Loop Industries, Inc. (LOOP) Q2 2024 Earnings Call Transcript

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Loop Industries Second Quarter 2024 Corporate Update Call. This conference is being recorded today, October 16, 2023, and the press release accompanying this conference call was issued this morning, October 16, 2023. On our call today is Loop Industries Chief Executive Officer, Daniel Solomita; Fady Mansour, Chief Financial Officer; and Kevin O'Dowd, VP of Communications and Investor Relations. I would now like to hand the conference over to Kevin to read the disclaimer about forward-looking statements.

Thank you, operator. Before we start, let me remind you that today's meeting will include forward-looking statements within the meaning of 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 materially differ from these expectations. Additional information concerning these statements and related risks and uncertainties is contained in the Risk Factors report on Form 10-Q filed with the SEC today. In today's press release, a copy of these documents is 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. Please go ahead, Daniel.

Hi. Good morning, everyone. Thanks for joining the call today. I'm Daniel Solomita, the Founder and CEO of Loop Industries. Today, I'm excited to walk you through our recent developments and what lies ahead for Loop. I think we’ll start with the most important project that we're working on right now, which is the project in partnership with SK Geo Centric, which is going to be built in Ulsan, South Korea, on SK's large industrial and petrochemical complex. We are at the final stages of the development for the plant in Ulsan. The engineers and the construction team are finalizing the packages to start the construction process. We have an exciting groundbreaking ceremony for the Ulsan Arc in South Korea on November 9. The Ulsan Arc is where Loop's technology will be housed. This is a very exciting development for us, and it’s on schedule as we had planned. There will be top executives from the SK Group present, local government officials, federal officials, some of our customers, media, environmental institutes, and academic experts. It's really exciting for us, and customer demand is very high for the product from Ulsan, especially from the fiber players in the textile industry. Fiber-to-fiber recycling, which Loop's technology can handle, is a significant advantage for us and is exactly what the textile customers are looking for—being able to recycle old textile waste, old clothing, and turn that into brand-new clothing. The quality of what Loop produces is always top quality, which is really important for the brands. The supply chain in Asia will be a big component of the Ulsan customer base. We are back in advanced negotiations with a few strategic partners and government partners for the required equity funding for Ulsan. We've decided to upsize the deal a little bit from where we initially were. The financing terms are very advantageous to the company, so we feel really good about that. Sometimes when we’re tapping into strategic partners and government, it takes a little bit longer, but at the end of the day, it’s the best financing package for the company. We've reviewed various options and have found that this is the best financing structure moving forward. We look forward to announcing our milestone on financing very soon. The structure of the deal has been agreed upon and is in place; it’s just a matter of timing and execution. We don’t need the funds until after breaking ground on the Infinite Loop Ulsan project, which is scheduled for the end of this year. Depending on the final investment cost on Ulsan, which is approximately $80 million to $100 million, we've decided to upsize the financing package, and the terms are very advantageous to Loop. For our French project, we are in a public consultation phase, and everything—the feedback—so far has been very positive. So we are excited about that project. After the public consultation, we will proceed into the permitting process. At this time, I will turn it over to Fady, our CFO, to go through some of the financials.

Thank you very much, Daniel, and it’s great to be here again. I completely concur with Daniel; we are at the latter stages of final investment decision that leads to the construction of the facility and the funding. We are also at the later stages of the funding requirements we need. Those are obviously the home runs we’ve been working on over the last couple of months, and they’ve been top priorities. While those have been home runs, we’ve been looking at base hits as well, and we have a lot of successful endeavors that we’d love to communicate to you. If you have the analyst package in front of you, I’d love for you to turn to the P&L, which is Page 2 of the document. There, you’ll see the results for the quarter. Ordinarily, negatives imply bad news, but not in our case because the negatives are indicating that the expenses are way down versus last year. Not only are they significantly down across the board, but every single line item shows a drop, except for foreign exchange, which is outside our control. We’re talking about reductions in R&D of 46%, just under the 50% threshold. On the G&A side, we're looking at a 30% reduction in expenses, largely driven by lower professional fees—half of that reduction comes from lower professional fees. We’ve looked at every item where we can streamline operations, improve productivity, and understand what is discretionary and what is necessary. I’m very proud that overall, our expenses are down 40% this quarter compared to last quarter. Additionally, we’ve increased our interest income from $10,000 last quarter to $219,000 this quarter. We are actively deploying our significant cash position in highly liquid market instruments while benefiting from an inverted yield curve. I had guided the market last quarter regarding our cash burn rate, which I define as excluding stock-based compensation (as it's non-cash), excluding depreciation on property, plant, and equipment (again, it’s not cash), and backing out the items that will be recoverable from the joint venture. Our cash burn rate for the current quarter stands at $4.1 million, or approximately $1.36 million per month. Given all the streamlining opportunities we have, I’m confident that our run rate for the remainder of 2024 will be between $1 million and $1.2 million. I initially guided towards a $15 million run rate for fiscal 2024, and I believe we will achieve that for the full year, not just land there which implies $6 million to $7.5 million of back-office expenses. We are controlling costs smartly, continuing to support our innovation pipeline, and ensuring that we have the liquidity necessary for the Ulsan plant. Turning to the balance sheet, we have about $13.4 million in cash and another $1 million in restricted cash, giving us a total of around $14 million. If I could mention the accounting bonds, I would also note that we expect to recover about $16 million from the joint venture with SK in the next fiscal cycle, likely in 2024. So, between the recoverable $16 million and the $14 million, we have around $30 million of liquidity available to cover our fixed office expenses until the Ulsan plant becomes operational, after which we will be able to generate royalties and, with some luck, dividends, making us pretty much self-sufficient. We're advanced on our path toward self-sufficiency, and with the cash on hand and expected recoverables from the joint venture, we have around three years of liquidity—this coincides with the timeframe we need to generate funds and returns on investments from the plant. Therefore, we are in a very good financial position, with liquidity and ongoing efforts to streamline our expenses. That concludes my remarks, and I will open the floor to questions.

And our first question today goes to Gerry Sweeney of ROTH Capital.

I wanted to see, Daniel, could you just remind us or update us on the full timeline or the build-out of Ulsan? You mentioned the ceremony on November 9. I believe you said breaking ground by the end of the year or even maybe early next year, but then the timeline after that process.

Yes. We're aiming for 22 months of construction and to be up and producing the first material within 24 to 26 months. So the timeline is still to have material from the facility by the end of '25 or the beginning of '26. The ramp-up time is something we can't control, but having it built on SK's site should minimize the risks in start-up and delays. Additionally, because we operate a plant here in Quebec that has been running for three years, we can leverage those learnings for the start-up and ramp-up of the plant in Ulsan.

Sure. No doubt, I think being co-located with SK in Ulsan is definitely positive.

Having the plant built on SK's site, with SK overseeing operations and construction, reduces a lot of risks for us, which is really important. The only potential risk we see is that a large petrochemical complex is also being built by Saudi Aramco in Ulsan. The labor pool is tight due to this enormous project, estimated at $8 billion, which could affect our project. However, SK is doing a good job mitigating those risks.

Got it. That's helpful. And then could you discuss financing? I believe you mentioned $80 million to $100 million, but I want to confirm that. Also, if possible, could you provide further details on the financing package, whether you're looking at equity, debt, or how that will work out?

Yes. I believe it’s a great financing package. We’ve explored various options and will be issuing equity at a low price; that’s the last thing we want to do at this stage, as this financing will impact our future valuations. We want to ensure we have the best package possible. That’s why I have always worked with strategic partners. They view this not only as a financial investment but also as a long-term collaboration. Currently, we're negotiating the package, which has been agreed upon, but we need to align everyone as we finalize the timing. We would have liked to have completed the financing for this call, but it will take a bit longer. Once the package is announced, I believe stakeholders will understand why the wait is beneficial.

Got it. That's fair. And could you also remind us of the cost of the facility and clarify what Loop is responsible for?

Yes. Loop is responsible for 49% of the equity portion. In terms of the overall project, SK is responsible for securing project financing—60% debt or higher is the minimum requirement. We’re looking closer to 65% or 70% in debt for the facility. Another 5% of financing comes from equipment that we procure in Germany, which qualifies for equipment financing from German authorities. Therefore, Loop is responsible for approximately 17% of the total project cost, considering the 65% debt structure. All project finance and debt are managed by SK, which was crucial for our negotiations since Loop is a smaller company. The total investment cost has been guided at $400 million, with some variation due to rising labor costs associated with the Saudi Aramco project. However, as we are only responsible for 17% of any increase, we are comfortable with our position.

Got it. And my final question is on customers. I’m curious if you're conducting any runs for customers, as you've previously done with Avion and others. Could you provide an update on the customer side of the business and any short-term product runs from the Quebec facility?

Yes, we’re continuously conducting customer runs out of Quebec. We produce material daily for various customers, particularly in the textile industry. Fiber-to-fiber recycling is extremely important. Large textile companies send us 10 or 20 tons of material, which we process on-site, re-polymerizing it into products like clothing or shoes. This work is essential for securing contracts for Ulsan or other facilities. We're working with a major apparel company on launching a product line next year centered on fiber-to-fiber recycling, which is very exciting for us. We are very active with a range of customers, and the uniqueness of Loop's technology is a significant advantage, particularly in the textile sector, which is a substantial market—with textiles representing 66% of the global PET polyester market.

Thank you. It appears we have no further questions. This now concludes today’s call. Thank you all for joining. You may now disconnect your lines.

Thank you.