Earnings Transcript for QFUEL.OL - Q3 Fiscal Year 2022

Lars Jensen: [Presentation] Good morning, and welcome to our Third Quarter Presentation. I really hope you enjoyed this short video explaining what we do in Quantafuel. I think it's pretty cool. Personally, I look forward to this presentation. This is truly exciting times, and we are grateful that so many of you have taken time off a busy schedule to join us today. Currently, the COP27 is ongoing. The UN's Secretary General opened the summit saying, "We are on a highway to climate hell with the foot on the accelerator." This is truly a wake-up call. Never has there been a greater need for companies that help tackle the bigger threat to the environment. Noncircular plastic waste is one of these threats. And with our unique approach, we are and will continue to contribute towards a sustainable future by converting end-of-life plastic waste into valuable circular products. Last quarter, we marked that we have started on the next stage in our development of Quantafuel, the stage where we launched the vision of becoming a global leader within chemical recycling of plastic waste with large-scale operations in multiple locations around the world. This quarter, we can follow up by stating that we have confidently moved forward and that important details in the parcel are being worked with precision. Key highlights. I should start by welcoming my new CFO, Christian Bekkevold Nilsen. Christian has both industrial and international competence, which will strengthen our team in our preparation to become a truly industrial and international player. We will all get a chance to meet Christian as he will present in a moment. This has been a good quarter, and our business activities have progressed as expected. The Skive improvement program is progressing well. The rollout of our next-generation PtL plant called Mk II is on track. We progress in the U.K., and our construction of Resource Denmark is well underway. Strategy and growth. Our development of the Mk II concept and design is on track. The learnings we get from Skive are very important for this development. And we will continue to use Skive to gain these valuable inputs also if it causes us to lower performance and volumes from Skive. The front-end engineering and design or FEED study is progressing as planned and should allow us for a final investment decision early next year. Our cooperation with Saipem has moved ahead. And since we announced last quarter, this industrial move has led to a significant interest from major oil and petrochemical actors. If you want to play with these major industrial companies, as we do, you have to set up to become one yourself. This is a volume game, and we need large volumes to become relevant amongst these major companies or customers. Our agreement with Saipem provide us with the strength to deliver PtL plants either on license or as part of our Build-Own-and-Operate strategy across the world. In addition, we have recently developed an assay of our oil, which is the right way to communicate with refiners. Ideally, we dream of developing a light fraction, which is directly suited for petchem production of new plastics; and a heavy fraction, which could be suited for refiners producing petrochemical feedstock. We believe this is the best value proposition to the market, securing the highest recycling rate. The Sunderland project is also proceeding as planned. With an approval of our planning application, which is expected early next year, we can start firming up some of these positive discussions we have ongoing with feedstock suppliers. As mentioned in our last presentation, we received strong governmental and tax support, and we hold several interesting site locations across U.K. Therefore, we have decided to proceed with a portfolio approach, and we have recently engaged the U.K.-based financial adviser, CBRE, to secure funding commitments for up to four projects in U.K., starting with Sunderland. Quantafuel will hold a majority share and maintain control over the IP and lead the partnership. Ideally, a significant part of the share can be sweated, and we try this capital-light or at least capital-lighter model out in U.K. as part of our Build-Own-and-Operate strategy. The project pipeline is unchanged, and we still believe Dubai project is the first out, followed by Sunderland. We are setting up for the ability to start two projects on an annual basis in addition to licensing activities through Saipem. The order and schedule is, of course, depending on financing. Then a plant and project update. In Skive, our systematic improvement approach continues to show progress, both in terms of operating cost, capacity and stability. During third quarter, all four lines were equipped with instrumentation, allowing heating of self-generated gas or NCG. This improvement has significantly impacted our operating cost as well as the CO2 emission. We have also implemented and tested optimizations, bringing operating load from 550 kilo an hour close to the design capacity of 625, and this with high processing stability. This, by the way, has led to a new weekly production record on a single line of 84 tonnes, just indicating that we keep pushing the boundaries. As you know, uptime or operating time between line shutdowns has been one of our challenges. We have concluded some very interesting lab tests to improve this situation. And we will, over the coming months, test this in real operation. As mentioned earlier, we will continue to prioritize testing and learnings in Skive, and we are currently using two lines for this purpose. This will impact our produced volumes and economical figures, but the impact on Mk II is significantly higher, and I trust you will all understand this. Finally, we have renegotiated our offtake agreement. So Skive is moving forward with confidence. In Kristiansund, the short status is that we maintain attractive offtake prices and ramp-up of our feedstock volumes month-over-month. Several actions are initiated to improve sourcing of feedstock, which is our key challenge. This has led to us -- this has led us to postpone expected positive cash flow from Kristiansund from end of this year to mid next year. In Esbjerg, our plan becoming a market leader in Denmark continues as expected. The construction is progressing in accordance with the schedule and so do the sorting equipment contract. In September, we had a great groundbreaking ceremony with the Mayor of Esbjerg. The plant is expected to be commissioning late 2023. And Denmark has no such sorting facility today, and this plan will be a key advantage for sourcing feedstock to the co-located PtL plant, which is our next stage in our Esbjerg site development. And one last thing, Resource Denmark, which is the name of our JV, is not only building a factory, it is building a business. Feedstock is needed, and I believe that we will be able to update the market on the feedstock situation over the coming period. And with this, I will now hand it over to you, Christian.

Christian Nilsen: Thank you, Lars. I have to start with saying thank you to Lars and to the Board of Directors for the trust put in me. Then presenting myself. So I'm Christian, and my background is from industrial companies like ABB and Alstom and, where in the latter, I spent 11 years of my career in various roles as a Finance Director and also in several different countries, gaining international exposure and experience from the energy industry. In the last 10 years, I was the CFO in the Norwegian and now Scandinavian engineering group, Norconsult. When I was put in contact with Lars about this role, I have to admit that, at first, I was a bit unsure about the match. But as I got to know him and the Company, this quickly changed as I both understood the purpose of the Company and also the potential of the business case. The purpose is something you can explain to someone in the time of an elevator trip. We make plastic waste into new plastic products, reducing global CO2 emissions and not least make sure it does not turn into microplastics polluting the planet. And Lars is a nice guy, by the way. The business case, we will come on to now. We have, at the end of the third quarter, NOK247 million in cash as such at the group level. If we also include the deposits that we have in the joint venture, Resource Denmark, this figure is about NOK314 million. The revenues for the quarter was NOK14.8 million, which might be below some expectations due to the turnaround process in Skive with many improvements carried out in the quarter. But they are significantly up still compared with the last quarter and nearly on level with the first half year. We expect a continued increase in revenues in the fourth quarter from Skive due to the ramp-up and the increasing capacity and operating time, which is planned, between line shutdowns. Similarly, we see a gradual improvement in Kristiansund, which leads to an expected increase in revenues. When it comes to Skive, we now expect that the improvements from the cost reduction program and not least also the improved offtake agreement, which Lars mentioned, this will result in a positive cash flow within 2022, more precisely in the month of December. From 2025, of course, this is a little bit into the future, we still maintain that we expect Skive on a yearly basis to deliver an EBITDA of approximately NOK70 million based on the current assumptions. We will gradually be improving towards this target during 2023 and 2024 with increased feedstock volumes processed and also improved stability and optimization of the plant. Concerning Kristiansund, we have previously stated that we expect positive cash flow within 2022, but we realized that this is currently not achievable in the current conditions even if we see growth in feedstock volumes month-by-month. We are, therefore, now guiding that the Kristiansund mechanical recycling plant will only be cash positive from around mid-2023 with an expected negative result of less than minus NOK5 million in the first half of the year. We expect the profitability to be gradually improving through 2023. Although we see improvements in profitability from our current plants, we are now focusing on and planning for the launch of the next generation of PtL plants, the Mk II

Operator:

A - Lars Jensen: Thank you, Christian.

Unidentified Analyst: Lars, what is the feedstock program in Kristiansund? And can this also be an issue in Esbjerg?

Lars Jensen: The two facilities are very different. The Esbjerg facility is state-of-the-art and can take, you can say, all kind of mixed household waste plastic. In Kristiansund, we have some limitations on the quality we can take in there, and that is causing some of the issues we currently see. We are, though, happy to see that we have a month-over-month increase in volumes. And as we stated, the negative impact is not that great. So overall, we will get there.

Unidentified Analyst: And Christian, this quarter, about NOK88 million of cash was deposited with the joint venture, Resource Denmark. How frequent does such deposit occur? And how much more should we expect to be transferred?

Christian Nilsen: We have had basically quarterly installments into the JV. So far, we believe it has been, let's say, a little bit front-loaded, the installments. But this will be adjusted now going forward because we get more visibility on the actual progress of the project. So the installments will match better with the actual needs of the project. As such, there is still around, I think, around NOK220 million remaining to be installed during the course of 2023. But at the same time, we are looking at gearing the plant with debt, which would offset most of this. And we are around -- we expect this concluded around mid-2023.

Unidentified Analyst: And on the renegotiated offtake agreement in Skive, can you highlight the annual EBITDA capacity on normal as expected production?

Lars Jensen: You mentioned that in the presentation. We can say the way we have framed the offtake agreement is in a way, so we have control over the EBITDA in Skive. So we will, you can say, in a normal situation and over time, deliver the EBITDA of NOK70 million.

Unidentified Analyst: Yes. And also a question regarding raise of new capital. When do you expect this to happen as cash is running out fast and long time to positive cash from operations?

Christian Nilsen: We are, of course, working on this together with ABG. And our expectation is that we have a need to have this concluded by the first half of next year.

Unidentified Analyst: And on your guided generic payback time of four years for the second-generation platform, you have assumed level on the offtake price agreement. How is this estimate relative to the level you have renegotiated to Skive?

Lars Jensen: In fact, the generic assumptions are more conservative than what we have in the current offtake agreement for Skive.

Unidentified Analyst: And earlier this year, you disclosed NOK620 million in total CapEx group for Skive. Now mentioning you expect NOK70 million EBITDA per annum, today, you speak of payback expected for generic PtL plants within four years. Can you bridge the difference between this? Will the generic PtL plant be half of Skive'sCapEx?

Christian Nilsen: No. The generic plant will be much larger than the Skive plant. That's the first thing. The Skive plant is designed with a capacity of around 20,000 tonnes per annum, whereas the plants that we are looking at now is 80,000 to up to 120,000, depending a little bit on the site. So size, of course, the scaling is one factor into this. And then, of course, Skive is not, as we see it now, it's not, let's say, the model for the next generation of plants. So of course, we've done significant learnings from that, and that is why we expect the next generation to be more efficient and with some simplifications. And this is why we believe that the payback time for the second generation is actually realistic with the factors that we have put in.

Lars Jensen: I think it's fair to say that we have rebuilt Skive many times. It had been a process of trial and error to some extent, but we have learned a lot. And that is exactly what Skive is there for, to develop the learning, the mindsets and the knowledge we need in order to develop a better plant, which is the intention with Mk II.

Unidentified Analyst: And you mentioned that minority share around 20% on the potential new U.K. plants. On top of that, you have a license agreement with Saipem. Should we conclude that 50-50 deals are no longer an ambition, at least for projects FID started before 2025?

Lars Jensen: We have to use the flexibility we have as a company. And as I said many times, financing is, of course, a prerequisite for developing the Company. We think we have the right value proposition. But in order to get the momentum going, I think what we have to do is to lower our stake in some of these projects to move forward. As I have mentioned many times, this is a business that requires volume, and then we need to crank up the volume to develop this in a good way.

Unidentified Analyst: And also regarding the CapEx for the new generic chemical recycling facility, is the CapEx of NOK150 million per tonne for a 100,000-tonne input facility still the guiding?

Christian Nilsen: Until we have completed the FEED study, this is still the guiding that we have. And we believe with the information we have so far that it's within that range.

Unidentified Analyst: And Christian, could you also try to shed a bit more light on the quarterly cash flow? It was negative with NOK220 million, by far the largest negative cash flow for a quarter.

Christian Nilsen: Yes, of course, some of the reasoning for this is that we have the plant in Esbjerg, the sorting plant, which is being erected and the installments that we are making there. So this is a big reason for the drain in the quarter. I think that the loan is around NOK90 million. And then, of course, it's other investments and the operations as such.

Unidentified Analyst: And the last question for today, how much are the saving with NCG?

Lars Jensen: Saving on the NCG has been in the range of NOK800,000 to NOK1.4 million a month per line. So this is a significant improvement of our operation cost in Skive.

Lars Jensen: And this is concluding the Q&A session. So thanks again for joining us. Thank you for the interest. We are moving forward with confidence. Thank you.