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

Hello, everybody. Welcome to Origin's mid-quarter investor Q&A video. I'm Evan Winchester, standing in this time for Origin Co-Founder, Ryan Smith. Today, I'm with Origin CEO and Co-Founder, John Bissell. And today, we're going to spend some time engaging on investor frequently asked questions. And while we're going to do our best to answer most of the questions we received, we're not going to be totally exhaustive. We're going to be focusing on the most requested and most pertinent questions. So before we get into questions, John, do you want to start by setting the table and some context on where we are today?

Yes, I'd love to do that. So where we are right now is we've developed a product that we're really excited about it and our customers are really excited about it, which is PET cap. We have done a lot of product development around that cap. We've built the first line to produce those caps from PET sheet. We have that line installed at Reed City Group in Reed City, Michigan. That line is operating. We've produced a bunch of caps from that line, those caps are in the hands of customers, and we're accumulating caps from that line as well, so that we have the inventory required to be able to supply a lot of our customers. We also have 3 additional lines in construction or in assembly, maybe is a better way to say it. Those lines are expected to be delivered and/or factory tested, depending on which one you're talking about over the course of the next couple of months. So we're really -- we're excited about where we are. We still have a lot of work to do to get to our caps in volume to our customers. So no pulling off the throttle. But we think we're in a good spot.

Thank you. Now let's start off with some questions that are focused on what -- on everybody's mind lately, which is tariffs and what's going on with global trade. We're in the midst of commercializing our caps and closures business. I think the year ahead is very much about building manufacturing capacity. And at the same time, we have a new challenge, which is this significant global trade disruption. So these first questions are going to be focused on that. Can you tell us about what is our strategy for deploying CapFormer Systems, taking into account considerations like geography, so production in North America versus in Europe, tariffs, of course, and tethering. So tethered products being acquired in Europe. And some of the trade-offs involved in deciding to place more CapFormer in the United States versus Europe.

Yes. Obviously, that -- as you know, Evan and the rest of the team knows the tariffs are definitely something that we're having to spend time thinking about. One of the most challenging parts is that we don't really know where they're going to land. As we record this video today, we think it's a 10% tariff for most of the equipment that we need for our CapForming lines, again, most of which is produced in Europe. And then we expect to be shipped to the United States. If that number changes substantially, then that can change the sort of business case for where to put those CapFormers, where to produce the caps in order to deliver the caps too and which customers. So we're in the process of building contingency plans depending on exactly how those numbers land. And frankly, how the trade environment more broadly than just the specific tariffs plan. And we'll see how that all works out. I think you listed some of the really key elements, which is both what's the cost of taking -- importing the equipment that's required with the CapFormers into United States versus putting it somewhere else. And then what's the cost of delivering to different regions from the United States or to the United States from Europe perhaps. And as we look through, I think this is causing us to think a little differently about which customers to serve in the first sort of tranche of CapFormer lines that we deliver. It's causing us to think a little differently about where those CapFormers might go and in what order. We're sort of not ready to substantially adjust how we decide to locate those CapFormers in lines yet, but it's obviously something that we're thinking about a lot right now. And it's hard to see how these tariffs won't have some kind of impact on our plans over the course of the next year or maybe more.

Well, that brings me to the next question, which is how do these tariffs affect Origin's overall outlook? For example, does this change our outlook on what we should expect in the future? Does it change how we would approach things like our financing strategy for these CapFormers? Can you talk a little bit about the effects in terms of our business, medium and longer term?

Yes. I think our view so far is that it really doesn't undermine the business case for CapFormers lines themselves. So we think that we turn that profile that we've talked about so far with be [ separate ] lines is pretty consistent. Yes, if we have to import a bunch of equipment and take tariff hits on that equipment, then that will have some impact on the effective total installed cost of those CapFormers lines in the United States. . But generally speaking, it's not so much of a difference that somehow the business gets us to hang together for each of those lines. We still think it makes a data sense. If you go from an 18-month ROI to something slightly longer than that, that's still fine. And we think that, that's plenty to justify financing and still leaves lots of room for return for Origin past the cost of capital. So we're not -- we're pretty concerned about that despite, as I said, our concerns about, well, what makes the most sense for geographic deployment and how -- if there's any disruption besides just the tariffs themselves, how that might impact us? Those are very much concerns, but we think that the business case is still well underpinned. And also, I think it's worth as we talk about business cases, it's worth talking about demand. We absolutely still see very strong demand. And in fact, we have almost 60 companies that are active in our pipeline right now. 10 of those companies are currently qualifying our caps and then another 11 are preparing to receive caps for qualification. So it's really -- we've got a lot of work going on with customers. And not only that, but just in this month alone, we've had another 17 inquiries come in from really sizable customers. I mean flagship customers. So we don't see any flagging of demand at all in this environment despite the fact that we are absolutely seeing challenges on the supply side.

Okay. This next batch of questions has to do with our strategy for CapFormers. And we know that CapFormer Line 1 is operational in Reed City, Michigan. And in the last earnings call, we talked about some projections around when CapFormer lines 2 through 4 are going to be beginning production. Could you give us more on the status of CapFormer 5 through 8? For example, can you tell us anything about the status on equipment orders? And are we awaiting additional financing for those lines?

Yes. So we absolutely are looking at financing for those lines and other lines also. And that's a key part of what we do as we put these orders in. We're also, as I said earlier, weighing the impact of tariffs or trade more generally. But generally speaking, those evaluations are ongoing, not least of which because the environment seems to change on a sometimes day by day, but at the very least week-by-week basis. . So it's -- we're very engaged with our vendors on these topics, our suppliers, and we're quite focused on it, getting it right. But we're very much committed to scaling the business as quickly as we can, nonetheless.

Let's talk about the financing for individual CapFormer lines. We have recently publicly talked about an 18-month payback period for financing individual CapFormers. An investor asks, does that assume 1881 caps? And is there any other color you can provide on payback times for larger caps, for example?

Yes. Generally speaking, when we're talking about those kind of metrics, we're mostly talking about 1881 caps. There are some considerations that we look at in terms of the fact that these are differentiated PET Caps. We look at the geographies that we expect to sell those caps into. So there's a little more complexity than just is this straight up 1881. But generally, we're talking about 1181 caps. And as is alluded to in the question, we think that larger formats are going to be more profitable, higher margin for us. And so we expect that we do better than that with the larger formats. In large part due to the differentiated value proposition that does larger formats get when they're made using PET and using our platform.

Before one last question on CapFormer lines strategy. With CapFormer 1 operating and Reed City producing caps, why not try to sell all of those caps if we're producing caps at commercial scale there? A lot of those caps are going to qualification right now. Can you talk about the thinking around that? And how we're using line when production?

Yes. I mean -- I think building inventory and then shipping caps for qualification is that's the shortest path to selling caps on that line that we can get to. I think maybe there's a concept there that we can sell caps before they've been qualified. I think probably, to a certain extent, there's a way to do that. I think our view is we'd rather have the right customers who do their diligence in the boat with us whenever we can and that they're approaching this the right way with the right long-term incentives associated with the performance of our caps and their product. So we tend towards that rather than the other. But that said, we really are pursuing this in a way that we think we'll get us to market in meaningful volume, the fastest. .

This next one is about a different topic about furanics. And so the question is, what proportion of R&D spending goes towards furanics today as opposed to caps and closures. Can you tell us about what that breakdown is like, and where we're focused right now?

Yes. So as you look at furanics specific R&D spending, relative to everything else we're doing. Because of all the reallocation of resources that we've done from furanics to caps and closures, it's a pretty small number. So you're looking at single-digit percentages of total spend. go towards furanics. We think that, that's an appropriate amount to keep moving the technology forward actively to not lose any of the institutional knowledge associated with it to be able to support customer engagement and relationships on that side. So we think we can make really active progress there. But the vast majority, as we've said before, of our resources have been reallocated towards caps and closures. And one of the reasons we can do that -- we could do that is because our engineers and our scientists are very, very generally capable. So what we found is as we've moved our engineers and scientists from furanics into a specific application of materials, which is our cash program, they transition extremely effectively. In fact, the feedback we've gotten from partners and vendors that it's pretty shocking, how capable they are in that specific application despite having not decades of that kind of industry-specific experience or generalized ensuring a scientific experience.

Great. This is the last question is on the topic of Investor Relations and Communications. When CapFormer 1 was coming online and -- well, back in December and through February, we had a lot of social media updates, showing incremental progress on the line. We haven't seen any post like that about line progress since the last earnings call. Can you talk about why that is? And in general, if you could comment on Origin's communication strategy. Generally, we want to hear from you on that.

Yes. So with Line 1, we thought that was a really a major milestone. It's the first CapFormer that's being deployed. And so we really gave quite a few updates on that as we were going because we thought it gave people really some texture around what goes on as we take possession of equipment from our vendors, ship it to our site, get it set up, deployed started up, all those kinds of things. So we thought that one more granularity was appropriate, given the significance of that milestone. . I think we want to continue to be transparent, just in general. So we'll continue to give updates on things. But for Lines 2, 3 and 4, they're not so differentiated from Line 1. And so we do tend to look for things that we think are new information to provide to investors, and frankly, anybody else in our -- any other stakeholder in our [ EBIT ]. And so we're looking for opportunities to do that. But take the comment and we'll look to continue to be transparent and communicative on this front.

There's a couple of questions here around customers and pricing. The first one has to do with customer qualification. Have any customers finished qualification yet. Can you talk about that? And also there were questions that we're getting at what are the risks that could manifest during a qualification period?

Yes. So we have a customer that we're pretty excited to launch a new product with our cap on it. We think that's going to happen pretty imminently. What are the kinds of risks that can manifest our qualification? Well, the qualification process is not just about our cap as we described, but it's also about the way that our cap performs in that particular customers capping equipment and with their particular product. And frankly, their qualification tests, which can be even for -- if all one of the things are constant, those could be different from 1 customer or another. And so some of the things that could show up are aiming from all the typical sort of characteristics we look at for a cap like off to work, right, which is how hard is it to get the cap off of the beverage. It can be seal leakage, it can be an impact. So how hard do you have to hit the bottle or the cap with some sort of impact in order to cause it to crack or break. Everything breaks eventually. The question is how hard do you -- can you hit it before it does do that. These are all pretty typical sorts of tests for caps, and customers may have different thresholds or different methods of evaluating these. You can imagine in one you -- if you're testing seal and you just put the cap on and then pressurize it and see what happens. That's one time. You can also invert it, bang it with a hammer, throw out in a furnace and then see if it still didn't leak. Those are both a leak test, but they can have pretty significantly different results. And so customer by customer, we're working our way through these different kinds of tests and valuations.

Some of our investors asked about pricing. They want to understand how we're pricing these caps. And they also -- and one question caveat of that by saying, "Hey, if you can't give the pricing for an origin cap, can you help us baseline -- pricing based on industry prices for existing caps today?

Yes. Yes. So for 1881 -- and it tends to trend by format, which makes sense, right? There are certain kinds of -- certain amount of material that has to go into each of these formats. And there are certain cycle times for the existing injection molded materials. . So for an 1881 format, which is what I think most people are focused on right now for us appropriately. The pricing range is from, say, just under $10 per 1,000, and then can be a couple of multiples of that. So if it's a small volume, if it's a high-value product, if it's the right place to go, you can get up quite a bit higher, call it, $30, $40, $50, $60 per 1,000 higher than that or more. It just depends on the packet of the customer, this packet of product. So it's a pretty wide range. but it really never gets much cheaper for the incumbent product than maybe a little under $10 per 1,000.

Thank you, John, for answering all these questions. Anything you'd like to leave us with as we wrap up?

Look, we appreciate you guys taking the time to ask these questions to highlight them, to send them to us, to curate them. We things like this are one of the ways that we try to be transparent and communicative to our investors and other stakeholders. So keep doing it. Thanks for it. .

Thanks very much, John, and thanks, everybody, who submitted a great question.