Calix Limited (CXL) Earnings Call Transcript & Summary

All right. Good morning, all. Thank you for dialing in. We are hosting this webinar as we made an important [indiscernible] with PLS this morning about a revised structure to advance the midstream lithium technology, and we imagine there will be some questions. Once I hand over, Calix' CEO and MD, Phil Hodgson, will provide a quick intro, then open straight up to Q&A. We intend this to be an informal and interactive session and invite you to submit your questions in one of two ways. [Operator Instructions] And with the logistics out of the way, I will hand over to you, Phil.

Excellent. Thanks very much, Christineh, and thanks, everyone, for joining this morning. Obviously, an announcement out this morning about a change in the structure of the deal with PLS. We're very excited about this structural change. It does several things for us. It realizes good value today. It reduces our risk quite considerably in the project. It's about speed of demonstration of the project, and it's about focus for our business and capital efficiency. So it ticks quite a few boxes for us, which is really good. Let's have a quick think about value first. We're getting $11.4 million back as a result of this deal. And so most of the capital that we've invested in developing the demonstration plant with PLS is recycled back into Calix. And that $11.4 million is actually pretty good value today compared to PLS' license. So they get a free license as a result of this deal. But if we do a risk analysis, if you like, of the value of that license, $11.4 million in our pocket today is really good value for us. The other thing is we're still exposed to upside value here. So as the license with PLS, as we look to license this to third parties, which both parties are still focused on, then there's still further upside that we're exposed to there. And then that comes to risk. There's elimination of downside risk here. So if we think about the commissioning process for the plant, if we think about the current chemical margins and the volatility in the lithium market, -- it eliminates the risk associated with that of operating this demonstration facility. And so for Calix, having a capital-light business model and nonexposure of our balance sheet to those sorts of risks is actually a really positive advantage for us. So no downside and only upside. Think about speed as well. We've finished construction of the demonstration plant. It's our first full-scale electric calciner. We want to get this demonstrated as do PLS. And so if the chemical market, the lithium market is volatile and there's risk there, then obviously, that means that we might delay, if you like, the implementation or commissioning of the demonstration phase until those market conditions are more favorable. But without us having exposure to that risk in the demonstration facility, this allows Pilbara to move ahead unhindered in demonstrating the technology, which is to both our interest, as I mentioned before. So and demonstration of the electric calciner is not just important for the lithium application. It's important for all of our applications in cement & lime, iron & steel, alumina. Those markets are -- alumina, for example, 20x the size of the lithium market in terms of its potential. Iron and steel and cement and lime is 60 to 70x the size of the lithium market. So demonstrating the technology at scale, full-scale electric is really important there, so speed. And the last thing is focus. Certainly, with Pilbara taking on ownership of the demonstration facility, all of the issues around commissioning and operation lithium with respect to the lithium demonstration facility, Pilbara is taking on. It allows us to really focus on those larger opportunities I mentioned before. And so the capital that's coming back into our -- into the company in the form of that cash is going to allow us to focus on those much larger opportunities, simplify our business model, as I say, focus really on a capital-light business model. And so that's the last sort of, I guess, point I want to make is the focus that this allows us to bring to those other opportunities in our business. Of course, we'll continue to work with Pilbara moving forward, as I mentioned. There's a joint approach to licensing to third parties. We are going to get paid at market rates for all the technical support. We'll continue to supply both the Pilbara joint venture and also any other licensing opportunities that emerge in this space. So we think it's a pretty good deal. It's a good deal for us. It's a good deal for Pilbara, and it's a good deal for our shareholders. So happy for any questions, I guess, Christineh, following that introduction.

Okay. So a few have already come through. First one is, do you expect the diminished royalty model to flow through to other industries, example, Leilac when the demonstration plant sponsor seeks to promote the technology?

No. So first of all, what we did originally with this deal, there were some key strategic things we were trying to do. We're trying to get the demonstration -- full-scale demonstration facility of our electric calcination unit up and running as quick as possible. It looks like that we're going to hit that. This is the first full-scale one we've got. This deal clears the way to get that commissioned and demonstrated, so tick. The second thing that we did is we did a joint venture with Pilbara originally where we were 45% nominal equity in this particular application with respect to the IP. We did that originally because there was a lot of potential upside playing in chemical conversion. And so one of the things that we did is we traded a bit of forward value in our IP for a higher stake in an equity structure for a demonstration facility to demonstrate this in lithium. So we had a bet. The lithium market has changed quite substantially structurally since then. And so with respect to this, we've dropped our equity stake, obviously. We've traded a bit of future potential value in royalties for cash in today. Compare and contrast that with, say, a Leilac or ZESTY, there, we are absolutely -- well, certainly ZESTY 100% control of our IP. And even Leilac, we're 93% in control with some investment from Carbon Direct coming into the LLAC Group in 2021. So we remain in control fully pretty much of that IP. And so that's the difference between, I guess, where we're at with Leilac and where we're at with PLS. And I just wanted to highlight that because around the original, I guess, premise behind doing this deal with PLS. And obviously, as I say, the market has changed for both of us, for us and for PLS. And so this is a sensible restructure.

So as a follow-on to that, was the original deal the right deal for Calix?

Yes, I think so. I think it certainly achieved its first aim, which I mentioned before, which is to get a full-scale electric calciner up and hopefully demonstrate fairly soon, and this deal is all about doing that. The second bit, which was about see if we get some good return on value for taking an equity stake in the application. That is no longer an aim we're trying to pursue. The last 2 years, we've been very focused around making sure our costs come down, making sure we have a very capital-light business model. So the strategy of the business as it stands today doesn't fit with that original first aim. And so that's why we're doing this restructure.

Okay. With respect to this change in structure, who approached who first? And when were discussions surrounding a change in structure first discussed?

I think we talk with PLS all the time. They're great partners to work with. We obviously, as the plant was nearing completion of construction, discussions move forward into how we progress this as quick and as best as possible. So there's no one approaching the other. It's just part of an ongoing dialogue we have with PLS about moving the technology forward to demonstrate it. They're obviously very keen. They're taking on all the risk here. That says something about, I guess, their confidence in the technology. And so they're great partners to work with, and we look forward to continuing to work with them.

Okay. Why has the market seen this as a negative?

I don't know that the market is necessarily see it as a negative. I think it's a positive. The -- I guess there could have been perceptions that the demonstration plant was a potential significant revenue earner. And under certain market conditions, it could have been. Our current view is that those market conditions have structurally changed. So compared to, say, 3 years ago, we saw significant chemical margin. So lithium price compared to spodumene price. Those days, yes, when we had a look at the original deal and we struck that original deal, this could have been quite a lucrative operation. We believe there's been significant structural change in the market since then. We've seen big battery companies integrate backwards up the value chain, absorbing the chemical converters and crunching the margins that used to be there. And similarly, companies like PLS and Albemarle have been moving down the value chain and looking at opportunities in that midstream space. And so the synergies that those guys can realize with respect to having a midstream type operation also necessarily crunch the chemical margin a bit. So there's structural change that's happened in the industry. And so I think it's prudent for us to make sure we have a capital-light business model and nonexposure to all of that volatility.

A related question to that. How can you say this is a good deal for Calix when you're giving away 80% of royalties and only getting back invested capital? It seems to spam desperation for working capital by the market's reaction this morning.

Yes. So it's -- we haven't given away 80%. I just want to be clear on that. The original deal was 45% Calix, 55% PLS on licensing the technology to third parties. So we've dropped from 45% to 20%. So we've given away a little bit there. But if we think about the invested amount in the technology to date, it's $105 million project. The Calix calciner is $8 million of that. So let's be clear that there's $90 -- whatever the math says, $7 million that's invested in a new process and a new product into a new market effectively, so a lithium phosphate market. And PLS have carried all of that investment and risk effectively. And so $8 million out of $105 million is obviously a much lower percentage than 20% of a royalty from a potential application. So on that basis, we actually are doing pretty well with respect to, I guess, a free carry in the royalty or potential application of the technology for this particular industry. Our IP is ours. Any improvement to our IP is ours. So there's no implication for any other application of our technology. And so this royalty split reflects the risk that -- and a decent return for both PLS and for Calix.

Next question is the cash likely to be recycled into cash-generating assets?

At the moment, the focus, if you like, for the business is to pursue those very large opportunities. So certainly, it will be a continuation of those. So alumina, lime & cement, iron & steel, but also the magnesium business is something that's quite interesting. Again, I won't go into numbers now because we've got our half year results release next week. But in terms of the way that, that business is performing, there's also some opportunities we're going to be looking at there to continue to accelerate that growth.

And another similar question about deploying the capital elsewhere. There's been an increase in paid studies. Will we need similar capital outlays to progress to demo stages in future JVs?

I'm just trying to unpack that question a bit, Christineh. Will there be similar capital outlays to.

Will we need similar capital outlays to progress the demo stages in future JVs? And I imagine that's on with lithium players.

So certainly not. In future sort of lithium opportunities, we'll be doing that under paid circumstances. So any technical studies or scoping studies, we're going to be charging full market rates for our engineering studies. So yes, we're not going to be expending capital. We're going to be having revenue coming in for those opportunities.

Okay. Next question is, what happens if PLS decides not to license to anyone else but just keep it for themselves?

Well, they can't. So this is a nonexclusive -- well, it's an arrangement with PLS, both PLS and Calix are absolutely focused and together on having this technology developed for industry. And the premise of the grants that the projects have received from Modern Manufacturing Initiative, from the West Australian government are around an industry solution here. Spodumene, Australia supplies nearly half of the world's lithium through its spodumene mining. We know that the industry is under pressure. You've seen in the last week or 2, the Kemerton lithium conversion facility sort of mothballing for the moment. And so the government is very keen on an industry solution here that can offer a cheaper and better alternative to production of a lithium midstream product. So there's no intention by the party to quarantine this from the industry. And yes, we're both focused on developing this as an industry solution.

With the government's clean energy bill, do you expect any contracts from the government?

That's a good question. Nothing -- I don't see anything in the immediate future, but obviously, the opportunities that can open up with respect to the way critical minerals are looked at, both here in Australia and ultimately in the U.S. I haven't seen a lithium stockpile, for example, proposal yet, but those opportunities are obviously there to be developed. It's essentially up to Pilbara to take the lead on that. We're taking the lead on the application of the core technology in processing. They're taking the lead on things like salts, lithium salt sales. So yes, naturally, Pilbara will take the lead on those sorts of opportunities.

Okay. On the 20-80 split, so is 20% of future third-party royalties fair in your opinion?

Yes. I think I covered a little bit before about the investment to date with respect to the proportion of what's the Calix capital in the overall project versus the overall project cost. And so the Calix component is $8 million out of $105 million project and $105 million, by the way, is the completion of construction. Commissioning is going to be millions. And so there's quite a bit of capital still to go to get the plant up and running. And so I think 80-20 is a very fair split. The Calix part of the technology is important. There's no doubt. And so we're punching well above the capital split in terms of the way that the royalties will be split. Because no doubt there's -- and there is IP in the hydromet process that is the majority of the capital. And so it's just the -- and also the product itself and IP around the product and the product risk. So yes, it's a fair split. It represents basically the free carried equity that we had in the project prior, except for the fact that we're now recycling our capital back out, okay? So it represents a fair split.

Okay. We've got a couple more in the Q&A box that I invite you all to continue submitting your questions. We still got 13 minutes to go. So next question is how soon will the $11.4 million be paid to Calix?

So the agreement -- the full agreements, so we have a binding term sheet. So the terms are set. The full agreements around that binding term sheet are being developed now. As soon as those full agreements are developed and they've got to be developed within 40 days, then the first 50% of that $11.4 million payment will come in. And then the second with no preconditions occurs at the end of July. So it's 2 payments, one immediately on execution of the full agreements and the second at the end of July this year.

Next question is, how does the $11.4 million payment cover all the CapEx paid by Calix? In the past, you reported a $17 million contribution.

Yes. So in terms of the original contribution from Calix, it was going to be $22 million. That was then reduced when the Modern Manufacturing Initiative fund put a $20 million grant into the project. That was reduced to that $17.5 million. And then if you recall, we won another grant from the Western Australian government for the project of $15 million, which reduced Calix's contribution again. So the net contribution is about the $11.4 million that Calix has contributed to the facility to date. So it's a recycle of the capital. There's a couple of hundred thousand in services that were provided that we've already sort of been paid already that's netted off our net, but it's essentially the capital that we're putting in to date is $11.4 million.

Next question it involves Leilac. Are we likely to see a similar cost to retrieve our capital from the Leilac-2 project?

So there's no capital put into Leilac-2 yet. So let me be clear on that. Leilac-2 has been supported by the EU Horizon 2020 grant scheme and the partners that we've had in that project, such as Heidelberg, CEMEX, et cetera. So we have no capital there yet. Leilac-2, obviously, we're in the process of raising capital to progress the Leilac-2 project as well as permitting and those sorts of things. So there's no capital tied up in Leilac that we're necessarily trying to recycle at this point in time.

Okay. And obviously, on all projects outside of PLS, we'll be providing an update at the half year next week. Next question is, does the deal enable a fast track on commissioning because there is just a transfer of spodumene internally by PLS without having to worry about what price that may take place at?

I think it's less about that and more about the fact that PLS can move ahead with the costs of commissioning because of the robustness of the balance sheet, obviously. So commissioning, if it's 3 months, it's a few million bucks, if it's 9, 10, 12 months, it will be a quite substantial piece of effort. And so I think not having the extra governance structure and the extra admin associated with cash calls and obviously, Calix itself having to be very careful with respect to our balance sheet, removing all of those issues is the main reason why we feel that this is -- and PLS feel this is a good way forward for the project to get it demonstrated as soon as possible.

There's a question on IP. So what specific IP remains Calix core IP versus JV created IP now owned by PLS. How is the core IP protected going forward?

Yes, it's very specifically described in the license agreements. Anything to do with our core technology that's applicable to all of those other industries such as alumina and iron & steel, et cetera. That's very specifically designed in the license agreements. Any improvements to that core IP remains owned by Calix. So it's well defined in those license agreements.

There's currently only one question left. [Operator Instructions] because of the 80-20 split, will PLS have more of a say on the customers you commit to or how the process works?

Yes. Not really. PLS and Calix are both committed to implementing this as an industry solution. And so both of us will be developing those opportunities. Calix is currently running the pipeline of alternative opportunities. And ultimately, if there's an opportunity there that one doesn't want to necessarily pursue, the other can under the arrangement. And so any income that's derived in the form of royalties from those opportunities should they eventuate will still be the 80-20 split. So it's not like one can block the other on implementation into third-party opportunities.

Okay. One more question has gone through. What estimated annual revenue has Calix lost in royalties in return for the one-off payment at $11.4 million?

There's all sorts of models that can be applied to this. As I mentioned before, when we assessed the net present value of the cash in hand versus the potential royalties, there's all sorts of factors that need to come into play, how much capacity gets built under the old license scheme, what that represented in terms of dollars in, when that gets built because obviously, there's time value of money. But suffice to say, the bird in the hand, the $11.4 million now came out on top. So we feel we've got a good deal and good value for our shareholders.

Okay. I've just checked all the channels, and I don't have any more questions. [Operator Instructions] I will quickly check the list and give everybody another 20 seconds or so, perhaps dropping even half questions. I know to hold on. Otherwise, it looks like we've come to the end of audience questions. Going once. twice. I think, Philip, if you want to wrap up, if there's anything that comes through, I'll shout out.

No, fantastic. Thanks, Christineh. Look, thanks, everyone, for attending. It is important to talk through a deal like this. It does represent good value for Calix. It eliminates downside risk and keeps us exposed to the upside. It demonstrates speed. It allows the technology to be demonstrated more quickly, which is really important for us. And as I say, it doubles down on our focus, capital-light business model, prudent with cash and allows us to really focus on those large opportunities that are available for the technology. So we think it's a very good deal for us.

And do reach out if you have any further questions or anything comes up past this webinar, we're available. Great. Thank you all. Have a great...

Thanks very much, everyone.