Loop Industries, Inc.(LOOP)Q2 2025 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Loop Industries Second Quarter 2025 Earnings Call. My name is Emily, and I'll be coordinating your call today. This conference is being recorded today, October 16, 2024, and the press release accompanying this conference call was issued yesterday, October 15, 2024. On our call today are Loop Industries' Chief Executive Officer, Daniel Solomita; Fady Mansour, Chief Financial Officer; and Kevin O'Dowd, Head of Investor Relations. I would now like to turn the conference over to Kevin to read a disclaimer about forward-looking statements. Kevin, please go ahead.

Thank you, operator. Before we get started, let me remind you that today's call will include forward-looking statements within the meaning of the securities 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 annual report on Form 10-K and our quarterly report Form 10-Q filed with the SEC yesterday and yesterday's press release. Copies of these documents are available at sec.gov or from our Investor Relations department. At this time, I'd like to turn the call over to Daniel Solomita, Chief Executive Officer of Loop Industries. Please go ahead, Daniel.

Good morning, everyone. Thank you very much for joining today's call. It was a pretty significant quarter for us. The Reed Financing has been a topic we've been discussing for quite a while now. We are in the final stages of concluding the transaction with Reed. As we previously announced, Société Générale, the large French financial institution, acquired a 75% stake in Reed Management with an initial commitment of $250 million, with the potential to increase that to $350 million. Reed will also be raising additional financing from other sources. We are excited about partnering with Reed in their new venture for the energy transition in Europe. I believe they'll be a great long-term financial and strategic partner for Loop for financing and building out our capacity in Europe. The transaction is scheduled to close in November, and regulatory approval on Reed's side is imminent. Everything is going according to plan; there is a slight delay in the schedule, but nothing major.

We expect the entire transaction to close in November, and Loop will receive the financing from Reed. Just as a precaution against potential delays, we don't foresee any, but in case any unexpected issues arise, I, along with one of the other lead directors, have agreed to lend the company $2 million to ensure our liquidity lasts until mid-February. We are eager to close the Reed deal and advance the company on the commercialization side. Throughout the quarter, we have been diligently working on our project in India. I firmly believe that India is the ideal location for our facility, given its low-cost manufacturing capabilities, allowing us to remain competitive in the PET world regardless of fluctuating prices. Over the past couple of years, following COVID, we observed an increase in CapEx alongside a dramatic drop in the price of commodities and plastics. The initial high prices of PET and related plastics attracted a lot of global attention, but as inflation and interest rates rose, many consumer goods companies shifted their focus to cutting costs, moving away from strong ESG commitments.

Thus, many reverted to purchasing virgin PET plastics at very low prices due to China's overwhelming supply of cheap PET. This has significantly impacted our evaluation of projects globally regarding feasibility and costs. Transitioning to the opportunity in India positions us to be highly competitive regardless of PET price movements, and I believe our low-cost manufacturing strategy will yield substantial long-term benefits. We are fortunate to be partnering with Ester in India, a company with extensive experience in the polyester industry, producing virgin PET since 1985. They have multiple facilities across India, enabling low-cost manufacturing, project construction, and sourcing raw materials. We have engaged a British engineering firm with a significant presence in India to conduct a comprehensive land survey. We analyzed numerous regions to determine the best location for our plant.

The criteria for selecting the site included good infrastructure near a seaport, a skilled labor force, green energy, and proximity to the polyester manufacturing hubs, as our feedstock will come primarily from the polyester textile industry. After extensive research, we chose the Gujarat province, north of Mumbai, as it meets all these requirements. We are confident that 100% of the energy sourced for this facility will be biomass, with rice husks helping us achieve our renewable energy goals. Sustainability is fundamental to our mission, and relying on biomass is a significant advantage. The main input for our manufacturing process will be polyester fiber sourced from nearby sewing factories, primarily located in the Surat area. We have already secured a considerable amount of Polyester fiber that we are currently processing in our Montreal plant, and we have supplier relationships in place.

We are qualifying suppliers as we proceed. We believe that textile-to-textile recycling will be a major growth driver for our business. Apparel brands are in dire need of recycling solutions as legislation pressures them toward more sustainable practices. Current guidelines restrict the use of recycled content from bottles in textiles, which enhances Loop's unique ability to provide fiber-to-fiber technology. Our technology stands out, making Loop one of the few companies in the world capable of offering this solution, which will be crucial for the future of our operations. We are witnessing strong interest across the apparel industry as we are positioned close to their supply chains in India. Post resin sale, our product must undergo various processes before garment creation, so being near these stages is vital. All indications suggest that our Indian project is progressing well as we finalize engineering packages, and we look forward to breaking ground on the facility.

The Reed financing arrangements will allow us to realize our capabilities in India further. Regarding market conditions, we continue to see robust demand from both the fiber-to-fiber sector and customers requiring high-quality PET for food-grade and pharmaceutical applications. We have FDA approval, Health Canada approval, and REACH certification for our products. While we observed a temporary pullback in focus on ESG during inflationary times, we are now noticing a resurgence in interest as these pressures are alleviating. With upcoming regulations in Europe mandating 50% recycled content from January 2025, our company is well-positioned for this shift, making our materials highly valuable.

Thank you very much, Dan. As we review the financial results for the second quarter ended August 31, our total operating expenses amounted to $4.5 million, exceeding the baseline cash expenses I had previously outlined. However, I will help clarify the reasons behind this discrepancy. There are three items to reconcile the difference. First is stock-based compensation, totaling $400,000, which represents non-cash expenses linked to our stock options and restricted share units. Secondly, we incurred approximately $800,000 in nonrecurring legal expenses related to regulatory compliance, including an update to our shelf prospectus, which will keep us compliant for three years. We also updated an S-3 for one of our major shareholders, contributing to these legal expenses. The third item is project costs, totaling $500,000. Backing out these three components brings our adjusted total to $2.9 million, marking our first quarter below the $3 million threshold and the $1 million per month mark, which is an achievement we're proud of.

We structured the project costs based on our overall Capital Expenditure estimate for India, which is $165 million. Most of this figure comes from CapEx, with around $160 million as CapEx while avoiding double counting these costs. As we set our sights on the next fiscal year, we've identified an additional 10% in potential savings, equating to around $1 million, which would adjust our annual run rate closer to $11 million rather than the previously stated $12 million. This will stem from several factors, including enhanced productivity initiatives, government incentives for our R&D lab, consolidating real estate, and reducing consulting fees and outsourced services. These steps will strategically position us towards a run rate of $11 million as we continue searching for further cost-saving opportunities leading up to India's first commercial operation in 2027. Concerning our balance sheet, we currently maintain $2.4 million in total liquidity, consisting of $1.4 million in cash and an available line of credit of $1 million.

As Daniel previously noted, the potential $2 million contribution from our CEO and Board of Directors secures our liquidity through February, allowing us sufficient time to conclude the Reed arrangement. Again, we anticipate closing this transaction in November. Interestingly, our current cash expenditure also rounds out to $2.9 million, aligning with the adjusted figure previously discussed. All back office and fixed costs metrics are trending downward, positioning us well to manage liquidity through the coming months until we finalize the Reed arrangements. With that, I'll turn it back over to Daniel or Kevin for concluding remarks or Q&A.

Yes, please continue to Q&A.

Daniel, I'm wondering if you can share a little more information about the India opportunity, specifically when we might hear some details about the exact site location. I understand and appreciate that it's now in Gujarat, but when can we have a bit more visibility on the site, expected timelines for breaking ground, or announcements on things like feedstock and offtake agreements?

Regarding feedstock, we have already secured a significant amount for the facility, but we generally prefer not to publicly disclose our suppliers for competitive reasons. All our suppliers for feedstock are derived from the waste polyester fiber sewing factories throughout India, primarily concentrated in the Surat area. As for the final site selection, I would anticipate having the concrete location defined by November. We are in the process of narrowing down a few sites in Gujarat and negotiating prices for the land. We expect the engineering groundwork to proceed towards breaking ground in the first half of next year, likely around March. Milestones such as customer contracts will probably emerge in Q1 of 2025, as we are focusing on the price dynamics set to change in January of 2025. We need to observe how the pricing for PET will react before entering into long-term supply agreements. Regular project updates will be shared as they arise. Everything is progressing as planned.

Can you elaborate on the pricing dynamics? Specifically, what supply and demand conditions are at play? Will these influence the amounts of DMT, MEG, or other monomers, and will repolymerization of some output from India be required? Any color on the broader industry landscape would be helpful.

The PET industry is indeed dynamic, impacted by commodity prices and virgin resin supply dynamics. There's substantial overcapacity in China, leading to a major supply of cheaply priced virgin PET, creating challenges for companies focused solely on virgin PET. The landscape for recycled materials, however, is shifting positively. For food-grade materials, we’ve experienced over a 50% price increase from January to October this year, leading to an uptick in Loop's material pricing due to our provided quality. As mechanical recycling grows, the quality of recycled PET is declining due to contamination issues, creating a market need for our higher-quality solutions. Brands are looking towards sustainable options, thus amplifying opportunities for Loop, especially with pending regulations in Europe for 50% recycled content in 2025, which aligns with the direction we're aiming.

That's informative. Back to India, when do you expect to allocate capital, and will the timing of the Reed Financing impact capital allocation?

We'll start allocating capital for the Indian project in Q1 of 2025. Financing from Reed won't slow down the project; we're already incurring costs related to testing feedstock. The bulk of the capital outlay for construction will happen mainly in Q1 of 2025 when we begin heavy investments such as land purchases and long-lead equipment orders. Alongside the Reed financing, government financing will also be scheduled during this timeframe.

Additionally, we've engaged one of the big four accounting firms to create a detailed project report, which is essential for the banking syndicate in India to assess for debt financing.

I want to start with Reed. What hurdles remain for closing? And once it is closed, what will the timeframe be for funding to come from Reed to Loop?

The only remaining hurdle for closing the transaction is obtaining final regulatory approval, which has been in progress since August. We are in constant communication with the involved parties and expect that approval very soon. Once we have the approval, a few weeks will be required for administrative tasks before receiving the cash.

The transaction remains as described previously, correct? Two different tranches?

Yes, the transaction will proceed in two tranches: the initial €10 million convertible preferred security that converts into Loop shares at $4.75 per share in five years, with a 13% PIK interest rate, followed by additional amounts thereafter.

What are the possibilities of licensing the technology to other areas or interested parties?

We have strong potential for licensing our technology due to the successful operational history of our Montreal plant. Stakeholders seeking sustainability are increasingly looking to partner with us, either through licensing or joint ventures. We need to improve how we communicate our offerings to financial investors and will continue to pursue partnerships aggressively as sustainability gains traction.

With India as the focal point, are you considering establishing more facilities or primarily focusing on licensing agreements?

In India, we are certainly considering a second facility as we have secured enough land for two. The first facility will handle a mix of products, while the second facility will primarily focus on fiber-to-fiber operations, anticipating increasing demand for sustainable material by 2030. We have numerous international inquiries about potential projects globally, making it imperative to align our strategies with government involvement and financing for higher-cost areas.

Can you elaborate on potential licensing agreement structures being considered?

Licensing agreements can take several forms, often involving an upfront payment, revenue percentage, or additional commissions for sales efforts. The structure will be tailored to the specific circumstances, including current PET pricing and the ability of potential partners to sustain profitability while employing our technology. The challenge of pricing and the regional market conditions will determine the potential for successful licensing.

What are the latest developments in the local North American market?

We are evaluating several opportunities in North America, keeping our options open. Additionally, we are keen on establishing a larger facility in Quebec where we believe there's significant market potential.

By October 2027, how many operational plants using Loop technology do you envision?

By that time, we anticipate having our Indian facility operational, and potentially a second facility as well, assuming we initiate project work by the end of next year. Typically, projects require about two years for completion.

What is the status of the French plant by that point?

The timeframe for the French plant will significantly depend on pricing dynamics in Europe, which has slowed global project progress. We will closely monitor market conditions in early 2025 to gauge the landscape as that will influence our project deployment timelines.

Will the Europeans impose substantial tariffs on Chinese PET into Western Europe?

I cannot predict tariffs on virgin PET. Currently, there's a modest tariff on recycled material, but the situation remains fluid, and geopolitical developments could prompt varying responses regarding tariffs.

2025 seems crucial for clarity on these issues.

Indeed, with interest and inflation rates decreasing, we are observing a renewed focus on sustainability from brands that previously prioritized cost-cutting measures. This shift back toward sustainability emphasizes the relevance of our low-cost manufacturing strategy in India, irrespective of PET price fluctuations.

The Indian project is highly promising.

If we consider a scenario where higher prices arise due to regulatory changes in 2025, it could position the French plant for a startup in 2028.

Thank you all for your questions and interest in Loop. We're committed to driving sustainable value. For any further inquiries, please reach out to our Investor Relations team. We look forward to sharing our continued progress next quarter. Thank you for your support, and have a great day.

Thank you, everyone.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.