Greenlane Renewables Q1 2024 Earnings Call Transcript

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May 9, 2024

Key Takeaways

  • Greenlane reported a 23% year-over-year revenue increase to $18.1 M in Q1 2024, with an adjusted EBITDA loss narrowing to $0.5 M versus losses of $1.6 M in Q1 2023 and $1.7 M in Q4 2023.
  • Gross margin improved by 250 basis points to 26.5% in Q1 2024, driven primarily by a more favorable product mix.
  • Under the ZEG Biogas collaboration in Brazil, the first unit delivered in Q1 generated royalty revenue, kicking off a two-year fixed commitment of at least five units with additional service and after-care fees expected.
  • The sales order backlog stood at $24 M at quarter-end, and management is aggressively filling its pipeline to drive toward positive adjusted EBITDA, with typical project revenue recognition over 9–24 months.
  • Greenlane divested its non-core UK/Europe aftercare arm to sharpen focus on its core Cascade products and services, anticipating further operational efficiencies and growing recurring service revenues in North America.
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Earnings Conference Call
Greenlane Renewables Q1 2024
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Welcome to the Greenlane Renewables Inc. 1st Quarter 2024 Results Conference Call. At this time, all participants are in 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 with Insight Capital Markets. You may begin your conference.

Speaker 1

Thank you, operator, and good afternoon. Welcome to the Greenlane Renewables Q1 2024 conference call. I'm joined today by Ian Kane, Greenlane's President and Chief Executive Officer and Monty 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 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 the Canadian Securities Regulators. Lastly, while this conference call is open to the public and for

Speaker 2

the sake of brevity, questions will be prioritized for analysts. Now, I'll turn the call over to Ian. Thanks, Darren, and good afternoon. Thank you for participating on today's call. As in my previous conference calls, I will cover some of the results from our last quarter and also comment on our future.

Speaker 2

We've had a good start to the year as we recognize a significant improvement EBITDA with reduced loss of $500,000 in Q1, twenty twenty four compared to a loss of $1,700,000 in Q4 of 2023. Further to the adjusted EBITDA results, our revenue grew 23% over Q1 of last year with $18,100,000 in revenue for Q1 of this year. As many of you have followed, our financial goals for Greenlane have been clear and published. We continue to drive towards our goal of positive adjusted EBITDA this year which is also requires us to refill our sales pipeline. We have significant sales activity on the go and look to convert them in purchase orders into purchase orders as soon as possible.

Speaker 2

With respect to our collaboration agreement with ZAGG Biogas in Brazil announced a year ago, we started to recognize royalty revenue this quarter, which will help improve our overall business and margin profile and further strengthen our brand presence in Brazil. I appreciate your continued support, especially given the short timeframe between our last call and today's call. And I look forward to keeping the public informed of our progress. Also, I want to thank the Greenlane employees for their continued hard work and drive. With that, I 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 unless otherwise stated, and all comparisons are for the Q1 of 2024 against the Q1 of 2023. As I noted in our release, I'm encouraged with the progress we made towards our objective of achieving adjusted EBITDA positive results for this fiscal year. Greenlane's revenue in the Q1 was $18,100,000 compared to $14,800,000 in the same period of fiscal 2023. System sales revenue accounted for 85% of the total revenue in the quarter, which is recognized in accordance with the stage of completion of our projects and the remaining 15% of revenue was due to afterkale services and our royalty contract that Ian just mentioned.

Speaker 3

We delivered a gross margin in Q1 of 26.5 percent or $4,800,000 compared to $3,500,000 or 24% in the Q1 of 2023. The 250 basis point increase in gross margin percentage was largely the result of a change in products mix during the current quarter. We reported an adjusted EBITDA loss in the Q1 of $500,000 versus a loss of 1,600,000 dollars in the Q1 of 2023. The company incurred an operating loss from continuing operations of $1,000,000 in Q1 2024 compared to a loss of $2,500,000 in Q1 of 2023. Net loss and comprehensive loss from continuing operations in the first quarter was $800,000 compared to a loss of $2,000,000 in the comparative quarter of 2023.

Speaker 3

The company's sales order backlog the end of the quarter was $24,000,000 and as a reminder, the sales order backlog is a snapshot at one moment in time, which varies from quarter to quarter. The sales order backlog increases by the value of new system sale contracts and is drawn down over time as the progresses or sorry, as the project progresses towards completion with amounts recognized in revenue. You should also note that sales order backlog does not include our Cascade H2S sales, service revenue or revenue from the company's agreement with, say, Biogas that's a royalty like structure. As part of management's ongoing evaluation of its operations and strategic plan, we exited non core parts of our business to increase the focus on growth of Greenlane's core, including our Cascade products and services. More specifically, subsequent to March 31, 2024, the company sold its wholly owned subsidiary, Greenlane Renewables UK Limited, which carried on the company's UK and European based legacy aftercare services business.

Speaker 3

For the Q1, revenue generated was $500,000 and the business incurred an adjusted EBITDA loss of $100,000 This transaction triggered a restatement of our financial statements to reflect this business as a discontinued operation and all comparisons for Q1 of 2024 against Q1 of 2023 reflect this adjustment. I'm encouraged by our progress during the quarter as we continue executing on our strategy and we continue to evaluate our operations and we'll look to extract further efficiencies as we focus on the core aspects of our business. We look forward to keeping our shareholders apprised of our progress. And with that, I'll open the call to questions. Operator?

Operator

Thank The first question comes from Nick Boruchak with Cormark Securities. Please go ahead.

Speaker 4

Thanks. Good evening, guys. Can you expand on the ZEG royalties that started up this quarter? What are the details around the project or project that those royalties were derived from and how they're being calculated and really what we should be expecting in royalty revenue moving forward for the rest of the year?

Speaker 3

Well, probably the easiest way to describe it is there's an assured portion of the royalty agreement and then there's an unassured portion of the royalty agreement. So right now we're in the firm piece of that contract. So how it works is as units are delivered, we recognize a portion of that royalty. So in Q1, the first unit was physically manufactured and the portion of our contribution towards that. So our towards that were completed.

Speaker 3

And so we were able to recognize the revenue on that. And so, on the contract, there's a 2 year term that's the fixed portion of it. And so, we're a year in and we delivered the 1st unit. We expect ZEG to have 1 or 2 units in the second half of the year, but obviously they're still in progress on that. And so, when we complete those units, the revenue would be recognized on that as well.

Speaker 3

So, basically what you're seeing in Q1 is 1 unit under the fixed course of the contract. So, you can do the math if it was 2 or 3 or 4.

Speaker 4

Got it. That makes sense. And is there a recurring component? So now that you've got this one to send it to the field, is there going to be a smaller ongoing recurring component that will come on the back of that as well?

Speaker 3

Yes. So, we have a similar to our other projects, we get involved in the commissioning of the unit. We don't actually construct the unit, but we do the commissioning piece and so that's where you'll see a smaller portion of revenue being recognized. I mean, it's

Speaker 5

not for the size of the royalty, but

Speaker 3

for each unit, we do have a service component to it. And then depending on the situation, we hope to have an aftercare support agreement with those units as well. Okay.

Speaker 4

And so, you mentioned that there's going to be, call it, 1 or 2 Mortisex systems sold within the year. Have they given you any indication on what they need to see from you guys or just from their local market in order to really start to ramp up production towards that kind of bigger TAM that they previously suggested is there?

Speaker 2

Well, I think what you're seeing now is the first units delivered and with any supplier customer relationship once they've got the units running, the customers get more and more accustomed to it and more interested in it. So as I expect with any customer as they're seeing the increased performance in delivery, they will be more interested in more units. So, we'll see. We'll watch this space.

Speaker 4

Got it. Okay. Thanks.

Operator

The next question comes from Aaron MacNeil with TD Cowen. Please go ahead.

Speaker 4

I think I'll try to

Speaker 5

follow on the last question. Good afternoon, guys. Thanks for taking the time. So I know there's a minimum volume and commitment for the 1st 2 years. Can you say what that like the number of units is

Speaker 3

that we should expect? The minimum commitment is 5. 5.

Speaker 5

Okay. And then once that minimum commitment is up, you've talked about 75 units over 5 years, like is that still something that you can reasonably expect or like how do you see this ramping up over time or Ian as you mentioned maybe it's that you need to demonstrate the 1st unit in the field before you have more visibility on that?

Speaker 3

Well, I mean, it's really in our customers' hands more than our hands. So, I'm not saying we don't know anything about it, but it's we're not in control of how many units. Obviously, we want to see our customer be extremely successful, but perhaps the 75 might be a little aggressive within the timeframe that they're suggesting. But, they've got the facilities to build the units set up. They've got the, for lack of better term, the floor plan on how to build it.

Speaker 3

And the first unit has been fully constructed. So, they've gone through the growing pains, if you want to call it, on getting their idea set up. And the unit that we're talking about is actually being commissioned here in the next 45 days. So, it's been moved to site and now it's, for lack of a return, being turned on. And so a lot of our customers we find want to go and see what you've already done.

Speaker 3

So now they're going to have one that's actually up and running here in the next few months. So I think you'll see some momentum from that. And obviously, time will tell us how successful they'll be, but there's the minimum commitment which we was kind of what we agreed to. And then, we have expectations that the momentum will continue to get stronger as they've got proven unit yield that people can, for lack of their term, touch and taste and feel.

Speaker 5

Got you. And in the prepared remarks, you talked about filling the backlog back up and the significant sales activity pipeline. I'm wondering a couple of things on that front. First, can you comment on the pricing strategy like our historical margins, a good benchmark? And second, like can you give us a sense of how quickly you could recognize revenue?

Speaker 5

I know that you've said historically it's 9 to 24 months, but can you give us a sense of what you would expect for some of the projects you're chasing, how quickly that revenue would be recognized?

Speaker 2

Yes. So from a backlog perspective, these larger projects, obviously, as we said previously, they do take there is a lower margin on them. So there certainly is that piece. And revenue recognition, I'll let Monty cover that piece.

Speaker 3

Yes. So on revenue recognition, basically it's your activities against the contract, right? So as you complete the activities against the contract, you recognize the revenue. And so I mean, it's not straight line, but a significant portion of the work is done in the first I would call it, let's call it 6 to 8 months. And then there's a slowdown period while the unit gets constructed because, obviously we are not involved in the physical construction of the unit on-site.

Speaker 3

But then we come back in at the end to do the commissioning. So it's a little bit front end loaded. So, on these projects, like for instance on the large project in Brazil that we're doing now, you've seen the revenue pop materially in Q4 and Q1 and it's largely related to that project being in the heavy lifting phase for lack of better term of the design and the construction of the components by our suppliers.

Speaker 5

Got you. And then final question, as we think about updating the model for the aftercare services segment, I'm wondering if the performance in the quarter and the prior quarter comparable is indicative of the run rate, like have got your revenue there and a modest loss on an EBITDA basis. Is that what we should sort of think about when we are adjusting the

Speaker 2

model on a go forward basis? Yes.

Speaker 3

So to adjust the model, if you look at our P and L, the UK operation has been removed from the P and L and it shows up as a discontinued operation line at the bottom. So, the P and L that you're looking at for Q1 of this year and Q1 of last year reflects the UK operation being removed. So, you can kind of get a little bit of a sensation for or sense as to what the go forward business has achieved in the past. You could also in the note disclosure look to see that like you mentioned the business had $500,000 in revenue, but on an EBITDA basis was slightly below 0. So, our expectation is it's not a huge bottom line mover, but from a revenue standpoint, we're probably going to be short somewhere between $500,000 $0.75 $1,000,000 a quarter if you were to use the run rate previous when that business is included in our operations.

Speaker 2

Yes. Let me just quickly touch on Optocare. You asked about Optocare's piece. We expect as we deliver commission these projects we have on the go at the moment, after care contracts will be signed with the various customers as we go. So that book should increase?

Speaker 3

Yes. So what we're seeing is our U. K. Business was starting to decline because obviously we haven't commissioned a new project in the U. K.

Speaker 3

In a long period of time. But the North America, we had a lot of upgrader work in the last 2 years. And so, those projects are now coming online. And so that's where the recurring service revenue is going to grow. So basically, it's a shift of that activity from the UK to, for the most part the United States.

Operator

We have a follow-up question from Nick Kloycek with Cormark Securities. Please go ahead.

Speaker 4

Thanks guys. Just one quick follow-up here. Kind of curious how you're thinking about staffing levels right now. Obviously, you have to manage costs, but also kind of strengthen that balance to have enough people on hand to take advantage of that revenue opportunity you're looking at. What are your thoughts on the current cost profile and is that going to evolve over the rest of the year?

Speaker 2

Yes, I mean, we will see some adjustments in cost over the next 6 months at the end of the day. Staffing profiles are mostly pretty stable as they are and our model is as we get more projects or less projects we adjust as needed. So that's kind of our objective.

Speaker 3

Okay. Thank you.

Operator

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

Speaker 1

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

Operator

This concludes today's conference call. You may disconnect your lines.

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