Loop Industries Q4 2023 Earnings Call Transcript

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Provided by Quartr
May 19, 2023

There are 5 speakers on the call.

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Loop Industries' 4th Quarter of 2023 Update Corporate Call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference will be open for questions.

Operator

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, Fedi 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.

Speaker 1

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 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 and Forward Looking Statements section of our latest Annual Report Form 10 ks filed with the SEC yesterday in yesterday's press release.

Speaker 1

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 Fadi Mansour, Chief Financial Officer of Loop Industries. Fadi, please go ahead.

Speaker 2

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.

Speaker 2

I've call. 4 weeks under my belt. It's been a rock and roll 4 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 alerted me 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.

Speaker 2

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, 2023 to the future as we get off the dirt trail of experimentation and R and D and off to the highway of deployment and commercialization. But I will go through the results. Obviously, for the quarter ended February 28, call, we saw our expenses come down and that's going to be a common theme that it's going to hold as we go forward. A lot of engineering related to basic design package came down.

Speaker 2

Our external engineering came down tremendously and you could expect that to continue into the future. Our machinery equipment, as we finalized Tebban, saw a dramatic decrease in expenses, again, more of a sign of things to come. So we saw total R and D expenses come down by more than 2 thirds to more of a steady line run rate, but we're going to continue to look at costs decreasing and I'll talk through that in a couple of minutes. On the G and 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.

Speaker 2

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 Becancour. It was 2 tranches. 1 happened in the Q4 of 2023 and reported a gain just under $10,000,000 There was another gain that was recorded in the 3rd quarter, which was $6,700,000 So it brought our full year gain to about $16,700,000 But more importantly, it solidified our coffers 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 and A perspective, we had a higher stock based comp Because it was related to a performance condition that was met in fiscal 2023.

Speaker 2

So the stock based comp was vested. It hasn't been exercised. So that was kind of a one timer that occurred. Obviously, in addition to that, our tax credits, We had a bigger tax credit related to the Terabon upgrade. So that was good news that served to reduce our expenses.

Speaker 2

More importantly, as we pivot forward, and I told you about the pivots that we're going to do and 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 will 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 and D, engineering and G and 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. We have to have a keep the lights on mentality and preserve our precious expenses in line with the cash that we have on hand.

Speaker 2

So 50% cost takeout. Obviously, Terabon is complete right now. So like I said before, we're off the dirt trail of R and D and off to the highway of commercialization and deployment. Engineering projects are going to obviously go up as we get all set up and running under 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.

Speaker 2

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 and D and engineering expenses As a cross charge, so even if they hit our P and L from time 0, we're looking at cross charging them very quickly so that we get the recovery from the P and L And more importantly, we get we preserve our precious cash. Turning over to the balance sheet. Obviously, the sale that happened In late 2022, 3rd and 4th quarter of the current fiscal year or last fiscal year helped to shore up our finances. Three quarters 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 are minimum expenses going forward.

Speaker 2

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 shoveled in the ground by the end of the year, which 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 quarters, the latest 2, Q3 2023, Q4 2023 because of the excess land sales that I referred to. And obviously, we are laser focused on making sure that the expenses come down with that.

Speaker 2

So that's where we are from the P and L perspective. Again, like I said, we're at the pivot point right now. So we're keeping track. Back office call. 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.

Speaker 2

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?

Speaker 3

Thank you very much, Fadi. It's a great pleasure to have Fadi 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 Fadi about 6 months ago.

Speaker 3

So we took the to get to know each other and make sure that Fadi 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 Gloop 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.

Speaker 3

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 All Send facility, also defense facility and other future facilities as well. So there's really been a strong, strong demand from the customer side, which is really exciting. Corp?

Speaker 3

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 call. The quality of the recycled PET or R PET 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 dye 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.

Speaker 3

And as those packages get back into the recycling stream, the quality is only going to get worse. Call. 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, the L'Oreal brand, the Merciller Water brand In the United States, last month, the package of the Mercilar Water, it's sold exclusively in Ulta stores across the United States.

Speaker 3

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. The ON AG, we signed a LOI for an offtake for the Allsan facility from ON AG, The exciting Swiss shoe manufacturer that makes the cloud running shoes, so really excited to work with them.

Speaker 3

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.

Speaker 3

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 coat is polyester fiber. So we probably secured about 60% of the feedstock for the Alstom facility will be coming from the textile industry polyester fiber.

Speaker 3

So that's really, really an exciting market for us. Today, having the Terabon facility up and running, operating, getting material into call. So they can see the quality has completely changed the game. Operating this facility for the past 2.5, 3 years has really Corp. It's 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 co.

Speaker 3

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 Tevan facility most of those customers are going to translate to our larger facilities. So customer demand never been higher and everyone is really excited about the quality. The other big milestone obviously is the SK Global Chemical SK Geocentric Partnership.

Speaker 3

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. 2 companies complement each other really well. Corp? Loop brings in the technology piece.

Speaker 3

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 all of the Construction of the facilities, the operations of the facilities and all of the day to day manufacturing and maintenance of the facility. 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 call partners are going to be off takers from the Alsan 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 feedstocks coming from fibers for that facility.

Speaker 3

So really excited. The SK partnership call 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 Geocentric moving forward and I couldn't ask for a better partner than them. As for our French project, we updated the markets.

Speaker 3

We chose Saint Davold in the Grande Jean del Leste In France, so we did an exhaustive search of all the different sites all over France and decided on Saint Gobauld, 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, Frank 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.

Speaker 3

Tremendous government support for the French project. I was just at Choose France on Monday hosted by President Macron. I was there. Mr. Nain from SK was there as well, the CEO of SK GC was there and Sabrina Soussaint, the CEO of SUEZ.

Speaker 3

So all three of us together were meeting with all of the government officials, all of our customers, feedstock suppliers. So was a great event hosted by President Macron. That was the 2nd 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 plastics space.

Speaker 3

So that's that project is really moving forward well. Feedstock has all been secured for the projects Through SUEZ's, obviously SUEZ is a large waste management company in France. So they've secured a percentage of Group. Feedstock Loop has also secured a percentage of the feedstock. So feedstock has been secured for the project.

Speaker 3

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 in that facility in 2025 to be up for 2027. So it's like I said, it's been a really eventful year.

Speaker 3

Hoop has never been in a better position to be able to execute on our business plan. Have the best quality material coming from 100% recycled content, great partnerships, great customers. Now we're just working on finalizing our financing for facilities. As Fadi mentioned before, selling the land in Becancour 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 and D and more into operations where all of our different departments, so R and D and our engineering will be always a cost center now we will be charging back to the various projects.

Speaker 3

So we're really transforming the company from purely R and 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

Call. Our first question today is from the line of David Casaba of Raymond James. David, please go ahead. Your line is now open.

Speaker 4

Thanks. Good morning, everyone. I appreciate the update there. My first question is just on, I guess, we'll start with Allsan and just thinking about the contracting strategy there, great to see, But there's a lot of demand and you've got ONAG on there now. Maybe Daniel, could you just talk high level about What your strategy is for that facility?

Speaker 4

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?

Speaker 3

Yes. Thanks, David. Great talking to you. So for the Alsan facility, we'll probably sell about so the capacity is 70,000 tonnes. And so we'll probably sell under contract about 50,000 tonnes with our existing customers, call?

Speaker 3

The Danons 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, about 25 fiber and 25 bottle grade. So Then the other 20,000 tonnes 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 Everything locked into long term contracts.

Speaker 3

So that's kind of the sales strategy there. We always use formula based pricing anyway. So As long as we use indexes tied to 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, call. That's a pass through cost to our customers. Customers are used to working with these type of formulas.

Speaker 3

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.

Speaker 3

I was going in 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 the really big thing with PET is the color. That's where that's what chemical recycling loops depolymerization technology. That's what it brings. Because we break it down to the monomers and build it back up and we remove all of those colors, that's where our technology really shines.

Speaker 3

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.

Speaker 4

Okay. Excellent. That's great color. Thanks, Daniel. And then maybe just On the feedstock side, I guess, again, for Olsson, you mentioned that you've got, I think, 60% of call.

Speaker 4

I'm guessing you'll look to contract all of it and or 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 call. And I guess the mix between is it going to be all fiber or will there be some recycled bottles as well?

Speaker 3

Yes. So there'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 call.

Speaker 3

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, salad 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 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.

Speaker 3

A really good example is there's 20,000 tonnes 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.

Speaker 3

Coop. They go to the waste management companies, but there's no home for them. And so those are again things that Loop Technology can handle. And so that's where SK Developing that supply chain with the local governments.

Speaker 4

Okay, great. Thanks again for that. And then maybe just on construction costs for the Old Sam facility, 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 call? Somewhat contained since it's on an existing industrial site.

Speaker 3

Yes, we haven't seen too much call? 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 Corp? Higher inflation numbers. The big jump in inflation happened probably like 2021, 2020 2, that's where we saw really big increases. We started to see things level off definitely right now.

Speaker 3

And so there's no big surprises on the CapEx in Korea. Again, you have the advantage of building on SK site. 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 production.

Speaker 3

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.

Speaker 4

Okay. Excellent. Thank you. 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.

Speaker 4

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 quote just from a total expense perspective?

Speaker 3

I think we're at about 12,000,000

Speaker 2

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 it's not 2024, but 2025, we're looking to get to about $12,000,000 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 call. 50% next year for fiscal 2024 and then another, call it, 20% for fiscal 2025.

Speaker 2

So our ultimate end goal is to end up No, at $12,000,000 or below from expenses, so $1,000,000 per month and less. That's what we're currently in our projections and that's currently we're all going to be accountable

Speaker 4

That's great color. Thanks, Adi.

Operator

Thank you. I'll

Speaker 3

touch on that. I would say The real transition that the company is making is now all of our employees are every department is now becoming we're charging back the fees to the projects. So let's say for the SK All Sand project, any feedstock related testing that's needed, right? So when we're securing feedstock, FeedLock is sent to Montreal. We're testing it at the lab scale.

Speaker 3

We're testing it in the production facility. So all of those costs are now being It will be absorbed by the project because it's ultimately the project is the one that's benefiting from that work. Same thing with our engineering team. We're going to be call. All of our engineering team to the projects because the project is going to charge it back.

Speaker 3

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 call? As far as CapEx or things needed because the plant is up and running, it's operational.

Speaker 3

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 Old San, 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 would 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.

Speaker 4

Perfect. Thanks for that, Daniel. Appreciate it.

Operator

And it appears we have no further questions in the queue for today. So I'd like to thank everybody for joining Loop Industries' 4th Quarter Earnings Call for 2023. Thank you for joining. You may now disconnect your lines.

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