Li-Cycle - Q2 2024

Executive Summary

• Record quarterly revenue of $8.4M (+133% YoY) with materially lower SG&A (-39% YoY) narrowed net loss to $8.2M; however, cost of sales remained well above revenue and cash fell to $57.0M at quarter-end, underscoring near‑term liquidity risk.
• Strategic focus unchanged: closing the U.S. DOE loan (up to $375M) remains top priority; Rochester Hub MHP scope total project cost held at ~$960M, while “cost to complete” was refined to ~ $490M (from ~$504M in Q1), and Ontario Spoke moves from pause to closure to prioritize Gen‑3 Spokes.
• Commercial traction improved: ~40% of Q2 feedstock were EV battery packs; four of top five customers were large global EV OEMs; recycling services drove revenue mix gains; Q2 produced ~1,394 tonnes of black mass and sold ~1,158 tonnes.
• Incremental financing optionality added in/around the quarter: 1‑for‑8 share consolidation to support NYSE compliance and an at‑the‑market equity program of up to $75M; company continues exploring strategic and financing alternatives to bolster liquidity—key catalysts alongside DOE loan documentation and disbursement timing.

What Went Well and What Went Wrong

• What Went Well

  • “Closing the U.S. DOE loan remains our top priority,” with progress on “key technical, financial and legal workstreams” toward definitive documentation; MHP scope technical work is “now quite advanced”.
  • Execution and mix: record revenue ($8.4M), higher recycling services revenue ($3.2M vs. $0.5M YoY), and SG&A down 39% to $15.3M on restructuring/cost actions.
  • Operational KPIs: ~40% of feedstock were EV packs; black mass production ~1,394 tonnes and sales ~1,158 tonnes; Germany Spoke achieved ISO certifications.

• What Went Wrong

  • Unit economics remain pressured: total cost of sales ($19.4M) still far exceeds revenue ($8.4M); adjusted EBITDA loss improved but remained sizeable at $(23.4)M.
  • Liquidity draw: cash and equivalents fell to $57.0M (from $109.1M in Q1), with Q2 operating cash outflow of $(37.3)M; management is “exploring financing and strategic alternatives”.
  • Network rationalization signals constraints: Ontario Spoke is transitioning from pause to closure to focus on Gen‑3 Spokes; Rochester Hub still requires DOE loan plus additional base equity before drawdowns.

Transcript

Operator (participant)

Good day. My name is Ashley, and I'll be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2024 Li-Cycle Holdings earnings call and webcast. 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 at that time, please press star one on your telephone keypad. If you should need operator assistance, please press star zero. Thank you. I will now turn the call over to Louie Diaz, VP Corporate Affairs. Please go ahead.

Louie Diaz (VP of Marketing & Communications)

Thank you. Good morning, and thank you everyone for joining us for Li-Cycle's business update and review financial results for the interim period ended June 30th, 2024. We will start today with formal remarks from Ajay Kochhar, President and Chief Executive Officer, and Craig Cunningham, 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, or in our past reports and filings with the U.S. Securities and Exchange Commission and the Ontario Securities Commission 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 assessments as of any date subsequent to the date of this call. With that, I'm pleased to turn the call to Ajay.

Ajay Kochhar (Co-CEO)

Thank you, Louie, and good morning, everyone. On our first quarter earnings call in May, we provided an update on the progress made on our comprehensive review for the restart of construction of the Rochester Hub. Today, we are pleased to share additional updates on the steps we've taken towards achieving our previously mentioned key objectives and also to discuss our second quarter financial and operating results. Starting on slide 3, we continue to make progress on our key objectives. First, closing the U.S. DOE loan remains our top priority. We continue to work closely with the DOE Loan Programs Office to advance towards definitive financing documentation and satisfying conditions precedent for loan disbursements. Second, we continue to evaluate additional financing alternatives, including exploring financial and strategic options to increase our near-term liquidity. Third, we have advanced our comprehensive review of the Rochester Hub.

We refined the cost estimates for the local market as part of our work on evaluating the total project cost, and we also advanced the go-forward Rochester Hub project execution plan for the proposed mixed hydroxide precipitate, or MHP, process. Finally, we are reviewing and optimizing our Spoke network. We are exploring ways to extract more value from our Spoke network and are transitioning the Ontario Spoke from a paused operation to closure to focus on our key Generation Three facilities. In addition, we are pleased to announce that the Germany Spoke secured ISO certifications for meeting global standards. We will continue our strategic review of our operations. Turn to slide 4 for an update on the current status of the DOE process regarding the conditional commitment for a loan for gross proceeds of up to $375 million.

As you can see, we remain in step 5 of the DOE's loan application process, and we remain committed to finalizing the loan. During Q2, we continued to work closely with the DOE on key technical, financial, and legal work streams to advance towards reaching an agreement on definitive financing documentation, execution thereof, and satisfying conditions precedent for loan disbursements. Turn to slide 5 for an update on the Rochester Hub project and the proposed MHP scope. On our Q4 earnings call in March, we reported that we had completed an internal technical review confirming the viability of the MHP scope to produce MHP and lithium carbonate as part of the proposed change in our project development strategy for the Rochester Hub. Since then, we've made significant progress on the technical work stream. This includes advancing the go-forward project execution plan for the Rochester Hub.

Additionally, we refined cost estimates with the local market for major construction contracts, including consideration of the recent work with the local market. Our current estimated cost to complete the Rochester Hub project is substantially similar at approximately $490 million for the MHP scope, which is inclusive of cash commitments to date. For clarity and positively, the total project cost estimate for the MHP scope remains the same at approximately $960 million. We note that these estimates are subject to several assumptions and will continue to be refined as we complete our comprehensive review work. In summary, the technical work on the proposed MHP scope is now quite advanced. Turn to slide 6 for an overview of Li-Cycle's commercial updates. We've established a broadly diversified global base of battery supply customers, including a leading U.S.-headquartered, vertically integrated EV and battery manufacturer....

which is our largest customer source of revenue for the first half of the year. Notably, four of our top five partners for feed intake during Q2 were among the largest global EV OEMs. We continue to demonstrate our expertise in processing all types of lithium-ion batteries, independent of form factor and chemistry. We remain focused on EV battery packs to leverage the value differentiators provided by our Gen Three Spoke capabilities in processing this material. EV battery packs continue to be a large portion of our input feed and represented approximately 40% of the total battery materials processed at our Spokes in Q2. We've also widened our commercial footprint for input feedstock for the Germany Spoke in Europe. As well, during the quarter, we announced a partnership with Daimler Truck North America to recycle batteries.

Finally, we continue to see broad-based support for our differentiated technologies, reflected in our position as a preferred recycling partner for leading global battery, EV, and energy storage OEMs. Turn to slide 7, for some highlights of our Spoke operations. During the quarter, our spokes produced approximately 1,394 tons of black mass and equivalents. We have continued to optimize our spoke network and have increased throughput rates at our Arizona and Alabama Spokes. We secured ISO certifications for our Germany Spoke, highlighting our commitment to sustainability and the highest global environmental, health, and quality standards. And finally, we are transitioning the Ontario Spoke, where operations have been paused since November 2023, to closure in order to focus on our priority Gen Three facilities. Turn to slide 8 for some highlights related to the optimization initiatives at our spokes.

Our goal is to take near-term steps towards creating financially accretive Spokes. As noted, we are prioritizing our Gen Three Spokes, which can process full battery packs without the need for dismantling. This aligns with priorities of our EV and battery OEM partners, who comprise a large share of our global battery feed intake. In line with this, we aim to maximize and sustain throughput rates at our Gen Three Spokes to fully leverage these capabilities. We are also optimizing our product conversion costs to increase our competitiveness in the market. As you can see in this quarter, recycling services are a growing share of our revenue. We're accepting approximately 43% of our revenue in the first half of the year. We will continue focusing on these services to leverage the value differentiators of our Gen Three Spokes and generate revenue.

We are working with our strategic partners to support and execute on these plans, and look forward to providing further details on our Spoke optimization and strategic initiatives in Q3 2024. With that, I'll now turn the call over to Craig to provide a review of the financials.

Craig Cunningham (CFO)

Thank you, Ajay. Turning to slide 9 for a review of our 2024 second quarter financial results. Highlights include record quarterly revenue and lower SG&A and cost of sales for the second quarter of 2024 versus 2023. Starting with the sales of black mass and equivalents, which were 1,158 tons versus 2,093 tons sold in the same period last year. Total revenue increased 133% to $8.4 million, a record for the company. This increase reflects higher recycling revenue and favorable non-cash fair value pricing adjustments of approximately $0.2 million versus an unfavorable adjustment of $1.7 million from the prior year. Moving to cost of sales, which decreased 4% to $19.4 million versus $20.2 million in 2023.

Cost of sales attributable to product revenue decreased by $2.3 million or 11% compared to the last year's results, due to lower production levels, partially offset by costs associated with Spoke repairs and maintenance activities. Cost of sales attributable to service revenue increased $1.5 million compared to last year due to new service contracts entered. We are also pleased to note that SG&A has decreased 39% to $15.3 million versus $24.9 million in 2023, primarily driven by lower recurring personnel costs resulting from our restructuring initiatives implemented since the pause of the construction of the Rochester Hub. Adjusted EBITDA was a loss, largely driven by a decrease in SG&A, cost of sales, and higher revenue, as well as $2.2 million in restructuring fees.

As of June 30, 2024, Li-Cycle has cash and cash equivalents of $57 million, versus $109.1 million at the end of the first quarter of 2024. This is mainly due to higher working capital and investing activities, partially offset by lower SG&A. I will now turn it back to Ajay.

Ajay Kochhar (Co-CEO)

Thanks, Craig. Turn to slide 10. I wanted to conclude by addressing the current industry dynamics we're seeing across the battery supply chain. While there have been recent challenges, we continue to believe in the long-term fundamental for Li-Cycle due to two main drivers: increasing recycling supply and the deficit of expected post-processing capacity, and the continued trend towards localization of the battery supply chain. The chart on the left illustrates the rising adoption of electric vehicles in North America, with sales achieving a CAGR of approximately 36% from 2019 through 2024. Notably, despite current industry headwinds, third-party sources are projecting a robust 23% CAGR off this base through the end of the decade. As depicted on the right, these growth dynamics support the strong demand for an expanding market for recycling of all forms of lithium-ion batteries.

In the near to mid-term, the increase in recycling materials is largely being driven by manufacturing scrap from Gigafactory growth, with end-of-life battery feedstock supplementing this growth towards the end of the decade. By 2030, the supply of recycling materials is projected to increase by up to 6 times versus 2024 levels. Despite the recent challenges we are seeing in the battery supply chain, the longer-term fundamentals for the industry remain clear for recycling. The transition to EV adoption is well underway, and growth is continuing, even if at a different rate in the near term. Li-Cycle is well positioned to capitalize on these opportunities as there is still a significant gap in post-processing recycling capacity. The Rochester Hub is expected to play a pivotal role in helping to fill this gap. Turning to slide 12.

We believe the trend towards localization will also continue to be a positive for the industry and our company. Policy initiatives in North America and Europe continue to provide a favorable backdrop, encouraging local production and reducing reliance on external supply chains. This includes the U.S. Inflation Reduction Act, various tax incentives, and more recently, potential tariffs on imports. In the U.S., we have seen continued bipartisan support to build domestic capacity in the battery supply chain, to onshore clean energy jobs and reduce reliance on critical minerals from foreign entities of concern. With the continued growth in EV adoption underpinning the long-term demand for recycling and post-processing capacity and the ongoing support for the localization of the supply chain, the planned development of the Rochester Hub will strategically position Li-Cycle to create value for our stakeholders. Turning to slide 13, and to reiterate our go-forward strategy and key objectives.

First, we are focused on reaching an agreement on definitive financing documentation for the DOE loan. Second, we are evaluating financing and strategic options to bolster our liquidity. Third, we aim to complete the comprehensive review of the MHP scope for the Rochester Hub. And lastly, we are working with our strategic partners to maximize value across our Spoke network. Stay tuned as we expect to provide further details on our Spoke optimization and strategic initiatives in Q3. Before we get to Q&A, I wanted to thank our employees and our partners for their continuing support. Li-Cycle has clear objectives over the second half of this year, and we are focused on capitalizing on our opportunities. Operator, we're now ready for questions.

Operator (participant)

Thank you. At this time, if you would like to ask a question, please press star one on your telephone keypad. If you wish to remove yourself from the queue, you may do so by pressing star two. We remind you to please pick up your handset for optimal sound quality. We'll pause to allow any questions to queue. We will take our first question from Doug Paul with LPL Financial. Please go ahead.

Doug Paul (Analyst)

Hi, can you provide some more color on where we're at in this step five or how—possibly how long this step five takes for this loan to close?

Ajay Kochhar (Co-CEO)

Sure. Hi. So, I'd say at a high level, you know, just to take a step back, probably folks have seen a lot of progress from the DOE recently, and momentum picking up. Now, just to contextualize, right, this is the last stage before we close. So, we've been here for a while. Obviously, back since February 2023, we got our conditional commitment. Since then, we've been in closing, though in between, we had the pause, a bit of a proposed shift in the strategy. Within the closing phase, there are three work streams. There's technical, financial, market, and legal. The technical side has been focused on the MHP scope. That is well progressed. The financial market side has been basically reintegrating that into the view from the financial perspective.

That's also very well progressed, and now we're really focused on those definitive financing documents, as mentioned.

Doug Paul (Analyst)

Okay. Do you have an anticipated date of closing?

Ajay Kochhar (Co-CEO)

I think at this time, we're moving as extremely as possible to close, and I can tell you this is my top priority. It's a top priority for the organization, and we're continuing to progress towards that.

Doug Paul (Analyst)

All right. Thank you.

Operator (participant)

Once again, as a reminder, that is star and one for your questions. We will take our next question from Matthew O'Keefe with Cantor Fitzgerald. Please go ahead.

Matthew O'Keefe (Analyst)

Thanks, operator. Good morning. Just a question on the comprehensive review. Some good progress, sounds like, has been made there. I'm just wondering, I mean, how much more and timing-wise on that being completed, and how are metal prices sort of impacting that review? And as an addition to that, if you could sort of comment on your view on listings are going to be a very important component of your revenue stream when you get this operational. Maybe you could comment on current pricing and the kind of pricing you expect is needed to make this work.

Ajay Kochhar (Co-CEO)

Yeah. Hey, Matt, good morning. So, yeah, let me start maybe on the review first, then I'll talk a little bit about the influence of metal pricing. So, when we, yeah, we keep talking about this review, I think just to break it apart in simple terms, there's a technical part and there's a financial part, right? So, the technical part has been a lot of what we talked about, I talked about in the presentation, vis-a-vis the internal technical viability tech of the MHP scope. So that's been completed. And then a big thing that we did in Q2 was going to the local market to refine the estimate for the CapEx, which, by the way, was also a necessary activity for the DOE. So, that's also done great. And as you saw, we didn't change the CapEx estimate.

So that then feeds into the second part, the financial part, which is really what you're driving at. Within that, obviously, there's the full financing package that we're working on. The DOE is the cornerstone of that. And what you're getting at is really, okay, what does it mean at current metal prices? Yeah, I mean, look, we're in a, we've been in a soft period for nickel, cobalt, and lithium. One of the benefits we have is, obviously, we're not reliant on any one of those, unlike to a sole lithium-producing project. Obviously, as you know, we have, you know, we have never really gotten into, you know, forecast economics. We'll get there when we get there.

But I can tell you, given the basket of those three, even at current prices and where they're expected to be, we still see this as accretive, or otherwise, we wouldn't be, we wouldn't be pursuing it. So, that's another way of talking about where current prices are and how we see the economics.

Matthew O'Keefe (Analyst)

Okay. Can I just ask you a little bit different way? Or, I mean, in your discussions with the DOE, do they have a kind of price deck or expectation that they're focused on? I mean, are they putting in some sort of hurdles for you or not hurdles, but targets for you?

Ajay Kochhar (Co-CEO)

So they do have an expectation. I'm not at liberty to say what it is, because that's their advice to them. But what I can say is, at a high level, and just sticking based on what most folks' experience would be, obviously, given it's a debt and it's a loan, these aren't, you know, sort of, bullish, equity underwriting sort of commodity prices that are typically been used, broadly speaking, right? So, like, it's. That's the sort of, zone range, just to talk broadly.

Matthew O'Keefe (Analyst)

Okay. Okay, I appreciate that. Thank you.

Ajay Kochhar (Co-CEO)

Thank you, Matt.

Operator (participant)

Once again, as a reminder, that is star and one for your questions. We will pause another moment to allow any further questions to queue. It does appear that we have no further questions at this time. I'll turn the call back over to Ajay for any closing remarks.

Ajay Kochhar (Co-CEO)

Thank you. So as mentioned, given the continued favorable long-term trends in our industry, we're excited to execute on our clear objectives, and we look forward to providing you with a further update on our progress soon. Thank you.

Operator (participant)

Thank you, and this does conclude today's program. Thank you for your participation. You may disconnect at any time.