Loop Industries, Inc. (LOOP) Q4 2023 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Loop Industries Fourth Quarter 2023 Update Corporate Call. [Operator Instructions] 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 Reed -- sorry, to Kevin 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 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 Fady Mansour, Chief Financial Officer of Loop Industries. Fady, please go ahead.

Thank you, Kevin. Thank you so much. And thanks for having me here today. I'm so honored to be part of this leadership team. I'm a newly minted CFO. I've got 4 weeks under my belt. It's been a rock and roll four weeks, but I couldn't be more excited to join this amazing franchise. The combination of the stellar team that we have, the cutting-edge technology, and the aggressive milestones that we have going forward are really what referred me to this company, so I couldn't be more excited, and I look forward to working with all of you in the future. Please -- Dan will give an update on the business, and I'll pass it over to him later, but I'd like to go through the financial results. Obviously, I wasn't here, but I've got caught up on the results that have happened in the past. But also what I call it a pivot point right now, we're pivoting from 2022, '23 to the future as we get off the dirt trail of experimentation and R&D and onto the highway of deployment and commercialization. But I will go through the results. Obviously, for the quarter ended February 28, 2023, we saw our expenses come down, and that's going to be a common theme that is going to hold as we go forward. A lot of engineering related to basic design package came down. Our external engineering came down tremendously. And you can expect that to continue into the future. Our machinery equipment, as we finalized [ Terrebonne ] saw a dramatic decrease in expenses. Again, more of a sign of things to come. So we saw total R&D expenses come down by more than 2/3 to more of a steady line run rate, but we're going to continue to look at cost decreasing and I'll talk through that in a couple of minutes. On the G&A perspective, the costs were down pretty much across the board. So that's another area that we're looking to optimize for, which is a combination of professional services, employee comp more of our back-office functions. So we're looking at the frontline team, and obviously, the back line team to get through a total of reduced expenses. Obviously, we benefited from the gain on the disposal of Bécancour. It was 2 tranches. One happened in the fourth quarter of 2023, and we reported a gain just under $10 million. There was another gain that was recorded in the third quarter, which was $6.7 million. So it brought our full year gain to about $16.7 million, but more importantly, it solidified our [indiscernible] and built a nice amount of dry powder and just to make sure we can fund our operations for the next couple of years. Turning over to the full year. Again, same theme that you saw a tremendous amount of reduced expenses for the same reasons that I articulated for the last quarter. One of the things in the G&A -- the G&A perspective, we had a higher stock-based comp because it was related to a performance condition that was met in fiscal 2023. So the stock-based comp was vested. It hasn't been exercised. So that was kind of a onetimer that occurred. Obviously, in addition to that, our tax credits, we had a bigger tax credit related to the Terrebonne upgrade. So that was good news that served to reduce our expenses. More importantly, as we pivot forward, and I told you about the pivot that we're going to do in looking at our back office expenses. When I look and I've had a time to work with the team, internal stakeholders and see how we're able to reduce our expenses going forward, I'm proud to say that from a recurring expenses standpoint, we're looking at reducing our current run rate by about 50% which is a total of R&D, engineering and G&A. So we're taking a large -- we understand that we won't be able to generate revenues -- or material revenues in the next couple of years. So we have to have it keep the lights on [indiscernible] and preserve our precious expenses in line with the cash that we have on hand. So 50% cost takeout, obviously, Terrebonne is complete right now. So like I said before, we're off the dirt trail of R&D and onto the highway of commercialization and deployment. Engineering projects are going to obviously go up as we get all side up and running and the future facilities, but those costs, we are looking at -- we are looking and doing cross-charging all of these expenses because they are incremental to the projects. So the theme, looking forward from our expenses is lower headcount, lower spend on machinery and equipment, cost-cutting from a back office perspective, watching all forms of spending, really bifurcating what's discretionary versus what's needed and obviously treating our R&D and engineering expenses as a cross charge. So even if they hit our P&L from time 0, we're looking at cost charging them very quickly so that we get the recovery from the P&L perspective. And more importantly, we get -- we preserve our precious cash. Turning over to the balance sheet. Obviously, the sales that happened in late 2022, third and fourth quarter of the current fiscal year -- or last fiscal year, helped to shore up our finances, 3/4 of our total assets are cash on hand that's going to give us the dry powder that we need to make sure we're able to fund our minimum expenses going forward. So we have more than 2 years of operation expenses that we can fund. So we're well served and well anchored on delivering all the projects that we see in the pipeline and most notably, the first terminal that we're looking to get shovels in the ground by the end of the year, which is the [ old time ]. So we're really, really in good shape from a balance sheet perspective and a funding perspective. On the cash flow, obviously, we had 2 positive cash flow orders, the latest 2, Q3 2023, Q4 2023 because of the excess land sale that I referred to. And obviously, we are laser focused on making sure that the expenses come down with that. So that's where we are from the P&L perspective. Again, like I said, we're at the pivot point right now. So we're keeping track back office expenses are going to be on a de minimis perspective. and we're going to be more spending on the project expenses, which is obviously the cost of success. So I'm happy to spend money on projects, that are recoverable and what's needed to get our company to the next level. With that, I'll turn it over to our CEO, Dan Solomita. Daniel?

Thank you very much, Fady. It's a great pleasure to have Fady join us. He's been a tremendous resource. Even though for the only 4 weeks, he's been here, he's been fantastic. Got to know Fady about 6 months ago. So we took the time to get to know each other and make sure that Fady is going to be the right fit for the CEO role moving forward. So 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 all around the world is such a big difference. And we're the only company out there that's able to supply this type of material to brands, 100% recycled content, virgin quality material, and brands are really 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 really been a strong, strong demand from the customer side, which is really exciting. Right now, in the world, the only way to get recycled content into, let's say, packaging today or with the fiber space is through mechanical recycling. And what we've seen and what the world has seen and especially what our customers see is as government regulations are forcing more and more brands to use more recycled content into their packaging, the quality of the recycled PET or rPET is going down dramatically. And you could see that if anyone looks at a bottle made from -- with mechanical recycling today, most of the bottles are like a very dark gray or they have to die them blue or green, and it's really something that's really concerning for all of the global brands because the quality is continuously going down. And as those packages get back into the recycling stream, the quality is only going to get worse. And so that's really where Loop steps up and brings in the virgin quality material exactly the same quality as the petrochemical industry made from 100% recycled content. So that's really been a huge plus for us. We launched a really exciting program with Garnier, L'Oreal brand, the Micellar water brand in the United States last month, the package, it's a Micellar water. It's sold exclusively in Ulta stores across the United States. And so that was a tremendous achievement working with the L'Oreal brand, what a great brand they are, huge cosmetic company, and they're going to be a future customer of our facilities. So that was a really exciting launch. We have some other things with L'Oreal later on this year in New York. On AG, we signed an LOI for an offtake for the Ulsan facility from On AG, the exciting Swiss shoe manufacturer that makes the cloud running shoes. So 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, so supplying all of the textile industry with virgin quality fibers, which is something they cannot get today and to be able to start with a fiber. So nobody can recycle polyester fibers back into virgin quality polyester fiber or going from a fiber into food-grade packaging and Loop can do any of those things. And so that really sets us apart from anything that exists out there. So that's another really exciting opportunity for us. Fiber to fiber is really 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 all in Asia. Most of the feedstock that we're going to be using for those facilities is polyester fiber, so we probably secured about 60% of the feedstock for the Ulsan facility will be coming from the textile industry, polyester fiber. So that's really a really an exciting market for us. Today, having the Terrebonne facility up and running, operating, getting material into customers' hands so they can see the quality has completely changed the game. Operating this facility for the past 2.5 to 3 years has really been hugely beneficial for us as we move to global expansion, being able to get that knowledge of running the facility for 3 years, operating it and getting all that data is really, really important. Today, we supply from our facility. Today, we supply customers in the -- obviously, in the packaging, food-grade packaging industry, in the automotive industry, textile industry, pharmaceutical industry and the toy industry. So we have 5 different real segments that we're into today from our Terrebonne facility, and most of those customers are going to translate to our larger facilities. So customer demand has never been higher, and everyone is really excited about the quality. The other big milestone, obviously, is the SK Global Chemical -- the SK Geo Centric partnership. We've been working with them for over 2 years. So it's not a huge surprise, but it is good to get the joint venture agreements finalized. Two companies complement each other really well. Loop brings in the technology piece. Loop brings in the customers, the marketing and the branding. We always get our Loop logo on the package, which is tremendous branding and marketing with all of these great brand companies that we work with. SK brings in -- SK brings in all of the construction of the facilities, the operations of the facilities and all of the day-to-day manufacturing and maintenance of the facilities. So it's a really great partnership where each company brings in their expertise. Strong customer demand for Asia. A lot of our existing customers and all of our close partners are going to be off-takers from the Ulsan facility. As I mentioned earlier, the fiber feedstock is going to be the main feedstock used for those facilities. So textile waste. We've already secured over 60% of the feedstock coming from fibers for that facility. So really excited the SK partnership is to develop multiple facilities across Asia, first one in Ulsan, South Korea, but we're already discussing and looking at other facilities in Japan. China would be able to absorb at least 2 facilities. Vietnam is another exciting location. So tremendous expansion plans with SK Geo Centric moving forward, and I couldn't ask for a better partner than them. As for our French project, we updated the markets we chose Saint-Avold in the Grand Est in France. So we did an exhaustive search of all the different sites all over France and decided on Saint-Avold, which is right near the German border, great location for logistics and feedstock. So we're really excited to be there. The President of the region, Franck Leroy will be visiting us next week at Loop. So he's coming to visit our facility. We're going to tour the factory with him and talk about our expansion plan there. Tremendous government support for the French project. I was just at Choose France on Monday, hosted by President Macron. I was there; Mr. Na from SK was there as well, the CEO of SK GC was there; and Sabrina Soussan, the CEO of Suez. So all 3 of us together, we're meeting with all of the government officials, all of our customers, feedstock suppliers. So it was a great event hosted by President Macron. That was the second year that I've attended. And so, the tremendous support from the French government for the project. They need solutions in France for packaging and France is really leading the way for sustainability in the plastic space. So that's -- that project is really moving forward well. Feedstock has all been secured for the projects through Suez. Obviously, Suez is a large waste management company in France. So they've secured a percentage of the feedstock. Loop has also secured a percentage of the feedstock. So feedstock is -- has been secured for the project. Customer demand is huge from our French brands, such as Danone, L'Oreal, L'Occitane and the rest. So that's a really exciting project. We're in the permitting phases right now, so we're going through the permitting and expecting to break ground on that facility in 2025 to be up for 2027. So it's -- like I said, it's been a really eventful year. Loop has never been in a better position to be able to execute on our business plan. We have the best quality material coming from 100% recycled content, great partnerships, great customers. Now we're just working on finalizing our financing for the facilities. As Fady mentioned before, selling the land in Bécancour gave us enough cash to be able to get to our licensing fees which will basically cover all of our top line expenses here at our head office. So that's really -- that was a really good move for us being able to sell that land and now transitioning the company away from R&D and more into operations where all of our different departments. So R&D and our engineering will be always a cost center. Now we will be charging back to the various projects. So we're really transforming the company from purely R&D into an operating company. So it's a really exciting future. And as far as financing for the facilities, we're exploring a couple of different options that we're looking at on being able to finance the plants. And we should be updating the market pretty soon on that as well. So that's it for me. With that, I guess we'll turn it over to questions.

[Operator Instructions] Our first question today is from the line of David Quezada of Raymond James.

Appreciate the update there. My first question, just on -- I guess we'll start with Ulsan and just thinking about the contracting strategy there. Great to see, but there's a lot of demand and you've got On AG on there now. Maybe, Daniel, could you just talk high level about what your strategy is for that facility? Will you look to contract all the volumes? Is there any split between sort of local Korean customers and your international customers that you would look for? Just any like broadly how you're thinking about it and how you can derisk that from -- I guess, from a sales perspective over time?

Yes. Thanks, David. Great talking to you. So for the Ulsan facility, we'll probably sell about 5 -- so the -- the capacity is 70,000 tons. And so we'll probably sell under contract about 50,000 tons with our existing customers, the Danones of the world, On AG will be our customers and a few others that we'll be announcing soon. So it's going to be probably a split pretty even of the 50,000, about 25,000 fiber and 25,000 bottle grade. So then the other 20,000 tons will probably leave it for the spot market. We see 2025 as being a really important year for brands, where they're going to need more recycled content, especially in Europe. And so, we want to take advantage of that price swing and not have everything locked into long-term contracts. So that's kind of the sales strategy there. We always use formula-based pricing anyway. So as long as we use indexes-tied formula prices which allow us to make sure that if the cost of raw materials go up or the cost of any of our inputs go up, then that's a pass-through cost to our customers. Customers are used to working with these type of formulas. So this is what we're currently negotiating with all the different customers. Again, the real differentiating factor for us is the quality. And that's really what the customers need. The customers need virgin quality material coming from 100% recycled content. And a lot of the really great brands are not willing to sacrifice quality which they can't get today from the mechanical recycling industry. It's really interesting. I was going a couple of stores in France when I was there for the Choose France event and you see some packaging from the mechanical recycling industry, and the bottles are like a really dark gray and it just looks so bad visually. And that's a really big thing with PET is the color. That's where -- that's what chemical recycling [ loops ] the polymerization technology that's what it brings because we break it down to the monomers and build it back up, we remove all of those colors, that's where our technology really shines. And there's a huge difference between the quality of our packaging versus the quality of the mechanical recycling. So yes, no shortage of demand for the facility, no shortage of demand for any of our facilities.

Okay. Excellent. That's great color, Daniel. And then maybe just on the feedstock side, I guess, for -- again, for Ulsan, you mentioned that you've got, I think, 60% of it secured. I'm guessing you'll look to contract all of it. And just I'm wondering if you're able to talk at all about the nature of those contracts, like -- are they formula-based pricing as well, the term of the contracts and I guess the mix between. Is it going to be all fiber? Or will there be some recycled bottles as well?

Yes. So it's going to be -- 60% of the feedstock is going to be probably coming from the fiber industry. So textile waste from the polyester fiber manufacturing, which goes on a lot in Asia. SK is really working hard on the supply chain in Asia. They've actually gone in -- and this is public information they've gone in and they've made some equity investments into some companies across Asia to be able to supply our facilities with feedstock coming from either like the trays from, let's say, solid trays or [ fruit ] cups or that type of material and also from the polyester fiber supply chain. A lot of that goes with the government. There's a lot of government action within Korea to be able to develop this new supply chain because there's never been a company that can -- is able to recycle this material. The supply chain kind of doesn't exist right now. And so, SK is working very hard with the Korean government on setting up those supply chains to be able to capture all of that material. A really good example is there's 20,000 tons of brown beer bottles in Korea, that use PET for their beer bottles. And those brown beer bottles obviously can't be recycled. And so that's another great feedstock for us. Trays is another great example where those trays are not recycled today in Korea. So the collection doesn't really exist for them. They go to the waste management companies, but there's no home for them. And so those are, again, things that Loop's technology can handle. And so that's where SK is developing that supply chain with the local governments.

Okay. Great. And then maybe just on construction costs for the Ulsan facility? Or do you think there have been any change 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 much of an increase in costs. Korea -- inflation in Korea is a little bit lower than, let's say, in North America, where we have these higher inflation numbers. The big jump in inflation happened probably like 2021, 2022. That's where we saw really big increases. We started to see things level off definitely right now. And so, there's no big surprises on the CapEx in Korea. Again, you have the advantage of building on SK sites, so there is some infrastructure there at the site that's not needed in the CapEx. But yes, costs are in line with what our expectations were. SKEE is doing all of the final engineering and the construction. And so having that as an internal SK company also helps manage the costs of the EPC contract. So everything is in line. So we're really happy with that as well.

Okay. Excellent. And then maybe just one last one for me, if I could. Thinking about expenses, obviously, you guys have done -- or have made some really good progress already in reducing expenses. I'm wondering if you have a kind of like a run rate that you think expenses can get to on an annual basis that you can share just from a total expense perspective?

I think right now we're about $12 million.

I can take that one. Yes. Yes. So right now, we're -- the expense -- the projection for 2024, we're going to be -- what we're ultimately targeting to, if you look at maybe not 2024, but 2025, we're looking to get to about $12 million a month, give or take, David. So obviously, we're going to see a major decrease in expenses that are not project related because of the cost recovery mechanism that we mentioned. So we're going to have a major decrease to the tune of 50% next year for fiscal 2024. And then another, call it, 20% for fiscal 2025. So our ultimate end goal is to end up at $12 million or below from expenses, so $1 million per month and less. That's what we're currently in our projections, and that's currently we're all going to be accountable for.

On that, I would say the real transition that the company is making is now all of our employees or every department is now becoming -- we're charging back the fees to the projects. So let's say, for the SK Ulsan project, any feedstock-related testing that's needed, right? So when we're securing feedstock, feedstock is sent to Montreal. We're testing it at the lab scale, we're testing in the production facility. So all of those costs are now going to be absorbed by the project because it's -- obviously the project is the one that's benefiting from that work. Same thing with our engineering team. We're going to be outsourcing all of our engineering team to the projects because the project is going to charge you back. So these are all going to be CapEx-related project costs that are coming back to us. Same thing for the French project. Any feedstock testing or any other work that we do that's getting charged back to the project. So that's going to be a really big difference. Obviously, the plant here, there's no more expenses as far as CapEx are things needed because the plant is up and running. It's operational. So that's really leveled off. So we really -- we're on the right track in getting costs in line. The other big thing is once the construction is finalized for Ulsan, the Quebec facility here in Terrebonne probably wouldn't -- there's no use in running a smaller facility once you have the large-scale facilities up and running. So this again would be if any customer wants to do some trials or a partner wants to do trials, we have this facility available, but it would be charged back to the project. So really -- we're really shifting our focus to be able to control costs as much as possible going forward.

[Operator Instructions] 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.