PyroGenesis Inc. (PYR) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining PyroGenesis 2023 Second Quarter Financial Results and Business Update Conference Call. On the call with us today are Steve McCormick, Vice President of Corporate Affairs; Andre Mainella, Chief Financial Officer. Peter Pascali, Chief Executive Officer, will not be joining us today as he is currently on a business trip. The company issued a press release on Thursday, August 10, 2023, containing a business update and financial results for the second quarter, which ended June 30, 2023, and which can be viewed on the company's website. [Operator Instructions]. The company's management will now provide prepared remarks reviewing the operational and financial results for the second quarter ended June 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 obligation 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 www.sedar.com. With that, I will now turn the call over to Steve McCormick, Vice President of Corporate Affairs. Please go ahead, Steve.

Thanks, Rodayna, and thanks to 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. I'll then turn the call over to the company's Chief Financial Officer, Andre Mainella. So we exited the quarter with revenues of just over $3 million, which was lower than desired, especially after the expectations set by the company's highest ever second quarter results from 2021 and 2022. While lower, this quarter's results are not out of range when compared to the rest of the company's second quarter financial history, but certainly leaves room for improvement as the company works to regain the momentum of the last 2 years. Gross margin was up considerably to 37%, rising back to a level more consistent with the company's past second quarter results. 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 system type, we regard any high or even medium-sized margins at such an early stage as very positive and a strong sign for the future. As the company continues to focus on improving efficiency for its technologies while growing its customer base, future sales should improve margin even further. The 37% gross margin is also notable when compared to the industries the company primarily serves, who continue to have difficulty maintaining 2022 level margins due to persistent logistical difficulties in an inflationary environment for heavy industry and their customers. For example, overall aluminum industry margins continued to fall to 6.3% in the second quarter, down from approximately 19.8% in 2022. Iron and steel industry margins are down to 26.9% from 30.7%, metal and mining fell to 28% from 31.5%, and aerospace and defense is at 20.7%, down from 25.6% all Q2 versus previous year's Q2. And when compared to other industrial machine and component manufacturers, PyroGenesis' 37% is slightly ahead of the sector with the broader industry registering 36.3% second quarter margin. And finally, backlog, which, for the quarter, was a bright spot, growing to $33.9 million. This represents the 12th quarter out of the last 15 above $30 million in backlog since the company first reached that mark in 2019. In general, 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 for a variety of reasons. Revenue is accrued on a percentage of work completed model that varies based on both the nature of the project and the client's own scheduling and logistical decisions, both of which can impact the company's production milestones and resulting ability to book revenue. During this period of continued supply chain, logistical and inflationary challenges, those issues have been more frequent and exacerbating. As noted in the 2022 year-end report, some client projects were indeed experiencing longer-than-expected client logistical or project management delays impacting the company's ability to conclude key aspects of projects such as commissioning that would advance revenue progression. And this continued into 2023, contributing to the lower quarterly revenue for the first half of the year. Also noted in the 2022 full year report was the additional cautioned and highly methodical approaches occurring within industries undergoing decarbonization efforts, especially in regards to fuel switching to electricity. These changes are often preceded by first time and lengthy pilot and testing phases where unanticipated issues can often lead to delay. An example of this of just such an occurrence was reported by the company in this quarter's outlook, whereby the company's iron ore pelletization towards client suffered damages after torrential rain storms that affected the Montreal area. The furnace containing the company's torches was impacted, causing several weeks' delay to the current site acceptance testing leading up to the trials. Overall, while the financials for the second quarter were an improvement on Q1 by 17%, we still have work to do. As existing customers continue to press forward on slower moving projects while resolving their own logistical issues, our aim is to add more concurrent overlapping and higher profit projects to help offset slowdowns that may occur in other areas. We continue to increase sales and marketing efforts to this end. The significant improvement in margins, the ongoing focus on efficiency and the recent signing of contracts in new markets bodes well for this objective. And now on to company business. First, a reminder of the company's business strategy that the company outlined starting in the 2022 year-end results. The company is a provider of a growing technology ecosystem for heavy industry with a number of solutions in different stages from early pilot to full commercialization. That ecosystem is a concentration of offerings under 3 verticals that align with the economic drivers key to heavy industry. These 3 verticals are: energy transition and emission reduction, which focuses on fuel switching, helping heavy industry reduce their fossil fuel use and lower their greenhouse gas emissions by utilizing the company's electric-powered plasma torches and its biogas upgrading technology across various process steps. Second, waste remediation. The safe destruction of hazardous materials and the recovery in valorization of underlying substances such as chemicals and minerals that can be reused or resold. And third, commodity security and optimization, which is using the company's technology to aid in the recovery of viable metals and in 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. But first, there was a key development that occurred post quarter end that the company believes will have impact for the years ahead. On August 1, the company was awarded a $4.1 million contract to produce a 4.5-megawatt plasma torch system for a U.S.-based aeronautics and defense contractor. Both the client and the technology contracted for are positive developments for the company's future. The nature of the client, a highly regarded, but confidential contractor for the U.S. government as well as for public and private corporations, helps to reaffirm PyroGenesis' long-term opportunity within both military and aeronautics. The technology, a 4.5-megawatt plasma torch system, reveals the necessity for appreciably higher power levels solutions made without fossil fuels, the demand for which the company sees accelerating as a result of advancing global energy transition measures. Higher-powered systems, such as the 4.5-megawatt and beyond will help the company expand into other heavy industries such as glass, cement and petrochemical that are also facing tightening greenhouse gas emission regulations while considering moves toward electricity. Moving now to actual end-quarter Q2 production highlights. In the energy transition and emission reduction vertical, in May, the company announced that its subsidiary, Pyro Green-Gas, had successfully completed the integrated cold test step or ICT under our previously announced $9.3 million project with a key client, who is one of the world's top diversified steel producers. The test completion mark a significant milestone towards the completion of the overall project where Pyro Green-Gas has been mandated to supply; first, coke-oven gas purification solutions; and second, hydrogen production processes that, combined, have the potential to allow for the extracting of hydrogen with a 99.999% purity level while improving the client's environmental outcome. With the implementation of Pyro Green-Gas' hydrogen extraction technology, the client would benefit from a cleaner energy source for its annealing, galvanizing and acid recovery processes, helping to reduce its carbon footprint. The ICT step confirms that all systems, equipment and their components meet and exceed the required operation and safety standards. Within commodity security and optimization, this quarter saw a major corporate breakthrough. As in May, the company announced the signing of its first commercial by-the-tonne order for titanium metal powder, a key material used in additive manufacturing, the ink, so to speak, that is used by 3D printers to make metal parts and components. The contract was for 5 metric tonnes or 5,000 kilograms, with the provisional order for an additional 6 tonnes. These titanium metal powders are being produced using the company's NexGen plasma atomization system, which the company has spent several years designing, developing and testing to produce what is planned to be among the highest quality titanium metal powders available. The NexGen system has evolved from producing initial test batches measured in grams, to sample batches measured in kilograms and then hundreds of kilograms. The company's stated goal had been to gain orders by the ton. And with this order from an advanced materials company in the U.S. who has requested anonymity, that goal has been achieved, signaling full entrance into the titanium metal powders marketplace. In June, the company announced an achievement regarding its Gen3 PUREVAP Quartz Reduction Reactor pilot plant or QRR, which received successful laboratory validation. The high-purity silicon rated 3N+ plus was produced in 1 step from quartz. During #5 of a multi test phase, the pilot plant achieved an average silicon purity percentage of 99.92% across 2 separate tests. This outcome validates the capability of the QRR process to surpass the minimum purity requirement of 3N or 99.9% that is needed for battery-grade silicon, especially silicon used in electric vehicle batteries. As noted at the time in the client's news release, silicon, also known as silicon metal, is a key strategic material needed for the decarbonization of the economy and the renewable energy revolution. However, silicon does not exist in its pure state and must be extracted from quartz in what has historically been a capital and energy extensive -- intensive process. As invented by PyroGenesis, the PUREVAP is an innovative patented process that will enable the one-step conversion of quarts into high-purity silicon to reduce cost, reduce energy input and carbon footprint. The client, HPQ Silicon Inc., is an advanced materials company that offers a unique portfolio of sustainable silica and silicon solutions sought after by electric vehicle and battery manufacturers, among others. PyroGenesis is the engineering and development producer, but also as part of the terms of the contract with HPQ, PyroGenesis benefits from a royalty payment, representing 10% of the client's sales with set minimums. And lastly, for the company's Waste Remediation vertical. In June, the company signed 2 contracts with Aluminerie Alouette for projects to valorize residue waste streams from primary aluminum smelters. Alouette, located in Quebec, is home to the largest aluminum smelter in the Americas. The first contract is to further advance the technology to treat spent pot lining or SPL that the company originally announced in March of 2021 upon receipt of a research grant to study the concept. Pot linings are the insulating carbon material that helps enable electrical conductivity inside an aluminum smelter cell called a pot. As part of the process of turning aluminum oxide into aluminum, this lining typically has an average life span of about 5 years, after which it eventually fails from continuous use, causing the pot to be considered spent and put out of service and the highly contaminated linings to be removed and replaced. An estimated 1.5 million tons of spent pot linings are produced annually worldwide. PyroGenesis SPL Remediation Technology has now advanced to the point where full participation of Alouette in partnership with PyroGenesis has commenced. If PyroGenesis' proposed process proves successful, it could address a major issue concerning the aluminum industry. The second contract is geared to develop a new valorization solution for material known as excess electrolytic bath. In both instances, the dangerous materials, if processed correctly, can be recovered and reused by the primary aluminum producer. Both projects have a commercial end goal to market the solutions industry-wide in conjunction with Aluminerie Alouette. To read about 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?

Thank you, Steve, and good morning, everyone. Let me begin with a review of our financial results. Total revenue for Q2 2023 was $3 million compared to $5.8 million for the same period last year. Revenue for the first 6 months of 2023 was $5.6 million compared to $10.1 million for the same period of 2022. Although second quarter revenue for 2023 was modest by recent company standards, in previous years, only 2021 and 2022 showed second quarter revenue larger than this year's Q2 results. The revenue variation was seen as a general decrease in individual product lines, except for increased sales related to development and support related to the U.S. Navy and increased sales related to SPARC refrigerant destruction, which both increased by $0.2 million each. As of August 10, 2023, the company had a backlog of signed and/or awarded contracts of $33.9 million. The company's backlog grew again, remaining very comfortably above both the $10 million backlog level that was reached for the first time in Q2 of 2019 and a $25 million backlog threshold first established in Q3 of 2019. This quarter's $33.9 million backlog also represents a rise from Q1 2023 and Q4 2022, which were both at $30.6 million and $32.4 million, respectively, and is, in fact, the fifth largest quarterly backlog in the company's history. Gross profit for Q2 23 was $1.1 million or 37% of revenues and compared to $2.5 million or 43% for Q2 of 2022. For the 6-month period ended June 2023, the gross profit was $1.6 million or 29% compared to a gross profit of $3.5 million or 35% for the 6 months ended June 2022. The company's healthy gross margin achieved in the current quarter represents a large rebound of more than 1,600 basis points from Q1, which was 20.3% and a [ 22 ] basis points over Q4 2022, which was 14.5% margin. This quarter comprised no special or onetime measures contributing to this 37% margin and is based exclusively on production. The decrease in the gross profit margin was mainly attributable to the impact of employee compensation, foreign exchange, and finally, to the amortization of intangible assets, which does not vary based on revenue. Selling, general and administrative expenses were $6.4 million and $14 million for the 3 and 6 months period ended June 30, 2023, respectively, and compared to $7.1 million for Q2 '22, and $12.7 million for the same 2022 6-month period. The decrease in Q2 2023 is mainly a result of the share-based compensation expense, which is a noncash item and relates mainly to prior year's grants not repeated in 2023. The share-based compensation expense for the 3-month period ended June 2023 decreased to $0.7 million, down from $1.7 million in Q2 of 2022. Also, as part of the SG&A reduction, professional fees for Q2 2023 were $1 million, which decreased by $0.8 million compared to the Q2 2022 period due to a reduction and tightening in accounting fees, legal and investor relations expenses. The offsetting increase to our SG&A expenses, including employee compensation and to the expected credit loss, which increased to $0.7 million in Q2 2023, and is due to the additional quarterly allowance whereby no such expense was reported in the comparable period. Research and development expense for Q2 '23 was $0.7 million compared to $0.8 million for Q2 of 2022. This slight decrease in R&D expense for Q2 2023 is related to less materials and equipment expense offset by an increase in employee compensation for a net variation of $60,000. Net finance costs amounted to $0.9 million income in the current quarter versus an expense of $0.2 million in Q2 of 2022. The favorable variation of $1.1 million is due to the reversal of a liability connected to the balance due on business combination. This milestone payment will not be required, and therefore, the reversal of the liability favorably impact the income statement. The change in fair value of strategic investment for the current quarter was a loss of $1.2 million versus $7.5 million for the comparable quarter. This was caused by both the disposition and to the fair value of the common shares and warrants of HPQ recognized in the period. Comprehensive loss for Q2 2023 was $6.3 million, reflecting a decrease of $6.7 million compared to Q2 of 2022. This decrease was summarized as a decrease in SG&A explained earlier, a decrease in cost of sales and services while achieving a 37% gross margin, a decrease in financial expense, and most significant, the changes in the strategic investment. Lastly, the modified EBITDA, a useful metric in assessing the company's operations, as it excludes noncash and/or discretionary items, was a loss of $4.7 million in Q2 2023 compared to a loss of $3.2 million in the same period last year. This is an increase of $1.5 million and is explained by the comprehensive loss detailed earlier and adjusting mainly for depreciation and amortization, net finance costs, share-based expense and fair value adjustments. At this point, I'll turn the call back over to Steve.

Thanks very much, Andre. In closing, despite a lower quarter year-over-year, revenues exhibited an upturn over Q1, and management remains confident in its long-term strategy as the opportunities for the country -- for the company across the large-scale industrial technology and industrial decarbonization landscapes are both significant and emerging. With return growth to the backlog and a varied pipeline, the company has some unique developments on the horizon, stemming from existing customer partnerships as well as from new and even some returning clients. As the company's CEO, Peter Pascali, was quoted in today's news release. While the barriers to entry for gaining a foothold in these markets has always been high from both a technology and resource perspective, particularly in the energy transition segments, where fundamental structural change to long-established underlying energy and fuel systems are conducted with measured and exacting processes and where delays are common, we firmly believe that this is where our close to 30 years of R&D and our long-standing industry relationships provide a long-term advantage. As evidenced against much larger competitors and by using our globally recognized expertise in ultra-high temperature processes such as plasma along with robust client relationship building, we continue to experience successes that have enabled us to push past the barriers to entry in several of our strategic business lines. The above-mentioned commercialization and the by-the-tonne sales in titanium metal powders and the opening of new markets for higher-powered plasma torches, that August contract with the Defense and Aeronautics contractor for a 4.5-megawatt plasma torch signifies are just the most recent examples. As Peter was quoted, despite the quarterly ups and downs, our commitment to supporting heavy industry with customer-ready, low-carbon-footprint technology solutions remains steadfast. Beyond all else, the company remains committed to driving shareholder value and looks forward to providing further updates as developments unfold. Thank you once again for joining today's call, and I'll now pass it back to Rodayna.

[Operator Instructions] I'll now pass it back again to Steve.

Thanks again. One of the challenges we've received with this batch of questions is that the vast majority of them are asking for updates to projects. And without having revealed that information publicly, it's almost entirely impossible to answer the majority of these, but we'll see what we can do. There're some other questions that are nonproject related, and perhaps we'll touch more on those. First question is about the recent raise and asking that we failed to raise the $5 million deemed necessary for operations in the finished quarter. What are our future plans for the financial situation? $5 million was a target amount. It was not a necessary or essential amount. Financing are just 1 tool in a larger toolbox. The company has a strong and growing backlog, some key outstanding receivables getting close to resolution and a diverse pipeline of opportunities and also a 30-year history. So at this point, we're not too concerned about the long-term financial solution -- or situation, excuse me. Contract with an advanced materials firm to supply SPARC land-based waste destruction, and the first payment of $2.2 million. Are there any other payments coming before the 18-month deadline of the project? This was asked and answered in a previous Q&A session. And the answer is, yes, there will be payments coming before the 18 months duration of the project. With poor revenue, why are you not laying people off and cutting expenses? Well, our margins are solid, which validates the staffing level, but we are continuously seeking efficiencies and we'll continue to do so. There's a question about the certification process with -- several questions about the certification process with the major aerospace company that's still not been confirmed or PR'd yet. This particular investor would like to know whether or not there's a potential patent issue causing these delays? Our response is, there is definitely no patent issue of any kind whatsoever, and we're not sure where you get that idea. The time lapse is simply the nature of the process, and we remain confident going forward. That's basically the answer to all of the questions regarding the certification process for the global OEM. The process is the process, and it continues, and we remain confident. Regarding the site acceptance testing for client fee, the iron ore pelletization torch system, which was moving towards trial phase. What's going on? It's been several months. We don't feel we've got an update. There's a variety of similar questions. So we will just say, we have provided several updates when we get them. The most recent, as indicated in this quarter's outlook, is that the client experienced quite a bit of damage to both the furnaces and to the installed torches as a result of the recent torrential rainstorms and resulting power failures that impacted the area. And various components have been repaired and the commissioning continues. Please note that we have no control over the process. It is entirely up to the customer and has been underway for some time as previously reported. What I will say though, reports about performance of the torches during the time they were operational before the damage were very good. Moving around, what is the situation of Aubert & Duval? Is the partnership still continuing? Yes, it does. We have several questions about that. The partnership continues, and we will -- we cannot comment on anything beyond that at this time. From which quarter does the management expect a sustainable positive result? Well, the company is -- or profit, obviously. The company is focused on sales growth, bringing into commercialization and closer to commercialization the various commercial ready and in development solutions and continuing to find efficiencies to improve margin, all of those hopefully combined to create a profitable environment, but no predictions are possible. We can't make predictions on quarterly profits, nor can we make predictions on potential sales to individual clients. We have questions, or a series of questions about how confident are we that a large order will be placed with the R&R palletization towards clients? We will say we have confidence in our plasma torch system technology overall in terms of its potential to help in areas like iron ore pelletization. And we have confidence in the iron and steel sectors' growing interest in electrification. We cannot though, make predictions on sales to individual clients. We just have to wait until the results of the client trials are complete. In regards to revenue, I'm confused as to why there is no revenue showing from 3D powders and the substantial revenue from the SPARC system? The 5-ton powder order was to be largely complete and the SPARC contract had a large upfront payment, so why is no revenue showing? That's a misunderstanding of revenue versus sales. Payments made by customers do not turn into revenue until we show work towards projects against the sales. We are on a GAAP system. And for manufacturers, that means revenue is accrued based on a work-complete methodology for projects. The fact that we get a payment in does not indicate that it's revenue. It's just a payment, and it has to sit there and wait until we actually do work against it, then we can show a percentage of revenue based on how much of the project we've completed. And there is a number of questions about a series of different projects, everything from incorporating plasma torches and aluminum scrap, remelting furnaces, cast houses, upstream processes, a bunch of similarly related CFD studies, European multinational chemical and energy conglomerates. I will say we have no updates on these beyond what we reported, or we have updates forthcoming and saying something today wouldn't be appropriate against the upcoming updates. But we'll say everything is positive as leading up to those updates. And going through the list, it's sad to say, I cannot comment on any of the further questions because they're all asking for updates on things that we just don't -- either don't have an update for or are not ready to release an update yet. And on that, we will conclude the call, and we want to thank you again for your time and for tuning in today. Thank you again for your patience as investors, and we look forward to providing updates as developments occur. Have a good day.