Greenlane Renewables Q4 2023 Earnings Call Transcript

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March 26, 2024

Key Takeaways

  • Greenlane is transitioning from an engineered-to-order to a configured-to-order model with standardized products to streamline costs, scale sustainably, and enhance competitiveness.
  • The company has 28 active biogas upgrading projects and announced C$42.5 million in new sales contracts along with a partnership with ZAGG Biogas in Brazil under a royalty-like model, expanding its revenue streams.
  • Fiscal 2023 revenue declined 19% year-over-year to C$57.8 million (Q4 revenue was C$17.3 million, flat versus 2022), with system sales accounting for 84% and aftercare services 16%.
  • Adjusted EBITDA loss widened to C$10 million for 2023 (C$2.3 million loss in Q4) and the net loss grew to C$29.4 million, driven in part by a C$14.4 million impairment of goodwill and intangibles.
  • As of December 31, 2023, Greenlane held C$11.8 million in cash, C$16.7 million in working capital, no debt, and a C$36 million sales order backlog expected to be realized largely in early 2024.
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Earnings Conference Call
Greenlane Renewables Q4 2023
00:00 / 00:00

There are 5 speakers on the call.

Operator

Thank you for standing by. Welcome to the Greenlane Renewables Inc. 4th Quarter 2023 Results Conference Call. At this time, all participants are in a listen only mode. Following the results, we will conduct a question and answer session.

Operator

Today's call is being recorded and a replay will be available on the Greenlane website. I will now turn the call over to Darren Seed from Insight Capital Markets. You may begin your conference.

Speaker 1

Thank you, operator, and good afternoon. Welcome to the Greenlane Renewables 4th quarter fiscal year end 2023 conference call. I'm joined today by Ian Kane, Greenlane's President and Chief Executive Officer and Monty Balgerson, 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 those forward looking statements.

Speaker 1

Greenlane Renewables 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 annual information form, which has been filed with Canadian Securities Regulators. Lastly, while the conference call is open to the public and for the sake of brevity, questions will be prioritized for analysts. Now, I'll turn the call over to Ian.

Speaker 2

Good afternoon and thank you for participating on today's call. I'll cover some of the events in 2023 and then focus on our goals in 2024 and the path ahead. In 2023, our focus was on preparing the business for future growth, scaling and positive adjusted EBITDA in 2024. We continue on this journey of business foundation building and are happy with our progress to date. We have invested in and implemented processes, systems to enable us to scale sustainably.

Speaker 2

We're transitioning from an engineered to order to a configured to order business model, emphasizing standard products to streamline our costs and enhance our competitiveness in the market. This accelerates our ability to increase the sales pipeline, revenue and enhance our bottom line. In 2023, we've progressed 28 active biogas upgrading projects, demonstrating our team's experience and capacity. This puts us among the global industrial industry leaders and with a broad variety of solutions and configurations that are unparalleled. We announced $42,500,000 in new sales contracts featuring 135,300,000 for landfill to RNG projects in Brazil announced in October.

Speaker 2

As we mature our business, we have prioritized cost management, are realizing our cost realigning our cost structure and focusing on efficiency in our supply chain execution. These efforts are expected to contribute to our goals of achieving positive adjusted EBITDA on 2024 as was achieved in 2021 and maintaining cash reserves. Our dedicated team closely aligned with our customers ensures the delivery of quality services and products. I am confident and excited about our strong future considering the foundation work we have done and continue to do. With respect to the market backdrop, the RNG market is maturing and customers are becoming more sophisticated, shifting towards both larger projects and larger portfolio of projects.

Speaker 2

And this is influencing how we are orientating our business model going forward. Our sales funnel is robust, giving us confidence in our approach and we're particularly excited about Brazil and North America with extensive interest from multiple repeat customers and new customers. Additionally, the collaboration agreement that we entered into last year with ZAGG Biogas to establish industrial scale volume production locally in Brazil is structured to provide revenue under a new royalty like business model together with service contracts. While the changes underway will take time for the full benefit to reflect on our financial results, we expect to reflect our resilience, adaptability and commitment to deliver on our overall long term results to grow our product sales into existing and exciting new models sorry, new markets. I look forward to keep the public informed of our progress and want to thank GreenAmp employees for their continued hard work and drive and I look forward to bringing you further updates as we progress.

Speaker 2

With that, we will now turn the call over to Monty.

Speaker 3

Thanks, Ian, and good afternoon, everyone. As a reminder, all figures are in Canadian dollars and all comparisons are for the Q4 fiscal year 2023 against the respective periods of 2022 unless otherwise stated. Greenlane generated revenue in the Q4 of $17,300,000 compared to $17,000,000 in 2022. This was a significant improvement over Q3 2023 as the company commenced work on its $35,300,000 sales order announced in October. For the fiscal year 2023 revenue of $57,800,000 was a decline of 19% over 20 22 revenue $71,200,000 System sales revenue accounted for 84% of the total 2023 revenue, which is recognized in accordance with the stage of completion on the projects with the remaining 16% of revenue being generated from aftercare services.

Speaker 3

Our gross margin amortization in the Q4 of 2023 was 18% or $3,200,000 compared to 3,300,000 dollars or 19% in the Q4 of 2022. For the full year, we delivered a gross margin excluding amortization of 25% or $14,400,000 compared to 24% or $16,800,000 in 2022. The company has a portfolio of active projects at different stages of completion and at different gross margin levels. While the quarter and year over year results were effectively similar gross margin percentages, I do want to provide some additional color on the current quarter. During the Q4, gross margin before amortization reflects additional commissioning and related costs from 3 projects and an inventory obsolescence charge of $300,000 Furthermore, the October

Operator

23, dollars

Speaker 3

35,300,000 sales order I previously mentioned was a significant portion of our activity in Q4, and the contract reflects volume pricing, hence a lower gross margin profile in comparison to the company's historical run rate. As Ian noted earlier, we are transitioning our business model and emphasizing product standardization and cost streamlining together with royalty revenue from our ZEG Biogas agreement, which should assist in our gross margin improvement efforts in fiscal 2024. Adjusted EBITDA in the 4th quarter was a loss of $2,300,000 versus a loss of $2,000,000 in the Q4 of 2022. For the full year, adjusted EBITDA was a loss of $10,000,000 versus a $2,000,000 loss in 2022. The adjusted EBITDA results for 2023 reflect the overall decrease in system sales revenue and an increase in G and A expenses as we made a conscious investment in 2023 to improve our systems and processes to facilitate the company's ability to scale and be more cost effective.

Speaker 3

The company incurred a net loss and comprehensive loss of $17,700,000 in the Q4 of 2023 compared to a net loss and comprehensive loss of 1 point $5,000,000 in Q4 of 2022. For fiscal 2023, the company incurred a net loss and comprehensive loss of $29,400,000 compared to a net loss of comprehensive loss of $6,100,000 in the prior year. The net loss and comprehensive net loss was largely reflective of an impairment of goodwill and intangible assets charge taken in Q4 of $14,400,000 The impairment removes the remaining balance sheet value of our 2019 biogas upgrading business acquisition, which is reflective of Greenlane's current enterprise value. The company's sales order backlog was $36,000,000 at December 31, 2023. And as a reminder, our sales order backlog is a snapshot at one moment in time, and it varies from quarter to quarter.

Speaker 3

The sales order backlog increases by the value of new system sales contracts and is drawn down over time as the projects progress towards completion with those amounts being recognized in revenue. Further, our sales order backlog does not include our Cascade H2S sales, service revenue or revenue from our royalty like agreement with Zayt Biogas. As at December 31, Greenlane had cash and cash equivalents of $11,800,000 and working capital of $16,700,000 with no debt. We look forward to keeping our shareholders apprised of our progress. And with that, I will open the call to questions.

Speaker 3

Operator?

Operator

Thank you. We will now begin the question and answer session. The first question comes from Hamzah Faresh of Cormark Securities. Please go ahead.

Speaker 4

Hey, good evening. I just want to get a little bit of color on the market. So what are you currently seeing in the Brazil market compared to the U. S. And Italy in terms of market tailwinds and headwinds?

Speaker 2

Yes, that's a good question. I mean there's no doubt in Brazil there is a drive for biogas and a lot of that's partly because Bill doesn't have their own source of gas. And secondly, they have a lot of large sugarcane facilities and landfill facilities that are great sources of biogas. So overall, the country is well suited for the biogas RNG market.

Speaker 4

Okay, great. And then second question, can you help me understand the thinking around this 35 $300,000 sale order you secured? You quoted the sale is at a lower margin. What's the reason behind accepting this order? Do you expect to see future sales from different projects from the same customer?

Speaker 4

Or has the competitive landscape changed? And then how much of this project contribute to Q4 revenues?

Speaker 3

So it was loosely about half of our upgrader sales revenue in the 4th quarter, maybe a little bit more than half. And obviously, the logic behind the lower margin is we were in a competitive process. And certain things have a larger dollar value, but they don't necessarily require more physical work, the engineering work, the

Speaker 2

of the revenue, the margin

Speaker 3

is less than of the revenue, the margin is less than what we've historically quoted. And so there's always gives and takes in that exercise. But when you look at our cost of goods sold on upgraded projects, essentially 85 ish percent, plus or minus, maybe even 90%, is 3rd party acquisition of materials. So the labor component, which is often ours, is loosely in that 10% to 15%. So that's where the kind of the math comes into on a larger contract being able to be more aggressive and obviously we were in a competitive process with other parties and to secure it, that's why we went down that path.

Operator

As there are no more questions from the phones, this concludes the question and answer session. I would like to turn pardon me, we have another question from Mr. Hamzah Fares of Cormark Securities. Please go ahead.

Speaker 4

Yes. Sorry, just one final question. Of the 11 contracts completed this quarter, how much revenue do you believe is remaining? Can you provide any color on how you expect these revenues to be distributed across 2024?

Speaker 3

Well, at December 31, still had a backlog of $36,000,000 Obviously, that's going to largely be realized in the 1st 6 months to 9 months. So you're going to see a lot of that revenues coming through here, in particular, in Q1 and Q2. It will tail off. The project isn't linear. There's a lot of heavy lifting at the beginning, and then there's a bit of a lull and then there's a push when you go to commissioning.

Speaker 3

So hopefully, that answers the question there. And then obviously, as Ian had mentioned, we do have a number of projects that are at various stages in the sales pipeline. Obviously, they're not done because if they were done in contracted, we would have announced them. But we do have a stable of projects that we're working at the present time in both North America and in South America and Brazil.

Operator

This concludes the question and answer session. I would like to turn the conference back over to Darren Seed for any closing remarks.

Speaker 1

Thanks everyone. Thanks operator. I appreciate your questions and all your interest and support and look forward to seeing you on the next conference call.

Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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