Anaergia Inc

TSX:ANRG

Earnings Call Transcript 2022-Q3

[Operator]

Hello, and welcome to today's Q3 Anaergia Conference Call and Webcast for 2022. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions]

I'm now going to hand over to. Darlene Webb or Investor Relations to begin. Darlene, please go ahead.

[Darlene Webb]

Thank you very much, operator, and good morning, everyone. On this call, we'll be discussing our earnings for Anaergia's third quarter of 2022 ended September 30. If you're following along with our slides, my comments are directed at Slides 1 through 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; Ms. Paula Myson, Anaergia's Chief Financial Officer; and Mr. Hani El-Kaissi, Anaergia's, Chief Development Officer.

Before beginning our formal remarks, we would like to refer listeners to Slide 2 of the presentation that 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'll turn the call over to Andrew.

[Andrew Benedek, executive]

Thank you, Darlene. Before I start on Slide 4, I would be remiss if I didn't say we're very proud to have Paula on this call. She joined us a little over 3 weeks ago as the new CFO. And as a company, we're very fortunate not to have both Paula and Hani in key roles. Paula has been drinking from the fire hose or the hydrant, I think she likes to say, but she's getting there quickly. And we are very fortunate that Hani will soon be able to focus on the growth trajectory for the company, which is becoming bigger and bigger as we see it long term.

Looking at Slide 4, I want to start by just mentioning 3 particular squares that we are proud of. The first one is a major Asian project, probably the flagship project of Asia that we will be demonstrating our technologies for all of Asia to see. This will demonstrate -- the plant itself will be showing how they should be handled in Asian cities.

The next square talks about decarbonizing shipping. This has been an issue as people look at that market. And recently, Maersk, the largest container shipping company plus a few others decided that what they want to have is green methanol. Well, fortunately, we, together with a partner in Denmark are able to supply the very first ship with green methanol that Maersk will put into the water. And there will be a need for this kind of methanol throughout the world for all the ships, and we are hoping to play a significant role in supplying this methanol.

Finally, the third square of top is the top award in renewable natural gas in Europe that we -- that your company received this year, and we're -- I appreciate very much that we recognize, even though we are not a European company, but we have significant European activities, as you all know. On the bottom, 3 squares we just basically focus on telling you that we're continuing to focus on exactly what we said we would do. Our projects in Europe are coming in one by one. So we'll be putting gas into the grid and starting to earn money for these plants this quarter.

Furthermore, there has been very significant additional incentives announced in the quarter. The one in Europe is called REPower Europe, it requires an increase of 13-fold in this decade of renewable natural gas going into the grid. And as far as analysts, there's one new analysts covering us from ROTH, the backlog and the revenue -- sorry, the revenue is up in the quarter. And we're continuing the growth trend that we said we would be doing. We'd like to do it -- we're hoping to a little faster, but there's still substantial growth, particularly given the new accounting method that we have to do going forward.

On Slide 5, we are showing you the backlog and the backlog annually increased a little bit. We have not added major new projects. So we have some capital projects and some other issues. But overall, we're still moving ahead in our backlog.

Now getting back to Europe. On the right side, on Slide 5, you see the natural gas prices. They have come down a bit, but they're still very high and are forecasted to remain high, at least for the next 2 years.

With regards to the REPower Europe that I mentioned, it now is getting translated into each major European country, while you decrease as incentive. Italy has done that. And in that incentive, they also include a 40% grant for new plants. And so we will be building many more plants in that country. In the U.S. the inflation reduction act was passed, which provides 30% grants and other support for renewable energy projects such as ours.

And interestingly, we have significant progress in Canada as well with a clean fuel regulation and additional incentive similar to IRA that have been announced that we are expecting to see soon. Also, the volunteer market is also growing in North America, whereby many companies are trying to decarbonize by buying renewable natural gas.

At this point, I hand it over to Paula for her maiden voyage.

[Paula Myson, executive]

Thank you, Andrew, and good morning, everyone. I'll start on Slide 6 of your pack, which is the financial summary and address some of the line items there for you, give some color around those. On the revenue, we had higher revenues for the quarter. We were up 60% and year-to-date, up 47%. When we're looking at revenue, it's coming from -- by segment, the majority of our revenue is concentrated in our capital sale segment, 80% of the year-to-date revenues and that's because our BOO business is in the process of being developed. So capital sales is the primary contributor.

In terms of regions, the EMEA region, the European region is the major driver of the growth. It comprises about 70% of the year-to-date revenues. And we're seeing strong performance in EMEA in terms of revenue. It's capital sales driven. And the reason being there is significant government incentives in the region that drive the development of facilities to divert both organic waste from landfills and to produce RNG.

During the quarter, we also saw revenue growth in North America. And on a year-to-date basis, that's up almost 40% over 2021. And that's largely due to several large capital sales projects in construction. In terms of the gross margin, it was 23% for the quarter, 21% year-to-date. The quarter showed improvement over the prior quarter, and I'm referencing Q2 2022, which was 19%. That's because Q2 was a bit of an anomaly. It contains cost overruns on certain projects as well as some startup costs as we ramped up on some certain service projects. There has been higher SG&A relative to 2021 on both a quarter and year-to-date basis. And this relates to some onetime costs being legal fees and the higher overhead that we are experiencing as we position ourselves for growth.

In terms of adjusted EBITDA, we were $1 million to the negative for the quarter. That's slightly better than Q3 2021, mainly because of the increase in revenue. And on a year-to-date basis, were a negative $7 million in adjusted EBITDA. That's lower than the first 9 months of 2021. And that's driven, again, by the lower gross margin that we are just discussing due to the project cost overruns and higher SG&A.

Our small net loss for the quarter of $5.3 million contains the impact of changes related to fair value of embedded derivatives and movement of some interest in our equity accounted investees, just as a reminder for you.

Moving to Slide 7. That's the capital management and liquidity slide. We ended the quarter with cash, cash equivalents and restricted cash of $141 million. That's up $53 million from the end of the prior quarter. We used approximately $42 million in investing in the quarter. And we've been using our cash effectively as a bridge until we get project debt in place. And during the quarter, we did receive the bridge financing for the Italian BOO. So the 6 Italian BOO, projects are fully funded. For Rhode Island, Charlotte and the SoCal BOO financing agreement is in place. And we continue to work on facilities to support the Tonder project in Denmark.

In terms of -- I will move to Slide 8 now, and that's the financial outlook. Starting with fiscal 2022. On the revenue side, our year-to-date revenues are already approximately the total revenues from the entire fiscal year of 2021. So we do expect fiscal 2022 to show healthy revenue growth of approximately 25% to 35% compared to last year. That would place our current estimate of the 2022 revenues between approximately $160 million and $170 million. Now that is a reduction from previous guidance and the reasons underlying that change is that the previous guidance assumed revenues would accelerate each quarter, and it assumes that they would be particularly high in Q4. And that assumption was based on the contribution -- estimated contribution from the BOO projects.

Now both Rialto and SoCal Biomethane facilities were expected to be operating close to what would have been their full capacity with sales of RNG during the fourth quarter, as we assumed would be the case of the majority of the BOOs in Italy. And as we have stated, RBF, there's been a delay in the contribution due to -- there's been some feedstock plays or delays in the ramp-up and the delayed completion of -- we have to register under the federal RIN and LCFS programs to allow ourselves to commence a sale of RNG.

So therefore, the RNG sales, we wouldn't expect to start until the end of the fourth quarter of fiscal 2022. In addition to those reasons, the timing of the capital sales and project execution in both North America and Europe have been behind what our previous estimates were. And that's largely due to those -- on the capital sales side, it's due to client-driven delays that has slowed the progression of certain projects. And basically, those are things we can't control or predict, they are client-driven.

In terms of adjusted EBITDA for 2022, we expect adjusted EBITDA to be approximately $10 million negative. That's a reduction from the previous guidance. And this is because the lower revenue that we just discussed, but -- and the erosion of some gross margin due to the cost inflation higher SG&A we're seeing in the businesses.

So I would say as an overarching comment on 2022 guidance, I'd say we are continuing to do what we said we were going to do. It's taking a bit longer. And that's the impact that you're seeing on the outlook.

In terms of fiscal 2023, both revenue and adjusted EBITDA, we believe there are significant prospects for growth for the company in fiscal 2023 and beyond. But there has been some significant changes that -- since our last 2023 guidance. The large macroeconomic changes that we're all experiencing in terms of interest rates and natural gas pricing. When you combine that with the company-related developments, including, but not necessarily limited to the construction commissioning schedule for the BOOs, there's a need for us to review the key assumptions in the 2023 outlook. And so we made the decision to withdraw the prior guidance as a result. Having only been here 3 weeks, we will be doing that in the very near term and reviewing those key assumptions, and we will be providing an updated outlook for 2023 as soon as possible.

And that covers my slides. So I believe I'm handing it over to Yaniv.

[Yaniv Scherson, executive]

Great. Thank you, Paula. Much appreciated. Yaniv here, starting on Slide 9, on capital sales segment. I'll be summarizing the growth that we have seen, quite healthy growth. Overarching, 41% increase in our capital sales business, which, as Paula mentioned, has been a significant contributor to our revenue composition. And this has been driven primarily by the growth in Italy as well as large multiyear projects in North America. As you know, we're building in Italy one of the largest portfolios of digester facilities in the country as well as building the largest agricultural digester in North America.

So these are significant contributors to the healthy capital sales business. EMEA continues to drive growth. And with the backdrop of the REPowerEU program, as well as the extension of the incentives, both in Italy and in other countries, we're seeing the buildup of a healthy pipeline with additional opportunities in 2023, not just driven by the higher gas prices, but as I said, by the extension of programs that are government backed with long-term fixed price on the renewable natural gas production. So we're positioning our capital sales business to capitalize on the recent announcements of these new programs.

In the APAC region, the flagship facility that Andrew referred to is quite a significant contributor to our capital sales, not only revenue contribution but backlog, with the multiyear design build contract to supply what would be Singapore's first integrated facility, leveraging Anaergia's technology and expertise, to integrate both solid and liquid waste combined at a world-leading facility, one of the premier utilities in the planet. So we're very excited about this opportunity to showcase Anaergia's capability truly at a global scale and launch Singapore into the next generation of organic waste management. We also announced one of Japan's largest manure -- dairy manure digesters to make renewable electricity during the quarter.

Moving on to Slide #10. In the backdrop of our capital sales business, we wanted to share the progress at the Sterling Natural Resource Center, in large part because of its technological significance in the marketplace, both leveraging the integration of solid and liquid waste. This will be a world-leading facility that nearly complete, where all of the inputs sewage and organic waste become a commercial product and will enable the facility to not only meet its own energy demand, but export power to be a renewable energy contributor to the grid.

The facilities in near completion. It leverages Energy's technologies, both on the liquid side and on the solid side and is benefiting the community as a prime example of social infrastructure, an element that we're very proud of. Not only is this a technologically advanced facility and a market-staying model for resource recovery, but also fabric of the community with job training and a high school across the street where we'll be providing employment and job opportunities to high-tech renewable energy jobs.

The water as well, interestingly, that is clean, thanks to our technology will be used to across the street out of park with the lake that is providing community center in a community that's one of the disadvantaged communities in California.

Moving on to Slide #11. Our service and BOO business do continue to grow. Our service segment experienced a 59% year-over-year growth. Large contributions mainly from the ramp-up in the North American service business with multiple OREX lines and digester facilities with either large companies or municipalities that we're servicing. And we have additional service contracts in our revenue backlog that are typically tied to the capital sales that we provide.

On the BOO side, despite the delays in RBS, which is caused by the delay in regulatory enforcement, we have seen a month-over-month increase in feedstock, primarily from the waste management OREX line in Sun Valley. And we will be -- we are on track, as we said before, to implement the second OREX by the end of this quarter, which will be contributing more feedstock and then the third OREX early next year.

The big needle mover is the ordinance, which is a year delayed pursuant to SB 1383 state law in Los Angeles, that is on -- still on schedule and on track to be implemented in December, which would require all generators in Los Angeles to subscribe to the organic diversion program. With this in place, we remain optimistic and view a significant increase in turnaround in feedstock volumes to Rialto. The facility otherwise is receiving feedstock working and doing what we said it would do technologically.

The revenue contribution, however, that we have experienced in the BOO business have been primarily from the tipping fees as our facilities are ramping up, mainly the North American plants and the gas has been stored at both Rialto and SoCal until such time as the RIN and LCFS are registered. We've been driving these registrations aggressively and rapidly working collaboratively with the agencies. And in large part, the agencies have been moving at the speed that they can with the reality of a shortage of staff and a lot of applications to deal with. But we remain -- we still remain on schedule to have Rialto's registrations by the end of this year.

Moving on to Slide #12. A snapshot of the BOO overview. We continue to execute on our plan with our 13 build-own-operate facilities around the world. The European gas prices have been a strong tailwind where we see an immediate term -- short-term benefits over the next 2 years, as Andrew alluded to, with higher natural gas prices. And as a reminder, the government incentive is additive to natural gas price. And so then the government incentive stays fixed long term and the natural gas commodity prices [indiscernible]. So we see this being a beneficial timing in the term as our Italian facilities are starting to inject gas and get online in real time one by one.

The biogenic supply of CO2 is really a game changer and a market setting. All of our plants produce CO2 as a waste product and the ability to leverage a waste product into a revenue stream for a new market segment to decarbonize now shipping sector is very exciting and applicable at the global stage. So we're excited about the -- our toner opportunity and setting a market precedence.

On the execution side, 2 of our 6 Italian BOO facilities have been commissioned during 2022 and injecting gas. Toner will be injecting gas very shortly expected next week. And we are on track to have the Phase I completion for our toner plants this quarter. So that remains on track. The remaining BOO facilities are coming online and we'll all start commissioning by the end of this year.

Back to North America on Rhode Island, the construction to convert that plant from an electricity generating plant, which it is today, into RNG continues and is on track. And we're advanced in the construction of that and conversion of this facility.

At the Charlotte BOO facility, we are continuing to operate the plant and generate electricity and we'll be executing on the plan next year to convert that facility into RNG as well. And taking a step back on to what we're seeing in macro level at the market, in North America, the IRA and the voluntary market are enormous, enormous drivers. The IRA has now created a deadline and a major opportunity to start construction on projects in the next 2 years with up to a 40% incentive either as a tax credit for facilities that we own or for our municipal customers reimbursement and an incentive from the IRS.

We're very excited about the opportunity with the wastewater sector where Anaergia has extremely differentiated technology and a reference base from which to build and a very untapped market segments that we're aggressively pursuing.

So the RA is providing a significant economic boost to this. In the backdrop of the voluntary market utilities and company is seeking decarbonization through carbon-based procurement, carbon-negative fuels to decarbonize their portfolio. Italy remains an attractive market, not only in the backdrop of the extension of the incentive program another 3 years, but developing opportunities in other European markets, U.K., Germany as examples who are all implementing similar programs as Italy with respect to long-term incentives. So we continue to stay focused in the European market.

And now back over to Andrew.

[Andrew Benedek, executive]

Thank you, Yaniv. Between Yaniv and I, we pretty much summarized the key takeaways that are shown on this slide. And I don't want to repeat it. So -- but you have it here. What all this means is that we have many opportunities that we are developing in Europe and in America and this will eventually translate into increase -- continued and increased growth. It will also require a significant event. And so we are looking in parallel to both investing in people. We announced a few management changes already, and the last one I just announced today with Hani to joining the team on the development side. And we furthermore looking at different ways of financing this potential avalanche projects. This is a really good time from an opportunity point of view. It is somewhat challenging from an execution point of view, but we remain strong, and we're looking forward to growing the company as we always said we would.

At this point, I believe we are ready for questions. Darlene, will you start that step?

[Darlene Webb]

Certainly, I'm going to ask Jordan -- yes, going to ask Jordan here to remind everyone how to ask a question. I would like you to do that Jordan.

[Operator]

[Operator Instructions] We have a question from Aaron MacNeil of TD Securities.

[Aaron MacNeil, analyst]

I can appreciate that you're reevaluating your internal forecasts and you've already given kind of broad strokes. But I guess I'd argue that a lot of the rationalizations that you've used to reduce service and guidance were known when you reported Q2 results or earlier. So I guess I'm hoping you can give us a better sense of what specifically has changed quarter-over-quarter?

[Andrew Benedek, executive]

Well, Aaron, the reality is that we're living in turbulent times. Turbulent times in the sense that you have basically -- every company has supply issues and people issues both efficiency in terms of the new world and lack of people. And so we can control our end, but we can't control the other companies that -- and government bodies that we work with.

So a simple example, the second OREX that we were ready to install and plan to install in the second quarter, will not start operating on the first quarter next year. And we just -- there's nothing we could do because our partner, our clients had to get permits. And then it had to get construction done. And things stay longer than we've been assuming.

And so this is happening even in -- I'll give you another example, in Italy, our second -- the first plant we were rebuilt -- we finished building and we finished it and it's running and it's [indiscernible] took a couple of months to figure out how to let us put it in because they were not up to scratch and they have to do something of their own. So this is the world we're living in there. So I wish we weren't dependent on others outside of our company. We just do what we think we should do. But this is happening now on many fronts. And it's a more difficult world than we have ever seen.

Perhaps Paula, do you want to add something more to this -- to get a little more specific for Aaron?

[Paula Myson, executive]

There's not much more to add, Andrew, other than I would amplify the prior forecast did rely on, like I mentioned, the RIN and LCFS programs being in place for Q4, that was key. That would -- that was the assumption in August, but that is one of the big assumptions that's changed. It's things like that. And as Andrew mentioned, it's those things that are not within our control. So...

[Aaron MacNeil, analyst]

Right. Okay. Maybe just focusing on Italy for my follow-up question. Like I think in the guidance, you cited that the BOO wouldn't be operating -- most of the BOOs wouldn't be operating in Italy versus prior guidance, but only 2 have been commissioned thus far, and there's a ramp in volumes. So were you previously expecting that all of those facilities would be operational in Q4 for the previous guidance? And maybe you could also just give us a sense of where those 2 commissioned facilities are today relative to their nameplate capacity?

[Andrew Benedek, executive]

Sure, Aaron. I'll take this one also. We assume that 5 of them would be operating this year, 3 of them will, 2 will be injecting gas only next year. We were rushing because we also have to meet incentive deadline, but these have been extended. So the pressure has been off, but it's the same story I just mentioned to you. The 2 plants are -- one is in near -- one is in the south end of Italy. If you look at the booth, it's kind of near the front of the booth, a place -- not far from a place called Brindisi, if you know where that is. And the other one near Rome. And there will be one more new Rome. And then the a couple in the north and one on the island of Sardinia.

[Aaron MacNeil, analyst]

I guess I'm just wondering today, what sort of volumes of feedstock are they accepting relative to nameplate those 2 commissioned facilities?

[Andrew Benedek, executive]

Yes. There's no -- okay, it's not Rialto. In fact, we are making excess gas right now in the -- one is near Rome. And we'll be pretty close to making the gas very shortly in the one in the south.

[Operator]

[Operator Instructions] Our next question comes from Craig Irwin of ROTH Capital Partners.

[Craig Irwin, analyst]

Can you maybe update us on the equipment sales opportunity both domestically in the U.S. and then in Canada. And then probably more pertinent is the conversation about Europe and Germany. The severe shortage of natural gas and the strong financial support for green gas projects, both in North America and Europe, seems to be supporting a more accommodative environment for equipment sales. Can you maybe just give us some color on what's changing? What we can expect? How this could potentially take shape over the next number of months and quarters?

[Andrew Benedek, executive]

Yaniv, do you want to take that on?

[Yaniv Scherson, executive]

Sure. Yes, happily. Great question. In North America, the significant opportunities in the municipal sector, which has been sort of with an extra acceleration with the IRA backdrop that's now provided a significant financial incentive for municipalities with our ton facility specifically I'm referring to, to leverage the biogas in -- utilized in a beneficial way. As an example, most wastewater plants to give some color, do not have digesters and about 90% to be specific. And those that do a minority fraction are actually using the biogas beneficially.

So equipment sales and actually system solutions -- turnkey system solutions like the turkey sterling plant that we talked about remain a significant growth opportunity now with what is good to have in the municipal sector to the point that we can't control decision-making. And when there's economic turmoil in the backdrop, decision-making often gets slowed or stalled until interest rates become more predictable. But in the municipal sector, the IRA driver is now putting a significant financial incentive at a time where resource recovery and sustainability are front and center. So in the municipal ways, our sector is going to be a big driver in North America, and we're seeing it now with more opportunities than we've seen historically.

In Europe, the -- you're seeing a significant pipeline opportunity of capital sales mostly to private entities who are trying to capture exactly the opportunity you mentioned, the massive shortfall of domestic natural gas production and taking advantage of now the incentives across the EU for RNG.

And so these are materializing into those coming to us for turnkey capabilities to deliver plans with a single point of responsibility and a vertically integrated partner who can essentially -- potentially offer customers the confidence and comfort that there's one person to rely on, one entity to rely on for full turnkey delivery from the plant, to the equipment, to the service operations. And so we're seeing the pipeline increase mostly from private sector developers or large multinationals interested in plans to generate RNG and benefit from the EU incentive programs.

Craig does that answer your question?

[Craig Irwin, analyst]

Yes. No, that's very helpful. So then the bigger question then is the urgency with which to bring on gas production is pretty significant. What's the approximate lead time if someone wants to adopt your technology and triple their biogas production by introducing a little bit of food waste into the stream and treating those bugs extra special the way you guys do. What's the time line for wastewater for it to spec in and adopt this technology? Is this something that can be done in less than a year? Or do these projects typically take multiyear horizons for planning and procurement and implementation?

[Yaniv Scherson, executive]

Yes. The actual from the time the contract signs a retrofit, the tripling -- our technological ability to triple capacity of existing digesters is a 12 to 18 months instruction time line typically. What is on the pre end of that time line that has more broad variability is the decision-making, is the method of procurement, if it's RFPs and any predesign work and municipal approvals.

So that can be an additive time line with more broad variables. Megaprojects, however, like the one in Singapore, this is a multiyear project, enormous in scale with lots of detailed design milestones. And so the time line there is not driven by procurement of equipment more so by the execution of a really large complex facility from which we have a subscope.

[Operator]

[Operator Instructions] We have no further questions on the phone line. So I'll hand back to Andrew for any closing remarks.

[Andrew Benedek, executive]

Sure. Well, thank you for the questions, Aaron and Craig. The bottom line is that, as we have pointed out, the market is expanding in the developed world. And even in the less developed world, we see a long list of projects for both owner operate and capital. And we are sitting with the world's leading technology for accessing any kind of waste and an ability to turn it into RNG efficiently with demonstrated plants throughout the world, in markets where no one else could actually do what we are doing, and these are the largest markets.

So when you marry expanding opportunities and as a powerful platform, sooner or later, there is going to be good results, and that's exactly what we're doing, and as fast as we like, but they're all coming and what -- and so on. So thank you very much for tuning in, and we look forward to continuing the progress we're reporting on. Darlene?

[Darlene Webb]

Thank you, Andrew. As always, for additional information or should you have any questions, please contact the IR team at [e-mail] or visit us online @anaergia.com. Thank you all once again for your time today. Operator, you may end the call.

[Operator]

Thank you. This concludes today's call. You may now disconnect your lines.