Li-Cycle Q1 2024 Earnings Call Transcript

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May 10, 2024

Key Takeaways

  • Glencore investment of $75 million closed in Q1, and Lifecycle is collaborating with the DOE Loan Programs Office on a conditional commitment for up to $375 million to fund the Rochester Hub restart.
  • A comprehensive review of the Rochester Hub confirms the technical viability of the MHP process and estimates approximately $504 million to complete, though this figure remains subject to change as the review continues.
  • Lifecycle’s shift to a centralized management model, combined with extended supplier payment terms, is projected to generate roughly $10 million in annualized cost savings under its cash preservation plan.
  • Q1 revenue rose 17% year-over-year to $4.2 million, adjusted EBITDA loss narrowed to $27.4 million, and cash and cash equivalents increased to $109.1 million from $70.6 million.
  • New and amended recycling agreements signed with leading EV OEMs and battery cell manufacturers in Europe and North America strengthen Lifecycle’s position as a preferred global battery recycling partner.
AI Generated. May Contain Errors.
Earnings Conference Call
Li-Cycle Q1 2024
00:00 / 00:00

There are 5 speakers on the call.

Operator

Thank you. I will now turn the call over to Louis Diaz, VP, Corporate Affairs. Please go ahead.

Speaker 1

Thank you. Good morning, and thank you, everyone, for joining us for Lifecycle's business update and review of financial results for the interim period ended March 31, 2024. We will start today with formal remarks from Ajay Kochar, Co Founder, President and Chief Executive Officer and Craig Cunningham, Interim Chief Financial Officer. We will then follow with a Q and A session. Ahead of this call, Lifecycle issued a press release and a presentation, which can be found on the Investor Relations section of our website at investors.

Speaker 1

Lifecycle.com. On this call, management will be making statements based on current expectations, plans, estimates and assumptions, which are subject to significant risks and uncertainties, most of which are difficult to predict and many of which are beyond the control of life cycle. Actual results could differ materially from our forward looking statements if any of our key assumptions are incorrect, including because of factors discussed in today's press release, during this conference call and in our past reports and filings with the U. S. Securities and Exchange Commission and the Ontario Securities Commissions in Canada.

Speaker 1

These documents can be found on our website at investors. Lifecycle.com. We do not undertake any duty to update any forward looking statements, whether written or oral, made during this call or from time to time to reflect new information, future events or otherwise, except as required. These forward looking statements should not be relied upon as representing Lifecycle's assessment as of any subsequent to the date of this call. With that, I am pleased to turn the call to Ajay.

Speaker 1

Thank you, Louis, and good morning, everyone.

Speaker 2

Louis has been with Lifecycle for nearly 2 years. In addition to heading up Marketing Communications, he's also taken on leading Regulatory Affairs and Investor Relations. Nala Azmi is moving on to pursue other opportunities. We want to thank Nala for her contributions to Lifecycle and wish her well in her future endeavors. Now, I'd like to introduce Craig Cunningham as Lifecycle's Interim CFO.

Speaker 2

We're excited to add him to the team and are confident that he is a strong addition to the company. Craig has extensive background and executive level leadership and brings more than 17 years of accounting, finance, operational and capital markets experience to Lifecycle. In his previous roles as CFO and executive, he has been a key contributor to the formulation of corporate strategy and providing key financial oversight and controls on major projects. He also has broad experience overseeing IT, supply chain logistics and administrative functions. Welcome, Craig.

Speaker 2

We look forward to your contributions. On our most recent call in March, we provided an update on the progress made since pausing construction at the Rochester Hub in October 2023 and initiating a comprehensive review. Today, we are pleased to share additional updates on the steps we've taken towards achieving the key objectives from this review, providing an overview of our commercial highlights and also discuss our Q1 financial and operating results. Starting on Slide 3, we continue to make progress on the key strategic priorities I've outlined on our last call. 1st, as part of our comprehensive review of the Rochester Hub, we've advanced work with the local market to refine cost estimates for the project since we confirmed the technical viability of the mixed hydroxide precipitate or MHP process.

Speaker 2

2nd, with respect to financing, we closed on the strategic investment of $75,000,000 by Glencore on March 25, strengthening our long term partnership and enhancing our liquidity. Additionally, in parallel with our comprehensive review, we're working closely with the DOE Loan Programs Office on key financial, technical and legal work streams towards close of the conditional commitment for a loan for gross proceeds of up to $375,000,000 3rd, regarding liquidity. As part of our cash preservation plan and in conjunction with our plan to right size and right shape our organization, we transitioned from a regional management model to a centralized model to better position Lifecycle for future success. This strategic decision is expected to generate approximately $10,000,000 in annualized savings from lower payroll costs. Finally, we continue to optimize our spoke network to reduce costs and improve efficiencies.

Speaker 2

We remain focused on prioritizing our Generation 3 spoke as we align with EV and battery OEM customers who continue to execute on growth plans in North America and Europe. Turning to Slide 4, for an update on the comprehensive review for the restart of the Rochester Hub project. On our last call, we reported that we completed an internal technical review confirming the viability of the MHP process as part of the potential change in our product development strategy for the Rochester Hub. Since then, another work stream that has significantly progressed is work with the local market regarding major construction contracts to refine our capital estimates for the project. Our current estimated cost to complete the Rochester Hub project is approximately 504,000,000 for the MHP scope, which includes the total cash spend as of March 31, 2024.

Speaker 2

We note this estimate is subject to a number of assumptions and is likely to change as we continue to complete our comprehensive review work. Our near term priorities for the research of the project include completing the technical and economic review, which dovetails with the DOE loan closing process. Turn to Slide 5, which highlights key initiatives we completed to enhance liquidity. First, regarding financing. In late March, we were pleased to announce that we closed on the previously announced $75,000,000 investment from Glencore, strengthening our long term partnership and enhancing our liquidity position.

Speaker 2

In late April, we received approximately $5,800,000 as a first tranche of a total grant for up to $6,900,000 from the German state of Saxony Anhalt for our German slippers. This is another example of the positive support we continue to receive from our local stakeholders. We remain committed to diligently exploring strategic alternatives and financing options to enhance our liquidity. 2nd, we are strategically managing our cash to support our liquidity needs as part of the cash preservation plan. In March, we made a strategic decision to pivot from a regional business model to centralize 1, reorganizing lifecycle to drive increased efficiencies.

Speaker 2

This decision is expected to generate approximately $10,000,000 in annualized cost savings through workforce reductions. In addition, we've been actively engaged with certain contractors and suppliers to the Rochester Hub and now have agreements in place providing for extended payment cycles. Looking forward, we're exploring further opportunities to increase efficiencies across organization, including realizing cost savings from our spoke operations and implementing additional adjustments to non core SG and A expenditures. Finally, we continue to evaluate further positive slowdown in our spoke operations beyond those previously announced in lockstep with commercial demand. Turning to Slide 6 for an overview of Lifecycle's commercial agreements.

Speaker 2

Our capability to process all types of lithium ion batteries independent of form factor and chemistry, coupled with our operational capacity has led to the establishment of a broadly diversified global base of battery supply customers spanning the entire battery supply chain. Shown on the left of the slide, we are pleased to report that during the Q1, we continue to attract new customers while extending and amending existing agreements. We signed new recycling agreements with some of the largest EV OEMs in the world, as well as leading battery cell manufacturers in both Europe and North America for battery material intake. In Europe, this included signing new agreements or expanding and amending current agreements with 3 of the largest EV OEMs of the continent. We now have agreements in place with 4 of the largest EV OEMs in Europe to recycle modules and full battery packs.

Speaker 2

We continue to see broad based support for our differentiated technologies across both continents reflected in our position as a preferred recycling partner for leading global battery, EV and energy storage OEMs. Turning to Slide 7 for some highlights of our Spok technology and operations. As a reminder, Lifecycle developed a patented method for processing all forms of lithium batteries regardless of chemistry, form factor or state of charge. This environmentally friendly process does not rely on any thermal treatment and is highly scalable for the growing EV battery market. We are prioritizing our generation 3 spokes, which can process full battery packs without the need to dismantle and aligning with EV and battery OEM partners who comprise a large share of our global battery feed intake.

Speaker 2

It is worth highlighting that 4 of our top 5 partners for feed intake during Q1 are EV OEMs. With respect to our smoke operations, we continue to see higher composition of EV battery packs in our input feed with approximately 41% by mass of the total battery materials processed at our spokes being EV battery packs. We believe we're in a strategic position to receive these feedstock materials through the enhanced capabilities of our Gen 3 Spokes, through the enhanced capabilities of our Gen 3 Spokes, which can efficiently process full battery pack. Turning to Slide 8, providing an overview of our sustainability performance, as we expect to issue our 2023 sustainability report in the coming weeks. Our report has been aligned with SASB standards and builds on the interim report we issued last year.

Speaker 2

In 2023, we strengthened our data tracking and reporting capabilities for greater transparency. Ultimately, better data will help us to enhance our performance in this important area of our business. A few key takeaways from our 2023 performance include 0% of our scoped 1 air emissions are from our recycling processes, which is reflective of our environmentally friendly non thermal recycling technologies. Our journey spoke procured all of its electricity from renewable sources, and we continue to prioritize safety and have had 0 critical safety, environmental and community initiatives since our company's inception. Sustainability is core to our business and believe it is a value differentiator for our company.

Speaker 2

Not only is Sound ESG performance good for the world and our community, but it also supports our position as a preferred global recycling partner. With that, I'll now turn it over to Craig to provide a review of the financials. Thank you, Ajay. Before getting into the financial results, I'd like to start by saying how pleased I am to be joining LifeCycle. Ajay and the team have built a truly differentiated business model with the capacity to make meaningful contributions to the future of clean energy.

Speaker 2

I look forward to the opportunity to help execute on this mission and to create value for our shareholders. Turning to Slide 9 for a review of our 2024 Q1 financial results. Highlights include improved revenue, cost of sales, adjusted EBITDA and cash position for the Q1 of 2024 versus 2023. Starting with the sales of Black Mass, which were 946 tons, a 7% increase versus 8 81 tons sold in 2023. Product sales and recycling service revenues before non cash fair value pricing adjustments decreased to $4,600,000 compared to $7,700,000 in 2023.

Speaker 2

The decrease was largely driven by reduced market prices for cobalt, nickel and partially offset by higher recycling service revenue and an increase in products sold. Total revenue increased 17 percent to $4,200,000 reflecting lower unfavorable non cash fair value pricing adjustments of $400,000 versus an unfavorable adjustment of $4,100,000 in 2023. Moving to cost of sales, which decreased 12% to $16,800,000 versus $19,100,000 in 2023. Cost of sales attributable to product revenue decreased by $3,200,000 or 17% compared to last year as a result of lower production levels, partially offset by increased operational cost associated with repairs and maintenance activities. Cost of sales attributable to service revenue increased by $900,000 compared to last year due to new service contracts entered with an existing customer that commenced in October 2023.

Speaker 2

SG and A expenses were $31,700,000 versus $22,700,000 in 2023, primarily driven by higher professional fees and legal fees related to the Rochester Hub construction pause as well as severance costs stemming from the March workforce reduction. I would like to note that these expenses are one time in nature. This increase was partially offset by lower recurring personnel and other administrative costs of $3,700,000 Other expenses were $92,500,000 compared to other income of $2,700,000 in the prior year, primarily due to the debt extinguishment loss of 58,900,000 dollars and unrealized fair value loss on Financial Instruments of $23,800,000 relating to the amendment and restatement of the terms of the convertible notes issued by Lifecycle. Adjusted EBITDA loss was $27,400,000 compared to a loss of $37,900,000 in the Q1 of 2023. This was largely driven by higher revenue, lower cost of sales and partially offset by the increase in SG and A.

Speaker 2

As of March 31, 2024, Lifecycle has cash and cash equivalents of $109,100,000 versus $70,600,000 at the end of 2023, which includes the gross proceeds from Glencore financing that closed during the Q1. I will now turn it back to Ajay. Thank you, Craig. Turning to Slide 10, we continue to see favorable long term industry demand trends in both North America and Europe. The chart on the left illustrates the rising adoption of electric vehicles with sales achieving a CAGR of approximately 45% from 2019 through 2023.

Speaker 2

Notably, 3rd party sources are projecting a robust 25% CAGR off the space in the middle of a decade. If you're on the right, these growth dynamics support the robust demand for an expanding market for recycling of all forms of lithium ion batteries. Near to midterm, the increase in recycling materials is largely being driven by manufacturing scrap from Gigafactory growth, supplemented by end of life battery feedstock through the end of the decade. It is projected that by 2,030 demand for recycling materials will increase by up to 6 times in 2023 levels. Turning to Slide 11 and concluding on Lifecycle's go forward strategy and key objectives.

Speaker 2

First, we continue to work closely with the BB towards closing of a loan for gross proceeds of up to $375,000,000 2nd, we continue to evaluate a range of further financing and strategic alternatives to bolster our liquidity and facilitate the restart of the Rochester Hub project. 3rd, we remain focused on completing our technical and economic analysis of our go forward approach for the Rochester Hub. And finally, regarding the Spoken Hub network, are validating our Spoken network to identify further opportunities to drive down costs while focusing our production on our Gen 3s folks to support our key EV and battery OEM customers. Operator, we're now ready for questions.

Operator

Thank We will take our first question from Jeff Rossetti with TD Cowen.

Speaker 3

Hi, good morning. I just wanted to start with the review for the Hub and see if you could provide any more detail on the kind of work you're doing to refine costs there. What kind of steps have been or left in the process? And is there any kind of timeline on when you expect to complete the review?

Speaker 2

Hey, good morning, Jeff. Yes, so as I mentioned in my remarks, it really dovetails with the DOE process. So I'd say the key thing that we're working on right now is working with the local market to refine the capital cost estimate. Obviously, what we've put up there and was reiterated today is our best and latest information. But we're doing some additional work with the local market to get their input effectively, to validate, refine the estimate effectively.

Speaker 2

So that's important, obviously, because it drives some of the support for the work for the DOE, but it's also important, obviously, to be working towards a restart. In terms of timing, I'd say it's again very intertwined and dovetails with the DOE. So the priority and my top priority is closing the DOE loan and that's really the enabler to restart.

Speaker 3

Got you. Okay. And just regarding a restart, is there any kind of CapEx needed this year to preserve the hub at all? And would you plan to build any black mass inventory at all this year? Or you mentioned that you may focus on just the Gen 3 folks.

Speaker 3

So maybe you would reduce your black mass production or at some point this year, just anything on kind of what you're seeing on the inventory side and maybe any

Speaker 4

kind of

Speaker 3

incremental CapEx spend that you might need this year? Thanks.

Speaker 2

Yes, for sure. So in general, I would say Q1 is relatively indicative of the run rate on that. So we don't expect anything significantly incremental around CapEx. During Q1, we adjust the first part around the maintenance of the assets at the hub. So we're very focused on ensuring that the assets are preserved.

Speaker 2

There is some level of spend, but it's not very material. So that is included in the financials that you saw in Q1 and that will continue. Of course, that's a priority. And around the Black Mass inventory bills, so our priority right now as we continue to focus on managing our liquidity is going to continue to be to sell the Black Mass that we produce. Again, I'd say Q1 is relatively indicative of the run rate of where we are.

Speaker 2

After further changes, we'll obviously let the market know. But where we stand right now, the key focus is on Germany, Arizona,

Speaker 3

Alabama. Okay. Thanks very much.

Speaker 2

Thank you.

Operator

Thank you. We will take our next question from Brian Dobson with Chardan Capital Markets.

Speaker 2

Hi, good morning. Thanks very much for taking my question. You know what, I've got a quick follow-up question on the Rochester Hub. There's been a lot of talk recently about PFAS chemicals within battery production and I suppose also within battery recycling. I guess given recent regulations put in place by the EPA, how does your recycling process deal with PFAS Chemicals?

Speaker 2

And are they, I guess, mitigated prior to the raw materials being shipped for sale? Within the hub facility, not folks? Yes, no worries. No worries. And yes, it's a very good question.

Speaker 2

So this is definitely a hot topic. Mean, this should actually have been for a couple of years. So the key thing on so PFAS are foreign containing, it's a pollutant and the issue with it is it gets into people's bodies and it can be quite harmful through the ecosystem and essentially the human. So that's the big focus on PFAS. It might be such a hot topic for the gig, sort of around this kind of grounding.

Speaker 2

The big thing about lithium ion batteries and where the floor is contained is at the end of the day, if you're not treating the batteries thermally, you keep the fluorine in basically non gaseous, non emitted form. I can get into more depth, but there's different types of flooring and they go different places in the process. But the bottom line is we do not emit like PFAS, for example, into the air. This is one of the challenges actually with the traditional process for recycling with 1 batteries. So where you heat up the batteries and really what they're trying to do in simple terms is degrade the binder, the glue that keeps the cathode and the anode on the respective foils, that's a fluorine based binder.

Speaker 2

And that's one of the common places where you emit fluorine. So in our case, the fluorine goes into solid products, and as a result doesn't get admitted to the administrator and that's also been a part of the permitting that we did for the Rochester Hub. Yes, excellent. And do you think that this gives a competitive advantage to the type of recycling that you do versus a pyro based recycling? And would those players need to stop that type of recycling under these new regulations?

Speaker 2

Yes, we do think it gives us a big advantage. The customers have been focused on it for a while. The very traditional, the non lifecycle if you will approach, As I mentioned, there's basically some sort of pretreatment where you make tariff hard batteries and then very commonly some sort of what's called calcination step. That's the thermal step. That is the step that is of a concern for chlorine emissions.

Speaker 2

And we see that as a very common approach. It comes from Asia actually as they've installed in North America and Europe. So would they need to essentially stop operations? Not sure. But yes, it's a very hot topic and of course, it's going to renewed interest.

Speaker 2

Great. Thanks very much. Thanks, Brian.

Speaker 1

Thanks, Brian.

Operator

Thank you. And we will take our next question from Matthew O'Keefe with Cantor Fitzgerald.

Speaker 4

Thanks. Thanks for taking my call. Good morning. First question for me is just on the hub operations. You've got 4 operating hubs and you did 1300 tons of black mass.

Speaker 4

But what's the capacity of those 4 hubs with nameplate capacity? It's over 10,000, isn't it? Is it in that range?

Speaker 2

Hey, good morning, Matt. Yes. So that's the input capacity for like the yes, yes. So that's in terms of batteries to get to the black mass, it really depends on like the form factor of the material. But say roughly half, so that's not like full thankfully, but also even mindful shifts, right?

Speaker 2

So really, the way that we operate is it's very focused on really prioritizing the shifts around where the commercial demand is and that does move around over time, right? So the more shifts we have, the closer our to nameplate effectuate.

Speaker 4

So I guess what I was getting at is like what kind of I guess what capacity you're running at right now? And because you've got 4 hubs running and not at full capacity, you made about $1,900,000 in revenue on $15,900,000 of costs. Why aren't you just running 1 spoke and shipping everything there or 2, 1 in Europe, 1 in North America?

Speaker 2

Yes. So when we talk about optimizing the spoke network, that's part of the focus, right? So there's a balance there. So part of the reason to have numerous folks is you're closer to the batteries are and it is tough to ship batteries all around the world. But as we look at the Gen 3 spoke, that is a big focus, right?

Speaker 2

It's basically driving through where it makes sense, which then drives down unit costs, which then makes it much more efficient. But we'll just continue to be thoughtful around that. There is a bit of working capital consideration there too. So it's a balance, right, to what degree we want to be pushing. So always looking at that and we'll continue to update as fast as things may change.

Speaker 4

Okay. All right. But you didn't say you don't really have a number of sort of what percentage of capacity you're running at?

Speaker 2

Yes, we don't really like usually disclose by spoke. We kind of look at it on a network wide, but it does depend What is the network network wide? Network wide. I mean, you can do the math, right? If you take 10,000 tons of input capacity through Black Mass versus what we're producing.

Speaker 2

So yes, you'll see that we're we did disclose right last quarter that we slowed throughput. So this is reflective of that. Now the question really is combine that with the commercial demand and the working capital needs, what's the best choice around to your question, right? Where do you consolidate that demand potentially or not?

Speaker 4

Yes, because that's a pretty hefty burn. Okay. And then if I may ask one other thing, I didn't have a tight time to go through the full 10 ks, but on the debt side, there's one of the things you do with Glencore here is they renegotiated some of that converts, right? And to they took some restructured these unsecured converts and a portion of that is now into secured converts. Is that correct?

Speaker 4

Senior secured converts? Can you walk me through that again?

Speaker 2

Yes, sure. No problem. So yes, so there's 2 components to that. There's the new investment, the $75,000,000 investments, that's the senior secured convert. Right.

Speaker 2

That's on the close. And then what you're asking about is basically the restructuring or restriking of the old convert, the $200,000,000 convert from 2022. So there are 2 triggers for that convert, and this is back to the March 25 stock. So basically half half just at a very high level, it will reprice based on the VLOP of 30 days plus 25 percent a month after key milestones or that or the earlier of a date. So the 2 milestones are the closing or the completion of the definitive documentation around the DOE loan.

Speaker 2

So that's the first one or the end of this year. So that's the first milestone half of it. And the second is associated with a few different trigger points, but it's focused on commercial production from the Rochester Hub or a future date. So that's effectively how it's going to be repriced and part of that yet is addition of security for that original note That was part of the totality of the transaction that we did with Plancor. Okay.

Speaker 2

So the benefit there, just to be clear, the benefit there just to be clear is we're getting an extended maturity associated with that original note. So it will be 5 years for those 2 tranches from the point where they get repriced effectively and that adds a good amount of time relative to the original maturity date. So that's the benefit from us.

Speaker 4

Okay, that's important. Thank you. Thank you for that. Thanks for clearing that up. That's it for me for now.

Speaker 4

Thanks.

Speaker 2

Thanks, Matt.

Operator

Thank you. It appears that there are no further questions in the queue. I will now turn the call over to Ajay for his closing comments.

Speaker 2

Thank you. So thanks everybody again for joining. As we mentioned, we're laser focused on the key objectives of Airline. We look forward to continuing to update the market. We'll speak again

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