Loop Industries, Inc. Q1 FY2024 Earnings Call

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Loop Industries First Quarter 2024 Corporate Update Call. This conference is being recorded today, July 13, 2023, and the press release accompanying this conference call was issued after market close yesterday, July 12, 2023. On our call today is Loop Industries' Chief Executive Officer, Daniel Solomita; Fady Mansour, Chief Financial Officer; and myself, Kevin O'Dowd. I would now like to turn the conference over to me to read the 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 securities 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. These 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 on Form 10-K, our quarterly report on Form 10-Q filed with the SEC yesterday and yesterday's press release. 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 Daniel Solomita, Chief Executive Officer of Loop Industries.

Good morning, everyone. Thank you for joining us today at Loop Industries' Q1 Conference Call. I'm Daniel Solomita, the CEO and Founder of Loop Industries. I'd like to extend a warm welcome to all of you. We're excited to share our updates on our first commercialization project in Asia in our partnership with SK Global Chemical. The project in Ulsan, South Korea is on schedule and the costs are coming in on budget as well. So those are the two most important factors. We're scheduled to break ground on the project later this year, as we had previously announced. Teams are working together on finalizing all of the engineering packages in preparation for the construction. We've hired SK ecoengineering, SK's in-house EPC contractor, who is finalizing all of the engineering packages and will be leading all of the construction. On Loop's side, we're working with all of our proprietary equipment suppliers to supply the equipment packages needed for the Ulsan project. We've begun spending additional capital on the engineering fees for that equipment, and we're ordering some long-lead time equipment. Breaking ground is on schedule for the end of this year, so that's really good for our first Asian project. Customer demand for the Ulsan project is at an all-time high. The ability to recycle fiber to fiber, so polyester fiber to polyester fiber recycling, is really important for the Asian market. All of the supply chain for polyester fiber is in Asia. So all the big textile and fast-fashion companies, everything today, most of our clothing and running shoes are made in Asia. Therefore, it's a tremendous opportunity for us with our technology to be really the only technology able to fully complete the circularity for the textile industry. That's driven demand from all of the large textile and fast-fashion companies. So demand is extremely high, and we have our stable customers that have been with us throughout the years. All of the customers for Ulsan are currently buying from our manufacturing facility in Terrebonne. They are very familiar with Loop's technology and the quality of our output and the ability of our technology to recycle material that cannot be recycled today. So that's really important. It's very, very strong customer demand. Loop and SKGC's teams are working together on all aspects, including feedstock sourcing, which we expect the majority of the feedstock for the Ulsan facility to come from waste textiles. This is a key differentiator for us over others in the recycling industry, as we focus on materials that cannot be recycled today. In Q1 as well, we signed our first LOI for the Ulsan facility with On shoes, the Swiss shoe company that makes their Cloud shoes. The ability for us to go fiber to fiber is really what all of the textile and clothing industry wants, and we're able to deliver that for them. It's been a really interesting partnership, and we've been working with On shoes for many years. As far as the French project, it's moving really well. We have a lot of customer demand in France through our large partnerships with companies like Danone, L'Oreal, and L'Occitane. They are all very supportive of the French project. The French government is also behind the project, as they would like the waste from France incorporated into their packaging. That's our Loop SKGC and SUEZ partnerships. It's a three-company partnership. Each company brings in their area of expertise: SUEZ handles waste plastic; Loop provides technology and customers; and SKGC manages engineering and construction. All three CEOs, myself, Mr. Na from SK, and Sabrina Soussan from SUEZ, were recently with the French government. We have the full support of the French government for the project. We hosted Franck Leroy, the President of the Grand Est region, at our offices about a month ago. They were extremely excited and impressed by our technology and our ability to co-market and co-brand with these customers. Being able to get Loop's logo onto packaging was something they found very impressive. It shows the dedication of the customers to our unique product. We continue to execute at our head office here. Fady will get into the numbers a little more, but our cost reduction efforts have been working very well. We've been very cautious about protecting our cash, and we're doing a really good job of that. When we begin breaking ground on the facility in Ulsan later this year, the joint venture will be reimbursing us for certain expenses. With that, I'll pass it over to Fady so that he can give you more detailed insights into the numbers.

Thank you, Dan. It's good to present to you all again. I felt like we did this not long ago, on May 19. So we're seven weeks older and wiser in our evolution, as Dan gave a thorough description of our current projects. At the same time, we are managing our day-to-day expenses, and you will see the results. We have a financial presentation now available on our website that provides detail on our financials over the last three months. I am thrilled with the results for the three months ended May 31 compared to the equivalent period last year. R&D expenses have decreased by 35%, from $6.8 million to $4.5 million. G&A went down by 25%, if you exclude the one-time RSU milestone achieved in the first quarter of last year. Total expenses are down by 30%, again excluding the one-time RSU milestone last year. I am really thrilled that we can show such meaningful reductions. I wanted to walk you through a bit about the results for the current quarter. $7 million in expenses seems high, considering my guidance given seven weeks ago indicated a cash burn rate of about $15 million per annum this fiscal year, and dropping to $12 million next fiscal year. I want to clarify why that amount appears high. Within the R&D expenses, there are two items that were mentioned by Dan. They are project costs that we spend, which accounting rules prevent us from capitalizing on our balance sheet. Therefore, we expensed them. However, later in the year, we will get refunds from the joint venture in Ulsan for these costs. There's going to be some lumpiness in our results, which is why I'm guiding you towards the $15 million and $12 million as an annualized amount. Within the current quarter, we accrued approximately $1.2 million for polymerization equipment and about $900,000 related to Ulsan project costs. These will be part of the receivable that Dan mentioned, totaling around $2.2 million that we'll be reimbursed later in the year. Additionally, if you exclude stock-based compensation and depreciation expense, our cash burn rate for the quarter was $4 million, which aligns with our annualized amount of $16 million. We have other initiatives to implement over the next quarter or two to achieve further cost savings. All departmental heads are aligned on responsibility for our cash spend. Our focus is not short-term but rather on anything that feeds the long-term innovation pipeline of Loop. We aim to protect our current liquidity and manage our future liquidity well to maintain operations until Ulsan is operational in 2026. I feel good about our liquidity and run rate, even though it will be lumpy. I will provide details every quarter for your modeling. We have plenty of dry powder to get through this, and I'm satisfied with where we stand on cost control. That's all I have for today, and I'm happy to answer any questions. If you have a chance to look at the presentation and have other questions, feel free to direct them to Kevin and myself, and we’ll be happy to answer.

Okay operator, we will take questions now.

Our first question today comes from David Quezada with Raymond James.

My first question here, I guess, maybe we'll start with Ulsan. Just curious if you could remind us if there are any meaningful hurdles left to breaking ground there. And I guess, maybe a related question. When it comes to the equity contribution you'll be putting into that facility, does that need to happen prior to groundbreaking? Or could that be something that happens during the construction process?

David, thank you very much for the question. So hurdles for Ulsan, we're finalizing all of the information packages and construction packages with SK's engineering team to break ground later this year. We're planning a ceremony in Ulsan for the groundbreaking later this year. So there aren't many hurdles left. Everyone is very committed to the facility, but the engineering and construction packages need completion. We are also finalizing all of the customer contracts for the facility, aiming to sell out about 50,000 of the 70,000 tons in locked-in long-term supply contracts, with 20,000 tons reserved for the spot market. We believe that in 2025 and beyond, the price of our material will increase significantly due to more government regulations and the demand for brands to have more recycled content, especially of the quality that Loop can supply, which is in high demand. Many CPG companies are concerned that the mechanical recycling industry's quality is declining, which poses a problem for their packaging needs.

Excellent. That's great color. And then maybe just in France, I know at the site there, I think you're working on permitting offtake agreements and financing. Could you provide any updates on the permitting specifically? What significant permits do you still need? And can you share any other details on where that project stands?

Yes. So the project is very important for everyone involved, especially our customers in Europe, who really need a facility in France. There is strong support from our French brands. The French government is fully supportive by providing significant capital in the form of subsidies, both from the local and federal levels and the EU. We're currently in the public consultation phase, where we present the project, and the public has a certain amount of days to comment or ask questions. The plant will be built on an existing petrochemical complex, so we're well within all of the different regulatory requirements for that chemical park. We do not foresee major challenges with permitting. The French government has initiated efforts to reduce the permitting time from 18 months to 12 months, and we're working closely with them to expedite this process. All three companies involved are very much on board with the project. We recently met in Paris with the French government, including Macron, and we are all committed to ensuring this project is a huge success, as it could serve as a model for additional projects in Europe.

Okay. Excellent. And then regarding contracting for Ulsan and the 50,000 of the 70,000 tons being contracted, do you feel you have visibility on finalizing that by the end of this year? Can you update us on how far along you are toward that 50,000-ton target?

Yes. The 50,000-ton target will be purchased by four customers. We are finalizing contracts with those four customers, which have worked with us for many years. These contracts will be finalized in advance of breaking ground.

Okay. Excellent. And just one last question for me. Regarding the cost reduction, you've made great progress, and I appreciate Fady's comments about the proportion that can be reimbursed from the projects. Just to confirm, do you expect that reimbursement to happen in the fourth quarter?

Yes. Regarding the fourth quarter, some expenses for long-lead time equipment were accounted for in the current quarter. That project charge will be sent back to us upon breaking ground.

Could you provide as much detail as possible? I understand some of it might not be completed or not in a position to discuss.

Yes. As far as the CapEx of the project, our estimate has always been approximately $400 million. We're in that range. We'll have a final number towards the end of summer or beginning of fall, once SK E&E finishes all of their necessary EPC work. Both companies are working hard to reduce CapEx numbers, and we are addressing labor costs in Korea as well. Regarding project finance, that's primarily SK's responsibility. They are handling all project financing and guaranteeing 60% of the debt. Loop has no recourse to this, and we are not involved in those discussions. SK has their banking syndicate lined up for the facility's debt. Above the 60%, we will arrange proprietary equipment financing for the remaining 5%.

Got it. Understood. And just one question on feedstock. You're looking at the textile market in polyester. Is this waste polyester coming from waste streams, or is it low-quality polyester coming out of post-industrial waste markets?

It's a little bit of everything. We have post-industrial waste from sewing factories and big clothing companies, as well as waste polyester from post-consumer sources. Additionally, rigid packaging contributes to our feedstock, such as brown beer bottles with barrier layers, which only Loop's technology can break down. We'll also source trays used for packaging products like strawberries that cannot be recycled by mechanical recyclers, making them ideal for us. The collection of these materials in Korea is not currently organized. SKGC is initiating the collection process with the Korean government. Over 70% of the feedstock for the facility is already locked in agreements.

That's super helpful. It sounds like there's a big diverse market for your feedstock.

Yes. Polyester fiber is a market we plan to capitalize on significantly. The fibers often come dyed in many colors, and if any heat is applied during recycling, these dyes can't be removed. So Loop's technology has a big advantage because we can handle colors and the chemical makeup of textiles effectively.

Got you. Assuming the Ulsan facility, you will receive a royalty on top, correct?

Yes, we own 49% of the equity in the project, which entitles us to 49% of the profits. We also receive a royalty fee based on a percentage of top line revenue, and all material for Ulsan will be sold under our brand, making it a Loop-branded product.

At this time, we have no further questions registered. We have no further questions, so I'll turn the call back to the management team for any further remarks.

No. I guess that's it. Thank you very much for dialing in, and we have exciting months ahead before we talk again in October. Customer contracts should be finalized and announced by then, and we'll have our financing in place. Everything is on schedule and on budget, and we're really excited. Thank you.

Thank you.

Thank you for your time. Have a great day.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.