Montauk Renewables, Inc. (MNTK) on Q1 2022 Results - Earnings Call Transcript
Operator: Good afternoon, everyone, and thank you for participating in today's conference call. I'd like to turn the call over to Mr. John Ciroli as he provides some important cautions regarding forward-looking statements contained in the earnings material or made on this call. John, please proceed.
John Ciroli: Thank you, and good afternoon, everyone. Welcome to Montauk Renewables Earnings Conference Call to review First Quarter 2022 Financial and Operating Results and Business Developments. I'm John Ciroli, Vice President, General Counsel and Secretary at Montauk. Joining me today are Sean McClain, Montauk's President and Chief Executive Officer, to discuss business developments; and Kevin Van Asdalan, Chief Financial Officer, to discuss our first quarter 2022 financial and operating results. During this call, certain statements will be made, which will be forward-looking and based on management's beliefs and assumptions and information currently available to management at this time, including without limitation, statements relating to the company's future results of operations and financial condition as well as our expectations and plans for the company, such as with our Montauk Ag Renewables project in North Carolina, the Pico improvement project and Pico CI score and market volatility and fluctuations in commodity prices, the market prices of environmental attributes and future environmental attribute commitments. These statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control, including those set forth in our safe harbor provision for forward-looking statements that can be found in our first quarter 2022 earnings press release, in our Form 10-Q for the first quarter of 2022, in our most recent annual report on Form 10-K and the other reports on file with the SEC, which provide further detail about the risks associated with our business. Additionally, please note that the company's actual results may differ materially from those anticipated. And except as required by law, we undertake no obligation to update any forward-looking statements. Our remarks today may also include non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. Additional details regarding these non-GAAP financial measures, including reconciliations to the most directly comparable GAAP financial measures can be found in our slide presentation in our first quarter 2022 earnings press release and Form 10-Q issued and filed this morning. Those are available on our website at ir.montaukrenewables.com. . And with that, I will turn the call over to Sean.
Sean McClain: Thank you, John. Good day, everyone, and thanks for joining our call. I will begin with an update on the development progress at the Pico facility, our dairy cluster RNG project in Idaho. Our Pico facility continues to meet our expectations after the improvements to the existing digestion process. Production has more than doubled in the first quarter of 2022 as compared to production volumes in the first quarter of 2021. We continue to anticipate the California Air Resource Board will complete their review of our CI score pathway, and we will expect to receive approval of our score during the second half of 2022. While we continue to store gas in 2022, we expect to begin to release gas from storage in the third quarter of 2022. And while we do not expect to recognize LCFS credit revenue on 2022 production until 2023, and we do anticipate recognizing revenues on RINs generated from gas released from storage over the second half of 2022. Related to our feedstock amendments, we expect the dairy to begin to deliver the first tranche of increased feedstock volumes in the second half of 2022. The improved efficiencies of our existing digestion process have provided the opportunity to pursue additional process changes related to water management. The volume of water in the existing digestion process limits the capacity available for feedstock. We expect that our water management improvements will enable us to process the increased feedstock volumes expected from the dairy in the second half of 2022. Our improved water management has also allowed us to work with the dairy to meet their needs and interests related to enhanced water purification. Changes to the water purification process benefits the dairy by improving the quality of water that's being sent to their lagoons and may reduce our operating costs, though the improvements naturally elongate the time line of the overall capacity expansion at the Pico facility. We expect the final design phase for our digestion capacity to be completed during the third quarter of 2022, incorporating both these water management and water purification improvements. I also want to update on the Montauk Ag Renewables development project in North Carolina. We continue to work with our engineer record to optimize improvements to the now patented reactor technology, which is operating at pilot scale at our Magnolia North Carolina location. We have not yet, however, completed the full improvement programs and have not yet reached commercial operations at this location. The improvements to the reactor technology are intended to be deployed at our Turkey, North Carolina location. While these improvements continue, we're in various stages of discussion with regulatory agencies in North Carolina related to the resulting power generation derived from swine waste to ensure its eligibility for renewable energy credits under North Carolina's renewable energy portfolio standards. Our Magnolia and North Carolina location has an existing electricity interconnection, which can be reactivated based on the outcome of those discussions. We are also, in varying stages, of corresponding negotiations with power purchasers related to our Magnolia, North Carolina electric production. And while Kevin will discuss in greater detail, I will note that we made a strategic decision to not commit a significant amount of 2022 vintage RINs during the first quarter, which had an impact on our revenues and profitability. This decision was made due to the D3 RIN index price generally declining during the first quarter of 2022, which we viewed as a temporary event. With the rebound in the D3 RIN index pricing in the second quarter of 2022, we have since entered into commitments to sell all of our RINs generated, but unsold, as of the end of the first quarter. And with that, I will turn the call over to Kevin.
Kevin Van Asdalan: Thank you, Sean. I will be discussing our first quarter of 2022 financial and operating results. Please refer to our earnings press release and the supplemental slides that have been posted to our website for additional information. Total revenues in the first quarter of 2022 were $32.2 million, an increase of over approximately $0.7 million or 2.3% compared to $31.4 million in the first quarter of 2021. The primary driver for this increase related to an increase of 81.2% in realized RIN pricing in the first quarter of 2022 of $3.46 compared to $1.91 in the first quarter of 2021. Additionally, higher revenues were driven by an increase in natural gas index pricing up 84.0% in the first quarter of 2022 of $4.95 compared to $2.69 in the first quarter of 2021. These increases were offset by lower counterparty sharing revenues of $0.2 million in the first quarter of 2022 compared to $3.8 million in the first quarter of 2021. Also offsetting the increases or losses recognized in the first quarter of 2022 related to gas commodity hedging settlements of approximately $3.5 million. As it relates to 2022 results, our profitability is highly dependent on the market price of environmental attributes, including the market price of RINs. As we self-market a significant portion of our RINs, a decision not to commit available RINs during a period will impact our revenue and operating profit. The industry experienced volatile D3 RIN index prices during this quarter. Though the average market price of the D3 RIN index during the first quarter ended March 31, 2022, was approximately $3.25, the market price declined as low as $2.85 and generally decreased during the first quarter of 2022. We view this reduction in price as a temporary event, and we chose not to transfer a significant amount of D3 RINs generated and available for transfer. As a result, for the quarter ended March 31, 2022, we had approximately 4.4 million RINs in inventory as compared to 0.6 million RINs in inventory for the first quarter -- for the quarter ended March 31, 2021. The market price of D3 RINs have subsequently improved during the second quarter of 2022, with an average year-to-date D3 RIN index price of approximately $3.27. Accordingly, we have now entered into commitments to transfer all RINs in inventory as of March 31, 2022. We have also entered into agreements to transfer the majority of RINs expected to be generated and available for transfer during the second quarter of 2022. The average realized price of these commitments is approximately $3.40. The average D3 RIN index price during the month of April was approximately $3.33. We have not currently committed to transfer a significant amount of RINs beyond the second quarter of 2022. We report the impacts of our gas commodity hedge program within our corporate segment. In the first quarter of 2022, our gas commodity hedge program was priced at rates below actual index prices, resulting in realized losses of approximately $3.5 million. We did not have any gas hedge programs in the first quarter of 2021. Based on current rates, we expect our gas commodity hedge program to continue to be priced below actual index prices through year end of 2022, at which time the hedge program will expire. Total, general and administrative expenses were $8.5 million for the first quarter of 2022, a decrease of approximately $12.0 million or 58.5% compared to $20.5 million for the first quarter of 2021. Of the total expense in the first quarter of 2021, approximately $14.4 million was related to stock-based compensation costs primarily associated with the IPO and reorganization transaction. employee-related costs, including stock-based compensation, decreased approximately $11.9 million or 71% in the first quarter of 2022. Professional fees decreased approximately $0.7 million or 34.4% during the first quarter of 2022, primarily driven by higher fees incurred during the first quarter of 2021 related to our successful completion of our IPO and reorganization transactions. Turning to our segment operating metrics. I'll begin by reviewing our Renewable Natural Gas segment. We produced approximately 1.4 million MMBtu of RNG during the first quarter of 2022, an increase of approximately 21,000 MMBtu of RNG over the first quarter of 2021. Our Galveston facility produced 66,000 more in the first quarter of 2022 compared to the first quarter of 2021 as a result of higher inlet gas due to well fuel changes and plant efficiency optimization of process equipment. Our McCarty site produced 31,000 less MMBtu of RNG during the first quarter of 2022 compared to the first quarter of 2021. Our landfill host has made changes to its well fuel practices, which has reduced available processable feedstock. Our Atascocita facility produced 24,000 fewer MMBtu in the first quarter of 2022 compared to the first quarter of 2021 due to a process equipment failure that has since been repaired. Revenues from the Renewable Natural Gas segment in the first quarter of 2022 were $32.7 million, an increase of approximately $4.5 million or 16.2% compared to $28.1 million in the first quarter of 2021. Average commodity pricing for natural gas in the first quarter of 2022 was 84.0% higher than the first quarter of 2021. During the first quarter of 2022, we self marketed approximately 6.5 million RINs, representing an approximate $2.4 million or 26.9% decrease compared to the $8.9 million self marketed in the first quarter of 2021. The decrease was driven by our decision not to self-market a significant amount of RINs due to our belief that the 2022 first quarter D3 RIN index volatility and decline was temporary. Average realized pricing on RIN sales during the first quarter of 2022 was $3.46 as compared to $1.91 in the first quarter of 2021, an increase of 81.2%. This compares to the average D3 RIN index price for the first quarter of 2022 of $3.25 being approximately 28.0% higher than the average D3 RIN index price in the first quarter of 2021. Operating and maintenance expenses for our R&D facilities in the first quarter of 2022 were $9.6 million, an increase of approximately $2.0 million or 25.8% as compared to $7.6 million in the first quarter of 2021. The primary driver of this variance was the favorable impact on our Houston, Texas-based facilities of lower utility rates during the first quarter of 2021. Certain of our utility contracts have provisions that when we are not using utilities, the providers are able to contribute that capacity back into the market, and we receive credit against our future bills. The first quarter of 2021 weather event, which temporarily impacted our Houston facility's utility consumption, resulted in our R&D utilities being approximately $2.2 million lower in such period as compared to the first quarter of 2022. We produced approximately 45,000 megawatt hours in renewable electricity during the first quarter of 2022, a decrease of 2,000 megawatt hours from the 47,000 or 4.2% produced in the first quarter of 2021. The nominal decrease was due to our Bowerman facility, having produced 2-megawatt hours less in the first quarter of 2022 compared to the first quarter of 2021 due to preventative engine maintenance. Revenues from renewable electric facilities in the first quarter of 2022 were $4.0 million, an increase of approximately $0.6 million or 19.5% compared to $3.3 million in the first quarter of 2021. Our Bowerman facility was impacted in the fourth quarter of 2020 by California wildfires, forcing it to temporarily shut down the facility. This shutdown delayed the timing of monetization of the environmental attributes associated with the Bowerman facility, which resulted in an approximately $0.6 million in reduced revenues in the first quarter of 2021 as compared to the first quarter of 2022. Operating and maintenance expenses for our renewable electricity facilities in the first quarter of 2022 were $3.3 million, an increase of approximately $0.4 million or 11.8% compared to $3 million in the first quarter of 2021. The increase is primarily a result of the timing of scheduled engine preventive and maintenance intervals at our Bowerman facility, which was approximately $0.5 million higher in the first quarter of 2022 over the first quarter of 2021. Operating loss in the first quarter of 2022 was $1.7 million, a decrease of approximately $10.6 million or 86.5% compared to an operating loss of $12.2 million in the first quarter of 2021. RNG operating profit for the first quarter of 2022 was $13 million, an increase of approximately $2.4 million or 22.4% compared to $10.6 million in the first quarter of 2021. Renewable Electricity Generation operating loss for the first quarter of 2022 was $1.4 million, a decrease of approximately $0.8 million or 33.7% compared to an operating loss of $2.2 million for the first quarter of 2021. Turning to the balance sheet. As of March 31, 2022, $78 million was outstanding under our term loan, and we had no borrowings under our revolving credit facility. The company's capacity available for borrowing under the revolving credit facility was $116.1 million. During the first quarter of 2022, we generated $9.6 million of cash from operating activities, a 23.5% increase from the first quarter of 2021 of $7.8 million. For the first quarter of 2022, our capital expenditures were approximately $2.4 million, of which approximately $1.1 million of the first quarter of 2022 capital expenditures were related to the ongoing development of Montauk Ag Renewables in North Carolina. In the first quarter of 2022, we also received proceeds from the sale of NOx emission allowance credits resulting in a gain of approximately $0.3 million. We present EBITDA and adjusted EBITDA metrics because we believe the measures assist investors in analyzing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Adjusted EBITDA in the first quarter of 2022 was $7.0 million, an increase of approximately $12.8 million or 221.8% over adjusted EBITDA of negative $5.8 million for the first quarter of 2021. EBITDA for the first quarter of 2022 was $3.8 million, an increase of approximately $10.3 million or 158.6% over EBITDA of negative $6.5 million for the first quarter of 2021. Net loss for the first quarter of 2022 decreased approximately $13.2 million or 92.2% from net loss of $14.3 million for the first quarter of 2021. This decrease was primarily related to reduced employee-related costs, including stock-based compensation of $11.9 million and professional fees of $0.7 million, respectively, in the first quarter of 2022, over the first quarter of 2021 related to the successful completion of our IPO and reorganization transactions. I'll now turn the call back over to Sean.
Sean McClain: Thanks, Kevin. In closing, we want to reaffirm our full year 2022 outlook. While our decision to delay the monetization of 2022 RINs during the first quarter impacted the timing of our revenues, we're nominally updating our 2022 outlook. We expect RNG production volumes to range between 5.5 million and 6.7 million MMBtu with corresponding RNG revenues between $181 million and $226 million. We expect renewable electric production volumes to range between 188,000 and 230,000 megawatt hours, with corresponding renewable electricity revenues between $17 million and $20 million. And with that, we'll pause for any questions.
Operator: . Our first question comes from Matthew Blair with TPH.
Matthew Blair: I'm looking at Slide 11, which shows your opportunity pipeline, and it's pretty specific talking about 6 landfill RNG sites and multiple dairy digesters, even some wastewater treatment. I was hoping you could give us a sense of -- if all that materialized and came to pass, what kind of production uplift would you expect? For example, would that double or even like triple your existing production?
Sean McClain: Yes, Matt, thanks for the question. I can take that. The opportunity suite that we're looking at for inorganic growth is unprecedented. It's unprecedented in the industry right now and in specific regards to this company, having been in the business going into its fourth decade. You're shortlisted on a number of these opportunities right at the onset, several of these projects. We're in the second rounds of due diligence we've offered nonbinding indicatives to go into this. Should any subset of these opportunities close, they will have a material impact on not only our production, but also the revenue and the corresponding EBITDA that comes out of a variety of projects that either take primary focus on the RFS war play into the state-based programs for decarbonization, such as California's low carbon fuel standard. To say specific regards as to what percentage of volume production you would expect to get out of this, it wouldn't be something that would be disclosable at this time. One, as most of these projects are in varying stages of due diligence, we wouldn't want to set expectations that 30% or 70% or 100% of these projects end up being closed upon; and two, it would be shortsighted to communicate a percentage pickup in production because as we all know, depending on the item that's being produced or the way in which it's being monetized or its carbon footprint profile, you are going to have varying degrees of value that you can recognize out of every additional MMBtu of production that comes out of any one of those facilities.
Kevin Van Asdalan: And then Matthew, just to reiterate what Sean said, I did want to make sure that you saw the note there that we have not entered into any definitive agreement with any of the inorganic strategic opportunities within that development pipeline.
Operator: And our next question comes from Craig Shere with Tuohy Brothers.
Craig Shere: I guess taking a look again, along with Matthew's question, at Slide 11, what kind of all-in acquisition and associated CapEx multiple to longer-term run rate EBITDA do you target for these inorganic opportunities? And how do you contrast that with your organic opportunity set?
Sean McClain: That's a great question, Craig. The way in which we typically prioritize and value these opportunities is depending primarily on how we intend to monetize the process that we take in looking at new project opportunities is whether or not we need cash for ongoing operations, for short-term transaction due diligence processes, in which case we may look to bind a subset of that production or the production for an entire project into a long-term fixed price agreement. Now that will come at a discount relative to the self-marketing approach that the majority of the company's portfolio takes. And in that instance, in that example, we will focus on a low double-digit 10-year IRR to focus on the profitability of that type of a project relative to the capital that goes in. If we are taking the more traditional approach that the business takes, which is aggressively into the federal and state atrophy programs and monetizing those, not quite real-time, but on a nominal delay and being more respective of the market conditions, you look for a more aggressive approach in the form of a payback or recovery of your capital probably somewhere in that 5-year, 6-year range. And so we're focused heavily in that regard if we are able to take advantage of the ever-growing federal and state programs and monetize in that fashion. Relative to the capital needs for those projects, we're focused on a sufficient amount of capital to work through all of the varying stages of the due diligence processes that we have for each of the opportunity through a combination of our cash flows from operations, from a newly amended and robust credit syndication as well as an opportunity to tap even into accordion features that allow for us to get quick access to the capital that we would need for the development of a substantial minority of those projects should come to fruition. And we will announce the success of those as those projects, to Kevin's point, are ultimately contracted.
Operator: And I'm showing no other questions in the queue. I'd like to turn the call back to management for any closing remarks.
Sean McClain: Thank you. Thank you for taking the time to join us on the conference call today, and we look forward to speaking with you again on our 2022 second quarter conference call.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
