Anaergia Inc

TSX:ANRG

Earnings Call Transcript 2022-Q1

[Operator]

Hello, everyone. And welcome to the Q1 Anaergia Conference Call and Webcast 2022. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Darlene Webb, Investor Relations of Anaergia to begin. Darlene, please go ahead.

[Darlene Webb;Investor Relations, executive]

Thank you very much, Nadia. And good morning, everyone. This call will be discussing our earnings for Anaergia's first quarter of 2022 ended March 31, 2022. If you're following along with our slides, my comments as usual are directed to slides 1 through 3.

For our call today, I am joined by Dr. Andrew Benedek, Anaergia's Founder, Board Chairman, and CEO; Dr. Yaniv Scherson, Anaergia's Chief Operating Officer; and Mr. Hani Kaissi, Anaergia's Chief Financial Officer. Before beginning our formal remarks, we would like to refer listeners to Slide 2 of the presentation, which contains a caution on forward-looking information and a note on the use of non-IFRS measures.

Listeners are reminded that today's discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated in these forward-looking statements. Anaergia does not undertake to update any forward-looking statements except as may be required by applicable laws. Therefore listeners are urged to review the full discussion of risk factors in the company's perspectives, which is filed with Canadian securities regulators.

And lastly, while this conference call is open to the public, for the sake of brevity questions will be prioritized for analysts. And with that, I'll turn the call over to Andrew.

[Andrew Benedek, executive]

I'm on Slide 4, Summarizing the Key Highlights. The quarter's revenue is showing a very small growth. This should not be disappointing to anyone who saw our MD&A released at the year-end release about 6 weeks ago. We did in fact predict a slow start to the year and that's indeed what is happening, but we are still holding onto our estimate for the rest of the year, which means that it should be a very good year for the company. If the revenues made is not so disappointing, what is truly disappointing is the collapse of our share price, which we do not understand, because we are doing everything we said we would do.

Some of the delays that we're seeing are normal in this environment, but nonetheless, all our projects are proceeding and we're seeing tremendous opportunities, particularly in Europe. We have raised $60 million in a bought deal in early April. This was raised at $12.50. We needed to do this, although we didn't like the share price, because we felt in order to begin to roll in Europe, we had to take advantage of this historic opportunity. And that's why we did it. We are very disappointed for the shareholders that saw their price go down. And that includes me, of course, because I personally invested $5 million in that $60 million. But such is the way the markets are.

And eventually, having led a public company for a long time in the past on the TSX, things go up and down. And I always talked through our meetings and just kept doing what is right for the company and will continue to do so, this time as well. We're proceeding, maybe I'll pass through slide number 5, trying to summarize some of the things we're doing in more detail. On Slide 5, you'll basically see really important moments for us, which is a price of gas above $30 per MMBtu. This is likely to remain high. Hopefully, the war in Ukraine will be over. But even then, the predictions are that this year and next year, we'll continue to have high prices.

We see that, as we said before, that the EU governments, in particular, but even the UK governments are all keen and doubling up on the need for having RNG in their country. And together with the Chinese that are already there and this high wholesale price or revenue will increase significantly for all our projects. And this is the reason that we believe we have a historic opportunity that we need to invest in. In the US, the prices of the incentives either are essentially staying the same [indiscernible] it's down for FCFS, which means that the market price overall is a little bit lower, but still in excess of our estimates when we undertook our project.

And I need to speak later to this, but all the incentives in California are moving in the right direction, particularly for California-based gas. As you may know, we are fortunate to have offices in Germany and the UK, as well as Holland in Europe. And we see all of those markets as ready to boom in our business, as well as Spain and France. We have also added some capital sales to our backlog, but we did not sign any major new projects simply because we are shifting our way, given the current share price. And we will only get moving on projects once the financial support for the project is in place going forward, especially in the share price. With this, I'd like to hand it over to Hani for Slide 6 and 7.

[Hani Kaissi, executive]

Thank you, Andrew. And good morning, everyone, and thank you for joining. Going to Slide 6. As Andrew mentioned, and as previously disclosed, our 2022 is starting slow and expected to accelerate. At $20 million, the Q1 revenues are 6% higher than the same quarter in 2021 with 86% of these revenues coming from capital sales. The EMEA region made up 68% of the revenues and was the major driver of the revenue growth, while North America made up 29% and Asia 3%. The service segment also grew nicely related to Q1 2021. The gross margin of 24% is a good margin, and as usual, reflects the mix of projects during that quarter.

The net SG&A is in line with expectations and our Q1 adjusted EBITDA is $1.1 million. The net income loss includes a $7.1 million change in fair value of an embedded derivative. Going to Slide 7. As of March 31, 2022, our cash equivalents and current restricted cash was at $76.7 million down by $25 million. The cash used in investing activities during Q1 2022 is reported at $35.3 million. This cash is being used primarily as bridge financing for the BOO project, at which time we will recover a good portion of this bridge financing and cash invested. Following the quarter-end, we raised $60 million [indiscernible] as Andrew mentioned.

Following that, we find shelf prospectives to allow us opportunistic offering of securities of up to $250 million. Now, considering the project debt financing that we're working on putting in place, the company has enough capital to complete the project it has in hand. The question is really, how fast do we want to grow beyond that? At the current share price, it's unlikely that we will take advantage of the shelf prospectives, but we're hoping that given the fundamentals of the company and the increasing size of the opportunities in front of us the share price would improve at which point we would consider using the shelf prospectives. However, in any case, we're working on some alternative arrangements.

After quarter-end, we also closed the senior debt financing for Easy Energia. I want to follow Italian BOOs. And in parallel, in addition to our existing Mezzanine facility for the portfolio of Italian BOOs, we have been focused on putting in place, among others, a senior debt facility for the portfolio of Italian BOOs and the Mezzanine loan and senior debt for our Tønder project in Denmark. I will now pass it over to Yaniv.

[Yaniv Scherson, executive]

Thank you, Hani. And good morning, everybody. I'm on Slide 8. As a recap, we continue our 3 lines of business. Our capital sales, primarily driven in Europe and in North America at the moment, I try to mention. Our service business with ongoing revenue streams from mostly O&M contracts. And our expansion of our build, own, operate business as Hani mentioned. As you'll see, we see an increasing shift on our build, own, operate revenue that will grow precipitously this year.

Moving to slide number 9 on our capital sales, you notice a slight decrease in the revenue from last year, but this is primarily due to delays in executions in our US projects from global supply chain issue where the projects are still there and the revenues will be realized in subsequent quarter. We do expect to be on track with our capital sales business for the year despite the delay early this year. In the United States, we announced a recent follow-up contract with our carbon cycle facility in North Carolina. This is one of the largest agricultural digesters in the United States, and with that came substantial scope addition as well as a long-term operating contract.

India continues to be our core growth driver this quarter at 60% year-over-year increase, primarily driven by the capital sales in that region that are continuing to execute and go throughout the rest of the year across our portfolio. Notably, we had 2 capital sale projects of about $45 million in value, demonstrating the growth in the region and the fundamentals of our BOOs as well as the market in general. Moving to slide number 10, our service and BOO revenues both increased year-over-year. The primary growth in our service is the start of our operating contracts in Canada, as well as other contracts adding to our revenue backlog this year.

On the BOO side, the main revenue increase is attributable to our North American facilities starting to realize tipping fee revenues while restoring gas. And we are expecting as we've stated before organic waste volume in Los Angeles, specifically for the Rialto facility to increase as the franchise is starting to roll out the collection and most notably with a clear enforcement. Despite the delays in enforcement of the program, we continue to deploy 2 more OWC machines.

Currently, the second one is slated to start operation in Q3 that is expected to increase [indiscernible] to Rialto independent of the outcome of the Los Angeles specific enforcement timing, as well as the third one that is in manufacturing now and will be deployed in the Southern California region. We expect with these 3 OWC machines to be able to overfill Rialto with all 3 runnings and therefore ensure that Rialto will be filled.

Moving to Slide 11, we note the startup commissioning in Italy in the first of 6 projects slated to come online this year, Easy Energia. You notice on the figures that the financials are in line with our 4x to 6x, even a build cost multiple, reflective across our Italian portfolio and representative of the 5 additional facilities in Italy in addition to this one that will be coming online this year. We will note that there is an upside that we believe will be obtainable with the increase in natural gas price and energy security drivers in Europe in the wake of the Ukraine crisis.

Moving to Slide 12, we show a snapshot here of our portfolio of build, own, operate assets across North America and Europe, primarily in Italy and Denmark, with our operating, execution, and one project that's contracted and we haven't started yet showing a portfolio of 13. Highlighting a couple of key figures, this portfolio here, which is firm is representing a $682 million capital investment. So at 85% greater than at the time of our IPO, and contributing 150% increase in our proportional run-rate EBITDA. $130 million, our proportionate run-rate EBIT, versus $52 million at the time of the IPO.

The main drivers in Europe, we expect will be driving profitability with a dual driver from the increase in current prices in natural gas from the energy crisis, as well as a drive for not only decarbonization but local energy security. European policy is moving quite aggressively to produce local and domestic supplies of renewable natural gas in the wake of the crisis. As mentioned, our 6 Italian group projects are expected to commence this year, as well as the first phase of our project in Denmark to meet the first gas requirements, with the second phase completed next year in '23.

We noticed the increase in the run-rate EBITDA, about 150% again, and on the US side, the environmental attributes with our RNG is expected to increase volumes, but we are not including quite yet. As noted for the North American project, gas is being produced through our Rialto facility, so carbon methane that we noted, and currently being stored in the grid while we finalize approvals for the renewable attributes. As far as execution, we noted that our first Italian project was commissioned earlier this quarter with the follow-on coming online, so carbon methane also started last quarter Q1 and it's actively stored in the grid.

We've talked about the phase Tønder project with phase 2 next year. Fundamentally our pipeline continues to grow with the Kent County, Michigan project and Victor Valley in life development with secured agreement. We are working on continuing the development of these 2 mega projects underlying the need for diversion in RNG And most notably, as Andrew mentioned and will add detail, we reorganized our structure in Europe to take advantage of this major opportunity with consolidating leadership to you'd be able to take advantage of the other geographies that we have presence but haven't entered the build, own, operate business quite yet.

We are taking advantage of regional offices and references across European jurisdictions outside of Italy and Denmark with a focused structure and centralized leadership. With this, I'll pass it over back to Andrew.

[Andrew Benedek, executive]

Thank you very much, Yaniv. Between Hani and Yaniv, we pretty much covered both on Slide 13. Perhaps I can wrap up this discussion by talking about the overall picture that your company is involved in. And initially, the driver for us has been climate change, the energy transition and working with the incentives in place to bring that about. Essentially, RNG has relatively recently been recognized as a critical part of the transition because it is a simple drop-in fuel that can replace molecule for molecule once in the gas pipeline. The replacement actually has started in some countries. As I noted previously, in Denmark, it's already at 25% of the gas consumed.

What is the critical change that has happened? That it's now, in particular in Europe, it has become a security issue as well. A long-term job creation and security issue. And as a result, we're proceeding to take advantage of the bubble opportunity plus the additional increase in value of this gas far beyond what we had assumed. So we're in a terrific position as a North American company that's very well established in Europe. We've seen what we have done in a short time in Italy. And as Yaniv said, we're are now figuring out how to take advantage of our position in the other countries where we supply capital equipment. And so this will eventually bring great results for your company. In the meantime, we remain the strongest company in this space on the planet. Strongest technologically, strongest in geographical distribution, and therefore resilience, and we look forward to much better shared price and much faster growth as time goes on. Thank you very much for tuning in.

[Darlene Webb;Investor Relations, executive]

I think we can open it up for questions now.

[Operator]

[Operator Instructions] And our first question today comes from Aaron MacNeil of TD Securities.

[Aaron MacNeil, analyst]

I'm not sure if this one is for Andrew or Yaniv or maybe both, but you know, appreciating and maybe putting aside Rialto on the feedstocks sourcing issues, I think it would be helpful if you could give us a sense of where the so-called biomethane facility and the Easy Energia facilities are in terms of volumes relative to their name-plate capacity and what your expectations are in terms of the timeline to ramping up to name-plates if they're not there already?

[Andrew Benedek, executive]

Yaniv, do you want to address that?

[Yaniv Scherson, executive]

Yes, absolutely. The talk about methane is not short of feedstocks and we said that we also have the isolated situation that is dependent on the rollout of a new program. That is required by law, of course, and it has been delayed in ramp-up as rollout of the program as well as the strong enforcement. [indiscernible] methane is actively injecting gas. We are approaching about 50% of the flow capacity now and we expect that by end of Q2, we should be at name-plate close to there. With respect to Easy Energia, we started commissioning and are starting to ramp up the feed. Gas injection will start very shortly and we expect, a similar ramp-up to soak up our methane.

As I said, the feedstock for Easy Energia is available and it's presently being sent on a longer drive to another location waiting for the Easy Energia of site to start, which is at a closer location, thus providing a savings and logistics benefit to our suppliers.

[Andrew Benedek, executive]

Aaron, maybe just for your information, all our Italian projects have fixed contract for the feedstock. So there's no issue of feedstock.

[Aaron MacNeil, analyst]

Understood. Maybe one more for you. Can you provide any updates with respect to the ordinance that's expected from Los Angeles related to Rialto and that would ultimately compel more businesses to comply with the Senate [indiscernible] 1383? And I know there's nothing formal that's been announced so I'm just more looking for any anecdotes that you have if you can share them.

[Yaniv Scherson, executive]

Yes, absolutely. We're tracking this issue very closely as you know that every city in California is required to have an ordinance by law by, SB1383. Many have passed ordinances already, which are requiring constituents, generators, to subscribe to the organics collection program that the jurisdictions decided to elect. And the ordinance has not been officially passed in Los Angeles yet. We understand that it's in the works.

Los Angeles is currently required to have [indiscernible] in place and it's, as we said, required by state law. So there's some unknown timelines with respect to local politics for ordinance to come in place, but we know that it's happening. We expect that it would be this year. It'll have to be this year given that it's required by state law and LA is not in compliance.

[Aaron MacNeil, analyst]

Okay, understood. And then...

[Yaniv Scherson, executive]

But I would just add [indiscernible] Aaron, [indiscernible] . Sorry, Aaron. I would just add, though, that we believe, however, that independent of the timing of the ordinance, the second OREX and now this third that is in manufacturing, will increase the stock to Rialto because it's servicing jurisdictions that are outside of LA as well, where the commitments have already been in place to utilize these OREXs for extracting organics from the solid waste collected from other jurisdictions outside of Los Angeles.

[Aaron MacNeil, analyst]

Okay, that's helpful. Thank you. Hani, I don't want to leave you out here. I guess, can you share what portion of the capital related to the $420 million of consolidated CapEx for projects that are being executed has an expense as of the end of the first quarter? And maybe could you also share how you expect capital spending to flow over the next few quarters or a year.

[Hani Kaissi, executive]

Sure, but just for clarity, if you'd asked me about the PPE that's, what, $420 million?

[Aaron MacNeil, analyst]

That's right.

[Hani Kaissi, executive]

Which $420 million.

[Aaron MacNeil, analyst]

It's on Slide 12.

[Hani Kaissi, executive]

Are we trying to prove?

[Aaron MacNeil, analyst]

On Slide 12, the EU project in execution. The consolidated CapEx of $420 million.

[Hani Kaissi, executive]

Okay, and the question is, what exactly about [indiscernible]?

[Aaron MacNeil, analyst]

How much [indiscernible] today?

[Hani Kaissi, executive]

So how much of...

[Aaron MacNeil, analyst]

How much is [indiscernible] today?

[Hani Kaissi, executive]

Yes. Approximately, I would say approximately a third of that has already been spent.

[Aaron MacNeil, analyst]

Understood. And do you have any sense of how capital spending flows might trend over the next couple of quarters? Or do you have like a 2022 full-year?

[Hani Kaissi, executive]

Yes, it's at the end of the -- yes, the whole $420 million or most of is probably going to-- Actually no, that's not true. About $100 million of that $420 million is going to be in 2023 and the remainder is going to be during the rest of 2022.

[Operator]

And our next question comes from Derrick Whitfield of Stifel.

[Derrick Whitfield, analyst]

Congrats on your operational project during Q1. With my first question, I wanted to focus on your prepared remarks regarding European energy security and WePower EU. Now that you've reorganized your management structure in Europe and have had more time to evaluate and discuss business opportunities with various industry counterparts. I wanted to ask where you guys see the greatest opportunity for incremental growth within the boost segment in the areas where you do not have a good presence?

[Andrew Benedek, executive]

I'll answer that. The situation in Europe is, essentially, across Europe. So the opportunities, however, for build and operate, require local knowledge and -- excuse me -- local teams so we're tending to focus on locations where we already have a presence, sell capital equipment. And we also operate in the UK, for example, so we can easily do what we've done in Italy and transition. The company has been going through a very significant transition, but we've tended to start in one location.

Like in North America, we started in California. Then as we added the people and the knowledge of the East Coast, we moved to the East Coast. And before the East Coast, we actually moved to Italy where we had a very strong presence and good team, and we've proven that we can make that shift. Now what we're trying to do is repeat the Italian model and translated it to the countries where we are similarly positioned, and that's primarily the UK and Germany. We do sell capital equipment in other countries. In particular, Spain, and France, which are significant markets. And we are also considering establishing a stronger presence in those markets. That's the near-term focus.

[Derrick Whitfield, analyst]

Great. That makes sense, Andrew. And perhaps with my follow-up, I wanted to focus on Easy Energia project. Following a successful commissioning of your first Euro facility, I wanted to ask if there were any learnings from that first facility that can be...

[Andrew Benedek, executive]

So-- Sorry, go ahead.

[Derrick Whitfield, analyst]

Yes, apologies, guys. So I just wanted to ask if there were any learnings from that first facility that can be applied to subsequent projects to improve the capital efficiency of your operations.

[Andrew Benedek, executive]

I think there is always the learning. The biggest one is to lock down every single component before we start a project in today's environment. Technologically, most of these projects are similar and the real learning will start as we operate the plant. But building them is what we've been doing, so relatively speaking, there is no major discovery so far.

[Derrick Whitfield, analyst]

It's one quick follow-up for Yaniv on Rialto. Could you, perhaps, help frame our waste collection stand at present relative to the expected throughput?

[Yaniv Scherson, executive]

Yes, we're at roughly 20% of the throughput through the plant currently. This is about a 20% increase from prior quarter so it's a gradual increase. And as I said, the increase will really be a step function with the new OREXes coming online as sort of firm increases with a [ stepwise ]. The secondary driver, we expect continual increase as the organics collection program continues to roll out at a steady pace in LA with more subscribers. But the real inflection point will be with the ordinance. So the capacity is there, the facility's working, and it's a timing issue. As soon as we get these OREXes on, and then the ordinance coming in place.

[Operator]

[Operator Instructions] And our final question at the moment comes from Justin Strong of Scotiabank.

[Justin Strong, analyst]

Just wanted to see if you can give us some color on that Petawawa AD upgrade project that kind of just came across. Is that now in your revenue backlog? And if so, to kind of what magnitude? I'm just trying to get a sense of the size of this project and potential ongoing revenue for the length of the 10-year service contract.

[Andrew Benedek, executive]

Yaniv, do you want this one?

[Yaniv Scherson, executive]

Yes, I can take that. Yes. This facility is a significant one for us as a validation of our wastewater thesis in creating value with unique technology platform for resource recovery in the wastewater sector. It's significant for us because it's a first milestone and presence in the Canadian wastewater markets- Ironically, took us longer to get into the Canadian markets than US. -and we believe is opening up a significant door to expand into the Canadian wastewater treatment sector by demonstrating the ability through our unique technology platform to derive value fund and energy and resiliency with our technological retrofits.

So the contract itself, I don't believe, has been in our backlog yet. We don't add until things are signed. Hani can correct me. The value is modest but the entry into the market segment is significant.

[Hani Kaissi, executive]

You're right. It's not in the backlog yet.

[Operator]

It appears we have no further questions so I'll hand my call back over to Darlene for any closing remarks.

[Andrew Benedek, executive]

May I just say that this Petawawa contract proves that we are the most versatile RNG player on the planet. We handle the biggest output of human activity, either solid or liquid waste, and we have dramatic, unique, and enabling technologies that give us an opportunity over the long term. The opportunities we're talking about take time. It's great that in Europe, we have this accelerator. In North America, it has taken time but it is long-term, solid, and with great customers in the end, so I do think the Petawawa contract is significant. We have quite a few projects already in the US, all of them successful, and we are doing great things in this space. Including the plants that will revolutionize this whole industry worldwide. And one of those will be opened on July 23 so if anybody's interested let [indiscernible] know if you want to send openings in Southern California. Thank you.

[Darlene Webb;Investor Relations, executive]

Thank you, Andrew. And once again, Nadia, thank you. Did you want to ask if there was any further questions based on that?

[Operator]

Yes, of course. [Operator Instructions] [indiscernible] a question?

[Darlene Webb;Investor Relations, executive]

That's great. Thank you very much, Nadia. Thank you all for your time today and joining us on our Q1 call. For any additional information or should you have any further questions, please feel free to contact the IR team at [e-mail], or visit us online on our website at anaergia.com. Thank you all once again. That's our call for today.

[Operator]

Thank you ladies and gentlemen, this concludes today's call. Thank you all for joining the Anaergia conference call webcast.