Loop Industries, Inc. (LOOP) Q4 2023 Earnings Call Transcript

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Loop Industries Fourth Quarter 2023 Update Corporate Call. The conference is being recorded today, May 19, 2023, and the press release accompanying this conference call was issued after market close yesterday, May 18, 2023. On our call today is Loop Industries Chief Executive Officer, Daniel Solomita; Chief Financial Officer, Fady Mansour; and Kevin O'Dowd, VP of Communications and Investor Relations. I would now like to turn the call over to Kevin O'Dowd to read a disclaimer about forward-looking statements.

Thank you, operator. Before we get started, let me remind you that today's meeting will include forward-looking statements within the meaning of the security laws. These forward-looking statements relate to, among other things, current plans, expectations, events and industry trends that may affect the company's future operating results and financial position. Such statements involve risks and uncertainties and future activities and results may differ materially from these expectations. Additional information concerning these statements and related risks and uncertainties is contained in the Risk Factors and Forward-Looking Statements section of our latest annual report Form 10-K filed with the SEC yesterday. Copies of these documents are available at sec.gov or from our Investor Relations department. At this time, I'd like to turn the call over to Fady Mansour, Chief Financial Officer of Loop Industries. Fady, please go ahead.

Thank you, Kevin. I'm truly grateful to be here today and honored to be part of this leadership team. As the new CFO with just four weeks of experience, I am thrilled to join this remarkable franchise. The exceptional team, advanced technology, and ambitious goals we have ahead are what attracted me to this company. I eagerly anticipate collaborating with all of you in the future. Dan will provide a business update, and I'll hand it over to him shortly, but first, I'd like to discuss the financial results. Although I wasn't here for the previous results, I've reviewed them and believe we're at a crucial turning point as we move from 2022 towards the future, transitioning from experimental R&D to deployment and commercialization. For the quarter ending February 28, 2023, we saw a significant reduction in expenses, which will be a recurring theme moving forward. Engineering costs related to the basic design package decreased considerably, and our external engineering expenses dropped significantly as well, a trend we expect to continue. Additionally, the completion of the Terrebonne project led to a notable decline in machinery and equipment expenses. Our total R&D expenses fell by over two-thirds, and we will keep aiming for cost reductions which I will elaborate on shortly. From a G&A perspective, we saw decreased costs across the board. We're focusing on optimizing combined professional services, employee compensation, and back-office functions to achieve overall expense reductions. We also benefited from a gain on the disposal of Bécancour in two parts: nearly $10 million recorded in Q4 2023 and $6.7 million in Q3, bringing our total yearly gain to approximately $16.7 million, which strengthens our position and provides us with the necessary resources to fund operations for the coming years. For the full year, we saw a consistent theme of significantly reduced expenses, similar to what I described for the last quarter. In G&A, there was an increase in stock-based compensation due to a performance condition being satisfied in fiscal 2023, resulting in vesting but not yet exercised. We also gained larger tax credits related to the Terrebonne upgrade, which further helped reduce expenses. As we look ahead and optimize our back-office expenses, I am pleased to report that we aim to reduce our current recurring expense run rate by about 50%, encompassing total R&D, engineering, and G&A. We recognize that we are unlikely to generate material revenues over the next couple of years, necessitating a focus on maintaining our expenses in accordance with our available cash. We anticipate cuts in headcount, reduced spending on machinery and equipment, and ongoing cost reductions from back-office operations, ensuring we differentiate between discretionary and essential expenditures. We treat R&D and engineering costs as cross-charges to recover them quickly within our financial statements. Regarding our balance sheet, the sales from late 2022 and Q3 and Q4 have strengthened our financial position; three-quarters of our total assets are in cash, allowing us ample funds to cover our minimum expenses for over two years. This positions us well to advance all projects, notably the first terminal we plan to commence by the end of the year. Our financial standing and funding capabilities are solid. On cash flow, we recorded positive cash flows in the latest two quarters, Q3 and Q4 2023, thanks to the land sale I mentioned. Our primary focus remains on continuing to reduce expenses. We are currently at a pivotal moment, closely monitoring back-office expenses while allocating smartly towards project costs, which are essential for our success. I am fully supportive of investing in projects that are vital to elevate our company to the next level.

Thank you very much, Fady. It's a great pleasure to have Fady join us. He's been a tremendous resource. Even though for only four weeks, he's been here, he's been fantastic. I got to know Fady about six months ago, so we took the time to ensure that Fady is the right fit for the CEO role moving forward. I'm really happy to have him on board with us. It's been an eventful year. We've got a lot of milestones that have been completed, and I don't think Loop has ever been in a better position than we are today to supply virgin quality PET resin and polyester fiber to global brand companies around the world. Customer demand is extremely high for our products; being able to supply virgin quality material from our Terrebonne facility to global brands around the world is a significant achievement. We're the only company out there able to supply this type of material to brands with 100% recycled content and virgin quality material; brands are responding very well to this. We're negotiating contracts for the Ulsan facility, also for the French facility and other future facilities as well. So there's been really strong customer demand, which is very exciting. Right now, the only way to get recycled content into packaging today or in the fiber space is through mechanical recycling. What we've seen and what the world has seen, especially what our customers see, is that government regulations are forcing more brands to use more recycled content in their packaging, but the quality of the recycled PET or rPET is going down dramatically. If anyone looks at a bottle made from mechanical recycling today, most bottles are a very dark gray or they have to dye them blue or green, which is concerning for all global brands because the quality is continuously declining. And as those packages get back into the recycling stream, the quality will only get worse. That's where Loop steps up and brings in virgin quality material, the same quality as the petrochemical industry made from 100% recycled content. This has been a huge advantage for us. We launched a very exciting program with Garnier, a L'Oreal brand, the Micellar water brand in the United States last month; the package is a Micellar water sold exclusively in Ulta stores across the United States. This was a tremendous achievement working with L'Oreal, a fantastic brand, and they're going to be a future customer of our facilities. Additionally, we signed an LOI for an offtake for the Ulsan facility from On AG, the exciting Swiss shoe manufacturer that makes cloud running shoes. We are really excited to work with them; that's a fiber-to-fiber application. Again, that's only Loop that can provide fiber-to-fiber recycling, supplying the textile industry with virgin quality fibers, which is something they cannot get today. We can recycle polyester fibers back into virgin quality polyester fiber or from fiber into food-grade packaging, and Loop can do any of those things, setting us apart from anything that exists. Fiber-to-fiber is going to be the driving factor for the Asian partnership with SK Global Chemical; most of the global supply chain of textiles and polyester fiber is in Asia, and we have secured about 60% of the feedstock for the Ulsan facility from the textile industry. This is really an exciting market for us. Having the Terrebonne facility up and running for the past 2.5 to 3 years has been hugely beneficial as we move to global expansion, being able to leverage that experience. Today, we supply customers in various sectors including packaging, food-grade packaging, automotive, textile, pharmaceutical, and the toy industry. Therefore, customer demand has never been higher, and everyone is excited about the quality. The other big milestone involves our partnership with SK Global Chemical, which we've been working with for over two years. It's not a huge surprise, but it's good to have the joint venture agreements finalized. These two companies complement each other very well; Loop adds the technology piece while SK handles the facilities' construction, operations, and day-to-day maintenance. So, it's a beneficial partnership where each company brings essential expertise. Strong customer demand for Asia ensures that many of our existing customers and close partners will be off-takers from the Ulsan facility. As I mentioned earlier, the fiber feedstock will be the main feedstock used for these facilities, specifically textile waste. We've already secured over 60% of this feedstock for the facility. We have tremendous plans for expansion with SK Geo Centric moving forward, first in Ulsan, South Korea, but we are already discussing other facilities in Japan, with two potential locations in China. Vietnam is also an exciting location. For our French project, we selected Saint-Avold in the Grand Est region; we conducted an exhaustive search across France, and chose Saint-Avold, which is near the German border. This offers a great logistics advantage for feedstock. We're excited to be there; the President of the region, Franck Leroy, will be visiting our facility next week. Tremendous government support for the French project has been evident. I attended the Choose France event hosted by President Macron last Monday, where the CEO of SK Geo was also present, as well as significant figures from Suez. We met with officials from all levels of government, our customers, and feedstock suppliers, marking a successful event. The French government's support for our project is immense; they are leading sustainable solutions in the plastic space. We are currently in the permitting phase for the project, anticipating breaking ground in 2025 with operations commencing in 2027. It’s been an eventful year, and Loop is in a better position than ever to execute our business plan. We provide high-quality material from 100% recycled content and have great partnerships and customers. We're finalizing our financing for the facilities, and as Fady mentioned, selling the land in Bécancour provided us enough cash to cover all our top-line expenses at our head office. That's a really good move for us, transitioning the company from R&D toward operational projects.

Our first question today is from David Quezada of Raymond James.

Thank you for the update. I'd like to start by asking about Ulsan and your contracting strategy there. It's great to see the demand, especially now that On AG is involved. Daniel, could you provide an overview of your strategy for that facility? Will you aim to contract for all the volumes? Is there a distinction between local Korean customers and your international ones that you're considering? I'd appreciate any insights on your approach and how you're planning to mitigate sales risks over time.

Thanks, David. It's great to speak with you. For the Ulsan facility, we expect to sell about 50,000 tons under contract with our existing customers, including companies like Danone and On AG, along with a few others that we'll announce soon. This 50,000 tons will likely be split evenly between 25,000 tons of fiber and 25,000 tons of bottle grade. The remaining 20,000 tons will probably be sold on the spot market. We anticipate that 2025 will be a pivotal year for brands requiring more recycled content, particularly in Europe. Therefore, we intend to take advantage of the price changes and are cautious about locking everything into long-term contracts. We consistently apply formula-based pricing, which allows us to adapt to increases in raw material or input costs as long as we stick to index-linked prices. Our customers are familiar with these pricing models, and we are actively negotiating with several of them. Our key differentiator is the quality we provide. Our customers demand virgin quality material made from 100% recycled content, and many leading brands prioritize quality that is not achievable through mechanical recycling. During my visit to France for the Choose France event, I noticed that products made from mechanically recycled materials often appeared very dark gray. The visual quality is crucial, especially for PET, where color is essential. Chemical recycling, such as Loop's polymerization technology, breaks the materials down to monomers, enabling us to rebuild them free of discoloration, which highlights a clear quality advantage over mechanical recycling. Therefore, we expect strong demand for the Ulsan facility, as well as for our other facilities.

That's great insight, Daniel. Regarding the feedstock for Ulsan, you mentioned that you have secured about 60% of it. I assume you plan to contract the remainder. Could you share any details about the nature of those contracts? Are they based on formula pricing? What is the duration of the contracts, and what is the composition? Will it all be fiber, or will there be some recycled bottles included as well?

Yes. So about 60% of the feedstock is going to come from the fiber industry, specifically textile waste from polyester fiber manufacturing, which is prevalent in Asia. SK is working diligently on the supply chain in Asia. This information is public: they have made equity investments into several companies in Asia to secure feedstock for our facilities, including solid trays and material from the polyester fiber supply chain. Much of this is complemented by government efforts in Korea to develop a new supply chain, as there hasn't been a company capable of recycling this material until now. For example, there are 20,000 tons of brown beer bottles in Korea that use PET; these bottles can't currently be recycled, but they represent excellent potential feedstock for our production. Other materials, like trays, are also prime examples that are not presently recycled in Korea.

Okay. Great. And then maybe just on construction costs for the Ulsan facility? Or do you think there have been any changes over the past, call it, 6 months or so in terms of the expectation of the budget for that facility? Or is that somewhat contained since it's on an existing industrial site?

Yes, we haven't seen too many increases in costs. In Korea, inflation is a bit lower compared to North America, which has higher inflation numbers. The significant jump in costs occurred in 2021 and 2022. Currently, we observe things leveling off, meaning no big surprises regarding CapEx in Korea. Building on SK sites offers an advantage because there's existing infrastructure that does not count against the CapEx. Overall, we are satisfied with how costs are being managed.

Okay. Excellent. And then maybe just one last question from me. Regarding expenses, you have made significant progress in reducing them. Do you have an idea of what the annual expense run rate might look like from a total expense perspective?

Yes. So right now, the projection for 2024, we're targeting approximately $12 million a month, give or take. Keep in mind that we’re anticipating a major decrease in non-project-related expenses, which is part of our cost recovery mechanism. We forecast a 50% decrease in fiscal 2024 expenses, and then an additional 20% in fiscal 2025. Our ultimate goal is to have expenses at or below $12 million, meaning $1 million per month.

On that, I would add that every employee and department will now be charged back to the projects for their expenses. For example, any feedstock-related testing sent to Montreal for lab scale testing will be absorbed by the projects because it benefits them. Likewise, our engineering team will focus its costs on the projects. All expenses we used to carry as overhead will now be considered project costs. The plant here, having been operational, has leveled off towards no further CapEx expenses. We are on the right track to align our costs.

And it appears we have no further questions in the queue for today. So I'd like to thank everybody for joining Loop Industries Fourth Quarter Earnings Call for 2023. Thank you for joining. You may now disconnect your lines.