Earnings Call Transcript - LOOP Q3 2022

Kevin O’Dowd, Vice President of Communications and Investor Relations

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 law. 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 in 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 in the forward-looking statements section of our annual report on Form 10-K and the quarterly report on Form 10-Q filed with the SEC yesterday. The yesterday’s press release, copies of these documents are available at the sec.gov or from our Investor Relations department. At this time, I’d like to turn the call over to Daniel Solomita, Founder and Chief Executive Officer of Loop Industries. Daniel, please go ahead.

Daniel Solomita, CEO

Thank you, Kevin. Hi, everyone. Thank you for joining. Loop is on a mission to address climate change and really about the decarbonization of plastic. Loop owns a patented technology that depolymerizes low-value PET plastic and polyester fiber to its base building blocks or monomers. The monomers are then purified and repolymerized to make 100% recycled content virgin quality PET resin and polyester fiber. PET resin is the number one used plastic for packaging, and polyester fiber for carpets and clothing is a large part of the polyester capital market. Loop Industries is leading the charge in being able to provide a 100% recycled content for PET plastic and polyester fiber through our technology. Governments around the world are mandating more and more recycled content in packaging, and this is driving huge demand from the large consumer goods packaging companies. For example, the Government of Canada has continued to develop its 2030 zero plastic waste action plan, which includes goals and implementing initiatives such as requiring all plastic packaging in Canada to contain at least 50% recycled content by 2030, working with provinces to implement and enforce that ambitious recycling target of 90% for plastic beverage containers and introducing labeling rules that prohibit the use of chasing arrow symbols unless 80% of Canada’s recycling facilities accept and have reliable end markets for these products. We are pursuing the construction of Infinite Loop commercial scale facilities in Bécancour, Quebec, Canada, with our strategic partner in Europe with SUEZ and in South Korea with SK Geocentric. Additionally, we have a joint venture to pursue the retrofitting of existing fossil fuel-based PET polymerization facilities with our technology within the realm of ventures. Loop provided an update on its activities and reported its consolidated financial results for the third quarter of fiscal 2022. We’ll start off with Loop, the Infinite Loop Quebec project. I am pleased to inform you that in November, site preparation was initiated for Loop’s flagship Canadian facility project in Bécancour, Quebec, including building access roads, gravel pads, drainage, and landscaping. The initial work has been completed and readying the site for subsequent construction phases. Additionally, in December, we signed the contract for long lead time equipment for the Infinite Loop Quebec’s facility. Timing for expected delivery of this equipment is in line with the facility’s target construction plan. The company is focused on advancing our customer contract negotiations with global CPG brands for multi-year committed volume allocations for the Quebec facility. Loop also continues to collaborate with various levels of government and believes that the Infinite Loop project in Bécancour could become an important infrastructure in assisting Canada in meeting its 2030 zero plastic waste and recycling objectives. Engineering update. Loop has adopted a Design One, Build Many Engineering Philosophy, which includes a modular facility construction designed to allow the company to replicate the Infinite Loop model across all projected facilities in North America, Europe, and Asia. The engineering design of Infinite Loop manufacturing facilities is progressing on schedule with our partners at Chemtex Global and Worley. In Q3, we entered into a feasibility study phase of the engineering design. This allows us to obtain a more precise cost estimate. We are targeting completion at the end of calendar Q1, or start of calendar Q2. Infinite Loop Europe on September 10, 2020, we announced a strategic partnership with the French Environmental Services Group, SUEZ, with the objective to build the first Infinite Loop manufacturing facility in Europe. With the combination of Loop’s technology and the resource management expertise of SUEZ, who is one of the largest waste management companies in France, this partnership seeks to meet the growing demand in Europe from global beverage and consumer goods brand companies for virgin quality PET resin made from a 100% recycled content. We are currently finalizing site selection in Normandy, France. Both Loop and SUEZ teams are working on feedstock engineering site selection, ready to break ground on the facility in 2023. Asian joint venture with SK Geocentric, Asia remains the largest market opportunity for Loop Industries. It is home to 60% of the world’s population, represents nearly 70% of the world’s PET consumption and is the center of the global polyester fiber manufacturing industry. Most of our clothing and running shoes are currently manufactured in Asia. Loop and its strategic partner, SK Geocentric, signed a memorandum of understanding to commercialize Loop’s technology across Asia through a joint venture. Together Loop and SKGC plan to build a minimum of four facilities by 2030, all of which will be located – the first of which will be located in Ulsan, South Korea. Loop and SK Geocentric continue to work in tandem on advancing this important Asian joint venture. Financial results for Q3 2022. At the end of the quarter on November 30, 2021, Loop had $54.9 million of cash. We used $10.7 million of cash in the quarter. Our R&D expenses were $1.6 million higher than the prior quarter due to the continued engineering work for the Infinite Loop projects. Our G&A expenses were essentially flat for the quarter. We spent $0.9 million at the Bécancour site on improvements. In conclusion, I’m very proud of all Loop has accomplished in 2021 from our joint venture partnership with SK Geocentric to the announcement of evian bottles made from Loop PET and the beginning of the site preparation work in Bécancour. We have remained steadfast in our pursuit of our commercialization objectives. We expect 2022 to be an equally transformational year, focused on accelerating the commercial development of our technology, cementing Loop’s partnership with CPG brands through commercial product launches across different markets throughout the year, and securing multi-year off-take commitments for Infinite Loop production facilities. I would now like to open up the call to questions from our listeners.

Operator, Operator

Thank you, Daniel. We will now begin our question-and-answer session. Our first question comes from David Quezada from Raymond James. David, your line is now open if you’d like to proceed with your question.

David Quezada, Analyst

Thanks. Hi, everyone. I’d just like to start – I’ve got a few questions here. Just like to start with the status of Bécancour, certainly encouraging to hear that you’ve started site prep. I’m just curious what kind of conditions would you want to see in place to commence the next phase of construction? And maybe on a related note, any color that you could provide on potential sources of funding for that?

Daniel Solomita, CEO

Thanks, David. So the facility, as far as the project goes, we’re completing the engineering package to have the basic engineering package completed by Q1 2022. We’re currently discussing different financing options. Government financing is going to play a large part in the facility, as this is going to be critical infrastructure needed in Canada for them to be able to accomplish their 2030 goal to end plastic waste. And so those negotiations are ongoing on the financing side.

David Quezada, Analyst

Excellent. Thank you. And is it fair to say that the tone of those discussions has become a little bit more advanced since the 2030 action plan from the Canadian government was released?

Daniel Solomita, CEO

I think that does play a part. Because in that action plan, chemical recycling was identified as one of the solutions needed to accomplish this goal and Loop is the leader in chemical recycling for PET and polyester fiber, which really sets the tone.

David Quezada, Analyst

Okay, excellent. That’s great color. Thanks, Daniel. And then maybe just to move on to your partnerships with SUEZ and SK. We’re just curious what your latest thoughts are on timing for site selection with SUEZ?

Daniel Solomita, CEO

So yes, we started off. We went looking all over Europe for what would be the best site to put this facility. During that time, SUEZ, or most of SUEZ was acquired by Veolia, their largest competitor. So the new SUEZ operates mainly in France. And so that kind of narrowed the selection choice down to having the facility in France. So we started looking at three different sites across France and did all of our analysis. So I would say the selection – the timing on the selection is imminent.

David Quezada, Analyst

Okay, great. Great, thank you for that. And then maybe one more for me before I get back in the queue. Just curious how you’re thinking these days about potentially breaking ground in Asia with SK. Would you want to see the facility in Bécancour get to a certain point? And maybe get some lessons from that before you move into breaking ground in Asia? Or could you do both simultaneously?

Daniel Solomita, CEO

Yes. So the Asian facility will break ground before Bécancour is built. The timing for the Asian partnership is really to have that basic engineering package completed that I was mentioning for the first quarter of 2022, because that’s the basis for all of the other projects, right? So not only Bécancour, but that engineering package is going to be leveraged for the French facility and it’s going to be leveraged for the South Korean facility. So that’s really the gating item. We’re completing that engineering. It’s very detailed, getting all of the partnerships, customer, equipment suppliers negotiated, all the contracts signed, and that allows us to then execute on the project. So the timing would be to break ground in South Korea in Q1 2023.

David Quezada, Analyst

Okay, excellent. Thank you for that, Daniel. I’ll get back in the queue.

Operator, Operator

Thank you, David. Our next question is from Amit Dayal from H.C. Wainwright. Amit, your line is now open if you’d like to proceed with your question.

Amit Dayal, Analyst

Thank you. Good afternoon, everyone. So, Daniel, in terms of CapEx for calendar 2022, what should we expect your CapEx to come in at?

Daniel Solomita, CEO

So you’re talking about the CapEx for the commercial facility, or you’re talking about CapEx at our Terrebonne Facility?

Amit Dayal, Analyst

I guess, overall, what will be put into these different efforts…?

Daniel Solomita, CEO

So for the 2022 year, we would be breaking ground on the expected to break ground on the Bécancour facility here in Quebec. And the estimated CapEx for that facility is $300 million.

Amit Dayal, Analyst

Right. So this year, how much would you sort of be spending this year getting that going?

Daniel Solomita, CEO

Well, that’s where we have to put all of the financing in place. So, leveraging the government’s financing because this is a critical part of the infrastructure for Canada. So those are all the items that we’re finalizing now is really the financing package. So now that $300 million number, obviously, we’re looking to bring in the financing package for that, and then we’ll see how much of that Loop is actually going to be responsible for as far as equity for the project. We always look for as much non-dilutive capital as possible for these projects, which is why we work very closely with the governments, not only the governments in Canada, but also the governments in France and even the governments in South Korea. So governments are going to play a large role in this. They’re mandating more and more recycled content. They’re mandating the brand owners well, they have to – there has to be a solution to enable the brand owners to achieve these goals. And so that’s where we play a critical role. Loop’s facilities will become similar to what happens today, as far as infrastructure for countries, where they’re going to need to have these facilities put up in every country to be able to recycle the plastics that cannot be recycled through traditional means.

Amit Dayal, Analyst

Honestly, that’s what I was trying to get a sense of. So this year in sort of 2022, do you do some announcements related to some of these items?

Daniel Solomita, CEO

Yes. That’s the expectation.

Amit Dayal, Analyst

Okay. Okay, good. Thank you. With respect to – have you started supplying any of those bottles yet? Or when – what is the timeline for getting that going?

Daniel Solomita, CEO

I’m sorry, I didn’t understand the question.

Amit Dayal, Analyst

For the evian partnership, the water bottles that you guys had announced earlier, you had indicated that you’d begin supplying to evian the 300,000 bottles in 2022. I’m wondering, has that started for you guys yet and where we are with it?

Daniel Solomita, CEO

So we supply the resin. We don’t actually supply the bottle. So we just supply the PET resin that goes into the bottle. And so the resin has already been shipped to evian, so they have the resin at their facility. And now they’re – it’s going to be on their schedule to blow the bottles, fill the bottles, and then ship the material to Korea. So we fulfilled our part of that.

Amit Dayal, Analyst

Okay, good. That’s what I was trying to get at. Thank you. Okay. And the higher corporate R&D, you guys given a little bit higher compared to maybe what our estimates were, that is to be expected. I mean, from this point onwards, is that the level we should expect, $9 million to $10 million per quarter for operating expenses?

Daniel Solomita, CEO

No, I think it’s going to be – so a lot of the operation expenses for this quarter were obviously upgrades to the facility in Terrebonne, because we expense all of that. And so there was a significant amount of upgrading the plant here to be able to produce more material out of our small production facility in Terrebonne. So moving forward, that the production facility here, there’s one last piece of equipment that’s coming in, that’s going to be upgraded for us to be able to produce much more material here. After that, it’s all about the engineering costs. And today, Loop at the headquarters is absorbing all of the engineering costs for these projects. Whereas traditionally, or in other circumstances, the project would be paying for the engineering work. But this Design One, Build Many, Loop is paying for the engineering work, and then it will be given or sold to the different projects. So we’ll be recouping some of the costs from all of the engineering that’s being done. So there’s much more expenses today than you would normally have, because we are currently just absorbing all the costs for the engineering.

Amit Dayal, Analyst

No, makes sense. I get it. Thank you. That’s all I had, guys. Thank you so much.

Daniel Solomita, CEO

Thank you.

Operator, Operator

Thank you. And our next question is from Gerry Sweeney from Roth Capital. Gerry, your line will be open now if you’d like to proceed with your question.

Gerry Sweeney, Analyst

Hey, good afternoon, Daniel. Thanks for taking my call.

Daniel Solomita, CEO

Hi, Gerry.

Gerry Sweeney, Analyst

Question on the financing. I know you’re going to have government financing. Is there an opportunity to get a strategic partner as well?

Daniel Solomita, CEO

Well, I don’t think we’re really focusing on getting a strategic partner for that facility. It being very close to our current facility, we feel comfortable in being able to operate the plant on our own. That possibility always does exist, but at this time, we don’t think it’s a necessity for us.

Gerry Sweeney, Analyst

Okay. So I don’t want to read too much into the columns. Okay, perfect. And then I also – there were some excess land there. Any update on the land sale because obviously that would provide a little bit additional capital?

Daniel Solomita, CEO

Yes. We’ve had a significant amount of interest for the land. The land is for sale right now. And we’ve had a couple of different people that are doing their due diligence on the land. When you’re selling commercial land like that, there’s a lot of studies that have to happen and a lot of people doing all of the due diligence work. So discussions are ongoing on the sale of the land.

Gerry Sweeney, Analyst

Got it. And then switching gears a little bit to maybe some customer off-take agreements. Any updates or can we expect any updates on that plant?

Daniel Solomita, CEO

Yes. I mean, we’re pretty – we’re relatively confident or I’m very confident in the starting of the Bécancour plant. So we’re negotiating with customers. Right now, there’s a tremendous amount of customer interest for the product from the CPG beverage companies, as well as the polyester fiber users. So, the large polyester fiber brand companies are really focusing on their targets, which are going to place them under pressure to provide more sustainability for polyester fiber by 2030. But we’ve seen, recently, in the past six months, there’s been a real increase in the amount of interest and work that’s being done with the big five polyester fiber users for the clothing industry. We’re doing a lot of work with these customers on qualifying the materials, sometimes they send us the scraps from their facilities to make sure that we can complete the full circularity for polyester fiber, which is really an exciting opportunity. So, all of these companies produce fiber waste at their facilities, mainly those facilities are in Southeast Asia. So sending us the samples, and having us polymerize and repolymerize their material and putting it back into their garments is really the holy grail for these companies. So we’re doing a lot of work with them on this site.

Gerry Sweeney, Analyst

Gotcha. And I suspect that’s progressing pretty well.

Daniel Solomita, CEO

Yes, very well.

Gerry Sweeney, Analyst

Got it.

Daniel Solomita, CEO

Yes, very well.

Gerry Sweeney, Analyst

And then also, just one little additional question just for the Bécancour. Obviously, I’m assuming the pricing formula converts the platform conversion rates in terms of pricing. Is that fair to assume on that front as well?

Daniel Solomita, CEO

Sorry. You had a little bit of a hard time understanding, you were breaking up a little bit. Can you repeat the question?

Gerry Sweeney, Analyst

Sure. I’m sorry, I’m in my car in Florida. With the Bécancour, with these newer contracts, I’m assuming the pricing agreements are the newer version, which is positive feedback on a cost per conversion. Is that accurate?

Daniel Solomita, CEO

Yes. So all of our pricing formulas start with the feed cost of feedstock. So if the price of the raw material goes up, then our sales price goes up. And vice versa, if the sales price goes down if the raw material price goes down. So we have a little bit of a hedge versus the feedstock. So all of those contracts for Bécancour will be modeled that way, and we also put in floor pricing, so we have minimum floor pricing in the contracts as well, so that we can never go below a certain number.

Gerry Sweeney, Analyst

Got it. And then final question, actually, switching back to Bécancour. Have you officially hired a construction firm, or are you working with Worley and Chemtex for the construction of the Bécancour facility?

Daniel Solomita, CEO

Yes. So the way we do it, Gerry, is that Chemtex’s piece comes all in modular fashion. So the modules come in, and they’re just connected on site. We’re doing the same with other parts of the technology where we have other equipment suppliers that provide us either skid mounted or full modules that are connected on site. And we’ve hired a local engineering construction firm that handles all of the local, so the civil, all of the foundation work, all of the site preparation work, and all that is being done by a separate local Quebec company. So Worley does the engineering. The vendor packages provide the equipment for each section. And then the local engineering construction company is the one that actually manages the entire process – the entire build-out, let’s say.

Gerry Sweeney, Analyst

Okay, got it. All right. So you’re all set to go as we were saying.

Daniel Solomita, CEO

Yes, we’re all set to go. We’re just, like I said, finalizing the financing packages and financing the engineering package.

Gerry Sweeney, Analyst

Okay, great. I appreciate it. And that’s it from me. Thank you.

Operator, Operator

Thank you. I will now allow a moment for any additional questions to be submitted. At this point, we will conclude our question-and-answer session. I would like to hand the call back to Mr. Daniel Solomita for his closing remarks.

Daniel Solomita, CEO

Thank you, everybody, for participating on the call. It’s our first quarterly update call. So we’ll be continuing to have these from now on. Thank you very much. Bye bye.

Operator, Operator

This concludes today’s corporate update call. Thank you for your participation. You may now disconnect your lines.