Li-Cycle Holdings Corp. (NYSE:LICY) Q1 2024 Earnings Call Transcript May 12, 2024

Li-Cycle Holdings Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day. My name is Madison, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2024 Li-Cycle Holdings Earnings Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I will now turn the call over to Louie Diaz, VP, Corporate Affairs, please go ahead.

Louie Diaz: Thank you. Good morning, and thank you everyone for joining us for Li-Cycle's business update and review of financial results for the interim period ended March 31, 2024. We will start today with formal remarks from Ajay Kochhar, Co-Founder, President and Chief Executive Officer; and Craig Cunningham, Interim Chief Financial Officer. We will then follow with a Q&A session. Ahead of this call, Li-Cycle issued a press release and a presentation, which can be found on the Investor Relations section of our website at investors.li-cycle.com. On this call, management will be making statements based on current expectations, plans, estimates and assumptions, which are subject to significant risks and uncertainties, most of which are difficult to predict and many of which are beyond the control of Li-Cycle.

Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect including because of factors discussed in today's press release, during this conference call and in our past reports and filings with the U.S. Securities and Exchange Commission and Ontario Securities Commissions in Canada. These documents can be found on our website at investors.li-cycle.com. We do not undertake any duty to update any forward-looking statements, whether written or oral, made during this call or from time-to-time to reflect new information, future events or otherwise, except as required. These forward-looking statements should not be relied upon as representing Li-Cycle's assessment as of any date subsequent to the date of this call.

With that, I am pleased to turn the call to Ajay.

Ajay Kochhar: Thank you, Louie, and good morning, everyone. Louie has been with Li-Cycle for nearly two years. In addition to heading our Marketing Communications, he's also taken on leading Regulatory Affairs and Investor Relations. Nahla Azmy is moving on to pursue other opportunities. We want to thank Nahla for her contribution to Li-Cycle and wish her well in her future endeavors. Now I'd like to introduce Craig Cunningham as Li-Cycle's Interim CFO. We're excited to add him to the team and are confident that he'd be a strong addition to the company. Craig has extensive background in executive-level leadership and brings more than 17 years of accounting, finance operational and capital markets experience to Li-Cycle. In his previous roles as CFO and executive, he has been a key contributor to the formulation of corporate strategy and providing key financial oversight and controls on major projects.

He also has broad experience overseeing IT, supply chain and logistics and administrative functions. Welcome, Craig. We look forward to your contributions. On our most recent call in March, we provided an update on the progress made since pausing construction at the Rochester Hub in October 2023 and initiating a comprehensive review. Today, we are pleased to share additional updates on the steps we've taken towards achieving the key objectives from this review, providing an overview of our commercial highlights and also discuss our first quarter financial and operating results. Turning on Slide 3. We continue to make progress on the key strategic priorities that I've outlined on our last call. First, as part of our comprehensive review of the Rochester Hub.

We have advanced work with the local market to refine cost estimates for the project since we confirmed the technical viability of the mixed hydroxide precipitate or MHP process. Second, with respect to financing. We closed on the strategic investment of $75 million by Glencore on March 25, strengthening our long-term partnership and enhancing our liquidity. Additionally, in parallel with our comprehensive review, we're working closely with the DOE Loan Programs office on key financial, technical and legal workstreams towards close of the conditional commit for a loan for a gross proceeds of up to $375 million. Third, regarding liquidity. As part of our cash preservation plan and in conjunction with our plan to rightsize and right shape organization, we transitioned from a regional management model to a centralized model to better position Li-Cycle for future success.

This strategic decision is expected to generate approximately $10 million in annualized savings from lower payroll costs. Finally, we continue to optimize our Spoke network to reduce costs and improve efficiencies. We remain focused on prioritizing our Generation 3 Spokes as we align with EV and battery OEM customers, who continue to execute on growth plans in North America and Europe. Turning to Slide 4 for an update on the comprehensive review for the restart of the Rochester Hub project. On our last call, we reported that we completed an internal technical review, confirming the viability of the MHP process as part of the potential change in our project development strategy for the Rochester Hub. Since then, another work stream that has significantly progressed is work with the local market regarding major construction contracts to refine our capital estimates for the project.

Our current estimated cost to complete the Rochester Hub project is approximately $504 million for the MHP scope, which includes the total cash spend as of March 31, 2024. We note this estimate is subject to a number of assumptions and is likely to change as we continue to complete our comprehensive review work. Our near-term priorities for the restart of the project include completing the technical and economic review which dovetails with the DOE loan closing process. Turning to Slide 5, which highlights key initiatives we've completed to enhance liquidity. First, regarding financing. In late March, we were pleased to announce that we closed on the previously announced $75 million investment from Glencore, strengthening our long-term partnership and enhancing our liquidity position.

In late April, we received approximately $5.8 million as the first tranche of a total grant for up to $6.9 million from the German state of Saxony-Anhalt for our Germany Spoke. This is another example of the positive support we continue to receive from our local stakeholders. We remain committed to diligently exploring strategic alternatives and financing options to enhance our liquidity. Second, we are strategically managing our cash to support our liquidity needs as part of the cash preservation plan. In March, we made a strategic decision to pivot from a regional business model to centralized one, reorganizing Li-Cycle to drive increased efficiencies. This decision is expected to generate approximately $10 million in annualized cost savings through workforce reductions.

In addition, we've been actively engaged with certain contractors and suppliers to the Rochester Hub and now have agreements in place providing for extended payment cycles. Looking forward, we're exploring further opportunities to increase efficiencies across the organization, including realizing cost savings from our Spoke operations and implementing additional adjustments to noncore SG&A expenditures. Finally, we continue to evaluate further positive slowdown in our Spoke operations beyond those previously announced in lockstep with commercial demand. Turning to Slide 6 for an overview of Li-Cycle's commercial agreements. Our capability to process all types of lithium-ion batteries, independent of form factor and chemistry, coupled with our operational capacity has led to the establishment of a broadly diversified global base of battery supply customers spanning the entire battery supply chain.

As shown on the left of the slide, we are pleased to report that during the first quarter, we continue to attract new customers while extending and amending existing agreements. We signed new recycling agreements with some of the largest EV OEMs in the world as well as leading battery cell manufacturers in both Europe and North America for battery material intake. In Europe, this included signing new agreements or expanding and amending current agreements with three of the largest EV OEMs in the Continent. We now have agreements in place with four of the largest EV OEMs in Europe to recycle modules and full battery packs. We continue to see broad-based support for our differentiated technologies across both continents reflected in our position as a preferred recycling partner for leading global battery, EV and energy storage OEMs. Turning to Slide 7 for some highlights of our Spoke technology and operations.

As a reminder, Li-Cycle developed a patented method for processing all forms of lithium-ion batteries regardless of chemistry, form factor or state of charge. This environmentally friendly process does not rely on any thermal treatment and is highly scalable for the growing EV battery market. We are prioritizing our Generation 3 Spokes, which can process full battery packs without the need to dismantle and aligning with EV and battery OEM partners who comprise a large share of our global battery feed intake. It is worth highlighting that four of our top five partners for feed intake during Q1 are EV OEMs. With respect to our Spoke operations, we continue to see higher composition of EV battery packs in our input feed with approximately 41% by maps of the total battery materials processed at our Spokes being EV battery.

We believe we're in a strategic position to receive the feedstock materials due to the enhanced capabilities of our Gen 3 Spoke, which can efficiently process full battery pack. Turning to Slide 8, providing an overview of our sustainability performance as we expect to issue our 2023 sustainability report in the coming weeks. Our report has been aligned with SASB standards and built on the interim report we issued last year. In 2023, we strengthened our data tracking and reporting capabilities for greater transparency. Ultimately, better data will help us to enhance our performance in this important area of our business. A few key takeaways from our 2023 performance include 0% of our Scope 1 air emissions are from our recycling processes, which is reflective of our environmentally friendly nonthermal recycling technologies.

Our Germany Spoke procured all of its electricity from renewable sources, and we continue to prioritize safety and have had zero critical safety, environmental and community incidents since our company's inception. Sustainability is core to our business and believe it is a value differentiator for our company. Not only is sound ESG performance is good for the world and our communities, but it also supports our position as a preferred global respective partner. With that, I'll now turn over to Craig who will provide a review of the financials.

Craig Cunningham: Thank you, Ajay. Before getting into the financial results, I'd like to start by saying how pleased I am to be joining Li-Cycle. Ajay and the team have built a truly differentiated business model with the capacity to make meaningful contributions to the future of clean energy. I look forward to the opportunity to help execute on this mission and to create value for our shareholders. Turning to Slide 9 for a review of our 2024 first quarter financial results. Highlights include improved revenue, cost of sales, adjusted EBITDA and cash position for the first quarter of 2024 versus 2023. Starting with the sales of Black Mass, which were 946 tons, a 7% increase versus 881 tons sold in 2023. Product sales and recycling service revenues before noncash fair value pricing adjustments decreased to $4.6 million compared to $7.7 million in 2023.

The decrease was largely driven by reduced market prices for cobalt, nickel and partially offset by higher recycling service revenue and an increase in products sold. Total revenue increased 17% to $4.2 million, reflecting lower unfavorable noncash fair value pricing adjustments of $0.4 million versus an unfavorable adjustment of $4.1 million in 2023. Moving to cost of sales, which decreased 12% to $16.8 million versus $19.1 million in 2023. Cost of sales attributable to product revenue decreased by $3.2 million or 17% compared to last year as a result of lower production levels, partially offset by increased operational costs associated with repairs and maintenance activities. Cost of sales attributable to service revenue increased by $0.9 million compared to last year due to new service contracts entered with an existing customer that commenced in October 2023.

SG&A expenses were $31.7 million versus $22.7 million in 2023, primarily driven by higher professional fees and legal fees related to the Rochester Hub construction pause as well as severance costs stemming from the March workforce reduction. I would like to note that these expenses are onetime in nature. This increase was partially offset by lower recurring personnel and other administrative costs of $3.7 million. Other expenses were $92.5 million compared to other income of $2.7 million in the prior year, primarily due to the debt extinguishment loss of $58.9 million and unrealized fair value loss on financial instruments of $23.8 million relating to the amendment and restatement of the terms of the convertible notes issued by Li-Cycle. Adjusted EBITDA loss was $27.4 million compared to a loss of $37.9 million in the first quarter of 2023.

This was largely driven by higher revenue, lower cost of sales and partially offset by the increase in SG&A. As of March 31, 2024, Li-Cycle has cash and cash equivalents of $109.1 million versus $70.6 million at the end of 2023, which includes the gross proceeds from the Glencore financing that closed during the first quarter. I will now turn it back to Ajay.

Ajay Kochhar: Thank you, Craig. Turning to Slide 10. We continue to see favorable long-term industry demand trends in both North America and Europe. The chart on the left illustrates the rising adoption of electric vehicles, with sales achieving a CAGR of approximately 45% from 2019 through 2023. Notably, third-party sources are projecting a robust 25% CAGR off the space at the end of the decade. As seen on the right, these growth dynamics support the robust demand for an expanding market for recycling of all forms of lithium-ion batteries. Near to midterm, the increase in recycling materials is largely being driven by manufacturing scrap from Gigafactory growth, supplemented by end-of-life battery feedstock through the end of the decade.

It is projected that by 2030, demand for recycling materials will increase by up to 6x from 2023 levels. Turning to Slide 11 and concluding on Li-Cycle's go-forward strategy and key objectives. First, we continue to work closely with the DOE towards closing of a loan for gross proceeds of up to $375 million. Second, we continue to evaluate a range of further financing and strategic alternatives to bolster our liquidity and facilitate the restart of the Rochester Hub project. Third, we remain focused on completing our technical and economic analysis of our go-forward approach for the Rochester Hub. And finally, regarding the Spoke and Hub network. We are evaluating our Spoke network to identify further opportunities to drive down costs while focusing our production on our Gen 3 Spokes to support our key EV and battery OEM customers.

Operator, we're now ready for questions.

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