Loop Industries Q4 2024 Earnings Call Transcript

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Provided by Quartr
May 30, 2024

There are 5 speakers on the call.

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Loop Industries 4th Quarter 2024 Corporate Update Call. My name is Carla, and I will be coordinating your call today. This conference call is being recorded today, May 30, 2024, and the press release accompanying this conference call was issued last evening, May 29, 2024.

Operator

On our call today is Loop Industries' Chief Executive Officer, Daniel Salomita and Fadi Monceur, Chief Financial Officer and Kevin O'Dowd, Head of Investor Relations. I would now like to turn the conference call over to Kevin to read a disclaimer about the 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 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 positions. 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 ks of our quarterly report in 10Q-five with the SEC yesterday and yesterday's press release.

Speaker 1

Copies of these documents are available atsec.gov or from our Investor Relations department. At this time, I'd like to turn the call over to Daniel Salomita, Chief Executive Officer of Loop Industries. Please go ahead, Daniel.

Speaker 2

Thank you, Kevin. Good morning, everyone. Thank you for joining our call. It's been a very eventful quarter and year end. We have made great strides towards the commercialization of our technology.

Speaker 2

This morning, I'll be outlining our partnership with Esther Industries, which combines Loop's monomer and specialty polymer business with low cost manufacturing. I'll be updating you on our progress at Ulsan and with our partnership with SKGC. An update on our status of the REIT financing and finally, our On Shoes partnership, which showcases Loop's ability to recycle polyester textile waste. So let's get started with the Infinite Loop India, which combines the Monomer business opportunity with low cost manufacturing. The monomer business model is filling a market need for sustainably produced DMT and MEG and high margin specialty polymers.

Speaker 2

This is complementary to our PET business. The monomer business is addressing a huge underserved market for sustainably produced DMT and MEG. Today, the market opportunity is greater than $20,000,000,000 annually. DNT and MBG are used worldwide as intermediate chemicals to supply the automotive, cosmetics, packaging and other industries. Today, there's a global shortage in DMT and this is how we developed the business model.

Speaker 2

We've been receiving a lot of calls from chemical companies asking if Luke can and MEG is selling at $8.35 per metric tonne and MEG is selling at $8.35 per metric tonne for a combined price of $2,785 This is with no sustainability linked premiums. This is for virgin petroleum based products. In talking to potential customers who are the large petrochemical companies, we feel comfortable that a 15% premium can be applied for sustainability at Loop's product. The DMT and MEG that are produced through Loop's depolymerization technology are drop in replacements to the petroleum based DMT and MEG, which is extremely important. This means that our customers do not have to modify anything in their production facilities to replace their current supply.

Speaker 2

The Infinite Loop India facility will produce 70,000 tons of EMT and 23,000 tons of MEG made through Loop's depolarization technology. The Indian market offers an abundance of low cost waste polyester fiber that can be depolymerized using Loop's technology and turned into the DMT and MEG. Many of our customers in the textile manufacturing industry have production facilities in India and neighboring countries such as Bangladesh. So it's very close to our customer supply chain. The CapEx estimate for India is $165,000,000 Therefore, the equity commitment for Loop is in the $25,000,000 to $30,000,000 range, which our partners at Reed and a government agency are fully on board to fund.

Speaker 2

The partnership with Esther is a fifty-fifty joint venture. Loop receives a 5% royalty fee on all revenue generated from the facility, which is estimated the licensing fee is estimated to be at $8,000,000 per year. Loop is solely responsible for all sales and marketing of the final product, which is to be sold through the joint venture. It's all sold under Loop's brand. The expected EBITDA for the Indian facility is $70,000,000 per year, which of Loop owns 50% and a 35% unlevered IRR.

Speaker 2

Therefore, the economics of low cost manufacturing coupled with the monomer business model really provide very, very attractive shareholder returns. Our partners in India, Esther Industries, have been working with Loop for the past 5 years. Today in Taibun, we depolymerize waste polyester and PET into DMT and MEG. We then ship those chemicals, the DMT and MEG to Ester in India for polymerization. Examples of some of the products we've launched using this partnership with Esther is most recently our shoes with the Swiss shoe brand, On Shoes, Evian water bottles, which are for sale in South Korea and the L'Oreal skincare products, which are on sale at alt stores in the United States.

Speaker 2

So we have a long standing relationship with Esther, and we are fully aligned on our partnership and views for the future. This is a fifty-fifty joint venture and the partners are fully aligned on the execution and the strategy. As I said before, Loop is exclusively responsible for all sales of the DMT, MEG and Specialty Polymers, such as PBT, PTT, PETG. Specialty Polymers offer a high margin business, which today is really in need of sustainability. And Loop's DMT allows for sustainability to now reach these specialty polymers, which today cannot be have any type of sustainability because there's no monomers available to be used as the base building blocks.

Speaker 2

The Infinite Loop India project leverages Loop's existing engineering package and has the same major equipment suppliers as the Canadian facility we have running here in Terrebonne. The Terrebonne facility we've had operational for the past 4 years, And those 4 years have been allowing us to secure all of the lung, the major equipment that we need for the facility. So we have had 4 years of experience running all of these pieces of equipment and therefore very comfortable with all of our suppliers. So this project leverages our existing very mature engineering package and all of our key equipment suppliers. Luke and Esther have hired a global leading engineering firm to secure land for the project, which we're expecting to be in the Hyderabad area, and they will be providing all of the local engineering support for the project.

Speaker 2

We expect to break ground on the facility by the end of this fiscal year. This is in line this partnership is in line with LEAP's strategy of deploying capital to low cost manufacturing countries such as India to enhance shareholder returns. We will move to a more asset light business model focused on licensing our technology in higher cost manufacturing countries. As far as the Pulsanne update, Loop and SKGC are negotiating with the Korean government for grants and subsidies for the project. We are currently also studying the possibility of putting up a monomer plant in Ulsan.

Speaker 2

The other big significance to the monomer business model is that it significantly reduces the CapEx and increases financial returns. In the monomer business model, we do not need the polymerization section. So about 40% of the CapEx is not needed because we're selling the chemicals rather than repolymerizing it into PET. So this is something that we're studying in Olsson as well. Again, this is a huge market opportunity and we're showing a market opportunity that exists today because of this tremendous underserved market.

Speaker 2

As far as India as well, another thing that's very important to stress is that India is a high growth opportunity, and the Indian economy is

Speaker 3

the fastest growing economy in

Speaker 2

the world. It's 1,500,000,000 people and the population is growing. A lot of our customers are leaving China or finding a China plus one solution and moving a lot of their manufacturing into India, especially on the textile manufacturing, so all of the large clothing companies. Low cost manufacturing, labor rates are significantly cheaper than India. I was reading an presentation on the specialty chemical markets where labor costs for operators in a chemical plant in India are 80% less than what they are in China today.

Speaker 2

So we believe Asia is going to be the main driver for demand for the next several decades, which is why the Indian project is so important for us. And also the Modernberg business potentially in Korea is also very exciting because of the location. I'll switch now to the REIT financing. Over the past several months, Loop and REIT have been working diligently on completing our joint venture partnership and on our mainly non dilutive financing to fund Loop's global expansion of our technology. Reed has hired several independent firms to conduct thorough due diligence of all aspects of Loop's business, including technology, so technology due diligence, financial due diligence, legal due diligence, ESG due diligence, and all of the independent firms have concluded their due diligence and all of that was completed successfully.

Speaker 2

The joint venture with Reed is consistent with our business model to invest capital in low cost manufacturing countries and to have a more asset light business model built on licensing and higher cost manufacturing companies such as Europe. The partnership with Reed is for Europe specific, where Reed comes with Loop as our financial partner. So any equity commitments, any funding commitments that we would have to develop our technology in Europe, it will be split fifty-fifty between Loop and Reed. So on the equity side, we'll be splitting with Read. But all licensing revenue and all engineering revenue comes directly to Loop.

Speaker 2

So again, more of an asset light business model where Loop splits on the equity side, so much less equity check, but we get the licensing revenue, which is standard at 5% of sales. On the financing side, the financing REIT, which is largely non dilutive, coupled with financing from our other partner, we'll fund 100% of the capital need for our equity commitment for India and leave leftover funds for Loop's head office. The completion of the agreement is imminent. We had hoped to have everything signed off by the time of this call, but we are very confident in the signing and announcing the final agreements by the end of this week. Lastly, we had a this quarter we had a launch with Anshoes, the Swiss shoe manufacturer.

Speaker 2

They launched a Cloudeasy Cyclone shoe on May 21. The upper part of the shoe is crafted with polyester fiber made from Loop's facility here in Terrebonne, Canada. It's 100% recycled fiber using our technology. We're starting we started with waste polyester fiber, broke it down into the DMT and the MEG, purified the DMT and MEG, sent that over to Esther. Our partners at Esther Industry produced the polymer, which was then sent to On shoes, which they use to produce the upper part of the shoes.

Speaker 2

The program, it's a subscription program. And so as these people are paying a monthly subscription fee and they have access to the shoe, when the shoe is sent back on shoes, we'll remove the upper portion, send that over to us and we will recycle it for them and send it back to them. So it shows the complete circularity for textiles and for running shoes. This is the first shoe launched by ON using Loop's fiber to fiber recycling technology and sets a precedent for sustainability in the footwear and textile markets. With that, I'll hand it over to Fadi to go through the financials.

Speaker 3

Thank you, Dan, and good morning to all and thank you for joining. Exciting times. I've done a lot of business cases in my life, but I've never seen anything close to the risk return profile and how attractive the India opportunity is for us. I mean, we're excited about the opportunity set, the specificity of India in terms of their favorable demographics, the growth profile. You see a lot of migration into India, so it's attracting a lot of capital.

Speaker 3

We want to be part of that. The supply demand dynamics of the monomer business that we're undertaking, the partner where we have full alignment of roles and responsibilities. There's no channel conflict. It's built upon our respective strength to create synergy to the joint venture. But really and naturally as the CFO, I'm really excited about the financial metrics.

Speaker 3

We're talking about, as Daniel alluded to, dollars 70,000,000 of EBITDA at the joint venture level for a 25 that's consolidated. Our share would be 50% of that for about $35,000,000 For a $25,000,000 equity check, which is well within our wheelhouse. The capital intensity is something that we've been discussing more and more, dollars 165,000,000 of capital for $160,000,000 of revenue is almost a 1:one ratio. In terms of EBITDA, it's just over 2.3%. These are very, very favorable economics.

Speaker 3

Daniel alluded to it, our IRR north of 30%, 35%. I mean, the payback on the equity, we're looking at under 2 years. So this strikes this ticks a lot of boxes for Loop. Really, really excited about this. The estimate that we've done is that every plant that we build with our partner Esther in India creates $8 of stock price depending on the metrics you use.

Speaker 3

But let me walk you through that the validation of how we get to those numbers. We did it both from a price earnings perspective and an enterprise value perspective. From a price earnings perspective, if you use the $70,000,000 EBITDA, impute the interest expense of about we're in our pro form a guesstimating $11,000,000 of interest, 5% on the CapEx of $165,000,000 is about $8,000,000 That brings us to just north of $50,000,000 from a pretax income. After tax, at a tax rate of 25 percent, we're at $40,000,000 Our stake, as you all know, is 50%. So that's about $20,000,000 And then when you add the royalty that Daniel alluded to of $8,000,000 or $6,000,000 after tax, we're getting into the $26,000,000 range.

Speaker 3

And then when you factor out the financing cost that we need to for our equity raise. That's about $3,000,000 after tax. So we're talking about a pro form a of $23,000,000 of net income for one plant. And if you use that over a dilutive number base, we're at just south of 50,000,000 shares right now. You're getting and giving effect of if we have to for some of the securities that kind of come out there, We're looking at about $0.40 of EPS.

Speaker 3

The S and P as of today is trading just north of $0.21 so that's about $8 per share. So if people want to take a discount, if they think it's closer to 'sixteen, 'seventeen as a longer term rate, then our stock price value accretion would be $6 to $7 If they think we should trade at a premium because we're high growth, high-tech and a lot of that comes from the royalty in itself, we're closer to $9 $10 So we're straddling between the $7 $10 range. Our estimate is about $8 Same thing from an enterprise value perspective. If you look at $70,000,000 and apply the S and P multiple, which is just north of 14, you get almost $1,000,000,000 of enterprise value. Once you subtract out the debts just north of $100,000,000 you get about $800,000,000 $900,000,000 Our share of that 50 percent is about $450,000,000 That gives you and then you add the royalty that also gives you about $8 a share.

Speaker 3

So both valuation metrics, whether it's price earnings based or whether it's enterprise value based, kind of gravitate towards about an $8 share price for every single plant that we build in India. So there's no version of this, which is one and done. We plan to build multiple plants. You can see the accretion value of this opportunity. In line what Daniel said, asset light for countries that have low cost sorry, asset heavy for countries that have low cost and more of an asset light model for high cost countries where we just reap in the royalties, it goes straight to our bottom line.

Speaker 3

So the financing, as Dan alluded to, yes, it's taking a little longer than we wanted to, but it's definitely well worth it. We are getting into the final throws and it is a priority number 1 in the next couple of weeks to come to a finality for that. Please allow me to walk through the financial statements. If you look at our P and L, our total research and development costs were $3,000,000 for the quarter ended February 'twenty nine. There were two adjustments which affect the baseline of that.

Speaker 3

One is we did have a write down of about exactly $817,000 and we also had some onetime project related expenses related to our project in France for $500,000 So that's $1,300,000 that are non recurring. So the $3,000,000 as reported would have been $1,700,000 if you exclude those two items and that results a decrease of 23% over the prior period. So that's been a focus for us at Loop Industries. We continue to focus on not only R and D spend, but we want to also continue to preserve the integrity and the pipeline of innovation that's going on at Loop. For the G and A expenses, in the last comparative quarter, we did have a onetime stock based comp adjustment for forfeitures to the tune of $200,000 If you normalize for that on a pro form a perspective, our G and A would have been down 10%.

Speaker 3

So solid cost reductions for the quarter. As I've guided the market in the previous quarter and the quarter before that, if you look at our total expenses for the quarter, they were $5,100,000 If you back out noncash expenses, which include the write down of $800,000 the noncash stock based comp expense of a total of $300,000 and obviously depreciation, which is non cash of $100,000 plus total project costs for Ulfand and Europe of $800,000 for the quarter, our total cash burn rate is $3,100,000 for the quarter. So that averages to about $1,000,000 per month. So well within sight of our target between $1,000,000 $1,200,000 We're holding our baseline as tight as we could. From a liquidity perspective, at February 28, obviously from a statement of cash flow, we have $7,000,000 in cash.

Speaker 3

We have a total of $9,500,000 of liquidity. So we've got decent runway on that to make sure that it gets us until we've got the financing solved, which as Daniel alluded to, is happening over the course of the next weeks. So we're monitoring carefully our cash balances, but we've got enough dry powder to last us towards the balance of the calendar year. That's it. I continue to guide that our expenses from a cash burn rate for fiscal 2025 are going to be between $1,000,000 $1,200,000 Obviously, Q1 2025 maybe a little higher because we spent quite a bit on legal fees with respect to the ESSER agreements and getting to finality on the REIT agreements.

Speaker 3

But after that, you'll see it revert to more of a long term mean of $1,000,000 to $1,200,000 So with that, I'll that's my section and I'll turn it back over to Dan for final concluding remarks.

Speaker 2

Thank you very much, Fadi. So in conclusion, I think the monomer business and the low cost manufacturing model really showcases the ability to of loop to be agile and really be able to work within the constraints of the market. It's a tremendous market opportunity in an underserved market. Like I said, the total combined price of DMT and MEG sold separately today is much higher than if they would be recombined into PET. And that's something where we have to take advantage of these type of market conditions.

Speaker 2

So we're really excited about our partnership with Esther. We're very excited with our partnership with Reed, finalizing the financing and moving to the next phase of commercialization for the company. With that, I'll turn it over to questions.

Operator

Thank And our first question comes from Gerard Sweeney from Roth Capital Partners.

Speaker 3

Fahad. Could we go over I

Speaker 4

just want to go over the economics real quick on the India plant. I got most of it. But so 70,000 metric tons, DMT, could you go over how many pounds for DMT and MEG and the pricing per pound or ton, I should say, however you presented it, if you could do that quickly? So today

Speaker 2

yes, thank you. So the model right now is 70,000 metric tonne of DMT and 23,000 tonnes of MEG. So that's the total output of the facility. Today according to Wood Mackenzie, the price virgin petroleum based DMT is selling at $19.50 per metric ton and MEG is selling at $8.35 a metric ton.

Speaker 4

$35. That's what I missed. Got it. Okay. Got it.

Speaker 4

And And

Speaker 2

today, the combined that combined price is much higher than PET today.

Speaker 4

Yes. Got it. And you're looking at $70,000,000 of EBITDA from the client plant, correct? Yes,

Speaker 3

correct.

Speaker 4

Got it. Okay. The question I have is on DMT and MEG. They're commodities. They fluctuate.

Speaker 4

Obviously, this looks very appealing. But I'm just curious if we could maybe even if you could maybe give a little background as much as you can on some of the drivers behind the pricing of these chemicals. I mean, just initially off the cuff, some concerns are if there's definitely volatility in this market. Is there anything currently going on the market that's creating excessive pricing or higher pricing? Or is this sort of the pricing we're seeing for DMT, MEG sort of been relatively stable in a certain range?

Speaker 2

So if you look at of

Speaker 4

5 years? Yes. So if you look

Speaker 2

at the last 5 years, MEG pricing is very stable. This is where we are as far as MEG pricing for the past 5 years. On the DMT side, you're slightly above the 5 year average. The 5 year average is about $15.50 to $1600 So you're slightly above that. There was a major DMT plant that was taken offline in Europe, which was damaged during an earthquake, And there's no plans to there's no plan right now to put that facility back online.

Speaker 2

And there was another factory that was shut down in Germany during the war when the war with Russia started. So it's caused a little bit of a global shortage and those have increased the price of the DMT and MEG the DMT, sorry, not the MEG, the DMT slightly. But even if you just take out the 5 year averages of DMT and MEG, that coupled with the low cost manufacturing in India still allow you to have tremendous returns.

Speaker 4

Got it. That's helpful. That's fair. Got it. And the other concern I do have is CapEx pricing.

Speaker 4

Obviously, I think what you said, was it $165,000,000 of CapEx?

Speaker 2

I believe that was Yes, dollars 165,000,000 of CapEx.

Speaker 4

Considerably lower than the Old Sam project, but obviously the Old Sam project started at a much lower number. Is there any concern that or I should rephrase that. How are we certain that CapEx pricing doesn't escalate to a much higher level with the India project as we saw with the Olsam project?

Speaker 2

So with the Olsson project, I guess the initial estimate was about $400,000,000 It ended up being closer to $500,000 a little bit $500,000,000 So the good we've done engineering work, we've done all the preliminary work, all of the equipment and all of the like I said, all of the major equipment pieces from Loop's technology, we have all the relative pricing because of Ulsan, we have all of the relative pricing that we can apply to India. Our partners at Esther have also have relative construction experience. They put up a polymer plant in 2021. We've hired a global engineering firm to be doing all of the engineering work for us. So distillation columns, pumps, piping, all of those things which are very standard for chemical plants, there's a lot of relative data on the costing of those equipment and all of the proprietary equipment that we use for loops technology, which is some filtration and distillation columns.

Speaker 2

That's we're using pricing that we have from our Olsan from the Olsan plant. So we have a lot of relative data for all of those. If you think about total cost, if you take a $500,000,000 which would be a total project, take away 40% of it just on the polymerization. So you're bringing down

Speaker 3

your CapEx from $500,000,000 you bring it down to $300,000,000 right

Speaker 2

off the bat. Through various reports that I've been reading, the labor rates, through various reports that I've been reading, the labor rates in India versus labor rates in South Korea are dramatically different. Like I said, India's 80% labor rates are 80% cheaper than they are in China. And Korea is one of the higher cost manufacturing countries in the world. So we've done a lot of work.

Speaker 2

This is not something that we just started recently. We've been thinking about building a plant in India for many years. We have a really great partner who has experience in operation side and on relative experience on the construction side. So we're relatively we're very comfortable with the $165,000,000 number at this time.

Speaker 4

Got you. On the now you're making monomers, the MT MEG, does this change the marketing strategy? I mean previously, we you were marketing fully recycled PET. If I heard you correctly, DMT MEG could be or pure drop ins, totally understand that a huge additive bonus to that. Yes.

Speaker 4

But does this change the marketing side if it goes into end markets that maybe are a little less maybe tuned to some ESG standards? Obviously, the consumer market is very tuned to that sort of standard. But does this other markets are less so, does this change marketing or create any headwinds on that front?

Speaker 2

No, it doesn't really change any of our marketing or any of our branding efforts. Obviously, if we're selling the chemicals and we're not selling the final product, there's a little bit of a difference there. But we're still branding it as loop material. A lot of customers in our supply chain, especially like I said, the textile companies need textile to textile. They want material starting from the textile waste, which is huge in India because a lot of the sewing factories and spinning factories are all in India.

Speaker 2

So we've already secured over 50% of the feedstock needed for the facility coming from sewing factories, so the cutting waste. So that supply chain very robust in India and Bangladesh and those countries. And so the availability of very low cost feedstock and our customers wanting the material coming from that type of feedstock is really a perfect fit. And there's a lot of marketing and branding that can go around that because like you saw with On shoes, this fiber to fiber is something that's really exciting for these brands. They really need that.

Speaker 2

And that's something that we can offer them and that's a huge bonus for us.

Speaker 4

Got it. And then just one last question and I'll jump in line. I don't want to monopolize everything. But financing, I think you said I'm assuming you have REED and you have government financing. It said it sounded as though the REED financing was coming this week, maybe next week or 2 or in the very near future.

Speaker 4

Just curious if, 1, that's correct, 2, what are are there any major are there any hurdles remaining with that? Or are we literally just in the last final stages?

Speaker 2

We're in the last final stages of signing all of the binding agreement. There's a closing condition and we're expecting to have the entire financing package closed within the next I think we said the Q2 of the fiscal year.

Speaker 4

Got it. Okay. I appreciate it. Thank you. Thanks,

Operator

As we currently have no further questions, I will hand back over to Kevin O'Dowd for final remarks.

Speaker 1

Thank you everyone for joining us today to discuss Loop Industries' 4th quarter results. Before we conclude, I'd like to express our appreciation for your continued support and interested in Loop. If you have any questions or need any additional information, please feel free to reach out. Thank you again for your time today. We look forward to continuing our dialogue and updating you on our future developments.

Speaker 1

Have a great

Speaker 4

day. Thank you very much.

Operator

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

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