Earnings Transcript for QFUEL.OL - Q4 Fiscal Year 2021

Lars Rosenløv: Good morning, and welcome to the Fourth Quarter Presentation. My name is Lars Rosenløv, and I am the CEO in Quantafuel. Together with me today, I have to Terje Eiken, our COO, and he is currently located in [indiscernible] and he will join me for the presentation, and Kristian Flaten, our CFO, he will join us for the Q&A session after the presentation. Please make sure to read the disclaimer on the next slide, as I've not spend time reading it out here today. The agenda for today's presentation, I will take you through key highlights, then I will send it over to Terje to give you an update on Skive and Kristiansund. I will focus through strategy and growth, where our chemical recycling is still our main focus. And we will close with financial figures followed by a summary before we open it up for Q&A. I will recommend that you submit your questions during the presentation. So key highlights, in the fourth quarter, we have continued to build the foundation for this year's operation. [indiscernible] has been the main activity and we have completed the turnaround and transition into operations in December. And Terje will go through the status in a minute. We completed the private placement in January after two weeks with high production end of January. As announced, the use of receipts are primarily for the use of our SPS sorting plant. And in addition, we progress our plastic to liquids project in Dubai and Sunderland for SPS we have now secured the manufacturing slot for the sorting equipment, which is a critical part of this project and discussions with financial partner is ongoing. We continue to progress our international plastic-to-liquid projects. In fourth quarter, we signed the MOU with ENOC and Dubai Holding. What differentiates this project is that we have a financial partner so early in the process. In UK, we have signed an agreement taking 100% ownership to our UK activities. UK is a promising market and we continue to develop our chemical recycling plant in Sunderland. And with this, I will hand it over to Terje to give us a plant update.

Terje Eiken: As you said, I am in Skive today, and during this presentation, I will give you a short digital visit to the factory. Looking back at the end of Q4 and start of Q1, we have made great progress in Skive. The new equipment installed online 1 and 2 during the turnaround, works as expected and the production data speaks for itself. During two January weeks, we converted 200 tons of post-consumer plastic to high value oil. We have removed debottlenecks that prevented stable production at high load. We have gone from minimizing the down time to maximizing the up time. Due to the latest developments we needed to increase the final capex with 1.6% to NOK 620 million. This time includes ongoing activities to bring all four lines to the same high standard. From first of January, the asset is transferred to our Danish legal entity and taken over by operations. A lot is said and written about over 3-4 concepts or POC. From a technical perspective, and as January used an industry, POC demonstrates the feasibility of an idea. Looking at our factory and the fact that we have shipped numerous trucks with oil to be assessed, the concept is proven, no doubt about that. Having said that, we defined POC, which is related to proof of capacity and up-time. In other words, the abilities to continuously convert plastic at high feeding rates over longer time. It is an important milestone in our ramp up towards full production, and we will keep the market updated as we progress. Line 1 and 2 will both be back in production shortly. And we plan to add a third line towards end of second quarter. It is all of our trends started to guiding was based on one line in first quarter, and adding one more for each quarter. You maintain the guiding despite the downtime in February. Our technology works. And based on our learnings, Quantafuel management and Board of Directors are confident in continuing the plant plastic-to-liquid projects. A few days after the failure related to burn chamber and few gas system on line 1 -- on line 2, sorry, we invited to add open briefing and Q&A session. This sketch was also used in that presentation. And I would like to repeat that. Our operators on duty took the only right action to close stone production precautionally since high temperature prohibited inspection. We quickly found the real cause and initiated the repair work by a competent local company. We used the downtime efficiently for preventive maintenance and some minor modifications requiring a cold system. We targeted to be back in operation by mid-March, and I will show you in some minutes that the burner chamber for line number 2 is already back in Skive and that we are heating the line. And by that, we resumed production shortly. And within mid-March, we plan to start line number 1, too. We have previously presented our Kristiansund operations where we developed a plant with a total capacity of 30,000 tons, of which 20,000 are dedicated to mechanical recycling. Lars will later dive deeper into our strategy and explain why this combination of mechanical and chemical recycling makes a lot of sense. In short, this is not either or. The two technologies that together will give the highest possible recycling rates. This year's strong demand for sorted hard plastics and the availability of industrial feedstock is good. So what is unique with our setup. We combine different technologies in one line, enabling, even sorting of flat polymers. Further, we developed our capabilities and competency, within making high quality pellets that can be directly used by our clients without any further processing when making end-consumer products. The testing of the electrically driven paralyzes reactor discontinuing nd as previously reported, the quality of the produced oil is promising. With that, I hand over back to Lars, and I will join you for pivotal life presentation from the production hold here in Skive.

Lars Rosenløv: Thank you, Terje now I will continue with our strategy and growth plan but first I will show you how Quantafuel enables as circular economy. You're probably seeing the circuit to the left. So instead of producing plastic from fossil fuel, you can produce it from recycled plastic. The cheapest and most entity efficient way is by mechanically recycling. You see the pellets to the upper right. You can recycle hot plastic say, six to eight times before it loses its good properties and then you can recycle it chemically. Chemical recycling is also for soft plastic like foil, packaging and ravaging material And for all plastic, you would like to use in food, pharmaceutical and toys applications. By converting plastic into a liquid, you have the same starting point as with fossil oil based petrochemical feedstock. Chemical recycling complements the widely used mechanical recycling and is required to achieve the high recycling targets now set by E.U. Quantafuel is also in waste sorting in Kristiansund. And we have a very solid financial project coming -- coming in Espia in Denmark. And then we own 40% of Geminor with an option to buy the remaining 60%. Geminor is handling waste logistics in 10 countries across Europe. Our strategy has different targets in different markets. In the Nordic, we have a high use of plastic per capita, but the sorting and recycling is low. So here, we have targeted both mechanical and chemical recycling and some selective sorting. All parts of this value chain has proven to be economical, very attractive. If we go further south in Europe, the sorting and mechanical recycling is more developed. We have no intention to try to compete with these well-established companies. Instead, we have set up with strategic partnerships to secure access to feedstock and provide complement chemical recycling to these established local value chains, increasing the overall recycling rates. And if we go international, like we do in Dubai, it is important for us to gain control over the full value chain with local partners on both waste, sourcing, and product, and is to minimize our risk. On the right-hand side, you see three additional strategic targets. Securing enough upstream integration like we do with Geminor, is first to understand waste flows, pricing, and market opportunities. I believe that Quantafuel is quite unique here, and to me this is one of our competitive advantages. Finding a quick way to develop economy of scale by building optimized, standardized, and modularized processing plants. Thing about Skive has four lines. The coming chemical plant in Espia is four times bigger and will have 16 lines. So we don't have to build a lot of plants in order to start gaining some scale effects from construction, operation and maintenance. And then finally, deliver traceability certificates to our customers. Which document, which way source created, which product is also important. We have continued to develop our project pipeline in preparation for growth. We believe that there are some first-mover advantage from acting now. The announced projects you find on this slide, we are building industry, so permitting typically takes 6 to 12 months, and construction takes 18 to 24 months. And in addition, we are depending on financing. So timing and order of these projects can change. One comment on our Amsterdam project -- in Amsterdam, we are working closely with VTTI, towards a chemical recycling plant supplying circular raw materials to Vitol. The feasibility study is proceeding. But due to delays in the permitting process, we are once again looking at several sites, not only in Amsterdam, but in the Amsterdam, Rotterdam area. This iteration has delayed the target start-up date. But from a portfolio point of view, we are more or less balanced. We also continue to see strong interest in our plants and products. So in addition to the list of projects you see here, we are working other projects. SPS is a game changer in the Danish market and we are now progressing as planned with this development. As announced, we have signed a contract with [indiscernible], one of the leading suppliers of waste treatment plants. The contract includes engineering and secure Quantafuel a firm manufacturing slot for equipment, which will safeguard our time schedule on this very economical attractive project, we're talking about a plant capex of 617 million Norwegian kronas with an IRR higher than 30%. The plant will be operational the second half of 2023 and will have a capacity to sort more than 160 thousand tons of plastic waste into clean mono fractions, which ideally suited for recycling. This could be feedstock for scheme. And it could be for external customers who will use our product for mechanical recycling. The plastic waste sorting facility in SPS is Quantafuel 's first step towards developing an integrated recycling site there. The next phase will include a large-scale chemical recycling plant based on Quantafuel 's technology. And you see the full development on the illustration to the right. In UK, we have taken a 100% ownership as this is a promising market. We have a prime location in the Port of Sunderland, which means excellent logistics especially regarding transport by ship, which comes with the lowest carbon footprint. In Sunderland, plastic to liquid plants -- the Sunderland plastic to liquid plants will be our first plant in UK. We have excellent support also from the British government in form of the British embassy here in Oslo, and the relevant authorities in UK. The site layout, and design for the Sunderland project is completed. The coming month, will be important for the project with full planning application and permitting application being finalized and submitted. We have also arranged for public consultation and drop-in sessions to be held in Sunderland in March, before the application is submitted. Before continuing with the financial figures, I will ask Terje to join us from the factory floor in Skive. So are you ready Terje?

Terje Eiken: Yes, I am. Can you hear me? I hope so. I'm now in the factory area in Skive, and I will give you a short guided tour through the line parts of the factory. I will actually start at the back-end to show you the holding tank for the pyrolysis oil. It means the tank where we collect all the oil for the process before it's pumped into the distillation tower, 22 meters high, where we split the pyrolysis oil into three fractions. These three fractions are then [indiscernible] to the holding tanks for heavy and middle fraction. And to the holding tank for the light fraction. At the back-end here we can also see the loading station where we are filling the containers with oil — light, medium, heavy — going to BSF in Germany or Belgium. The oil in the holding tank from the process looks like this. Can see it? It's a normal black oil with good viscosity and ambient temperature. After the distillation when we get there, the medium fraction or the middle fraction, you can see that the color's much lighter, and it's also a lighter oil. And as the last example I will show you, it's the light fraction which is more yellow color on a very light oil. So this is the end of the process. I will now switch to the other view and walk to the area, where we start the whole process. This is the feeding area, where we have storage for plastic for some days at peak load for all four reactors. You have [Indiscernible] logistics area in wallboard, where we can store more plastic for several days of production, and then, take it off to Skive as needed. The reason why I wanted to show this plastic is that, many people are curious about the quality of the plastic we are feeding. And as I will show you now in just a few seconds, as you can see here -- if I just managed to turn the camera round. This is the kind of plastic they are using. It's called 3D plastic or soft plastic, or folio. It's used, it's sorted, but still post-consumer plastics. And these base with plastics are then lifted as needed up on the conveyor belt here, and transported off to a chute.And from that chute, it's then falling down onto the shredder, which is then taking the plastic into small pieces, suitable size for the reactors. I will now walk up to the shredder area. And for those who remember, we had reported in December that we needed to stock the factory because we had a mechanical failures in the shredder, and this is the unit we talked about. On the top of the unit you can see the chute where the base are cooling down onto Strander, and the shutdown has done converting this to the plastic portfolio plastic into smaller pieces. And I can show you some example here from the conveyor. You can see this is the kind of pieces. Typical size, typically consistent if you're, 10-50 into their system. I will now walk across into the production hole. I hope that connects the sound and other thing is still good. In the production hole, you will you see the for production lines and they are organized two modules. Plastic is coming in from the outside filling system on this conveyor belt for module 1, it consist of reactor for Line 1 and 2, with the [Indiscernible] signs on the thoughts. And on the bottom here, we have the lines. Line number 1, you can see that the burning chamber, this removed and sent for modifications. If I walk across here to the Line number 2, we can see that the chamber is [Indiscernible], it's mounted; not only molted, they are heating up. And you can actually see the flames inside the burning chambers. If I go a little bit backwards, you can see the other module with Line 3 and 4 with the same conveyor belt, and their reactors at the floor level 3 and 4. Number 3 is already removed, being prepared for shipment to the modification. Whilst number 4 is just de -mounted equipment outside and ready to be [Indiscernible] out and also [Indiscernible]. So we are making good progress on this modifications of the burner chambers. I will now walk down along the reactor where we -- initially you see the feeding system where the plastic is added into the reactor. The big pipe you see are for the fuel gas system. This fuel gas is the hot air or gases from the fuel gas chamber heating up the reactor. So the reactor itself is inside rotating and heated from the fuel gases surrounding the reactor. It's also what we tried to explain in the sketch in the presentation some weeks ago. So we're going down hear, the pyrolysis gases escaped from the reactor of the plastic has been converted into gas, and in this area, the pyrolysis gases are purified, stabilized, and cooled down. So that we get a stable oil product into the holding tanks. Behind this torqueline, we are installing the equipment on line 3 or 4 as we did on line 1 and 2 previously, to remove this so-called bottlenecks, which has prevented us from having a stable production at high rate. And with that, I conclude their digital tour of Skive and go back to the office so, see you in a minute.

Lars Rosenløv: Okay. Thank you, Terje for this. I hope you all got a very good idea of the scale we have in Skive. Skive Plant will be a small plant in our future portfolio. But let me underline what you just saw is not lap or pilot scale, it is industry. As I explained, going through our strategy, chemical recycling is our main focus. But we integrate off stream to develop and understand how the value chain is working and secure, how we can take out margins. So what differentiate us in the market is four things, I will say

Q - Unidentified Analyst: So Terje, I have a question for you. How many hours does it takes to heat the line and be ready the to start production?

Terje Eiken: I think, that I would not like to go into the very, very deep in details. But if I say, it takes between one or two days, if you start from normal cold temperature to ready to start heating. Could you hear me?

Lars Rosenløv: I think everybody else heard you.

Terje Eiken: Okay, that's fine.

Unidentified Analyst: Lars, financing this into their rows with regard to new process and thin plants quantafuel that cooperation with the oil containers and thus feasibility studies with the oil company continue that due to complications with approvals, the start date is postponed significantly. Can I say how long?

Lars Rosenløv: I think as we showed in the presentation that we now expect the Amsterdam or our plant to be in operation. 25 to 26. So it is postponed by one to two years due to the issues we have with the permitting. Now we are searching for other locations in addition and that is the reason why we now take time to find the right spot to continue.

Unidentified Analyst: So Kristian, on Asparec sorting, what's kind of annual EBITDA are you targeting in the production is at 100%?

Kristian Flaten: We're not disclosing too much details on the revenue and the EBITDA on the sorting plants that we have indicated, and unlevered IRR of above 30%. So as you can calculate backwards and forwards, it's a very profitable plant as well.

Unidentified Analyst: And also, with regards to operating expenses, SG&A, we note a significant increase. Do you see this increase as an anomaly for the quarter or do you see this level continuing given the expansion of the company?

Kristian Flaten: For a period now we have been running both the ordinary SG&A in Oslo. We are running the ramp-up of two plants, both in Kristiansund and then Skive. And we are also doing both studies and business development for, among others, Esbjerg, Dubai, Sunderland, Amsterdam, [Indiscernible]. So we have to cover an extraordinary high, kind of both opex and investments for the period now.

Unidentified Analyst: Lars, do you, in 2022, expect construction start on Esbjerg chemical plant?

Lars Rosenløv: In 2022, no. But I hope that we can get to a fit decision during the year, but time will show. I think what is important here is to get some headroom for the sorting plant. And then we will see when we need to continue with chemical recycling. But it's important that we gain control over the feedstock market [Indiscernible] in Denmark first, so that timing will be debated until we are ready.

Unidentified Analyst: And also, we have a question to Lars or Terje. Is it possible to build in more redundancy in Skive, so that we don't see so many stops?

Lars Rosenløv: I can start. I will say, first of all, we're very bold move to build Skive at the time and history for Quantafuel. And we're very happy that we have the plant now. I think the plant is built, you can say on a standard that we will normally not do. At least, not where I came from in the oil industry. So the issues we have with redundancy and up-time, are issues that are easily solvable, and I'm not so concerned that we can solve it for the next project. If we want to solve it for Skive, I think we have to assess whether or not it will be a suitable investment in Skive. I don't know if Terje, you want to add anything to that?

Terje Eiken: I think it's fair to say that Skive had a redundancy philosophy through having four adopted lines. And then within each line, no redundancy of pumps or more doors or other equipment. So what you see today is that if we had built Skive from scratch today, we probably have a what you can reduce standby pump on some areas where we have seen that we have three constructs, during the last half-a-year. This due to standby means that you have two pumps and one is working and other one is ready you take over if something happens. It takes in miner costs. If you take that from the beginning and that we would improve their up-time of Skive the way we see it today. But we have not done a lot of other mitigation, so I think going forward, the up-time of Skive will be as expected in the original design. Still our engineers, we'd like to have some redundancy and we will of course, evaluate that for the next plants. And as I said, to do that from scratch when you start project has a minor impact if you'd want to do it after you have built a factory, it's more complicated, still possible in some areas, but it takes more time.

Unidentified Analyst: And also Terje, is the type of burner chamber, steel comes from Skive installed in Kristiansund as well?

Terje Eiken: The Electronic consumed is electrically driven. So it doesn't have a burning chamber. I think that is a short-term speed answer.

Unidentified Analyst: And also, Lars or Kristian, thing guided of, take price of one thousand dollars per ton include and in net revenue or costs to receive plastic waste feedstock.

Kristian Flaten: We guide our net revenues. So it mainly called out that some of off-take under revenue alternative vehicles from the production of plastic will be one thousand dollars at all.

Unidentified Analyst: Also with regards to the SPX sorting plant will this be final solely by cash? Financing of SPX sorting plant.

Kristian Flaten: For the initial phase of the construction the financing will be done by equity. We have secured our part and we are working very closely with our financing partner now to secure the remaining part of that financing. Once we get into operation, that goes to both for Esbjerg, for Skive and also for the Kristiansund, we also see that there is a very good capacity for taking on debt in the different projects and also on the corporate level.

Unidentified Analyst: And also on the capex side of Esbjerg Plant, we have a question with, when do you expect the investment capex to begin for this facility? And when will that chemical recycling line at Esbjerg follow?

Kristian Flaten: For the sorting plant, we have already gradually started. And that was also the reason why it's most important to complete the private placement in January. So, it's for the Esbjerg sorting plant, capex has already started.

Unidentified Analyst: And Lars, the fact that you know how move the plant operation, does that affect them in that you have defined established proof-of-concept, although there's been on separately at a later stage?

Lars Rosenløv: As we tried to explain in the presentation, the way we have defined proof-of-concept is the proof that the technology and process is working. I think, we have proven that already, where six trucks coming out of Skive this year compared to six truck coming out of Skive for the full-year of 2021. What remains to be proven according to our definition, is also high up-time and high capacity. And as Terje said, now when we are getting back into operations, we will hunt these internal targets, as well.

Unidentified Analyst: And also with regards to the Esbjerg PTL Plant, I have a question, do you still guide for first oil in 2023?

Lars Rosenløv: I don't know if we have a guide for 2023. I think we have separated into two phases. We have said, the first phase is sorting plant and this is a one we are proceeding with right now. Then we have to build the market position on waste feedstock and then chemical plant come later as the states too.

Unidentified Analyst: And also finance question, Kristian. Can you provide more detailed overview of the cost development in fourth-quarter? Cost of material, was very high and what were the reason for the high level? Going forward, what is a typical run rate level?

Kristian Flaten: We haven't have price of the full details of that. But we can say, that for us certain period now, operating expenses both for Skive Plant and the Kristiansund Plant is higher than what it will be actually in normal production. One example here is that the reactor, for example, is heated up and down. And that takes a lot more energy, for example, than during continuous operation. And also, we are also, continuing the growth planning and the business development, so that also has operational costs that is taken over the [Indiscernible].

Unidentified Analyst: And we are now through of all incoming questions for the moment.

Lars Rosenløv: Okay, but then I think we have come to an end. So I will thank you all for participating and showing your interest in Quantafuel and see you around. Thank you.

Terje Eiken: Thank you.