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

Hello, everybody. Welcome to our mid-quarter investor Q&A video. I'm Evan Winchester. Today, I'm with John Bissell, Origin's CEO. Today, we're going to have a productive discussion. We're going to be answering most of the questions that we received, but we're not going to be answering every single one or attempting to be exhaustive. As a result, we're looking to have an informative focused conversation on the topics that are most relevant to investors today.

And before we get into the Q&A, I want to start by setting some context. So John, if you could just give us a little bit of overview around where we are today. Can you tell us about Origin right now?

Yes, absolutely. So where we are right now is we -- we've developed a platform for making PET caps. Obviously, the world uses polyethylene and propylene caps. Those caps are not recycled at anywhere close to the rate that PET and the PET bottle those caps are on. And so not only is this a sustainable solution, where you can both use recycled material in the cap more effectively, but you can also recycle the cap effectively, but it's also one that just provides better quality. So you get good transparency. We think they're beautiful caps, they're aesthetically pleasing. You get way better barrier and then as you get to larger caps, you can also get a lot more economic efficiency, both through processing speed. And because the natural properties of the PET material enable you to lightweight the cap more significantly. So we're really excited about this platform. We are bringing the 1881 cap. We call that a format, the 1881 format to the market first. We're excited about that format. We have the first line, Line 1 already up and running and has been for a little bit of time. We have Lines 2, 3 and 4. The thermoforming system of our CapFormer is already FAT-ed. Most recently, we announced Line 4's thermoformer FAT. We're excited to get those lines running too. We have a bunch of caps that are -- have gone to customers. We've received feedback. We're actively working with those customers on that feedback. We've iterated several times with many of these customers, and we're excited to get those qualified. We're also starting to look at larger formats with customers. So that's 1881 is a 28-millimeter diameter format. We're excited to look at 38-millimeter, 42.5 millimeter. We're excited to look at big stuff, too. So because we think that's where our tech guys can really provide extraordinarily differentiated cost in addition to just quality and aesthetics and sustainability. So we're excited about this. We think that we're tracking nicely. And we've got a ton of market demand that we need to deliver on. So we've got a long way to go. But we're going step by step. [indiscernible]

[indiscernible] for us here indeed. There's a few topics, just as a heads up on this call, we're going to cover. We're going to talk about some general company questions. We're going to talk about product qualification. We'll talk about our customers in a little bit more detail. And there were also some questions we received around cap performance and economic guidance. The first bunch of questions I want to look at are sort of general and have to do with our NASDAQ status, and financing, and things like this related to Origin. So first off is a question around our NASDAQ listing requirements. The question is, are you going to fulfill the NASDAQ listing requirements to stay trading on the NASDAQ without necessitating something like a reverse split?

Yes. So we fully expect that we're going to be able to get the stock price above $1, which if you can get above $1 for 10 consecutive days, and that removes the notice or the peril associated with delisting. We have a few months left to do that for the first grace period. There's typically a second grace period associated with that, which is another 6 months. We feel that there's -- there are a lot of good catalysts that are coming along that we're going to be able to announce and discuss. And frankly, just our straight up performance as a company will be more than enough to justify us avoiding any sort of delisting. And we also, of course, as part of, sort of good hygiene, if we get to the point that we need something like the second delisting grace period, it's likely that we will probably get a reverse split approved because that's considered the right thing to do, even if we don't use it, and we don't expect to use it. And that is something that we've had to do before. And obviously didn't use it then.

This next question is about protecting and maximizing shareholder value. Are you considering joint ventures or licensing or buyouts, things of that nature, or other strategies to protect or maximize shareholder value at this time?

So we certainly feel that our technology is the key. That's really where we provide a lot of value, our technology and I'd say our technical capability. And so two of those options that were just mentioned by that question are great ways in our view to commercialize and get value out of the technology without necessarily having to be the key operator for every single component of the deployment phase. So yes, we're looking at those kinds of things. And I think we've talked about looking at licensing quite a bit before. And our view of licensing, frankly, is not just that it's handover technology package and then take royalties. We actually -- because we believe in the operating benefit of the technology. We would like to be capital partners, and operating partners associated with other players that are using our technology even if we aren't the primary one in that particular instantiation. And so I think that it's reasonable to call that a joint venture or joint venture-like structure. And those are both things that we're very interested in. And have, I'd say, regular discussions on those kinds of topics, just as part of our general commercial discussions about how to roll this technology out most effectively.

Right now, what kind of financing options are being explored at Origin? In the last earnings call, there was a delay in the onset of revenue that was announced. Does that mean that we need to find financing sooner?

Yes. So we've talked about -- with respect to financing, our top choice is equipment financing, we believe that we can do this substantially with debt. That hasn't changed. Obviously, we're going to look at the full smorgasbord of different options for financing. We're going to take the one that we think makes the most sense for both, for the execution of the company, and successful commercial of the technology and also for shareholders. And so while we are intentionally blinding ourselves to all the options on the table, we believe that debt is the right way to do this. And there are a couple of different forms of debt that we could think could make sense. Our view on that hasn't changed dramatically since the delay associated with onset of significant revenue. We had anticipated that the gross margin still might not be dramatic from a cash perspective until significantly into '26. And so as a consequence, yes, there's a delay in revenue, but we still believe that the gross margin is going to ramp quite quickly once we bring it on. So it really just leads to a steeper slope of revenue growth later into '26 rather than a little bit more gradual and it starts earlier. So from a cash perspective, it's not a huge difference.

Next, we're going to move to product qualification questions, questions about customer feedback, design improvements and related. So first off, what is the latest customer feedback? And could you give a little context on where we're at with customer qualification?

Yes, sure. The most recent customer feedback that we've had actually is associated with some capping trials that we've done. And the feedback was extraordinarily positive. They're actually the best capping trials that we've run thus far. So we're really excited about them. We think they're good enough to get some product on shelves if we want to from that. I think some of the most recent advancements that we've had are -- there are a lot of different competing constraints associated cap design, and they're all a little bit different with PET than they are with polyolefins, polypropylene and polyethylene. And so one of the more interesting things recently is that we actually significantly reduced the torque required to both apply and remove the cap with some really interesting pretty minor design modifications. So we're excited about that. We're excited about how that opens up the constraint window a little bit. I don't know that that's going to have a game-changing difference, but it's an example of the kind of very specific improvements that we're making while we work on this with customers. And that we see as overall sort of accumulating into a pretty substantial advantage associated with PET caps.

Okay. Can you tell us when a customer qualifies an Origin Cap, are we allowed to disclose that? Are we required to disclose that? This is something people have asked about and want to know about. And so there's some eagerness there to have more information when it's available.

Yes. So we tend to abide by our NDAs. We think that's a good idea. And if we have a contract with a customer that has -- that prevents us from disclosing certain information without mutual agreement, then we're going to abide by them. As a consequence, we're not going to announce the qualification of a particular customer unless we have agreement from that customer, we can do so. Now what we might do is even if a customer doesn't want to be announced, is announced that we have called a customer without the name associated with that, and you've seen us do that in the past. So as we got large MOU, as we have signed additional MOUs associated with customers, even though we aren't releasing the specific name, we are indicating that we are getting those customers qualified. And by the way, it's likely that in many of those cases, we will never go back and point out exactly who that customer was. Because customers don't want to know -- they don't want the world to know that necessarily. That's their strategic decision as to whether a contract of a particular size or a particular type or a particular duration, which is really important, obviously, for our investors is something that they want that level of specificity applied or attached to their particular brand or name, and we respect that.

A few more customer questions here. So let's talk more about signed customer agreements. When can we expect some signed customer contracts? And what's driving this question oftentimes based on the questions coming in, is concerned about whether or not we're going to need a reverse split or what that near-term stock price looks like. How do those 2 things line up in terms of a signed customer agreement, and that sort of near-term pressure on the stock and concerns around the reverse split?

Yes. So in many cases, this is not in every single case, but in many cases, our customers have said, look, until we have a cap qualified, and we're very close to putting in the market, we don't want to announce our name. We understand that we've explained before that the reason for that is that they don't want their customers to have an expectation that when they go to the store, they can pick up a cap with a PET bottle, with a PET cap until it's going to be in market and they can actually do that. We understand that, as we just discussed, we respect that. However, there are customers that, for a variety of different reasons, some of them strategic, do want to announce these caps and their relationship with us, maybe earlier than that. Maybe once they've gotten through qualification or deep enough into qualification that they're comfortable that it's going to get there. There's just a little bit more work to do or maybe it's all the way through qualification, but it's not going to launch for a little while. Irrespective of the fact that through qualification, they may still be very comfortable making that announcement. So we're optimistic. And frankly, we expect that there are going to be some brands that we are able to announce in the not-too-distant future. In fact, we thought we were going to be able to announce one relatively recently that we obviously commented on. Circumstances changed on that particular customer, not because they are no longer interested in the caps or because they're no longer a potential customer. But just because the timing of communication for all of our customers is not always driven by Origin. Frequently, it's driven by whatever is going on at their company, and whatever their constraints are. So in that particular case that we're hopeful that we are going to be announcing a customer, it turned out that there were some things happening at that company that delayed that announcement. We still think that maybe -- may get out in the not-too-distant future. And that's not the only one like that.

Can you walk us through how licensing would work in a little bit more detail? It's something that Origin has mentioned that we've had conversations ongoing for some time now around licensing. So without telling us about who those companies are, can you walk us through what a good scenario of licensing would look like for Origin and how that would fit into our broader strategy?

Yes, sure. So when we license the technology at its core, we want the cost of operation to be low for whoever we're licensing to. And we believe that the technology is going to provide differentiated margin and gross profit. And so consequently, we want a sizable share of that once you're in the money, so to speak. And so the way that we usually think about licensing is, we're enabling the customer to make more money using our technology than they would have made, using either their own technology or somebody else's technology. And we also get to take a sizable fraction of that margin. But not so much that the customer of the license, the licensee isn't still making more than they would have otherwise, right? So your differentiated return is split between us and them. For us, that's an attractive proposition because it means that they're putting up the capital. Now we may be selling them equipment. They may be buying it directly from our vendors. It depends on the situation. But it means that we don't have to put it to capital, we don't have to operate them. It allows us to operate in geographies that we may not be comfortable in yet earlier. It may allow us to expand our capacity sooner than we would be able to do if we were relying on it ourselves. And so those are all attractive reasons to do this. But it's important from our perspective that we -- that when we do that, we are seeing a meaningful share of the gross margin associated with it.

All right. This next question is about customer demand. If Origin has more demand than can currently be supplied, why the ad campaigns? Origin has done some advertising recently. Can you talk about that?

Sure. So one, we fundamentally believe that it's a good idea for companies to try to market their products, and that's part of what we're doing. It's also extremely efficient to do those kinds of ad campaigns in our business because the deal sizes are relatively large. We find that it's not hard to garner interest, and it's a lot more efficient to do that work somebody's opting in because they're calling you as a result of an ad campaign rather than us calling through our network. And so I would argue that some of those patent campaigns are probably some of the most cost-efficient things that we've ever done. Generally speaking, certainly, there are products that are sold without marketing. But I think it's the distinct minority of successful products.

In the last earnings call, we announced but didn't name a large-format cap customer. Can you tell us more about that? Can we get any more detail or any more clarity on that large-format PET closure customer agreement and what that means for Origin?

Yes. So there are a couple of interesting things about that. One is we're excited about larger formats, obviously, because of the differentiated economics that we've described. So with 1881 or other 28-millimeter caps, as I said, we have the sustainability component, we have the quality component. And we have some economic advantage. But when you get to the larger cap formats, we have a very significant economic advantage to the production of those caps in addition to the quality, the aesthetics and the sustainability. So we're really excited about it from that perspective. Second reason is because that customer is going to be working really closely with us to develop these caps. And what's interesting about each of these different cat formats is there really are specific market elements to the feature sets associated with these accounts that are maybe not unique, but let's call them somewhat distinct to each -- or at least the combination is distinct to that particular market niche. And so we're excited to work with them because it lets us get up to speed on that distinct set of features faster. So that's really -- that's great. The last is that by getting in with one part, one sort of set of the market or corner of the market for a particular format. You can learn all about that, you can get the cap developed and then later, you can expand it into all the other different areas associated with that particular format. So we're excited to be working with what we would consider a flagship customer in that area, even though we haven't announced the name for reasons that I've alluded to earlier. We are excited because it's a cap format that we think is going to be really strongly economically advantaged. I'm personally just excited about that market segment. I think it's one that's going to be great when we can talk about it a little bit more to have our caps in. And I think they're really differentiated from an aesthetic perspective there in addition to the other ones. And then, of course, it's also great to diversify our product portfolio. So all of those things are reasons why we're excited about that relationship. And we'll talk about it more when we can.

This next question is about CapFormer performance and some of the economic guidance that's related to the performance of the system. In the recent earnings call, we noted that the newer CapFormer lines, Lines 2,3,4 and beyond, significantly outperformed or expected to outperform the Line 1 throughput. Were those expected improvements already baked into the economic forecast that we had given previously? Or are those improvements beyond what we've given previously?

Most of that was baked in at some point. So these are -- we absolutely don't come up with something overnight and then immediately put it into engineering and fabrication. We have a pretty long development cycle for a lot of these ideas. Once it gets into the shot, then maybe it's a little bit more quick a little bit quicker, rather. But we know about this stuff for a long time before it shows up in fabrication for equipment. So we have been expecting that this was going to end up in our unit economics for quite some time. But what we didn't know is exactly when precisely it was going to be line 2, 3, 4? Was it going to be 5, 6, 7, 8? Was it going to be a retrofit of one of those? A lot of those things are uncertain until it's go time. And so we're excited about that, not so much because we didn't think we would get there, but we're excited that it's actually -- we can sort of check the box on it. And we have more stuff like that coming. Not all of it baked in. This one, in particular, we did expect was going to hit within this first couple of tranches of lines. But some of them we may get earlier than we're expecting by a pretty significant amount.

So looking ahead, what do we have to look forward to with Origin as Origin investors. Can you tell us about the next milestones. Of course, people want to know when they can expect those milestones, things to be excited about as standing from where we are today, looking ahead?

Yes. So I think a few things. One, we're excited to get some caps qualified with large customers. We're excited to announce that. Two, we're going to get some names of customers that are meaningful out there. I still don't think that's in the distant future. I think that's relatively near. Three new formats are really exciting. So being able to diversify the product portfolio, actually lets us access more customers even for the earlier products, but also really, there's a lot of margin in many of those. Four, our limited pilot launch, is going to go out in, again, not too distant future. We're excited about that, actually putting some products on shelves even if it's not too many. And then finally, I think getting all of these CapFormers up and running means that we're going to be in a really good position as soon as we make it through of those customer qualifications, boom! So we're going to have a lot of capacity that we can deliver into those customers, and we can really start to generate serious revenue and gross profit.

Great. Thank you very much, John. And for everybody who submitted questions, thank you very much. Great questions, prompting a great discussion. Thanks, everybody.

Thanks, everyone. Good first half of the quarter.