Loop Energy Inc

TSX:LPEN

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, and thank you for standing by. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Loop Energy Q3 2021 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions]I would now like to hand the call over to our first speaker today [ Bill Zing ], Investor Relations. Bill, you may begin.

[Unknown Executive]

Thank you, David. Good morning, everyone. Welcome to our Q3 2021 Results Conference Call. Joining me today is our President and CEO, Ben Nyland; and our CFO, Darren Ready. On Q3 2021 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 today may contain forward-looking information. Forward-looking information by its nature is subject to risks and uncertainties that may cause stated outcomes to differ materially from the actual outcome. Certain material factors or assumptions were applied in drawing the conclusions or making 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 Q3 2021 MD&A and our 2020 annual MD&A and financial statements 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 Q3 press release for the definition of and further information about products backlogs.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 a Q&A period.

[Ben Nyland, President & CEO]

Thank you, Bill. And good morning, everyone. Welcome to Loop's quarterly call for Q3 2021. Q3 has continued the strong pace of progress in the business that we've seen in the first 2 quarters of the year. Highlights of Q3 are the solid growth in the company backlog and customer base, key additions to the executive and Board positioning the company for rapid growth and excellent results in the development of Loop's next generation of products for long-haul heavy-duty trucks. Before I get into company-related updates, I'd just like to reflect on the macro market and the progress that's being made globally that we expect will have a positive impact on Loop's growth over the coming years. At COP26, over the last couple of weeks, we've seen significant movement in countries and corporate entities committing to emissions reductions. While not always in agreement on the particular path to achieve the emissions reductions, it seems evident that there is a shared view that progress needs to be made on tangible steps for being taken. The most striking of these is the announcement this week of the U.S.-China cooperation to reduce emissions. These are the 2 largest carbon emitters globally and are making the statement that is critical to the interest of both that they cooperate to reduce emissions. Combined with the recent U.S. infrastructure bill, our confidence is increasing that the U.S. will start to move more quickly towards zero-emission solutions in the near future. Specific funding in the infrastructure bill focused towards hydrogen distribution and hydrogen fueling infrastructure are expected to set the stage for larger scale fuel cell vehicle deployments in the coming years. Significant build-out of hydrogen production and dispensing also continues with hundreds of hydrogen fuel solutions being planned and coming online in Europe and in China. Closer to home, the recent announcement of the Alberta Hydrogen Roadmap indicates that one of the engines of the Canadian economy is prioritizing hydrogen as a strategic sector. We're excited about the opportunity that this should afford to deploy Loop products into the Canadian market in scale, in addition to exporting our products and technology globally. Within the context of this rapidly growing market, Loop is focused on building sustainable, profitable, high-growth company. Core to this strategy is the program that we call 1-10-100. In this market with so many companies interested in fuel cell solutions, this 1-10-100 program allows Loop to ensure we are focusing our resources on customers with clearly articulated plans to scale their own production. We believe that this approach will enable us to build a stable of customers who, over time, will be able to provide solid, predictable source of product demand and revenue growth. This strategy is already reaping rewards in both revenue and backlog. Loop's year-to-date revenue for Q3 was $1.3 million, representing a year-over-year increase of more than 350% from Q3 2020. Loop's growth in backlog from $39 million to $45 million in the last 3 months is also a strong validation of the 1-10-100 strategy. In order to be considered a 1-10-100 customers, the company must have issued Loop a purchase order and executed an MOU with Loop articulating their plan to scale through a multiphase process, ultimately resulting in a commercial offering to their customers. Loop's objective for 2021 is to have 10 customers qualified and engaged in the 1-10-100 process with one of those customers having progressed from the 1 stage to the 10 stage. We are very pleased to announce that Loop now has 8 customers in the 1-10-100 stage, and we are confident that the company will achieve the objective of 10 customers in this process by the end of this year. As you are aware, the deployment of the 10 units in the spring for integration in Skywell buses for municipal service and managing China marked the progression of our first customer to the 10 stage and the achievement of our 2021 goal of having 1 customer progress to this stage. The fleet in China continues to operate very well, now having logged over 200,000 kilometers of in-revenue service. This is the second phase of a project undertaken by Loop's Chinese partner in power for the ultimate deployment of 300 fuel cell vehicles in Nanjing. In September, we announced a partnership with METTEM-M, a developer of vehicle control systems and a systems integrator, to provide hydrogen electric powertrain solutions to commercial vehicle OEMs across Russia, the Commonwealth of Independent States and Greater Europe. Our first project with METTEM-M, a hydrogen electric transit bus for GAZ Group was displayed in September at the International Commercial Vehicle Show 2021 in Moscow, Russia. The 12-meter passenger bus vehicle is expected to enter regular city transport service in Moscow in early 2022 after completing customary road testing and vehicle level certification requirements. Under this agreement, METTEM-M will use Loops eFlow powered fuel cell modules to develop and supply hydrogen electric subsystems, powertrains and complete vehicle solutions for a variety of applications, including transit vessels, logistics vehicles and rail transport. The hydrogen electric transit bus showcased by Gaz Group at COMTRANS 2021 marks the first commercial achievement between Loop Energy and METTEM-M. The vehicle's hydrogen electric control system was developed by METTEM-M under the contract with Gaz Group, a leading manufacturer of light commercial and medium-duty vehicles, buses, powertrain and automotive components and special use vehicles. Gaz Group is headquartered in Russia. The solution is using Gaz Group's existing battery electric passenger bus platform, Loop Energy's high-efficiency fuel cell modules and METTEM-M's fully integrated hydrogen electric fuel cell system. This momentum in our customer base and development of backlog and revenue is a key part of Loop's strategy to establish ourselves as one of the leading independent fuel cell providers globally over the coming years. During the course of 2021 and 2022, the work that we are doing is what we refer to as foundation building. This involves making the necessary changes to the company to prepare for the growth of the fuel cell market in 2023 and beyond. By broadening our customer base to include a diversity of customers and geographies, Loop is setting the stage for consistent and predictable revenue growth. We now have customers in China, Korea and Europe, who have clear commercialization plans in markets that are strongly supportive of fuel cell and hydrogen development and deployment. Another critical element of the foundation-setting process is the continuous improvement of Loop's product lines and development of the eFlow technology to ensure that we are delivering against customer requirements and continuing to develop for the future needs of the market. Our current 30, 50 and 60-kilowatt products are being integrated and tested by companies around the world. The progression to the 10-phase with Skywell demonstrates that these initial deployments are delivering on the value proposition that customers are seeking. The focus in these products, over the coming years, will be to continuously improve the performance, reliability and durability of the products, while driving costs out of the systems to achieve stronger gross margins. Based on our experience in the market to date, we believe our products will be high-value products with pricing based primarily on value, not cost. eFlow's advantage to reduce the cost of the system are therefore expected to enhance our gross margin, while eFlow's performance benefits are anticipated to command a premium pricing in a mature market. Development of our next-generation products for larger commercial vehicles, such as coach buses and long-haul heavy-duty trucks, is proceeding according to plan. Loop is planning a set of products that deliver between 120 and 250 kilowatts of power. First of these products is planned for deployment into demonstration vehicles in 2022, with the commercial 120-kilowatt product expected to be available towards the end of 2022. Interest in this product is very strong and demand for prototyping units exceeds Loop's currently planned number of deployments. Early testing shows that eFlow's performance benefit can be successfully scaled to a significantly larger bipolar plate design, meaning that we are confident that Loop's products will be able to compete very effectively in these new markets. Our product development and field operations teams have focused on providing full-service customer solutions that include among other things, the fuel cell cooling systems that had long been considered part of our customers' scope. This effort has paid off with a number of recent integrations being successfully completed in an efficient and effective manner, resulting in high praise from our customers. We are also pleased to report that the build-out of the Loop Energy Shanghai manufacturing facility is well underway. Phase 1 of the buildout is anticipated to complete in January 2022 and will exceed Loop's North American production capacity. Establishment of this facility will allow Loop products to meet localization requirements in China. Having a physical presence in China will also significantly support the business development process with new customer and partner prospects, who we will be able to tour the facility and see Loop product in production. Finally, we have continued to develop the entire team in preparation for the coming years. While we started 2021 with 41 employees, we closed Q3 with 67 employees. In a market where we hear about the challenges in hiring new employees, it is tremendously gratifying to see a consistent stream of top caliber individuals lining up to join the Loop team. There is a reflection of both the momentum in the marketplace and the attraction of working with Loop to deliver world-changing products to our global customers. Regardless of how good our technology and products are, our ability to meet customer demand will be dependent on our ability as an organization to execute. For this reason, we continue to focus on building the team with results-oriented, intelligent and enthusiastic team members. I'm consistently impressed with the people who joined Loop at all levels of the organization, and I would just like to highlight a few of the recent additions to the executive team and Board. Earlier this week, we announced the appointment of Damian Towns as Chief Financial Officer, replacing Darren Ready. Damian brings over 25 years of experience in progressive and rapid growth companies, spending 15 years leading organizations at the executive level. He joins Loop Energy from Photon Control, a Richmond, BC-based optical sensor supplier to the world's largest semiconductor OEMs. As a Chief Financial Officer and Corporate Secretary, Mr. Towns' guided Photon's exponential growth and maximize shareholder revenue through its recent acquisition. He brings deep technical expertise and technical knowledge in corporate finance, financial planning, accounting, governance and Investor Relations. Damian will start November 15, providing a 2-week overlap with Darren Ready for a smooth transition. Wendy Bach has recently joined Loop following an incredible legal career. During her 19-year career at Methanex, one of Canada's most successful publicly traded international energy companies, Wendy held a broad number of positions, including Director of Investor Relations; Senior Legal Counsel, Vice President, Human Resources; and ultimately, Senior Vice President, Corporate Resources and General Counsel. For her extensive legal experience and international commercial transactions will serve Loop well as we enter into commercial relationships with companies around the world in the coming years. Her experience at Methanex, handling securities-related activities for both the TSX and NASDAQ, will also serve Loop well as we grow our presence in the public markets and consider co-listing on other exchanges.We also recently announced the addition of Peter Johansson to the Loop's Board of Directors. Peter has had extensive experience driving growth for global companies across diverse engineered products and end markets. He was recently Executive Vice President, Strategy and Corporate Development and Marketing for Accudyne Industries, where he was instrumental in approximately $4 billion of corporate development transactions. Prior roles include VP of Marketing and Business Development for both ITT Corporation and WABCO. WABCO, a global supplier of commercial vehicle controls, Peter led the company's very successful market development efforts in China, Korea, India and North America. In the short time that he had been on the Board, he has been working closely with the management team and contributing significant value to our product and market strategies.And finally, I would like to take a moment to express my most sincere gratitude to Darren Ready, who has served as our CFO for the last 5 years. During his tenure, Darren has been an invaluable member of the Loop team. His commitment to Loop's success has been evident through good times and challenging times. Although we are now parting ways, his fingerprints are forever on the company, and he will be missed. The entire company, including the Board of Directors, wishes him all success for the next stage of this journey.As we move into the last quarter of 2021, we are extremely happy with the progress that we have made so far this year in the building of our customer base, our team growth, our product development and so many other parts of our business. We are looking forward to finishing 2021 strong and carrying that momentum into 2022 to drive even more growth. Our recent customer successes have us more convinced than ever that meaningful market adoption of fuel cells is coming quickly and that lubes products are well positioned to be category leaders as the market grows and matures. Darren and I are now available to answer questions.

[Operator]

[Operator Instructions]We'll take our first question from Viveck Panjabi with National Bank of Canada.

[Viveck Panjabi, Associate]

I just wanted to ask about any supply chain and inflationary issues that Loop may be facing? And what sort of risks we should be baking in our assumptions?

[Ben Nyland, President & CEO]

That's a great question, Viveck. Darren, would you like to step in and provide an answer there?

[Darren Z. Ready, Chief Financial Officer]

Sure. Yes. So good question. I mean, I think it's -- a lot of companies are facing supply chain challenges. Thankfully, Loop, I think when we had the earnings call last time, the last quarter update, we had -- the supply chain team has done a great job of forecasting this into 2022, and we went out and started scaling up the supply chain quarters ago. So I think the company is in a good position. What we've done is to bring enough of the key components to make sure that we've got good supply into 2022. We haven't yet seen inflationary pressures coming down through the supply chain yet. But certainly, I think when you're seeing these over the last couple of weeks that may happen. But our gross margins and the pricing support on the sales side remains consistent.

[Viveck Panjabi, Associate]

Sure. And just a follow-up. Can you also probably provide some update on progress in the Chinese market? And if there's any update on the Skywell bus program?

[Ben Nyland, President & CEO]

Yes. I'm happy to give you some color on that, Viveck. So the Chinese market in general continues to be enthusiastic about hydrogen. COVID has definitely made it slightly more challenging for western companies to participate in the Chinese market, and that certainly contributed to our establishment of Loop Energy Shanghai. I can tell you that in a brief period of time that Loop Energy Shanghai has existed. It's been very well received in that market. We're seeing strong interest from commercial entities and working with the company, and we're also very excited about the production coming online there. So we feel that loop is very well positioned to participate in that market as it starts to grow. I think we also see that there have been some delays in the national program for hydrogen. There's still a very clear commitment, but those delays, we believe, are largely related to COVID, and we'll sort themselves over time -- out over time. So very pleased with where we sit in the Chinese market. I'm looking forward to what we expect to be a really active 2022 for Loop Energy Shanghai. With the Skywell bus program, as I mentioned, that's part of a larger deployment, anticipated deployment, of 300 fuel cell vehicles over the next few years. The 10 buses -- actually, 11 buses, including the first 1 that we built are in full revenue service. They're performing exceptionally well. So over 200,000 kilometers of in-revenue service. They're exceeding availability targets. So currently at 96% availability. So very, very pleased with the way that system is performing. And our understanding is that both city and Skywell are also pleased with the performance of those buses. So we're looking forward to what we anticipate to be follow-on orders. It's difficult for us to speak to the timing of that at this time.

[Operator]

Next, we'll go to Michael Glen with Raymond James.

[Michael W. Glen, Equity Research Analyst]

To start with, can you guys just maybe give some thoughts on the backlog, it's at $45 million. So how to think about how that backlog could possibly translate into top line revenue over the next year or 2?

[Ben Nyland, President & CEO]

I'll defer this question to Darren as well.

[Darren Z. Ready, Chief Financial Officer]

Yes. Thanks, Michael. So just to confirm, you're looking at the backlog itself, how what it's been building over the last little while and then how it's -- how we expect that to translate into revenue.

[Michael W. Glen, Equity Research Analyst]

Yes.

[Darren Z. Ready, Chief Financial Officer]

Yes. Okay. Thank you. Yes. So as Ben described in how we calculate the backlog, we're looking at firm MOEs, POs from customers for at least 1 unit and then MOUs for the follow-on numbers, and so -- and this is within a 24-month period. So currently, for the next -- for the remainder of Q4 of this year and into 2022, we're not providing guidance, as we've described, but we see that the backlog number will continue to grow over those time periods. And so from a revenue perspective, I think this year, we're going to be looking somewhere around the $2 million revenue number potentially. Into next year, we haven't provided guidance at that yet, but we see the backlog there continue to grow.

[Michael W. Glen, Equity Research Analyst]

Okay. And I'm just trying to get some idea, do you see -- so $2 million in 2021, the way things are lining up, you would be able to say that you would expect something higher than that in 2022?

[Darren Z. Ready, Chief Financial Officer]

Okay. Yes, certainly, for 2022, yes, that's the expectation. So again, we provided some rough discussions around $1.5 million to $2 million for 2021. We're not providing guidance into 2022 at this stage. But yes, we're certainly seeing from a backlog perspective, given that, of the $35 million, $37 million that was reported in Q3, we've recorded revenue of that -- of the $1.3 billion.

[Michael W. Glen, Equity Research Analyst]

Okay. And circling over to the METTEM-M partnership that you were speaking about. Can you just -- I'm just curious, can you just provide a little more context. Like, when you're working with METTEM-M, what exactly is METTEM-M bringing to the relationship in terms of capabilities or supply chain sourcing that Loop does not have itself?

[Ben Nyland, President & CEO]

So happy to speak to that. So METTEM-M has a tremendous amount of experience in the Russian market and the Eastern European markets and actually acquired Continental Service division some time ago. And so they have a good, broad network of capabilities to support vehicles that are deployed. And they also have strong integration capabilities. So you may have seen one of our competitors made an acquisition of a company this morning to provide integration expertise to the company. We choose to partner to access those sorts of capabilities. We feel that, that's a very scalable way to grow our business. And so that's what our expectation is with respect to METTEM-M's strong local market expertise, great relationships with vehicle manufacturers, like Gaz Group, and also the ability to support in the aftermarket service arena.

[Michael W. Glen, Equity Research Analyst]

And can you speak to, is there an opportunity? Or does it make strategic sense for you to acquire an integrated business like METTEM-M in another market?

[Ben Nyland, President & CEO]

That's not really a discussion that we've had, and so I can't really comment on that at this time.

[Michael W. Glen, Equity Research Analyst]

Okay. And for these type of integrator relationships, is it -- when you talk about -- when you think about the scalability of the relationship, is it scalable outside of Russia? Or in each individual market, you would have to establish a partnership with an in-market integrator?

[Ben Nyland, President & CEO]

Well, each integrator has a different geographic footprint. In the case of METTEM-M, as I mentioned, it's both Russia and Europe, and so they cover a broader set of geographies and customers. But we also have relationships with Alliant Group, who are also [indiscernible] integration function in Europe. I think it's important to understand that each of these companies has strong expertise in electric powertrains and Loop is designing our products so that they're easily integrated into an existing electric powertrain. And so having a broad base of integrators gives us greater reach into other customers. And as our product is designed to be easy to deploy, having a good network of integrators will be, we believe, a competitive advantage for us moving forward.

[Michael W. Glen, Equity Research Analyst]

Okay. And then maybe just -- in terms of other parts of Europe, Germany and France and perhaps just discuss the U.K., can you talk about some of the customer activity or potential that you're seeing to take place in those markets right now?

[Ben Nyland, President & CEO]

Absolutely. So we've had a number of announcements this year with respect to different customers, including Morello, Alliant. We're seeing strong growth in the bus market. There are at least a couple of customers in that 8 customer list that we have not yet announced their names. And so where we're seeing the strongest push, if you will, from an application perspective, is municipal buses, fork equipments and medium-duty trucks and vehicles such as that. And so I think you'll see some announcements forthcoming around customers in those markets over the coming months, and we continue to see good growth in those markets because they're well positioned to scale as more fuel -- more hydrogen fuel comes along in the European market.

[Operator]

And next, we'll go to Roshni Luthra with CIBC.

[Roshni Luthra, Research Analyst]

Darren, I just wanted to follow up on Viveck's question earlier about growth in China. And I was just wondering like are there -- do you have any like timing of government initiatives despite the COVID delays, like, are you hearing anything in terms of timing?

[Darren Z. Ready, Chief Financial Officer]

Yes, I'll answer that and then follow up. I think certainly, 2021 was a little more quiet from the specific China announcements with related to COVID. I think they kind of -- their economy was a little bit slower. They were taking care of that initiative. I think what we've seen in the last kind of 8 to 12 weeks is a ramp-up of those activities. We do see a lot of information flowing through yet, nothing official yet. But I think what we're hearing from our partners on the street in China is all really positive, again, to the Skywell bus fleet going well, continuing to outperform what we see in the markets with other customers in China. I think that we're going to see follow-on orders coming into 2022 around that. And certainly, the global movement in the last month around this climate change has been a huge step forward in the right direction. And I think you're seeing some of the strategies coming back online to be coordinated with this climate change initiatives.

[Roshni Luthra, Research Analyst]

Right. Great. And then, just for next year, are there any preliminary figures you can provide for maybe like your sales and marketing spend as well as CapEx for next year?

[Darren Z. Ready, Chief Financial Officer]

Yes. I mean if we can provide some initial indications, we're still working through the budget process today. We'll come back in the early part of next year with more details around that. We are, as Ben noted, hiring very quickly. We're ramping up in all areas of the business. And one of the main focuses is in the business development area. We've got rich satellite offices over in Europe. We're going through a process right now to scale up again in China, certainly with the border situations and things like that, we're going to keep growing more domestically in those markets in Europe and China. And so you'll see a great investment into those areas. We've attended a lot of trade shows recently, which has been great. We were just recently in Korea at the Canadian trade show commission site and over in Europe as well. So I think a lot of fun activity has been interesting times over the next year.

[Operator]

[Operator Instructions] I'm showing no further questions, I'll now turn the call back over to CEO, Ben Nyland, for any additional or closing remarks.

[Ben Nyland, President & CEO]

Great. Thank you, David. Thank you again to everybody that attended this call for your ongoing interest in and support of Loop Energy. We've been really pleased to share with you today about the performance of the company and how we're exceeding business performance expectations that we set out during the IPO process and are looking forward to finishing out 2021 strong, setting the stage for further successes in 2022. Thank you very much.

[Operator]

This concludes today's conference call. You may now disconnect.