that wouldn't be perceived as material that might be interesting updates and giving you some insight as to how we're proceeding. So that's how we take it.

That's helpful. That's helpful. So let's then maybe dive in not seeking an update, but really to help understand a little bit better. Can you -- there are some questions here. I think it would be helpful to understand what is the role of debt as we roll out this business? And maybe talk a little bit about the debt stack as you see it for Origin in the next year?

It is -- debt, generally speaking, can be a way to leverage utilizing outside resources that's not dilutive to shareholders that is -- enables you to grow faster and deploy cash to, for us, build our manufacturing capacity quicker than if we're just accessing our own working capital. The way we see funding our debt is there are probably half a dozen equipment manufacturers that comprise our CapFormer line. And each of them are used to and have partners that they refer their customers to, which would be us, that provide financing. The manufacturers generally themselves don't provide financing, but they are a good reference for us to find that debt capital that is generally standardized in terms of kind of the way it works and what the cost of that capital is. And so for us, we're confident that we'll be able to finance each of those components. Generally, there's a majority of the equipment is financed. Some of it you have to pick up yourself. And so we see a primary sourcing through equipment lenders. And so we've got a lot of interest in partnering with us around that financing. And we think that's how we'll finance these lines over the next couple of years probably. As we've talked about previously, we expect to set up 8 lines by the end of this year. And for the majority of that equipment, we've got target lenders. So I think we're in good shape. And it's pretty good terms for equipment financing generally. The rates are coming down, and that's beneficial for us. So that's the strategy now. And yes, we're pretty excited.

Got it. That's helpful. All right. So this next question could be for either of you. So I'll let you guys figure out how you want to answer it. But a couple of questions asking about -- we had the press release around the MOU, but we didn't disclose the value of that, the specific value associated with that MOU. Is there a reason that, that wasn't part of the release?

Yes. Well, I think our view is we would like to really -- well, back up. the first -- really, the question is around the first MOU because that set the precedent, right? I think that's right. The precedent was set with the relatively large MOU that we described there because we know that investors want to see indications of demand. And we see indications of demand all the time, but investors don't get to see that same thing, obviously. And so we thought that was really useful in illustrating the size and scale and scope of the demand that we're seeing for our caps. So we thought that was really a useful thing to disclose. We tried to give some shape around it so that people could see that it wasn't just -- it wasn't a one-off sort of level of interest. As we look at additional MOUs, some of those are going to be large, some are going to be small. But across the board, we didn't think that -- well, I shouldn't say across the board. For that particular MOU, we didn't think it was going to substantially change everybody's view of what our demand picture look like. You can infer from that, that it's not as large as the first MOU, but it's not trivial. It's not nothing. And we don't want to get into a habit of disclosing just for MOUs what the full value is all the time. It's -- I think as we get to definitive agreements, I think there's -- it's more likely that we will have a sort of consistent way of communicating the scale of those, either aggregated or not. But I think we signed another MOU. We think that's useful for people to see that there are multiple customers in there. It's not as large as the first one. But we don't think the scale of it should change people's view, just the fact that there is another customer coming in.

Yes. That makes sense. Okay. All right. So you touched on this a little bit when you're sort of setting the big picture, John. But a question asking specifically, do you anticipate caps revenue feeding the Furanics program? What's going on with Furanics?

Yes. Well, as you said, I touched on it a little bit. We're excited about Furanics. We continue to invest in technology development. We continue to talk to customers and partners on that side, although with an eye towards our more limited willingness to devote our balance sheet to capital projects. So that -- we want to talk to customers that fit that sort of strategic willingness from us to commit to things at this stage. And so we continue those conversations, we continue the work. I think the goal is for, as I said earlier, cash flow from -- or the financial footing that caps and closure provides us to allow us to do what we want to do. And if that means being able to build capital projects for the Furanics technology, then yes, that would be exciting. What we don't know is exactly what the opportunities are going to be at that point. I think there's -- it's easy to say right now without having to actually write the check that, yes, of course, we would want to do big capital projects. But I think what we need to see is what does the world look like in 2 years, 3 years when we have that much stronger financial footing that we want where we can conceivably devote more resources that capital credits required probably to go develop.

Yes. I also think it's not necessarily an or but an and. The other thing about us focusing on debt right now is we just feel we're significantly undervalued. But I think there's an argument that says you can optimize your cost of capital by debt and equity at the right time and at the right valuation. So I think we want to open ourselves up to where we think we're a little -- we think the valuation is fair. Then it's not by going to the capital markets is accretive or not. And if it is, we can do both at the same time, right? So Yes, that's right.

Makes sense. All right. Well, a lot has changed, a lot of change coming up. So -- and then recently, we're at this one CEO model. And so if there's anything you want to say about that. But also just more generally, just you sort of just sort of taking the temperature of what's going on, how is it going? And particularly, what are you excited about the new year?

Yes. So I think Rich and I and Matt and the Board, we decided that the right answer was to optimize for speed of execution. And I think that this is not controversial. I think that lends itself to a single decision maker. And that was the goal. And I think that's -- we're already seeing that's working. right, simplifying that decision-making structure that makes things faster to only. And so we're excited about that. I think that's going to work out really well. I think Rich had a really good holiday. That's recently. And I think in terms of things that I'm excited about, obviously, we spent the last couple of days together working on stuff with the team. And we're -- I'm excited about where things are going. I'm excited about the speed at which we're bringing online these additional capabilities. I'm excited about the focus that the team has on execution. New technologies, even if they're mechanical technologies, can still be challenging. Doing things fast is challenging. And so I think everybody is enjoying it, but there's a lot to do. And of course, as I said earlier, we want to bring online new formats, new features. That means new stuff. We want to do that as efficiently as we can as we also bring online the manufacturing. Those 2 feed each other, but it means that there's -- there are a lot of balls that are in the air to figure it out and do it right. And we've got a lot of customer conversations going on, a lot of big customer conversations. I think one of the things that is most exciting about this, but is also one of the biggest challenges is the scale of what our customers want and trying to figure out how to do that is nontrivial. A lot of the product lines that you would introduce our caps for are really quite large product lines. And customers want to make the transition quickly. They don't want to have a single particular product line that has -- half of it has HDPE caps and the other half has PET caps. It just doesn't -- it doesn't give a nice consistent brand field. They want continuity. And so some of the pressure for us is bringing online enough capacity fast enough that we can allow these product lines to make the transition quickly. And that's super exciting. We're talking billions of caps a year being brought online really quite fast, many billions, but that's also hard. So it's the right kind of challenge. It's the right kind of problem, but it's a challenge.

Yes, the excitement and the challenge are the same in this case. That was great, you guys. Thank you so much.

Thank you.

Thank you.