Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Loop Industries Fourth Quarter 2023 Update Corporate Call. [Operator Instructions] The conference is being recorded today, May 19, 2023, and the press release accompanying this conference call was issued after market close yesterday, May 18, 2023. On our call today is Loop Industries Chief Executive Officer, Daniel Solomita; Chief Financial Officer; Fady Mansour; and Kevin O'Dowd, VP of Communications and Investor Relations. I would now like to turn the call over to Kevin Reed -- sorry, to Kevin to read a 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 annual report Form 10-K filed with the SEC yesterday in 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 Fady Mansour, Chief Financial Officer of Loop Industries. Fady, please go ahead.

Thank you, Kevin. Thank you so much. And thanks for having me here today. I'm so honored to be part of this leadership team. I'm a newly minted CFO. I've got 4 weeks under my belt. It's been a rock and roll four weeks, but I couldn't be more excited to join this amazing franchise. The combination of the stellar team that we have, the cutting-edge technology, and the aggressive milestones that we have going forward are really what referred me to this company, so I couldn't be more excited, and I look forward to working with all of you in the future. Please -- Dan will give an update on the business, and I'll pass it over to him later, but I'd like to go through the financial results. Obviously, I wasn't here, but I've got caught up on the results that have happened in the past. But also what I call it a pivot point right now, we're pivoting from 2022, '23 to the future as we get off the dirt trail of experimentation and R&D and onto the highway of deployment and commercialization. But I will go through the results. Obviously, for the quarter ended February 28, 2023, we saw our expenses come down, and that's going to be a common theme that is going to hold as we go forward. A lot of engineering related to basic design package came down. Our external engineering came down tremendously. And you can expect that to continue into the future. Our machinery equipment, as we finalized [ Terrebonne ] saw a dramatic decrease in expenses. Again, more of a sign of things to come. So we saw total R&D expenses come down by more than 2/3 to more of a steady line run rate, but we're going to continue…

Thank you very much, Fady. It's a great pleasure to have Fady join us. He's been a tremendous resource. Even though for the only 4 weeks, he's been here, he's been fantastic. Got to know Fady about 6 months ago. So we took the time to get to know each other and make sure that Fady is going to be the right fit for the CEO role moving forward. So really happy to have him on board with us. It's been an eventful year. We've got a lot of milestones that have been completed, and I don't think Loop has ever been in a better position than we are today to supply virgin quality PET resin and polyester fiber to global brand companies around the world. Customer demand is extremely high for our products, being able to supply virgin quality material from our Terrebonne facility to global brands all around the world is such a big difference. And we're the only company out there that's able to supply this type of material to brands, 100% recycled content, virgin quality material, and brands are really responding very well to this. We're negotiating contracts for the Ulsan facility, also for the French facility and other future facilities as well. So there's really been a strong, strong demand from the customer side, which is really exciting. Right now, in the world, the only way to get recycled content into, let's say, packaging today or with the fiber space is through mechanical recycling. And what we've seen and what the world has seen and especially what our customers see is as government regulations are forcing more and more brands to use more recycled content into their packaging, the quality of the recycled PET or rPET is going down dramatically. And you could see that…

[Operator Instructions] Our first question today is from the line of David Quezada of Raymond James.

Appreciate the update there. My first question, just on -- I guess we'll start with Ulsan and just thinking about the contracting strategy there. Great to see, but there's a lot of demand and you've got On AG on there now. Maybe, Daniel, could you just talk high level about what your strategy is for that facility? Will you look to contract all the volumes? Is there any split between sort of local Korean customers and your international customers that you would look for? Just any like broadly how you're thinking about it and how you can derisk that from -- I guess, from a sales perspective over time?

Yes. Thanks, David. Great talking to you. So for the Ulsan facility, we'll probably sell about 5 -- so the -- the capacity is 70,000 tons. And so we'll probably sell under contract about 50,000 tons with our existing customers, the Danones of the world, On AG will be our customers and a few others that we'll be announcing soon. So it's going to be probably a split pretty even of the 50,000, about 25,000 fiber and 25,000 bottle grade. So then the other 20,000 tons will probably leave it for the spot market. We see 2025 as being a really important year for brands, where they're going to need more recycled content, especially in Europe. And so, we want to take advantage of that price swing and not have everything locked into long-term contracts. So that's kind of the sales strategy there. We always use formula-based pricing anyway. So as long as we use indexes-tied formula prices which allow us to make sure that if the cost of raw materials go up or the cost of any of our inputs go up, then that's a pass-through cost to our customers. Customers are used to working with these type of formulas. So this is what we're currently negotiating with all the different customers. Again, the real differentiating factor for us is the quality. And that's really what the customers need. The customers need virgin quality material coming from 100% recycled content. And a lot of the really great brands are not willing to sacrifice quality which they can't get today from the mechanical recycling industry. It's really interesting. I was going a couple of stores in France when I was there for the Choose France event and you see some packaging from the mechanical recycling industry, and the bottles are like a really dark gray and it just looks so bad visually. And that's a really big thing with PET is the color. That's where -- that's what chemical recycling [ loops ] the polymerization technology that's what it brings because we break it down to the monomers and build it back up, we remove all of those colors, that's where our technology really shines. And there's a huge difference between the quality of our packaging versus the quality of the mechanical recycling. So yes, no shortage of demand for the facility, no shortage of demand for any of our facilities.

Okay. Excellent. That's great color, Daniel. And then maybe just on the feedstock side, I guess, for -- again, for Ulsan, you mentioned that you've got, I think, 60% of it secured. I'm guessing you'll look to contract all of it. And just I'm wondering if you're able to talk at all about the nature of those contracts, like -- are they formula-based pricing as well, the term of the contracts and I guess the mix between. Is it going to be all fiber? Or will there be some recycled bottles as well?

Yes. So it's going to be -- 60% of the feedstock is going to be probably coming from the fiber industry. So textile waste from the polyester fiber manufacturing, which goes on a lot in Asia. SK is really working hard on the supply chain in Asia. They've actually gone in -- and this is public information they've gone in and they've made some equity investments into some companies across Asia to be able to supply our facilities with feedstock coming from either like the trays from, let's say, solid trays or [ fruit ] cups or that type of material and also from the polyester fiber supply chain. A lot of that goes with the government. There's a lot of government action within Korea to be able to develop this new supply chain because there's never been a company that can -- is able to recycle this material. The supply chain kind of doesn't exist right now. And so, SK is working very hard with the Korean government on setting up those supply chains to be able to capture all of that material. A really good example is there's 20,000 tons of brown beer bottles in Korea, that use PET for their beer bottles. And those brown beer bottles obviously can't be recycled. And so that's another great feedstock for us. Trays is another great example where those trays are not recycled today in Korea. So the collection doesn't really exist for them. They go to the waste management companies, but there's no home for them. And so those are, again, things that Loop's technology can handle. And so that's where SK is developing that supply chain with the local governments.

Okay. Great. And then maybe just on construction costs for the Ulsan facility? Or do you think there have been any change over the past, call it, 6 months or so in terms of the expectation of the budget for that facility? Or is that somewhat contained since it's on an existing industrial site?

Yes, we haven't seen too much of an increase in costs. Korea -- inflation in Korea is a little bit lower than, let's say, in North America, where we have these higher inflation numbers. The big jump in inflation happened probably like 2021, 2022. That's where we saw really big increases. We started to see things level off definitely right now. And so, there's no big surprises on the CapEx in Korea. Again, you have the advantage of building on SK sites, so there is some infrastructure there at the site that's not needed in the CapEx. But yes, costs are in line with what our expectations were. SKEE is doing all of the final engineering and the construction. And so having that as an internal SK company also helps manage the costs of the EPC contract. So everything is in line. So we're really happy with that as well.

Okay. Excellent. And then maybe just one last one for me, if I could. Thinking about expenses, obviously, you guys have done -- or have made some really good progress already in reducing expenses. I'm wondering if you have a kind of like a run rate that you think expenses can get to on an annual basis that you can share just from a total expense perspective?

I think right now we're about $12 million.

I can take that one. Yes. Yes. So right now, we're -- the expense -- the projection for 2024, we're going to be -- what we're ultimately targeting to, if you look at maybe not 2024, but 2025, we're looking to get to about $12 million a month, give or take, David. So obviously, we're going to see a major decrease in expenses that are not project related because of the cost recovery mechanism that we mentioned. So we're going to have a major decrease to the tune of 50% next year for fiscal 2024. And then another, call it, 20% for fiscal 2025. So our ultimate end goal is to end up at $12 million or below from expenses, so $1 million per month and less. That's what we're currently in our projections, and that's currently we're all going to be accountable for.

On that, I would say the real transition that the company is making is now all of our employees or every department is now becoming -- we're charging back the fees to the projects. So let's say, for the SK Ulsan project, any feedstock-related testing that's needed, right? So when we're securing feedstock, feedstock is sent to Montreal. We're testing it at the lab scale, we're testing in the production facility. So all of those costs are now going to be absorbed by the project because it's -- obviously the project is the one that's benefiting from that work. Same thing with our engineering team. We're going to be outsourcing all of our engineering team to the projects because the project is going to charge you back. So these are all going to be CapEx-related project costs that are coming back to us. Same thing for the French project. Any feedstock testing or any other work that we do that's getting charged back to the project. So that's going to be a really big difference. Obviously, the plant here, there's no more expenses as far as CapEx are things needed because the plant is up and running. It's operational. So that's really leveled off. So we really -- we're on the right track in getting costs in line. The other big thing is once the construction is finalized for Ulsan, the Quebec facility here in Terrebonne probably wouldn't -- there's no use in running a smaller facility once you have the large-scale facilities up and running. So this again would be if any customer wants to do some trials or a partner wants to do trials, we have this facility available, but it would be charged back to the project. So really -- we're really shifting our focus to be able to control costs as much as possible going forward.

[Operator Instructions] And it appears we have no further questions in the queue for today. So I'd like to thank everybody for joining Loop Industries Fourth Quarter Earnings Call for 2023. Thank you for joining. You may now disconnect your lines.