Loop Energy Inc

TSX:LPEN

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and thank you for standing by. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Loop Energy Q1 2022 earnings conference call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Bill Zhang, Investor Relations. Bill, you may begin.

[Bill Zhang, executive]

Thank you. Good morning, everyone. Welcome to our Q1 2022 results conference call. Joining me today is our President and CEO, Ben Nyland; and our CFO, Damian Towns.

Our Q1 2022 news release, MD&A and financial statements can be accessed from the Investor Relations page on our website at www.loopenergy.com.

I would like to remind our listeners that our comments and answers to your questions may contain forward-looking information. Forward-looking information by its nature is subject to risks and uncertainties that may cause stated outcome to differ materially from the actual outcome. Certain material factors or assumptions were applied in drawing the conclusions or making the forecasts or projections, which are included in the forward-looking information. Listeners are warned not to place undue reliance on forward-looking statements. Please refer to our 2021 annual information form dated March 23, 2022, for more information.

During today's call, there could also be references to product backlog. Product backlog is a non-IFRS financial measure intended to provide additional information and should not be considered as substitute for measures of performance prepared in accordance with IFRS. In addition, this measure does not have a standardized meaning under IFRS and therefore may not be comparable to a similar measure presented by other companies. Please see our Q1 MD&A for the definition of and further information about product backlog.

I would also like to caution our listeners that any projections provided today regarding Loop's future financial performance are effective as of today's date. It is our policy not to comment on or update this guidance between quarters.

I would now like to turn the call over to Loop's President and CEO, Mr. Ben Nyland, for his comments, followed by Q&A period.

[Ben Nyland, executive]

Thank you, Bill. Good morning. And on behalf of the team at Loop Energy, welcome to our Q1 2022 conference call. I'm delighted to report our strongest quarter to date and share some thoughts and highlights as we continue to lay the foundation for our future growth.

During the call today, Damian and I will focus on key themes, and we'll look to expand on these during the course of our prepared remarks. Just as a quick summary, our go-to-market strategy is proving out very well. This has been our most successful quarter to date with 24 purchase orders achieved, representing 40% of our 2022 target in just the first quarter.

A big part of this, Tevva, our customer we announced a few weeks ago has become our second customer to enter our scale-up phase with a long-term supply agreement pending. These orders also represent great diversification of our geography of our customer base, and we're seeing strong traction with both our 30-kilowatt and our 50-kilowatt product offerings.

We continue to deliver and build on our foundation. We've been attracting key personnel around the world for our North American, European and Chinese operations. Capacity build-out is on track in North America and China, and we continue to make progress towards our cost-out goals, which will come from scale and engineering advances. We continue to build our financial strength, including the recent announcement of almost $10 million of funding from the Canadian government.

Our technology continues to prove out in the field where we've seen even better-than-anticipated fuel efficiency in our fleet in China and our work validating the benefits of eFlow in electrolyzers is going extremely well. Macro themes in general continue to support the move towards hydrogen. In addition to climate change, energy security has become a major driver for countries, especially in Europe. And 28 major economies now include hydrogen strategies in their national policies. All of this is manifesting for Loop in the form of very strong customer pull from first mover and disruptor entities.

To dig more into our go-to-market strategy in our first quarter and the purchase orders. In our year-end conference call, we announced a strong start to the year, and I'm delighted to confirm we generated purchase orders for 24 units in the first quarter of 2022. Not only is this more purchase orders than the entirety of 2021, but it represents a sixfold increase on purchase orders from the fourth quarter of 2021.

I'd like to highlight 2 recently announced examples of success of our 110, 100 customer adoption cycle: Mobility and Innovation minibus and Tevva's 7.5-tonne commercial truck. In both of these companies, we collaborated and worked very closely with the customers during the sales cycle to understand both their product needs and their go-to-market strategies.

Both customers engaged in a collaborative process with our sales and customer service teams because they have plans to scale and we're looking for a fuel cell solution that could be -- they could be confident with scale with them and deliver value their customers are looking for.

M&I's minibus is the first vehicle certified in Europe with a Loop fuel cell system. At the vehicle launch event in March of '22, there was tremendous interest. The bus is designed for the smaller streets in many of Europe's older cities and provides an excellent option as those cities move towards 0 emissions. It's engineered with fuel efficiency in mind going 400 kilometers on a single fill of its 10.5 kilogram hydrogen tank.

Market reception to this bus has been very positive, and M&I has already provided Loop with follow-on fuel cell orders for additional vehicles. We're looking forward to M&I transitioning from the pilot phase to the scale-up phase in our customer adoption cycle later this year.

Tevva ran a very disciplined vendor selection process involving multiple fuel cell providers, which they down selected to 4 final candidates. Tevva invested in building demonstration vehicles for each of the 4 providers to validate the systems and product claims. Loop's integration process into the demonstration vehicle took only 1.5 days of engineering time.

Our understanding is that this integration and subsequent testing was substantially smoother and faster than our competitors. It's a testament to our product design as well as the strength of our customer support processes and team.

As disclosed in our press release, we are currently negotiating a long-term supply agreement with Tevva and are looking forward to a successful relationship over the coming years. We've been very deliberate in our go-to-market strategy with a focus on building relationships with companies that we believe will be disruptors and first movers as the industry grows, while also establishing relationships with legacy players, who may represent longer-term growth opportunities.

Tevva is an excellent example of one of the first movers and disruptors. They have a stated goal that before the decade is out, they intend to have more than 100,000 Tevva vehicles in service, which would eliminate over 100 million liters of diesel consumption per annum. We're delighted to be partnering with them to help them achieve their goals.

In addition to these great successes with our current product line, we are also seeing strong early interest in our 120-kilowatt product that we plan to roll out in the second half of 2022. Initial testing is showing increases in performance beyond even our current generation of products. And so we expect this next generation to continue to establish Loop as a leader in the fuel cell market for commercial mobility.

I'd like to now turn the call over to Damian.

[Damian Towns, executive]

Thanks, Steve, and good morning, everyone. This morning, I would like to touch upon how Loop is continuing to deliver while building on our foundation for future growth. We remain well funded to achieve our 2022 milestone with $56 million in cash and cash equivalents as of March 31, 2022.

The recent $9.75 million interest-free loan from Pacific Economic Development Canada announced on Monday with Federal Minister Harjit Sajjan not only extends our runway but also helps validate our features for the macro support for the hydrogen industry, particularly in Canada.

As we set out in our MD&A, we believe the best measure of the success of our go-to-market strategy is our purchase orders received. And with one quarter of the year gone, we are already 40% towards achieving our stated objective of tripling our purchase orders in 2022.

Our revenue was $0.2 million for the quarter. We expect to have significant variability in our quarter-on-quarter revenues based on delivery schedules and timing of orders. We recognize that our value proposition is not based on the next 12 or 24-months revenue stream, but it does help validate our go-to-market strategy, demonstrate we are gaining market traction and can successfully execute against our purchase orders.

We are currently experiencing a 3-months lag between purchase order and shipment. Revenue is recognized when it is received by the customer, which can add another month or so before being -- before revenue is recognized. Assuming we had our purchase order target, we should be on track to deliver approximately 45 fuel cell modules in 2022, which would represent a 300% increase from full year 2021.

Our most mature product is the 50-kilowatt offering and while we anticipate gaining traction with our 30-kilowatt product with the likes of Mobility and Innovation, we expect our product mix to average around 50 kilowatts.

For the quarter, we had net operating expenses of $6.2 million versus $5.8 million for Q1 2021. G&A expenses were down from Q1 2021 as a result of costs associated with our IPO in 2021, while engineering costs were up $0.8 million as we continue to develop our product portfolio including our 120-kilowatt product and our larger bipolar plate.

We invested $3.2 million into capital asset additions as we continue to build out our capacity in both Vancouver and China. We anticipate spending between $20 million and $30 million in CapEx this year. This will help us reach our production capacity of 1,000 fuel cell modules at each of our Vancouver and Shanghai facilities.

We had anticipated opening our Shanghai facility in Q2 2022, but this now may be impacted by the COVID shutdowns in China. Our investment in production capacity will enable us to meet even our most aggressive growth projections. We are starting to see some price pressures in our supply chain, particularly when it comes to wiring. But are confident that scale will enable us to leverage rights law as our production rate increases.

We are in the process of building a supply chain that can deliver against our forecasted projections while significantly driving out our costs as producing in 1s and 2s is simply not economic. We also believe that our larger bipolar plate will not only increase our TAM and open up other opportunities, but will have a positive impact on cost on the majority of our existing product offerings.

Ben, back to you.

[Ben Nyland, executive]

Thank you, Damian. I'd like to talk a little bit about our technology now and our go-to-market plans. We continue to firmly believe in the value proposition that eFlow brings to the fuel cell industry and this is being well supported by the fuel efficiency demonstrated in our initial fleet deployment and also in our successful navigation of our customer selection processes.

That being said, we're acutely aware of the great technology only qualifies us to participate in the race, and we need to couple this with a strong go-to-market strategy and a razor-sharp focus in order to win in the marketplace. We believe our recent market successes are great evidence that Loop is well positioned to achieve the lead amongst independent fuel cell manufacturers.

At the same time, we continue to invest in improving our underlying technology with the objective of opening up new opportunities in the electrolyzer field and maintaining our technology lead in the fuel cell industry. We continue to work to improve our processes such as our customer adoption cycle 110, 100 and build on our learnings as we engage with customers in the marketplace like Tevva.

We're also encouraged from our initial results in testing of the eFlow technology in the electrolyzer space. We believe the eFlow can deliver similar benefits in electrolyzers as with fuel cells. One of the most important keys to our success will be not only the team that we've assembled today, but the people that joined the Loop team over the coming years. The labor market is incredibly tight and faces a number of post-pandemic challenges, and we are not immune to those challenges. But even in this environment, we are managing to attract some outstanding talent to help us drive towards achieving our goals.

In May alone, we will see our employee count grow by almost 20% as we move past 100 employees. The success in attracting such talented individuals in such a competitive market speaks to the quality of Loop's team, technology, products and customers. And I want to take this opportunity to acknowledge the incredible commitment of our team to deliver on a daily basis.

The macro market continues to drive the adoption of hydrogen and fuel cells. Globally, energy security and climate change are now secular drivers. The conflict in Ukraine has brought energy security considerations in particular to the front burner for many countries. This is particularly evident in Europe.

In March, REPowerEU, a joint European action for more affordable, secure and sustainable energy, announced the goal to make Europe the industrial leader in clean hydrogen. As part of this strategy, Europe has proposed a hydrogen accelerator to develop the necessary infrastructure, hydrogen storage technology and port facilities to ease the demand for Russian gas and oil.

There's been a recent acceleration of hydrogen production projects in Europe as a result of hydrogen fuel cells being identified as key pillars for energy security. Because of this market activity, we continue to grow our European presence with multiple sales and service representatives. We also plan to establish a distribution and service center in Europe within this calendar year.

In Asia, China's 5-year plan continues to have hydrogen as one of the top 6 priorities concerning energy security. China continues to introduce additional hydrogen cities and has reconfirmed that it is committed to becoming carbon neutral by 2060, resulting in a push to decarbonize their roads in industrial sector. It's our belief that China's hydrogen and fuel cell sector will experience a step function type of growth that is consistent with the growth of other sectors in China, such as solar, wind, semiconductors and battery electric vehicles.

Loop's strategy in China is to ensure that we are positioned to benefit from that expected rapid growth when it happens. In order to be well positioned to benefit from this growth, we have strengthened our leadership of the China team with the addition of both the President and a key director for Loop Shanghai.

Dr. Leon Liu brings 30 years of international automotive experience focused in China and around the world. Dr. Liu led WABCO in Asia and Europe for 11 years as President, Asia region; and also as Global President, Truck, Bus and Car division for WABCO globally. We expected deep relationships in the transportation industry in China to help Loop establish a strong customer and partner ecosystem.

In addition to Dr. Liu joining the Loop Shanghai Board, we also recently announced the appointment of Hu Quan as President of Loop Shanghai. Mr. Hu brings 20 years of experience in the automotive and technology sectors in Asia, North America and Europe. He joins us from a Chinese developer of 0 emission hydrogen power cells for motive applications, where he most recently developed a 1,000 hydrogen electric forklift pilot program and launched China's first commercial fleet fuels our fleet of forklifts.

Being able to attract high-caliber individuals with the expertise that Dr. Liu and Mr. Hu bring to Loop not only validates our technology and opportunities that shows that individuals that know the hydrogen space want to come and be part of the Loop Energy team and be part of building something special.

Circling back to North America. The United States with 13% of the global demand continues to be the world's second largest producer and consumer of hydrogen. In June 2021, the Hydrogen Earthshot program established its 111 goal to reduce the cost of clean hydrogen to $1 per kilogram in one decade.

President Biden in November also secured the $1 trillion U.S. infrastructure bill, which will provide a landmark $65 billion to modernize the power grid, improve supply chains for clean energy, including hydrogen and carbon capture technology and conduct renewable energy demonstrations as well as an additional $17 billion for port renovation.

Just last week, I had the opportunity to present at the sold-out Canadian hydrogen conference in Alberta. At that conference, Alberta's Premier, Jason Kenney, announced $50 million to fund hydrogen research and the Edmonton International Airport announced a major hydrogen hub initiative involving multiple vehicle types around the airport. This new conference is a great example of the momentum in both the private and public sector to make meaningful progress in scaling hydrogen production and fuel cell deployments.

It was also our pleasure to host on Monday, the Honorable Minister Harjit Sajjan as we jointly announced that Loop had received almost $10 million of government funding. Minister Sajjan's views on what the clean green initiatives such as hydrogen and fuel cells make it clear that the Canadian government is committed to helping companies like Loop to succeed both locally and internationally.

We're now over 28 major economies with hydrogen strategies in place and the overriding themes of energy security and reducing emissions. The tailwinds are well and truly here for the hydrogen market to gain momentum, and we are starting to see this with strong customer pull from first movers and disruptors such as Tevva and M&I.

Thank you for calling in today, and Damian and I will now take questions.

[Operator]

[Operator Instructions] Your first question is from the line of Rupert Merer with National Bank.

[Rupert Merer, analyst]

So great to see the most recent partner announcements. If I look at Tevva and M&I, I appreciate you're in early stages of development with them. But from a timing perspective, roughly, what do you think they are thinking or the market is thinking about timing for mass commercialization and assuming they remain on that path, how does that match up with your production plans? What's your timing for getting to 1,000 units of capacity and will that meet your customer needs?

[Ben Nyland, executive]

So obviously, we want to be careful not to speak for Tevva other than what they've said publicly. Their goal of reaching 100,000 trucks by 2030 obviously would involve ramping up fairly quickly. And so not at liberty to disclose what their plans are with respect to what that means over the coming years. But we are working very closely with them to make sure that we can supply according to what they are expecting. And I mentioned that they had a very rigorous process that they went through not only do they have all of the capabilities of our product, but they actually had a third party audit our manufacturing and supply chain capabilities as well to ensure that we can meet their needs. So we do have a time line. It's internal in terms of getting to 1,000 units, but we're confident that we'll be able to meet the needs of the customers as they grow.

Damian, anything you would add to that?

[Damian Towns, executive]

Yes. I'd just add that both the Vancouver and the Shanghai facility that they stand you have capacity over 1,000 modules. At our Shanghai facility, we have an option for another 60,000 square foot, which would obviously give us the ability to significantly ramp up our production beyond that. That would require some additional CapEx, our capital expenditure plan for 2022 does include some new testing equipment in our Vancouver facility, which is one of our constraints, I guess, to get into that 1,000 now. And we're confident that we're going to be able to demonstrate that 200 fuel cell modules by the end of 2022 on a one-shift basis and be up to show that we can deliver that 1,000 modules out of our Vancouver facility and do similar with the Shanghai facility.

[Rupert Merer, analyst]

Okay. Yes, you haven't released the time line to get to 1,000 units per year then, have you?

[Damian Towns, executive]

No, because part of that will be the various constraints come off for example, the testing constraints. So I talked about the CapEx going in. Also when we add those additional shifts or depending on when we see the demand coming in. So we haven't put a timeline out, no.

[Rupert Merer, analyst]

Great. And then looking at the Chinese market, and I see you've updated your data and performance of the Skywell buses. You seem to be moving along well. Do you have any thoughts on the Chinese market and what the outlook is for having follow-on orders with Skywell? I realize there's a lot of moving parts in China, the schedule has been shifting. But do you have any insight? Is the picture becoming any more clear?

[Ben Nyland, executive]

Well, Rupert, I'd say in the Chinese market in general continues to move very strongly towards hydrogen. So the numbers that I've seen are in the first quarter of '22, there were almost 1,000 hydrogen vehicles deployed in the Chinese market. So that's despite COVID and despite other challenges we're facing. So great momentum in the market. We just had our President start at the beginning of April. And unfortunately, he headed straight into a lockdown in Shanghai. And so you certainly been making great progress given the fact that he's confined to his home.

So we're still seeing what can actually be done during the lockdowns and hopefully getting those taken care of. The lockdowns are also affecting Skywell and the fleet in Nanjing. So we are looking for that to improve. We see great opportunity in China. They continue to move forward. As Damian said, we're building out our manufacturing facility in that market, and we're looking forward to being able to update you on the Skywell project in particular. But right now, it's is difficult to have visibility because of the COVID lockdowns.

[Operator]

Your next question is from the line of Anne Margaret Crow with Edison Group.

[Anne Crow, analyst]

I've got 2. One, looking at the supply chain and you were discussing costs, rising costs, particularly wiring. And I was wondering, what ability you had to pass cost increases on to your customers, whether you've got any clauses in your contracts covering the cost of materials?

And then my second question was looking at your fuel cells compared with those of more established and larger competitors. And clearly, you have that efficiency advantage, but because they've been finessing their technology for a long period, they've also had quite a long time to work through successive cost down. So I was wondering what the cost comparison per kilowatt was with your major competitors?

[Ben Nyland, executive]

Some great couple of questions there. In terms of the price environment, what we tend to see is we're continuing to see, particularly and as the industry matures, that the price per kilowatt is between that sort of USD 900 and USD 1,000 per kilowatt on the units sold.

In respect of your first question in respect to the wire harnesses, we're just finding the supply chain, lots of that type stuff can come from China. So we're finding some pressure, particularly with the metal components of that. But that's only a small part of our overall bond cost. When you look at things like enclosures, the EMEA, the plates and stuff like that, that certainly makes up a much more significant component of our bond, and we suggest that would come down. We are quite significantly, particularly of some of the internal initiatives that we're taking, but also as we get scale and as we get to volume.

In terms of passing them on, the costs on, I think basically, what we do is we're quoting a module cost to our customers with some additional parts for like AC/DC or cooling systems. And I wouldn't anticipate trying to pass those on. I think that's probably a way bit of nickel and diamond right now as everyone is aware on this call, we're not at the breakeven markets mark. So we're not trying to maintain a gross margin here. I think the customer experience is more important, and we just have to offset those smaller cost increase on the likes of the harness with other cost savings in other areas. Does that help address your questions.

[Operator]

[Operator Instructions] We have a question coming from the line of Mac Whale with Cormark Securities.

[MacMurray Whale, analyst]

Just around the increase in orders in the quarter. I'm wondering if you could discuss what's behind that acceleration. Is it simply new customers and is that being driven perhaps by more funding that they're being able to access? I'm wondering if you could give us some insight into what may be behind that acceleration and how robust could it be for the balance of the year?

[Ben Nyland, executive]

So it's a combination of factors. So we're going to take credit for some of it. Our customer adoption cycle, the 110, 100, clearly, Tevva is part of that 24%. And as we mentioned, they've moved into the scale-up phase. And so our process of working -- identifying customers who are legitimately interested in commercializing product and motivated to move into scale-up is definitely feeding some of that. And so we would expect that, that type of activity will influence the balance of this year. Again, part of the reason we've given guidance that we expect to triple the number of units this year is because we can see certain customers like Tevva moving from the pilot phase into the scale-up phase.

So that would be something that we will take credit for. There are other components in there that we're not going to take credit for other than the fact that we're providing a great solution. There are more companies looking for solutions today. And so in that mix were a number of new customers that came to us from different geographies, as we mentioned, it's well distributed and the result of a lot of great work by our sales team in Europe. So we see customers moving more quickly. Some of it is related to funding. But as I say, most of the customers that we choose to work with have a specific plan to commercialize. So does that answer your question?

[MacMurray Whale, analyst]

Yes. Yes. I suppose so. And you talked about the activities this year in that marketing is expected to increase. And I'm wondering how -- when you review those activities, how confident are you that you sort of have a sales cycle relatively nailed down? If you can almost look at it and say, we can see the -- you can sort of -- what am I fishing for kind of, how you build up confidence in the pipeline transitioning into sales? And whether you're able to look at that and say, well, this is just -- these guys are going to be adding a few this year, and we don't know how serious they are or is it like the guys got their shirt sleeves rolled up. And you can tell this has now moved to the next stage. It's happening. It's a question of time. I'm just trying to get a feel for, if you're questioning your sales guys, what your assessment of the change in that? And I just don't know how to quantify, you're giving good numbers to quantify, but I guess I'm asking more for understanding the change in the climate, so to speak.

[Ben Nyland, executive]

Yes. Well, Mac, so this -- I think I want to point out that the industry is new and we're moving through a disruptive phase, right? So it's not a mature industry where you can really look at historical numbers and decide what your conversion rates are likely to be based on 10 years of sales data. So we're still learning that. A lot of what we do and a lot of what the sales team is doing is based on really having customers articulate very clearly what they're planning on doing and which customers they are planning to work with.

And you can really differentiate between someone who's willing at their sleeves versus someone who's just notionally interested. When you start getting into the details of what their plans are and if they can answer those questions. So built into our process is separating the wheat from the chaff, if you will, really trying to identify customers that are rolling up their sleeves, I would say, without question, Tevva is absolutely one of those customers, I would say, M&I, absolutely one of those customers is very serious about getting product into the market.

And we've seen in the disruptive electric vehicle companies a real motivation to make sure they've got a complete product catalog for their customers and a recognition, especially in Europe, that completing that product catalog requires fuel cells. And so that is what we're seeing in terms of conversion rates. We're getting more insight into what the conversion rate should be based on those conversations, and that's part of the reason why we've set the target of 60%. We've set it out there because we're confident we can achieve it. And we wouldn't have done -- we wouldn't have set it out there if we weren't.

So our knowledge of the funnel is growing, our knowledge of the conversion rates is growing and getting better. But we are really we've only had product in the marketplace for a little over a year. So we're learning as we go, but it's looking good.

[MacMurray Whale, analyst]

And how in those discussions, how important is cost? I mean, is it -- when you're at this stage, when you're in sort of a handful of units, is there much discussion around that or is it really more technical about form factor and performance. And it's like, okay, well, sure, we'll get cost down. We'll talk about that later. Do you know what I mean, like -- or like how do you have that discussion about cost this early when your projections are all around volume. So can you even enter into that discussion or are they more like, let's get it to work, right? I mean, I'm trying to get an idea of the evolution of that discussion.

[Ben Nyland, executive]

So Mac, that's actually one of the most important discussions to determine whether or not they're serious. So a customer that isn't worried or isn't planning to talk about what it's going to cost 3 or 4 years down the road and volumes of thousands isn't actually thinking about commercializing. So the cost discussion that we have with them tends to be most focused on what does this look like in volume over time and less focused on what does it cost today.

And so the real discussion is about when the product commercializes, how much is it going to cost? And if they're not wanting to have that discussion, that's a real signal to us about whether or not we can expect them to scale. And so I would say the 2 biggest points of discussion are, what's the performance and how can we validate that what Loop is saying is true and will be true for them. And so I outlined how Tevva went about proving that to themselves.

And the second piece is, what does this look like when we start to scale and getting confidence that Loop can supply and that the costs will be such that they feel they can scale.

[Operator]

[Operator Instructions] Speakers, there are no further questions at this time. I would like to turn the call over back to Mr. Ben Nyland, President and CEO.

[Ben Nyland, executive]

Great. Well, thank you, everybody. We really appreciate you tuning in today to learn more about it. I just want to reiterate, how excited we are about the way 2022 has started. 24 purchase orders in the first quarter is our best quarter ever, and we're very excited about moving forward into the balance of the year. We're looking forward to our next quarterly call with all of you. And again, thank you, and I just want to say thank you to our team. Once again, there's been an amazing pull to get a lot of these things done. It will continue throughout the year. We're confident that we're going to be able to deliver on what we've set out. And as I say, looking forward to reporting in next time. Thank you, everybody.

[Operator]

Thank you, speakers. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.