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spk08: Hello and welcome to today's Energia Q2 2023 conference call and webcast. My name is Bailey and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to our host, Darlene Webb, Investor Relations for Energia. Please go ahead.
spk01: Thank you very much, Bailey. And good morning, everyone. This call will be discussing our earnings for Energia's second quarter of 2023, and to June 30, 2023. If you're following along with our slides, my comments are direct. For our call today, I am joined by Mr. Brett Hodson, Energia's chief executive officer, Dr. Yaniv Sherson, Energia's chief operating officer, and Mr. Andrew Spence, Anagea'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 risk 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 from the company's perspectives, 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 open for analysts only. And with that, I'll turn the call over to Brett.
spk04: Thank you, Darlene.
spk05: Hello, everyone.
spk04: Thank you for joining us on the call today. I will be speaking to slide four. The second quarter has been a difficult and challenging time for Energia. Our Q2 financial statements and management discussion and analysis of the financial results has been released and describe and reflect our situation. A few of the significant items in the quarter that I want to highlight include Rialto entering into Chapter 11, a pretty significant event that occurred during the second quarter. In addition, the recognition of the loss on certain loans that were no longer deemed recoverable and the company announcing the strategic shift in business reset, but I'll discuss about more later in the call after we review the financials and Rialto in more detail. Given that, the financial conditions of the company, plus the manifestation of the current risks surrounding our build-on-operate assets, particularly in Italy, in addition to the business reset, A strategic review was initiated on approval from the Board of Directors of Energera as previously disclosed. The company has since engaged financial advisors to assist with the strategic review and is looking at options to maximize shareholder value. In the strategic review includes discussions with lenders. And as a result, the company has possible implications of a lender option relating to a loan for the BU assets in Italy. In addition, a loss on certain loans that were no longer deemed recoverable were recorded. With that, as a summary, I want to hand this over to Andrew Spence, our CFO, to provide the Q2 financial overview. Over to you, Andrew.
spk03: Thank you, Brett. Good morning, everyone. My name is Andrew Spence. I was appointed the Chief Financial Officer of Energia on June 12, 2023. I'm going to provide a brief discussion of the second quarter results, starting with key disclosures, and I'm looking at slide number five. As was reported in our press release, note one to the financial statements and our MD&A, the company has disclosed that substantial doubt exists about its ability to continue as a going concern. While management has made efforts to improve the profitability, these efforts are unlikely to be sufficient on their own to address the financial challenges facing the company. The continued operations depend on its ability to meet its financing and liquidity requirements on a continuing basis. There can be no assurance, however, that the company can reach profitability, secure adequate debt or equity financing, or implement asset sales on desirable terms within the necessary timeframes or at all. These material uncertainties raise significant doubt about the company's ability to continue as a going concern. Next, the company has disclosed in the press release, note 10 to the financial statements, and within the highlight section, the section on liquidity and in risk factors of the MD&A, that the loan from Arjun Infrastructure Partners, or AIP, for the build, own, operate projects in Italy, as an option for AIP to require Energia to purchase outstanding loans related to such projects if certain conditions are not met. The company continues to assess this matter as part of the ongoing strategic review, including discussion with lenders. Next, I will present key accounting charges and provisions. The company recognized an expected credit loss on certain loan receivables in the amount of $55 million. During the company's ongoing strategic review, including discussion with lenders, we became aware that the loans for building, owning, and operating projects in Italy will probably not be collectible and thus determined that a full provision was necessary in order to adequately reflect the balance. This resulted in an additional loss provision during the quarter. On May 25th, 2023, the company's JV subsidiary Rialto filed a voluntary petition for Chapter 11 restructuring. Rialto is 51% owned by the company. Due to the bankruptcy, the company has determined that it no longer controls Rialto and thus has deconsolidated the subsidiary as of the same day as the filing. The company has recorded a loss on deconsolidation totaling $37.9 million in the second quarter. Energy reported a second quarter operating loss of $22.4 million and a net loss for the same period of $119.8 million. Cash used in operations year to date through June 30th was $33.9 million. Regarding our guidance. Energia in prior periods has provided guidance with respect to projected revenue and adjusted EBITDA for the fiscal year 2023, which was based on the company having adequate liquidity and access to capital necessary to execute its plans. Due to a number of factors, including the continued deterioration of the company's financial performance as reflected in the reported net losses and negative operating cash flows, weakened liquidity position, recent changes to senior management and potential transaction, Energia now believes it will not achieve the estimates included in previous guidance and expect such measures of revenue and adjusted EBITDA to be lower than previously guided. All right, moving on to slide six regarding our Q2 financial results. First, Revenues were in line with the prior periods of 2022. Gross profit declined due to a combination of project cost overruns and certain non-recurring items. SG&A for the quarter was $13.4 million above the prior year. The larger items included a charge on terminated O&M project that was $5.3 million, credit losses on trade receivables $4 million, certain pre-petition expenses at Rialto, $2.9 million, and an additional vacation accrual of $1.2 million. The Q2 2023 net loss increased by $103.4 million compared to the same period in 2022, mainly driven by the loss resulting from the deconsolidation at Rialto, and the estimated credit losses expense of $59 million. Adjusted EBITDA is $16 million lower than the same period in 2022, which is consistent with the reported loss from operations. With that, I'll turn the call over to my colleague, Yanni.
spk06: Thank you, Andrew. I'm now on slide seven, discussing the Rialto Chapter 11 and deconsolidation issue. As previously noted, Rialto Bioenergy Facility entered Chapter 11 bankruptcy protection as a protection measure while enforcement of the feedstock laws continued to be implemented. As part of the restructuring process, there is a court proceeding occurring in August concerning a dispute over the valuation the outcome of which will clarify potential outcomes and the future of the Rialto Bioenergy Facility assets. As a result of the bankruptcy, the company has seized control of the RBF, and so from an accounting perspective, RBF has been deconsolidated from the financial statements. The impact, as of May 24th, the RBF had about total assets of $363 million, current assets of 11, current liabilities of $18 million, and total liabilities of $250 million. Certainly refer everybody to the Q2 interim financial statements for further details on the matter. And now over back to Brett.
spk04: Okay, thank you, Yaniv. I'm on slide eight now, discussing strategic shift in business reset. Energy acknowledges the business and financial results and recognizes there's a significant room for improvement. As previously disclosed, the company is undergoing the strategic shift in business reset. For all new build or operate opportunities in the development pipeline, we plan to develop future projects with a financial partner who will fund all or the majority of the capital in these projects. In these situations, Energia intends to recognize revenue in EBITDA from a development fee. capital sales in long-term O&M contracts with each future build-on-operate opportunity. That shift is from where, in the past, Energia has been one of the major capital risk contributors to these projects. That shift will hopefully de-risk these projects in the future for us, reduce capital requirements, and improve margins earlier in the recognition, earlier in the projects. We're also in the process of evaluating our current BOO assets as part of the strategic review and are determining if certain financing options are worth pursuing at this time to increase capital resources available so that we can use them for the remaining projects. We'll continue to seek equity partners in debt financing on our current build and operate projects through the strategic review process along with other measures. Shifting to margin improvement, we plan to enhance contractual requirements for margin protection and perform a review of the business opportunities and improve discipline in our contracting and execution processes, including incorporation of enhanced third-party due diligence and improvement from past experiences. Many projects face risks of unique characteristics and at times those risks do come home to create challenges for the organization. We've seen that in Q2, and the key is to how to take those forward and improve upon those in future work that we're going to engage in. Moving to SG&A reductions, management is and will continue to target SG&A reductions during this current difficult phase. We're already seeing results from reductions in headcount, and we're striving to have significant run rate reductions in Q3 and Q4 heading into 2024. All of this is in the backdrop of prudent cash management and conservation, where management is and will continue to target cash retention initiatives to improve liquidity. And we look to the results of the strategic review to help guide us into the future. So with that, I'm going to turn it back to the operator to open it up to questions and answers.
spk08: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question and please do ensure that you have unmuted locally. Our first question today comes from the line of Aaron McNeill from TD Securities. Please go ahead, Aaron, your line is now open.
spk07: Hey, morning. Nice to meet you, Brent and Andrew, and thanks for taking my questions. Brent, you've obviously come into the company with fresh eyes and have had some time to sort of understand the opportunities and challenges of the business. Maybe you'll agree or disagree with my characterization, but on one hand, obviously, the technology and asset footprint has the potential to both decarbonize and generate returns for shareholders, but there have been obviously lots of unforeseen delays in several areas, and the leverage is high, which is sort of creates a little room for error. You've obviously got the strategic review underway, but in your view, what's sort of a plausible outcome for the review? What would be a great outcome in the review or a suboptimal outcome? And over what timeframe do you think this all plays out?
spk04: Aaron, thanks for the question. I'm new to the organization, but understand, you know, obviously the infrastructure industry quite well from my past experience. So stepping into the organization feels and looks a lot like many of the successful places I have been that have been involved in such types of infrastructure projects. I think my assessment is similar to yours in terms of the market opportunity. The demand for the solutions to offer are significant. Now, you made a comment regarding current projects and leveraging the company and leaving little room. These types of projects tend to have debt and leverage in them and other ways to minimize equity capital up front in order to get to your run rates on these projects. But they do run, they do have risks in these projects. And they're relatively normal risks, but they're usually unique for projects. I think for us, the challenge has been the simultaneous manifestation of several risks simultaneously that's put us into a bit of a challenge here in Q2. And that's leading us into the strategic review from the board of directors to look at all options going forward. I don't want to forecast what the time frame will be on this. We're in the midst and deep into the work on that review. The options and outcomes are varied and different, and so it would be premature for me to comment on exactly where things are going to go. I can say, though, that the future of the market and what Energia can do in this market encourages me quite a bit. I do believe that the services that we're offering, the technology packages we're offering, the people, skill set, capabilities are exactly in the right spot and give us some very significant competitive advantage going forward. So the key will be in the strategic review to assess these options and how to get to the point where we can capture those opportunities going forward in the future quarters and years.
spk07: Makes sense. Does the language around the AIP loan and the rescinding of guidance imply that there have been further delays to the ramp-up of the Italian BOO facilities? And can you just give us a sense of where those facilities are at today and what you expect the ramp-up period would be?
spk04: Yeah, there are some continuing challenges with the Italian BOO project. Again, from a risk point of view, one of the drivers of the value for doing these projects is the government incentives, which unfortunately have timelines attached to them of when they can be applied, so they require almost like a bit of a rushing to getting these projects to completion. And so in that approach, that's when execution risk and other risks can manifest themselves, and we've had that happen on those projects. We have, as I mentioned earlier, in terms of the strategic review, we're looking at all parts of the business and all aspects of it. And part of our work involves looking at all of those projects, looking at what is required in terms of additional capital and time to completion. And as I said, we're in the middle of the review and the process, so I can't say exactly what's going to be the end result of that. But I'm hopeful that where we are today can be accelerated over the coming weeks and months so that the projects have a reasonable chance to meet their expected construction deadlines on those projects. We're making progress. We've had risks that have increased on those projects from various different things, from supply challenges to feedstock challenges and other. And in a lot of cases, because these projects have, as I mentioned, government aspects to them, whether they're in terms of permitting or in terms of the incentives themselves, those are risks that definitely change and adjust, and we're constantly having to pivot towards them. So all of those require us over the coming weeks and months to make sure that we've got the right focus on trying to get those projects into their best place over the coming quarters. But at this point in time, the strategic review isn't complete, so I'm a little bit short of details on being able to say this project here or that project there, but we are looking at it in the context of the strategic review.
spk07: Got it. And then I know it's been deconsolidated, but can you provide any updates on the current feedstock situation at Rialto? You know, have you seen volumes increase, even if immaterially, or give us a sense of where that is?
spk04: Yeah, good question. Rather than my generalities, I'll turn it over to Yaniv to give you a bit more specific on that.
spk06: Yeah, thank you, Brad. Thanks, Aaron, for the question. The feedstock situation hasn't changed materially. There's been slight impacts in a positive direction, but there hasn't been a material change in the feedstock situation. As mentioned before, we're still anticipating improvements to occur with the installation to additional orexes, which will bring a step function increase in feedstock, and of course, the continued implementation of the one with penalties that can start early next year.
spk07: Understood. Thanks, everyone, for the responses. I'll turn it back.
spk08: Thanks, Aaron. Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. The next question today comes from the line of Derek Whitfield from Stiefel. Please go ahead, Derek. Your line is now open.
spk02: Good morning, all, and thanks for your time and taking my questions. I wanted to ask two follow-ups, maybe leaning in on the six Italian booths first. Could you help frame the incremental capital required to bring those plants on and what a reasonable timeline to optimize the digesters once they are online? And again, I'm looking for kind of parameters more so than very specific numbers.
spk04: Sorry, Derek, I just had a cough. Yeah, thanks for the question, Derek. It's difficult at this point in time for us to give specifics as we're in the middle of a detailed review on all of the projects with our financial analysts who have been hired by the organization to help us get to those exact answers on those questions. So I anticipate, subject to the strategic review, work being completed over the coming weeks and months that we'll be announcing possible details with regard to that. However, that strategic review is looking at lots of different aspects of the business at this point in time, so it's uncertain when and how that information will be put forward. With regard to the actual timelines necessary after you get the project to a commissioning state, to then tweak it to get it up to full optimal. It varies in each and all conditions. Some of the projects we're doing in Italy, the feedstocks are different. So whether it's coming from farm feedstocks or food waste feedstocks, make for different commissioning and also different de-bottlenecking at the plant once you get up and going. And those can vary from days and weeks of upgrading to many months. And like most processing plants, even after you get them up to the original design specs that they were intended, Robert Harrison, Operators at that point in time, often start to identify numerous ways to improve capacity at the plants. Robert Harrison, And so, and sometimes that occurs, even before you Commission the plant and therefore you you put change orders in and you have you have adjustments and the Italian projects are no different than that they're they're they're in depending on which project is they're having. different adjustments, different scope changes in requirements, even some of them before commissioning, in order to improve capacity post-commissioning based on what they're seeing on the ground. Unfortunately, I understand you're looking for a range of numbers with regard to the dollars necessary to complete off or get to that commissioning stage versus the ramp-up stage. But I don't have those for you at this point in time. It is a focus of the strategic review, and we'll continue to be looking for giving you a more clear line of sight for that over time here.
spk02: Terrific. And as my follow-up, and perhaps shifting over to the sector more broadly, we've seen a record amount of M&A across the R&D sector over the last two years. while not asking you to project a potential outcome from your strategic review, what's your sense on industry interest in your U.S. and Italian projects, and could you reasonably divest a couple to advance the broader portfolio?
spk04: All options are on the table for the strategic review, and without saying specifically which actions will be followed and which will be approved by the Board of Directors, that would be premature for me to suggest that. I can generally comment about what I'm seeing in the industry and with regard to the trend that you're seeing. And obviously Energia is in the industry and can be seen as facing similar opportunities out there. It is a reasonably dynamic marketplace. I would consider it to be still in its early stages of maturity, you know, It's not a full mature market by any means. There's a lot of parties, whether they be infrastructure funds, whether they be strategics, whether they be companies that are looking to expand into this market to improve their environmental track record or their environmental capabilities. That makes for, as a backdrop, there seems to be a lot of interest out there. And I would agree. My dialogue, my instruction out there and what I'm getting from instruction out there in the industry is that is accurate. What I would say, though, that what overlays all of that is the macro environments that exist in the market condition anyways. And it feels to be more of a buyer's market than a seller's market out there. And what I mean by that is given the uncertainty around interest rates, despite the fact that there seems to be a lot of interest and a lot of capital, there seems to be some caution relative to maybe some of the M&A deals that had been done in previous years in a bit more of a frothier market. I mean, it's just my gut that's saying that, and I'm trying to give you a bit of color of what I see out there in terms of the opportunity. In terms of going back to us and Energia and our strategic review, we're more micro, obviously, and we'll be talking with our closest stakeholders as to what the best options are for us and what paths for us to go down. And obviously, we've entertained incoming calls from parties that are interested in Energia services or even partnerships. And as I mentioned, in terms of our strategic reset and moving to more of a capital light model, we've been active and out there looking for partners to come alongside us for what is a very healthy business development pipeline that we have. And this is where a bit of the challenge is for this organization. We are in a challenging time right now. But when I look at the market demand and the projects that we're lining up, if we can find the right financial partner or the right solution or write solutions through our strategic review, I get very excited about the opportunity post this liquidity challenge we're having.
spk02: I completely agree with you. And just one last, if I could, Brianna. Shifting over to Rialto, the MD&A noted the City of LA is now operating under a corrective action plan stemming from its delayed efforts to adopt and enforce SB 1383. Could you perhaps speak to what measures have been taken in the corrective action plan?
spk06: Absolutely. A number of measures have been implemented, most notably the passing of the ordinance, which did occur, and then subsequent events related to distributions of notices to generators to comply, multiple notices, in fact, and the announcement of penalties that would be forthcoming on generators for noncompliance. So a number of mechanisms related to outreach, repeated outreach, getting customers to be aware of the requirements, signing up, and aware of the consequences for not doing so.
spk02: Thanks for your time.
spk08: Thank you. There are no additional questions waiting at this time, so I'd like to pass the call back over to Darlene Webb for any closing remarks.
spk01: Thank you very much, Operator. As always, for additional information or should you have any questions, please do contact the IR team at ir.energia.com or visit us online at energia.com. Thank you all once again for your time today. Operator, you may now end the call.
spk08: This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.
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