Loop Energy Inc

TSX:LPEN

Earnings Call Transcript 2020-Q4

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the inaugural Loop Energy conference call. [Operator Instructions] I would now like to turn the conference over to Ben Nyland, President and CEO. Please go ahead.

[Ben Nyland, CEO, President & Director]

Thank you, Therese, and welcome, everyone, to Loop's first conference call as a public company. We're very excited to be having this. We've already put the $100 million raised in our IPO to work, expanding our customer base and manufacturing capacity. For those of you just getting to know Loop, I'd like to take a few minutes to introduce you to the high points. At Loop, we believe, we have the team, the technology and the products to become a dominant player in the fuel cell market as it develops into more than a $50 billion opportunity over the coming decade. Our team is composed of seasoned executives with deep experience in fuel cell and automotive development, new product launches and high-growth enterprises. We build fuel cell stacks and modules for use in zero-emission commercial vehicles. We have a global footprint with headquarters in Vancouver, Canada, regional sales in Europe and China and regional manufacturing with our joint venture partner in China. With an expanding customer base in North America, Europe and China, we're positioned well to grow our market footprint over the next few years. Our products are based on our core proprietary and patented -- patent-protected eFlow technology. eFlow gives our products competitive advantages in the areas of fuel efficiency, maximum power output and durability. Our fuel cells have up to 16% better fuel efficiency than comparable competitors' products, leading to significant savings in the total cost of ownership for vehicle operators using Loop's products. This advantage is proven to be compelling to the market as evidenced by our rapidly growing customer engagements. Our fuel cells further deliver up to 90% higher peak power than the same sized competition. This benefit of putting more horses under the hood will help vehicle OEMs provide end customers with more versatile vehicles as the market grows and customer demand grows with it. Customers will demand greater versatility and power in their zero-emission vehicles, and Loop's products are well positioned to deliver those benefits. And finally, eFlow delivers something we call uniform current density. This balancing of the fuel cells production of electricity, heat and water leads to a more stable operating environment that eliminates a number of known lifetime failure modes in fuel cells. Our technology has led to investments from leading industry players. First, from InPower, a Chinese power electronics manufacturer with whom we now have a manufacturing joint venture in China. This was followed by 2 investments from Cummins, one of the leading developers and manufacturers of commercial vehicle powertrains. The first investment from Cummins was in the fall of 2019. Following a deeper due diligence process involving multiple site visits, the second investment was made by Cummins in March of 2020. Over the course of 2020, we continue to expand our technology with the launch of a development program for our next-generation fuel cell stack, which will further leverage eFlow to the benefit of our customers. The next-generation fuel cell stack will open up new markets and applications for Loop, including the long-haul heavy-duty trucking market. We have also started a program to better understand the benefits of eFlow when used in electrolyzers. While we are in the early stages of this process, we believe that the benefits of eFlow to electrolyzers will be similar to the benefits we see in our fuel cell products, specifically greater efficiency, higher performance and greater durability. These benefits could position Loop well to participate in the growth of the green hydrogen market over the coming years. In spite of the pandemic, 2020 has been a very successful year in terms of customer engagements across a full range of our target markets. The value proposition of our products has been resonating with the market. Over the last 18 months, our sales funnel has grown from 2 to over 100 actively engaged potential customers, and our backlog expanded from 0 as of January 1, 2020, to over $16 million at the end of January 2021. We will provide updated backlog numbers each quarter starting at our next quarterly call in May. In the transit bus vertical, the integration of the Loop fuel cell module with the Skywell bus resulted in the bus being successfully indexed for sale in China. This marks the completion of the first stage of an MOU signed by our joint venture partner, InPower, with the Lishui Economic Development Zone for the deployment of up to 300 fuel cell vehicles in Nanjing, China. We are looking forward to the next stages of this project as China continues to roll out its hydrogen strategy. We've continued to develop opportunities in the heavy-duty trucking space as well. Just last week, we announced our relationship with Rheintal-Transporte to supply fuel cell systems for the deployment of zero-emission heavy-duty trucks in Rheintal's fleet. This project complements the work we have been doing in California with Meritor, Peterbilt and the Gas Technology Institute to integrate Loop's fuel cell systems into an electric version of Peterbilt's 579. The 579 is one of Peterbilt's industry-leading Class 8 truck offerings. We are very excited to be involved in developing a zero-emission fuel cell version of this best seller. The Peterbilt truck is currently undergoing acceptance testing prior to being delivered into service as a drayage truck in the port of Los Angeles. This foundational work is part of Loop's strategy to ensure that we are a go-to supplier of fuel cells to the heavy-duty trucking space as that sector seeks to adopt zero-emission solutions. Our off-road applications are also gaining traction. A few weeks ago, we announced our partnership with Morello, a leading manufacturer of heavy-duty materials handling equipment. With Morello, we will be jointly developing zero-emission powertrains for heavy-duty logistics equipment. Morello builds heavy-duty yard trucks, forklifts and reach stackers, among other vehicles. These segments are very well suited to fuel cell deployments, and we have designed our products to perform in these challenging environments. All of these projects are very important as we look towards opportunities in California, China and Europe over the coming years and decade. All 3 jurisdictions have set very aggressive targets with respect to zero-emission vehicle deployments. Loop's technology and products are ideally positioned to play a key role in accomplishing these goals. Stationary power applications have emerged as an important market for us as well. We have started 2021 on a great foot, and we're very pleased to announce this week that we have shipped our first ever product to Europe. It's a 50-kilowatt unit that will be deployed in a stationary power application by ECUBES, a customer that we announced in January. This is the first of many product shipments announcements we expect to be making in the coming weeks and months. So between our deployments in California, China and Europe, Loop is very proud to be one of only a handful of fuel cell companies with a global footprint and a diversified dynamically expanding customer base. In the area of Loop's executive management team, we added George Rubin in January of 2020 to help us put together our commercialization strategy. George is a seasoned clean energy industry executive, whose work during 2020 has positioned Loop to benefit from the expected growth in the European market over the coming years. As our newly appointed Chief Commercialization Officer, George is now turning his attention to how best position Loop in other global markets and is well on his way to doing so. We hired Dr. Daryl Musselman in the spring of 2020 as VP, Engineering, bringing his considerable experience in designing, building and launching clean energy products to bear on our product development efforts. After a very successful first year at Loop, we were pleased to promote Darryl to COO shortly after the IPO to ensure the strong ties between product development and operations are preserved and strengthened as Loop continues to grow. Since the IPO, we have also hired Lisa Beck as VP HR. As with the rest of the executive team at Loop, Lisa brings deep experience that will support Loop's ambitions to grow quickly and sustainably over the coming years. With the addition of George and Lisa and the promotion of Darryl, we feel we have assembled a leadership team with a proven track record to successfully grow Loop for years to come.With all of these developments and our current opportunity pipeline, we believe Loop is very well positioned to be a top 5 fuel cell provider to the zero-emission commercial vehicle market. We believe Loop's value proposition is ideally suited to address the total cost of ownership concerns of the commercial vehicle operators and make zero emissions a viable economic solution for the replacement of internal combustion engine vehicles. The next 2 years are foundation building years for Loop. We have industry-leading technology, a great team and great products. Over the next 2 years, we will be working with customers to refine and prove our product capabilities, while we put in place manufacturing capacity to grow with the market as demand scales. As we have discussed, our focus will not be on growing top line revenue over the next 2 years, but rather on building a solid customer base and product offerings, which, we believe, are foundational for Loop to capitalize on the rapid growth we anticipate the industry will experience in the years to come. Having said that, we recognize that there's tremendous value in having clear metrics to guide our business and for investors to be able to measure our performance. So I'd like to give you some insight into how we will be measuring our progress through the next 24 months. In almost every customer and prospective customer we are engaged with, we see a 3-phase process to the development of each relationship. First phase is a product and vehicle design validation and typically involves the customer ordering 1 or 2 units. The second phase is the deployment of a pilot fleet, and typically involves ordering approximately 10 to 20 units. The third phase is the commercial launch of the customer's product. While size varies based on the customer, at Loop, our rule of thumb is that on average, the transition to Phase 3 involves an order of approximately 100 or more units. We measure our success based on how many customers we are bringing into this process over time and how well they are progressing through these phases. Depending on the customer size and type, each phase can last anywhere from 9 to 24 months. The metric that we will be using as we progress through 2021, is that by the end of the year, we expect to have a total of 10 customers actively engaged in this 3-phase process, with at least one of those customers transitioning to Phase 2. As of today, we're pleased to report that after 3 months, we are now at approximately 30% completion of this annual target. We're looking forward to checking in with you on these quarterly calls to update you on our progress towards these goals. And now I would like to hand the call off to Darren, so that he can take you through the 2020 financials.

[Darren Z. Ready, CFO & Corporate Secretary]

Great. Thanks, Ben. So during 2020, we spent a total of $7.7 million to support the overall operations of the company. Approximately 79% of this or $6.1 million was related to product development initiatives. This included our first investment into the business development of the company and also supporting general and administration. Within our product development group, our main focus in 2020 was to continue the development around our eFlow stack and further work through the refinement of our fuel cell module. During 2020, the company also invested $0.7 million into its testing and manufacturing facilities here in Vancouver to bring the total invested capital to date to around $2.5 million. As we look to 2021, with the successful completion of our IPO back in February, Loop Energy will plan to focus throughout 2021 on the heavy- and medium-duty motive applications, also including bus, commercial trucks, as well as stationary and material handling markets with the goal to continue to increase our geographic penetration in China and Europe, while continuing our presence in California. The company has also received several inbound opportunities in additional geographic markets, and therefore, we anticipate projects that may begin to expand the reach beyond these initial key markets. What we look for in terms of investments for 2021. In the product development and technology groups, Loop will invest into product innovation and development across these bus and truck markets as well as stationary and material handling markets. Part of the investments will go into research and development on a next-generation MEA as well as work in our bipolar plate for use with eFlow. We will also look to expand our product development team as we look to increase our fuel cell offerings into larger power applications. We also expect to have a significant increase in capital asset deployment in 2021 when compared to 2020, as we expand our in-house testing and end-of-line manufacturing capacity, both here in Vancouver and in China. Specifically for China, during 2021, the company does not expect to make any additional investments into its Chinese joint venture with InPower. InPower has proven to be a reliable partner, and we will continue to support the JV through our operational team here in Vancouver and to supply our eFlow stacks to the joint venture. We will, however, start the process of setting up our own 100% wholly-owned and operated subsidiary in China for the assembly of our proprietary eFlow stacks and fuel cell modules, as well the initial stages of setting up the bipolar plate manufacturing line. Further to this, we are actively looking to expand our business development efforts in China through the recruitment of key staff. For Europe. In Europe, Loop has just started the deployment of fuel cell modules into that market and expects to deliver more modules to support deployments of fuel cell electric buses, material handling units and modules and stationary applications in various countries throughout the European Union. The company anticipates increased market activity in the EU for 2021, which can be expected to result in additional module purchase orders for deliveries in future years. For North America. In North America, Loop expects continued market activity for fuel cell power trucks, which could be expected to result, albeit smaller numbers than what we're seeing in Europe and China, but some purchase orders coming in 2021 for delivery in future years. Consistent with the company's practice in this early stage growth of the hydrogen fuel cell market development and adoption and in view of the ongoing uncertainties resulting from COVID-19, Loop is not providing specific financial performance guidance for the coming year. Thank you.

[Operator]

[Operator Instructions] The first question comes from Hamir Patel with CIBC Capital Markets.

[Hamir Patel]

Ben, you provided the backlog at the $16.4 million at the end of January. I know you subsequently announced the Morello and Rheintal-Transporte agreements. Were those 2 relationships already in the backlog number? Or would those be additive to it?

[Ben Nyland, CEO, President & Director]

They would actually be additive to it, and there's a fair amount of activity going on right now. And so we -- as I said, we'll be updating the backlog at our next quarterly call, so that we can make sure we're giving you good guidance on that.

[Hamir Patel]

Okay. Great. That's helpful. And you mentioned you're looking at the opportunity for eFlow in electrolyzers. Just curious how you think about approaching that just given maybe your smaller scale than some of your competitors. Can you kind of do both? Or is that maybe something where you'd maybe license your technology to somebody else to advance?

[Ben Nyland, CEO, President & Director]

Yes. So the quick answer is we're open to a number of different business models with respect to the electrolyzer market. You're correct that we will be very careful to make sure that we're not fracturing our resources or distracting resources and make sure that whatever we do in the electrolyzer market is sustainable with the fuel cell business that we're building.

[Operator]

The next question comes from Rupert Merer with National Bank.

[Rupert M. Merer, Managing Director and Research Analyst]

So Ben, when you look at the scale up of the bipolar play, can you give us more color on the process? How much work is left to be completed on that scale up? And what's the timing for release, I suppose, into Phase 1 valuation?

[Ben Nyland, CEO, President & Director]

Sorry, Rupert, are you talking about our next-generation stack or manufacturing...

[Rupert M. Merer, Managing Director and Research Analyst]

Yes.

[Ben Nyland, CEO, President & Director]

Okay. So that next-generation stack is in the early stages right now of what we call proof-of-concept testing. We'll have our first full-size prototype stacks. They're planned to be active at the end of this year, with initial prototype vehicle deployments planned for the first half of 2022.

[Rupert M. Merer, Managing Director and Research Analyst]

Okay. If any sense of what the performance of that stack will look like versus the smaller stack? And any changes in cost, any opportunities for lower cost?

[Ben Nyland, CEO, President & Director]

So we'll provide more details as we move forward on this. One of the reasons that we were -- we've developed this is to access new applications and new markets that require a larger stack. But there are economies of scale with going to this larger stack, both with respect to cost and with respect to performance. And so we do see improved performance despite the fact that our first generation has exceptional performance, especially relative to competition. We will see that performance improve in this next-generation stack. And because we're scaling to larger systems that have a higher percentage of active area in the stack, we'll also -- we also expect to see cost improvements.

[Rupert M. Merer, Managing Director and Research Analyst]

Okay. Great. And then second, Darren, you talked about investing into a 100% owned sub in China and investing in your bipolar plate production line and I think some testing equipment as well. Can you give more color on where you plan to spend this year? What does the timing look like and the quantum of expenditures that we should look for in 2021?

[Darren Z. Ready, CFO & Corporate Secretary]

Yes. So as we've talked about in the use of proceeds that's in the prospectus, the split between the -- in the $100 million was about $60 million, $65 million into capital assets across the whole company over 2 years. And so within that, we expect probably about $10 million to $15 million of that to go into China for that bipolar plate manufacturing line, for the stack assembly and the module assembly [indiscernible] 18 months.

[Operator]

[Operator Instructions] The next question comes from Michael Glen with Raymond James.

[Michael W. Glen, Equity Research Analyst]

Ben and Darren, are you guys able just to give an update on any timing associated with when we might hear something with respect to the Chinese hydrogen road map?

[Ben Nyland, CEO, President & Director]

That's a great question, Michael. We continue to be actively involved in discussions, obviously, with our partners in China, understanding how that gets staged up. There are -- have clearly been delays in the process of getting the 5-year plan in place that are primarily COVID related. But we do see the hydrogen road map moving forward. So it's our understanding that 3 of the major cities, Beijing, Shanghai and Guangzhou have been approved as hydrogen cities officially, and that others are in the queue and waiting. What we can tell you is the partners that we have on the ground are moving forward confidently at this point. So we expect some good positive announcements over the next few months with respect to China and in general, and with Loop specifically.

[Michael W. Glen, Equity Research Analyst]

And can you help maybe just explain a little bit more like what does this potentially mean? Does this mean for you that the Nanjing bus deployment gets accelerated? Or are there additional opportunities that you see taking place as well?

[Ben Nyland, CEO, President & Director]

So specifically with respect to the Nanjing fuel cell vehicle deployment, we see this as a positive reflection on that project and the opportunity to move it forward. The question of whether it gets accelerated is a good one, and we'll have to see. We do have confidence that we'll move forward according to the plan, which was obviously delayed somewhat during COVID in 2020. The next phase is the deployment of a pilot vehicle fleet, and we're confident that, that will be happening soon. With respect to the opportunity with other customers, We are also seeing opportunities in China with other customers. And so we'll continue to expand on all fronts.

[Michael W. Glen, Equity Research Analyst]

And just the pilot fleet, can you just remind how many vehicles that is, exactly?

[Ben Nyland, CEO, President & Director]

It's anticipated to be 10 buses.

[Michael W. Glen, Equity Research Analyst]

10 buses. Okay. And that will happen over the next -- what you say over the next few months?

[Ben Nyland, CEO, President & Director]

Yes. I would say that we've got a certain amount of control over it in terms of how we deliver our systems. There are other things that we can't control in China as well that obviously impact the time line, but we're definitely looking to see that deployed over the next 3 to 6 months.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Ben Nyland for any closing remarks.

[Ben Nyland, CEO, President & Director]

Well, we'd like to thank everybody for attending this first call for Loop as a public company. As I mentioned at the beginning, we're really excited to be a public company. We're excited to have the funds from the IPO and be able to deploy those for the benefit of our shareholders. At Loop, we believe we've got the team, the technology and the products to be a dominant fuel cell player, and we are getting to work about the business of doing that. So thank you, everybody, for attending. We look forward to seeing you again on our quarterly call in May.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.