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spk01: Good morning, my name is Alex and I'll be the conference operator today. At this time, I would like to welcome everyone to the Loop Energy Q2 2021 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the sound button. On the call today, we have Ben Nyland, President and CEO, and Darren Reddy, CFO. Thank you. Ben, you may begin your conference.
spk06: Thank you very much, Alex. And welcome, everyone, to the Loop Energy Q2 conference call. We're extremely happy with the outcomes of Q2 and the progress the business has made. Just some quick highlights. We've recorded revenues of $1 million in the quarter. Conversion of backlogged sales has begun with customers responsible for over $23 million worth of previously disclosed backlogged commitments placing their initial purchase orders. Our market footprint in the transit bus market, arguably the most dynamic vertical in the industry, has grown dramatically. As of today, we have four transit bus OEM customers between Asia and Europe. that have either launched or are preparing to launch vehicle platforms with Loop fuel cells. Last but certainly not least, our first municipal bus fleet in China has now accumulated over 100,000 kilometres with performance exceeding expectations for this stage of the deployment. All in all, Q2 was an outstanding quarter for our company and I'm looking forward to sharing some more details with you. On the financial front, Q2 was Loop's first million dollar quarter with shipments to both China and Europe and the successful deployment of the bus fleet in Nanjing, China. As a follow-on quarter to our successful IPO, we have built and are capitalizing on the strong momentum in both the industry and our business. We have recently initiated over $7 million in purchase orders related to the build-out of the manufacturing facilities both here in Vancouver and in China. The HR recruitment process as per our plan of record, is well underway and we are nearing double the size as an organization as compared to the close of our IPO. These increased assets and human resources are positioning us to continually win and supply a steadily increasing customer base. Looking forward, we're very excited to report that in addition to the revenue generated in Q2, we are seeing good conversion of our backlog into sales with the placement of initial purchase orders from multiple customers. We define our backlog as a combination of POs and MOUs, both contingent and committed orders. As of today, customers responsible for 90% of our current $38 million backlog have placed initial purchase orders in line with what is expected under their 24-month commitments. On the business front, the execution against our business objectives has continued strong into the second quarter. In spite of recent weakness in the stock market across fuel cell and hydrogen companies, The sector's market continues to grow and expand. Continued announcements from industry giants such as Shell, Tata Motors, Hyundai, and Cummins demonstrate the scale-up of both hydrogen production and fuel cell vehicles around the planet. Global resolve to deal with emissions continues to gain momentum globally with the EU's recent aggressive adjustment of their 2030 emissions reduction targets. The recognition of the critical role that hydrogen and fuel cells will play over the coming years continues to grow, with global giants such as Honeywell, Indian Oil, and Komatsu recently joining the Hydrogen Council. Tom Leinberger, Cummins chairman and CEO, was also just recently announced as co-chair of the Hydrogen Council. Our own success in the market is very much in line with this positive industry momentum. Even more importantly, by focusing our sales and business development efforts on some of the highest growth areas, we were able to significantly expand our presence in one of the most dynamic vertical markets, transit buses. Since the last earnings announcement, we were able to engage and secure purchase orders from three separate OEM customers serving transit bus fleet operators from South Korea to Eastern Europe and Russia. In addition to broadening our customer base in one of the most important verticals, we were able to further gain exposure to multiple geographic markets thus enabling Loop to better capitalize on regional opportunities created through various government-driven policies. We expect Loop to benefit for years to come from our growing transit bus market footprint, as well as the geographic diversity of our customer base. In addition to the efforts of the sales, marketing, and integration teams, our success in the bus market has been greatly assisted by the performance of the first transit bus fleet launched in Nanjing, China earlier this year. The shipment of 10 fuel cell units in April was successfully integrated into a bus fleet and put in full revenue service operation in an extremely fast six week period. As we reported at our investor day in June, this fleet continues to exceed our expectations for both uptime and fuel efficiency and is providing an exceptional showcase for our value proposition in the field. This is the second phase of a multi-year project to deploy 300 fuel cell vehicles in Nanjing as part of an MOU signed in January of 2020 between the Lishui Economic Development Zone and InPower Renewables, Loop's joint venture manufacturing partner in China. We're looking forward to completing this pilot phase and moving into production. This is the first hydrogen fuel cell bus line in Nanjing. and is being serviced by a hydrogen refueling station capable of dispensing 500 kilograms of hydrogen per day. The fleet is servicing the Leashway Number 12 route, which runs 20 kilometers each way between Chauteng Station and the Leashway Bus Passenger Transport Station, with a total of 29 stops. There are 120 daily departures, with a total daily operating mileage per bus of about 220 to 250 kilometers. Powered by Loop's T-505, our 50 kilowatt system, Each bus is capable of traveling up to 400 kilometers on a single fill. Looking forward, our sales focus remains in high-growth vertical markets, each meeting three key criteria. The first, multiple OEM customers with electrified product platforms. The second, a strong business case for hydrogen. And the third, a three-year serviceable, obtainable market in excess of 1,000 units. Our 2021 goal is to establish a diversified base of at least 10 customers addressing these target market applications and as of today we're well on track to complete this objective with six customers signed on to date and meeting the 110 100 criteria which I will expand on shortly. we've also been working hard towards growing ecosystem of channel partners capable of supporting our customer base, as well as expanding the reach of our sales. Just last week, we announced our partnership with Technicus Rayonidis. Throughout its almost 60-year history, Technicus Rayonidis has designed and managed the construction of more than 1,000 industrial plants in over 50 countries. They specialize in refining petrochemicals, natural gas, and hydrogen. With over $3.5 billion in annual sales, Technicus is exactly the type of mature, stable, and motivated partner that we want to go to market with. The initial scope of this joint market agreement focuses on providing hydrogen-based solutions to several key vertical markets, transport agencies, truck, transit and coach bus service fleets, material handling, warehouse, and port logistics, including drayage, urban delivery services, and stationary power applications. With the assistance of Technicus on-site production and supply equipment, Creating hydrogen both via water electrolysis and steam reforming of natural gas, Loop will be able to provide more convenient and cost-effective hydrogen solutions to our global customers. Loop and Technicus are also exploring partnership opportunities to develop commercial products that leverage both Loop's proprietary eFlow fuel cell technology and Technicus know-how and experience in hydrogen technologies. In China, Loop Energy Technologies Shanghai is now incorporated Facilities have been secured in Jiading Technology Park just north of Shanghai, and the build-out of the facilities is underway. Initially, the facility in Jiading will be a replication of our production facility in Vancouver, allowing Loop to produce units in China to meet localization requirements and provide Chinese customers and partners with supply chain certainty, while also continuing to protect our IP. This facility future-proofs Loop's manufacturing requirements in China as well as giving the ability to expand operations as needed to the over 8,500 square meter facility as production capacity requirements grow. This location is ideally situated in the Yangtze River Delta with close proximity to Shanghai and the surrounding area which is home to over 100 million people and represents a quarter of China's GDP, roughly 2 trillion US dollars. It has the full support of the national government as a hydrogen super city surrounding Shanghai. All in all, it's been a very positive quarter for Loop. We expect more positive news as we continue to execute our business plan. For those of you just getting to know Loop, I'd like to take a few minutes to introduce you to the high points. For those of you who have attended previous calls and have heard this section before, I promise you that this is the last time that I'll be running through it on one of these calls. 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, and soon to have regional manufacturing in China in our own facility that I just mentioned. With an expanding customer base in North America, Europe, and China, we are positioned well to grow our market footprint over the next few years. Our products are based on our core proprietary and 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 products. This advantage is proving 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 size 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 that we call uniform current density. This balancing of fuel cell 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 two investments from Cummins, one of the leading developers and manufacturers of commercial vehicle powertrains. 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 in March of 2020. Development of our next generation stack is also on schedule for the initial prototypes to be deployed in the field in the first half of 2022. This next generation provides a substantial increase in power output capabilities over our current products, while bringing the benefits of eFlow to a new set of applications, including long-haul heavy-duty trucking. We're in discussions with a number of potential customers and partners for those deployments. We'll announce the details of these relationships as they progress. With all of these developments in our current opportunity pipeline, we believe Loop is very well positioned to achieve our objective to be a top 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 commercial vehicle operators and make zero emissions a viable economic solution for the replacement of internal combustion engine vehicles. The next two years are foundation-building years for Loop. We have industry-leading technology, a great team, and great products. Over the next two years, we'll be working with customers to refine and improve 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 two 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 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 end of 2022. In almost every customer and prospective customer, We are engaged with we see a three phase process to the development of each relationship. The first phase of the product and vehicle design validation typically involves the customer ordering one or two 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 customers product, while the 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 the phases. Depending on the customer size and type, each phase can last anywhere from 9 to 12 months. The metric that we will be using as we progress through 2021 is that by the end of this year, we expect to have a total of 10 customers actively engaged in this three-phase process, with at least one of them transitioning to phase two. As I mentioned earlier in this presentation, we now have six customers actively engaged in the process, and one of those customers, Skywell, the bus fleet in Nanjing, has successfully transitioned to phase two. So we consider ourselves to be well on plan, if not ahead of plan, at this point. And so we are very excited at Loop that we see in our business today that we are exceeding the expectations that we set out during the IPO process and are extremely excited about how the balance of 2021 will be moving forward. So with that, I'd like to turn control of the meeting back over to Alex, the moderator, and we'd be happy to take questions at this time.
spk01: As a reminder, to ask a question, you will need to press star 1 on your telephone keypad. Again, that is star 1 on your telephone keypad. So, with your question, you may press the pound key. Let us stand by while we compile the Q&A roster. Your first question comes from the line of Rupert Amer from National Bank. Your line is now open.
spk02: Good morning. Morning, Rupert. Wondering if we can go back to the Skywell bus fleet. So the vehicles are accumulating miles quickly, or you're happy with the uptime and the efficiency. Can you walk us through any other learnings you might have there, anything that's informing your design process? And I noticed you have a warranty provision on the bus sales. Do you anticipate incurring much cost to support the fleet?
spk06: Both great questions, Rupert, and really appreciate that. So as mentioned, the buses are accumulating mileage very quickly. That recently stopped because COVID, they shut down the bus, all the public transit in Nanjing. But we are very pleased to get over 100,000 kilometers before that happened, and we're excited to see what happens going forward. We're getting exceptional data off of these buses. As I mentioned, the efficiency is actually exceeding our expectations, so that's the sort of pleasant surprise that we expect. And we continue to see data that helps us refine our design moving forward. So these sorts of deployments are very helpful in that way. We're very pleased that we're not seeing anything from these buses that's indicating a major design or anything that we are going to need to do to our systems before we do other major deployments. So very excited about the data that we're getting, and it's really opening a path, as we've mentioned, to additional customers and providing us with the kind of data that we need to help land those additional customers. So excited to see that move forward. With... With respect to the warranty, as you can imagine, this is the first deployment of 10 units that we've done in the field. And we really appreciate that Skywell and Leashway Economic Development Zone see the benefit of Loop's technology. They really resonate with the value proposition. I'm sure you can appreciate that as it is the first 10-unit deployment and it's going into full commercial service, they really want to make sure they're covering all their bases. We were comfortable with providing a very strong warranty because we have a lot of confidence in our product and also understanding that this is our first deployment, perfectly reasonable for the customers to expect that. We do not expect charges against the warranty based on the performance that we're seeing in the field, but we've taken a very conservative approach, and maybe I'll let Darren speak to our approach with respect to the warranty provisions.
spk05: Hi, Rupert. Yeah, so I think in terms of, you know, the financial statements and IFRSs, there's provisions that are guiding how we do the warranty, and given that this is the first deployment in the field, we've taken that measure. But as Ben said, you know, what we've seen in the lab and what we're seeing in the field, we do not have indications that a warranty provision in terms of cost out of pocket will be here for loop. What we do know is that we're going to be servicing these modules in terms of air filters and things like that as we're collecting data and getting data out of the units in the field, which provides us a great amount of information for our team as they're developing, continuing to develop the product.
spk02: All right, great. Thank you. And then secondly, wondering if you can give us a little more color on the opportunity in the Chinese market. The Skyworld buses are performing well there, and I know you have an opportunity to expand that relationship. How fast do you think that market could develop? But also, what other opportunities do you think could evolve in China to work with other bus and truck manufacturers?
spk06: So we have multiple avenues of discussions going on in China right now in the truck market, in the specialty vehicle market, and in the bus market. And we're seeing really good appetites for deployments of what we've seen with Skywell, so the ones in the tens. We expect that market to grow very quickly historically. In other sectors, that's what happened is when the momentum kicks in, it grows very quickly. So we saw that in the battery-operated bus vehicle market. And so our strategic view right now is to work with a number of different vehicle manufacturers and fleet operators in China and be positioned to grow really quickly when that wave hits, which is traditionally how things work in China. Getting our manufacturing facility up and running in Shanghai is a big part of that strategy. As I mentioned, incentives tend to be regionalized in China. And to access those incentives, you need to be contributing to the GDP in that region. Having our facility within the Shanghai catchment, or the Shanghai Hydrogen City, is extremely important to be able to benefit from those incentives around hydrogen. So we're very excited about the location. We're excited about the opportunity. And we see certainly the market is developing more slowly than we would have anticipated a year ago. Part of that's due to COVID. But we actually see that playing to our advantage as the Skywell fleet matures, as our credibility in the market matures, and as we have a production facility that satisfied localization requirements right there in Shanghai.
spk02: Great. Thank you very much. I'll get back in the queue.
spk01: Your second question comes from the line of Michael Glenn from Raymond James. Your line is now open.
spk03: Hey, good morning. A couple of questions. So I think you mentioned, did you mention earlier in the call that you're having some traction in the European bus market? Just curious if you can give a little more insight there.
spk06: Yes, absolutely. We recently announced Mobility Innovations, which is a small bus, a manufacturer of smaller buses in Eastern Europe. There are other companies that we're dealing with, which we haven't yet announced, so we can't name them, but a broad spectrum of different buses covering European geographies and also Russia. And so we're seeing really good uptake in that market, similar to our experience with Skywell, in working with bus manufacturers who already have battery electric product designed and deployed meaning that the addition of the fuel cell systems to those battery to the battery vehicles is a fairly straightforward integration process and so it's consistent with what we outlined our strategic imperatives are in in terms of accessing the market and what sorts of customers we're going after interestingly the fastest movement seems to be happening in that eastern european
spk03: geographic area which is working out very well for us okay and is there anything specific just curious on that like in terms of bus has been identified by Europe as one of those categories they would like to be on the front end of that hydrogen adoption curve so I'm just curious like do you see programs like subsidy programs coming into place that you'll be able to take advantage of? Are the customers that you're speaking to, are they communicating anything on the horizon that might accelerate movement in that European bus market?
spk06: So that's a really great question, Michael, and I think I'd like to maybe set up a chance for George to get back to you, our Chief Commercialization Officer. He's not on this call. to talk a little bit more about that. We're focused, as I said, on customers that have a legitimate 110-100 plan that they can articulate to us. And when I say legitimate, we have discussions about how they are going to deploy that and get those numbers into the field. And it's only when we have confidence that plan is well thought through and has a good opportunity to succeed that they become part of that 10 customer target base that I was talking about earlier. And so obviously different geographies have different incentives and those incentives for each of those customers would provide a piece of that.
spk03: Okay. And on the six customers that you have engaged with, you talked about Skywall transitioning to phase as being the example of one of the one that transitioned to phase two. Have you disclosed the other five customers that are included in that count?
spk06: We have not disclosed the names of all of them at this point, no.
spk03: So I guess eCubes would be one of those included? Sorry, which?
spk06: I think it was eCubes. Yeah, eCubes is one, yes.
spk03: Okay, so the other one, okay.
spk06: Mobility Innovations would be two of those, yeah.
spk03: Would be two of those, okay. And then just one final question for me. You do talk about the eFlow technology. You talk about the advantages that it brings. We see that there's a lot of companies investing large amounts of capital towards fuel cell programs. Have you thought any additionally about the potential to license the eFlow technology out as a revenue stream?
spk06: We have A lot of conversations going on with different entities. At this time, licensing is, it's not an impossible route, but it's not a primary route that we are looking to take based on the market dynamics.
spk03: Okay, that's all my questions, thanks.
spk01: Again, if you would like to ask a question, please press star one on your telephone keypad. Your next question comes from the line of Mac Whale from Coremark Securities. Your line is now open.
spk04: Hi, good morning. I'm wondering if you could discuss a little bit of the stages or the timeline to progress from prototypes on this next-gen stack. What should we be looking for in terms of a timeline, and then how does that stack... How should we think of it in terms of the S300 and the T600? Are these things that will be replaced by that stack?
spk06: Great question, Max. So the timeline on this is we are in the development process. The first stack prototypes are planned for the end of Q1. The first field prototype deployments are planned for the end of Q2 in 2022. So that gives you sort of the timeline. we'd be looking at commercial product with this new stack towards the end of 2022, beginning of 2023. So that's our product development timeline. In terms of replacement or supplement, it's a supplementary, it's an additional product line that we're developing. So our existing product line, we have products of 30, 50, and 60 kilowatts. These products are very well suited to municipal buses, delivery vans, logistics vehicles in cities, these sorts of things for the E-Cube stationary deployments. As we move into larger vehicles, so coach buses that are longer range, heavy duty vehicles that are traveling longer haul, this is really what this next generation stack is targeted towards. And so the products that will come out from that will range from 80 kilowatts up to 250 kilowatts. So it's really addressing a different application segment.
spk04: Okay. When you spoke in some detail about the manufacturing in China, I'm wondering, when you talk about Europe, you talk about sourcing all that or supplying them out of BC. Is that all because of regional differences or is it really to be competitive in the markets?
spk06: So to be clear, we expect that regional production will be necessary in Europe as well as volume grows, and so we'll be watching that very closely. One of the reasons we focused on China is we expect that it will be very much a step function of demand at some point, and that we want to make sure that we move quickly with that. Europe, we would expect to develop a little bit more gradually. And so we're ready to make that investment in Europe when the time is right, but we'll be watching that closely. So in this new world that we're living in, you know, there's two macro forces at work. One of them is COVID, which is very much limiting movement of goods and people. And the other is this sort of de-globalization trend that we're seeing, we expect regional production to become more and more strategically important. And so our strategy in China is not unique to China. We expect to expand regionally in other areas as well. The timing will just be based on market development.
spk04: So is that market development then, like when you look at your pipeline, do you have just that much better visibility on like today what China can do versus Europe? Is it that stark a difference?
spk06: That's a really good question, so no. A year ago I would have said yes. Europe is definitely moving now, but I think we have a higher level of confidence that we will be able to effectively supply Europe out of Vancouver for earlier volumes, and that in China it will be more important for those earlier volumes to have a facility in China.
spk04: And then lastly on that, then, should we look to news of your investment in capacity as a sign that it's taking off in Europe? In other words, and the counter to that would be if we don't see one, then you just don't see it building sufficiently yet. Is that a fair way of reading that?
spk06: into the news or lack thereof yeah i'm not i'm not sure it is because like i say we see the ability to supply europe out of our north american facilities as being more viable than supplying china and so um i think it's fair to say that we would invest in regional production in europe later in the process uh than than we would in china so i don't think you can think of that as a leading indicator. I think what I'd prefer to do is, you know, we will continue to be as transparent as we can about what we're actually seeing in the market and what's going on. And I appreciate, you know, you asked of the six, customers are actively engaged. Have they all been announced? You know, my answer is no. We expect to be able to announce most of those in the foreseeable future. And when we do so, we'll be able to speak a little bit more transparently about how we see the market developing because of those accounts. Okay.
spk04: Yeah, it makes sense. I mean, I can imagine you have to make decisions on deploying capital to meet demand. And then when that materializes, then you kind of take a look at the situation and say, well, okay, we can do this out of, we don't need to go to that next step yet, but eventually you would be expected to have to do that. And I guess it's just a, a bunch of things have to line up before you can actually pull the trigger on yet another facility, I guess.
spk06: Yep, that's right. And we want to be responsible with our capital, right? Investors have entrusted us with this capital and we want to make sure we're managing it responsibly.
spk04: Okay. And then just my last question is just on, I realize volume is still small, but is there anything you could say about contribution margin versus gross margin when you see when you're shipping some of these multiple unit orders, is there anything meaningful you can say about that at this point? Is it still too small?
spk05: Hi, Mac. It's Darren here. Yeah, I think at this stage, you know, the focus is really on the technology in the field, and so proving out the fuel efficiency, durability, and things of that nature. And so, you know, being given that the unit volume is low, the contribution margin, gross margin is not something that we're measuring ourselves on yet. We certainly see that happening towards the end of 2022 and into 2023 when we've targeted some of those those kind of internal metrics around the more the financial measures.
spk04: OK.
spk05: OK, thanks guys, that's all. Thanks Mac.
spk01: That ends our question and answer session. I'll turn the call back over to the presenters for closing remarks.
spk06: Great. thank you again to all the attendees of this call thank you 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 are exceeding business performance expectations that we set during the ipo process we're looking forward to finishing 2021 strong and setting the stage for further successes in 2022. we'll see you again on our next earnings call for q3
spk01: That concludes today's conference call. Thank you all for participating. You may now disconnect.
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