Loop Industries, Inc. (LOOP) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to Loop Industries Corporate Update Call. During today's presentation, all parties will be in listen-only mode. Following the presentation, the conference will be opened for questions. This conference is being recorded today, December 23, 2022, and the press release accompanying this conference call was issued after market close yesterday, December 22, 2022. On our call today is Loop Industry's Chief Executive Officer, Daniel Solomita; and Kevin O'Dowd, Vice President of Investor Relations. [Operator Instructions] And I would now like to hand the call over to Kevin to read the disclaimer about forward-looking statements.

Thank you, operator. Before we get started, let me remind you that today's meeting will include forward-looking statements within the meaning of the security laws. These forward-looking statements relate to, among other things, current plans, expectations, events and industry trends that may affect the company's future operating results and financial position. Such statements involve risks and uncertainties, and future activities and results may differ materially from these expectations. Additional information concerning these statements and related risks and uncertainties is contained in the Risk Factors and Forward-Looking Statements section of our latest 10-K and 10-Q and Forward-Looking Statements section in yesterday's press releases. Copies of these documents are available at sec.gov or from our investor relations department. At this time, I would like to turn over the call to Daniel Solomita, Chief Executive Officer of Loop Industries. Daniel, please go ahead.

Thank you very much. Hi, everyone. Just year-end update, I guess we put out 2 press releases yesterday. The major news is that we've decided to sell the Bécancour land, the remaining land that we hold for CAD 12.5 million, which was really done to shore up any questions on the liquidity. It provides us with 3 years of cash burn. So that's -- obviously, during these challenging macroeconomic times, it's a really important thing for us, that coupled with our cost-reduction plan. So the cost reduction was really about slowing down the operations at our Terrebonne production facility. We've proven the technology out at this scale. There's really no use in running the facility 7/24, 365 producing material because we've proven it out. We have many customer contracts that are existing will be honored, but we will be cutting the capacity -- production capacity at the plant. This facility was never built to be able to generate profits. It was just built to be able to prove out the technology at scale, which has been accomplished. And now as we move towards the execution of larger manufacturing facilities with our partners, specifically SK Global Chemical, South Korean chemical giants part of the SK Group, who we have plans to develop multiple projects across Asia with the first one scheduled to break ground later on this year in Ulsan, South Korea. So the facility here in Terrebonne will still be used for R&D purposes, any type of work that either customers or partners want to do or any small improvements, but that's basically what this facility will be kept for. Production will still happen on a daily basis, but it would just be slowed down. That's really the key messages that we had. So shoring up our liquidity. We have 3 years of cash on the balance sheet. Cost reductions related to the slowdown of production at our Terrebonne facility. So those are the major headlines for us. I'll open the call up for any questions at this time. I think everything else is pretty self-explanatory.

[Operator Instructions] Our first question today comes from David Quezada from Raymond James. David, please go ahead.

Daniel, maybe my first question is just about, I guess, the plan going forward here with SK. I mean it certainly seems like they're very committed to your technology. I'm just wondering if there any kind of like goalposts or maybe like a set of scenarios that you're contemplating now with the JV, just like as it pertains to how they could help you with a potential funding and/or what kind of licensing model or how the JV develops going forward.

Yes. Thanks, David. So really, nothing has changed. We are discussing different potential models, but the way that stands today is that Loop -- so SK Global Chemical provides all of the debt and project financing for the facilities, so Loop doesn't have to provide any of that. They provide 50% -- 51% of the equity for the project. So the original program is Loop is responsible for 49% of the equity, which is 20% of the overall project cost. And also, we received a licensing feedback, which is a percentage of revenue back to Loop every year. So today, we have that dual system of a licensing revenue and the equity pickup from the joint venture. We are discussing all kinds of different options from SK -- with SK, who are very motivated to build out not only Korea but multiple facilities with us. So we're exploring other opportunities or other options such as more licensing or working together on a funding plan to help Loop fund the equity needed. But yes, we have an amazing partner. I couldn't ask for a better partner in developing our technology. And so working together with them on the funding solution will be completed before breaking ground on the facility, which is scheduled for later on this year.

Okay. Excellent. And then just -- I believe you guys ordered some long lead time equipment at one point for Bécancour. Can you transfer that to the facility in Ulsan? Or is that just something you hang on to in case you decide to move forward to the facility in North America at some point?

So we are still going to move forward with a facility in North America. It's still an important market for us. Canada is an important market for us. Quebec is an important market for us. There's plenty of land available in other parts in Quebec. The Bécancour area just exploded in the need for land and projects that want to come to Bécancour. So it was really great financial decision to be able to sell that at 6x the price that we bought it for. So I think that's the motivation behind the Bécancour land sale. The equipment that was purchased was the long lead time items for the polymerization reactors from Chemtex. Those can be used anywhere in the world, so any of our projects. So yes, those could be transferred to the Ulsan project.

Okay. Excellent. And then maybe just one more for me. With the sales agreements that you already have in place, I guess, a, is it fair to assume that those just shift like the agreement with Danone and L'Occitane that will shift to the Korea facility or potential at the upcoming Korea facility? And just maybe, Daniel, your general thoughts on how things will proceed in terms of selling to customers in the Asia region? Like, will SK take a lead on that? Or would you still be primarily involved in marketing the product in Asia?

So we're primarily involved in marketing the product in Asia to the global brand owners. So the way the joint venture is structured that Loop is responsible for global brand owners. Any local Korean customers, SK would take the lead on those customers. So we -- the expectation is that all of our global customers, most of them have needs in Asia as well. And so they'll be moving their capacities to their -- to the Asian market. The Asian market, there's a lot more fiber players there because all of the supply chains for polyester fiber are there. So a lot of the sportswear, running shoe companies, a lot of their volumes are only in Asia because of the manufacturing being done in Asia. So you might see a little bit more on the fiber customers in Asia and a little bit less on the bottle side. But yes, we expect all of our global customers to be being supplied material from Ulsan and from other Asian partnerships, as well as the Danone and the L'Occitane, their volumes are more for Europe. And so our European plant in France with SK Global Chemical and Suez is still a really important project for us and moving forward with that project as well. So that's a really exciting one for the brands.

[Operator Instructions] Our next question is from Amit Dayal from H.C. Wainwright.

So Daniel, could you shed some color on what prevented this facility from getting commercialized? Was it just lack of interest on the customer side or inability to get financing? Just trying to get a sense of what happened that you are trying to move in this direction now.

It's really just about selling. It's just about in these economic times, you have to choose which projects are going to be the most -- the easiest projects for us to execute on, the ones that require the most -- the least amount of capital and the ones that are the least risky. And so those are the projects that -- where we have our partner at SK Global Chemical because they provide all of the construction for the facilities, the EPC contract for the facilities, the operations for the facilities. They provide most of the capital for the facilities. The reason for selling the land is not because the project was not viable in Canada. The reason for selling the land was to shore up the balance sheet, where we had this piece of land that exploded in value. And for us, bringing in non-dilutive capital at that time was the most -- at this time is the most important thing for us. So the Canadian project, we still have ongoing discussions with the government here to build a project in Canada, in Quebec. There's lots of industrial land available. But the price of the Bécancour land and so much interest in land in Bécancour led us to a decision to say, you know what, as far as the land, we're better off selling it, taking the money to shore up the balance sheet and have enough cash liquidity on hand for 3 years of operation without diluting shareholders. That's really the reason. So it's not that there was any economic viability of the project. We're still very interested in building a project in Canada and in Quebec, but it was just about shoring up the balance sheet, and we had this tremendous asset that appreciated in value. So that was the reason.

Understood. And then just alongside the long lead time equipment that was ordered for this site, Were there any sort of project planning and engineering type of work pre sort of work that had gone into it or the expenses around that weren't too much?

Well, so the engineering package that was done, right? So we had all of -- we've completed all of our engineering package, which is another reduction in expenses over last year where we had a lot of engineering expenses. This year, that engineering package And the way we did it is always design one, build many. So the engineering package that we use is the same engineering for France. It's the same engineering for Korea. So each of our projects used the same base engineering package. So the base engineering package that we built was built for Quebec, Korea, France. Wherever we want to put a plant in the world, that engineering is completed and the technology is completed. So there's no loss of any type of value in the work that's been done because it's easily used in other sites as well as the Chemtex reactors, the 2 polymerization reactors. Those are standard equipment that we could use anywhere in the world. So they'll be used for a different project in Ulsan.

Okay. Just last one for me. So you just commented earlier that before SK breaks ground in Korea, you might have a financing event required to move forward. So does that mean you might have to come to the markets to raise your portion of the equity contribution of that project?

So what we're doing is we're discussing with our partners at SK about different financing solutions for our equity commitment there. So that's what we're looking at right now.

How close is that? I mean can you share anything tangible that indicates you may be close to getting -- breaking ground over there, like in terms of the number of steps in the process or anything that is material to execution on that front. Any color on how close you may be to breaking ground there, just from a, say, probability perspective, I guess?

Well, I would say the probability is very high. I think SK Global Chemical has been very vocal in the media, not in North America but the media in Asia about their plans for Ulsan. They recently raised 400 -- close to $400 million ESG bond for the facility to provide the debt financing for the facility. So they've been very vocal about it. So the schedule is to break ground later on this year. I would say that teams from Loop and SK work on a daily basis on feedstock customers, the construction, everything related to the project. So I would say the probability is quite high. And it's obviously a very important project for both companies.

Thank you. At this time, this concludes our question-and-answer session. So I'd now like to turn the call back over to Mr. Daniel Solomita for his closing remarks.

Yes. Thank you, everybody, for attending the call. Like I said, this shows up Loop's liquidity position for having 3 years of cash on hand as of today. And we have really strong motivated partners to build out our capacity. We just have to choose which plants -- in uncertain economic times, you've got to choose which plants are the easiest to execute on. So thank you very much. Happy holidays, and we'll be speaking again in early January when we have our third quarter call. Thank you.

Thank you, everyone, for joining today's call. You may now disconnect your lines and have a lovely day.