Greenlane Renewables Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 11, 2023

Key Takeaways

  • The company has refined its strategy to focus on configurable systems across its three core biogas upgrading technologies, targeting key sectors with the aim to be cash flow positive and adjusted EBITDA positive by Q1 2024.
  • In Q1 2023, Greenlane reported $15.5 M in revenue (87% system sales), a 24% gross margin, an adjusted EBITDA loss of $1.7 M and a net loss of $2.1 M, while ending the quarter with $16.3 M cash, no debt and a $25.1 M backlog.
  • Management implemented a ~10% workforce reduction and other cost-containment initiatives, and is investing in an ERP roll-out to streamline operations and drive further efficiencies.
  • The ZEG Biogas partnership in Brazil employs a royalty-light model to localize execution and target deployment of 75 TatarraPlus units over five years, unlocking substantial sugarcane-and-landfill RNG potential.
  • Recurring aftercare services and the ARDAP acquisition continue to deliver stable, growing revenues, with aftercare up ~15–20% Y/Y and ARDAP contributing a Q1 run rate of approximately $3.6 M.
AI Generated. May Contain Errors.
Earnings Conference Call
Greenlane Renewables Q1 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Greenlane Renewables Q1 2023 Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, May 11, 2023. I would now like to turn the conference over to Darren Seed.

Operator

Please go ahead, sir.

Speaker 1

Thank you, operator, and good afternoon. Welcome to the Greenlane Renewables Q1 2023 conference call. I'm joined today by Brad DeVille, Greenlane's President and Chief Executive Officer and Monte Balderson, Greenlane's Chief Financial Officer. Before beginning our formal remarks, We'd like to remind listeners 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 projected in these forward looking statements.

Speaker 1

Greenlane Renewables does not undertake to update any forward looking statements except as made or required by applicable laws. Listeners are urged to review the full discussion of risk factors in the company's annual information form, which has been filed with the Canadian Securities Regulators. Lastly, while this conference call is open to the public and for the sake of brevity, questions will be prioritized for analysts. Now, I'll turn

Speaker 2

the call over to Brett. Good afternoon, and thank you everyone for participating on today's call. I'd like to start off with a brief recap of our business progress and updated outlook along with some industry commentary before I turn the call over to Monty for a more detailed review of 4 years ago, when we launched Greenlane Renewables as a standalone public company, we told investors that RNG demand Would grow rapidly due to its attractiveness of the low carbon and carbon negative drop in substitute for fossil natural gas, which would be supported by the adoption of an increasing number of regulatory incentives, policies, funding mechanisms around the world As governments, industry and consumers recognize the potential of RNG to help meet greenhouse gas production targets, we were right. Global production of RNG has gone from roughly 150,000,000,000 cubic feet in 2019 to 250,000,000,000 in 2022, The compound annual growth rate of 20%. RNG is now a key global energy asset and will continue to grow and replace fossil fuels using the We also told investors that we would offer the 3 major biogas upgrading technologies, Water wash, pressure swing absorption and membrane separation, building out comprehensive solutions for our customers' needs.

Speaker 2

We've sold many of each. In fact, over the last 4 years, as a trusted industry technology provider, we have sold 40 systems worth 168,000,000 to customers worldwide across the 3 product technologies. In 2022, we added compelling in house biogas desulfurization technology Because every biogas project has hydrogen sulfide and we saw an opportunity to add more value to our customers. As an established leader in the global RNG industry And through delivering these projects, we've developed we've deepened our understanding of the market and we're taking the opportunities to reflect and refocus how we want to lead into our future. Given that growth is never a straight line, we're resetting and we've honed our strategy to target And from a financial standpoint, as part of this trajectory, we're focused on our future and expect to be cash flow positive and adjusted EBITDA positive in the next 12 months.

Speaker 2

We're confident in our capabilities in each of the technologies we And we fine tuned our product portfolio to deliver configurable systems faster, replicate them across many similar opportunities, optimize costs and drive measurable value to our customers. Our collaboration with ZEG Biogas, which we announced last month, is a prime example of this strategy in action and offers us the opportunity to create another step change in global RNG production capacity. We've seen the global RNG Market evolved through growing consolidation and sophistication in our customer set with large energy companies continuing to focus on low carbon or in the case of RNG For example, oil and gas majors BP and Shell are now integrating recently completed major acquisitions in the RNG sector into their respective businesses with significant plans for growth. BP through its acquisition of RK Energy It's targeting annual biomethane production of 145,000,000 MMBTUs by 2,030 from the current 13,000,000 MMBTUs through Arke has significant development pipeline, while Shell through its acquisition of Nature Energy is looking to scale up its existing RNG business as part of a strategy to build a global integrated biomethane value chain. Against this backdrop, we remain optimistic not only about the future of our industry, but also Green Circling back to the Brazilian market and the exciting opportunity we have with ZIG Biogas in particular, We've laid a new path forward with the royalty light business model to establish industrial scale volume production of Green As a reminder, Zinc Biogas is 50% owned by Zebra Energia S.

Speaker 2

A, One of Green previously the fuel distribution unit of Petrobras. The Tataro Plus is one of Greenlane's largest and most popular biogas upgrading products. ZAG Biogas is initially focused on the large landfill and even larger sugar mill to waste biomethane opportunities that exist in Brazil. Their goal is to deliver 75 ChitarraPlus systems over the next 5 years, which would install greater biogas processing capacity More than 140 units Greenlane has delivered over the last 30 years. Production capacity in Brazil but we phased in by zinc biogas over time with a minimum volume commitment in the 1st 2 years.

Speaker 2

The biomethane opportunities in Brazil are wide open and largely untapped. The Brazilian sugarcane sector is a promising new and immense market opportunity for biomethane. Today, there are more than 330 sugar mills across the country engaged in the production of sugar and ethanol biofuel. The latter produces vast quantities of a lipid byproduct Production industry in Brazil dates back to the 1970s and today the country is the world's 2nd largest producer. The consumption of ethanol biofuels equipment to gasoline volumes in the country's transportation sector.

Speaker 2

Biomethane production from sugar mill Waste across the entire sector has the potential to exceed the total current natural gas consumption in Brazil. I'll now pass the call over to Monty.

Speaker 3

Thanks, Brad, and good afternoon, everyone. As a reminder, all figures are in Canadian dollars unless otherwise stated, And all comparisons are for the Q1 of 2023 against the Q1 of fiscal 2022. Greenlane's revenue in the Q1 was $15,500,000 compared to $16,300,000 in the same period 1 year ago. System sales revenue accounted for 87% of total revenue in the quarter, which is recognized in accordance with the stage of completion of the projects, with the remaining 13% of revenue coming from aftercare services. We delivered a gross margin in Q1 of 24% or $3,800,000 compared to $4,000,000 or 25 percent in the Q1 of 2022.

Speaker 3

We reported an adjusted EBITDA loss in the first Quarter of $1,700,000 versus a $30,000 profit in the Q1 of 2022. Net loss in Q1 2023 was $2,100,000 compared to a net loss of $2,200,000 in the comparative quarter of 2022. During the quarter, the company announced a $7,200,000 contract win for a food waste to RNG project in Ohio, United States for the supply of a biogas upgrading system and order fulfillment commenced immediately on this contract. As at March 31, 2023, the company's sales order backlog was at $25,100,000 And as a reminder, the sales order backlog is snapshot at one moment in time, which varies from quarter to quarter. The sales order backlog increases by the value of new system sales contract And it's drawn down over time as the projects progress towards completion with the amounts being recognized in revenue.

Speaker 3

Greenlane historically provided an estimate of its active system sales opportunities or sales pipeline to create awareness remains healthy as we exited the quarter with a cash balance of $16,300,000 and no debt, providing ample flexibility for Greenlane to invest and grow in our core RNG business as well as pursuing other strategic initiatives. In support of our focused strategy, we are also Systems, processes and infrastructure to sustain the business at its scales, and we have made the decision to realign our resources. While we could not have achieved our historical growth without the dedicated contributions of our employees, we have made the difficult decision We have selectively reduced our workforce by approximately 10% and have also implemented other cost containment initiatives to reflect our needs while maintaining a strong core on which to build. By concentrating on our strategic Competencies, as Brad mentioned previously, we expect to be cash flow and adjusted EBITDA positive in the next 12 months or the Q1 of 2024. We look forward to keeping our shareholders apprised of our progress on that.

Speaker 3

And with that, I will open the call to questions. Operator?

Operator

Thank you. You will hear a 3 tone prompt acknowledging your request. The first question comes from Aaron MacNeil of TD Cowen. Please go ahead.

Speaker 4

Hey, afternoon and thanks for taking my questions. Aside from the cost cutting initiatives that you've introduced today, what needs to happen in order for you to hit your Breakeven adjusted EBITDA target in Q1 of 'twenty four. Are you assuming elevated bookings throughout this year that convert into Higher revenues beginning in 2024. Or maybe if I ask it differently, how can we sort of assess whether or not you're on track to hit that target Throughout the remainder of this year. And again, I assume it will be a function of backlog progression and The run rate of your operating expenses, but maybe you could just give us a sense of what to look for?

Speaker 3

Good question. I mean, obviously, We need to land some sales contracts and we do have a significant pipeline of opportunities, but they're not contract wins until their contract wins. And So we do have visibility and we do have expectations on probability of those items. So we do need to See, obviously, some material contract wins over the next number of months to achieve that goal in 2024. And then on top of that, obviously, one of the things that we announced here, obviously, 3 or 4 weeks ago was the contract with ZEG The arrangement was vague, I should say.

Speaker 3

And as that comes to fruition, we will see, Obviously, revenue and margin contribution start to materialize on that arrangement that we have.

Speaker 4

I guess, like maybe to ask more pointedly, is there a certain revenue number that you need to hit in your view that Would translate into a breakeven EBITDA?

Speaker 3

Well, the answer is yes, but we do not provide forward looking information. So I would Directionally, if you would want to look at kind of our past, you can make some assumptions that where you saw the breakeven in the past, It's going to be in those ranges, but a specific number, we're not at liberty to

Speaker 4

provide that at this time. Sure. Am I right to assume that ARDAP revenues were in the $3,600,000 range this quarter? And If so, would you characterize the growth or at least the Q1 run rate as sustainable? Or was there something lumpy in there that we should be aware of?

Speaker 4

And Maybe the same question for the aftercare services, which was also up meaningfully from prior quarters.

Speaker 3

Yes. I mean Airgas has been a nice tuck in acquisition. It's contributed nicely. We are seeing some growth. So it's both nice from the standpoint of the revenue and then ultimately the EBITDA contribution.

Speaker 3

So It's not perfectly straight line, but I do think it's a very stable quarter to quarter number. And then as aftercare specifically, We've continued to see growth as we focused on it. I mean, as our installed base continues to climb, There's more opportunities for aftercare services. So it's a natural progression that, that line should We'll continue to grow at a nice pace here over the next number of quarters and years. And then you can obviously kind of delineate in the MD and A what those margin contributions are.

Speaker 3

We like it because it's recurring and we like it because it has strong margins.

Speaker 4

So just to confirm, you think that Kind of the run rates in both AirDAP and the aftercare services are sustainable on a go

Speaker 3

Yes, absolutely. I actually, we have a lot of optimism that they will continue to grow it. In the case of aftercare, we've kind of seen it loosely grow at 15% -ish, 20 percent -ish over the last couple of years and expect that to expect that Trajectory to continue, it won't be straight line, but like I mentioned, the installed base increases, which gives us the opportunities for aftercare sales. So We've seen that and then obviously there's other areas where we've seen some growth, but that's kind of a magic behind its Tailwinds, if you want to call it that.

Operator

Thanks. I'll turn it over.

Speaker 4

Thank you. Thanks, sir.

Operator

Thank you. The next question comes from David Quezada of Raymond James. Please go ahead.

Speaker 5

Hey, thanks. Good afternoon, everyone. My first question here is just on the comments The MD and A about plans to rationalize products, I guess it's focused on the dairy sector. I'm just curious, Brad, if there's any Color you could provide on that, just in terms of like how many products you have and if can say how many you intend to rationalize and how does that contribute to your cost savings targets?

Speaker 2

Yes. Hi, David. Good question. So related to our product strategy, really what we've had the opportunity to do over the last 4 years since we've grown rapidly and significantly, not only in the top line, but also across the product portfolios in the three technologies. And that's put us in a situation where we've learned an awful lot around what the customers are looking for specifically.

Speaker 2

In the meantime, the market has evolved and matured into a different place, certainly in places like the U. S, where I think customer Recognition of which technologies work and in which applications has evolved and matured as well. So for us what that means specifically is Looking across our 3 technologies and being more targeted across the 4 main sectors, which we generally think of as With our treatment plants, landfills, agriculture and food waste. So if we think about each of those And what each of our core technologies brings will be more targeted with technologies into each of those sectors. So that's a good example of what we just did was our deal with ZEC Biogas in Brazil For that particular feedstock, for that particular application, the water wash to Tara Plus was The ExactRate technology and that's an opportunity that allows us to scale in volume with their goal of 75 units Over the next 5 years, which as I noted in the remarks, I'll just repeat it because it may not have stuck.

Speaker 2

That installed base of 75 Guitar Plus units over the next 5 years represents The same as we've more than what we've installed over the last 30 years with 140 systems. So It's a significant opportunity for us that Tatara Plus is one of our larger and most popular products and hence why we're seeing A focus for us with where we can win with the core technologies and the right products on volume opportunities. So that's really what we meant by the strategy.

Speaker 5

That's great color. Thanks for that Brad. And then maybe one just from an industry perspective and I guess as it relates to The demand you're seeing at the U. S, I know last quarter we talked about changes to The LCFS and how there's some hope around the industry that, that would translate into More activity, have you seen any early evidence of that? I know it wasn't too long ago when we first talked about that.

Speaker 5

Just curious if that has started to trickle through into the market at all?

Speaker 2

Yes, I think last quarter we also said for the LCFS in particular with the actions that California Air Resources Board would take, They have a lever to pull and that's making the compliance targets steeper or in other words deeper greenhouse gas reduction cuts Over a shorter amount of time, but that takes some time to work through. So the general expectation, at least from the experts who've forecasted what that would Resulting is increasing LCFS prices, I guess, throughout 2023 into the towards the later part of the year. So we're still optimistic that that will happen. I think generally the feeling in the industry is that that's going to occur. But I'd say as of now, we're not seeing exact flow back to the spot pricing.

Speaker 2

Now that said, many of our customers We're looking at these as 20 year assets, which they are they need to take their pro form a number and they generally don't take the spot price value as of Today, they take what they believe the LCFS value will be over the average time period. And generally, people are saying It's going to be somewhere in the $100 to $125 range for the LCFS credits.

Speaker 5

That was great color. Thanks for that Brad. I'll turn it over.

Operator

Thank you. The next question comes from Sameer Joshi of H. C. Wainwright. Please go ahead.

Speaker 6

Yes. Good afternoon, everyone. Thanks for taking my questions. Just wanted to understand the 10% reduction in workforce. Will it translate into 10% reduction in OpEx costs or how should we look at it?

Speaker 3

Good question. Obviously, making those changes take some time to end up in the numbers. So Reality is, it's adjusting the go forward run rate. I think it's not going to Translate exactly into 10% because obviously there are some larger salaried individuals and lower salaried individuals. So But as a proxy or directionally, I think you could make the assumption that it is going to Make a material impact in the operating expense lines.

Speaker 6

Got it. In terms of the Brazil contract agreement, What are the expected revenues from that on an annual basis? I mean, I know there are 75 5 years, but it's also a partnership. So what amount of money should we expect you to receive from that? And then is the margin profile different for these sales?

Speaker 6

Just would like to understand that.

Speaker 2

Yes, there's a lot to unpack on this deal and it is different and distinct from the way we've been transacting business more generally over the past several years. And we mentioned that in its press release some weeks ago that it think of it as a royalty like model. We call it that because there's several components to this. So one is that there's a localization activity that ZAGG is leading and Possible for Greenlane retains the design responsibility, but also the provision of parts that are not locally available in Brazil. So from a revenue perspective, the revenue accruing to Greenlane would be the value of those parts Plus the royalty, which we've not specifically disclosed in this.

Speaker 2

And there's also going to be as part of revenue coming out of this arrangement is commissioning services and ongoing service as per normal that we would normally have in Any other system sale as part of our portfolio. So that's the basic structure of the deal and the arrangement.

Speaker 6

And you will be able to service these whatever maintenance requirements Using your reduced workforce or would you need to hire as that business grows, Would you need to hire additional resources for that business?

Speaker 2

Yes. So I think we need to be clear that this is a It's refocusing on those specific market areas where we see volume opportunities and Brazil is certainly one of those markets with this new deal with ZEG. We have recently established a legal entity, local entity in Brazil. We've had employees there for Some time, we're growing that part of the business in order to direct services. We also have the benefit from having field service Team members around the world that we bring in on a time to time basis, you can imagine that the activities around commissioning That has peaks and valleys in different parts of the world.

Speaker 2

So we are able to redeploy our subject matter experts To study when we need to, but in large part, we will be continuing to grow the Brazilian Part of our business to service this upcoming opportunity with ZEG.

Speaker 6

Understood. And just one last one slightly higher level question. In terms of competitive landscape, are you seeing different Like higher competition in one as against the other, for example, in ag or food waste or land Phil, is there a different set of competition that you see and one is more aggressive than the other?

Speaker 2

Interesting way to ask the question. I think we do see a bit of a distinction Between I'll generalize between anaerobic digestion generally, so a project that has a digester versus a landfill, those are 2 quite different biogas These are compositions that require quite a different technology solution from the upgrader perspective. So I think it is fair to say that we see a different level of competition between those 2 broad sectors of digester projects versus landfill projects. And I think it's also fair to say because the I'll call the AD, the digester gas, A simpler gas to deal with from a technology perspective, given that that's a simpler gas to deal with, there's a few more competitors that are able to Participate in that market.

Speaker 6

And just follow-up on that. So are you finding more wins in 1 or the other Proportionate to the complex to the competition, I just want to understand like How you are able to grab share of the market?

Speaker 2

Well, hopefully that's clear in our Press releases and kind of the trending that you're seeing, I think you will have seen and we've talked about this previously of the 4 key sectors that we identify, Namely wastewater, landfill, agricultural, which today is mainly dairy in the U. S, But also food waste, it's the latter one, the food waste that you all have seen more activity. Generally in the industry, food waste It's seen as the next big feedstock that people want to focus on. It's the largest single stream of feedstock Of all the waste streams, however, it does require some adjacent technology that industry partners Other than Greenlane offer to do depackaging, separation, pre digester technology. So there's more Going on in a project that the food waste based project that needs to happen, but we are seeing an uptake in that particular sector and we're seeing some nice Project wins for Greenlane in that space as it begins to take off.

Speaker 2

I think you'll also see that as the dairy space has been a big driver The market and by consequence Greenlane's top line over the last several years, and we've had a Very solid presence in that market and continue to have going forward. You will have also seen landfill projects. So it's really across the board. All four sectors we continue to sell and that's been a benefit for us as we can take stock Where we've had the most success, obviously, the success manifests itself in the contract wins, but more generally, How can we get more targeted and more streamlined in the products that we offer across those 4 sectors and be More specific around how do we create the right profitability level on a product basis to help improve the operating leverage in the business.

Speaker 6

That is really good color. Thanks a lot. Thanks, Matt. Thanks, Monti.

Operator

Thank you. The next question comes from Nick Boychuk of Cormark Securities. Please go ahead.

Speaker 4

Thanks, doctor and guys. Looking for a little

Speaker 2

bit of extra clarity on

Speaker 4

the 10% cost reduction, if you could expand what areas of the business experience with staff reductions? And then also elaborate on the other types of cost initiatives you wanted to take magnitude when those are going to start to pull through?

Speaker 3

Yes. So obviously, we were selective in some areas of the business where We felt we either weren't getting traction or you can only do so many things and so perhaps you do 3 things versus Four things. So, all decisions happened throughout the organization in pockets. So there isn't any one And then as the other initiatives that we're talking about, We've looked at well, we had some strategic things that we're going to do this year that we're no longer going to do And focus on the ones that we believe have the highest probability of success, both in the terms of getting it done and then doing it At a profit level, but beyond those broad brush things, I don't think we're really at liberty to The strategic guidance that we're doing, they'll become transparent when they're executed, but at this point, we don't really want to Disclose it due to its competitive nature.

Speaker 4

Okay. I guess then after something, can you expand on the types of I think the documents in the prepared remarks, I'm going to call the systems, processes and infrastructure that you are investing in.

Speaker 3

Yes. I mean, The big thing there is we are in a we're probably halfway or 3 quarters away through an ERP implementation, which I pretty obvious when you talk about systems and processes. And so we're incurring those costs. You've seen them in Q4, you've seen them in Q1, And you're going to continue to see them through the balance of the year or a portion of the year, but They will start to reap benefits in the form of the implementation costs will fall off in the latter part of the year. And then in addition to that, we do expect to see some savings in the forms of redundancies Right now, we're having to either do manually or maybe not as efficiently as we could.

Speaker 3

And so That project is well on its path. And so we do expect that's part of the expectations in the next 12 months of reducing of the cost inefficiency that we have right now.

Speaker 1

Thanks, Nick.

Operator

Thank you. The next question comes from Ahmad Shah from Beacon Securities. Please go ahead.

Speaker 7

Hi, guys. Thanks for taking my questions. I guess, help us understand, I'm just looking at your working capital movements. There seems to be a good chunk of investment from a cash flow perspective there. Help me understand how should I think about that given historically you guys have structured your contracts in a sort of a cash neutral way.

Speaker 7

It seems that this quarter, some investment has occurred. So maybe help us understand what's going on there?

Speaker 3

Yes. So big picture, the biggest movement in the cash was in non cash working capital and you hit on it pretty solid right in the middle. It was negative as it relates I shouldn't say negative. It was a decrease in payables, so in So obviously, some accruals turned into cash out the door that was larger than perhaps In the past quarters. And then on the AR side, we do have some lumpiness in our AR because obviously We bill on progress billings, so it goes in chunks.

Speaker 3

It's not specific, but like 10% or 20% chunks. So unfortunately from a financial standpoint, we did have some cash land in April versus in March. And so you'll see the negative impact of that coming Through the AR, our expectation is that the net working capital balance that you can calculate It's relatively stable and it's not going to continue to decrease. But obviously, As new projects come on and old projects come off, there will be some movement

Speaker 4

in that number.

Speaker 2

Yes, maybe I'll add, Ahmad, just you've obviously Been at this for a while. The principle is still the same in terms of how we structure our contracts and having milestone payments From the customers coming ahead of our payments out to customers, so sorry, out to suppliers. So that's a fundamental principle. But as Monty said, there were some unique swings this quarter.

Speaker 7

Fair enough. I appreciate the color on that. And then maybe from a high level strategic perspective, Any other pockets of geographical pockets that you see attractive given the slowdown in all the deposits, at least For this year in the U. S, it's nice that you guys expanded in Brazil, but any other pockets of Geographical markets that you see potential maybe repeat of a similar agreement you had in Brazil or different structure?

Speaker 2

Yes. So I think it's fair to say that we continue to focus on the 3 core geographies that we have been focused on for Obviously, the Latin America one is coming up quickly and high growth with the zinc biogas opportunity. The 3 geographic areas being U. S, Canada being 1, Europe being the other and Latin America being the 3rd with the latter really starting to There's lots of talk about other regions. Asia comes up often.

Speaker 2

But in terms of having the right dynamics To value the resulting RNG and therefore that translating into system sales, It continues to be for us that focus on those three areas. And I think it's also a slightly different path to market in all three. You've seen what we've Done with the Zig Biogas deal, it's a unique arrangement with the royalty like model with a local partner who's taking on obligations and Allowing us to derisk it for us while continuing to enjoy some benefits, financial benefits from that relationship is That goal of 75 units over the next 5 years gets fulfilled. In Europe, we've last year, of course, we did our deal to purchase The Italian unit for the biogas upgrading system that's been very successful for us selling as a component into the biogas space in Europe. So that's we'll continue to make sure that, that thrives And then our system sales business more generally in the U.

Speaker 2

S. And Canada. So those continue to be the 3 markets and Pockets of opportunity that we see, we'll continue to monitor other parts of the world. Right now, as part of our Rationalization of our products, the markets in which we're most active allows us to do that and seek out those cost synergies to help with the operating leverage of the business.

Speaker 7

Got it. That's helpful. But Maybe a couple more, if I may. If the legislation becomes Supportive again in California and the U. S, have you guys ran any numbers internally in light of Let's call them the higher hurdle rates that these projects will have to be operating in and how is the environment with both, what level of LCFS prices we need to see To justify investment in new projects given the higher interest rate environment, is that has been a factor in the slowdown at all from Your experience, Brad, in the industry over the last 10, 15 years?

Speaker 2

Yes. I'm not sure we've seen A ton of pushback on high interest rates. I think there's certainly been some. There's obviously With some short term depression of the spot pricing ALCFS, we talked about that. However, as I also said A few minutes ago that generally the financial performance at the project level from our customers, they tend to take a longer term view and it's really just Determining what they're going to go in that for the LCFS, is that 100, is that 125?

Speaker 2

It's certainly not to 60 or 70 it is at today. We also have the ITCs under the IRA in the U. S. The investment tax Credits are now coming into the picture that our customers are looking at it and that ends up When they factor that in and I think it's also fair to say that folks are still working through the mechanics as to how to value those and trade those And turn that into value for the project. But that is lowering the bar at the pro form a level for projects.

Speaker 2

So in other words, prior to The investment tax credits being available under the IRA that there'd be a higher hurdle rate than there will be When you factor in those ITCs.

Speaker 7

That's very helpful. Thanks, Brad. Thanks for answering my questions. I'll jump back in queue.

Speaker 2

Thanks a lot.

Operator

Thank you. The next question comes from Jim Smith, UK Renewables. Please go ahead. Mr. Smith, your line is open.

Operator

I'm sorry, we cannot hear you. I'm sorry, I'm going to have to place your line back There are no further questions at this time. I will turn the call back to Darren Seed for closing remarks.

Speaker 1

Thank you for participating on today's call everyone. We appreciate your questions as well as your ongoing interest and support and look forward to seeing you on the next conference call. Thank you.

Operator

Ladies and gentlemen, this does conclude the conference call for today. We ask that you we thank you for your participation and ask that you please disconnect your lines.

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