Loop Industries, Inc. (LOOP) Q1 2024 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Loop Industries First Quarter 2024 Corporate Update Call. [Operator Instructions]. 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 Kevin O'Dowd, VP of Communications and Investor Relations. I would now like to turn the conference over to Kevin 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. 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 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. Please go ahead, Daniel.

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 or SK geo centric. Excuse me. They changed their name recently. The project in Ulsan, South Korea is on schedule, as planned, and the costs are coming in on budget as well. So that's the 2 most important factors. We're scheduled to break ground on the project later on this year, as we had previously announced. Teams are working together on finalizing all of the engineering packages in preparation for the construction. So we've hired SK ecoengineering in-house -- SK's in-house EPC contractor, who is finalizing all of the engineering packages and who 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. So we've begun spending some additional capital on the engineering fees for that equipment, and we're ordering some long-lead time equipment. So breaking ground is as planned, as scheduled 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 of the big textile and fast-fashion companies, everything today, most of our clothing and running shoes are made in Asia. So 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 with all of the large textile and fast-fashion companies. So demand is extremely high, and then we always have our stable customers that have been with us throughout the years. All of the customers for Ulsan are today buying from our manufacturing facility in Terrebonne. So, they're very familiar with Loop's technology, very familiar with the quality of our output and the ability of our technology to recycle material that cannot be recycled today. So that's really important. So a strong -- very, very strong customer demand. Loop and SKGC's teams are working together on all aspects. So feedstock sourcing, which we expect majority of the feedstock for the Ulsan facility to be coming from waste textile. So that's a key differentiator for us over other people in the recycling industry. So that's a material that cannot be recycled today. Then you have your customer side and all of the engineering and construction. So project is moving really well. In Q1 as well, we signed our first LOI for the Ulsan facility with On shoes, the Swiss shoe company, makes their Cloud shoes. So again, that's 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. So that was a really interesting partnership, and we've been working with On shoes for many years. They've been a customer of our facility here in Terrebonne. As far as the French project, the French project is moving really well. We have a lot of, obviously, customer demand in France through our large partnerships with companies like Danone, L'Oreal, L'Occitane. So they're all very supportive of the French project, and they're all really behind the French project because they'd like the waste from France coming into their packaging. That's our Loop SKGC and SUEZ partnerships. So it's a 3-company partnership. Each company brings in their area of expertise: SUEZ, the waste plastic; Loop, the technology and customers; and SKGC, the engineering and construction piece. So all 3 CEOs, myself, Mr. Na from SK and Sabrina Soussan from SUEZ, were recently with the French government in France. We have full support of the French government for the project. We hosted Franck Leroy, who's the President of the Grand Est region, at our offices about a month ago. They were extremely excited and impressed by the technology, what they saw, our ability to co-market and co-brand [ with these ] to customers. Being able to get Loop's logo on to packaging was something that was really impressive for them, and it really shows the dedication of the customers to our very unique product. We continue to execute at our head office here. Fady will get into the numbers a little bit more, but our cost reduction efforts have been working very well. So that's something that we've been very cautious with protecting our cash, and we're doing a really good job of that. When we start the breaking ground of the facility in Ulsan later on this year, the joint venture will be repaying us certain expenses. So we've already started charging expenses to the project, which will be reimbursed at end of year. With that, I'll pass it over to Fady so that he can go through the numbers in more depth with you.

Thank you, Dan. It's good to present to you guys, again, I felt like we do it not that long ago, it was May 19. So we're 7 weeks older and 7 weeks wiser in our evolution, as Dan gave a really thorough description of where we are with the projects. At the same time, we are managing our day-to-day expenses. And you will see the results. We have a financial presentation that's now on our website. So it gives you some detail on the financials that have transpired over the last 3 months. So I'm thrilled with the results for the 3 months ended May 31 compared to the equivalent period of last year. You see R&D is down to the tune of 35% from $6.8 million to $4.5 million. G&A is down by 25%, if you exclude the onetime RSU milestone achieved in the first quarter of last year. So 35% in R&D, 25% reduction in G&A and total expenses are down 30%, again, if you exclude the onetime RSU milestone last year. So really, really thrilled that we're able to show that meaningful of a reduction. I wanted to walk you through a little bit about the results for the current quarter. $7 million of expenses is high, given the guidance that I gave 7 weeks ago of our cash burn rate being in the vicinity of kind of $15 million per annum in this fiscal year and diving to $12 million in the next fiscal year. So $7 million does appear, but allow me to explain why that is. In the R&D caption, there's 2 items which are exactly what Dan alluded to. They're project costs that we spend, and accounting rules don't allow us to capitalize that on our balance sheet. So we expensed it. But later on in the year, we're going to get a massive refund from the joint venture in Ulsan for these type of costs. So there's going to be some lumpiness in our results. That's why when I'm guiding you towards the $15 million and $12 million, that's an annualized amount. Intra-quarter, there is going to be some lumpiness. So there's $1.2 million related to a polymerization equipment that we accrued for in the current quarter. And there's about $900,000 of project costs related to Ulsan, which are going to be part of the receivable that Dan mentioned. So that's about $2.2 million that we're going to get reimbursed later in the year. And then if you back out stock-based compensation, which we all know is noncash, and depreciation expense, our cash burn rate for the current quarter was $4 million, so right in line with the $16 million. We have other initiatives that we're going to ignite in the next quarter or 2 to reduce cost savings. So all those things are in flight. We have perfect alignment between all the department heads that we need to be responsible for our cash spend. We're not going to be short term focused on that. Anything that feeds the long-term innovation pipeline of Loop, that's something that we want to spend. So we thought about optimizing around the current year results. But it's about protecting the liquidity that we have on hand and the receivables, the future liquidity that we're going to get to make sure that we build the bridge between 2023 and 2026 when Ulsan is operational. So I feel good about the liquidity. I feel good about the run rate. It is going to be lumpy. I will ask that you leave that with me, and I will explain the details every single quarter so you can model that up. So we have plenty of dry powder to get us through to that. And I feel good with where we are on the cost control side, but we look forward. That's all I have for today, and I'm happy to answer any questions. If you guys have a chance to look at the presentation and you have other questions, I'll ask that you direct them to Kevin and myself, and we'll be happy to answer that. Thank you.

Okay operator, we will take questions now.

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

My first question here, I guess, maybe we'll start with Ulsan. Just curious if you could just 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 -- SK's engineering team is finalizing all of the information packages and construction packages to break ground later on this year. We're planning a ceremony in Ulsan for the groundbreaking later on this year. So as far as hurdles, there's not much. Everyone is very dedicated to the facility, but the engineering has to be completed. The construction packages have to be completed. We'll be starting to finalize all of the customer contracts for the facility. So we're planning on selling out about 50,000 of the 70,000 tons locked-in long-term supply contracts and leaving 20,000 tons for the spot market. We believe that in 2025 and beyond, the price of our material will be meaningfully higher, because of more government regulations coming in and the need for brand to have more recycled content and especially recycled content of the quality that Loop can supply, which is really in demand. Because as these targets get put in, the mechanical recycling industry is really suffering because the quality of the mechanical recycled product is getting worse and worse and the quality of the packaging is becoming worse and worse. And so that's really a big concern for the CPG companies. So having the quality, obviously, the virgin quality that Loop can provide to the marketplace is in very, very high demand because the brands don't want to have these gray or really charcoal-looking bottles. They really want the quality that we can provide. I think you guys saw, we said in this quarter, we launched the product with L'Oreal in the U.S. in the Ulta stores. It's a micellar water package, and the quality is just pristine. So that's really what the customers are looking for. So that's one thing that you'll see from now 'til breaking ground, is all of the 50,000 tons being signed up and locked into long-term supply agreements with certain customers. As far as the financing, to answer your question, we're finalizing the financing with our partners. So we're working with our customers, partners and strategics on helping with the financing for the facility. The facility -- actually the spend is, so 20% at groundbreaking, 40% 6 months later and 40% 6 months after that. So that's the way the cash has to be spread out. So it's not everything upfront from day 1, but it is over a year that the cash has to be put into the project. So that answers, I think, that question.

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. Maybe with permitting specifically, could you just -- is there any update you can provide on where you are there? What significant permits do you still need? And any other details you can share on where that project stands?

Yes. So the project is -- it's very important for everybody involved. It's the customers -- mostly, I think, for the customers in Europe to really have a facility in France. Supplying them with the packaging is hugely important. So strong support from all of our French brands. The French government is fully supportive of the project with providing a significant amount of capital to the project in the form of subsidies, so the local government and the federal government there as well as the EU. So we're in the public consultation phase where you present the project, and the public has a certain amount of days to be able to comment on the project, ask questions on the project. So those are all the things we're going through right now. The plant is being built on an existing petrochemical complex. So as far as regulations and permitting, we're all -- we're well within all of the different requirements for that chemical park. So we don't foresee too many challenges on the permitting. The French government has actually put an initiative in to start reducing the permitting time. So they're trying to go from 18 months to 12 months. So we're in the middle of all of this. So we're working very closely with the governments on seeing how they can reduce timing for the permitting. But yes, all 3 companies are really on board with the project. Like I said, we all met in Paris not too long ago with the French government, with Macron. And we're all pulling towards making that project a huge success, as our first of many possible projects in Europe as this 3-company partnership.

Okay. Excellent. And then maybe just going back to your comments around contracting for Ulsan and the 50,000 of the 70,000 tons getting contracted. Do you see that -- like do you feel like you have line of sight on that happening, I guess, by the end of this year? And is there any update you can provide just on how far towards that 50,000-ton target you are?

Yes. So we have -- the 50,000 target is going to be purchased by 4 customers. So we're just finalizing the contracts with the 4 customers. They're 4 customers that have been working with us for many years. So it's just about finalizing the details on the Ulsan contracts. But yes, we have 4 main customers taking that 50,000. Yes, so also, that will be all, the contract -- sorry, just to clarify, those will all be contracted in advance of the breaking ground.

Okay. Okay. Excellent. And then maybe just one last one for me. Just with respect to -- I mean, certainly, on cost reduction, I think you've made some really good progress and I appreciate the comments that Fady made about the proportion that can be clawed back. Is that -- or I guess, I don't know if clawed back is the right word, but just, I guess, charged back from the projects. And just to confirm from a modeling perspective, do you expect that to happen in the fourth quarter?

Yes. So in the fourth quarter -- so long lead time equipment. Some even from the long lead time equipment we had orders from Bécancour that we said we were going to be using for Ulsan. So that's a project charge that's going to be sent back to us at the breaking [Audio Gap]

[Audio Gap] potentially seeing as much detail as you can give, I understand that some of it is not completed or not in a position to discuss.

Yes. So as far as the CapEx of the project, our estimate was always approximately $400 million. So that's -- we're in that range of $400 million. We'll have a final number later on towards the end of the summer, beginning of the fall, once SK E&E (sic) [ SKEE ] finishes all of their EPC work that's needed. So that's where we are on the CapEx. Both companies are working really hard to be able to reduce CapEx numbers. So that's another thing that SK E&E (sic) [ SKEE ] and SKGC and Loop are all working together on those things, labor costs in Korea and things of that nature. And then as far as project finance, that's really SK's responsibility. So within our joint venture, SK is responsible for all of the project finance, all of the debt for the projects. So they're responsible and guarantee 60% of the debt. So Loop has -- really no recourse to Loop. So we're not really involved in those discussions. SK has their banking syndicate lined up for all of the debt needed for the facility. Above the 60% we bring in for all of the proprietary equipment such as the polymerization, all of the other reactors and all of the other proprietary equipment, that's where we work with the equipment financing to go above the 60% debt and use all of the equipment financing as extra debt onto the project. So roughly another 5%.

Got it. Understood. And then just one question on the feedstock. Obviously, you're looking at the textile market in polyester. Is this waste polyester coming out of the waste streams? Or is it sort of excess or doused up or low-quality polyester coming out of like sort of post-industrial waste markets?

So it's a little bit of everything. To be honest with you, Gerry, there's going to be post-industrial waste from sewing factories, from big clothing companies. There is going to be waste polyester post-consumer stuff as well, waste polyester there. And then you're going to have also some rigid packaging. So our bottle customers would prefer the feedstock coming from packaging. So you'll have -- in Korea, they have brown beer bottles that have a barrier layer within them. So again, that's a feedstock only Loop's technology can break down. So that's going to be an important feedstock. Then there's all of the trays, which is when you go to the store and you buy, let's say, a bucket of strawberries or blueberries, that type of material, which again can't be recycled by mechanical recyclers. So that's another great feedstock for us. The collection of that in Korea today is not organized. So SKGC is starting to organize that collection with the Korean government. So other materials such as PET mixed with PVC, again, that cannot be recycled. But because of our low temperature technology, we break down the polyester and PET, and all of the PVC comes out of the stream. So we have all those different feedstocks. Again, the feedstock is mainly the SK's responsibility because they're local. They have the people on the ground. But we support them in all of the testing. So all of the qualification, before signing a contract with feedstock suppliers, we get material here at our Terrebonne facility. We test it. We make sure we give the data back and check the PET percentage, make sure that what we're paying for the material is worth it. So we're working and collaborating together. But I think over 70% of the feedstock for the facility is already locked up in agreements.

Got you. That's super helpful. And suffice to say, a big diverse market and inputs for the feedstock.

Yes. Polyester fiber is one that's really -- we're really going to take advantage on the polyester fiber side. Because the fibers come with so many different colorings and dyes, if you use any type of technology that has any type of heat in it, you can't use that -- you can't remove those dyes and those colorings. So that's where Loop's technology has a huge advantage because of that -- those dyes that get put into the textile industry that we can remove.

Got you. And then one last question. I'm assuming the Ulsan facility, you will receive a royalty off the top, correct?

Yes. So we own 49% of the equity in the project, so 49% of the profits. And we also have a royalty fee that's paid back to us, which is a percentage of top line revenue. And all the material for Ulsan is sold under our brand. So it's a Loop-branded product to our customers.

At this time, we have no further questions registered. [Operator Instructions] 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'll have an exciting few months here before we talk again in October. Like I said, customer contracts should all be finalized and announced by then. We'll have our financing in place. So everything is on schedule and on budget. So 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.