PyroGenesis Canada Inc.

Welcome everyone to the second quarter 2024 business update conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the star one again. At this time, I'd like to turn the conference over to Steve McCormick of Pyrogenesis. Please go ahead.

thank you operator good morning i'm steve mccormick vice president of corporate affairs for pyrogenesis thank you for joining pyrogenesis 2024 second quarter financial results and business update conference call on the call with us today are mr p peter pascali president and ceo of pyrogenesis and mr andre manella the company's chief financial officer the company issued a news release on tuesday august 6th 2024 containing the financial results and a business update for the second quarter ending June 30th, 2024, which can be viewed on the company's website. If you have any questions after the call or would like any additional information about the company, please contact the Investor Relations Department and we'll try as best as possible to answer questions that are of a public nature. The company's management will shortly provide prepared remarks reviewing the operational and financial results for the second quarter ending June 30th, 2024. I would like to remind everyone that this discussion will include forward-looking information that is based on certain assumptions and is subject to risks and uncertainties that could cause actual results to differ materially from historical results or from results anticipated by the forward-looking information. Forward-looking information provided in this call speaks only as of the date of this call and is based on the plans, beliefs, estimates, projections, expectations, opinions, and assumptions of management as of today's date. There can be no assurance that forward-looking information will prove to be accurate, and you should not place undue reliance on forward-looking information. Pyrogenesis disclaims any obligation to update any forward-looking information or to explain any material difference between subsequent actual events and such forward-looking information, except as required by applicable law. In addition, during the course of this call, there may also be references to certain non-IFRS financial measures, including references to EBITDA, modified EBITDA, and backlog, which do not have any standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other companies. For more information about both forward-looking information and non-IFRS financial measures, including a reconciliation of EBITDA and modified EBITDA, please refer to the company's management discussion and analysis, which along with the financial statements are available on the company's website at pyrogenesis.com and at cdarplus.ca. Also a reminder that Pyrogenesis follows Canadian Generally Accepted Accounting Principles, or GAP, where revenue is accrued not on sales, but on a model that reflects a percentage of the work completed for contracts during the period, which can vary. based on both the nature of the projects in-house and on a client's own scheduling and logistical decisions, both of which can impact production milestones and the company's ability to book revenue. During these recent years of supply chain, logistical, and inflationary uncertainties, those issues have been more frequent and exacerbating. And, as stated in previous reports, the company's revenues are likely to be irregular and unpredictable quarter to quarter as contract-related revenue fluctuates, based on various reasons, including those just explained. With that, I will now turn the call over to Mr. P. Peter Pascali, President and CEO of Pyrogenesis. Please go ahead, Mr. Pascali.

Thanks a lot, Steve, and thanks for everyone for joining us today. Before I start off with a quick review of some of the company's top-line financials, followed by a summary of key business activities that occurred over the quarter, Um, I like to, uh, go off script. Yes. And, uh, present, uh, what I consider to be the, uh, like a 30,000 foot overview of what's taking place. And, and, and what I talk about being excited, I'm over the top excited about this quarter. This is a quarter that I could only dream about. Seriously. I had something, everything came together in this particular quarter. And when I talk about excitement, again, I'm talking about the company and how it's been laid up for the future. And I'm not talking about stock price. Nothing that I'm talking about here has to do with stock price. You can look at the company from two perspectives. The financials that we published from the line-by-line numerical disclosure, we had gross profit and net profit in the same quarter. Our backlog is increasing. And if you read our press releases, we could very well double that over the next few months. Sales are improving and cash flow is even better. But what I'm speaking to is what happened over the quarter. We started landing some contracts, not major, well, in the millions of dollars, but one after another across a large number of our business lines. And this speaks to what I alluded to, I think, in our previous call, where I said that our clients were basically two types. They're the multi-billion dollar clients, and they're the small startups. Both had been plagued with challenges, not just the supply chain and labor issues post-COVID, but the newer challenge, which was interest rates increasing rapidly, unforeseen number of interest rates increases in a short period of time, which shocked both of our clients. the small cap and the multi-billion dollar clients. Both had to figure out what does this mean in their reality. The small caps were shocked by the sticker price of having to go to market. In fact, oftentimes, it was very difficult for them to raise the caps they needed to proceed, and they had to retrench and regroup and figure out what to do. One client said that typically $100,000 investors are now putting in $10,000, $20,000, if that. The larger billion-dollar companies had to look at how they're going to react to this new interest rate environment. And as I alluded to in our previous discussion, they started to come forward, and we had a large number of contracts being written in the second quarter. When you're looking at our company, I was at a presentation the other day and a question came up, you know, what is our burn or what is our break-even? I said, that's a good question. And I asked, what company are you looking at? And the reason I asked that is because when you look at what Pyrogenesis is doing, we're introducing new technology into sometimes, oftentimes, conservative industries. So we are selling one-off. Well, not one-off. When I say one-off, I mean we're selling just one system But oftentimes we're doing it at an introductory price, although we're making half decent margins at an introductory price. And oftentimes our profits have to be tapered because there's government support or they're with a government which strictly prohibits or regulates what type of profit we can ask for. That's the environment the company has been working in for the past God knows how many years. Now we're turning towards repeat orders and orders where there are an order for multiple units of the same type of product. What happens? First of all, the margins increase significantly. We have no engineering costs associated with those, which are quite expensive. Our cost savings for multiple orders In one case, it's up to 35% savings on costs. So these repeat orders and these orders that are multiple orders, sorry, one order for multiple items of the same type will now translate into huge improved margins. So that's where we're going to now. We're transitioning into a company that's entertaining those type of, we're at a position where we're entertaining those type of contracts. Similarly, in the second quarter, one of the most satisfying developments was our client in Saudi Arabia made a significant payment on a past due receivable. A receivable where many people had questioned whether it was even at any chance of being paid. And our position has always been, we've looked at it, it was a strategic decision. And quite frankly, we see a lot of opportunity coming out of Saudi Arabia as the needs in Saudi Arabia and that part of the world marry up with pretty much every one of our business lines. And that is so exciting. Now, if anybody was paying attention, you will have read in our press releases that the entity that is actually buying our client invested in our private placement, which signals to us a further interest in developing our technology in that part of the world. Now, that's it for my 30,000 off-the-script analysis. I'm extremely excited, as I said. The excitement has to do with the contracts that are coming in and the ones that we are laying up. Actually, you know what? If you look back at all our press releases over time and you tick off the ones that come through, yes, there may be a delay. There may be a delay because, quite frankly, we can't control our clients and the delays that our clients take, like I just described, multi-billion-dollar companies and small startups that are trying to figure out what to do in this new environment. So we cannot be responsible for delays, but we try to give you the best sense that we get from our clients as to what the timeframes are. But if you go back at our press releases and you tick off which ones have come true, you'll find that we're doing very, very, very, very well. And I think that's all you can expect from us is to come out with the news. The timeframes have to be taken into consideration of who our clients are and their pressures. But I think we're doing very, very well. If you look at how we are positioning ourselves in some very interesting markets as a key player with multi-billion dollar companies, I think hopefully you'll share my excitement. Anyways, onto the review of the second quarter 2024. a quarter in which we exited the quarter with revenues of close to $4 million, $3.93 million. And as stated in yesterday's news release, this represented an increase of close to 30% year-over-year and more than 13% over Q1 of this year. We continue to create distance from the three-year low revenue mark that was recorded back in Q1 2023. And this quarter marks the fifth consecutive quarter where we've comfortably exceeded that low point. And this was the fourth quarter of the last five where we've booked revenue that exceeds the preceding quarter. This is the reason why I'm excited. We're starting this trend and we're continuing it in very trying markets. Gross margin, 30% for the second quarter, up from 21.7% in Q1. And we consider this to be a very solid margin number, particularly in the face of continuing fluctuation of the global supply chain costs and inflationary figures. And let's compare them to some of the industries we serve. 30% compared to aerospace and defense, which is at 21, 22% for the quarter. Iron and steel, 26%. Metal and mining is at 34%. And I should mention that we usually also reference the aluminum industry as well, but as of today, it appears that many of the major aluminum companies have yet to report their earnings, so an industry-wide margin figure for them wasn't available as of this time. It's important to note that our margins are even more impressive when one considers that many of our projects are conducted in partnership with clients like HBQ Silicon or have government grants associated with them, which I mentioned limit the profits we can ask for. And we conscientiously in those type of projects obviously have lower profit margin when it comes to our engineering and production. As for our backlog, as similar to our revenue, our backlog is back strong, now up to 30, almost 30 million, 29.8 million. So we're once again hovering around the 30 million backlog number that we first reached back in 2019.

Now to a report on production highlights for the quarter.

Please note that projects or potential projects previously announced in various press releases that do not appear in this summary update or within the MD&A and outlook should not be considered at risk or gone. Noteworthy developments can occur at any time based on project stages, and the information presented is a reflection of information on hand for some but not all projects. Projects that we don't mention simply have not passed some milestone worthy of discussion. Now moving on with a brief reminder of the company's business strategy for those that are new to the story. Pyrogenesis is a provider of a focused selection of technologies that leverage the company's expertise in ultra-high temperature processes. With a technology ecosystem for heavy industry, we offer a number of solutions in different stages, from early pilot to full commercialization, concentrated basically under three verticals that align with important economic drivers that are key to heavy industry. One of the first is energy transition and emission reduction, which focuses on fuel switching. for helping heavy industry reduce their fossil fuel use and lower their greenhouse gas emissions by utilizing the company's electrically powered plasma torches and its biogas upgrading technology with various industrial process steps. In this particular vertical, we had a number of notable announcements in the second quarter. April, in particular, was an extremely busy month across all our verticals. We announced a signed letter of intent with global aluminum manufacturer Costellium for large-scale plasma remelting furnaces amid an agreement to investigate the potential replacement of fossil fuel burners in Costellium's furnaces. Next step here is to implement an industrial-scale aluminum remelting furnace for tests onsite at Costellium using plasma as the heat source. In mid-April, we announced a contract with a global mining supply company related to the company's intention to examine the use of plasma in decarbonizing its metal cast houses. Things are going extremely well there, and I hope to have some news, more news on that later on in the coming months. In late April, we announced a contract with one of the five largest global steel makers to assess the applicability of using plasma in primary steel production, specifically during the production of direct reduced iron production. for use in electric arc furnaces. In May, we announced that our subsidiary Pyro Green Gas had signed contracts with a global steel company in India to desulfurize and clean the gas that is released during the creation of metallurgical coke from coal. And finally, in June, another contract for Pyro Green Gas to dehydrate pure oxygen produced from electrolyzers at the Varens Carbon Recycling Plant, a large biofuel production project currently under construction in Quebec. Under our second tier, commodity security and optimization, which essentially means using pyrogenesis technology to aid in the recovery of viable metals, and in the optimization of production output, both of which are meant to improve the availability of critical metals such as titanium, aluminum, magnesium, and others that are essential for modern manufacturing. It was also a busy quarter with some very interesting developments here as well. In April, we announced the positive results of lab tests for the green cement additive known as POSPYRO. These tests indicated comprehensive strength at the seven-day mark were 45% above the target for green cement additives. That's above, 45% above the target for such green cement additives. This is huge, but it gets better. The goal of the project is to create a replacement for fly ash, which is used in cement as an additive, but which is in diminishing supply due to the ongoing reduction in the coal-fired pyro plants that create that fly ash. Whereas pyro is made using a quartz silica, which is an abundant material. So I said it gets better. It does. As a follow-up later on that month, we announced that the 28-day lab tests were even more impressive. achieving comprehensive strength results that are up to 99.56 above the target, almost 100% above the target for green cement additive products. There'll be more news on this, I'm sure. Also in April, we announced a contract to supply a Spanish aerospace entity with titanium metal powder products produced by our next-gen plasma atomization system. The same client would sign a second contract with us in June and indicated they may qualify us for a long-term contract following the successful completion of the second contract. Finally, June saw one of the most anticipated announcements we've made, I mean, that Pyrogenesis had cleared the final requirement to become an approved supplier of titanium metal powder to a global North American aerospace original equipment manufacturing. This is the client with whom we've been engaged an extensive qualification process. And now we await the formal process. Actually, we're in the formal process of adding us to the client-approved supplier list, which is underway. I should also note that the first approval was for what we call our coarse-cut metal. Our fine cut is still in the running for approval as well. And last but not least, our third tier, waste remediation, which is the safe destruction of hazardous materials which is the safe destruction of hazardous materials and or the recovery and valorization of underlying substances such as chemicals and minerals that can be reused or resold. While we did not sign any new contracts during the quarter, post-quarter end in July, we announced the signing of a contract for a land-based waste energy system to a European entity servicing a group of municipalities and associated landfills that serve a particular region in Europe. This is a two-phase project, with the first phase that is already signed representing a $2 million design phase. Phase one is scheduled to end before Q3 2025, so it's about a year, and the results of that will determine the final size of the system to be built. Now, here's the key. The potential phase to value is in the neighborhood of between $120 and $160 million.

So let me put this in perspective.

Typically what will happen is the contract, you'll get the total contract, right? And then the first part will be for design phase, which is, you know, you try and design it to the specs and then you move forward and build the project. Well, in this one, When they asked us for a range of price for a project, we said it was between $120 and $160 million. Actually, it's in euros, but that's equivalent. $120 to $160 million, which they found to be very, very competitive. So what they put together was, I think it's from European funding, $2 million. So they're spending $2 million for us to essentially narrow that price to within, I think it's 15%, plus or minus 15% within the 120 and 160. So we're very confident we can do that. I mean, we made the bid. And once we're successful, subject to them getting the money and putting together a final agreement, they're committed to move forward. This is extremely exciting, extremely big, extremely interesting. It is not, and this is something that I have to stress, it's built off our platform that we did for the U.S. military. So we're not starting something new. We're taking something that we've already done and adjusting it for this particular purpose. All very, very exciting. So as you can see in summary, Q2, not only is it very busy, But it confirms many of the things that we've said in the past, including the Saudi situation. And it bodes very well for the future. To read about these and other events and updates as well as to the ongoing projects that I haven't discussed in this call, you can always refer to the corresponding sections in our news release or in the MDMA, and particularly Outlook section of these documents. So I'll be back at the end for some final thoughts. At this point, I'd like to turn the call over to the company's Chief Financial Officer, Andre Manella, to discuss the finances in more detail. Andre, the floor is yours.

Thank you, Peter, and good morning, everyone. Let me continue with a review of our Q2 financial results. We're excited to announce that revenue continues to trend upwards. Revenue for the current quarter exceeds the Q1 revenue, and as Peter stated, we're excited to close the Q2 quarter with a revenue of $3.9 million compared to $3 million for the same period last year. This means the current quarter revenue is $900,000, a little over 29% greater than the same period last year, and was due to the net effect of several factors, namely torch-related revenue, which increased by $2.2 million due to the continued progress on our 4.5 megawatt and 1 megawatt torch systems. We made progress on significant components, such as power supplies, which increased the percentage completion and thus the recognized revenue. In addition, we continue to provide 24-7 on-site support to our customers which further drives the revenue. Also, Dross-Rite-related sales increased by $0.2 million due to additional spare parts for existing clients and the increase in other revenue related to these Dross-Rite units. This was offset by the revenue related to system supply to the US Navy, which decreased by $0.6 million due to the current stage of the project, whereas in the comparable period, significant advancement was made related to the inspection, packaging, and shipment of the equipment to our customer, in order to move forward with the installation and commissioning. As well, pure VAP-related sales decreased by 0.3 million due to the completion of the project and with the successful silicon pour previously announced by the company. As a result, minimal revenue was forecasted and realized in the current quarter. And finally, sales related to biogas upgrading and pollution controls decreased by 0.4 million due to 2023 having a higher volume of contracts and those contracts were successfully completed prior to the Q2 2024 period. As of August 6, 2024, the company's backlog was higher than the figure announced in May, and now stands at $29.8 million. The backlog is almost equally divided into the company's three verticals, with a slightly higher emphasis on energy transition and emission reduction, followed by commodity security and optimization, and the smallest portion in waste remediation. The gross profit for Q2 2024 was $1.1 million, or 29% of revenue, compared to a similar gross profit, also $1.1 million, or Q2 2023, however, represents 37% of revenue. The decrease in gross profit percentages was mainly due to the increase in direct material costs and to the 2023 Q2 sale mix, which had a higher margin. Once again, the company's gross margin achieved in the current quarter is based exclusively on project advancements, and comprised no special or one-time measures. Moving on to the selling general and administrative expense category, the total SG&A expense for Q2 2024 was only 0.2 million compared to 6.4 million for Q2 of 2023. This is a substantial variation of over $6 million. The majority of the decrease is due to one main item, a partial reversal of the credit loss and bad debt expense. The company collected an amount of $4.1 million from its clients in Saudi Arabia, and additional receivables, which were partially or fully provisioned. As a result of collecting such amounts, the expense and provision had to be reversed. Also, share-based expense decreased by $0.3 million. This relates mainly to grants of stock options and varies based on the number of stock options granted in the past and the vesting period. Also, professional expenses and other expenses continued to decrease. due to less reliance on external services, namely legal, accounting, and unrested relations. More of these are being performed in-house. These items are in line with Pyrogenesis' initiative to monitor costs. Finally, the company also benefited from foreign exchange that was caused by the FX rate between the US and Canadian dollar. The depreciation expense for property equipment was stable in the quarter, as these assets continued to be amortized over their useful lives. Research and development activities for Q2 2024 decreased to $0.3 million compared to $0.7 for the comparable period. The company continues to assess the individual R&D initiatives and places emphasis on key projects. Next is net finance costs, which includes interest and accretion on the ventures and loans, the balance due on the business combination, and on the royalty receivable. The current quarter expense is $341,000 and falls within the expected amounts. This variation versus 2023 is due mainly to the reversal of the liability related to the balance due on business combination in 2023, as the company concluded that a milestone payment would not be required. The change in fair value of strategic investment is mainly from the common shares of HPQ held by Pyrogenesis, more specifically the fair value of these shares. During April 2024, the company sold the remaining 3.8 million shares of HPQ which it held. The sale price per share was roughly 17.5 cents and realized a loss in the quarter. A new item in the quarter is the other income gain of $1.2 million. In May, the company's subsidiary settled a legal claim with a party, which was also a customer of the company. The settlement was for $1.5 million and recorded partly against the accounts receivable for $300,000, and the remaining was a gain on the income statement for $1.2 million. Comprehensive income for Q2 2024 was $1.4 million, a favorable impact of $7.7 million when compared to the loss of $6.3 million in Q2 of last year. The increase is summarized as additional revenue of $0.9 million, generating 29% margins. A decrease in SG&A, explained earlier, by the reevaluation of the credit loss, the expenses related to stock options, professional fees, and other expenses. also due to the finance expense, which are now normalized in the quarter, and finally by the variation of both the fair market value of strategic investments and the gain on legal settlement. Lastly, the modified MDA, which management and investors use as it brings additional clarity to operating performance and it eliminates variations in the fair value of strategic investments and other items which may be beyond the control of the companies. This modified WDA was an income of $2.4 million for Q2 2024, an improvement of $7.2 million from last year. It's explained by the comprehensive income detailed earlier, and adjusting mainly for the fair value adjustment of the HPQ shares, depreciation and amortization, net finance costs, and share-based expenses.

That completes my review of the financial results, and at this point, I'll turn the call back over to Peter. Thank you. Thanks, Andre. In closing, what can I say more than that's already been said?

Those of you who can look at the numbers and read our press releases, you'll see that our second quarter financials wrap up an extremely strong first half of the year for Pyrogenesis. We know what we have to do to move forward. Prioritize completing the benchmarks in our projects. nail our potential pipeline that we've spoken about in some of our press releases, and continue to manage our costs to improve our margins.

We're constantly doing that, particularly in light of getting significant cost reductions for large orders with our suppliers.

So we'll be focused on improving efficiency, locating new and better suppliers and growing our customer base while engaging with the potential customers around the world on a variety of new business opportunities. I want to thank all the employees who've made this a reality, our board for understanding and being supportive, as well as our investors. Thank you all for your support and patience. From here on, all I can say is that I believe the future is electric.

Thank you very much. All the best.

Thank you, Mr. Pascali, and that will mark the end of today's call.

We look forward to providing you with additional updates in the near future. A reminder to submit any questions you may have about the company and or its projects to our Investor Relations Department as we may follow up with a response news release to any notable questions. Thank you again, and good morning. Operator, please end the call.

That concludes today's call. Thank you all for joining. You may now disconnect. Thank you.