Li-Cycle Q2 2024 Earnings Call Transcript

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August 8, 2024

There are 5 speakers on the call.

Operator

Good day. My name is Ashley, and I'll be your conference operator today. At this time, I would like to welcome everyone to the 2nd Quarter 2024 Lifecycle Holdings Earnings Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I will now turn the call over to Louie 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 financial results for the interim period ended June 30, 2024. We will start today with formal remarks from Ajay Kochar, President and Chief Executive Officer and Craig Cunningham, 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 or in our past reports and filings with the U. S. Securities and Exchange Commission and Ontario Securities Commission 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 date subsequent to the date of this call. With that, I'm pleased to turn the call to Ajay.

Speaker 2

Thank you, Louis, and good morning, everyone. On our Q1 earnings call in May, we provided an update on the progress made on our comprehensive review for the restart of construction of the Rochester Hub. Today, we are pleased to share additional updates on the steps we've taken towards achieving our previously mentioned key objectives and also to discuss our Q2 financial and operating results. Starting on Slide 3, we continue to make progress on our key objectives. 1st, closing the U.

Speaker 2

S. DOE loan remains our top priority. We continue to work closely with the DOE Loan Programs Office to advance towards definitive financing documentation and satisfying conditions precedent for loan disbursements. 2nd, we continue to evaluate additional financing alternatives, including exploring financial and strategic options to increase our near term liquidity. 3rd, we have advanced our comprehensive review of the Rochester Hub.

Speaker 2

We refined the cost estimates for the local market as part of our work on evaluating the total project cost. And we also advanced the go forward Rochester Hub project execution plan for the proposed mixed hydroxide precipitate or MHP process. Finally, we are reviewing and optimizing our spoke network. We are exploring ways to extract more value from our Spok network and are transitioning the Ontario Spok from a paused operation to closure to focus on our key generation 3 facilities. In addition, we are pleased to announce that the Germany Spoke secured ISO certifications for meeting global standards.

Speaker 2

We will continue our strategic review of our operations. Turn to Slide 4 for an update on the current status of the DOE process regarding the conditional commitment for a loan for gross proceeds of up to $375,000,000 As you can see, we remain in step 5 of the DOE's loan application process and we remain committed to finalizing the loan. During Q2, we continue to work closely with the DOE on key technical, financial and legal work streams to advance towards reaching an agreement on definitive financing documentation, execution thereof and satisfying conditions precedent for loan disbursements. Turn to Slide 5 for an update on the Rochester Hub project and the proposed MHP scope. On our Q4 earnings call in March, we reported that we had completed an internal technical review confirming the viability of the MHP scope to produce MHP and lithium carbonate as part of the proposed change in our project development strategy for the Rochester Hub.

Speaker 2

Since then, we've made significant progress on the technical work stream. This includes advancing the go forward project execution plan for the Rochester Hub. Additionally, we refined cost estimates with the local market for major construction contracts. Including consideration of the recent work with the local market, our current estimated cost to complete the Rochester Hub project is substantially similar at approximately $490,000,000 for the MHP scope, which is inclusive of cash commitments to date. For clarity and positively, the total project cost estimate for MHPscope remains the same at approximately $960,000,000 We note that these estimates are subject to several assumptions and will continue to be refined as we complete our comprehensive review work.

Speaker 2

In summary, the technical work on the proposed MHB scope is now quite advanced. Turning to Slide 6 for an overview of lifecycle's commercial updates. We've established a broadly diversified global base of battery supply customers, including a leading U. S. Headquartered, vertically integrated EV and battery manufacturer, which is our largest customer source of revenue for the first half of the year.

Speaker 2

Notably, 4 of our top 5 partners for feed intake during Q2 were among the largest global EV OEMs. We continue to demonstrate our expertise in processing all types of lithium ion batteries, independent of form factor and chemistry. We remain focused on EV battery packs to leverage the value differentiators provided by our Gen 3 spoke capabilities in processing this material. EV battery packs continue to be a large portion of our input feed and represented approximately 40% of the total battery materials processed at our spokes in Q2. We've also widened our commercial footprint for input feedstock for the Germany spoke in Europe.

Speaker 2

As well during the quarter, we announced a partnership with Daimler Truck North America to recycle batteries. Finally, we continue to see broad based support for our differentiated technologies 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 spoke operations. During the quarter, our spokes produced approximately 1394 tons of black mass and equivalents. We have continued to optimize our spoke network and have increased throughput rates at our Arizona and Alabama spokes.

Speaker 2

We secured ISO certifications for our Germany spoke, highlighting our commitment to sustainability and the highest global environmental health and quality standards. And finally, we are transitioning the Ontario spoke, where operations have been paused since November 2023 to closure in order to focus on our priority Gen 3 facilities. Turn to Slide 8 for some highlights related to the optimization initiatives at our take near term steps towards creating financially accretive spokes. As noted, we are prioritizing our Gen 3 spokes, which can process full battery packs without the need for dismantling. This aligns with priorities of our EV and battery OEM partners who comprise a large share of our global battery feed intake.

Speaker 2

In line with this, we aim to maximize and sustain throughput rates at our Gen 3 Spokes to fully leverage these capabilities. We're also optimizing our product conversion costs to increase our competitiveness in the market. As you can see in this quarter, recycling services are a growing share of our revenue. We're accepting approximately 43% of our revenue in the first half of the year. We will continue focusing on these services to leverage the value differentiators of our Gen 3 Spokes and generate revenue.

Speaker 2

We are working with our strategic partners to support and execute on these plans and look forward to providing further details on our spoke optimization and strategic initiatives in Q3, 2024. With that, I'll now turn the call over to Craig to provide a review of the financials.

Speaker 3

Thank you, Ajay. Turning to Slide 9 for a review of our 2024 Q2 financial results. Highlights include record quarterly revenue and lower SG and A and cost of sales for the Q2 of 2024 versus 2023. Starting with the sales of Black Mass and equivalents, which were 11.58 tons versus 2,093 tons sold in the same period last year. Total revenue increased 133 percent to 8,400,000, a record for the company.

Speaker 3

This increase reflects higher recycling revenue and favorable non cash fair value pricing adjustments of approximately $200,000 versus an unfavorable adjustment of $1,700,000 from the prior year. Moving to cost of sales, which decreased 4% to $19,400,000 versus $20,200,000 in 2023. Cost of sales attributable to product revenue decreased by $2,300,000 or 11% compared to the last year's results due to lower production levels, partially offset by costs associated with smoke repairs and maintenance activities. Cost of sales attributable to service revenue increased $1,500,000 compared to last year due to new service contracts entered. We are also pleased to note that SG and A has decreased 39% to $15,300,000 versus $24,900,000 in 2023, primarily driven by lower recurring personnel costs, resulting from a restructuring initiatives implemented since the pause of the construction of the Rochester Hub.

Speaker 3

Adjusted EBITDA was a loss largely driven by a decrease in SG

Speaker 2

SG and A, cost of sales and higher revenue, as well

Speaker 3

as 2,200,000 in restructuring fees. As of June 30, 2024, Lifecycle has cash and cash equivalents of 57,000,000 versus 109,100,000 at the end of the Q1 of 2024. This is mainly due to higher working capital and investing activities partially offset by lower SG and And I'll now turn it back to Ajay.

Speaker 2

Thanks, Greg. Turning to Slide 10, I wanted to conclude by addressing the current industry dynamics we're seeing across battery supply chain. While there have been recent challenges, we continue to believe in the long term fundamental for lifecycle to the 2 main drivers, increasing recycling supply and the deficit of expected post processing capacity and the continued trend towards localization of the battery supply chain. The chart on the left illustrates the rising adoption of electric vehicles in North America, with sales achieving a CAGR of approximately 36% from 2019 through 2024. Notably, despite current industry headwinds, 3rd party sources are projecting a robust 23% CAGR off this base through the end of the decade.

Speaker 2

As depicted on the right, these growth dynamics support the strong demand for an expanding market for recycling of all forms of lithium ion batteries. In the near to midterm, the increase in recycling materials is largely being driven by manufacturing scrap from Gigafactory growth, with end of life battery feedstock supplementing this growth towards the end of the decade. By 2,030, the supply of recycling materials is projected to increase by up to 6 times versus 2024 levels. Despite the recent challenges we are seeing in the battery supply chain, the longer term fundamentals for the industry remain clear for recycling. The transition to EV adoption is well underway and growth is continuing even if at a different rate in the near term.

Speaker 2

Lexical is well positioned to capitalize on these opportunities as there is still a significant gap in post processing recycling capacity. The Rochester Hub is expected to play a pivotal role in helping to fill this gap. Turning to Slide 12. We believe the trend towards localization will also continue to be a positive for the industry and our company. Policy initiatives in North America and Europe continue to provide a favorable backdrop, encouraging local production and reducing reliance on external supply chains.

Speaker 2

This includes the U. S. Inflation Reduction Act, various tax incentives, and more recently, potential tariffs on imports. In the U. S, we have seen continued bipartisan support to build domestic capacity in the battery supply chain to onshore clean energy jobs and reduce reliance on critical minerals from foreign entities of concern.

Speaker 2

With the continued growth in EV adoption underpinning the long term demand for recycling and post processing capacity and the ongoing support for the localization of the supply chain, the planned development of the Rochester Hub will strategically position Lifecycle to create value for our stakeholders. Turn to Slide 13 and to reiterate our go forward strategy and key objectives. First, we are focused on reaching an agreement on definitive financing documentation for the DOE loan. 2nd, we are evaluating financing and strategic options to bolster our liquidity. 3rd, we aim to complete the comprehensive review of the MHP scope for the Rochester Hub.

Speaker 2

And lastly, we are working with our strategic partners to maximize value across our Spok network. Stay tuned as we expect to provide further details on our spoke optimization and strategic initiatives in Q3. Before we get to Q and A, I wanted to thank our employees and our partners for their continuing support. Lifecycle has clear objectives over the second half of this year, and we are focused on capitalizing on our opportunities. Operator, we're now ready for questions.

Operator

We will take our first question from Doug Paul with LPL Financial. Please go ahead.

Speaker 4

Hi. Can you provide some more color on where we're at in the Step 5 or possibly how long the step 5 takes for this loan to close?

Speaker 2

Sure. Hi. So I'd say at a high level, just to take a step back, probably folks have seen a lot of, in the subject speaking, seen a lot of progress from the DoD recently and momentum picking up. Now just to contextualize, this is the last stage before we close. And so we've been here for a while, I'll see back since February 2023.

Speaker 2

We got our initial agreement. Since then, we've been enclosed. In between, we had the pause, a bit of a proposed shift in the strategy. Within the closing phase, there are 3 work streams. There's technical, financial market and legal.

Speaker 2

The technical side has been focused on the MHP scope. That is well progressed. The financial market side has been basically reintegrating that into the view from the financial perspective, that's also very well progressed. And now we're really focused on those definitive financing documents as mentioned.

Speaker 4

Okay. Do you have an anticipation date of closing?

Speaker 2

So I think at this time, we're moving as extremely as possible to close. And I could tell you this is my top priority. It's a top priority for the organization and we're continuing to progress towards that.

Speaker 4

All right. Thank you.

Operator

We will take our next question from Matthew O'Keefe with Cantor Fitzgerald. Please go ahead.

Speaker 4

Thanks, operator. Good morning. Just a question on the comprehensive review. Some good progress sounds like has been made there. I'm just wondering, I mean, how much more and timing wise on that being completed?

Speaker 4

And how is how are metal prices sort of impacting that review? And as an addition to that, if you could sort of comment on your view on listings are going to be a very important component of your revenue stream when you get this operational. Maybe you could comment on current pricing and the kind of pricing you expect is needed to make this work?

Speaker 2

Yes. Hey, Matt. Good morning. So let me start maybe on the review first, then talk a little bit about influence of metal pricing. So, yes, we keep talking about this review, I think just to break it apart in simple terms, there's a technical part and there's a financial part, right?

Speaker 2

So the technical part has been a lot of what we talked about in the presentation, visavis, the internal technical viability tech of Danish BScope, stuff and completed. And then a big thing that we did in Q2 was going to a local market to refine the estimate for the CapEx, which by the way was also necessary activity for the DOE. So that's also done great. And as you saw, we didn't change the CapEx estimate. So that then feeds into the second part of the financial part, which really you're driving at.

Speaker 2

Within that, obviously, there's the full financing package that we're working on the Dewey is the cornerstone of that. And then what you're getting at is really, okay, what does it mean at current metal prices? Yes, I mean, look, we're in a we've been in a soft period for nickel, cobalt and lithium. One of the benefits we have is obviously we're not reliant on any one of those, unlike a sole lithium producing project. Obviously, as you know, we have never really gotten into forecast economics.

Speaker 2

We'll get there when we get there. But I can tell you, given the basket of those 3, even at current prices and where they're expected to be, we still see this as accretive, otherwise we wouldn't be pursuing it. So that's maybe another way of talking about where current prices are and how we see the economics.

Speaker 4

Okay. Can I just ask you a little bit different way or I mean, in your discussions with the DOE, do they have a kind of price deck or expectation that they're focused on? Mean, are they putting in some sort of hurdles for you or not hurdles, but targets for you?

Speaker 2

So they do have an expectation, not a liberty to say what it is because that's their own advice to them. But what I can say is at a high level, and just sticking based on what most folks experience would be, obviously given it's debt and it's a loan, these aren't sort of bullish equity underwriting sort of commodity prices that are typically the news probably speaking, right. So like it's that's the sort of zone rent to talk broadly.

Speaker 4

Okay. I appreciate that. Thank you.

Speaker 2

Thank you,

Operator

Ben. And it does appear that we have no further questions at this time. I'll turn the call back over to Ajay for any closing remarks.

Speaker 2

Thank you. So as mentioned, given the continued favorable long term trends in our industry, we're excited to execute on our clear objectives and we look forward to providing you with a further update on our progress soon. Thank you.

Operator

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.

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Key Takeaways

  • Lifecycle remains focused on finalizing its DOE loan of up to $375 million and is actively working through the technical, financial and legal streams of Step 5 toward loan disbursement.
  • The Rochester Hub comprehensive review is advanced, confirming a mixed hydroxide precipitate (MHP) process plan with a $490 million cost to complete and a total project estimate of approximately $960 million.
  • Lifecycle is optimizing its spoke network, transitioning the Ontario spoke to closure, prioritizing Gen 3 facilities and securing ISO certifications for its Germany spoke.
  • Commercially, the company serves a diversified global battery feed customer base—including a leading U.S. EV and battery manufacturer—and reported that EV battery packs accounted for 40 percent of Q2 input feed, with a new partnership to recycle Daimler Truck North America batteries.
  • Financially, Q2 revenue jumped 133 percent to a record $8.4 million, SG&A expenses declined 39 percent year-over-year, and cash on hand was $57 million as of June 30, 2024.
A.I. generated. May contain errors.
Earnings Conference Call
Li-Cycle Q2 2024
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