Anaergia Inc

TSX:ANRG

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to today's conference call Anaergia Q1 2023 Conference Call and Webcast. My name is Felicia, and I'll be your operator today. [Operator Instructions] I will now hand you over to your host, Darlene Webb, Investor Relations for Anaergia. Please go ahead, Darlene.

[Darlene Webb]

Thank you very much, Felicia. I would like to thank the operator, and good morning to everyone. This call will be discussing our earnings for Anaergia's first quarter of 2023 ended March 31, 2023. If you're following along with our slides, my comments are directed to Slides 1 to 3. For our call today, I'm 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 Development Officer and Acting 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. Listeners are urged to review the full discussion of risk factors in the company's prospectus, which is filed with the 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 turn the call over to Andrew.

[Andrew Benedek, executive]

Thank you very much, Darlene. I'm on Slide 4, and there are 5 main points on this slide. The first one is the fact that given our asset base, which is significantly above our share price. It's important to note that these assets are valuable. And in fact, they are more valuable than what we have it in the books. And the validation of that is the sale of our Tonder assets where we sold it for what we invested in -- at an additional $10 million.

We are continuing to see the unfolding of the support structure for RNG. This is very important, and will create an increasingly large markets on rolling of these incentives, given the bureaucracy on Western nations always takes a little longer but it is starting to happen and will definitely impact '24, '25 in a major way.

We are also getting validation on our technology and our market presence through 2 major awards that have been added to the many other awards that we've won over the years. And this particular ones [ I'll go through ] in more detail in a couple of minutes. And of course, we are continuing to advance our BOO portfolio with all of the Italian projects finished sometime this year and ramping up.

Finally, at the end of the talk, I will discuss our recognition of where we are and the work we are intending to do to shift the strategy from what we have been using to a new, more cash flow-oriented strategy.

Moving on to Slide 5. I would like to just comment on the fact that I've already commented on the incentives. So that's there. The other aspect is that we are now finding markets that weren't there for the RNG beyond the California incentives and the federal incentives in the U.S. The first one shows that there is a real interest in a major company to use the RNG for other fuels, in this case, hydrogen. And the second one, most of which we have announced, is the case of Irving Oil, who wants to decarbonize its fuel base. And this is happening across Europe, and it will be increasing in Canada. We're also making progress in getting recognition by multinationals for our technology, and we announced this briefly just a summary here.

And last but not least, we are progressing very well, in particular in the U.S., but also in Canada on working with wastewater utilities where we uniquely qualify to get a benefit from the residues that these plants produce, turn them into RNG. We received a contract just a few days ago from Monterey. And we've also been selected for a major build on operate plant in California that will be releasing information later on.

At this point, I'll hand it over to -- oh, no sorry, one more. The market recognition that I talked about, this is a global business association of major water companies and major water users, you feel it is that get together once a year, and it's kind of like the Olympics of water, they provide prices for the most -- for the greatest accomplishment or the most impressive company. We managed to win not 1 but 2 prices in Berlin just a few days ago. And the first one is for being the company that does the most for carbon -- for reducing carbon. And the second one is the recognition for what's considered the most important and interesting project of the year.

Given the large number of companies, much bigger, much older, multibillion dollar companies and utilities, it's surely amazing that a modest-sized company was able to win two of the top prices. So we're very proud of this, but the significance is that what we're doing very successfully in the U.S. and Canada will be welcomed everywhere in the world and there's much more opportunities in this space, especially with this additional recognition than we are showing at the moment. The challenge in this market is that it takes a while, but it's a really wonderful market where long-term relationship can exist to the benefit of both parties, the utility as well as our company.

So at this point, I hand it over to Hani Kaissi. Thanks, Hani. Go ahead.

[Hani Kaissi, executive]

Thank you, Andrew. Good morning, everyone, and thank you for joining. Going to Slide 7. The Q1 revenues at $37 million and 2.8% growth over the same period in 2022 were lighter than anticipated due to lower capital sales revenues and delayed BOO revenues. The capital sales segment and the EMEA region remained strong contributors to the revenues at 67% and 71%, respectively. The $4.2 million decrease in gross profit was mainly due to a combination of project cost overruns and certain strategic low-margin projects in EMEA during the quarter. These are largely attributable to O&M contract where the characteristics of the feedstock changed relative to the original parameters, resulting in higher residue disposal costs. And we have recommended technical solutions to the customer to address this issue and improve the plant profitability.

And also capital sales on brownfield facilities where unexpected issues related to the existing infrastructure at the plants has impacted us. Although each brownfield facility is unique, we're updating our contracting and execution procedures to mitigate such risks on future brownfield projects. The net SG&A was $3.3 million higher than Q1 2022. The increase was largely driven by higher overhead costs, additional provisions and higher audit fees. The adjusted EBITDA is $2.8 million higher than the same period in 2022. Losses driven by higher SG&A and decrease in gross profit for the quarter were offset by the $10.2 million net gain from the sale of Tonder, the project in Denmark. Q1 2023 net income loss, which improved by $5.1 million compared to Q1 2022, includes $5.1 million of noncash loss on an embedded derivative and the gain from the sale of the Tonder BOO project.

Moving on to Slide 8. As of March 31, our cash, cash equivalents and current restricted cash was at $93.8 million. That's up by $15 million from the same date last year, and noncurrent restricted cash was $15.2 million. In February 2023, the company completed the sale of Tonder with gross proceeds of EUR 56 million. That's on a book value of approximately EUR 43.6 million and pre-transaction costs gross gains of roughly EUR 8.4 million. The net cash provided by investing activities during Q1 2023 is reported at $15.6 million. That's compared to $35.7 million used during the same period in 2022. This was mainly directed at advancing the construction of the book portfolio, and the majority of the invested capital was funded at the subsidiary level with $21.6 million of debt and $8.9 million of preferred capital, with the balance funded by the corporate proceeds from the issuance of our share capital.

Moving to the 2023 guidance on Slide 9. Based on a recent review of our projects and current market conditions, we're revising our fiscal 2023 guidance with the updated revenue range being from $180 million to $220 million and the updated adjusted EBITDA range from minus $10 million to plus $10 million. The key events, circumstances and updated assumptions that have contributed to the guidance update are that the expected continuing feedstock shortfall at Rialto. It's unclear how quickly the commercial and multifamily generators under the RecycLA franchise would subscribe to organic waste collection and diversion services, as is required by the state law SB 1383, and how effectively the City of LA's ordinance is enforced. So given the current history, we have taken a conservative view on the Rialto forecast.

The second is that all 6 Italian BOOs will not be fully operational by the end of Q2 2023. While all our Italian BOOs are expected to have started operations in '23, it's difficult to predict when they will ramp up as they are dependent on external factors such as delayed electrical utility connections and varying waste characteristics requiring plant optimization on certain of those plants. So we have conservatively forecasted that the 6 facilities will be fully operational by the fourth quarter of 2023. And the last point is that we also reasonably anticipate additional client-driven delays on the capital sales project and cost and SG&A overruns.

I will now pass it over to Yaniv.

[Yaniv Scherson, executive]

Thank you, Hani. Moving over to Slide 10. On the capital sales front, this quarter saw a decrease of 18% year-over-year, mainly attributable to completion of projects and customers driven delays. The capital sales segment continues to be driven primarily from the North America and EMEA regions. With that said, we are seeing significant growth opportunity with influx of inbound primarily driven in North America by the IRA and in Europe by the REPowerEU program. And it's important to note that these programs are massive tectonic shifts in driving infrastructure deployment of RNG assets. The challenge is that they take time to implement all the rules and have clarity uncertainty before customers can decide on actionability of projects.

However, given our presence in the capital market with infrastructure that is functional and validation from major global companies, we're well poised to take advantage of this market surge, and expect to have impacts in '24, '25 and beyond from these policies. The momentum in the capital sales business continues to move forward, validating the technology from major players. We announced the supply to PepsiCo in 2 projects in Europe that will support reduction of Scope 1 emissions, as well as recently signed a major supply agreement to a California leading wastewater utility, Monterey One that will be supporting organic waste diversion in RNG infrastructure in California pursuant to the requirements. So the momentum continues to go, and we see strong opportunity ahead.

Moving on to Slide 11. On the Service and BOO segment, we saw an 18% growth in the Service segment, really driven from North American service contracts. And we'll expect continued growth in the Service segment as the facilities that we are building will begin operation. These are third-party supply contracts that we'll be converting into service or operations contracts through this year and next. On the BOO front, we continue to see growth on BOO revenues. You can see the figures there, primarily driven by the continued increase in the operating revenue from the BOOs that are in operation, and a major contribution from one of our assets in Italy. Most notably, it's important to highlight that the BOOs are making a difference in the market. We announced the supply with Toyota for renewable hydrogen production, validating the demand for this fuel and more importantly, on the platform fuel, well beyond transportation sector CNG only.

Moving on to Slide 12, an update on the BOO overview here. In Europe, the sale of the Tonder facility, as Andrew mentioned, was significant not only for liquidity, but critically validating both the asset value that it's worth more than what we put in and the technology that this is a functioning plant that had met the deadline in a very aggressive time line. We view this as a proof point across the BOO portfolio.

In Italy, we have delays on achieving operations of the plants. They're all moving forward. A lot of factors outside of our control. However, we continue to get the remaining 3 facilities expected conservatively to start operations Q4 of this year. So they will continue to come online and execute on the plan that we have forth in front of us.

Moving over to North America. We continue the construction on Rhode Island and Charlotte. Both facilities are on track, expected to finish their upgrades by Q3 of this year and contribute economically with the ramp-up in Q4 with respect to Rhode Island.

It's important to note now an underlying thesis in the market, we viewed the voluntary and compliance market as a very big demand side opportunity, much greater than transportation that would be most adequately and appropriately supplied by affordable carbon-negative RNG, which is the type of RNG that we produce from organic waste. We're seeing, albeit took longer than expected validation across major market segments. And as we sit today, we are now supplying RNG for decarbonization purposes on long-term fixed price contracts to a major oil company, Fortune 500 and major gas utilities. Again, validating our thesis of large demand side growth that will continue to grow in the voluntary and emerging compliance market.

We continue to develop on laser-focused projects. As Andrew mentioned, a recent award of another build-own operate at a wastewater plant similar to our successful so SoCal Biomethane model and large opportunities like [ Kent ] continue to advance forward.

With that, I'll pass it over to Andrew for Slide 13.

[Andrew Benedek, executive]

Thank you, Yaniv. This final slide called business reset, we simply explain it to you what we're doing given the circumstances of delays that make in the end, has driven our share price way below where we think it should be. And -- but it also means that we can't just do business as usual. We have to act in light of that. So the first one is that raising capital at these levels is not warranted and not a good idea. And so we have to shift to a more capital-light, what we call capital-light model. Essentially, this means that instead of focusing on owning assets we focus on cash flow and take advantage of a very powerful technology base and knowledge of projects, development of projects and operating the projects.

So in each of those steps, we will get rewarded from our financial partner who will want to own most if not all of these projects, but that's okay with us because we will have a strong positive cash flow and we can keep building more and more of these plans.

In each of the projects, we will get cash for development, we'll get cash for building the plant, we will then get cash from operating the plant, and then we also get cash for improving the returns on those projects or part of the return on the projects.

Margins have also not done well because of the complexity of some of our older projects that we're still dealing with. We have learned a great deal over time on what can go wrong in contracts, what can go wrong in execution of brownfield projects. And so we're putting this -- putting procedures, additional safety and risk analysis into place to make sure that this doesn't go on any future projects.

Our SG&A, given the fact that we cannot grow as fast as we intended to, and we have to watch our capital. Our SG&A has been built up because of the desire to grow fast. We will reduce this SG&A to be in proportion with the lower revenue base that you have seen today. In addition to that, we will -- prudent, and that's why the capital-light business model, prudent cash flow and make sure that we finance our projects systematically.

Finally, we've had some unfortunate events around the CFO and the auditors. This will be managed. Hopefully, we will appoint an auditor by the end of May. And we should be also appointing a permanent CFO. We're excited about some of the opportunities for that.

So that brings us to the end of our talk, and we are now ready for questions.

[Operator]

[Operator Instructions] The first question we have comes from Derrick Whitfield from Stifel.

[Derrick Whitfield, analyst]

Perhaps at a high level first. Could you speak to your expectation of interest from financial partners to pursue -- build on operate opportunities under the capital-light business model you've outlined.

[Andrew Benedek, executive]

Thank you, Derrick. I'll take this one on. So what -- those of you who follow the RNG market, realize that we are an oddity in this market. It seems that there is a tremendous financial interest, and there is major valuation on companies in this space. What we see is everybody wants projects. So there's many more people wanting to finance projects, and there are people offering them so that we think we can select companies that are purely financial institutions that on longer-term investment and need a partner that can deliver the projects and operate them for the financial partner. So we started this process, particularly for the European projects. We do have some partnerships in America and in Europe already, but we need a broader, bigger one in Europe, especially because of all the opportunities there.

I think the last thing that I might want to add to this, Derrick, is that, we have this enormous technology base and knowledge of the market. So we think we can bring great opportunities to our financial partner.

[Derrick Whitfield, analyst]

Terrific, Andrew. And certainly, I agree. We see the demand from financial institutions on our side as well. So again, I just wanted to understand it from your perspective and where it would specifically be applied.

Maybe for my follow-up, I certainly understand your restorations with Rialto, and it comes through in the release. Could you perhaps speak to your conversations with recycLA and local municipalities to drive the enforcement of SB 1383, and what you're seeing come out of those discussions in terms of expectations?

[Andrew Benedek, executive]

Absolutely. I think Yaniv is closest to [indiscernible] I'm also involved. So Yaniv, would you take it on?

[Yaniv Scherson, executive]

Yes, happily, happily, of course. You're right, there is frustration not only by us, but by many stakeholders across the state, including at the state level on the sluggish rollout. The situation on the ground is that it needs to happen, this rollout. It's required by law. If it doesn't happen, it undermines the entire state law and program. So a lot of that stake and a lot of eyes are watching with pressure. The challenge is one of timing still that the contract mechanism is challenging because it sort of overlooked a requirements of rollout, but more of an incentive with opting in. And so that's really the fundamental issue that's trying to be solved for now is how to balance -- how to get this rollout without imposing severe consequences that could be controversial or painful for generators financially.

So what this means on our latest outlook, given that this is sort of fresh information evolving every month is the rollout will happen as it must, by law, but this issue needs to be resolved between the major stakeholders in L.A. And unfortunately, we're sort of sitting here on the sideline. Needless to say, we still have conviction because what we're seeing across the state and the Tonder and tone of regulators that we also will be full one day, these 3 OREX lines that are coming online will supply, and there is enormous asset value in this facility given its location, its exclusive outlet as a major outlook for the city of Los Angeles. And so on a long-term basis, this asset has tremendous value, but we do have a timing issue this year and into '24.

[Operator]

The next question we have comes from Aaron MacNeil from TD Securities.

[Aaron MacNeil, analyst]

As it relates to the guidance, I know you've provided sort of broad brush overviews. But I'm hoping to understand some of the specific assumptions with -- that are embedded, like, I guess, as an example, what's the sort of specific ramp-up scenario at Rialto that's embedded in the guidance. What are you assuming for the sequencing of Italian BOO facilities? When do you think they get utility connections? And then what sort of margin expectations are you expecting for capital sales as the year progresses?

[Andrew Benedek, executive]

Hani or Yaniv.

[Yaniv Scherson, executive]

Yes. I can give an overlay, and Hani can give some more figures. At a macro level, with respect to going in reverse to our capital margins, majority of our projects are maintained and intact across the portfolio. We've had an unfortunate timing event with the reason Hani mentioned on brownfield sites and unforeseen conditions that impacted some of our capital projects in this time. So on a forward-looking basis, we will continue to enter into contracts and execute under primarily our greenfield capital projects that have historically maintained healthy margins in the 20%, 25% range. And we expect [ resulting ] on a go-forward basis, particularly with these new policies we're going to be implementing to course correct and learn from our lessons on those brownfields that went -- that didn't go so well.

With respect to the ramp-up on Rialto, given we keep being more and more conservative on the rate of ramp up. And at this point, we are not forecasting the facility to be full this year. We are considerably forecasting that, that will be an event that occurs well into '24, simply because of the slow progress of just implementing this -- the rollout of generators signing up. So we've downgraded in our guidance, the rate at which generators will sign up. And frankly, it's very difficult for us to predict. It's a human behavior shift across the largest city in California. Hani, other color?

[Hani Kaissi, executive]

On the gross margin part of the capital sale, the guidance is basically based on projects we already have in hand and we know basic -- what is the margin expected on these particular projects. So it is inbuilt into our estimate of the guidance.

[Aaron MacNeil, analyst]

And then on the Italian -- the commissioning of the final 3 Italian facilities and utility, the status of, I guess, utility connections across all 6.

[Yaniv Scherson, executive]

My apologies, Aaron, I forgot to hit that one. So we've learned from our first few plants that I -- the forces like final permits and utility connections have had some large error bars they're resolvable, and we're learning now how to push to the bureaucracy faster and better. But given the experience of what it actually took or is taking, we've shifted back the Italian plants to Q4 operations because that's what we feel to the best of our knowledge now is conservative or realistic on timing. So we -- internally, we hope to exceed this time line. But given the fact that we've seen a few months of delay in some cases, with utility connections and the final permit, we shifted back for another level of conservatism.

[Aaron MacNeil, analyst]

Understood. You've maintained this guidance for this theoretical $70 million of run rate EBITDA from the BOO facilities. Obviously, there's been a lot that's changed in terms of pricing for RNG since that time. So can you maybe give us a sense of what California LCFS price or what European natural gas spot price are embedded in that $70 million run rate assumption. And based on the Italian facilities in Rialto, your understanding of those facilities to date, like are the cost -- operating costs of those facilities in line with your prior expectations.

[Yaniv Scherson, executive]

Yes. The answer at the macro levels for the most part for all of our assets, except Rialto, the gas revenue is based on either a long-term fixed price contract, which is certain or in the case of Italy, the fixed government incentive and a realistic expectation of natural gas, not the temporal peaks during the Ukraine crisis. And so again, with the exception of Rialto that has more LCFS and RIN exposure than the other assets, which have fixed. We do feel that this is still representative with actuals from our plants today. And it's an issue of fully ramping up all the operations and then optimizing the operations to get there.

[Aaron MacNeil, analyst]

Understood. And then maybe I'll just sneak one more in. You mentioned a commitment to a 12-month cash runway as part of your business reset. But what avenues would you be willing to pursue in the event of your cash balancing decreasing to a point where you don't have that 12-month runway.

[Andrew Benedek, executive]

I guess, Hani, if you don't want to take it on, I'll give it a try. Would you like to take that one?

[Hani Kaissi, executive]

Sure. I'd love to add to it. Basically, Aaron, on the 12-month run rate, we have levers that we can use. Just as an example, with the funding, we have now room on the line of credit that we had -- there is the possibility of leveraging more of the assets we can bring in additional senior debt to recover some of the funds that we have in place that we have already put in the project. So we have a number of levers that we can -- we have been looking at and we are keeping in the pocket.

[Operator]

Thank you. As we are running short on time -- the time allocated for the call, I will now pass over to Darlene Webb for any final remarks.

[Darlene Webb]

Thank you, operator. I'll just quickly ask Andrew, if there's anything you'd further like to add.

[Andrew Benedek, executive]

Yes. I think as we look at some of these resets and guidance changes and auditor change, many of our shareholders will be disappointed, but I -- as are we. But I want to remind everybody that we are still, by far, the most capable company in the RNG space technologically. We are, by far -- and we have the ability to access markets that no one else can. We are by far the most international. And we have valuable projects that had a timing issue but ultimately are dramatically more valuable than they're given credit for right now. So please don't give a hope on us. We will eventually get to what I founded the company for, what we built over time systematically to be the #1 RNG company in the world. And we have that opportunity. It will take more time, but we are still in a very strong position to become the leader in this space. Thank you very much for tuning in.

[Darlene Webb]

Thank you, Andrew. And as always, for additional information or if you have questions we weren't able to get to on this call, please do contact the IR team at [e-mail] or visit us online at anaergia.com. Thank you all once again for your time today. And operator, you may now end the call.

[Operator]

Thank you. With that, this does conclude today's call. Thank you all for attending, and I wish you all a great rest of your day. You may now disconnect your lines.