Li-Cycle Holdings Corp

NYSE:LICY

Earnings Call Transcript 2023-Q1

[Operator]

Good day, everyone, and welcome to today's Li-Cycle Business and Financial Transition Period Results Conference Call. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. (Operator Instructions) Please note, today's call will be recorded, and I will be standing by if you should need any assistance.

It is now my pleasure to turn the conference over to Ms. Nahla Azmy, Head of Investor Relations. Please go ahead.

[Nahla Azmy, Head of Investor Relations]

Thank you. Good morning and thank you, everyone, for joining us today for Li-Cycle's review of our business and financial transition period results ended December 31, 2022. We will start today with formal remarks from Ajay Kochhar, Co-Founder, President and Chief Executive Officer; Tim Johnston, Co-Founder and Executive Chairman; and Debbie Simpson, Chief Financial Officer. We will then follow with a Q&A session.

Ahead of this call, Li-Cycle issued a press release and a presentation which can be found on the Investor Relations section of our website at investors.li-cycle.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 Li-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 US Securities and Exchange Commission and the Ontario Securities Commission in Canada.

These documents can be found on our website at investors.li-cycle.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.

With that, I'm pleased to turn the call to Ajay.

[Ajay Kochhar, President and Chief Executive Officer]

Thank you, Nahla, and good morning, everyone. We are excited to discuss the continued progress in implementing our Spoke & Hub Network strategy provide a review of our transition period results and our 2023 business outlook.

Turning to slide four. We continue to execute on our strategic objectives, solidifying Li-Cycle's position and the development of the sustainable domestic EV battery supply chain in North America and Europe.

To highlight some key achievements that we will discuss in greater detail. We advanced the Rochester Hub construction and are on schedule to start commissioning in late 2023. Expanded development of our global network of Spokes, marrying customer demand, and building feedstock for our Rochester Hub, enhanced our global position with additional battery supply chain participants including recently being named as a preferred battery recycling partner for KION, a leading global forklift and warehouse trucks supplier, and strengthen our balance sheet with the US Department of Energy's loan commitment for $375 million, which will enhance our financial flexibility for future network expansion.

Turning to slide five. Let's take a step back to discuss for Li-Cycle fits in the battery supply chain and why? As depicted on this slide, Li-Cycle focuses on transforming all types of lithium-ion batteries into battery grade materials. These are the fundamental building blocks for producing new lithium-ion batteries again. A secure supply of critical materials is core to the success of the battery supply chain. Li-Cycle is positioned to specifically address this with domestic and recycled critical materials.

With respect to our input, we are agnostic to the type of lithium-ion battery chemistry, form factor, and application. This broad range of inputs ensures that Li-Cycle is flexible to service many customers, including everything from manufacturing scrap to full battery packs.

Regarding our outlook products, we have strategically chosen to produce battery grade chemicals as opposed to downstream active materials for example cathode active materials for several key reasons. First off, economics. Some of the most optimal margin points in the battery supply chain are associated with the production and sale of critical materials. Hence Li-Cycle has focused here.

Additionally many of Li-Cycle's key customers are cathode producers themselves as such Li-Cycle's choice to produce the fundamental building blocks as an input to precursor and cathode production ensures a broad customer aperture and doesn't limit our flexibility. In conclusion, Li-Cycle is focused and its end products are at the center of the value chain.

Turning to slide six for our business model. As we discussed in prior earnings calls, we take a modular approach to the implementation of our Spoke & Hub Network strategy in multiple regions. That is first we seek to develop a network of Spoke strategically located near customers and feedstock to reduce their handling costs and operational risks. This is intended to secure sustainable feedstock for a centralized large scale battery material refining facility or hub.

And second, we underpin these investments in the near term with multi-year intake and offtake commercial contracts with a mid to long-term objective of closing the supply chain loop, meaning, matching up customer offtake with intake arrangements. And finally, we optimize our capital structure with a timed modular approach to capital funding. A good example is the recent DOE loan commitment that would provide low-cost long-term financing.

Turning to slide seven for a strategy for growing our global footprint. Just to reiterate, we cluster our Spoke facilities near the highest regional customer demand centers, focus on being the preferred global recycling partner, and mirror customer demand timing, allocate capital investment in each project underpinned by commercial contracting and maintain a strong project pipeline providing us with the flexibility to shift and scale with market and customer demand.

Turning to slide eight for a closer look at the favorable industry trends. Starting with North America. Shown on the right side, the potential total addressable market or TAM is driven by Gigafactory investments with supply expected to grow by nearly two times by 2025 and four times by 2030.

Notably, we see very favorable supply demand dynamics developing over these time frames as total expected post-processing recycling capacity lags quantities of lithium-ion batteries available for recycling. Li-Cycle is strategically growing its commercial position to capture this demand with four operational Spokes and other in development that will provide feed to our first commercial Hub in Rochester, New York.

Turning to slide nine for a view into the accelerating growth trends in the European battery materials market. We are focused on regional TAM growth with meaningful Gigafactory presence and accelerating EV adoption. With multiple commercial contracts and similar favorable supply demand dynamics, we are locating our Spoke network in key regional segments including Germany which represents the largest market for both battery manufacturing scrap and the expected supply of end-of-life lithium-ion batteries.

France, which we'll discuss more later is projected to be the third largest battery cell manufacturing and end-of-life battery market in Europe and finally, Norway, which has a growing Gigafactory presence and notably the highest EV penetration rate over 75% with the regulatory mandate for all new vehicle sales to be a 100% zero emissions by 2025.

Let me now turn it over to Tim for an update on the Spoke & Hub Network.

[Tim Johnston, Executive Chairman]

Thanks, Ajay. Turning to slide 10 for our brief update on our Spoke networks. In North America, our Generation 3 full battery pack processing plants in Arizona and Alabama are benefiting from higher volumes as we ramp to target throughput at these twin plants. At our Generation 2 New York Spoke, we are leveraging higher operating performance capability having recently upgraded the facility to process a wider range of battery materials.

Further, we will commence initial work later this year at our new Ontario Spoke with the Generation 3 plant and warehouse facility to replace the current Generation 1 Spoke. In Europe, construction of our German Spoke is well-advanced. We are ahead of the plan to begin commissioning Line 1 in mid-2023 to be followed by Line 2 in the second half of the year. In Norway, construction is progressing with the building expected to be finished in late 2023.

Turning to slide 11 to discuss our new Spoke site in France. Consistent with our strategy, we are excited about this development for several reasons. Our capital investment in France is supported by multi-year commercial contracts. We're excited to announce our partnership with the KION Group.

KION is a leading global provider of forklift and warehouse trucks. Li-Cycle is now KION 's preferred recycling partner and the commercial arrangements will begin in France and Germany and will expand globally.

France is projected to be one of the largest battery cell manufacturing and end-of-life markets in Europe. The Gen 3 Spoke will be located in the North of France, an existing building site in Harnes with access to renewable energy in close proximity to three upcoming Gigafactories and several automotive OEM groups. And the Spoke will have an initial processing capacity of 10,000 tons per year with optionality to expand up to 25,000 tons per year.

Turning to slide 12 to discuss our Black Mass Production strategy. As we've noted on prior calls, our Spoke Network build-out and Black Mass Production is anchored to the feedstock requirements of our Rochester Hub. As you recall earlier with our view of the value chain, we are positioning Li-Cycle to be essential partner in terms of closing the battery materials supply loop.

In 2023, we are targeting Black Mass Production to be between 7,500 and 8,500 tons for the year. This is in-line with our strategy to work with key customers as we ramp towards production requirements to satisfy the needs of the Rochester Hub. This will allow us to maximize recoverable value from the critical materials including lithium, nickel, and cobalt.

Turning to slide 13 for a discussion on the Rochester Hub. This aerial view of the Rochester Hub in early March showed significant progress since our last update just two months ago. Major equipment is now on-site or en route. The warehouse is now 95% complete and we'll be ready for occupancy by late spring and key process buildings are well advanced as you can see from the pictures.

Turning to slide 14 for an overview of the five key pillars driving the project schedule and budget for the Rochester Hub. The first three are well advanced, specifically equipment procurement with greater than 95% of process equipment ordered, key crystallizer equipment and solvent extraction equipment is now either on-site or in transit.

Bulk procurement such as steel, cabling, and piping is largely completed. And detailed engineering is more than 75% complete and on track ahead of construction needs. The last two pillars are the current key focus to ensure an on-plan on-budget delivery.

Labor unit rates are the installation costs associated with the construction labor and labor productivity is the total volume of labor required to complete the installation. Currently, we are comfortable with the combination of our rates and productivity.

We are pleased to confirm when factoring the fixed pillars and the remaining drivers that we are currently on-track trending towards the higher end of the previously disclosed range of $486 million to $560 million.

I would like to hand it over to Debbie for an update regarding the DOE announcement, financial results, and business outlook.

[Debbie Simpson, Chief Financial Officer]

Thank you, Tim. Turning to slide 15. We were thrilled to announce that in late February, we received a conditional commitment for a loan of up to $375 million from the DOE to its Advanced Technology Vehicles Manufacturing program.

Let me outline a couple of key points here. From the DOE perspective, this is the first support from the DOE ATVM program for sustainable pure-play lithium-ion battery materials recycling company. From Li-Cycle's perspective, this strategic financing achieved their commitments of executing on low-cost long-term debt financing which helps optimize our capital structure and provides liquidity and flexibility to fund future network expansion plans.

Turning to slide 16 for some additional details. The commitment by the DOE follows extensive technical market financial and legal diligence since our formal loan application October '21. By its further validation of our differentiated recycling technology and underscores Li-Cycle's importance as a critical battery materials supplier in the US EV battery supply chain.

Unfortunately, the proposed terms of the loan are favorable with a term of up to 12 years and interest based on 10-year US treasury rates. We expect to close this transaction in Q2 '23 subject to customary closing conditions.

Now turning to slide 17 for a discussion on our two-month financial results ended December 31, 2022. As a reminder, we changed our fiscal year end from October 31 to December 31 to better align Li-Cycle's financial reporting calendar with our peer group companies. Briefly, I will review Black Mass Production and sales, revenue and adjusted EBITDA results.

We produced 898 tons of Black Mass for the two months ended December 31, 2022. This was at the top end of our guidance range of 850 tons to 900 tons and in line with our scheduled maintenance program. Looking at the top left chart, this result drove the calendar year '22 production to 4,416 tons of Black Mass versus 2,218 in 2021.

Total revenue per the top right chart was $5.9 million in the two-month period compared to $2.8 million for the same period last year. This included a favorable impact of a fair market value gain of $2.3 million compared to $1.2 million in the prior period with increasing nickel prices more than offsetting a decline in cobalt prices.

Product sales and recycling services were $3.6 million, a 125% increase compared to the prior period. Our sales volume for the calendar year was 3,760 tons of Black Mass up from 2,175 tons in 2021. Adjusted EBITDA loss for the two months ended December 31, 2022 was approximately $17.8 million versus $8.5 million in the same period last year. This reflects increased operating expenses mainly employee-related costs to support the expansion of our network, driven by the growth in our global footprint.

Turning to slide 18 for a review of the strength of our balance sheet. We ended the period with approximately $518 million of cash on hand combined with the expected DOE loan proceeds provides meaningful future financial flexibility to fund our current and robust pipeline of near to mid-term growth plans in North America and Europe.

Capital expenditures for the two months ended December 31 were $22 million compared to $18 million in the same period last year. This primarily relates to purchase of equipment and construction materials for the Rochester Hub as well as detailed engineering, equipment and installation for our Spoke operation.

Turning to slide 19 for an update on our key business outlook metrics for 2023. As Tim reviewed earlier, we are targeting Black Mass Production in the range of 7,500 tons to 8,500 tons for the year going sequentially higher over the course of the four quarters as we continue to ramp up in North America and bring on our operations in Germany.

In terms of our inventory builds to feed the Hub, we expect to begin storing Black Mass towards the back end of '23 and into early '24 aligning with our hub needs and timing. Capital investment to support this Spoke & Hub Network growth is expected to be in the range of $285 million to $345 million with the hub build accounting for approximately $250 million to $300 million of the total and the balance being attributed to the development of our Spoke Network.

Finally and importantly, we continue to optimize our financial flexibility for future growth and we expect the $375 million financing commitment by the DOE to close in the second quarter.

Turning to slide 20 on closing. I'd like to reiterate what we said at the beginning of the call regarding the positive strides that we're making as we execute on our Spoke & Hub strategy. We are advancing the Rochester Hub project on time and within budget, including commencing and commissioning in late 2023.

Expanding our global network of Spokes with multi-year commercial contracting and mirroring customer demand and building strength in our balance sheet for growth with the DOE funding.

That concludes our formal remarks. Operator, we are ready to take questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Jeff Osborne with TD Cowen.

[Jeff Osborne, TD Cowen]

Yeah, good morning. Very helpful detail so far in the call. I was curious if there's anything incremental on the Hub economics that either you've learned internally or through the DOE process and their extensive evaluation of you folks relative to what was shared both in the SPAC merger deck and subsequent publications from you folks as we think about the commissioning process of the facility would be helpful to understand.

[Ajay Kochhar, President and Chief Executive Officer]

Hey, Jeff, good morning. Yeah, so maybe I'll start quickly on what you just asked and Tim can speak specifically to some aspects. But yeah and it's worthwhile to emphasize is just that the DOE did significant work here. I think today we indicated that we would have heard Debbie say that we actually applied for that back in October of 2021. So that was quite a path there, rigorous path including lots of diligence. Vis-a-vis if we've learned anything new, I can turn it over to Tim who can add a little on that.

[Tim Johnston, Executive Chairman]

Yeah, Jeff. So essentially no is the answer. The scope of the project has remained unchanged. We still plan to process 35,000 tons per year of Black Mass. The chemistry has held up all the way through the process. Therefore the unit operations have done so as well. The key growth drivers remain -- from an operating perspective associated with variable inputs such as reagents which because the chemistry hasn't changed because the unit operations haven't changed, hasn't moved significantly.

From the capital cost perspective, we're indicating that we're moving towards the higher end of the range of $486 million to $560 million. It's being one of the things we wanted to illuminate today is that we've really made significant process in locking down key components associated with the capital costs.

And we described that in terms of five key pillars being equipment procurement, bulk procurement, detailed engineering, largely complete. And now focusing on the final two aspects, which are really associated with construction labor, which is the labor unit rates and productivity, which we continue to manage and monitor through the final execution of the project.

[Jeff Osborne, TD Cowen]

Got it. That's very helpful. A couple of other quick ones here. Is there any update you can give us on how long we should anticipate the commissioning process to take as you ramp that up obviously you've never done this before, but I didn't know if you could share what your internal expectations were, how investors should think about that?

[Ajay Kochhar, President and Chief Executive Officer]

Yeah, Jeff, as we indicated, we're on track to start commissioning at the end of this year. We do expect a lockstep with that will get more outlook as part of that, not today necessarily, but, yeah, that's more to come on that in the coming periods.

[Jeff Osborne, TD Cowen]

Bigger, that was the answer. Just thought I would check. And then two other quick ones. Any update on what -- now that you have three facilities or three locations in Europe where that Black Mass is going to go later this year and into next? Is that going to remain in Europe to be sold as Black Mass or are you going to bring that into the US that was a bit unclear to me.

And then also any update you can share on lithium offtake agreements? I think Traxys is dealing with your nickel and cobalt, but I wasn't sure as we get closer to the commissioning process where the lithium will be going?

[Ajay Kochhar, President and Chief Executive Officer]

Yeah, certainly. So, starting with the first part, and actually one of the things I want to touch on today was our modular approach to how we build out. I think it's becoming hopefully clear and clear to folks. So that was what I was talking about what are the components of that, right? So we have Spokes eventually it's scaled hub commercial partnerships in and out and a funding package to support that. And so that's what you've seen in North America.

Speaking to Europe, you would have seen now obviously several of those aspects in place, for example, you just cited the Spoke presence has continued to grow and lockstep with customers. In terms of where that Black Mass will go, we do have optionality to bring it to the Rochester Hub in the near term or the medium term, but that said, from a geopolitical perspective, policy perspective, economic perspective and closing the loop domestically, we would see over time that it makes sense to close that loop you know in a domestic sense as well speaking to Europe as a broader jurisdiction.

So more on that to come when we're ready, but that's what we're trying to illuminate, there's basically that's a strategy. And then vis-a-vis your question on lithium offtake, Tim can speak about.

[Tim Johnston, Executive Chairman]

Yeah, no worries, Jeff. And so our focus at the moment is to be extremely disciplined when it comes to offtake. Essentially what we're building is a book that relates back to circular economy and that means that we're contracting and seeking the contract with the same customers that we're receiving materials from to deliver materials including lithium back to their own supply chain.

And so whilst we work with Traxys and we work with Glencore as well on other products from the Rochester Hub. The ultimate consumers of these materials are largely going to be the same customers that we receive materials from on the intake side.

[Ajay Kochhar, President and Chief Executive Officer]

Yeah. So, just for clarity, the Traxys contract does include lithium, Jeff. So it does include lithium, nickel, cobalt as well as manganese and graphite. So we have the offtake to that. There is a buyer of it. What Tim referring to is, okay, where is it going downstream of that? And so we have a buyer for it that's de-risked, but we're being very prudent downstream of that, working with our partners, including Traxys and Glencore more broadly to close that loop. So trying to link it up with input as well as output.

[Jeff Osborne, TD Cowen]

Makes sense. That's all I had. Appreciate the clarity there.

[Ajay Kochhar, President and Chief Executive Officer]

Thank you.

[Tim Johnston, Executive Chairman]

Thanks, Jeff.

[Operator]

Thank you. [Operator Instructions] Our next question comes from Brian Dobson with Chardan.

[Greg Pendy, Chardan Capital Markets]

Hi. Thanks for taking my questions. It's Greg Pendy in for Brian Dobson. Just I guess dovetailing on the prior question, can you just talk about The Hub? Have you learned? I know it was interesting times building the hub and, you know, material costs were high, but have you learned anything from this hub for future hubs that you think you can trim that cost range down for a future hub?

[Ajay Kochhar, President and Chief Executive Officer]

Yes. And, hi, Brian. Good morning. It's good for Tim to address.

[Tim Johnston, Executive Chairman]

Yeah. No worries. And so, in short, absolutely. We've learnt a lot through executing on this process. I would say, you know, on the high side we've learnt, you know, our execution strategy overall in terms of focusing on early stage procurement of key materials and equipment has worked quite well.

We're receiving a lot of these this equipment on site now well ahead of when it actually needs to be installed. But where there has been slippages, we've been able to catch that without impacting the overall schedule, which is a big advantage, I think, to the overall strategy. In terms of other things that, that we've learnt in relation to this is really, you know, coming back to the sequencing of execution.

I would say the process and scope of the project hasn't changed significantly. It's really comes down to the strategy behind the execution which we continue to refine. So as we look at future potential hubs, we have a clear understanding of what the key drivers are, how to prioritize them and organize them to minimize inconsequential costs associated with the project. So what I mean by that is not direct costs on equipment, for example, but really more around how you build the project.

[Greg Pendy, Chardan Capital Markets]

That's helpful. Thanks a lot.

[Operator]

Thank you. [Operator Instructions] Our next question comes from Evan Silverberg with Morgan Stanley.

[Evan Silverberg, Morgan Stanley]

Hey, guys. Evan Silverberg on for Adam Jonas. A quick question on the Black Mass Production. As you guys are installing more capacity, are you taking your time ramping the factories or is it more that, you know, the feedstock coming in isn't quite in lockstep with how you guys are building out capacity at this time?

[Ajay Kochhar, President and Chief Executive Officer]

Hey, Evan, good morning. Yeah, Tim can start on that and then I can add on if needed.

[Tim Johnston, Executive Chairman]

Yeah. Good morning, Evan. So it's really two aspects. The first is that we continue and we tried to demonstrate that in the presentation today continue to grow our feedstock supply in line with our customers. And so we're continuing to grow lockstep with the market.

And you're seeing another forecast of basically a doubling of year-on-year production of Black Mass, which would be our third year in a row for doubling production. The other aspect is we are continuing to ramp up our two new and largest facilities in North America being Arizona and Alabama.

Arizona became four shift 24 hour operations late last year, and the Alabama facility added a fourth shift in January, making it 24 hour operation. So we're continuing to ramp up those facilities. The other aspect to remind everyone, Evan, is that this, of course, ties in closely with our execution strategy for the Rochester Hub. The timing of the Black Mass that we need for that facility is on track. And we're continuing to grow Black Mass Production in line with that.

[Ajay Kochhar, President and Chief Executive Officer]

Just maybe tying that together. And I think the point there is that we're not a Black Mass only production company. We're a resource recovery company. And Black Mass is a means to an end to ultimately get those battery grade materials out. And for us, it's the feedstock to the hub. So we want to see is that it's growing in lockstep with when we need it. And that's the key point that Tim was just making, and we see that in line from our perspective.

[Evan Silverberg, Morgan Stanley]

I appreciate that color. Would you guys consider in the future and once Rochester is open, would you ever consider breaking out maybe capacity utilization by Spoke & Hub.

[Ajay Kochhar, President and Chief Executive Officer]

Yeah, good question. Our network continues to grow and so obviously the fine balance there, we don't want to snow everybody with a bunch of detail, you know, facility by facility. But I think certainly over time, I think a key metric to pay attention to is on the hub side. And so the Spokes are really, you know, the feed to that hub. There's optionality to also get Black Mass from the market. We want to ultimately primarily fulfil that internally. And so I think the key point to focus on is really that feed to the hub. And then what does that mean ultimately for those battery grade materials that are being produced?

[Tim Johnston, Executive Chairman]

Yeah. There is significant value in having a diversified network of merchant Spoke facilities to access the broad market of import materials to generate Black Mass. And so as we continue to build out our network, we can flex with the market where it makes the most economic sense to produce the lowest-cost metal units delivered to the Hub and that's really our focus. So at the end of the day, the Spokes are low-capital intensity assets that give us broad access to recycle materials to feed the Rochester Hub.

[Evan Silverberg, Morgan Stanley]

Thanks for the color guys.

[Ajay Kochhar, President and Chief Executive Officer]

Appreciate it. Thanks, Evan.

[Operator]

Thank you. [Operator Instructions] It appears we have no further questions at this time. I'll turn the call back over to Ajay Kochhar for any additional or closing remarks.

[Ajay Kochhar, President and Chief Executive Officer]

Thank you. So to summarize, we kicked off 2023 with great momentum, executing our Spoke & Hub Network strategy and growth plans. Thanks to the outstanding achievements by the team, our prospects are accelerating through increased global commercial partnerships and significant government support.

We're positioning Li-Cycle as the go-to innovative, sustainable and localized solutions provider to the battery supply chain enabling a clean energy future. We remain focused on delivering significant value to our key stakeholders and are excited to continue to update you folks as we continued to progress. Thank you for all your time and support of Li-Cycle.

[Operator]

This does conclude today's call. Thank you for your participation. You may disconnect at any time.