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spk04: Hello everyone and welcome to the second quarter Anarjia conference call and webcast 2022. My name is Victoria and I will be calling into your call today. If you'd like to ask a question during the presentation, please press star 1 on your telephone keypad. If you have joined us online, please press the red flag icon. When preparing to ask your question, please ensure that your line is unmuted locally. I'll now pass over to your host, Darlene Webb, Investor Relations for Anarjia to begin. Please go ahead.
spk09: Thank you very much, Victoria, and good morning, everyone. We thank you for joining us for our second quarter 2022 earnings call for the period end of June 30, 2022. If you're following along with our slides, my comments, as usual, are directed at slides one through to three. For our call today, I'm joined by Dr. Andrew Benedek, Energia's founder, board chairman, and CEO, Dr. Yaniv Sherson, Energia's chief operating officer, and Mr. Hanny Casey, Energy's Chief Financial Officer. Before beginning our formal remarks, we would like to refer listeners to slide two 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. Energia 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 perspectives, which is filed with the Canadian securities regulators. And lastly, while this conference call is open to the public, For the sake of brevity, questions will be prioritized for analysts. And with that, I turn our call over to Andrew.
spk05: Thank you, Darlene. Slide four summarizes the events of the past quarter. First and foremost, we announced some significant capital sales in Canada, Japan, and Singapore. Each of these plans are a model that we expect to follow in the various spheres. The Canadian one is on a wastewater plan that we think we can expand substantially in the country. Japan is having a major transition to renewable gas. This is our second project, and we look forward to building many more. And in Singapore, we're building a model for Asia that will be repeated across the different capitals of Asia. In terms of our build-on-operate, we continue to progress with construction and the ramp-ups. Most significantly, the second of our Italian booths has now been commissioned and is expected to start producing gas very soon. The other one is already producing that we talked about last quarter, which is easy energy. And interestingly, one after the other, there have been major incentive programs announced as we come up to this conference. I'll speak to them a little later. The background to all of this is that natural gas prices have been very significantly spiking and are continuing to stay high, in particular in Europe, but everywhere else it also has gone up substantially. We issued during this quarter a sustainability report that showed a significant contribution toward fighting climate change. And as you can see, we are continuing growth both quote by quarter and year-to-date I'm moving on to slide five that gives you a little more detail so you can see here that the gas prices the future pricing in Europe is an all-time high and is expected to stay high even next year these are all good things for your company because we have the assets coming online in Europe that will be producing renewable gas and they'll benefit from this high price but we're not counting that in the backlog which remains pretty much as it was in the quarter before in spite of the accounting changes. In terms of recent programs announced that are supportive of what we are doing. Italy first extended its current incentive program deadline until the end of next year and this will be not necessary for us but very helpful because a couple of our projects were pushing up against that deadline and regardless we will be turning these on but we don't have to rush them so much toward the end of the year. Also, interestingly, just yesterday, the EU approved the next Italian program, which is going to be very beneficial to us since we are very strong in that country and there are lots of other opportunities remaining that we can exploit with this new program. We didn't want to start new projects until we had the incentive scheme extended. And now we should be in position to start again. U.S. Congress passed an Inflation Reduction Act, as everybody knows, and this will be beneficial in the American market, both to our current projects, we hope, and also the new ones that we intend to start. The voluntary market, as we said last quarter, is continuing to grow. people wanting to decarbonize. And Canada has now got a program similar to the California LCFS for RNG use and we expect that will benefit us as well. At this point, I'll hand it over to Honey to talk about the financials.
spk08: Thank you, Andrew. Good morning, everyone, and thank you for joining. Going to slide six, although at $42 million, the Q2 revenues are 57% higher than the same quarter in 2021, they are a bit lighter than we anticipated, as without the accounting adjustment, we would have been around $49 million. Of the year-to-date Q2 revenues, 83% are from capital sales, And the EMEA region made up 60% of that revenue and was the major driver of the growth. While North America made up 37% and Asia 3%. This quarter, we had a gross margin drop to 19%, mainly due to cost overruns on certain projects, mainly including due to higher material costs, as well as startup costs incurred during ramp up of some service projects. This margin drop and some legal expenses and higher SG&A costs that are required to drive the BOO developments have impacted our adjusted EBITDA figures, which were at minus $3.3 million. The net income loss includes $14.3 million in losses from changes in fair value of embedded derivatives. An example of that is the value of an option that's in the financing of Rialto debt. And in addition to that, there is the losses in equity accounted investees. Moving to slide seven. Following discussions with our auditors, it was determined that previously audited accounting interpretation relating to the recognition of capital saves and related VU project costs for three U.S. projects needed adjustment. In these cases, we have used a third-party general contractor for the construction of facilities for the booth, and the subsidiary of the company was engaged on arm's-length terms by the general contractor to fulfill certain project-related activities. It was determined that revenues should not have been recognized on these subcontractor arrangements, and costs incurred should not have been expensed as cost of sale, but should have been capitalized to PPE, property, plant, and equipment. The impact of the resulting changes to the company's accounting policy was material on certain financials, and we have restated our annual financial statements for 2021 and interim financial statements for Q1 2022 with the comparative periods and the relevant MD&As. This has minimal impact on the previously disclosed $4.7 billion in revenue backlog. But the key takeaway from all of this is that this is a technical accounting matter only. It does not impact the company's ongoing operations, its cash position, or its future cash flows from BU assets. And there is really no ultimate loss of profitability It's a timing issue, with the income reduction in the capital saved segment translating directly into a reduction of the capitalized cost and reduces future depreciation expenses, and all of that with no overall impact on cash flow. Moving to slide eight, this slide summarizes the impact of these accounting changes on the results of 2021. $26.5 million of revenues that were previously recognized as capital saved for three projects in the US were eliminated. This is within the indicated range of $25 to $31 million. The adjustment impact on the 2021 net income is $6.2 million, also within the indicated range of $2 to $7 million. Now, despite the changes in accounting treatments, the company expects to meet the guidance that was previously given for fiscal year 2022 and fiscal year 2023. And the company continues to demonstrate significant revenue growth and is well on track to achieve all-time high annual revenues for fiscal 2022.
spk07: Moving on to slide nine, as of June 30th,
spk08: Our cash, cash equivalent, and current restricted cash was at $88.3 million, up by $11.6 million. And the cash used in investing activities during Q2 2022 is reported at $50.6 million. This cash is being used primarily as bridge financing until all the project debt is in place, at which time we will recover a good portion of it. During Q2, we raised $60 million in a bar deal and filed a shelf prospectus to allow opportunistic offering of securities of up to $250 million. After quarter end, we closed the financing agreement for the Rhode Island, Charlotte, and SoCal Biomethane Boo Project. And we have also a debt facility set aside for the Italian booze that makes these six projects fully financed. I'll now pass it on to Yaniv.
spk02: Thank you, Hani. Good morning, everybody. I'm on slide number 10. We'll be walking through the increase in growth in our capital sales, service, and build and operate business this quarter. And the underlying theme remains the same, that our build and operate business continues to grow and will exponentially increase our revenue as we ramp up our facilities in the immediate term in our California portfolio and in Italy. Moving to slide number 11, on the capital sales front, we've seen significant growth in our capital sales from last year, primarily because of drivers in our Italian portfolio that is growing. This is going to be accelerated, we anticipate, thanks to the extensions and incentives in the Italian market, driven by Repower EU, which is expanding across the European continents. Across the world, made some very significant sales. Andrew mentioned in Japan the largest cow manure agreement that is with a follow-on partner where we anticipate more to come. And in Canada, we sold our first wastewater plants. That's a model for many to follow. That's a significant reference for us, entering significantly into the Canadian municipal wastewater market. Most notably, in Singapore, we announced a large design build agreement with a world-leading utility for what will be one of the world's largest co-digestion facilities integrating for singapore solid waste and wastewater at a grand scale we're very thrilled about this announcement and the ability to serve as a global model and global leader moving to slide number 12 our service and boo business continues to grow uh Primarily with our service revenues growth, we've seen contributions from the eastern part of North America and the UK. And we expect that as additional facilities capital sales continue to come online, like the ones we've announced, our service business will grow accordingly. On the BOO side, we've seen an increase in ramp up in our North American facilities with revenue contributions from tipping fees as our facilities continue to ramp up. And most notably on the Rialto front, we've seen month-over-month increase in feedstock as the enforcement of the regulatory requirements are coming into play. However, this will be driven most notably with an ordinance that the City of Los Angeles is required to implement pursuant to California state law. Despite the ordinance, which is slated according to the City of LA for end of this year, We advance with a second and third OREX line that will increase feedstock to Rialto, independent of the ordinance timing. The second OREX is on time for this fall and the third for early 2023. As noted, both will increase feedstock to Rialto with the ordinance as a backdrop to increase at a macro level feedstock overall in the region. The Rialto and SoCal facilities continue to store the RNG in the gas pipeline while we're registering the gas. We still expect, by the end of this year, registrations to be in place for Rialto. But at a macro level, our BOO outlook is positive, thanks to new incentives that Andrew mentioned in the U.S. With the Inflation Reduction Act, we anticipate our portfolio to improve profitability and expand on our pipeline. and most notably with Europe's favorable extensions of the current programs and expansions in Italy and across the EU. Moving to slide 13, we summarize here our 13 build-on-outbreak facilities, again noting nearly 700 million of consolidated capex. In the immediate term, the high of European gas prices That's well above historic average. We expect to increase the near-term profitability. As Andrew noted, the current historic highs we have not considered at these levels. So we expect an immediate near-term benefit in 23. And Toner as well will benefit as it comes online late this year, the first phase, and then the continuation of expansion into 23. In Italy, we noted that our two first booths have been commissioned. We have four more that are coming online. And our phase one toner project continues to be on track. We continue to do the upgrades with the construction at the Rhode Island plant to convert it to RNG, as well as development on Charlotte, and continue the advancement of Kent County project development activities. We continue to investigate investment opportunities across European markets. We expect significantly more projects to be able to come into the fold in the immediate term in Italy, thanks to the extension of the program, as well as other parts of the EU, now with the Repower II programs in place, and the drive to energy security. On slide 14, we show an updated photo late construction phase of the Calamara project that recently commissioned. You can see here the facilities substantially complete in this photo and as noted has been commissioned and will be injecting gas here very shortly. At this point, I'll hand it back over to Andrew for slide 15.
spk06: Apologies, Andrew. We are not receiving audio from your line.
spk05: So sorry, Darlene. My apologies to everybody. I forgot to unmute myself. I guess this happens. So very briefly, I am just saying that the final slide summarizes everything you've heard. and essentially what you've heard is that we are continuing to do exactly what we said we would do we're building the plants we are we are positioning ourselves for major growth and we are benefiting from what we hope the government would be doing is providing further incentives on top of that the gas price increase is a unexpected but favorable winds that should be helping us as we go forward. With this, I will close our presentations and we are ready for questions.
spk04: Thank you. We will now start our Q&A session. If you would like to ask a question, please press star 1 on your telephone keypad. If you have joined us online, please press the red flag icon.
spk06: When we're going to ask your question, please ensure that your line is unmuted. And our first question comes from Aaron McNeil at TD Securities.
spk04: Please go ahead. Your line is open.
spk01: Hey, morning, all. Thanks for taking my questions. Hani, can you speak to the sort of the puts and takes on the guidance? And I guess I'm wondering if we just look at it in isolation, did the accounting policy change have any negative impact on your 2023 EBITDA expectations? And if it did, what were the offsets that sort of allowed you to keep the guidance unchanged?
spk08: Thanks, Adam. The changes in the accounting policies does have an impact on certain revenues that we were recognizing, and it does reduce the amount of revenues that we were expecting to receive. However, there are other opportunities that we believe are going to make up for that difference.
spk01: Understood. Yaniv, a question on Rialto. Maybe I'm reading too much into the disclosures, but it seems like there's been a bit of a slippage in terms of when that second OREX with UWS will begin operations. I think in the prior quarter, the disclosures said a summer installation, and the revised disclosures now say the fall. I guess what's the status of that second OREX line, and can you give us a bit more details on the timeline for that? in the volume ramp expectations as you see it today?
spk02: Yeah, absolutely, Aaron. The OREX is being installed as we speak right now in downtown LA. The client had some delays with respect to final approvals and permits, so we've tempered the season from summer to fall for some conservatism, but we're working to accelerate and start the line as soon as we can. risk as far as procurement and shipping, getting materials to sites all behind us. It's just installed and then getting the final permit to operate by the client. We expect that the machine will increase tonnage to Rialto. We're forecasting somewhere between a quarter and a third of Rialto's capacity.
spk01: Okay, understood. Maybe one more if I could, you know, on the Senate bulletin 1383 implementation more broadly. I guess I'm wondering how the cost structure of the ORECs might compare to, you know, a green bin composting program. I came across an article recently that, you know, talked about the city of Lancaster. It implemented a green bin collection program, increased property taxes to residents by $450 per year. And there was some backlash from the local community. And again, I know you're focused more on commercial waste, but do you have any idea of how the ORECs would stack up against a green bin collection from a cost perspective? And are you seeing any local opposition in your franchise zones in LA that would ultimately defer the implementation of the regulation?
spk02: Yeah, it's a great question. 1383, what the OREX offers is the lowest and most cost-certain compliance solution because it eliminates the volatility from the alternative, which is compost markets, where the only revenue stream is tipping fees. And so as the surge of material increases in the state, the tipping fees go up at compost sites as well. And digesters are the opposite, where we're aligned with long-term fixed price agreement so cost certainty is one but the real value uh with the orex is uh the ability to be compatible with either of the two choices that cities make and the choices are either adding a third bin like you referenced which has higher collection costs to add a third route and then is subject to variability and compost rates which have been increasing quite substantially The second choice, so the OREX and that solution offers the benefit of lower cost and cost certainty compared to export, which is variable and often further. But the second choice is to do what's called the high diversion facility, and then that means processing the black bin in a two-cart collection. So you have one blue for recycling, a black for trash, and then you forego the green. This is really attractive for urban dense centers like a lot of Southern California metro area, particularly commercial establishments and apartment buildings where it's difficult to put a large third bin and costly. And so this eliminates the highest cost, which is collection. Collection is by far the highest cost, much more than equipment and processing and disposal on the back end. And so it eliminates the collection cost, and then the OREX offers a compatible platform that can be compliant with either approach, whether they do 3-bin or whether there's 2-bin.
spk01: Did I answer the question? Yeah, no, that's great. I've got more questions, but I'll jump back in the queue. Thank you.
spk04: Thank you. And as a reminder, if you would like to ask a question, please press dial 1 on your telephone keypad. And our next question comes from Justin Strong at Scotiabank. Please go ahead. Justin?
spk03: Hi, guys. Thanks for taking my call today. So just wondering if you can give us some color on those cost overruns, in particular, which projects they were related to and any bounds that you can put on the dollar. for inflated costs and then also any outlook changes to your SG&A estimates?
spk08: So in terms of the cost overruns that impacted the gross margin, these are a couple of projects that were experiencing higher material costs due to the inflation and supply chain issues. And there were a couple of other projects, mostly in Europe and in Asia, where we are ramping up a service project. And the period during that ramp-up period has entailed additional operating costs. So it's only up to getting to the point where the project is fully operational. In terms of quantifying, you can see the drop in margin from last year, for example, to the current year. And if you were to apply the percentage difference to the revenue, you can get a sense of what that would have been. In terms of the SG&A, we had a one-time event where we had a legal expense that we had to take in Q2. It was a significant expense, but it was a one-time off settlement on a court case. And the balance of that incremental SG&A is due to our natural growth and establishing the infrastructure
spk07: for developing and executing our book projects. Okay, that's great. Thank you.
spk04: Perfect. Thank you so much for your question, Justin. And as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. And we have a follow-up from Aaron McNeil. Please go ahead.
spk01: Me again. The 30% investment tax credit in the Inflation Reduction Act, I guess I'm wondering if you combine that with the Senate built in 1440 economics, does that sort of end market start to make a lot more sense if you assume that contract pricing is around that $26 per MMBTU, which is what they sort of quote as being at the higher end of the range?
spk02: This is Yaniv. The answer is yes, but what it really does is it expands the opportunity set of projects that might have not had sufficient scale otherwise. So our projects that are slated for 1440 work without the ITC. The ITC is a boost to the project that we're currently developing, but what we can do now is expand and pursue opportunities that may be of a smaller scale or a lower TIP fee structure because the ITC would enable the return threshold to be met.
spk01: Okay, that makes sense. Given the Eligibility extension in Italy, you made some comments on some projects potentially moving into the start of 2023. Can you give us a sense of, you know, any specifics around that? Or are you just saying that's a hypothetical that some projects may be commissioned in 2023 now that you're not rushing towards the end of the year?
spk02: The extension gives us, we're still on track for this year for the current projects, but it gives us a bit of a cushion just in case. But what it really does is the extension of the current program by one year and then expansion of another program three years enables us to go after projects, start putting projects in our backlog that we didn't prior because we couldn't meet the timeline, the original timeline.
spk01: Okay, makes sense. And then maybe one more for Hani. How should we treat the preferred equity interest in the three U.S. projects, Victorville, Charlotte, and Rhode Island? And is that sufficient from a, you know, project level debt finance perspective?
spk08: So the, yeah, the... The agreement that we have contemplates not just an equity part, but also a senior debt part. And the REF equity is only a portion of the overall financing, the other portion being obviously the senior debt. And it is very similar to the arrangement we had previously for the Victorville project or so-called biomethane project. that now is rolled under the same umbrella with the other two projects under the similar arrangement of both a preferred equity and a senior debt.
spk01: Okay, that's all for me. I'll turn it over.
spk04: Perfect. Thank you so much for your question. This concludes our Q&A session, and I would like to pass it back over to Darlene Webb for any final remarks.
spk07: I, too, had a problem with my mute.
spk09: Andrew, is there anything you would like to add to the end of the call? Or I'm happy to close the call for the day.
spk07: Sorry, I was muted again.
spk05: Please go ahead and close. I think we covered everything.
spk09: Fantastic. Once again, everyone, thank you for attending today's call and for your time. For any additional information or should you have any questions, please contact the IR team here at IR at Energia.com or visit us online at Energia.com. And with that, I'll pass over to the operator.
spk04: Perfect. Thank you, everybody, for joining today's call. You may now disconnect.
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