Earnings Call Transcript - LOOP Q1 2023

Operator, Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Loop Industries' First Quarter 2023 Update Call. During today's presentation, all parties will be on listen-only mode. Following the presentation, the conference will be opened for questions. This conference is being recorded today, July 14, 2022, and the press release accompanying this conference call will be issued after market closed yesterday, July 13, 2022. On our call today is Loop Industries' Chief Executive Officer, Daniel Solomita; Chief Financial Officer, Drew Hickey; and Kevin O’Dowd, Vice President of Communications and Investor Relations. I would now like to turn the conference call over to Kevin to read the disclaimer about the forward-looking statements.

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 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 in forward-looking statements section of our annual 10-K filed with the SEC yesterday, in 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. Daniel, please go ahead.

Daniel Solomita, CEO

Thank you, Kevin. And good morning, and thank you to everyone for joining us. I am very pleased to share Loop's progress on our financial update with you today. One of the major items that happened recently in our quarter is on June 16, 2022, for our French project or European project in partnership with SUEZ. We announced that SK Geo Centric will become an equal partner in that strategic partnership, which was formed to build the first Infinite Loop manufacturing facility in Europe. Having SK Geo Centric bring their experience in petrochemical manufacturing complements SUEZ's expertise in feedstock sourcing and Loop’s technology for marketing and branding the Loop branded resin. Those three companies together really complement each other, so that’s a fantastic addition to that partnership. Things on that partnership are moving well. We're scheduled to break ground in 2023 for that project. Right now, we're going through all of the permitting necessary to build in Europe. We've seen an uptick in customer demand recently, largely driven by government regulations pushing customers towards more recycled content for packaging and tighter supply chains. Companies are really looking to make a change to find new sources of recycled PET. Loop’s PET provides them with virgin quality material, exactly the same quality as the petrochemical industry, but coming from 100% recycled content. We have seen an important uptick in customer activation. We recently signed a five-year anchor agreement with Danone for our Becancour facility. Additionally, we’re launching the evian Loop bottle in South Korea, which will be the first chemically recycled, 100% recycled content packaging to be sold in stores in South Korea. That's an exciting launch for us. We also entered into a supply agreement with an innovative Swiss shoe manufacturer to provide them with 100% recycled polyester resin for use in a polyester fiber application. We are seeing increased interest from fiber companies, and large apparel companies have become more active in sustainable sourcing. A huge part of what they want to do is fiber-to-fiber recycling, taking waste fiber and turning it into new fiber, which Loop’s technology is perfectly suited to do. We're working hard to supply resin from our manufacturing facility in Terrebonne. The big thing is that we've completed all of the upgrades in Terrebonne, and now we are focusing on production and selling materials to generate first revenues, which sets us apart from competitors globally. Our North American project in Becancour is advancing well, with detailed engineering and financing plans progressing smoothly. Our target is to break ground later this year, and ensuring strong financing plans to start building our international projects is critical. The South Korean project with Ulsan and SK Geo Centric is also moving well; land has been purchased, and site preparation has begun. Manufacturing facilities in North America, Asia, and Europe provide confidence to our customers that they will be able to get the same Loop resin or polyester fiber from any facility around the world. This is incredibly important to us, and we are working diligently.

Drew Hickey, CFO

Thanks, Daniel. On the financial side, for the quarter, the net loss for the first quarter ended May 31, 2022, increased by $5.8 million to $18 million as compared to a net loss of $12.2 million for the same period in 2021. The change is primarily due to increased G&A expenses of $7.9 million, partially offset by lower R&D expenses of $1.4 million. The increase in G&A expenses for the first quarter ended May 31, 2022, was primarily attributable to increased stock-based compensation expenses of $8.4 million. Of that, $7.74 million was related to the achievement of a performance milestone for 1 million restricted stock units. The RSUs, which are non-cash expenses, will vest in equal amounts over a five-year period. Excluding this one-time performance milestone for RSUs, the first quarter loss would have been $10.3 million. There was a $1.8 million decrease in R&D expenses for the quarter, which was primarily due to a $1.3 million decrease in external engineering expenses for our design package for the Infinite Loop full-scale manufacturing facilities, completed in the first quarter, as well as a $0.73 million decrease in the purchases of machinery and equipment at the Terrebonne facility following its completion. As of the end of the quarter, Loop's cash balance is $32.4 million. Daniel?

Daniel Solomita, CEO

Thanks, Drew. We are well positioned to advance our financing plans. The increasing pressure from government regulatory requirements for recycled plastics continues to support demand for recycled PET and polyester fiber. We are excited to commercialize our technology with our strategic partners to address the global challenges surrounding plastic waste and climate change by delivering a circular solution that helps customers meet their sustainability commitments. The progress we have made, along with support from our strategic partners, positions Loop well to proceed with the commercialization of our breakthrough technology on a global scale. I would now like to open the call up to questions from listeners. Operator?

Operator, Operator

Thank you. Our first question comes from David Quezada from Raymond James. Your line is now open. Please go ahead.

David Quezada, Analyst

Thanks. Good morning, everyone. Daniel, maybe a first question here, just starting with Becancour and the key developments you see coming up here. Just wondering if you could walk us through how you see the progression from detailed engineering? How many more customer off-take agreements you'd like to see? And whether or not, I guess, the financing sources that you're discussing with would like to see the detailed engineering and more customer off-take agreements? Maybe just walk us through what the key milestones are to watch out for there?

Daniel Solomita, CEO

Yes. So the detailed engineering is just a function of not needing to have it fully completed before breaking ground on the project. We're advancing with the detailed engineering to stay ahead of our time schedule to break ground later this year. We're dealing with key equipment suppliers to ensure they have all of their detailed drawings and engineering before fabrication begins. This is a normal progression for the project. Regarding customer agreements, we are diligently working to sign up customers and expect to have 100% of the facility contracted before breaking ground this fall. We anticipate securing between six and eight customers for the total capacity of the facility. Sales are strong, and we are negotiating contracts for other locations as well, including the French facility with European brands and the Asian facility in South Korea.

David Quezada, Analyst

That's great color. Thanks, Daniel. And then maybe just with respect to feedstock, are there any agreements you can enter into in any of your jurisdictions ahead of building your plants to, I guess, secure some feedstock or stockpile it before you start to move to commercial operations?

Daniel Solomita, CEO

Yes, that's a great question. Each project has its own feedstock strategy. In Europe, our partners at SUEZ are one of the largest waste management companies in France, so much of the feedstock will come from their network. We're also working with the French government to secure feedstock part of the project. We have good visibility on feedstock in Europe because of our partnerships there. In North America, we have contracts in place with suppliers for material, and we are already stockpiling for the facility. Feedstock is a key advantage of Loop’s technology. Our low-temperature de-polymerization allows us to use feedstock that others cannot handle, accommodating a wide variety of feedstock that no one else can process. We have certified over 200 different feedstock suppliers in North America for the Becancour facility.

David Quezada, Analyst

Excellent. That's great. Thank you for that. And Daniel, maybe just one more for me. You mentioned that you're moving through the permitting process in Europe. Are there any milestones that we should look out for there? Any key permits that you're looking for in the next three to six months?

Daniel Solomita, CEO

As far as milestones on the permitting, I don't think there are specific milestones to mention. It’s largely an administrative process we have to navigate for the permitting and the government subsidies for the project. We are all involved in that process collectively with SUEZ, SK, and LOOP. I want to also mention that for the Korean project, a key source of feedstock will be polyester fiber. A large amount of polyester fiber waste comes from Asia, so that will serve as a significant feedstock for us.

David Quezada, Analyst

That's great additional color. Thanks for that, Daniel. I’ll hop back in the queue for now.

Daniel Solomita, CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from Gerry Sweeney of ROTH Capital. Your line is now open. Please go ahead.

Gerry Sweeney, Analyst

Hey, good morning, Daniel and Drew. Thanks for taking my call.

Daniel Solomita, CEO

Hey, Drew.

Gerry Sweeney, Analyst

Could you guys hear me? Okay.

Daniel Solomita, CEO

Yes, we can hear you, Gerry.

Gerry Sweeney, Analyst

Okay. Just staying with Becancour and the finance for a moment. Do you have a timeline on completing that financing? Does the current environment materially change some of these in some sense that you had previously?

Daniel Solomita, CEO

So the current plan is still in place to fully break ground on the facility this fall. We believe that is a realistic timeline. Our discussions on the financing side have not changed dramatically even in the market downturn. There remains strong demand for sustainable materials and PET plastics. The economic outlook for the project is strong, even with inflationary pressures. Capital expenditures are more expensive due to rising commodity and transportation costs, but the sales price of PET is also higher, which is reflected in our contracts. We don’t see any substantial changes in the financing plan.

Gerry Sweeney, Analyst

Got it. That's helpful. Are there any deliverables that some of your potential financing partners are looking for before crossing the finish line? Or is it just the negotiation process?

Daniel Solomita, CEO

For the financing plans, the engineering and feasibility report must be completed, which it has been. Third-party due diligence on the technology has been completed as well. Customer agreements become increasingly important as we finalize contracts, and the more we have in place, the better for our financing negotiations. It’s mostly about negotiating terms now to secure the best deal for Loop.

Gerry Sweeney, Analyst

Got it. That’s super helpful. I appreciate that. One more question, though — about Terrebonne. How much visibility does Terrebonne provide in projecting estimates for Becancour? You have input materials, reactions, mass balances, energy consumption — how much confidence does Quai give you for your projections on Becancour?

Daniel Solomita, CEO

Yes, I completely understand. The Terrebonne facility is not a batch facility. Only the reactor section operates in batch mode, whereas the rest operates continuously. Having Terrebonne in operation gives us the data needed to validate various assumptions, including energy requirements, catalyst needs, and other key drivers. This data is vital as it builds confidence not just in our technology, but also in our ability to scale. The scale of the facility we have today is unmatched in this industry, providing all necessary data points to support our operations.

Gerry Sweeney, Analyst

Got it. You mentioned the SK Geo Centric, SUEZ, and the partnership in Europe. Can you provide details about the equity structure? Will it be a third, a third, a third, or will you require less equity upfront because you own the technology?

Daniel Solomita, CEO

For the equity upfront, it depends on whether we consider licensing fees. Negotiations could be structured to forgive those fees in exchange for less equity upfront or some other arrangement. We're currently assuming it will be a third, a third, a third. We’re also working with European governments on subsidies for the facility, which is well-received. That opportunity exists, but we value the licensing fees over the next 20 years, so we are unlikely to give them up.

Gerry Sweeney, Analyst

Got it. Thanks for that. That’s everything from me. I appreciate it.

Daniel Solomita, CEO

Thanks, Gerry.

Operator, Operator

Thank you. Our next question comes from the line of Sameer Joshi of Wainwright. Your line is now open. Please go ahead.

Sameer Joshi, Analyst

Yes, thanks. Good morning. Thanks for taking my questions. The first question is about the product you’re sending to prospective customers that is being produced at Terrebonne. Are you getting any remuneration for that? Are you generating any revenue, and if so, is it netted in the R&D line? Just curious about that.

Daniel Solomita, CEO

Yes, we are selling material. In the past, when we sold materials for R&D purposes, those revenues were netted in the R&D line. But now, if the material is actually being sold as a marketable product, it will be booked as revenue. For instance, we have the launch with evian in South Korea this fall, where there are hundreds of thousands of bottles produced for sale. Those sales will be revenue-generating. It’s conditional on the purpose of the material: if it's for sale, it generates revenue; if it's for R&D, it counts as an expense.

Sameer Joshi, Analyst

Got it. Understood. Can we expect sales from South Korea in the second or third fiscal quarter?

Daniel Solomita, CEO

We're not selling yet. It's not Evian's sale that we're making; Evian will sell their own bottles.

Drew Hickey, CFO

Yes, primarily other products will generate revenue.

Sameer Joshi, Analyst

Got it. Thanks for that. Over the next few quarters, what are the expected operating expenses and equity contributions? In a previous quarter, you mentioned a separate line item showing your investments. What should we expect in the upcoming quarters?

Drew Hickey, CFO

Operating expenses are expected to decrease as we generate revenue from our Terrebonne facility, which will offset some of the costs incurred. Engineering teams’ expenses will be charged to projects as construction breaks ground, becoming part of the CapEx built into the facility. This will slightly increase our burn at Loop. We will also see revenue from engineering packages for projects. Looking ahead, we’re targeting lower quarterly costs in the range of $5 million to $6 million.

Sameer Joshi, Analyst

Yes, we were expecting that to happen this quarter or next quarter. I appreciate the transparency.

Daniel Solomita, CEO

We’re clearly seeing the last of those expenditures in this quarter, but they don’t just switch off completely; they will tail off.

Sameer Joshi, Analyst

Got it. Thanks for that.

Operator, Operator

Thank you. At this time, this concludes our question-and-answer session. I would now like to turn the conference call back over to Mr. Daniel Solomita for closing remarks.

Daniel Solomita, CEO

Thank you very much. Thank you, everybody, for participating, and I look forward to updating you next quarter. Thank you.

Operator, Operator

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