Loop Industries Inc

NASDAQ:LOOP

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Loop Industries [Second] Quarter 2023 Corporate Update Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. This conference is being recorded today, [October 13, 2022], and the press release accompanying this conference call was issued after market close yesterday, [October 12, 2022].

On our call today is Loop Industries Chief Executive Officer, Daniel Solomita, Kevin O’Dowd, VP, Communications, Investor Relations. I'd now like to turn the conference over to Kevin to read a disclaimer about forward-looking statements.

[Kevin O’Dowd]

Thank you, operator. Before we get started, let me remind you that today's meeting will include forward-looking statements within the meaning of the securities laws. These forward-looking statements relate to among other things, current plans, expectations, events and industry trends that may affect the Company's future operating results and financial position.

Such statements include 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 Risk Factors and Forward-Looking Statements section of our latest annual report on Form 10-K, our quarterly report on Form 10-Q filed with the SEC yesterday, in yesterday's press release. Copies of these documents are available at the sec.gov or from our Investor Relations department.

At this time, I'd like to turn the call over to Daniel Solomita, Chief Executive Officer of Loop Industries. Daniel, please go ahead.

[Daniel Solomita, Founder and Chief Executive Officer]

Thanks, Kevin. Hi, everyone. Welcome to our Q3 earnings call. I'll just start with the main headlines of what has gone down in the last quarter. First, the sale of the land in Bécancour. It's just a really solid business decision. The value of that land has increased over 500% in the two years since we bought the land, so that the value of the land has exploded, and there was a lot of people that were looking for land in Bécancour and that was the main motivation behind selling the land. The value had increased significantly. And for us, that was just a really solid business decision, selling the land plus our cost reduction initiative gives us three years of cash on hand. That's without having any – raising capital and dilution, and that is more than enough to get us through this current global slowdown that we're experiencing.

The Quebec and the Canadian project is still really important for us. It's an important project for Loop. It's important for Canada to be able to get to their 2030 goals of eliminating plastic waste. We're continuing to be engaged with the Canadian government and the Quebec government. We've already looked for other land available in Quebec and outside of Quebec and other parts of Canada. So there's plenty of land available that's much cheaper than the land that we had at Bécancour.

And so when the macro environment improves, we'll be ready to begin that project. So it's still a very important project for us, and it definitely still in our cards for the future projects that we're going to develop. With these uncertain macroeconomic times, it's important for us to make sure that the projects that we do focus on and that we do build are the ones that have the least amount of risk and the highest amount of success.

And that's what leads us to the projects that we're working with our partners at SK Global Chemical. SK Global Chemical is a large petrochemical company with very deep resources. Our project in Ulsan, South Korea has been going on for quite a while. It's not like it's a new project that we're just starting. We've been working with SK hand-in-hand.

Teams from Loop and SK are working on a daily basis together to execute on the Ulsan project since we announced our partnership when SK became a 10% owner – equity ownership stake in Loop in 2021. So the companies have been working really closely together and we have multiple projects with SK that we're working on.

First one being the project in Ulsan, South Korea that is scheduled to break ground in this year in 2023. Really important project for us, having that foothold in Asia is hugely important for some of our customers, especially on the fiber side. So all of the polyester fiber supply chains for the clothing and textile industry. So that's a really important area for us.

SKGC brings in a wealth of experience. Obviously, they do all of the operation of the plant. So they have an experienced operations team. We're building the plant on one of their existing petrochemical sites. So they already have a lot of the infrastructure for the site available. We're working together with SKEE, ecoengineering, who is the SK division of their in-house EPC contractor, very large organization. They built petrochemical plants all around the world, and they have a huge wealth of knowledge in this experience and building not only on the engineering but on the construction of these facilities. So they'll be providing all of the construction and engineering services for the projects.

SKGC also provides the majority of the capital for the projects, which is obviously very important for Loop. I said they're an experienced operator. SKGC also is in charge of all of the feedstock sourcing. Loop and SKGC working together on the customers. So Loop brings in the global customers that we have for other projects and SKGC works mainly on the local customers. So it's really a tremendous partnership between both companies.

These are projects are really the ones that are the easiest to execute the least amount of risk because of having a partner such as SKGC. And so in these more uncertain economic times and the macro environment out there, we think it's best decision for Loop to be executing on the projects with the least amount of risk and the easiest to execute on.

We have plenty of projects in the pipeline. There's tons of interest for the technology in other parts of the world. I mean, Asia as well. Asia, obviously, with SKGC. We have a plan to build multiple plants with them over the coming years. We also have multiple projects in Europe. We have our project in France, but we are also looking at other projects in Europe as well with the same consortium of partners and we have other projects in other parts of the world.

So there's no shortage of demand for the technology or for the final product. But in today's world, we have to be looking at which projects are the easiest to execute on with the least amount of risk and the highest return on capital. And so that's where we see huge benefits in working with our partners at SKGC. That's all I have. So we can open the call up for questions now.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Gerry Sweeney of ROTH Capital. Gerry your line is open. Please go ahead.

[Gerard Sweeney, ROTH Capital Partners, LLC]

Good morning, Daniel. Thanks for taking my call.

[Daniel Solomita, Founder and Chief Executive Officer]

Hi, Gerry.

[Gerard Sweeney, ROTH Capital Partners, LLC]

I was hoping that maybe you could discuss maybe the best that you're permitted to maybe some of the critical next steps with SK. I believe you're looking at – there's a bunch of scenarios, I think, maybe determining structure of the JV as well as the financing of the project on a go-forward basis and maybe any other items? And secondarily, maybe timing or target timing on sort of hitting these milestones. I know things are in flux, but I want to get an understanding of what big steps are out there and potentially when we can see some resolution on those steps?

[Daniel Solomita, Founder and Chief Executive Officer]

Yes. Thanks for the question, Gerry. So with SKGC things are not in flux. It's been very organized and structured work that we're working with them. So there's the finalization of all of the joint venture agreements. That's something that we are at the6 final stages of completing with them. So that's one part of it.

And then our engineering teams are already working together on the final engineering and construction. Like I said, we've engaged with SKEE, the ecoengineering, which is a division of SK Inc., the broader company. So SKEE will be providing all of the engineering and construction for the facility.

We're scheduled to break ground on the facility in Q3 of 2023. So that's the goal. SKGC has been very vocal about the project and their intentions. Most of that is in the Korean and Asian media. So it doesn't really come to the Canadian or the U.S. media very much, but you can look through at the Korea Times and things like that. So they're very vocal about the project and the timing and the importance of this. Because SKGC really wants to be seen as the largest recycling company in the world and really moving sustainability to the front of their agenda. So I would say, signing up the joint venture, which we're at the final stages of and then breaking ground in Q3 of this year.

As far as the financing, we're discussing SKGC in the partnership. SKGC provides 80% of the capital for the project. Loop is responsible for the 20% of the capital for our equity portion. And that's the portion that we're discussing with SKGC on providing the capital that Loop needs for our equity positioning in the project.

[Gerard Sweeney, ROTH Capital Partners, LLC]

Got it. That is it for me. I appreciate it. Thank you.

[Daniel Solomita, Founder and Chief Executive Officer]

Thanks, Gerry.

[Operator]

Thank you. [Operator Instructions] Our next question comes from David Quezada of Raymond James. David, your line is open. Please proceed.

[David Quezada, Raymond James Ltd.]

Thanks. Good morning, everyone. Daniel, my first question here, just kind of a follow-up on what's happening with the Ulsan project. Could – like are you able to comment on whether or not the long lead time pieces of equipment have been ordered and any thoughts or context around how those time lines are shaping up relative to expectations? And if costs for that facility overall are still shaping up in line with your expectations?

[Daniel Solomita, Founder and Chief Executive Officer]

Yes. Thanks, David. Nice to hear from you. Thanks for the question. So long lead time equipment, so the two reactors, the polymerization reactors that Loop had ordered for the Bécancour project will be transferred over to this project. So that long lead time equipment will just be shifted over because those are standard pieces of equipment, so they can – they can go to any of our projects.

As far as long lead time equipment for this project, right now, like I said, we're scheduled to break ground in Q3 of 2023. So the long lead time order equipment needs to be ordered later on during the year. So there's nothing that needs to be ordered today. Costs are in line with expectations.

We already have our first cost estimates internally for the project. They've been approved. So we're in line. We don't see – we've built all of this through this crazy inflationary environment. So we don't see – foresee any changes coming up in the cost of the facilities going forward. Hopefully, we'll start seeing some reduction in cost as we start seeing the world's economy is cooling off a little bit and supply chains easing up, hopefully with China's decision to forgo their zero COVID policy. So the project is in a really great space right now and both parties are very dedicated and very motivated to get this project built as soon as possible.

[David Quezada, Raymond James Ltd.]

Excellent. Excellent. Thanks for that, Daniel. And then maybe on feedstock for this facility is are there agreements in place for a certain volume of feedstock? And are you able to – do you have any color you can provide on if any of it has been sourced so far?

[Daniel Solomita, Founder and Chief Executive Officer]

Yes. So there's quite a bit of feedstock that's been we're starting like Loop has been testing the feedstock from different Korea suppliers. So we were doing a lot of that work together with SKGC. So there's a lot of typical feedstocks that we use in our process, which is the waste PET finds from the mechanical recycling industry, PET trays. A big thing in Asia is going to be the polyester fiber waste coming from all of the polyester fiber clothing supply chains. So that's going to be a feedstock that's important for the Asian expansion. So SKGC is primarily responsible for the feedstock. We do – we support them with all of the testing and all of the qualification, but it's really SKGC's role in the joint venture to be able to source the local feedstock.

[David Quezada, Raymond James Ltd.]

Okay. Perfect. That's great. And then maybe on the sales side of things, I guess, you and SK are kind of working together on lining up new customers. Is there a target that you guys have in terms of the proportion of volumes from the Ulsan facility that you like to have contracted? And do you anticipate those contracts happening or closing prior to groundbreaking? Or would you break around and then look to contract whatever volumes you would – you're targeting?

[Daniel Solomita, Founder and Chief Executive Officer]

No, we always look to have certain volume or capacities of the volume sold or reserved in some type of [indiscernible] contract or an LOI with customers before the breaking ground of the facility. So yes, we're definitely – we're starting to engage with the customers on which customers will be taking volumes from the Asian facility focusing on some Asian customers. But we can also ship material from Korea anywhere in the world.

But the Asian supply chain, like I said, in the polyester fiber space are extremely interesting because a lot of the polyester fiber clothing companies need more sustainability. They need more recycled content into their fibers, into their clothing and into their products. And today, the mechanical recycling industry is the only way for them to do that. So taking water bottles and turning that into fibers. So the ability to get fibers back into fibers is something of huge interest to them, and that's obviously Loop's technology can provide that to them. So there's a strong interest there not only to sell them the final material but also to be able to recycle the waste that's generated at their facilities.

So we anticipate to have quite a few fiber customers from the facility, but then there's also the bottle grade customers that we work with around the world that all have needs in Asia as well. So – but we do anticipate having I would say, majority of the volume already contracted before breaking ground.

[David Quezada, Raymond James Ltd.]

Okay. Excellent. And maybe just one more for me, if I could. Your R&D expenses were down in the quarter, which I think is consistent with your plan to reduce the burn rate. But could you comment on just – are most of the R&D activities that you that you need to undertake for your upcoming projects? Are you mostly complete at this point? Or I think you mentioned you're still doing some R&D or some testing for feedstock in Korea. Just wondering how you expect that R&D expense to trend going forward?

[Daniel Solomita, Founder and Chief Executive Officer]

So the biggest – in our cost cutting and our cost reduction, the biggest thing that we've done is we just reduced the hours of operation for – from the production facility in Terrebonne. The production facility in Terrebonne, the nameplate capacity is 1,000 tons a year, roughly 2.2 million pounds a year of capacity is what we can produce at the Terrebonne facility. The facility was never built to generate profits, but it's built to be able to showcase the technology at a commercial scale and supply customers with commercial volumes. And we've been successful in doing that. So the plant worked well.

We built it out to a scale that anybody can come and see and our partners can do due diligence or customers or companies like SK Global Chemical, can do full due diligence on the technology. And so that's been completed. So by reducing the hours of operation, instead of running the facility 24/7 slowing down, having full night shift, having four shifts of workers. I mean that's a very big expense, and you can't generate a profit because the volumes are too small.

And so really, it's just about reducing the hours of operations. So we're still producing material. We're honoring all of our existing customer contracts with on shoes, and we had some material with other brand owners, and we have some upcoming events as well with other brand owners coming up. So we still have the operation and know that R&D expense is really the operations running at the plant.

So we'll always keep the facility open to be able to test feedstocks as that's always really important. That's an important part of the business. So being able to qualify any feedstocks that come in from Korea or any other part of the world that needs to be characterized. So we do it first at our lab scale and then we do it at the production facility in a few tons at a time.

So the R&D and production expenses kind of mix together in there. But you need to keep this facility open to be able to produce material for the customer. So you mix in the customers with R&D because we're testing feedstock. So it all blends in really well together. But there is no need for us to be running this facility at full capacity producing 1,000 tons and trying to get it out there. Today – in the world we live in today, it's – cost cutting is an important measure. And I think it makes a better – the customer – the company leaner and keeps people motivated. So I think it's been a bit overall, it's been a success.

[David Quezada, Raymond James Ltd.]

Excellent. Appreciate the color. Thanks Daniel. I will turn it over.

[Operator]

Thank you. At this time, this concludes our Q&A session. I'd now like to turn the call back over to Mr. Daniel Solomita for his closing remarks.

[Daniel Solomita, Founder and Chief Executive Officer]

Thank you very much, operator. So I guess this concludes our Q3 earnings call. Like I said, the company has made really smart business decisions. Selling the land in Bécancour was a really smart business decision as it had appreciated over 500% in two years, focusing on the projects that are the easiest to execute on with the least amount of risk with SKGC is obviously in my mind and in management's mind with the best course of action. So really excited about 2023 breaking ground on our first facility and then many more to come. So thank you very much for your time.

[Operator]

Ladies and gentlemen, this concludes today's call. You may now disconnect your lines.