Welcome to today's conference call, Anaergia Q1 2023 conference call and webcast. My name is Felicia, and I'll be your operator today. Please note there will be an opportunity to ask questions on the call. If you wish to enter the queue, please press star followed by one on your telephone keypad. I will now hand you over to your host, Darlene Webb, Investor Relations for Anaergia. Please go ahead, Darlene.
Thank you very much, Felicia. I'd like to thank the operator and good morning to everyone. This call will be discussing our earnings for Anaergia's first quarter of 2023, ended March 31st, 2023. If you're following along with our slides, my comments are directed to slides one through three. For our call today, I'm joined by Dr. Andrew Benedek, Anaergia's Founder, Board Chairman, and CEO. Dr. Yaniv Scherson, Anaergia's Chief Operating Officer, and Mr. Hani Kaissi... Sorry, Hani. Anaergia's Chief Development Officer and Acting Chief Financial Officer. Before beginning our formal remarks, we would like to refer listeners to slide 2 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 risks and uncertainties that could cause actual results to differ materially from those anticipated in these forward-looking statements. Anaergia 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 the Canadian Securities Administrators. Lastly, while this conference call is open to the public, for the sake of brevity, questions will be prioritized for analysts. With that, I turn the call over to Andrew.
Thank you very much, Darlene. I'm on slide four, and there are five main points on this slide. The first one is the fact that given our asset base, which is significantly above our share price, it's important to know that these assets are valuable, in fact, they're more valuable than what we have it in the books. The validation of that is the sale of our Tønder assets, where we sold it for what we invested in and made an additional $10 million. We are continuing to see the unfolding of the support structure for RNG. This is very important and will create an increasingly large market.
The unrolling of these incentives, given the bureaucracy on Western nations, always takes a little longer, but it is starting to happen and will definitely impact, 2024, 2025 in a major way. We are also getting validation on our technology and our market, presence through two major awards that have been added to the many other awards that we've won over the years. These particular ones I'll speak to in more detail in a couple of minutes. Of course, we are continuing to advance our full portfolio with all of the Italian projects, finished, sometime this year and ramping up.
At the end of the talk, I will discuss our recognition of where we are and what we are intending to do to shift the strategy from what we have been using to a new, more cash flow-oriented strategy. Moving on to slide five. I would like to just comment on the fact that I've already commented on the incentives, so that's there. The other aspect is that we are now finding markets that weren't there for the RNG beyond the California incentives and the federal incentives in the U.S. The first one shows that there is a real interest in a major company to use the RNG for other fuels, in this case, hydrogen. The second one, most of which we have announced, is the case of Irving Oil, who wants to decarbonize its fuel base.
This is happening across Europe, and it will be increasing in Canada. We are also making progress in getting recognition by multinationals for our technology, and we announced this briefly, just a summary here. Last but not least, we are progressing very well, in particular in the U.S., but also in Canada, on working with wastewater utilities where we uniquely qualify to get a benefit from the residues that these plants produce, turn them into RNG. We received a contract just a few days ago from Monterey, and we're also being selected for a major build-own-operate plant in California that we'll be releasing information later on. At this point I'll hand it over to... Oh, no, sorry, one more. The market recognition that I talked about.
This is a global business association of major water companies and major water users, utilities that get together once a year, and it's kind of like the Olympics of water. They provide prizes for the most for the greatest accomplishment or the most impressive company. We managed to win not one but two prizes in Berlin just a few days ago. The first one is for being the company that does the most for carbon, for reducing carbon. The second one is a recognition for what's considered the most important and interesting project of the year. Given the large number of companies, much bigger, much older, multi-billion dollar companies and utilities, it's truly amazing that a moderate-sized company was able to win two of the top prizes. We're very proud of this.
The significance is that what we're doing very successfully in the U.S. and Canada will be welcomed everywhere in the world. There's much more opportunities in this space, especially with this additional recognition than we are showing at the moment. The challenge with this market is that it takes a while, but it's a really wonderful market where a long-term relationship can exist to the benefit of both parties, the utility as well as our company. At this point, I hand it over to Hani Kaissi. Thank you, Hani. Thanks, Hani. Go ahead.
Thank you, Andrew. Good morning, everyone, thank you for joining. Going to slide seven. The Q1 revenues at $37 million and 2.8% growth over the same period in 2022 were lighter than anticipated due to lower capital sales revenues and delayed BOO revenues. The capital sales segment in the EMEA region remained strong contributors to the revenues at 67% and 71% respectively. The $4.2 million decrease in gross profit was mainly due to a combination of project cost overruns and certain strategic low-margin projects in EMEA during the quarter. These are largely attributable to an O&M contract where the characteristics of the feedstock changed relative to the original parameters, resulting in higher residue disposal costs. We have recommended technical solutions to the customer to address this issue and improve the plant profitability.
Also capital sales on brownfield facilities, where unexpected issues related to the existing infrastructure at the plants has impacted us. Although each brownfield facility is unique, we're updating our contracting and execution procedures to mitigate such risks on future brownfield projects. The net SG&A was $3.3 million higher than Q1 2022. The increase was largely driven by higher overhead costs, additional provisions, and higher audit fees. The Adjusted EBITDA is $2.8 million higher than the same period in 2022. Losses driven by higher SG&A and decrease in gross profit for the quarter were offset by the $10.2 million net gain from the sale of Tønder, the project in Denmark.
Q1, 2023 net income loss, which improved by $5.1 million compared to Q1, 2022, includes $5.1 million of non-cash loss on an embedded derivative and the gain from the sale of the Tønder BOO project. Moving on to slide eight. As of March 31st, our cash equivalents, and current restricted cash was at $93.8 million. That's up by $15 million from the same date last year. Non-current restricted cash was $15.2 million. In February 2023, the company completed the sale of Tønder with gross proceeds of EUR 56 million. That's on a book value of approximately EUR 43.6 million and pre-transaction costs gross gains of roughly EUR 8.4 million.
The net cash provided by investing activities during Q1, 2023, is reported at $15.6 million. That's compared to $35.7 million used during the same period in 2022. This was mainly directed at advancing the construction of the BOO portfolio. The majority of the invested capital was funded at the subsidiary level with $21.6 million of debt and $8.9 million of preferred capital, with the balance funded by the corporate proceeds from the issuance of our share capital. Moving to the 2023 guidance on slide nine. Based on a recent review of our projects and current market conditions, we're revising our fiscal 2023 guidance with the updated revenue range being from $180 million-$220 million and the updated Adjusted EBITDA range from -$10 million to +$10 million.
The key events, circumstances, and updated assumptions that have contributed to the guidance update are that the expected continuing feedstock shortfall at Rialto. It's unclear how quickly the commercial and multifamily generators under the Recology franchise would subscribe to organic waste collection and diversion services, as is required by the state law SB 1383, and how effectively the City of L.A. ordinance is enforced. Given the current history, we have taken a conservative view on the Rialto forecast. The second is that all Italian BOOs will not be fully operational by the end of Q2 2023.
While all our Italian BOOs are expected to have started operations in 2023, it's difficult to predict when they will hit ramp-up as they are dependent on external factors such as delayed electric utility connections and varying waste characteristics requiring plant optimization on certain of those plants. We have conservatively forecasted that the six facilities will be fully operational by the Q4 of 2023. The last point is that we also reasonably anticipate additional client-driven delays on the capital sales project and cost and SG&A overruns. I will now pass it over to Yanni.
Thank you, Hani. Moving over to slide 10. On the capital sales front, this quarter saw a decrease of 18% year-over-year, mainly attributable to completion of projects and customer-driven delays. The capital sales segment continues to be driven primarily from the North America and EMEA regions. With that said, we are seeing significant growth opportunity with influx of inbounds, primarily driven in North America by the IRA and in Europe by the REPowerEU programs. It's important to note that these programs are massive tectonic shifts in driving infrastructure deployment of RNG assets. The challenge is that they take time to implement all the rules and have clarity and certainty before customers can decide on actionability of projects.
However, given our presence in the capital market with a infrastructure that is functional and validation from major global companies, we're well poised to take advantage of this market surge, and expect to have impacts in 2024, 2025 and beyond from these policies. The momentum in the capital sales business continues to move forward, validating the technology from major players. We announced the supply to PepsiCo in two projects in Europe that will support reduction of Scope 1 emissions, as well as recently signed a major supply agreement to a California leading wastewater utility, Monterey One, that will be supporting organic waste diversion and RNG infrastructure in California pursuant to the requirements. The momentum continues to go, and we see strong opportunity ahead.
Moving on to slide 11. On the service and BOO segments, we saw an 18% growth in the service segment, really driven from North American service contracts. We'll expect continued growth in the service segment as the facilities that we are building will begin operation. These are third-party supply contracts that will be converting into service or operations contracts through this year and next. On the BOO front, we continue to see growth on BOO revenues. You can see the figures there, primarily driven by the continued increase in the operating revenue from the BOOs that are in operation and a major contribution from one of our assets in Italy. Most notably, it's important to highlight that the BOOs are making a difference in the market.
We announced the supply with Toyota for renewable hydrogen production, validating the demand for this fuel, and more importantly, as a platform fuel, well beyond transportation sector CNG only. Moving on to slide 12, an update on the BOO overview here. In Europe, the sale of the Tønder facility, as Andrew mentioned, was significant, not only for liquidity, but critically validating both the asset value that is worth more than what we put in and the technology that this was a functioning plant that had met the deadline in a very aggressive timeline. We view this as a proof point across the BOO portfolio. In Italy, we have delays on achieving operations of the plants. They're all moving forward. A lot of factors outside of our control.
We continue to get the remaining three facilities, expected conservatively to start operations Q4 of this year. They will continue to come online and execute on the plan that we have forth in front of us. Moving over to North America, we continue the construction on Rhode Island and Charlotte. Both facilities on track, expected to finish their upgrades by Q3 of this year, and contribute economically with a ramp up in Q4 with respect to Rhode Island. It's important to note now an underlying thesis in the market. We viewed the voluntary and compliance market as a very big demand-side opportunity, much greater than transportation, that would be most adequately and appropriately supplied by affordable carbon negative RNG, which is the type of RNG that we produce from organic waste.
We're seeing, albeit took longer than expected, validation across major market segments. As we sit today, we are now supplying RNG for decarbonization purposes on long-term fixed-price contracts to major oil company, Fortune 500 and major gas utilities. Again, validating our thesis of large demand-side growth that will continue to grow in the voluntary and emerging compliance market. We continue to develop on laser-focused projects. As Andrew mentioned, a recent award of another build-own-operate at a wastewater plant similar to our successful SoCal methane model. Large opportunities like Kent continue to advance forward. With that, I'll pass it over to Andrew for slide 13.
Thank you, Yaniv. This final slide called Business Reset is simply explaining to you what we're doing given the circumstances of delays that make in the end has driven our share price way below where we think it should be. It also means that we can't just do business as usual. We have to act in light of that. The first one is that raising capital at these levels is not warranted and not a good idea. We have to shift to a more capital-light, what we call capital-light model. Essentially, this means that instead of focusing on owning assets, we focus on cash flow and take advantage of our very powerful technology base and knowledge of project development of projects, and operating the projects.
In each of those steps, we will get rewarded from our financial partner, who will want to own most, if not all, of these projects. That's okay with us because we will have strong positive cash flow, and they can keep building more and more of these plans. In each of the projects, we will get cash for development. We'll get cash for building the plant. We will then get cash from operating the plant, and then we'll also get cash for, you know, for improving the returns on those projects or part of the return on the projects. Margins have also not done well because of the complexity of some of our older projects that we're still dealing with.
We have learned a great deal over time on what can go wrong in contracts, what can go wrong in execution of brownfield projects. We're putting procedures, additional safety and risk analysis into place to make sure that this doesn't go on any future projects. Our SG&A, given the fact that we cannot grow as fast as we intended to, and we have to watch our capital. Our SG&A has been built up because of the desire to grow fast. We will reduce this SG&A to be in proportion with the lower revenue base that you have seen today. In addition to that, we will be prudent, and that's why the capital-light business model, prudent with cash flow, and make sure that we finance our projects systematically.
Finally, we've had some unfortunate events around the CFO and the auditors. This will be managed. Hopefully, we will appoint an auditor by the end of May, and we should be also appointing a permanent CFO. We're excited about some of the opportunities for that. That brings us to the end of our talk and we are now ready for questions.
Thank you. We will now begin the Q&A session. If you'd like to ask a question, please press star followed by one on your telephone keypad. The first question we have comes from Derrick Whitfield from Stifel. Please go ahead. Your line is now open. Please make sure that you are unmuted locally.
Good morning, all, and thanks for your time. Perhaps at a high level first, could you speak to your expectation of interest from financial partners to pursue build own operate opportunities under the capitalized business model you've outlined?
Thank you, Derrick. I'll take this one on. What those of you who follow the RNG market realize that we are an oddity in this market. It seems that there is a tremendous financial interest, and there is a major valuation on companies in this space. What we see is everybody wants projects. There's many more people wanting to finance projects than there are people offering them. That we think we can select companies that are purely financial institutions that want longer-term investment and need a partner that can deliver the projects and operate them for the financial partner. We've started this process particularly for the European projects.
We do have some partnerships in America and in Europe already. We need a broader, bigger one in Europe, especially because of all the opportunities there. I think the last thing that I might wanna add to this, Derrick, is that we have this enormous technology base and knowledge of the market. We think we can bring great opportunities to a financial partner.
Perfect, Andrew. Certainly I agree, we see the demand from financial institutions on our side as well. Again, just wanted to understand that from your perspective and where it would specifically be applied. Maybe for my follow-up, I certainly understand your frustrations with Rialto, and it comes through in the release. Could you perhaps speak to your conversations with Recology and local municipalities to drive enforcement of SB 1383 and what you're seeing come out of those discussions in terms of expectations?
absolutely. I think Yaniv is closest to all of that.
Yeah.
although I am also involved. Yaniv, will you take it on?
Yeah, happily. Happily, of course. You're right. There is frustration not only by us but by many stakeholders across the state, including at the state level, on the sluggish rollout. You know, the situation on the ground is that it needs to happen, this rollout. It's required by law. If it doesn't happen, it undermines the entire state law and program. A lot is at stake, and a lot of eyes are watching with pressure. The challenge is one of timing still, that the contract mechanism is challenging because it sort of overlooks a requirement of rollout, but more of an incentive with opting in.
That's really the fundamental issue that's trying to be solved for now, is how to get this rollout without imposing severe consequences that could be controversial or painful for generators financially. What this means on our latest outlook, you know, given that this is sort of fresh information evolving every month, is the rollout will happen as it must by law, but this issue needs to be resolved between the major stakeholders in L.A. Unfortunately, we're sort of sitting here on the sideline. Needless to say, we still have conviction because what we're seeing across the state and the tenor and tone of regulators that Rialto will be full one day.
These three OREX lines that are coming online will supply, and there's enormous asset value in this facility, given its location, its exclusive outlet as a major outlet for the city of Los Angeles. On a long-term basis, this asset has tremendous value. We do have a timing issue this year and into 2024.
Understood. Thanks again for your time.
The next question we have comes from Aaron MacNeil from TD Securities. Please go ahead.
Morning. Thanks for taking my questions. As it relates to the guidance, I know you've provided sort of broad brush overviews, but I'm hoping to understand some of the specific assumptions that are embedded. Like, I guess as an example, what's the sort of specific ramp-up scenario at Rialto that's embedded in the guidance? You know, what are you assuming for the sequencing of Italian boot facilities? When do you think they get utility connections? What sort of margin expectations are you expecting for capital sales as the year progresses?
Hani or Yaniv?
Yeah, I can give an overlay and Hani can give some more figures. You know, at a macro level, with respect to going in reverse to our capital margins, majority of our projects are maintained and intact across the portfolio. We've had an unfortunate timing event with the reasons Hany mentioned on brownfield sites and unforeseen conditions that impacted at some of our capital projects in this time. On a forward-looking basis, we will continue to enter into contracts and execute under primarily our greenfield capital projects that have historically maintained healthy margin, you know, in the 20%-25% range.
We expect recounting on a go-forward basis, particularly with these new policies we're gonna be implementing to course correct and learn from our lessons on those brownfield that didn't go so well. With respect to the ramp-up on Rialto, you know, given we keep being more and more conservative on the rate of ramp up, and at this point, we are not forecasting the facility to be full this year. We are conservatively forecasting that that will be an event that occurs well into 2024, simply because of the slow progress of just implementing this, the rollout of generators signing up. We've downgraded in our guidance the rate at which generators will sign up. Frankly, it's very difficult for us to predict.
It's a, it's a human behavior shift, across the largest city in California. Hani, any other color?
On the gross margin part of the capital sale, you know, the guidance is basically based on projects we already have in hand. We know, you know, what is the margin expected on these particular projects. It is inbuilt into our estimate of the guidance.
On the Italian, the commissioning of the final three Italian facilities and, you know, utility, the status of, I guess, of utility connections across all six.
My apologies, Aaron. I forgot to hit that one. We've learned from our first few plants that forces like final permits and utility connections have had some large error bars. They're resolvable, and we're learning now how to push through the bureaucracy faster and better. Given the experience of what it actually took or is taking, we've shifted back the Italian plans to Q4 operations. That's what we feel, to the best of our knowledge now is conservative of realistic on timing.
We internally, we hope to exceed this timeline, but given the fact that we've seen, you know, a few months of delay in some cases with utility connections and the final permit, we shifted back for another level of conservatism.
Understood. You've maintained this guidance for, you know, this theoretical CAD 70 million of run rate EBITDA from the BOO facilities. Obviously, you know, there's been a lot that's changed in terms of pricing for RNG since that time. Can you maybe give us a sense of, you know, what California LCFS price or what European natural gas spot price are embedded in that CAD 70 million run rate assumption? Based on, you know, the Italian facilities and Rialto, your understanding of those facilities to date, like, are the operating costs of those facilities in line with your prior expectations?
The answer at the macro levels, for the most part, for all of our assets except Rialto, the gas revenue is based on either a long-term fixed price contract, which is certain, or in the case of Italy, the fixed government incentive and, you know, a realistic expectation of natural gas, not the, you know, not the temporal peak, you know, during the Ukraine crisis. Again, with the exception of Rialto that has more LCFS and RIN exposure than the other assets which have fixed. We do feel that this is still representative, with, you know, with actuals from our plans today. It's an issue of fully ramping up all the operations and then optimizing the operations to get there.
Understood. Then maybe I'll just sneak one more in. You mentioned a commitment to a 12-month cash runway as part of your business reset. You know, what avenues would you be willing to pursue in the event of your cash balances decreasing to a point where you don't have that 12-month runway?
I guess, Hani, if you don't want to take it on, I'll give it a try. Would you like to take it on?
Sure. Sure. Then add to it.
Basically, Aaron, is on the 12-month runway, we have levers that we can use. You know, just as an example, with the funding, we have now room on the line of credits that we had. There is the possibility of leveraging more of the assets. We can bring in additional senior debt to recover some of the funds that we have in place that we have already put in the project. We have a number of levers that we have been looking at and we are keeping in the pocket.
Okay. That's all for me. I'll turn it over.
Thank you. As we are running short on time, the time allocated for the call, I will now pass over to Darlene Webb for any final remarks.
Thank you, operator. I'll just quickly ask Andrew if there's anything he'd further like to add.
Yeah. I think as we look at some of these resets and guidance changes and auditor change, many of our shareholders will be disappointed, as are we. I wanna remind everybody that we are still, by far, the most capable company in the RNG space technologically. We are by far and we have the ability to access markets that no one else can. We are by far the most international. We have valuable projects that had a timing issue, but ultimately are dramatically more valuable than we're given credit for right now. Please don't give up hope on us. We will eventually get to what I founded the company for. What we built over time systematically to be the number one RNG company in the world.
We have that opportunity. It will take more time, but we are still in a very strong position to become the leader in this space. Thank you very much for tuning in.
Thank you. Thank you, Andrew. As always, if for additional information or if you have questions we weren't able to get to on this call, please do contact the IR team at ir@anaergia.com or visit us online at anaergia.com. Thank you all once again for your time today. Operator, you may now end the call.
Thank you. With that, this does conclude today's call. Thank you all for attending, and I wish you all a great rest of your day. You may now disconnect your line.