Anaergia Inc

TSX:ANRG

Earnings Call Transcript 2021-Q2

[Operator]

Hello, everyone, and welcome to the Anaergia Q2 Conference Call and Webcast 2021. My name is Daisy, and I'll be coordinating today's call. [Operator Instructions] I now hand over to your host, Darlene Webb from the Investor Relations group of Anaergia. Darlene, please go ahead.

[Unknown Executive]

Thank you very much, operator, and good morning, everyone. This call will discuss our earnings for the second quarter ended June 30, 2021. If you're following along on our slide deck, I'll be directing my comments to Slides 1 through 3. Today, I am joined by Dr. Andrew Benedek, Anaergia's Founder, Board Chairman and CEO; Dr. Yaniv Scherson, Anaergia's Chief Operating Officer; and Dr. -- pardon me, 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 doesn't 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 has been filed with the Canadian securities regulators. Lastly, while this conference call is open to the public, and 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 Chairman and Chief Executive Officer]

Thank you, Darlene. Before we start, I would like to remind you all that we are here to provide solutions at significant scale to the global climate change issues as outlined in the recent IPCC report. Over the last 14 years, we have been preparing our company for the acceleration that is needed to bring scale and to bring carbon negative fuel that is absolutely necessary to get to net zero. And the IPO was one of the steps in -- an important step to get us to the point where we can increase our scale. Nonetheless, the results of this quarter are not influenced by the IPO. If anything, they've been hurt by the IPO because the top management has been preoccupied with the obvious steps required to get the IPO done. So over time, however, you will see the impact of the IPO. But what I want to caution you on is this is our very first call -- quarterly call after an IPO, that we will be making continuous -- continual step-by-step growth, but it is a business that isn't best described by quarter because it takes typically years for us to complete projects. Nonetheless, you can expect significant growth over time. We have all the right ingredients. We have the right global locations, the right people and mostly the right differentiated technology. And we have the wind at our back caused by the more and more dire situation globally. So now going to discuss -- going to the quarter, I'd like to bring your attention to Slide 4, the highlights. The important thing is that we continue to expand our projects. As you have already seen, we have announced a significant project that we are starting to build now in the Northeast to expand our geographical reach within the U.S. And significantly, we've added several new projects in Italy. And we will continue to add these because we see a right opportunity there, but we also see many right opportunities across Europe. In terms of the bookings themselves, we have grown them now 50 -- by 50% to $3.2 billion, as you can see it. And our growth year-over-year is also significant, 52%. Going to the next slide, it's just a simple summary of the IPO itself. Please note that nearly $200 million was raised. This was, I believe, the largest Canadian IPO in the environmental space because of the over-allotment that was picked up by Toronto-Dominion. And as you can see, our debt situation is minimal. The debt that's shown is project-related nonrecourse financing. Corporate debt is low. And of course, we still have much of the money remaining as outlined by Hani in his NDA. And I'll now pass it to Hani, our CFO.

[Hani Kaissi, Chief Financial Officer]

Thank you, Andrew. Good morning, everyone, and thank you for joining. Turning to Slide 6. Although the RIN and the LCFS price -- LCFS pricing has been strong and more U.S. states are introducing LCFS like programs, which is expanding the market for us. Generally, the waste market in California is building up slower than expected due to the COVID pandemic. And on the other hand, we are seeing strong growth in opportunities in Italy and other European countries. So during the quarter, we were able to realize $499 million in new bookings. These were primarily driven by the Rhode Island, build-own-operate project acquisition and Italian BOOs, and that increased our backlog from $2.8 billion to $3.2 billion, which represents a 15% increase quarter-over-quarter. Moving on to Slide 7. We're happy to report significant year-over-year growth of 44% in Q2 and 52% for the first half, and that's growth in revenues. On the profitability side, it is also up with an adjusted EBITDA year-over-year increase of 41% for the quarter and totaling $3.9 million year-to-date. As mentioned earlier, the COVID pandemic is causing a sluggish recovery in the commercial waste sector in California, and that's mainly due to the impact of COVID on commercial businesses and delay in the rollout of the commercial organics program required by the Los Angeles solid waste franchise. This has resulted in a slower ramp-up in Rialto's revenues and we now anticipate reaching full capacity of the plant sometime in 2022. Now that being said, the 2022 and 2023 guidance remains unchanged. And that's because we have seen stronger-than-anticipated demand in Europe that we expect would offset the delays in California. Lastly, the expected growth in revenues and EBITDA from 2020 to 2022, is not going to be linear. And this is partly, as Andrew explained, there is quarterly variations and variability, and because also an important portion of the growth is expected to happen in 2022 as new projects start going online. I will now pass the call over to Yaniv.

[Yaniv Dror Scherson, Chief Operating Officer]

Thank you, Hani. This is Yaniv speaking, and pleasure to speak with everybody today. Referencing Slide 8, as a recap, our business's development is segmented into 3 segments: our Capital Sales, Services that are recurring revenue base and our build-own-operate.As time goes on, our build-own-operate business is growing significantly with the ramp-up of current projects and the acquisitions and construction of new ones. And this is a significant revenue driver with high margin and long-term profitability and growth. We're seeing a growth in our Capital Sales business that's adding to recurring revenue through new operating contracts and primarily significant growth in our build-own-operate business in North America and in Europe. As facilities get online and ramp up, there will be significant growth. Moving to Slide 9. You can see here on our Capital Sales, we've seen an impressive growth over Q2 from last year to this year, 49%. And this is primarily due to an increasing demand for our technologies that are driving short-term capital sale projects that are bringing in near-term revenue as well as adding operating contracts associated. Most of the rapid capital sales growth has been due to capital projects being sold in Italy to our projects, which is really being driven by incentives -- lucrative incentives in Europe for renewable natural gas that needs to start before 2023. Moving to North America and the APAC region. Our team in Asia is currently executing projects across multiple jurisdictions with a robust pipeline. And in North America, we continue to see growth in our 3 major sectors, solid waste to wastewater and agriculture. Moving to Slide 10, in our Service and build-own-operate, which are recurring revenue streams, we've seen a growth in our Services business between second quarter of 2020 and second quarter of this year, and sluggish growth in our build-own-operate, primarily due to the slower-than-expected ramp-up at Rialto due to COVID, as Hani described. Nonetheless, the facility is operating and is anticipated to increase as the COVID pandemic subsides. In the near term, we have capital projects that are coming online booking this year, that are coming with associated O&M agreements. So expecting firm growth in our operating and service contracts, primarily in North America and in Italy. And on our build-own-operate side, revenue is expected to grow from our build-own-operate business this year primarily due to the growth from our Rialto project, our Victor Valley project that's coming online Q4 of this year, and the first wave of our Italian projects that we'll be completing construction by this year and starting operations. In an immediate term, the Italian renewable natural gas incentive remains a significant driver for the growth of our build-own-operate business with a number of projects coming online at the tail end of this year and into next year. Moving to Slide 11, with an update on our build-own-operate business. Our backlog of projects is strong. And you can see here over 11 projects that are either operating, in construction or contracted this year, representing over $0.5 billion of capital investment and over $100 million of run rate EBITDA, with $73 million for Anaergia's proportional interest. A significant growth is driven by the acquisition of the Rhode Island facility that Andrew mentioned, which is a significant entry into the Northeast market that has significant drivers for organic recycling and landfill diversion. And Anaergia is in the process of upgrading the facility to convert it to renewable natural gas production with pipeline injection. In North America, we discussed the Rialto Bioenergy facility as well as the Victor Valley project. And in Italy, we continue to grow with our backlog. And moving to Slide 12, a bit of a feature on the Rhode Island project here. You can see the scale roughly similar to the Victor Valley project as far as gas production, 100,000 tonnes per year of capacity, and a 5x EBITDA build cost multiple. Attractive returns, thanks to the tipping fees and gas sales driven by LCFS markets. And with that, we will move into the Q&A section.

[Operator]

[Operator Instructions] Our first question comes from Aaron MacNeil from TD Securities.

[Aaron MacNeil, Equity Research Analyst]

I guess since it's your first conference call, maybe I'll just rip the band-aid off and get the obvious tough question out of the way that I'm sure is on everyone's mind. You guys obviously referenced it in the prepared remarks. But can you help us understand the Rialto dynamic a bit more? To the extent that you'd be willing to share -- the types of questions I'm looking for answers on are things like where are volumes today relative to the 310,000 tonnes of annual [ nameplate ] capacity, even a ballpark would be great. What takes -- or what percentage of volumes would come from the 2 waste franchise zones versus the 3 waste treatment facilities? And are there any -- is there any 1 feedstock source that's really lagging? Are there issues at the transfer station level? Would there be a way to get access to feedstock from other sources in the near-term? And then finally, sort of a related question for Hani. What is the $21 million of capital expenditure commitments for Rialto and SoCal relate to? Is there still capital to complete Rialto, I guess, would be a better question. So maybe -- I know that's a lot, but maybe I'll leave it to you guys.

[Yaniv Dror Scherson, Chief Operating Officer]

Thank you for the question. This is Yaniv Scherson speaking. The Rialto facility, as described, is suffering a shortage of feedstock due to COVID. And the dynamic is that with COVID, the commercial sector, which is the RecycLA franchise, the Los Angeles franchise, is servicing the commercial sector primarily, has suffered closure. So the closing of restaurants has resulted in much less organic waste being disposed, and has also had stymied the rollout of the program, which required the haulers to have boots on the ground with people signing up customers for the program. without that sort of face-to-face interaction, the rollout has been delayed. With that said, we're seeing a slow increase over time, but now the new wave of the Delta variant has put a bit of uncertainty on the rate of ramp-up with restaurants primarily being at a partial capacity or not fully open. On the -- that's for the food waste, the organic waste side. We're seeing, however, in the biosolids, which is the other feedstocks from the wastewater plant, that feedstock is available and processing. Fortunately, COVID or no COVID, people still flush toilets and they go to the wastewater plants. And so the biosolids is running and ramping up. Mitigation efforts underway, however, are the -- we will have another OREX, that's the organic extrusion machine at the transfer stations that separates organics. The Anaergia's technology that separates organics from solid waste are coming online. It's being manufactured and will be installed in the fourth quarter of this year with a hauler called UWS in downtown Los Angeles. This will be step function increase in feedstock as we have another system bringing online to Rialto. And with respect to efforts to increase ramp-up, we are working with multiple haulers, 4 -- well, 4 in the Los Angeles and Orange County region, including Waste Management, Republic Services, EWS, and working to incentivize and increase third-party volume that can come to those transfer stations. COVID has been a blow across the commercial sector across the region, particularly in the organic space.

[Aaron MacNeil, Equity Research Analyst]

Got it. And just a quick clarification, that's the second OREX, not a third? Because I think the original scope was for 2, right?

[Yaniv Dror Scherson, Chief Operating Officer]

That's the -- That's correct. That is the second OREX in addition to the first, which is that Waste Management Sun Valley material recovery facility.

[Aaron MacNeil, Equity Research Analyst]

Got it. Okay. That's very helpful. Maybe one more question on project ramping. Victorville and -- if I've pronounced it incorrectly, forgive me, but Calimera should come on by the end of the year. Can you just give us an update on -- in terms of the timing of when they should start up and also what the ramp time to full capacity might look like?

[Yaniv Dror Scherson, Chief Operating Officer]

Sure. Victorville [indiscernible] and Calimera are -- will be starting up Q4 of this year. Victorville, will be starting injection at the beginning of Q4, gas injection. There is gas that is currently produced at the sites already from sludge. So the digesters that are processing indigenous sludge are producing gas. And there's a number of haulers already subscribed to bring in 5, in particular, subscribers to start bringing feedstock. So we expect a fairly smooth and quick ramp-up in Victorville. Calimera is a similar situation. Feedstock is lined up and the facility is expected to have a successful ramp-up.

[Aaron MacNeil, Equity Research Analyst]

Understood. Last question from me. Just trying to understand the -- your reference to the increased strength or optimism in Italy. Does that relate to the 2 projects that were added to the backlog? Or is that something incremental that you're seeing that gives you a bit more comfort on the 2022 and 2023 guidance?

[Andrew Benedek, Executive Chairman and Chief Executive Officer]

Go ahead. Do you want to answer that?

[Yaniv Dror Scherson, Chief Operating Officer]

Sure. I can start, and then Andrew can add some color. The Italian portfolio benefits from a robust pipeline of projects that are -- we knew about for time -- some time. And really, the bottleneck is not project count, it's just the rate with which we can acquire and get execution started to meet this 2022 tariff deadline. So the optimism with Italy is that there's a growth pipeline of just under a dozen projects, identified known and incrementally increasing acquisition and contracting. And they're fairly standardized, similar in size, similar technology. So sort of a repeatable executable model.

[Aaron MacNeil, Equity Research Analyst]

So this -- just to be clear, this would be something that was currently in the selected pipeline that would potentially move into a contract?

[Yaniv Dror Scherson, Chief Operating Officer]

Correct.

[Operator]

[Operator Instructions] We have no further questions, so I'll hand back over to Darlene for closing.

[Andrew Benedek, Executive Chairman and Chief Executive Officer]

Hold on, Darlene. Just for Aaron, I just wanted to explain that we don't see the COVID problem in the same way as it happens for Rialto project in our other projects because they are tapping existing feedstocks and they're not dependent on the commercial side of the industry just to give them some comfort. Thanks. Go ahead, Darlene.

[Unknown Executive]

All right. Okay. Thank you. Everyone, we would like to thank you again for your time today. For additional information or if you have any questions, please contact us at [e-mail]. That's the call for today. Thank you.

[Operator]

Thank you, everyone, for joining today's call. You may now disconnect your lines.