PyroGenesis Canada Inc. (PYR) Q3 2023 Earnings Call Transcript

PyroGenesis Canada Inc. (NASDAQ:PYR) Q3 2023 Earnings Conference Call November 10, 2023 10:00 AM ET

Company Participants

Rodayna Kafal – Vice President, Investor Relations

Steve McCormick – Vice President, Corporate Affairs

Andre Mainella – Chief Financial Officer

Conference Call Participants

Operator

Good day, and thank you for standing by. Welcome to the PyroGenesis Third Quarter 2023 Business Update Conference Call. At this time, all participants are in listen-only mode. Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your speaker today, Rodayna Kafal, Vice President, Investor Relations. Please go ahead.

Rodayna Kafal

Good morning, everyone, and thank you for joining PyroGenesis 2023 third quarter financial results and business update conference call. On the call with us today are Peter Pascali, CEO and President; Steve McCormick, Vice President of Corporate Affairs; and Andre Mainella, Chief Financial Officer.

The company issued a press release on Thursday, November 9, 2023, containing a business update and financial results for the third quarter, ending September 30, 2023, which can be viewed on the company’s website. If you have any questions after the call or would like any additional information about the company, please contact us. We’ve collected a number of questions in advance of the call. Many of these will be discussed during today’s call.

The company’s management will now provide prepared remarks reviewing the operational and financial results for the third quarter ended September 30, 2023. I would like to remind everyone that this discussion will include forward-looking information that is based on certain assumptions and is subject to risks and uncertainties that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information.

Forward-looking information provided in this call speaks only as of the date of this call and is based on the plans, beliefs, estimates, projections, expectations, opinions, and assumptions of management as of today’s date. There can be no assurance that forward-looking information will prove to be accurate, and you should not place undue reliance on forward-looking information.

PyroGenesis disclaims any obligations to update any forward-looking information or to explain any material difference between subsequent actual events and such forward-looking information except as required by applicable law.

In addition, during the course of this call, there may also be references to certain non-IFRS financial measures, including references to adjusted net loss and adjusted EBITDA, which do not have any standardized meaning under IFRS, and therefore, may not be comparable to similar measures presented by other companies.

For more information about both forward-looking information and non-IFRS financial measures, including a reconciliation of each of adjusted net loss and adjusted EBITDA to net loss, please refer to the company’s Management Discussion and Analysis, which along with the financial statements are available on the company’s website at www.pyrogenesis.com and the company’s corporate filings on SEDAR+ at sedarplus.ca.

With that, I will now turn the call over to Steve McCormick, Vice President of Corporate Affair. Please go ahead, Steve.

Steve McCormick

Thanks, Rodayna, and thanks everyone for joining us today on our call. I’m going to start off with a quick review of some of the company’s top line financials, followed by a summary of key business activities that occurred during the quarter.

Before turning the call over to the company’s, Chief Financial Officer, Andre Mainella. I’d like to first start off with an update on the company’s status as a dual listed public company. Post quarter end on October 27, 2023 after careful consideration, the Board of Directors decided and the company announced that it will be ending its dual listing status by voluntarily delisting from the NASDAQ exchange. This decision would not affect its listing on the Toronto Stock Exchange and the company remains public and will so continue to trade on the TSX.

As background for some time, the company had been evaluating the cost and benefits of maintaining a dual listing on both NASDAQ and the TSX. The ongoing evaluation entailed an analysis of several key factors, including the historical advantages of dual listed companies, the financial costs associated with being on the NASDAQ, such as insurance, regulatory compliance, legal fees and accounting, the low volume of trading on the NASDAQ and the regulatory and compliance requirements mandated significant professional hours and duplication of effort and additional obligation for a Quebec company that already has to meet compliance and filing requirements in two languages.

PyroGenesis associated to its dual listing in the US were considerable with incremental US-specific fees related to directors and officer insurance, legal, listing and filings and accounting of more than $2.2 million, which would require approximately $6 million to $8 million in gross revenue. Ultimately, the Board of Directors decided that after weighing all of the above, the dual listing was not providing significant benefit and the company would voluntarily delist from the NASDAQ exchange. Again, this decision does not affect its listing on the Toronto Stock Exchange.

The company has taken steps to have it shares quoted over the counter on the US-based OT the QX Best market. The company has initiated the NASDAQ delisting process and has filed the required Form 25 with the SEC for the removal of its shares from NASDAQ. This form is anticipated to become effective 10 days following resulting in a delisting of the company’s shares from NASDAQ on or about November 16, 2023.

Now back to the financial summary. First, a reminder that PyroGenesis follows Canadian generally accepted accounting principles or GAAP, where revenue is accrued not on sales, but on a model that reflects a percentage of the work completed for long-term contracts during the period, which can vary, based on both the nature of the projects in-house and on our client’s own scheduling and logistical decisions, both of which can impact production milestones and the company’s ability to book revenue.

During these recent years, the supply chain, logistical and inflationary uncertainties, those issues have been more frequent in exacerbating. And as stated in previous reports, the company’s revenues are likely to be irregular and unpredictable quarter-to-quarter as contract-related revenue fluctuates based on various reasons, including those just explained.

For the third quarter of 2023, the company exited the quarter with revenues of $3.7 million, which, while still low compared to the past two years, is the second consecutive quarter of growth from the revenue low point of two quarters ago in Q1 of 2023. As stated in yesterday’s news release, we are seeing improvements across industrial supply chains and customer bottlenecks. And along with better-than-expected customer demand for new project starts, we anticipate the revenue momentum to continue and for Q4 to maintain the upward trend of Q2 and Q3.

Gross margin was 30%. This is comparable to industries the company serves and consistent with margin pressures being seen across those industries who continue to have difficulty, maintaining 2022 level margins due to persistent inflationary environment for heavy industry and their customers. For comparison, the aluminum industry returned margins of 5.1%, Aerospace and Defense at 18.5%, iron and steel at 24.7% and metal mining at 29%, all for Q3 results reported to date.

One aspect pertaining to margin that is often overlooked is that because some of the company’s projects are conducted in partnerships such as with clients like HPQ silicon, where PyroGenesis has back-end royalty revenue potential on the client’s end product or has sold intellectual property to the client, the engineering and production aspects are likely to be conducted with intentionally lower profit margins.

Additionally, project developed using government grant funding often have lower margin mandates, both instances can affect the company’s margin results based on the mix of work currently underway.

As mentioned in the past, given that several of the company’s technology solutions are either only recently commercialized or can have long time spans between orders of a similar type system, we regard any high or even medium-sized margins at such an early stage as both positive and strong time for the future.

And finally, to backlog. Corresponding to increasing customer demand, the backlog continues to rise, up more than $1 million to $35 million. This represents the 13th of the last 16 quarters above $30 million in backlog since the company first reached that mark in 2019.

Overall, the financials for the third quarter were an improvement on Q2 by 21% and on Q1 by 42% and while not yet back to the levels produced by 2021 and 2022 represents continued momentum in the right direction, both for the company and its customers. We continue to press forward on slower moving projects, while resolving their own bottlenecks.

Now, to production highlights for the quarter. Please note that projects or potential projects previously announced that do not appear in the summary update or within the management discussion and analysis or outlook should not be considered as at risk.

Noteworthy developments can occur at any time based on project stages and the information presented is a reflection of information on hand. Projects not mentioned may have simply not included or not got milestones worthy of discussion.

Also, some projects that are announced are relatively small, such as investigated studies requested by customers. Once concluded, the studies are the property of the customer and decisions they make as a result of the studies are entirely unforeseen and can often be months or even years away from manifesting as equipment sales.

While these projects can be small, we announce these projects to give light to the areas where customers are showing interest and where PyroGenesis’ technology has potential future promise and may conduct further research.

Under those circumstances, and given the number of studies the company conducts on behalf of customers, it is generally not deem necessary to announce their conclusion, especially when the customer’s ultimate end goal for the studies are still unknown or are part of further research and investigation or even a long negotiation between PyroGenesis and the customer.

And now a brief reminder of the company’s business strategy, where the company is a provider of an expanding technology ecosystem for heavy industry with a number of solutions in different stages from early pilot to full commercialization concentrated under three verticals that align with economic drivers key to heavy industry.

First, energy transition and emission reduction, which focuses on fuel switching for helping heavy industry reduce their fossil fuel use and lower their greenhouse gas emissions by utilizing the company’s electrically-powered plasma torches and its biogas upgrading technology within various process steps.

Second, waste remediation, the safe destruction of hazardous materials and the recovery and valorization of underlying substances such as chemicals and minerals that can be reused or resold.

And finally, commodity, security, and optimization which means using PyroGenesis technology to aid in the recovery of viable metals and the optimization of production output. Both actions meant to improve the availability of critical minerals, such as titanium, aluminum, magnesium, and others that are essential for modern manufacturing.

In Q3, within the energy transition and emission reduction vertical, in August, the company announced a contract for $4.13 million or a 4.5-megawatt plasma torch system with an aeronautics and defense industry client who is a prime contractor for the US government and who has extensive experience as an innovation of providing Technology and Tech services to solve critical Defense, Military and Aeronautics challenges.

The importance of this contract was that the Plasma Torch Systems sold at 4.5 megawatts was at an appreciably higher power level than recent sales, a requirement that is becoming more common and indicates the potential for the company’s entry into other industries that require such high-power, including glass, cement and petrochemical industries, among others.

In Q3, within the commodity security and optimization vertical, in September, the company announced receipt of an order from a Global Aerospace firm for course cut titanium metal powder produced by PyroGenesis, Next-Gen, Plasma Automization System, which produces metal powder for use in industrial 3D Printing and Additive Manufacturing.

The client is a large global aerospace original equipment manufacturer in the United States with PyroGenesis has previously disclosed being in an ongoing qualification process towards approved vendor status. This new order is unrelated to that process is intended for use in the clients’ Research and Development Programs.

With the particle size distribution for this titanium powder of between 45 and 150 microns, this contract recognizes the overall quality of the company’s powder and potentially establishes a market for a larger percentage of powder output, thereby improving overall returns.

By selling both the fine and coarse cut of each powder production run, the company’s yield percentage from raw material is greatly enhanced, which is in line with the company’s broader mandate for commodity security and optimization.

And lastly, for Q3 within PyroGenesis Waste Remediation Vertical, in September, the company announced receipt of a $2.25 million Plasma Torch contract from a US corporation geared to destroy for Perfluoroalkyl and Polyfluoroalkyl Substances known as PFAS on behalf of a large operator of Public Water Systems.

PyroGenesis had previously announced — a previously announced its involvement in this very same project before subsequently suspending and discontinuing discussions as at the time, the project did not align with the minimum requirements of the company’s global strategy.

However, because of renewed interest from the project principles and upon developing a different approach, the client reengaged with PyroGenesis and PyroGenesis will now supply a Plasma Torch System as a key destruction component of the overall solution build.

For those who are unaware, PFAS are a group of almost 15,000 Synthetic Chemicals that have been widely used in various industries for decades and thousands of products, including nonstick cookware, stain resistant coatings on carpets and upholstery, water-resistant clothing, firefighting foam, cleaning products, personal care, cosmetics, plastic food container and any other product that crease, water and oil.

Because of their widespread use, the cumulative tendencies and resistance to breaking down PFAS or proving to be a persistent pollutant with a longevity measured in centuries, hence, given the name “forever chemicals”, with worrying concentrations in drinking water, soil and air, recent scientific investigations have revealed concerning connections between PFAS exposure and damage to the health of humans and Wildlife, leading global governments and industry seeking ways to reduce their usage and destroy existing stockpiles for the chemicals.

To read about these and additional events and updates to ongoing projects not discussed on this call, please refer to the corresponding section of the news release or the management discussion and analysis, in particular, the outlook sections of those documents. I’ll be back at the end for some final thoughts. But at this point, I’d like to turn the call over to the company’s Chief Financial Officer, Andre Mainella, to discuss the financials in more detail. Andre?

Andre Mainella

Thank you, Steve, and good morning, everyone. Let me begin with a review of the financial results. Total revenue for Q3 2023 was $3.7 million compared to $5.7 million for the same period last year. Revenue for the first nine months of 2023 was $9.3 million compared to $15.7 million for the same period last year. Although, the third quarter revenue for 2023 was lower than the prior year, it’s important to note that the prior year included an IP sale of $3.6 million, which was not repeated in Q3 of 2023.

Furthermore, the current quarter is the second consecutive quarter of revenue growth in the year, and we expect Q4 to maintain the positive trend. The revenue variation was a general increase across all product lines, except for the high-purity silicon and Purevacline.

Otherwise, in the quarter, sales of biograph upgrading increased by $0.7 million versus the same quarter of 2022 as well as sales to the U.S. Navy, which increased by $0.6 million. The combined increases in the other product lines equaled $0.6 million, offset by the IP sale, which did not reoccur in 2023.

As of November 9, 2023, the company had a backlog of signed and/or awarded contracts of $35 million. The company’s backlog grew again slightly as we continue to add contracts while delivering and progressing on contract advancement. Of the $35 million of backlog, close to half is categorized in the vertical that we call energy transition and emission reduction. One-third is related to commodity security and optimization and the remainder in waste remediation.

Gross profit for Q3 2023 was $1.1 million or 30% of revenue compared to a gross profit of $4.1 million or 73% of revenue for Q3 of 2022. For the nine months ended September 30, 2023, the gross profit was $2.7 million or 29% compared to gross profit of $7.6 million or 49% of revenue for the nine months ended September 2022.

And once again, the prior year included an IP sale of $3.6 million, which directly impacted the gross profit, both in dollars and in percentage. The company’s gross margin achieved in the current quarter comprised no special or onetime measures contributing to this 30% margin and is based exclusively on production and project advancement. This is once again comparable to industries the company serves and consistent with margin pressures being seen across those industries.

We continue to have difficulty maintaining 2022 margin levels due to a persistent inflationary environment in the sector. The decrease in the gross profit margin was mainly attributable to the impact of direct materials used in production and in foreign exchange in 2023 and the fact that Q3 2022 included the IP sale directly benefiting the gross profit.

Selling, general and administrative expenses were $7.6 million and $21.6 million for the three and nine months period ended September 2023 respectively. This is compared to $5.9 million for Q3 of 2022 and $18.6 million for the same 2022 nine months period. The increase in Q3 2023 is mainly due to the expected credit loss, which increased to $2.8 million in Q3 of 2023, and is due to the additional quarterly allowance, which whereby no such expense was recorded in the comparable period. It’s important to note that the expected credit loss is a non-cash expense.

As part of the SG&A reduction, professional fees for the current quarter were $0.8 million, which decreased by $0.4 million, almost one-third when compared to Q3 of 2022, due to continued reduction and tightening related to accounting, legal and investor relation expenses. Share-based compensation expense, which is also a non-cash item and relates mainly to prior year’s grants that didn’t repeat in 2023, decreased to $650,000 for the three-month period ended September 2023, a reduction of $300,000.

Research and development expenses for Q3 of 2023 were $0.7 million compared to $0.3 million of Q3 in the prior year. The increase in R&D expenses is related to additional employee compensation on internal projects and associated materials and equipment expenses as well as other expenses related to those projects.

Net finance costs amounted to $0.2 million in the current quarter and compared to $0.2 million for Q3 of 2022. Although the expenses are comparable, the current quarter included the interest and accretion expense of the convertible debenture, but offset by the interest accretion and reevaluation of the balance due on the business combination.

The change in fair value of strategic investment for the current quarter was actually a gain of $1.2 million versus the loss of $1.8 million for the comparable quarter. This was caused mainly by the increased fair value of the common shares of HPQ recognized in the period.

Comprehensive loss for Q3 of 2023 was $6.3 million, reflecting an increase of $2.1 compared to Q3 of last year. This increase is summarized as a decrease in revenue of $2 million arising in Q3, an increase of cost of sales and services of $1 million due to increase in direct materials and foreign exchange, an increase in the SG&A explained earlier, and mainly due to the non-cash credit loss charge, and offset by the significant favorable variation and the fair market value of strategic investments of $3 million.

Lastly, the Modified EBITDA, which is a useful metric in assessing the company’s operation, as it excludes non-cash and/or discretionary items, was at a loss of $6 million for Q3 2023, compared to a loss of 0.6% in the same period last year. This is an increase of $5.4 million and explained by the comprehensive loss detailed earlier and adjusting mainly for the fair value adjustment, along with depreciation and amortization, net finance costs and share-based expense.

At this point, I’ll turn the call back over to Steve. Thank you.

Steve McCormick

Thanks, Andre. In closing, revenues continued the steady climb up from Q1, which management believes was likely the revenue bottom for the past three years. Despite this quarter being a lower quarter year-over-year, management is optimistic that the downtrend that has affected quarter since Q3 of 2021 has likely subsided and a quarterly growth pattern is more likely.

As the company’s CEO, Peter Pascali was quoted in today’s news release, while we can’t guarantee that these early signs of sector-wide recovery will continue at the same pace, our quarterly revenues are positively recovering from the early year low, and our backlog continues to climb.

Combined with renewed demand and traditionally slower business lines such as waste destruction, where we have signed contracts for six separate projects so far this year and the increasing interest in plasma torch applications of 2-megawatt power and higher, management believes there is good reason to have confidence around continued momentum.

The opportunities for the company across the large-scale industrial technology and decarbonization landscapes, which are both significant and emerging, continue to expand. For Q4 and into Q1 of 2024, the company has some major developments in play, both from existing customer relationships as well as from new and returning clients.

Beyond all else, the company remains committed to driving shareholder value and continues to focus on improving efficiency, locating new and better suppliers and growing its customer base, all to improve margins, while engaging with potential customers around the world on a variety of new business opportunities.

I want to thank you once again for joining today’s call, and I’ll now pass it back to Rodayna.

Rodayna Kafal

As we conclude our third quarter earnings calls, I would like to thank you all for attending throughout the quarter. And in the week leading up to the call, we have collected a number of questions addressed to the company. The majority of these have been addressed in Steve’s remarks, and we are not in a position to address the others as they have not yet been disclosed in press releases. We thank you for your understanding and participation today. We wish you an excellent day.

Question-and-Answer Session

Operator