Anaergia Inc
TSX:ANRG
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Hello, everyone, and welcome to today's Anaergia Q3 2024 Conference Call and Webcast. My name is Drew, and I'll be the moderator for today's call. [Operator Instructions]
It's now my pleasure to hand over to Darlene Webb, Investor Relations at Anaergia.
Thank you very much, operator, and good morning, everyone. On this call, we'll be discussing our earnings for Anaergia's third quarter 2024 ended September 30, 2024. If you're following along with our slides, my comments are directed to Slides 1 through 3. And on Slide 2, you'll see that for our call today, I am joined by Mr. Assaf Onn, Anaergia's Chief Executive Officer; Mr. Greg Wolf, Anaergia's Chief Financial Officer; and Dr. Yaniv Scherson, Anaergia's Chief Operating Officer.
Before our formal -- beginning our formal remarks, we would like to refer listeners to Slide 3 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 Canadian Securities Regulators.
And with that, I'll turn the call over to Assaf.
Thank you, Darlene, and good morning, everyone.
We are now on Slide 4. I'm honored to lead Anaergia through what I like to call Anaergia 2.0. We have made strategic update to our leadership team. We have recently welcomed 3 new Board members, our new Chairman, Ohad Epschtein, Ronen Kantor and myself. I am also honored to have been appointed as Anaergia's CEO, a role picked by dedicated team will drive our vision forward. Greg Wolf has joined as our CFO and Scott Hodgdon is our new General Counsel. These changes are bringing fresh perspective and will guide Anaergia forward.
Across our organization, we are shifting to a refined approach in sales and project development. We are expanding our global presence and identifying a strong pipeline of new opportunities. These changes are establishing a foundation for sustainable long-term growth and positioning Anaergia as a leader in a renewable energy solution.
Moving on to Slide 5. Our capital sales pipeline is gaining strength with the recent new activity, which we believe will financially benefit the company in both near and long-term. We are also advancing in our old build-own-operate model through recent lease agreements, which can be -- which can position us to expand the BOO facilities with the support of financial partners. Throughout this capital-light model, we will take on a minority equity position, build a facility with our engineering and products and establish long-term operation and maintenance contracts.
Alongside this development, we are growing our presence in key international markets. For example, our recent announcement of our Japan office. With the Marny strategic investment, we have strengthened our foundation, allowing us to drive shareholder value, stabilize the company and focus on our core capabilities. This partnership supports our strategy of pursuing profitable projects that align with our mission of becoming the world's leading renewable fuel producer.
I would like to introduce to all of you, Mr. Greg Wolf, our CFO, to go over the financial highlights for the quarter. Greg?
Thank you, Assaf. As we review our financial performance for the quarter, our results are starting to reflect the impact of our strategic shift towards a capital-light model, which is already yielding significant operational and financial efficiencies. Adjusted EBITDA has improved 42% from CAD 11.1 million to just CAD 6.4 million this quarter, a significant improvement in just a short span this quarter under new leadership. This progress underscores the effectiveness of our transition strategy. Achieving these improved results within the quarter speaks to the strong alignment of our operational priorities with our financial goals.
Loss from operations also improved. We saw a year-over-year reduction in our loss -- a substantial reduction in our loss. In early -- this is an early indication that our focus on our cost efficiency and streamlined operations is starting to deliver results. This improvement demonstrates our commitment to building a leaner, more focused operational structure that supports profitability.
Our net loss has decreased significantly compared to previous years. This improvement reflects some initial benefit to our capital-light structure, which is allowing us to optimize our financial resources and continue to pursue higher-margin opportunities as we move forward. Our cash position has increased to CAD 40.2 million, primarily attributable to the strategic investment from Marny, which has provided a stronger financial base for our ongoing initiatives.
In terms of key milestones this quarter, we've achieved several important steps that support our strategic goals and financial stability. First, the Marny investment on July 10 was closed for the third tranche from the equity investment. This strengthened our cash position and provided valuable capital for growth initiatives. We did a share restructuring simplification at our Annual and Special Meeting of Shareholders on July 29. We completed the conversion of our dual-class share structure into a single share class. This change reflects our commitment to governance, improvements and aligned shareholder interest.
In addition to closing the Marny third tranche of equity investment, we extensively reviewed our pipeline of opportunities, our long-term future cash flow projections and our current strong cash position. Given this, our senior management has determined that the conditions that had previously led to the doubt regarding the company's ability to continue as a going concern have now been mitigated. These substantial milestones mark pivotal steps in reinforcing Anaergia's financial stability, streamlining our governance structure and ensuring a solid foundation for future growth. Together, they reflect our commitment to executing our strategic vision with a focus on long-term resilience and alignment with shareholder interest.
Moving to Slide 7. Q3 2024 revenues decreased from CAD 34 million in Q3 2023 to CAD 29 million in Q3 2024. This slight decrease was primarily due to Italian Capital Sales projects being completed and an interim delay in new project signings. Gross margins remained steady year-over-year, reflecting the stability in our core operations as we continue to implement our new capital-light strategy. Net SG&A expenses for Q3 2024 decreased 19.2% compared to Q3 2023 and decreased 21.6% year-to-date Q3 2024 compared to year-to-date Q3 2023 due to decreased transaction activity with the completion of the RBF and Tonder transaction in 2023 as well as reductions in overhead expenses and decreases in headcount for Q3 2024 compared to Q3 2023.
Adjusted EBITDA, as noted, improved substantially by 42% to CAD 6.4 million in Q3 2024 from CAD 11.1 million in Q3 2023, primarily due to improvements in SG&A period-over-period. Together, these results signal the progress we're making in transforming Anaergia into a streamlined margin-focused organization in a significantly short timeframe with new management. As we move forward, our capital-light model will remain central to our strategy, allowing us to concentrate on profitable growth and deliver sustainable value to our shareholders.
Now Dr. Yaniv Scherson will take us through our operational highlights. Yaniv?
Thanks very much, Greg.
We're moving on to Slide 8. I'll be providing an overview of our current projects, each reinforcing our focus on financial discipline and our core capabilities and markets where we have established expertise. First off, the Riverside water quality control plant upgrade, we were awarded a CAD 13.3 million contract with the City of Riverside to upgrade the water quality control plant, increasing its capacity to convert organic waste and wastewater sludge into renewable natural gas. This project aligns with California's Senate Bill 1383 regulation to reduce methane emissions and support Riverside's environmental goals.
Also announced was the Riverside County organic waste processing facility. At the same facility, we're also developing an organic waste RNG facility under a build-own-operate model. This project is supported by CalRecycle and the City of Riverside and uses our proven model of retrofitting existing digester infrastructure to create sustainable energy from waste.
Moving west in the world, we announced the Jeju Island, South Korea project under a letter of intent valued at approximately CAD 25 million. We plan to design and build the Jeju Bio Energy Biogas plant, a waste-to-energy facility on Jeju Island, converting organic waste into RNG. This project aligns with Jeju's sustainability goals and strengthens our footprint in the global renewable energy market.
Transitioning to Slide 9. Back to the U.S., Michigan State University digester upgrade. We're expanding one of the largest on-campus anaerobic digesters in North America, allowing it to process additional organic waste, including manure from MSU's new Dairy Cattle Teaching and Research Center. This facility will produce renewable energy for campus use and provide a practical learning platform, demonstrating our commitment to innovation in partnership with leading institutions.
The East Valley Water District, another project announced, we've extended our long-term O&M contract with the East Valley Water District in Southern California, adding food waste processing and power generation services to the scope. This project uses our anaerobic digestion technology and showcases our experience in managing complex ongoing waste energy operations.
Moving to Slide 10. With respect to the BOO facilities, SoCal Biomethane in California and the Rhode Island Bioenergy Facility in Rhode Island are operating steadily, injecting RNG into the pipeline with the Rhode Island facility continuing to ramp up. Our development pipeline also advances on projects in Riverside and Charlotte, supporting our expansion goals. Focused growth in key markets continues. Our capital sales pipeline remains strong across our 3 regions, bolstered by incentives such as the U.S. Inflation Reduction Act, IRA, and Europe's RePower EU program. These market tailwinds enable us to drive growth in regions where we already have proven presence.
In line with our growth, we opened a new office in Japan to take advantage of the growing Asia Pacific region. Japan's basic energy plan targets 5% carbon neutrality in city gas by 2030 and the Japan Gas Association's Clean Gas Certification System supports renewable gas expansion. Our new office in Japan positions us to meet rising demand in the Asia Pacific region for waste-to-energy solutions, providing significant growth potential based off of an existing platform and base in the country.
New contract in Africa. We've secured a new contract in Africa, highlighting our commitment to grow this developing market. This expansion strengthens our presence and supports our mission to deliver sustainable energy solutions globally. And finally, on a go-forward basis, we're continuing to pursue our selective capital-light growth. We're following a capital-light strategy focused on markets where we have an established presence and proven project success. This approach aligns with our strategic priorities, leveraging our core competencies to support long-term profitability. These projects and initiatives underscore our commitment to financial reset, operational efficiency and targeted growth in familiar markets where we can leverage our expertise.
With that, I'll pass the call back to Assaf for closing remarks. Assaf?
Thank you very much, Yaniv.
We are now on Slide 11. As we wrap up today's call, I want to emphasize my excitement by the progress we have made in such limited timeframe and the large opportunities that we see ahead. We are focusing on a disciplined growth for Anaergia and we are on a path of becoming a stronger, well-positioned company to lead the rapidly expanding renewable energy sector.
The global push for sustainable solution and carbon reduction is growing and we are right at the heart of this movement. With our unique technology, capital-light model and the support of valuable financial partners, we are in the ideal position to capture market growth and deliver meaningful solutions on a large scale. Our team commitment to technical innovation, engineering, operational excellence and financial discipline will drive positive momentum.
And as we look for 2025 and beyond, I'm confident that Anaergia will be at the forefront of a cleaner, greener future. We are excited to continue building on this foundation, creating a value for our shareholders and making a real difference in the world. Thank you for your ongoing support and trust in Anaergia. Together, we are making the world a better place. Darlene? Thank you very much, Assaf. I believe now we can open the call to questions. Operator?
[Operator Instructions] Our first question today comes from Derrick Whitfield from Texas Capital Bank.
In your prepared remarks, you've noted that your pipeline of commercial opportunities and expected cash flow have mitigated previous going concern views. At a high level, could you perhaps speak to how the pipeline has evolved over the last few quarters and where you see the greatest opportunities for growth in your capital-light model?
I'll take that question. So I think we see -- so the markets that we see and when we ran out our cash flow and did a substantial detail on this is really in the U.S. and the European markets. Those 2 areas we're seeing substantial opportunities that we believe we're going to capture over the next several months and years. So I think that those are probably the highlight areas, plus we've expanded into the Asian market, which even more so than we already are, those are developing. But our real growth for the next year or so is really in North America and the European markets.
And perhaps more specifically on that outlook, do you have the facilities in place to support a higher growth trajectory? And if so, when would you expect to turn free cash flow positive?
We don't provide the guidance on that, but we're looking at 2025 as a substantially different year for us as a company, but we don't provide the guidance on when that turns. But we do see the trend lines that we show in our model are very positive.
Terrific. And certainly appreciate the color there. Maybe finally for Yaniv. I know the success of Rialto and SB 1383 are very important to you, could you perhaps speak to how the adoption of SB 1383 is progressing?
Yes, Derrick, Yaniv here. Thanks for the question. Yes, I'm here taking that. The 1383 has been sluggish to roll out and deploy, but progress is being made. The team in California with a lot of environmental policies is slow out the gate, but doesn't turn back, and that's what we're seeing on the ground. So as you know, the Rialto facility did go through a sale process and is continuing to operate and feedstock volumes continue to come to the site.
And we're seeing in our other assets as well in Southern California, the multiple assets that we do manage increasing volumes, food waste particularly from the growing commercial sector that is the most underserved for compliance. And so more corporate accounts are complying with source separated organic spins. And we're seeing, in general, volumes increasing across the state as reported by CalRecycle. So positive trends, sluggish, but momentum is building.
[Operator Instructions] Our next question today comes from Craig Irwin from ROTH Capital Partners.
So first, I'd like to ask about capital sales. So we all understand Anaergia has gone through some turbulence in the last year. And when I look at the capital sales line, my number, right, is somewhere between CAD 75 million and CAD 80 million in revenue from capital sales this year. When we look at the last 5 years, the average has been CAD 113 million, I mean, you almost touched CAD 140 million a couple of years ago in revenue there. Can you maybe talk about the opportunity to return to more normalized market activity on the capital sales side? Are there any impediments to us seeing improving activity in 2025? How would you compare the market right now versus the market over the last 5 years?
Yes. This is Yaniv. I'll take that one. You're right, there's been shifts with our capital sales. It is a fluctuating revenue line. But what we have seen with steady growth is increasing demand for our integrated system solution sales. Where we have the greatest value is on engineered systems where we're integrating turnkey packages to convert feedstock to fuel, soup to nuts. And we're seeing quite strong tailwinds, particularly in North America with the IRA. That was a recent incentive program that had some market delay in reaction. But we're certainly seeing a surge in demand and also an expansion to the municipal sector as well as that -- as this credit program can benefit publicly-owned agencies that do not pay taxes, they can still benefit from this under the regulation.
So this has been a driving force in North America. And in Europe as well, we've seen strong tailwinds with growing demand. We're increasing momentum out of our transformational year, as you noted. And so you'll be seeing increasing news about our refocus. But the core to remember is what has been core to our business has been and is always has dominated our capital sales business has always been a dominant source of our revenue between our product sales and our integrated system sales, that has been a lion's share of our revenue contribution and will continue to do so. So we're seeing more push here as more developers and municipalities get into the space to take advantage of these incentives now.
Understood. Understood. So then that dovetails nicely with the second question, which is your services looks like actually it could have record revenue this year. The record that I have previously was last year at CAD 18.4 million. So fingers crossed. And it sounds like you're getting a benefit from the integrated sales that you're describing now. Can you maybe describe a little bit about the services model, how this is likely to evolve over the next year? Are you making any substantial changes to the way you approach the market or price the business or the overall offering in the business that might help us understand how this is going to unfold over the next few quarters?
Yes, it's a great question, and you're right. We've been increasingly -- we've been growing our O&M business, our O&M and service business as follow-on service to customers interested in the support for post capital sales. And this has been part of our business. Many of the capital sales we have, have ongoing service and the value-add to customers in the way that we're viewing the offering is we have a portfolio of O&M hub from which there's a lot of institutional knowledge and expertise, particularly in complex food waste, sludge, biogas plants with sophisticated technologies. And leveraging an operator who is vertically integrated that was also the designer and the technology provider offers incredible value as a derisk to customers. The design engineer is still part of the same group as the operations. And so there's an integrated synergy with know-how. And this has been a sort of follow-on offering service.
So we're very flexible with the model. We want to put customers' needs first and offer most value-add. And so the business has been growing into sort of 2 pillars, either a service model where we'll do the ongoing service for the technology we're providing with our expertise to a turnkey full O&M even with asset management services as well to our customers. And this has been a growing base that's been a positive out of the outcome of our capital sales business over the years and establishing a base globally.
Understood. Understood. And then big picture, I know you've made a lot of changes at the organization over the last several months. But do you have an approximate revenue run rate where you would expect EBITDA breakeven?
Greg? We cannot provide this. We have it? We don't provide the guidance.
Yes, Craig, we do know internally what those numbers are. We just can't share them from a perspective of projections and forward-looking. But our -- as Yaniv had mentioned to on this, as the capital sales pipeline grows, our bookings grow, our revenues grow on the capital sales side. At the end of those, we get the O&M contracts, which is our goal on every single one of them.
And that -- so on the longer term going into -- actually going into 2025 and forward, we're building backlog. We're starting to execute. We have several projects that have not been announced that are more mid-sized or small projects that are more EP throughout our system. And those projects continue to come in with our equipment and those offer also O&M contracts that come at the end of those as well because we're the best to operate our own equipment and technology. So it just makes sense.
So I think on the question of where -- what level do we have to hit, there's 2 things happening. Obviously, we're looking continually at our SG&A. So that number continues to be analyzed and reduced where we can. And the second part of it is we're increasing top-line and margins on projects. So it's a combination of both of those is going to get us to the point that you mentioned sooner than later is our goal.
Yes. So the comparisons, the year-over-year comparisons on SG&A as we roll forward into future quarters, the turbulence that Anaergia encountered in the last year kind of impacts the historical reference point. So if we were to take a look at SG&A from what you printed this quarter, CAD 16.7 million, would you expect the kind of volatility where you've had in the last year where your low was CAD 12.8 million and your high was CAD 20.7 million or should we be looking at CAD 16.7 million as sort of a starting point where things can maybe come down from there? And how should we be thinking about SG&A, because the last year was not a fair one to compare you to, at least in my opinion?
Yes. I mean, on that side, I would say that where we're currently running at, as we grow the business, obviously, we're going to need a little bit more SG&A, but at the same time, we're reducing where we can on other spots. So I mean, our goal is to reduce that number down further. However, we have a lot of engineering capacity and stuff. And so we want to make sure we're utilizing that. As that becomes more utilized too, that number also reduces. So it's kind of a combination of growth and having the right people in place, which we do.
And so I think when you think about that number, the total number, the goal is to drive that down, obviously, to get that to a size that makes sense for this -- for our revenue projections. So that's -- I can't answer it directly on that, but I would say that we're continuing to reduce where we can. And that's really the point we want to make on that at this point. So as far as your...
And then last question for me...
Yes. The prior year run rate was not a good comparison because of all the noise, but we still are looking to reduce outside services as much as we can. Those obviously are very expensive for the company in the prior year. So those items are definitely going to be benefits to us going forward as we reduce those.
Understood. Understood. You're obviously taking the right action. So historically, the equipment business actually was a pretty nice margin. Your consolidated margin of 20.7% is strong considering where you are in the cycle. Can you maybe describe what your target margins or your ideal margins would be looking forward towards the future? Would it be conceivable for Anaergia to seek 30% margins out in the next couple of years or is mid-20s maybe a more fair assessment? How should we be thinking about the gross margin structure at the company?
Sorry, Greg, go ahead. I was just going to chime in here that...
No, our targets haven't changed from before with our business. So targeting 20%, 25% margins through our sales and O&M business and higher margins through our build-own-operate portfolio continues to be the target and the trend. And for the most part is in that direction.
Understood. Understood. So structurally, very similar, but lower risk profile. So I appreciate that. Great. Congratulations on getting the business rightsized and stable, and we look forward to following your growth.
We have no further questions in the queue at this time. So that concludes the Q&A session. I'll now hand you back over to Darlene Webb for closing remarks. Thank you.
Thanks again, operator, and thank you, everyone. As always, for additional information or should you have any questions, please do contact the IR team at ir@anaergia.com or visit us online at anaergia.com. Thank you all once again for your time today. Operator, you may now end the call.
Thank you. That concludes today's Anaergia Q3 2024 conference call and webcast. You may disconnect your lines.