Good day, and welcome to the LanzaTech Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I now hand the conference over to Omar El-Sharkawy, Vice President of Corporate Development. Please go ahead.

Good morning, and thank you for joining us for LanzaTech Global, Inc. Second Quarter 2023 Earnings Conference Call. On the call today, I'm joined by our Board Chair and CEO, Dr. Jennifer Holmgren; and our CFO, Geoff Trukenbrod. 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 second quarter 2023 financial and operating results as well as an investor presentation summarizing the company's performance and key operational highlights for the quarter. Both our press release and results summary investor presentation can be found in the Investor Relations section of our website at www.lanzatech.com. Before we begin, I'd like to direct you to the disclaimers and 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. 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 to their most directly comparable GAAP measure. Today's call will begin with remarks from Jennifer providing an overview of and update on our 2023 execution priorities, including our recent financial results. Geoff will then review in greater detail our financial results from the second quarter and provide additional insight into our business model and growth of the business. At the conclusion of these prepared remarks, we will open the line for questions. With that I'll turn the call over to Jennifer.

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 safer carbon economy is becoming increasingly evident. In the second quarter alone, the effects of climate change, exacerbated by the early return of El Nino have impacted countless lives and caused vast commercial disruption globally. According to the U.S. National Oceanic and Atmospheric Administration, NOAA, the cost of climate and weather disasters in the United States alone last year totaled more than $165 billion. This data demonstrates 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. 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 second quarter results within the framework of our 2023 execution priorities as outlined on Slide 5 of the presentation. First 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. Second, global production. We are on target to grow a cumulative installed…

Thank you, Jennifer, and good morning. Thank you to everyone joining us. I'll first start with a recap of our second quarter results and then provide some incremental color on our business model and how to think about forecasting our growth. As seen on Slide 12 of the presentation, second quarter revenue from our biorefining carbon capture and utilization category grew 64% year-on-year reaching $9.7 million, 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 $2.2 million in the quarter and CarbonSmart revenue totaled $1 million. Total revenue for the first half 2023 of $22.6 million was in line with our forecast. As we have previously suggested, we have consistently anticipated a significant back-end weighting to revenue generation this year and are targeting more than 70% quarter-on-quarter growth on average during the second half of the year as more projects progress through the biorefining pipeline and additional CarbonSmart campaigns are filled. Cost of sales in the second 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 to SAF project in the U.K., which we call Project Dragon. The lower year-to-date gross margins and the quarter-on-quarter decline in 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 from a project. Still, this is a great opportunity for us as we have…

Thank you, Geoff. In summary, we had another strong quarter with continued growth across our business. Our first half 2023 revenue grew 27% year-on-year compared to the first half of 2022. 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 a paradigm shift in treating carbon as an opportunity rather than as a liability. Customers ranging from heavy industry to personal care 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 economy. And I look forward to continuing to deliver positive results as evidenced by LanzaTech recently being named one of the Time 100 most influential companies alongside other audacious companies changing the world. Thank you for joining us and to so many of you for your support. Operator, we can now open the lines for Q&A please.

[Operator Instructions] The first question comes from Leo Mariani from ROTH MKM.

I was hoping we could get a little bit more detail on the revenue growth expected in the second half of the year. Looks like you guys need to do around $67 million 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. But maybe can you talk about some of the other key plants that sort of drive that ramp here in the second half?

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

Sure. So in terms of revenue growth for the year for the back half, I 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 -- or 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 partners Woodside, Bridgestone, NextChem, Gale, et cetera. 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.

Okay. And then with respect to 2024, you guys have previously spoken about greater than 2x 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 light of the fact that you reduced the '23 guidance a little bit here on revenues?

Yes, we do. In fact, we think the revenue that has kind of 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 EBITA a break -- even EBITDA positive number by the end of next year, but we're continuing to [indiscernible] from that.

Okay. And then you spoke briefly about gross margins. I wanted to see if we can get a little bit more color in terms of the progression in 3Q and 4Q of '23. I mean, your gross margins have fallen. It looks like the last 3 quarter, it was 26%, in the third quarter 22%, 16% in the second quarter here of '23. So how should we be expecting that progression unfold here in the second half? Can you help us out with maybe some numbers here on this?

Yes, absolutely. So we expect it to revert to some of the gross margins you've seen previously. This quarter and the first quarter this year were dragged down pretty significantly from 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 -- sorry, Contract Dragon -- 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 U.K. government. 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 actually 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 '23 and 2024. We continue to own the development rights of that project. And so again, we're very excited about it. But it is a drain on gross margin in 2023. That will 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 inversion to some of our [indiscernible] models.

Okay. And then just on R&D expense, looks like that's gone up a fair bit in the last couple of quarters. I think you guys are running kind of $13 million to $14 million per quarter in the back half of '22. It was $16 million in the first quarter, now it's $19 million this quarter. You guys did talk about some kind of onetime start-up costs. I wasn't sure if some of those were going into the R&D expense number. It wasn't crystal clear to me. So I'm just trying to get a sense. Do you expect that R&D falls from this $19 million quarterly run rate in the second half of the year? Is that going to go down here?

So we think it's going to be fairly consistent. Largely, our -- the biggest component of our OpEx is people, and the biggest amount of our people has historically been, although it's declining as a percentage, our R&D staff. And so the R&D staff did increase year-over-year. So that's largely what's driving that as well as some noncash stock comp expense as we have deployed [ dotcom ] pretty significantly this year as an incentive for our people and attention to [indiscernible] term. And so that combination actually makes up the majority of the increase in these R&D expense. There was some additional -- 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, so.

Okay. So, I mean it sounds like you're saying second half of '23 R&D is pretty similar to the first half, if I'm hearing you right.

Pretty steady state for us [ here ].

The next question comes from the line of Thomas Meric from Janney Montgomery.

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?

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 first quarter of next year. We've made quite a bit of investment. We've hired a leader for that group. As you know, Aura 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.

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 oneoff in nature? And kind of a follow-up to that is, do you think there are other types of commercial or financing partnerships coming in the next few years?

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 plants. 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. 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. And 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 Primetals Technologies. They're working with us to create a pipeline, a stronger pipeline in steel and ferroalloy. And NextChem, who's one of our partners in the municipal solid waste space, is also a channel to market to municipal solid waste projects. So we're creating multiple types of channels to market, one which is the financing side, but the other which is actually the people who are actually embedded in those industries pulling us along.

Just 2 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?

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, LanzaJet is already developing projects with their current investors. The Dragon Project as an example with LanzaTech. They're working also with Mitsui British Airways and Shougang developing a pipeline of projects. When those investors pick up a license, that is when LanzaTech'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, LanzaJet is fully funded through mechanical completion and start-up. So no cash will be required. And much of the -- all of the inside battery limits, the actual alcohol to jet plant, is already in modules and being installed. We're in the last stages of installing that. And then the rest is the additional work, the outside battery limits, so the 10 gauge, et cetera, that's also being installed. There should be no -- there should be nothing to stop that plan from being mechanically complete by the end of this year. All the contracts are in play, all the construction is in play, tremendous progress by the LanzaJet team.

The next question comes from Pavel Molchanov from Raymond James.

Maybe kind of zooming in on the steel and oil 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?

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 hot works 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. We expect to complete all the hot commissioning work in the next, I would say, 30 to 60 days max and then start up the bioreactors. So we will certainly be -- should be operating in the fourth quarter of this year.

And financially, in terms of LanzaTech actual income statement, what changes as the projects move into production as you said in Q4?

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

No, I was just going to say, yes, in addition -- as Jennifer mentioned, ArcelorMittal was set up in kind of hinted my remarks. It is a first-of-a-kind plant being placed 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 they won't be particularly material this year until the material volumes coming off that plant. But there are also the consumable side, the microbes and media, and then we do have some of our other recurring revenue products like our software and services.

Okay. Maybe just kind of zooming out for a moment. The whole green steel space is pretty nascent. Obviously, I mean, you guys have been involved with Shougang in China for quite a while. When do you think steel production in the U.S. will 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.

I think when I think about green steel, there has already been a major transition in the U.S. steel sector towards recycling scraps, et cetera, 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. 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 is 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.

Well, you guys are involved with Arcelor, which is by far the most active globally in the transition. So good, we'll look forward to getting updates on Belgium over the next 6 months.

The next question comes from Tom Curran from Seaport Research Partners.

Just 2 follow-ups on LanzaJet. First, would you provide us with a progress update and some color on offtake agreements or other anchor SAF buyers for the Freedom Pines plant? Just how much of that 10 million gallons per year of capacity is already contracted?

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

Yes. That's -- I'm not surprised to hear that, which is kind of a nice segue into my next question, which is for SAF, there seems to be a lot of consternation about the availability dilemma. The idea that the drop in supply side remains resource constrained when it comes to economically viable options or making drop in SAF and therefore, global SAF production is stated to continue to fall well short of the aviation industries 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 LanzaTech biorefining plant with a license for LanzaJet 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 a biorefining plus ATJ combination could grow? Where are you focused for maximizing that potential growth rate?

Absolutely. That's the next stage is 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-LanzaJet solution, at least for the next feasibility stage. You probably saw that Tadweer in the Middle East, that project is municipal solid waste to aviation fuel. And so that combines both LanzaTech and LanzaJet. We are very, very focused on that. And I think the key drivers will be, one, we're going to go a lot faster as soon as Freedom Pines Fuels is built out. 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, Tadweer and New Zealand. But there are multiples of that that are in the early stages and feasibility stages.

The next question is from the line of [ Sean Ernes ] from Stifel.

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 under operations this year? And could you perhaps characterize whether engineering improvements and/or changes to bacteria design are driving any efficiencies?

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 kind of offer reduced costs because they know that we're replicating, right? They're not going to sell one compressor, they are 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 second-generation bioreactor. 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 second-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.

Makes sense. And for my follow-up, you highlighted in your prepared remarks that you are ahead of schedule in 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 are looking at the time line of progressing these microbes from the demonstration stage to commercial operation?

Absolutely. And actually, we jumped in on opportunity. The plant at Suncor, the plant that we were testing with Suncor, our 2G -- our second-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 second-generation bioreactor as well. If things continue as expected, we should have that microbe 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, will be very useful in acrylics and other applications. And so that's what's next in the pipeline. That, again, is in the 18 to 24 commercial timeline.

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

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 first year of our public presence. So thanks again for joining us.

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.