Loop Energy Inc

TSX:LPEN

Earnings Call Transcript 2023-Q2

[Operator]

Good afternoon. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2023 earnings conference call for Loop Energy. [Operator Instructions]

Loop Energy, you may now begin your conference.

[Natalie Arseneau, executive]

Hello, and welcome, everyone. Thank you for joining us this afternoon for the second quarter 2023 Earnings Conference Call for Loop Energy. Joining me is our President and Chief Executive Officer, Ben Nyland; and our Chief Financial Officer and Corporate Secretary, Paul Cataford. We will be available for sections at the end of the call.

Before we begin, I would like to clarify that our comments today will include statements and answers to questions that could affect future events and financial performance and could include the use of non-GAAP and non-IFRS measures. These statements are subject to risks, uncertainties and assumptions accordingly. Actual performance could differ materially from statements made today, so please do not place undue reliance upon them.

We also disclaim any obligation to update forward-looking statements, except as required by law. I ask that you read our legal disclaimer and refer to our risks and assumptions outlined in our public disclosures, in particular, the section entitled Forward-Looking Statements and Risk Factors in our annual information form for the year ended December 31, 2022, and our filings, which are available on SEDAR+.

Second quarter results were released today after market. The press release of financial statements and MD&A are available on SEDAR+ and our website at loopenergy.com.

I would now like to turn the call over to Ben Nyland.

[Ben Nyland, executive]

Thank you, Natalie. In my remarks today, I will update you on the 3 key initiatives we've been focusing on in the first half of 2023, and then I will provide some brief comments on our strategic engagement with the company's financial adviser, Credit Suisse. Following that, I will pass the call over to Paul Cataford to provide a summary of our second quarter financial results. And following Paul's comments, we will open the lines for Q&A.

We remain focused on projects and design wins that provide clear near-term value creation and market opportunities. In this regard, let me update on the initiatives that I mentioned on our last call. First, we have been working aggressively on completing the development of a low-profile 60-kilowatt unit, which is targeted at the European municipal bus market where the demand is for low-profile fuel cell systems designed for rooftop installations. Our OEM bus transport customers are seeing municipal purchases making their decisions based on reduced emissions and climate change mandates. This is a key growth market for Loop.

And in the second quarter, we announced the Polish electric bus manufacturer, ARP E-Vehicles, has selected our T605 fuel cell system for its new hydrogen-electric bus platform. This announcement marks Loop's third win with European bus manufacturers and its sixth win globally. Under the agreement, our rooftop fuel cell system will be integrated into ARP's new 12-meter hydrogen-electric transit bus for the European market. We anticipate delivery of the first T605 will take place in Q4 2023.

Further, on Tuesday, we announced that our value-added distributor in South Korea, NGVI, has secured a supply contract for a hydrogen-electric bus project with the second municipality in that country. This mark Loop's second design win in South Korea in less than 1 year, and provides strong validation for our product in the bus sector. It is also a strong signal of the South Korean market growth potential and accelerated demand for fuel cell adoption. The 2-year government project will see the hydrogen-electric bus put into operation in the hydrogen hub of Busan in South Korea in 2024. By way of background, the serviceable market for fuel cell electric buses across Europe, South Korea and Australia is estimated to be up to 12,000 units per year.

The second key initiative we have been working on is completing the vertical integration of the bipolar plate manufacturing process for our next-gen products. This has been progressing well, and we are bringing the plate manufacturing in-house at our Burnaby facility to improve our product development process and engineering agility. We see this as one of the key pillars to reducing our cost of goods and improving our gross margins over time.

The third key initiative is sourcing a strategic partner to develop an electrolyzer using Loop's proprietary eFlow technology. The preliminary test work with Fraunhofer ISE shows that Loop can deliver greater efficiency and compelling value in the development of electrolyzers. Our Chief Scientist, Sean Mackinnon; and our Chief Commercial Officer, George Rubin, have been having productive discussions and workshops on this with potential strategic partners, so I will provide you with more of an update on that during my next quarterly call.

Now let me provide a brief update on the strategic initiatives we are undertaking with our financial adviser, Credit Suisse. We remain pleased with the level of interest and engagement from potential investors, acquirers and government partners. In general, we can say that over the last 5 months, we've reached out to over 120 companies and organizations and continue in active discussions with a number of interested parties. Given the current state of the capital markets and industry, potential investors and acquirers are being thorough. Both the Board and the management team remain open-minded and committed to this process and are taking into consideration the best interest of all our stakeholders, including our employees, partners, customers and of course, our shareholders.

In conclusion, I would say that the global demand for fuel cell solutions in 2023 is very similar to 2022, supporting the comments that we provided last quarter. In this current macroeconomic environment, we continue to see longer decision-making time lines, which have led to delays in commitments and rollouts. This is impacting demand across the value chain, and we are continuing to work collaboratively with our customers and suppliers to adjust our production schedules accordingly. We expect full year revenue in 2023 to be in line with or slightly above 2022 on a year-over-year basis, subject to current market uncertainty and the risk factors that the company has outlined in the quarterly MD&A and annual information form.

With that, I will now turn the call over to Paul Cataford for his review of the second quarter financials for 2023.

[Paul Cataford, executive]

Thanks, Ben. And I'll now review Loop Energy's results for the 3-month period ending June 30, 2023. Year-to-date revenues of $1.2 million remain unchanged year-over-year. In the second quarter, we recorded $300,000 in revenue compared to $1.1 million for the same period in 2022. At this time, we expect full year revenue in 2023 to be in line or slightly above 2022. At the gross margin level, we reported a quarterly loss of $2.7 million in Q2 2023 compared to Q2 quarterly loss of $2.5 million in 2022. As the company is collaborating with numerous OEM customers and early stage product commercialization at low volumes, we expect gross margins to remain negative until our unit volumes increase to commercial levels.

In the second quarter, our operating expenses after cost recoveries were $5.6 million compared to $7.7 million in the same quarter last year. While we did have some cost savings in Q2 resulting from the reduction in workforce that we implemented in Q1, we expect operating costs to continue to decrease in the second half of the year as we continue to work to improve our operating efficiency and to reduce manufacturing costs and engineering costs. The company's net loss in the second quarter of 2023 was $8.2 million compared to a loss of $9.9 million in the same period of 2022. On a year-to-date basis for Q2, the net loss was $15.5 million compared to a year-to-date loss in 2022 for the second quarter of $18 million.

Loss per share in Q2 2023 was $0.24 compared to loss per share of $0.29 in Q2 2022. CapEx in the second quarter this year was $1.5 million, unchanged from the second quarter of 2022. Capital expenditures in the second half are resulting from prior period commitments made and are very modest. Cash and cash equivalents at the end of Q2 2023 was $9.9 million compared to $13.2 million at the end of the first quarter. This year burning -- first quarter this year, burning only $3.3 million in cash during the second quarter after cost recoveries. The company continues to believe it has adequate cash resources and funding commitments to continue operations until the end of the calendar year.

Thank you. This concludes our prepared remarks, and we will now turn the call over to the operator for questions and answers.

[Operator]

[Operator Instructions] We will take our first question from Rupert Merer, National Bank.

[Rupert Merer, analyst]

Good evening, everyone. Wondering if you can talk about how your sales pipeline has evolved over the last few months? And are you seeing any activity in that pipeline that is -- as a result of your strategic plan discussions?

[Ben Nyland, executive]

Rupert, thanks for joining. Great question. So we're continuing to see the sales pipeline develop. I think it's important to note that a number of projects are being pushed out and delayed, but we haven't had any cancellations, which is great. I think it's indicative of the market. Right now, the customers are optimistically being cautious about the process. I can't really speak to elements of the strategic process and whether or not that's affecting things, but I'd say we're happy with the sales funnel at this point, and prospects continue to come.

[Rupert Merer, analyst]

All right. Great. And maybe even as part of the strategic review, I'm sure you're gaining some insights into your competitive position in the market. Just wondering if you have any thoughts on your relative efficiency or cost potential in your product. Any more insights into your competitive position?

[Ben Nyland, executive]

I would say that the strategic review has really reaffirmed for us our thoughts on the competitive value of eFlow and the quality of the products that we're bring into the market. So it's been very good from that perspective.

[Operator]

[Operator Instructions] We'll take our next question from Mac Whale, Cormark.

[MacMurray Whale, analyst]

When you look at your discussion on the revenue being flattish in 2023, it looks like you're expecting the second half of '23 to be a fair amount stronger than the second half of '22. Is -- do you have those orders in hand? Can you speak to how your guidance continues to be that sort of in line when the sort of the orders that you're delivering seem to be a bit light so far this year?

[Paul Cataford, executive]

Yes, Mac, thanks for the question. The -- as far as the sales pipeline is concerned and so forth, it's probably a similar point to last year at the same point in time. Sales and revenues are lumpy for us. I mean it takes us a while to take the orders, process the orders, put together the materials and ship them out before we can recognize revenue. But I would say that we're in a similar position as far as sales forecast and pipeline and confidence and our ability to execute at the end of the year as we were last year. So last year was a strong second half. I think -- relative to the first half, I think we're going to see the same thing at this -- in this fiscal year.

[MacMurray Whale, analyst]

Okay. When you look at the latest news items you went through, that shift to municipal buses seems to be dominating the activity level this year versus more commercial truck last year. Is that -- can you give us sort of an update on what's happening in the commercial front? I know things sort of slowed down, and I'm wondering can -- are we into sort of a situation with the bus market that's different than the commercial market. Can you give us sort of some insight into maybe the buying patterns that make the differences in the way those buyers may behave over the course of the next 12 months?

[Ben Nyland, executive]

Yes, absolutely, Mac. So the buyers are very different, and they're driven by different mandates. So the truck market tends to be driven by private commercial fleets. So think of companies like FedEx, UPS, those sorts of companies. What we're seeing in the buying behavior in that the adoption of new technologies into those fleets have slowed as a result of the economic conditions -- prevailing economic conditions and their concerns about operating costs.

The municipal bus market, the buyers tend to be cities. Those cities tend to have mandates to continue to reduce emissions in spite of current economic conditions. And so that buying activity continues. Now that being said, even at the city level, we are seeing that tenders are taking a little bit longer. Payments are taking a little bit longer, but those buyers continue to move forward in this market. And so we would expect, as the economy starts to recover and as fleet operators have more confidence in that recovery, we would expect the truck market to start to move again. But that's really the macro influence that we're seeing right now.

[MacMurray Whale, analyst]

Okay. And I just noticed that you pulled down another $2 million in debt. Is that all from that JGF program?

[Paul Cataford, executive]

Yes. Yes, that was all JGF human placement for capital expenditures. So we did -- the capital expenditures for '23 really were just kind of deliveries and commitments that were made in prior periods, and we already have lined up JGF -- I mean our results for that, and then we're just drawing down the JGF [indiscernible].

[Operator]

We'll go next to Fred Gatali, Raymond James.

[Fred Gatali, analyst]

Just the cost savings on the margin side. If -- on the gross margin, -- could you give a sense what's underlying [indiscernible]? And just a second part to that question. Maybe if you could discuss what sort of pricing you're getting on the raw materials.

[Ben Nyland, executive]

Yes, Paul, can you take the question on gross margin?

[Paul Cataford, executive]

Yes. So I mean, the gross margins, this is basically 3 components. If you look through the details in our financial statements, that's bill of materials, labor and overhead. As far as bill of materials are concerned, bills are tied to supply agreements and things of that sort. We haven't hit [indiscernible] scale yet, so our costs are significantly tied to what our revenues are and the reason for that negative gross margin. As we move forward to commercial levels of production, I mean into the thousands of units, we expect to get to gross margin breakeven. And then when we get to the 3,000 to 5,000 annual units of production, then we look to get to some levels of gross margin profitability in line with other Tier 1, Tier 2 automotive manufacturers is kind of the target gross margin for us.

[Fred Gatali, analyst]

Okay. And then maybe just -- do you have any update on partnerships or how the market in China is doing? A few quarters back, there was the Nanjing program. Maybe is there indication or have you had any sort of indication on the resumption of that program or that market overall?

[Ben Nyland, executive]

That's a great question. So we continue to watch China closely. As you know, we've got a facility just north of Shanghai. What we have seen in the Chinese market is during COVID, there is slowing down of fuel cell of option. Many of the municipalities were required to support COVID initiatives and 0 COVID initiatives, and that had a fairly significant impact on their treasuries. We're seeing them starting to rebuild those treasuries, and some of those programs starting to relaunch. China, we continue to expect and believe that it's going to be one of the most significant fuel cell markets in the world.

Today, most of the activity there is heavily dependent on subsidies, and the government entities that need to put those subsidies in place are still -- really burdened their treasuries from the COVID battle. So we continue to watch it closely. We do see indications of Shanghai's recent assertion of their objective to get to 10,000 fuel cell vehicles by the end of 2025 as a part of the signal that, that market is starting to move towards deployments, and we'll continue to watch for that.

[Operator]

There are no further questions at this time. Mr. Nyland, I'll turn the call back over to you.

[Ben Nyland, executive]

Great. Thank you, Lisa. I would like to conclude today's call by thanking staff and the management team at Loop Energy who have been working very diligently over the last 2 to 3 quarters, despite all the recent changes. We have a really high caliber -- a really high-caliber group of employees, and the effort and commitment is deeply appreciated. That concludes our quarterly call today. Thank you all for attending.

[Operator]

And this concludes today's conference call. You may now disconnect.