LanzaTech Global Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 9 speakers on the call.

Operator

Good day, and welcome to the LanzaTech Second Quarter 2023 Earnings Conference Call. All participants will be in the listen only mode. After today's presentation, there will be an opportunity to ask Please note this event is being recorded. I now hand the conference over to Omar Elsharkavy, Vice President of Corporate Development. Please go ahead.

Speaker 1

Good morning, and thank you for joining us for LanzaTech Global Inc. Q2 2023 earnings conference call. On the call today, I'm joined by our Board Chair and CEO, Doctor. Jennifer Holmgren and our CFO, Jeff Trukenbrut. Earlier this morning, we filed with the SEC our quarterly report on Form 10 Q for the quarter ending June 30, 2023, and issued a press release with our Q2 2023 financial and operating results as well as an investor presentation summarizing the company's performance and key operational highlights for the quarter.

Speaker 1

Both our press release and results summary investor presentation Can be found in the Investor Relations section of our website at www.lanzatek.com. Before we begin, I'd like to direct you to the disclaimers in the front of the company's investor presentation and remind you that today's call may include forward looking statements. Any statements describing our beliefs, goals, plans, strategies, expectations, projections, forecasts and assumptions are forward looking statements. Please note that the company's actual results may differ from those anticipated by such forward looking statements for a variety of reasons, many of which are beyond our control. Please see our recent filings with the Securities and Exchange Commission, which identify the principal risks and uncertainties that could affect our business, Prospects and future results.

Speaker 1

We assume no obligation to update publicly any forward looking statements. In addition, we will be discussing and providing Certain non GAAP financial measures today, including adjusted EBITDA. Please see our earnings release and filings for a reconciliation of these non GAAP measures their most directly comparable GAAP measure. Today's call will begin with remarks from Jennifer providing an overview of and update on our 2023 priorities, including our recent financial results. Jeff will then review in greater detail our financial results from the Q2 and provide additional insight into our business model and growth of the business.

Speaker 1

At the conclusion of these prepared remarks, we will open the line for questions. With that, I'll turn the call over to Jennifer.

Speaker 2

Thank you, Omar, and thanks to everyone for joining us today. As we continue our mission to recycle the world's waste carbon supply, the urgency of acting on climate change and creating a circular carbon economy In the Q2 alone, the effects of climate change exacerbated by the early return of El Nino administration, Noah, the cost of climate and weather disasters in the United States alone last year Total more than $165,000,000,000 This data demonstrate how important it is to advance sustainable business models that align commercial, social and environmental strategies. Our work is centered around reorienting how the world uses waste carbon in a way that creates value. LanzaTech's performance this quarter demonstrates that we're continuing to make progress. Within this fiscal year, the annual installed production capacity enabled by LanzaTech's technology will capture roughly twice the amount of carbon as it did last year.

Speaker 2

We're doing this not by the old paradigm scaling up, but by numbering up, which means local execution on a global scale. This approach translates into the utilization of locally sourced raw materials, so that every country can secure and benefit from its own domestic supply chain. Turning now to our results and with the first half of the year completed, I'd like to share our 2nd quarter results within the framework of our 2023 execution priorities as outlined on Slide 5 of the presentation. 1st and foremost, safety. In the second quarter, we had 0 lost time injuries and 0 recordable injuries across our global operations from our offices and laboratories to our commercial scale plants.

Speaker 2

2nd, global production. We are on target to grow our commuted installed main capacity By over 100% over 2022 capacity to more than 300,000 tons per year or approximately 100,000,000 gallons per year by the end of 2023. You can see this on Slide 7. Importantly, this capacity growth includes expansion of the geographic footprint to include India and the European Union. In India, alongside of the partner Indian Oil, we continue to make progress towards full production of our 33,500 tonnes per year Commercial facility that will convert carbon dioxide rich refinery acid into ethanol.

Speaker 2

This is the first commercial deployment of our technology in a refinery using a refinery of gas. In Europe, with our partner, ArcelorMittal, initial samples of ethanol were produced at the 64,000 ton per year facility in late May. Commercial scale ethanol production from the bioreactors is expected to follow in the 4th quarter. In China, a 60,000 ton per year facility at Afero Allo Mill successfully started up in the second quarter. This project marks our 4th facility where our joint venture partner Shogang and it is currently ramping up to full scale commercial production.

Speaker 2

Once these 3 additional commercial plants are fully operational, the cumulative installed nameplate capacity of our existing And new commercial scale facilities will equate to removing over 500,000 tons of carbon dioxide from the atmosphere every year. This is what gives me the confidence that LanzaTech will be a gigaton scale solution for carbon abatement, something that the planet urgently needs. Turning to Sustainable Aviation Fuel or SAF, Landsekjet continues to make progress towards the 2023 completion of the world's first ethanol based alcohol to jet, SAF plant at the Lancet Field Pines Fuel Facility in Georgia, as you can see on Slide 8. Once operational in 2024, this In addition to the development of Freedom Pines fuels, Landsatjet has made tremendous progress and continues to be extremely well positioned in the SAF market. Earlier this year, Landsatjet entered a memorandum of understanding With Indian Oil to explore the development of SAF production in India and in March, they announced the collaboration with JetZero Australia for the 1st alcohol to jet production plant in Australia.

Speaker 2

Most recently, Landsatjet entered an MoU with Airbus to advance the building of SAF facilities, which will use the Lancetjet ATJ process. This agreement also represents a collaboration to accelerate the certification and adoption of 100% drop in SAF, which would ultimately Eliminate the use of fossil fuels without necessitating any changes to existing aircraft or infrastructure. In addition, this would eliminate the need for aromatics in Aviation Fuel, which will bring an additional benefit, including the reduction of controls and particular admissions as shown by our 2021 study with NRC Canada. We are proud of the work Lanfichet is doing and as a meaningful shareholder of the business are excited about the position they're building as a leader in the SAF market. Together with Lanza Jet, we're also making strong progress in advancing several other SAF projects that will utilize waste beds ethanol feedstock produced through the Landsatet platform.

Speaker 2

These projects include our SAF Project in the United Kingdom, which received a $30,000,000 grant from the U. K. Department for Transport late last year. For this project, LanzaTech selected Technip Energies as a technology provided and awarded through Corporation the contract to provide Employment awarded LanzaTech and Zenergy, a wholly owned subsidiary of Ample Group And New Zealand's largest fuel retailer, a feasibility study to convert local New Zealand waste products into ethanol and then utilize that ethanol to produce SAF. SAF is a critical part of the global energy transition And we're proud to be helping the aviation industry reduce its carbon footprint without impacting land, water or food resources.

Speaker 2

Let's turn now to our 3rd execution priority, commercial growth. The demand driving our capacity increases is also resulting in robust Revenue growth for our business. We saw year on year revenue growth of 31% to $12,900,000 for the 2nd quarter. This revenue performance for the first half of the year was in line with our projections and is consistent with our previously provided revenue guidance of $80,000,000 to $120,000,000 in 2023. However, with more than half of calendar 2023 behind us, We're tightening our 2023 revenue guidance to $80,000,000 to $100,000,000 The updated and narrowed continues to reflect the back end weighing associated with our 2023 forecast.

Speaker 2

The revenue associated with Higher end of our original revenue guidance range now moves into 2024, further bolstering our 2024 growth outlook. Our commercial pipeline continues to grow as outlined on Slide 10, setting the stage We continue to add projects to the pipeline funnel and are seeing steady progression of individual projects through the pipeline moving through various stages of engineering. In fact, we saw 2 projects progress to the advanced engineering stage during the Q2 and anticipate several additional projects We'll move into advanced engineering through the second half of the year. Let's now look at our short, medium and longer term revenue growth pictures. We are creating a new industry as we work towards a vision of a circular carbon economy.

Speaker 2

NH Business Line, Biorefining, Joint Development and Contract Research and CarbonSmart contributes to that goal. We are assembling a global ecosystem of Participants from deployment partners such as Prime Metals Technologies and Technic Energies and key supply chain players including Fastipac and To product developers like On, Zara, Cody, Adidas and H and M Move, which resulted in product lines in stores this year, including a new Gucci fragrance that contains 100 percent carbon captured ethanol. This ecosystem also includes waste processors We're making progress with both partners with the engineering now complete on our project with Nexchem in Rome. With these partners, we plug into existing value chains to have immediate impact while we build a new circular material system. We acknowledge that bridging different industries means we don't fit squarely into single category.

Speaker 2

So I hope that as we next go through our business lines, We can effectively break down how these different work streams are contributing to our revenue growth. Starting with our biorefining business line, we expect engineering services and sales of equipment packages on several key committed and contracted projects to drive revenue most significantly in the second half of twenty twenty three. On the Engineering Services side, we expect continued significant contributions from our integrated gas fermentation and alcohol to jet SAF project in Wales, which we call Project Dragon, as well as from other projects with Bridgestone, Woodside and several others. Initial equipment package sales are expected to commence in the 3rd 4th quarters this year, including on projects with Woodside in Australia, Gale in India as well as on 2 other projects in India. For our CarbonSmart business line, we expect 20 22 revenues to be multiples of our 2022 performance, fueled by planned commercial campaigns from brand partners across many consumer product verticals in the second half of twenty twenty three.

Speaker 2

In our joint development and contract research business line, we continue to see revenues committed or under contract contributing to the top line in the second half of the year, showing customer demand for solutions that lower the carbon footprints of their supply chains. As recent evidence of this customer demand, we recently signed a joint collaboration agreement with Technip Energies to create a new pathway to sustainable ethylene Utilizing our combined technologies. Just like with prime metal technology, we expect Technip to also serve as a channel to market, helping us better Longer term, our project pipeline is laying the foundation for strong revenue progression. Over the next several quarters, we will continue to be in the deployment stage as we advance projects through the pipeline, While Jeff will provide additional insight into the workings of our pipeline in a few moments, I'd like to highlight that the bulk of the near term biorefining revenue Will come from the sales of engineering services and equipment packages as projects move from early stage engineering To advanced engineering and then from advanced engineering into construction. This is our numbering up strategy in action.

Speaker 2

Moving to our 4th execution priority, adjusted EBITDA. Given the strong momentum we're seeing across our business, We are reiterating our forecast to achieve positive adjusted EBITDA by the end of 2024 as our commercial pipeline continues to expand. Turning back now to recent performance. Adjusted EBITDA for the 2nd quarter totaled negative $23,800,000 Bringing the adjusted EBITDA loss for the first half of twenty twenty three to negative $47,300,000 There are several cost factors that have contributed to the adjusted EBITDA loss during the first half of the year. First is talent.

Speaker 2

We expedited the expansion of key teams to support strategic growth throughout 2023 and into 2024, including in our engineering and strategic project groups. The development and expansion of these teams will accelerate project development across the board, but especially within our pipeline of projects that we are co developing with Brookfield, several of which will enter early stage engineering in the coming months. We look forward to making our first announcement on these projects very soon. In addition, We pride ourselves on attracting and retaining top talent across the organization. Like other companies, we're facing an increasingly competitive job market.

Speaker 2

This macro dynamic combined with the continued investment in people and our focus on retention has led to upward pressure on our overall compensation expense. Finally, we saw increased costs associated with moving ahead of schedule for demonstrations of our isopropanol producing microbe at scale. Isopropanol is a chemical intermediate that can be used in multiple supply chains. For example, isopropanol can be used to make polypropylene, which had a 2022 market size of around $120,000,000,000 and has applications in numerous industries, including medical, automotive, packaging, building and construction. This is a big deal as the flexibility of commercial microbes will allow our partners to potentially use the same LanzaTech Biorefining hardware to switch between products, taking advantage of market fluctuations and demand cycles.

Speaker 2

We anticipate sharing more progress on this in the second half of the year. Given the updates to our forecasted Full year 2023 revenue guidance as well as the factors I've just mentioned. We're updating our 2023 Adjusted EBITDA guidance to a range of negative $75,000,000 to negative $65,000,000 versus negative $65,000,000 to negative 55 $1,000,000 previously. Once again, we remain confident that our growth initiatives along with continued investment In our people and resources, we'll support project deployments and growth over the medium term, supporting our continued expectation to turn Adjusted EBITDA positive by the end of 2024. Moving on to our 5th Process Competitiveness.

Speaker 2

Since the Q3 last year, our 2nd generation bioreactor has been in operation At a demonstration scale facility in Alberta, Canada with our partner, Suncor. This improved design does several important things. First, it improves production yields by up to 15% to 20%, which means greater redness for our partners and for Lamzacelk through ethanol sales and royalty revenue. 2nd, the design optimization reduces the cost for our partners, improving the return on investment. And lastly, as mentioned previously, we are ahead of schedule on the demonstration of Our isopropanol production microbe in the second half of this year.

Speaker 2

With that, I'll turn the call over to Jeff to provide details on our financial

Speaker 3

Thank you, Jennifer, and good morning. Thank you to everyone joining us. I'll first start with a recap on our second quarter results and then provide some incremental color on our business model How to think about forecasting our growth. As seen on Slide 12 of the presentation, 2nd quarter revenue from our biorefining, carbon capture and utilization category Grew 64% year on year, reaching $9,700,000 driven mainly by ongoing and recently initiated engineering services work on several projects. Research and development revenue, which includes our joint development and contract research work reached $2,200,000 in the quarter And Carbon Smart revenue totaled $1,000,000 Total revenue for the first half twenty twenty three of $22,600,000 Was in line with our forecast.

Speaker 3

As we have previously suggested, we have consistently anticipated a significant back end weighting to revenue generation this year We are targeting more than 70% quarter on quarter growth on average during the second half of the year as more projects progress through the biophonic pipeline And additional Carbon Smart campaigns are fulfilled. Cost of sales in the 2nd quarter increased 46% over the same period last year, Reflecting 31% higher revenue year over year for the quarter and the significant cost of engineering and other services On our integrated waste based ethanol for SAF project in the UK, which we call Project Dragon. The lower year to date gross margins and the quarter on quarter Client gross margin is largely attributable to this project, one of our biggest revenue sources for the year. The revenue contribution from Dragon in the form of Engineering Services Will continue to be realized over the course of this year and into next. However, given our 20% cost share obligation associated with this government contract, We record negative gross margin on the project.

Speaker 3

Still, this is a great opportunity for us as we have Contracting committed revenue source to develop this flagship integrated facility, which combines gas fermentation and Alcozeb Technologies, while continuing to own the development rights to the project. We do anticipate gross margin improvement in the second half of the year as we expect several projects to commence engineering services, adding higher margin revenues to the sales mix in the coming quarters. With regards to the year over year increase in operating expenses, the SG and A component of operating expense expanded mainly as a result of the growth in our overall headcount, Going from approximately 340 people to over 400 people in the last 12 months, expediting the expansion of key teams critical to our strategic growth objectives, Increased compensation to prioritize talent retention as well as higher professional services expenses and certain ongoing public company costs. The investments in our engineering and strategic project teams reflect in part an exciting pace of progress in project development within our Brookfield partnership. The research and development component of operating expenses increased $5,700,000 year over year in the Q2, consistent with our forecasted costs And reflecting our ongoing investment in people, innovation and process improvement in our gas fermentation platform and microbe commercialization activities Beyond ethanol producing microbes, the latter efforts, one of our 2023 execution priorities are progressing well and those commercialization efforts And increase our costs in 2023 as we bring more of that work into 2023 as compared to 2024.

Speaker 3

We expect operating expenses in the second half of twenty twenty three to be less than the level in the first half, As we experienced several one time expenses in the first half, mainly from professional services associated with the closing of the business combination, Accelerate investing of restricted stock awards and various compensation related expenses associated with transitioning employees. Net loss in the quarter was negative $26,800,000 and adjusted EBITDA was negative $23,800,000 Turning to adjusted EBITDA loss for the first half of twenty twenty three of negative $47,300,000 We recast the adjusted EBITDA loss in the Q1 From negative $27,600,000 to negative $23,500,000 We previously did not exclude from adjusted EBIT to serve onetime costs Related to the business combination and initial securities registration that occurred during the Q1. We believe that excluding these one time costs, mostly related to professional services, provides a more accurate picture of the company's operating performance. With today's updates to our full year 2023 revenue and adjusted EBITDA guidance, we want to reiterate the importance of viewing our business over the long horizon due to significant impacts that can result from minor timing shifts in our large scale projects. Said another way, today's guidance It mainly reflect our updated view of project timing, not a net change in our growth opportunities nor our path to positive adjusted EBITDA between now and the end of 2024.

Speaker 3

Taking into consideration these one time expenses in the first half of the year and the investments in 2023 to accelerate multiple aspects of our planned business strategy, the Medium term outlook for the business shows a faster execution of our planned strategy, gross profit growth and lower normalized future expense from earnings. In short, we're extremely pleased with where we are headed and believe our business plan is stronger than ever. Turning to the balance sheet. We exited the quarter with cash, cash equivalents, restricted cash and investments in U. S.

Speaker 3

Treasuries, totaling approximately $161,100,000 Cash burn in the quarter was approximately $33,800,000 of which $5,500,000 was one time in nature associated with our participation In the Lands'AjET shareholder loan alongside our other Lands'AjET shareholders, we expect cash burn to reduce in the second half of the year With our current liquidity combined with our confidence in achieving positive adjusted EBITDA in late 2024, we continue to believe that we are well capitalized with adequate financial flexibility to achieve our growth objectives. I'd now like to turn to a discussion on how to think about forecasting our growth. Over the last several months, we've engaged extensively with the investment community, many of whom expressed interest in more clearly understanding how individual projects advance through the development to our financial results. With this feedback in mind, we laid out some of the key financial drivers and forecasted principles on Slide 14 of the presentation. For our biorefining business line, where we license our core technology platform to customers, I'd like to provide some I'll cover on how we think about the financial contribution of a typical plant for its development cycle.

Speaker 3

We think about the project life cycle in 2 distinct buckets The series of stage gates, which you can see represented on Slide 15. 1st, the development stage and second, the operating stage. We generate revenues through our services and licensing model in each of these stages. We want to unpack that a little bit further here. First, the development stage is broken up into 3 main categories: a, early stage engineering b, advanced engineering and c, construction.

Speaker 3

During this stage, we realized revenues associated with our engineering and start up services as well as revenues from the same equipment. While we do not typically provide all the equipment for a project, we provide key components to the equipment package, especially those that are based on our proprietary designs. During the 2nd stage, the operating stage, we begin to realize a variety of high margin recurring revenues, including running royalty typically tied to the gross revenue of the plants output, the ongoing sale of microbes and media, effectively consumables in the process, As well as software, monitoring and analytics services designed to help our licensees optimize the operations of their facilities. I'll now turn to how projects progress through our pipeline and over what periods of time. Prior to entering our forecast pipeline, each opportunity completes a preliminary technoeconomic Analysis or TEA, which upon yielding positive economic results likely advance the opportunity along with the first stage, early stage engineering.

Speaker 3

We see approximately 50% to 60% of projects with positive TAE results in advanced early stage engineering and believe that is an appropriate probability factor In early engineering, the customer engages in a paid feasibility study, generating additional engineering detail and scoping. Recent example of a project under the space in the partnership pipeline is with our integrated SAF project with Air New York. We forecast that approximately 70% to 80% of projects It is in these engineering stages where LanzaTech begins to Substantial engineering services revenue, typically between $1,000,000 $5,000,000 the both of which is realized in the advanced engineering stage for a basic engineering package or BEP. The contracting of the BEP marks an important milestone of the project's development It's a significant predictor of the progression of our long term financial performance. Examples of projects in our current commercial pipeline at this stage include our project in Rome with partner Max Chem as well as our recently added project with Partner Bridgestone.

Speaker 3

Approximately 80% to 90% of projects that have completed the BEP Have earned a positive financial investment commitment by the customer and will enter the next portion of the development stage, the construction phase. Once in construction, we generally expect a near 100% probability that a project will complete construction and start up. During this construction stage, BioNTech realizes revenues through 2 streams. 1st, the sales of key proprietary componentry and equipment packages typically in the range of $15,000,000 to $20,000,000 depending on several factors, including but not limited to capacity, integrations and geography. And second, start up services and operational training typically in the range of $1,000,000 to $3,000,000 From T-eighty eight construction completion, we anticipate the timeline to be approximately 24 to 36 months, approximately 12 months in the preconstruction phases 12 months to 24 months in the construction phase.

Speaker 3

Once construction is completed, the project enters start up and full scale operations. It is in the operating stage that the project generates recurring revenues for Lanxitect through the licensing royalties, the ongoing sale of microbes and media and The ongoing sales of software monitoring and analytics services. Our licensing royalty is typically structured as a percent of gross revenue on the sales of products from the facility With royalty rates typically in the high single digit percentages. We believe that the anchor KPI for estimating the long term buildup of revenues The biorefining business line will be the number of BEP starts each year. Once a project is commenced at BEP, the significant engineering services revenues begin to our results and once completed, there's a high probability of the project advancing through the disruption and then on to operations.

Speaker 3

Given the timelines involved in our project deployment, we believe it helps to think about our business on an annual basis rather than quarterly. These biorefined projects are large capital investments on the order of several $100,000,000 depending on the size, integration and location. These investments are made by our licensing customers and the projects we developed and constructed over multiple years. Therefore, it is not uncommon to face delays associated with project decision making by customers. This dynamic can result in a shift of project milestones, which can contribute to some challenges in forecasted quarterly results with Precision.

Speaker 3

Slide 16 outlines the number of projects we target commencing a BEP in 2024 2025 on a probability adjusted basis based on our current project pipeline. The illustrative economics to Landotec of a 50,000 ton per annum facility From each of the development and operating stages are also shown on Slide 16. As you would expect, based on the pipeline progression demonstrated, Our near term revenues will be dominated by one time revenues earned during the development stage, while we are building up a base of operating assets with long tail recurring revenue streams and extremely attractive margins at Landsatide. Jennifer discussed earlier our 3 new partner facilities opening this year. I also wanted to expand a bit on the revenue dynamics of these projects.

Speaker 3

Important to remember that many of these are first in time plants. For example, the first line of tech by refinery in Europe and simultaneously the first plant in India, is the first line of tech facility utilizing refinery off gas. Our 3rd new project is our 4th plant in China And is held through a joint venture structure with our partner, Xiaogang. Therefore, the recurring revenues associated with the licensing royalties from these plants look different and are not indicative of plants in the current commercial pipeline. As mentioned back on Slide 14, We expect joint development and contract research to grow modestly year on year and be a smaller component of overall revenue in the medium term.

Speaker 3

This work will continue to help prioritize our roadmap for new microbes and drive process optimizations. We expect CarbonSmart revenue to significantly improve year on year over the medium term As more plants come online and LanzaTech secures offtake supply from these plants to place into our customers and partners carbon smart supply chains. I'll now turn the call back over to Jennifer for some closing remarks before we open the call for Q and A. Jennifer?

Speaker 2

Thank you, Jeff. In summary, we had another strong quarter with continued growth across our business. Our first half twenty twenty three revenue grew 27% year on year compared to the first half of twenty twenty two. Our focus is squarely on business execution and delivering the results we guided the market to for the rest of the year. We continue to deliver solutions that can help us make The paradigm shift in treating carbon as an opportunity rather than as a liability.

Speaker 2

Customers ranging from heavy industry to personal Companies and airlines are becoming carbon champions as they see the value in turning carbon from a cost to a profit center while creating a more sustainable future for all. I am proud to represent a team and partners across multiple sectors who share our vision of the Circular Carbon And I look forward to continuing to deliver positive results as evidenced by Lantepix recently being named 1 of the TIME 100 Thank you for joining us and to so many of you for your support. Operator, we can now open the lines for Q and A, please.

Operator

Thank you. We will now begin the question and answer If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your questions have been addressed The first question comes from Leo Mariani from Roth MKM. Please go ahead.

Speaker 4

Hi, guys. I was hoping we could get a little bit more detail on the revenue growth expected In the second half of the year, it looks like you guys need to do around $67,000,000 to kind of hit the midpoint of the revised guidance. Just trying to get a sense of what are the major projects that contribute. You mentioned Dragon on the call. Presumably, you're going to see also Just ramping revenues from the Indian oil plant here as well as the ArcelorMittal plant in Belgium.

Speaker 4

But Any can you talk about some of the other key plants that sort of drive that ramp here in the second half?

Speaker 2

Thank you for your question, Leo. I'm going to pass this one over to Jeff to address. Jeff, can you please provide more detail?

Speaker 3

Sure. Hey, Leo, good to hear from you. So in terms of revenue growth here for the year for the back half, We mentioned a little bit in our prepared remarks some of the plants that are coming online, but largely it's a function of the plants that are in the development stage that are The projects that are in the development stage that are coming along, we mentioned a couple of them that we've announced already, increasing work with Woodside, Bridgestone, Nexcam, Gale, etcetera. So we expect to see expansion of our engineering services and equipment revenues in the back half of the year, which will also be Kind of positive gross margin improvements over some of the work we did in the first half as we mentioned Project Dragon and others.

Speaker 4

Okay. And then with respect to 2024, you guys have previously spoken about greater than 2 times revenue growth Next year on a year over year basis, do you guys still feel confident that that's kind of the right number to be thinking about in The fact that you reduced the 2023 guidance a little bit here on revenues?

Speaker 5

Yes, we do. In fact, we

Speaker 3

think the revenue that has Slipped out of 2023 into 2024 sets us up nicely for that type of revenue growth. And we do continue to believe that it's going to take that type of revenue growth to get to that Even a breakeven, even a positive number by the end of next year, but we are continuing to reaffirm that.

Speaker 4

Okay. And then you spoke briefly about gross margins. I want to see if we can get a little bit more color in terms of the progression in 3Q and 4Q of 2023, I mean, the gross margins have fallen. It looks like the last three quarters, it was 26% in the Q3 of 22%, 16% and the 2nd quarter here of 23%. So How should we be expecting that progression unfold here in the second half?

Speaker 4

Can you help us out with maybe some numbers here on this?

Speaker 3

Yes, Absolutely. So we expect it to revert to some of the gross margins you've seen previously. This quarter and the Q1 this year would drag down pretty significantly a gross margin standpoint, just based on the revenue mix, the revenue mix being heavily weighted to Project Dragon and some of our contract research work in the first half. So, Contract Dragon or sorry, the Project Dragon being kind of the most significant component of our revenue mix in the first half Runs at a negative gross margin. It's work that we're doing with funding that's provided from the UK government.

Speaker 3

There's a cost share component of that and the cost share component, part of that actually results in effectively a negative gross margin. So all of that work is Bringing our gross margins down. Again, it's a great project and we're really excited about doing it. We think it sets us up for important milestones in late 2023 2024. We continue to own the development rights of that project.

Speaker 3

And so, again, we're very excited about it, but it is a drain on gross margin In 2023. That'll be diluted by these additional revenue sources that are coming online in the back half of the year. And that's why we'll see some reversion to some of our Yes, tempest to work gross margin levels.

Speaker 4

Okay. And then just on R and D expense, it looks like that's gone up a fair bit in the last couple of quarters. I think you guys are running kind of $13,000,000 to $14,000,000 per quarter in the back half of 'twenty two. It was $16,000,000 in the Q1, now it's $19,000,000 this quarter. You guys did talk about some kind of one time startup costs.

Speaker 4

I wasn't sure if some of those were going into the R and D expense number. It wasn't crystal clear to me. So I'm just trying to get a sense, do you expect that R and D falls from this $19,000,000 quarterly run rate the second half of the year, is that going to go down here?

Speaker 3

So we think it's going to be fairly consistent. Yes, largely our the biggest component of our OpEx is people, the biggest and the biggest component of our people Yes, it's historically been, although it's declining as a percentage, our R and D staff. And so the R and D staff did increase year over year. So that's Largely that's driving that as well as some non cash stock comp expense as we deployed dotcom pretty significantly this year as an incentive for our people and attention to the long term. And so that combination is actually makes up the majority Of the increase in these R and D expense, there was some additional just We spent some money on improving some of our facilities and just some basic non CapEx maintenance associated with it as well as Associated with some of the work that we're doing to accelerate our non ethanol microbe development, There have been some third party contract expenses associated with that as well.

Speaker 4

Okay. So it sounds like you're saying Second half of 'twenty three R and D is pretty similar to first half, if I'm hearing you right.

Speaker 3

Pretty steady state for us, Steve.

Operator

Okay. Thank you. Thank you. The next question comes from the line of Thomas Merrick from Janney Montgomery. Please go ahead.

Speaker 6

Good morning. Thanks for taking the time. Just wanted to dig in on Brookfield a little bit with a few questions. How many pipeline projects are attributable to Brookfield and where are those projects in terms of stage of development, especially relative to FID?

Speaker 2

Thank you for the question. On Brookfield, we have quite a number of Projects and we expect to and we haven't named them yet. They are all in Europe or North America. And we expect to get a couple of them to FID by the Q1 of next year. We've made quite a bit of investment.

Speaker 2

We've hired A leader for that group, as you know, Ara comes to us from Shell and she is leading the Brookfield Pipeline work and that team is focused on getting at least one project to FID either by the end of this year or early next year.

Speaker 6

Great. Thank you. And stepping back a little bit, with the Brookfield partnership, do you think it's a blueprint for other potential arrangements To do something similar or is this maybe more one off in nature? And kind of the follow-up to that is, Do you think there are other types of commercial or financing partnerships coming in the next few years?

Speaker 2

So absolutely, I believe Brookfield is just the first of multiple partnerships that are focused on investment in infrastructure, I. E, helping us build out plans. And so we do have multiple such discussions in the pipeline and I think you'll see more of such partnerships across the globe. As you well know, Europe and North America is what Brookfield is focused on, And we are looking of course to scale in other parts of the world. So having other partners across the world is going to be quite important for us and we are working on that.

Speaker 2

I do think it's worth since you asked about multiple types of partnerships, there is the financing and infrastructure partnerships that we've just discussed In relation to Brookfield, we've also been building our channels to market. I think you saw an announcement with Technip, they are going to help us create demand in the petrochemical sector. You also saw a partnership with Prime Metal Technologies. They're working with us to create a pipeline, a stronger pipeline in steel and ferroalloy. And Nexchem, who's one of our partners In the municipal solid waste space is also a channel to market to municipal solid waste projects.

Speaker 2

So We're creating multiple types of channels to market, one which is the financing side, but the other which is

Speaker 6

Great. Thank you. Just two quick ones on Freedom Pines. I wonder if you could update us on what's needed for mechanical completion this year specifically. And then going forward as it's Operating, what milestones do you need to hit to increase your equity stake if you want to?

Speaker 2

Great question. So the let me tackle the milestones first. So the milestones for our equity stake depend on Other investors taking up a license. So, as Freedom Pines Fuel comes into play and As you know, Lancerjet is already developing projects with their current investors. The Dragon project is an example with LancerTeq.

Speaker 2

They're working also with Mitsui British Airways and Shell on developing a pipeline of projects. When those investors pick up a license, That is when LandSat Tech's equity investment goes up. For every license that one of the investor takes for the first licenses that they take, Our equity shareholding goes up and that will be happening over the next 6 to 9 months. The second part of the question is what's required for mechanical completion. Right now, Lancet is Fully funded through mechanical completion and start up, so no cash will be required.

Speaker 2

And much of the All of the inside battery limits, the actual Alcohope jet plant is already in modules and being installed. We're on the last stages of installing that. And then the rest is the additional work, the outside battery limit. So The tankage, etcetera, that's also being installed. There should be no there should be nothing to That plan from being mechanically complete by the end of this year.

Speaker 2

All the contracts are in play. All the construction is in play. Tremendous progress by the Landsatjet team.

Speaker 6

Great. Thank you. And that's it for me.

Operator

Thank you. The next question comes from Pavel Mark Schanel from Raymond James. Please go ahead.

Speaker 7

Thanks for taking the question. Maybe kind of zooming in on the Stylenol project in Belgium, pretty high profile Projects for you guys. First, can we just get an update on kind of where the facility is in the Commissioning process and what's going to happen between now and the end of the year?

Speaker 2

Thanks, Pavel. Yes, that's a high profile project sitting in Europe and also because ArcelorMittal is The largest Western Steel Company. We have completed The construction of the plant, so it's in the Hotworks commissioning stage and That's really the last stage. In fact, we started the inoculator and produced ethanol in June. So we know all of that part of the plant is working quite well.

Speaker 2

We Back to complete Aldaha commissioning work in the next, I would say, 30 to 60 days max and then start up the bioreactor. So, we will certainly be should be operating in the 4th quarter this year.

Speaker 7

And financially in terms of LanzaTech's Actual income statement, what changes as the project moves into production as you said in

Speaker 2

Q4. Right. The key change will be that we will be receiving licensing revenues from the production of ethanol. That will be the biggest change that you will see. Do you want to add anything to that, Jeff?

Speaker 3

No, I was just going to say, yes, in addition, as Jennifer mentioned, ArcelorMittal is set up and kind of in my remarks. It is a first of a kind plant being a first in Europe. So the royalty economics are slightly different than what we see in the rest of our pipeline, But we'll start seeing royalty revenues associated with production of that plant. Again, it's starting up closer to the end of the year, so won't be particularly material this year until we're seeing material volumes coming off that plant. But there are also Consumable side, the micros and media and then we do have some of our other recurring products like our software and services.

Speaker 7

Okay. Maybe just kind of zooming out for a moment. The whole Greensteel Space, pretty nascent obviously. I mean you guys have been involved with Shugang in China for quite a while. When do you think steel production in the U.

Speaker 7

S. We'll kind of jump on this bandwagon because it feels like it's very Europe centric with maybe a handful of Chinese companies doing that as well?

Speaker 2

I think when I think about Green Steel, There has already been major transition in the U. S. Steel sector towards recycling scraps, etcetera, versus actually running electric arc furnaces and such. I think you know this area quite well, Pavel, so the fact is there's only a couple of coke oven type linked steel plants in the U. S.

Speaker 2

And so decarbonizing those is going to require Something like our technology, something like carbon capture and sequestration or what they're doing in other parts of the world, which Transitioning to hydrogen, but so much of the steel sector in the U. S. Is based on technologies, which Don't quite produce carbon monoxide, carbon dioxide directly because of the type of steel that they do produce. So it's quite a different landscape. I'd love to hear your views on that because I know you've been looking at Green Steel.

Speaker 7

Yes. Well, you guys are involved with Arkelor, which is by far the most active Globally in the transition. So good. Well, we'll look forward to getting updates on Belgium Over the next 6 months. Thanks again.

Operator

Thank you. The next question comes from Tom Curran from Seaport Research Partners. Please go ahead.

Speaker 8

Good morning. Just two follow ups on Lanza Jet. First, would you provide us with Progress update and some color on offtake agreements or other anchor SAF buyers for the Freedom Pines plant. Just how much of that 10,000,000 gallons per year of capacity is already contracted?

Speaker 2

All of it. All of it. The investors in Lancerjet took all the fuel. So there was nothing left To provide to anybody else, it's 100%.

Speaker 8

Yes. That's I'm not surprised to hear that, which is kind of nice segue into my next question, which is, For SAS, there seems to be a lot of consternation about the availability dilemma. The idea that the drop in supply side remains resource constrained when When it comes to economically viable options for making drop in SAS and therefore global SAS production is fated to continue to fall Well short of the aviation industry's ambitious consumption targets, given the abundance, diversity And lack of human need for the potential feedstock for LanzaTech's waste based ethanol technology, it seems as if combining a license For a LonzaTech biorefining plant with a license for LonzaJet's ATJ process Could take a lead role in solving for availability. What do you think are the main governing factors in determining How fast such

Speaker 6

a biorefining

Speaker 8

plus ATJ combination could grow? Where are you focused for maximizing that potential growth

Speaker 2

Yes. Thank you for that question. Absolutely, that's the next stages in our pipeline. As you will know, the combined Waste based ethanol plus the alcohol to jet technology. And I think you saw the announcement that Air New Zealand And the New Zealand government have selected the LanzaTech Lanza Jet solution at least for the next feasibility stage.

Speaker 2

You probably saw that we are in the Middle East. That project is municipal solid waste to aviation fuel. And so that combines both LanzaTech and LanzaTech. We are very, very focused on that. And I think the key drivers will be 1, We're going to go a lot faster as soon as Freedom Pines Fuel is built out.

Speaker 2

That will give a lot of certainty. And then the second piece of that is going to be as we continue to drop the price on the waste to ethanol Part of the portfolio, which is something, as you know, the more plants we build, the cheaper it will be to build the next plant. So I think we'll start to see ourselves go very fast next year, but I think we already have those projects In the pipeline, we've announced only a couple of those that we are in New Zealand, but there are multiples of that, that are in the early

Operator

Thank you. The next question is from the line of Sean Annis from Stifel. Please go ahead.

Speaker 5

Hey, good morning all and thanks for taking my questions. For my first one, as you near the expected start up of 3 additional facilities this year, could you offer any high level Commentary on some of the learnings in terms of cost savings and reducing build times that you've achieved as you move from the first Commercial plant in 2018 to these facilities slated to enter operations this year? And could you perhaps characterize whether engineering improvements And or changes to bacteria design are driving any efficiencies?

Speaker 2

Right. So in the replication, which is what we're doing right now, the efficiencies come from Being able to work with equipment vendors and EPCs that understand our technology can go faster and can offer Reduce costs because they know that we're replicating, right? They're not going to sell 1 compressor, they're going to sell multiple because they know we have a pipeline. So a lot of the costs that we're seeing where we're coming down right now are just based on simple replication. Now As we've also announced, we have worked on our 2nd generation bioreactor.

Speaker 2

We have demonstrated that at Suncor in the field And that will give us significant savings because it will improve not just the cost of the plant, they'll reduce the cost of the plant, but it will also at the same time improve yield. And so that combination will improve the total IRR of the plan. So you'll see that our improvements Come from the combination of technology like the 2nd generation bioreactor and fundamentally just from replicating, the more you build, the cheaper everything gets, right? Just like you saw in Solar, right? It's that part of the model and that part of the business that really helps.

Speaker 5

Makes sense. And for my follow-up, you highlighted in your prepared remarks that you are ahead of schedule And demonstrating the production of isopropanol microbes at scale and there is certainly a large end market opportunity that you highlighted. Maybe using Slide 15 as a basis, could you frame how you're looking at the timeline of progressing these microbes from the demonstration stage to commercial operation?

Speaker 2

Absolutely. And actually we jumped on an opportunity. The plant at Suncor, the plant that we were testing with Suncor, our 2 gs our 2nd generation bioreactor, we had completed all the ethanol work that we were doing there with that reactor ahead of Schedule, which is what allowed us to jump on testing our isopropanol microbe there. The isopropanol Microbe has done very, very well in our lab and our pilot. It is looking quite good at the 2nd generation bioreactor as well.

Speaker 2

If things continue as expected, we should have that micro ready for commercial use next year. So That is the timeline we have for that microbe. Quickly on the heels of that will be our acetone producing microbes, which as you know, We'll be very useful in acrylics and other applications. And so that's what's next in the pipeline that again is in the 2018 to 20

Speaker 1

I appreciate

Speaker 2

it. Yes. Thank you so much.

Speaker 3

Thank you.

Operator

Thank you. This concludes our question and answer session. I would now like to turn the conference back to Jennifer Homgran for any closing remarks. Thank you, and over to you.

Speaker 2

Thank you so much to everybody for joining us and for supporting our journey to create a different Carbon Economy, I really appreciate you taking the time, especially during the 1st year of our public presence. So thanks again for joining us.

Operator

Thank you very much. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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Key Takeaways

  • In Q2 LanzaTech posted 31% y/y revenue growth to $12.9 M, narrowed full-year revenue guidance to $80–100 M and updated adjusted EBITDA loss to –$75 M to –$65 M while reaffirming a goal of positive adjusted EBITDA by end-2024.
  • Installed annual production capacity is on track to exceed 300,000 tons (∼100 M gallons) by end-2023—double 2022’s capacity—with three new commercial plants ramping up in India (Indian Oil), Europe (ArcelorMittal) and China (Shougang).
  • Progress on sustainable aviation fuel includes the world’s first ethanol-to-jet (ATJ) plant at Freedom Pines (operational in 2024), plus MoUs with Indian Oil, JetZero Australia and Airbus and SAF projects in the UK, New Zealand and the Middle East.
  • Technology advances such as the second-generation bioreactor (15–20% higher yields, lower capital cost) at Suncor and accelerated scale-up of an isopropanol-producing microbe demonstrate LanzaTech’s efforts to improve process efficiency and add new chemical product streams.
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Earnings Conference Call
LanzaTech Global Q2 2023
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