Anaergia Inc.

Q4 2022 Earnings Conference Call

3/27/2023

spk00: Good morning. Thank you for attending today's Energia Q4 and 2022 year end results conference call. My name is Frances and I'll be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Darlene Webb, Energia Investor Relations.
spk06: Thank you very much, operator, and good morning, everyone. On this call, we'll be discussing our earnings for Energia's fourth quarter and year end, dated December 31st, 2022. And if you're following along with our slides, my comments are directed to slides one through three. For our call today, I am joined by Dr. Andrew Benedek, Energia's founder, board chairman, and CEO, Dr. Yaniv Sherson, Energia's Chief Operating Officer, and Ms. Paula Meissen, Energia's Chief Financial Officer. Before beginning our formal remarks, we would like to refer listeners to slide two 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. 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 prospectus, which is filed with 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 today's call over to Andrew.
spk07: Thank you very much, Darlene. I am starting on slide four, which lists the highlights of 2022. These highlights include a significant amount of interesting opportunities and capital sales around the world. And these opportunities are continuing to rise with the interest in RNG. Our existing booths are also continuing to be executed as per plan, although somewhat delayed. All of our Italian booths will now, this year, will be operating. Two of them are already. The remaining four will be put into operation during the next two quarters. RNG as a market is continuing to be growing throughout the world in all of our markets. and there are new incentives in Europe, in Canada, in the US, and there are volunteer markets around the world that will continue to drive this market. We did sell our toner project. We sold it because we Given the low share price, we did not have the resources to complete it. It still had a significant amount of additional investment. And we also felt that we can better deploy the money elsewhere. But we're looking forward to the results beyond donor. In terms of global recognition, just a few weeks ago we are your our italian project easy energia was named as the world leading biogas project we are also have received other awards and been in the running next month for a couple of awards in a global water meeting in berlin our quarter was lower than last year, but last year was an exceptionally high quarter. Overall, on the year, our revenue has grown 25%. I'm moving on to the next slide, slide five. This basically summarizes some of the things I just told you in a little more detail. For example, it shows that our backlog has decreased because of toner. We counted the backlog for the full build-up before, but nonetheless it's still a very healthy backlog. Our Italian market, and in fact all of the European markets, are going to increase substantially because of new decrease caused by the European Parliament's desire to increase renewable energy and in particular biogas. So in Italy, for example, you now have a new incentive that gives you 45% discount and will be available until June 2026. The IRA became law in Q3 and this will impact both our blue business as well as the capital equipment business Canada now provides incentives for the renewable energy that is useful for providers of non-renewable energy this this explains our sale of the Rhode Island plant gas to Irving oil in Canada in addition In most of our markets, the voluntary market is increasing, particularly in California with a new law, SB 1440. And we're also looking forward to bring additional contracts on the voluntary markets. For example, for our so-called biomethane facility, we are negotiating a new contract. So overall, Opportunity is continuing to grow. I'll hand this over now to Paula Meissen, our chief financial officer.
spk05: Thank you, Andrew, and good morning, everyone. Moving to slide six. Again, we'll highlight a point Andrew has already made. The revenue grew 25% in 2022 compared to 2021. The capital sales segment remains a very strong contributor, driving approximately 76% of the revenue for the year. The boo segment is increasing in contribution, contributing 15% for the year. That's up from 4% in 2021. When revenue is segmented by region, you'll see that in the graphic on the slide. EMEA continues to lead the other regions in revenue with 74% of the total, followed by North America at 23%. and the Asia-Pacific region at 3%. The gross margin for 2022 was 17.6%. That's down from just over 19 in 2021. And that was as a result of higher material costs and customer-driven delays on a small number of projects. The 2022 adjusted EBITDA, when we're looking at adjusted EBITDA as a year-over-year comparison, it was 20.3 million lower than 2021. And that was largely due to higher SG&A costs. When we're looking at net SG&A, it was $21.5 million higher than the prior year. And that increase was mainly driven by growth-related activities to support projects and BOO development. It's an increase in ECLs and legal expenses and provisions and higher net R&D spending. Compared to 2021, The year-to-date net income was 60.6 million lower, and that was due to a non-cash loss on an embedded derivative. The difference year-over-year was 22.3 million. We had higher net SG&A, which we just spoke about, and we had an increase in income tax expense. The change year-over-year was 13 million, and the large majority of that was non-cash, and there were other items totaling about 3.8 million. If we move to the 2022 guidance, our 2022 revenue of 163 million was within the guidance range. And to remind you, that range was 160 to 170. The adjusted EBITDA was 12 million lower than guidance. Approximately half of that variance to guidance resulted from lower gross margin on four projects that we had. with the remainder resulting from an increase in SG&A related to some BOO costs that had to be expensed. As previously disclosed in December of 2022, 2023 revenue is expected to range from $280 to $340 million and adjusted EBITDA from $25 to $35 million. And we re-evaluate the guidance every quarter. Moving to slide 7, cash equivalents and current restricted cash as of the end of the year was 78.8 million. That's roughly 23 million lower than the end of Q4 2021. And non-current restricted cash was 16.5 million. In February 2023, a subsequent event, we completed the sale of toner for gross proceeds of 56 million euros. We expect to recognize a positive impact on that sale, which will get booked in Q1 2023. The proceeds from the sale be used for general corporate purposes and facilitating additional growth in Europe that Andrew referenced. For the year, cash used in investing activities was $192.5 million and was mainly directed at advancing the construction of the Boo portfolio. And the majority of the invested capital was funded at the subsidiary level. So 134 million of debt and 24 million of preferred capital with the balance being funded by corporate proceeds from the issuance of our share capital. And with that, I will turn it over to Yaniv.
spk03: Great. Thank you, Paula. And good morning, everybody. Moving on to slide number eight, you'll see a modest increase in the capital sales segments year over year. And this continues to be driven primarily from the North American and EMEA regions. This modest increase is mostly driven to project delays. And it's not necessarily a loss of the projects, but that will occur this year. The EMEA regions continues to be the backbone of the 22 contributions, up 31% year over year. and driven by the execution of multiple projects in the region, both between our BOO and our capital sales segment, third-party sales. And we still face quite a healthy pipeline in the EMEA region, primarily driven by the RepowerEU program and the extension of multiple incentives. Most notably, the Italian decree has been extended an additional three years, from 23 to 26. And as Andrew mentioned before, This will now result in a substantial capital cost subsidy by the government on new projects. In 22, we saw bookings totaling over 100 million, and these include large turnkey projects. For example, in the EMEA region, large turnkey facilities producing LNG as a product among the largest agricultural digester in North America. And you'll see the first integrated solid waste and wastewater facility in Singapore with the TWAS Nexus Integrated Waste Management Facility. It's part of a world-leading municipality, PUB, that was booked last year. And notably, two projects with PepsiCo, of which we anticipate follow-on opportunities among hundreds of facilities around the world. Moving on to slide nine, you'll see a photo here of the recently commissioned Ambiente facility. This is an example. This facility is just outside of Milan, a showcase servicing the municipal region, and an example of the replicable model of the Italian facilities and assets that are all benefiting, again, from the 10-year fixed price CIC credit. Moving on to slide number 10, in the services and BOO segment, we saw a 28% increase in our service segments from 22 to 21, and a substantial increase, nearly fourfold, in the BOO segment. The service segment continues to grow, primarily driven from service agreements in North America, and we expect the service segment to continue to grow as our capital sales come online, for which we perform ongoing service and operation-related services to those customers. On the BOO side, substantial increase in our BOO revenue, primarily driven from the arrangement with our construction in Udine, Italy, as well as startup revenues from our operating plants. Notably, the Rialto Byron facility did obtain the RIN and LCFS approvals after substantial administrative delays, and so gas from March onwards will monetize. And then SoCal Biomethane Facility is working on finalizing an offtake with a major multinational, underscoring the interest, particularly in the voluntary market, with gas. Moving on to slide number 11, as you can see here, of the 12 assets in the EnerGeo portfolio, six in operation, six in execution, with the adjustments from current market conditions and the toner sales, we're looking at a $70 million proportional run rate EBITDA across the portfolio, reflective of nearly $600 million of invested capex, most of which is financed. As noted, the toner facility was sold, and these proceeds will be directed to continue to drive growth in our focus regions, particularly Italy and Germany and Europe. Ambiente is another facility of three out of the six that was commissioned. And as noted before, the remaining three will be commissioned this year. And the number of boot facilities are in advanced stages of development in Italy and other European markets, again, particularly driven by the renewal of government-backed incentives that are guaranteeing gas prices as well as now subsidizing capital costs. Moving over to North America, construction at Rhode Island and the improvements at Charlotte continue. They're both expected to finish their upgrades by Q3 of this year. with Rhode Island selling gas to Canada's largest refinery, Irving Oil. And the IRA in North America continues to accelerate RNG projects, as well as what is an emerging voluntary market and what we're calling the compliance market, an example being the CFR, driving the requirements on obligated parties to procure lower carbon intensity fuels. naturally driving demand for RNG, a drop-in and immediately dispatchable fuel. This is evidenced by Irving Oil as well as other opportunities that we are in advanced stages of discussions and finalizing. And our development continues on multiple wastewater and solid waste RNG opportunities in North America. The large development in Kent County continues to advance. and a number of wastewater opportunities recently awarded and will be expected this year continue to advance. Again, accelerated by a burgeoning voluntary market, driving desire for low-CI fuels, and accelerated as well with the IRA that's now a substantial capital cost incentive on projects. Moving on to slide 12, a specific update on the Rialto Bioenergy Facility. As noted before, the ramp up has been sluggish with feedstock in Los Angeles. This has primarily been due to the delay in the implementation of an ordinance. This ordinance requires generators to sign up for organic waste collection and diversion services as required by state law. The ordinance was finally implemented, albeit late and behind schedule per the state requirements in December of 22, and it requires all commercial and multifamily generators to subscribe. to services. So, this ordinance is expected to drive increase in feedstock from our anchor supplier, the OREX facility at Waste Management Sun Valley Recycling Park, at a steady rate throughout the year. However, two additional OREXs are being deployed with Universal Waste System, an independent hauler based in the Los Angeles region, and these are implemented to facilitate de-risking the sluggish ramp up from the ordinance and regulatory action. However, both machines have experienced client-driven delays in permanent construction. And as a result, the second OREX, which is located in downtown LA, is expected now to start operations in the second quarter of 23. And a third OREX in a city just out of Los Angeles called Tenafay Springs is expected to start operations third quarter of 23. Both of these machines will drive feedstock increase to Rialto. in part from ordinance and in part from just the existence of additional machines. And so we do expect a continued increase throughout the year. Notably, however, greater revenue contribution will come from the facility now that the REN and LCFS approvals have been completed. And with that, I'll pass this back over to Andrew.
spk08: Andrew, back over to you.
spk07: Thank you, Janet. I was on mute. I'm on slide 13, which summarizes what my colleagues have ably explained in terms of progress in the company. The main point on this slide, in the interest of time, I will not repeat everything that has been said, but you can see it. It's clear. The last point on this slide is the most important one. The company value is well below our book value, and it is in spite of the fact that the company's fundamentals are still very strong. Delays in accounting or delays in projects and so on don't alter that fundamental value. And we truly believe that we're a world leading company in an extremely exciting space that is a critical one for us to combat climate change. And with this, I'll pass it over to Darlene.
spk06: Thank you, Andrew. Appreciate that. We are able to open for our Q&A operator.
spk00: Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you'd like to remove your question, press star followed by 2. Again, to ask a question, that's star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from the line of Aaron McNeil with TD Securities. Please go ahead, Aaron.
spk02: Hey, morning all. Thanks for taking my questions. I know you're now suggesting in the presentation that all the battalion booths will be completed by the end of Q3, but I was hoping you could give us a bit more specifics on the sequencing of each of those projects, you know, when they're going to be commissioned, when you expect them to be fully ramped up. And then similar question on Rialto, I guess, on the ramp up and maybe more importantly, your expectations for all of those facilities have changed since you introduced the guidance in December.
spk07: Yanni, do you want to take that one?
spk03: Sure. Thanks for the question, Aaron. The Italian projects, typically once commissioned, there's between a three to five month period for ramp up and registrations with the subsidy scheme. And so, we anticipate that to occur the commissioning milestone in Q2 and in Q3 with remaining three assets. With respect to Rialto, we expect an increase in the ramp-up to occur this year, as noted before, with the ordinance in place and with these two additional ORECs machines. But we know that it's difficult for us to predict exactly the rate of which adoption will occur. We continue to monitor very closely on a regular basis and we'll absolutely update as we learn more on the rate of rollout. But the ordinance did recently go into effect and there has been a campaign and messaging by the city to generators. Notifying of the requirement, getting the word out, making sure that it's clear. And there is a penalty that can commence in January of 24 for those that don't subscribe. And so we believe that between the, you know, positive carrots of notification and generally folks that are good citizens to be signing up as well as the stick in 24 to drive ramp up into 24. as far as reaching full capacity.
spk02: Okay. There's some language in the press release around a comprehensive strategic review on Rialto. Can you elaborate on that?
spk03: Yeah. All options are being evaluated currently. There's been no decisions as far as restructuring alternatives, but we are conducting a strategic review and we do maintain a direct line of communications with the bondholders. And so we're evaluating financial options.
spk02: To refinance the bonds or? Correct, for refinancing comprehensive strategic.
spk03: Yeah, for refinancing or all financing options that may be available.
spk02: Got it. How much capital do you need to spend to complete all the BOO projects in the backlog?
spk08: Paula, do you want to take that one?
spk05: Sure. There isn't a number we've provided for that, Aaron, but largely in Italy, as you know, We're either have the projects in operation, the three, or the other three remaining are nearing completion and going to be entering ramp up. So the capital there is minimal. In terms of North America, four of the six are significantly complete. The others... I would say we're looking at something less in North America, less than 50 million. And the Italian booze, of course, we don't consolidate all of those. So those don't get shown in the same manner.
spk02: Understood. Maybe one more, if I can sneak it in. What's an appropriate G&A run rate going forward? And would you highlight any items in the quarter as non-recurring or one-time in Q4-20?
spk05: Yeah, yeah. So in terms of SG&A, as you would expect, our SG&A does grow because we are growing. That definitely does happen. But on a go-forward basis, with the larger operating base, the diverse nature of the operations, I would expect SG&A to be the net SG&A to be at or below where we are for 2022. I would expect it to be lower because we did take some provisions in the year that I wouldn't expect to occur again. But we have increased headcount, of course, for SG&A to support the bigger company, the bigger booth, the larger level of activity, and that will keep going. So, if you're trying to look forward, I would say 2022, less, you can go through the provisions and adjust for those. We wouldn't expect those to continue. Those are the one time items.
spk08: Understood. Thanks. I'll turn it over.
spk00: Thank you, Erin. The next question comes from Derek Whitfield with Stiefel. Please go ahead.
spk04: Good morning, all, and thanks for taking my questions as well. For my first question, I wanted to ask a follow-up on Rialto. Regarding the strategic review, could you perhaps speak to the broad financing and business implications from this review and comment on if it's limited just to Rialto?
spk03: It is limited just to Rialto. As far as the overall implications, we're evaluating all options and so it's premature for us to say implications as of now. But we are evaluating all project structural financing options that might be available.
spk04: Thanks. And then staying on Rialto, assuming the universal waste system and operation targets hold for Q2 and Q3 for the second and third ORECs, how are you thinking about the feedstock build through year end? Or I guess more specifically, what have you guys assumed in your 2023 guidance?
spk03: We've assumed a ramp up. with a substantial ramp up and increase with OREC number two and OREC number three. They will certainly deliver more feedstock with known certainty. Another contributing factor is the fact that gas sales are now possible. It's another accretive adjustment from prior year. With respect to the feedstock, we've assumed in our guidance that there is a substantial increase into Q4. for the year, although we note that there's uncertainty on the rate of rollout with the generators. And so the OREX number two and OREX number three are shielded in part because they serve areas that are also outside of the Los Angeles franchise. And so we assume that there'll be a substantial amount of feedstock by the end of the year driven by those three, but not necessarily totally full.
spk04: Terrific. And one final, if I could, just with regard to the SoCal biomass aim project, you referenced that you're actively negotiating offtake terms in your prepared comments. Could you perhaps give us any color on the nature of the pricing arrangement you're pursuing? I'm assuming that you guys are referring to fixed price offtake.
spk03: Yeah, we have. We'll be able to disclose some more granular information here coming forth, but thematically it's in line with what we've been messaging about the voluntary market before, that the voluntary market is growing very rapidly for fixed price off-takes that are CI-based, meaning premium for the lower CI or even negative CI fuels. because of their ability to achieve either carbon-neutral products or carbon-negative products for decarbonization purposes. So, the answer to your question is yes, it is in line with what we've been seeing in the voluntary market as far as fixed-price premiums for renewable low-CI or carbon-negative fuel.
spk04: Great. Thanks for your time.
spk00: Thank you for your question. The next question comes from Craig Irwin with Roth Capital Partners. Please go ahead, Craig.
spk01: Good morning. Thanks for taking my questions. So, first thing I really wanted to understand a little bit better is the gas price assumptions and guidance. This is something where you guys have had a fairly conservative basis for how you put things together. But can you maybe update us on where gas prices are now versus what you've been using to put your guidance together?
spk07: Paula, do you want to address that one?
spk08: I'll take that on.
spk07: Craig, thanks for that question. I think I should have said that in the backlog calculations, We are basically using gas prices as they used to be before the Ukrainian war. So continuing to be fairly conservative.
spk01: Okay, excellent. Then, you know, I do know that, you know, you have run Rialto on a fairly regular basis. Can you maybe give us an approximate tonnage or volume that you processed at the facility in the quarter? And, you know, how would you expect capacity to ramp? Would it have a kind of a little bit of a stop-start approach, or should there be a linear ramp, or are we likely to see sort of, you know, a jump in capacity over the next months and quarters?
spk03: Yeah, generally speaking, the ramp is – It's somewhat linear and gradual from the machines, particularly because it's been driven historically by voluntary customers signing up in the Los Angeles region for organics collection. What we expect for the year, however, is sort of the two-step functions of increase with OREC number two and OREC number three. Those are binary sources, so new catchments and new machines to be delivering. And they either run or they don't. So it's a binary sort of step function and increase. Deliveries are steady. They come five or six days a week, Monday through Friday, Monday through Saturday. And so we'd expect from Sun Valley sort of a linear gradual increase throughout the year as customers sign up. And then a step function in Q2 and Q3 towards the tail end, of course, with ORC number two and ORC number three coming online. And then they sort of linearly gradually increasing as well over time.
spk01: Okay, excellent. And changing subjects completely, right? When we look at the European market, it seems like green gas, there would be a tremendous investment opportunity over the next many years. You know, fundamental changes in, you know, German gas commitments, you know, structurally higher energy prices in Europe. Can you maybe just talk a little bit about the broader pipeline of projects and opportunities that, where do you see as areas that you could participate or where you have uh dialogue with uh existing customers or or um owners of existing facilities um that might be potential customers over the next many years so i'll take that craig basically you're absolutely right there is uh lots of opportunities in europe we we have uh
spk07: we could almost at will bring on many more projects what we're trying to do though is focus on making sure that we do deliver the current projects and we're collectively looking at investing in additional projects just because our financial means are limited and i don't want to raise money at the current share prices or even before the current share prices so but on the other side we can also do capital projects in a booming market so this will give us a way to grow the company and enable to cover our sgn excellent and
spk01: last question if i if i may um the tonder project that you sold you sold the uh the ownership in the quarter um can you talk about the um the profit on uh project development as far as sort of total capital invested um and your return on that capital um as you sold a piece to uh to this partner paula do you want to take that on
spk05: Sure Craig yeah we we did, we will realize a benefit for the sale of that project that will actually be the positive impact will actually be shown in Q1, but it will be you know roughly. The book value of that asset is between 58 and 60 million Canadian-ish approximately. And so we did get a significant benefit from that.
spk01: Understood. Congratulations, Ben. Thank you for taking my questions. Okay.
spk00: Thank you, Craig. There are no questions waiting at this time. So I'll now pass the conference back over to Darlene Webb for any additional remarks.
spk06: Thank you, operator, and thank you for those who participated today. As always, for additional information or should you have any questions, please contact the IR team at IR at Energia.com or visit us online at Energia.com. Thank you all once again for your time today. And operator, you may end the call at this time.
spk00: That concludes the Energia Q4 and 2022 year end results conference call. Thank you for your participation. You may now disconnect your lines.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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