Greenlane Renewables Inc. (GRN) reported a narrowed loss and revenue growth in its first quarter of 2024. The company saw a significant improvement in its adjusted EBITDA, with a reduced loss of $0.5 million compared to a $1.7 million loss in the previous quarter. Revenue increased by 23% to $18.1 million.
Greenlane is optimistic about converting its sales pipeline into purchase orders and achieving positive adjusted EBITDA within the year. The firm also highlighted the start of royalty revenue streams from a collaboration in Brazil and a focus on core business after the sale of its UK subsidiary.
Key Takeaways
- Adjusted EBITDA loss reduced to $0.5 million from $1.7 million.
- Revenue grew by 23% to $18.1 million in Q1 2024.
- Sales order backlog stood at $24 million at quarter's end.
- Company sold its Greenlane Renewables U.K. Limited subsidiary.
- Anticipates positive adjusted EBITDA for the full year.
- Started to recognize royalty revenue from ZEG Biogas collaboration in Brazil.
Company Outlook
- Aims to achieve positive adjusted EBITDA this year.
- Expects to convert sales pipeline into purchase orders.
- Anticipates revenue increase in the initial months of projects.
- Aftercare services segment expected to grow with new contracts post-commissioning.
- Plans to adjust staffing levels according to project needs.
Bearish Highlights
- Lower margins observed on larger projects.
- Revenue recognition contingent on completion of contract activities, leading to potential variability in quarterly results.
- UK business has been declining, affecting overall revenue.
Bullish Highlights
- Project set to be operational in the coming months, likely to attract customers and generate momentum.
- Significant sales activity pipeline reported.
- Growth in recurring service revenue expected in North America.
Misses
- Despite revenue growth, the company still reported a loss on an adjusted EBITDA basis.
- The removal of the UK operation from the profit and loss statement resulted in decreased revenue.
Q&A Highlights
- Company discussed the heavy lifting phase of a project's design and construction.
- Expects an increase in aftercare service contracts as projects are delivered and commissioned.
- Staffing levels remain stable but will be adjusted in line with project requirements.
In summary, Greenlane Renewables is navigating through a transformative phase with strategic divestments and a focus on strengthening its core operations. The company's management expressed confidence in the sales pipeline and the potential for increased project-based revenue, particularly in the North American market. With the anticipation of new projects coming online and the expansion of aftercare services, Greenlane Renewables is positioning itself for a more profitable trajectory in the upcoming months.
Full transcript - None (GRNWF) Q1 2024:
Operator: Thank you for standing by. Welcome to the Greenlane Renewables Inc. First Quarter 2024 Results Conference Call. At this time, all participants are in a listen-only mode. Following the results, we will conduct a question-and-answer session. [Operator Instructions] Today's call is being recorded and a replay will be available on the Greenlane website. I will now turn the call over to, Darren Seed from Incite Capital Markets. You may begin your conference.
Darren Seed: Thank you, operator, and good afternoon. Welcome to the Greenlane Renewables' first quarter 2024 conference call. I'm joined today by Ian Kane, Greenlane's President and Chief Executive Officer; and Monty Balderston, Greenlane's Chief Financial Officer. Before beginning our formal remarks, we'd like to remind listeners that today's discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in those forward-looking statements. Greenlane Renewables does not undertake to update any forward-looking statements except as may be required by applicable laws. Listeners are urged to review the full discussion of risk factors in the Company's annual information form, which has been filed with Canadian Securities Regulators. Lastly, while the conference call is open to the public and for the sake of brevity, questions will be prioritized for analysts. Now, I'll turn the call over to, Ian.
Ian Kane: Thanks, Darren, and good afternoon, and thank you for participating on today's call. As in my previous conference calls, I will cover some of the results from our last quarter and also comment on our future. We've had a good start to the year as we recognized a significant improvement in adjusted EBITDA with reduced loss of $0.5 million in Q1 2024 compared to a loss of $1.7 million in Q4 of 2023. Further to the adjusted EBITDA results, our revenue grew 23% over Q1 of last year with $18.1 million in revenue for Q1 of this year. As many of you have followed, our financial goals for Greenlane have been clear and published. We continue to drive towards our goal of positive adjusted EBITDA this year, which is also requires us to refill our sales pipeline. We have significant sales activity on the go and look to convert them into purchase orders as soon as possible. With respect to our collaboration agreement with ZEG Biogas in Brazil announced a year ago, we started to recognize royalty revenue this quarter, which will help improve our overall business and margin profile and further strengthen our brand presence in Brazil. I appreciate your continued support, especially given the short time frame between our last call and today's call and I look forward to keeping the public informed of our progress. Also, I want to thank the Greenlane employees for their continued hard work and drive. With that, I will now turn the call over to Monty.
Monty Balderston: Thanks, Ian, and good afternoon, everyone. As a reminder, all figures are in Canadian dollars unless otherwise stated, and all comparisons are for the first quarter of 2024 against the first quarter of 2023. As I noted in our release, I'm encouraged with the progress we've made towards our objective of achieving adjusted EBITDA positive results for this fiscal year. Greenlane's revenue in the first quarter was $18.1 million compared to $14.8 million in the same period of fiscal 2023. System sales revenue accounted for 85% of the total revenue in the quarter, which is recognized in accordance with the stage of completion of our projects and the remaining 15% of revenue was due to aftercare services and our royalty contract that Ian just mentioned. We delivered a gross margin in Q1 of 26.5% or $4.8 million compared to $3.5 million or 24% in the first of 2023. The 250 basis points increase in gross margin percentage was largely the result of a change in product mix during the current quarter. We reported an adjusted EBITDA loss in the first quarter of $0.5 million versus a loss of $1.6 million in the first of 2023. The company incurred an operating loss from continuing operations of $1 million in Q1 2024 compared to a loss of $2.5 million in Q1 of 2023. Net loss and comprehensive loss from continuing operations in the first quarter was $800,000 compared to a loss of $2 million in the comparative quarter of 2023. The company's sales order backlog at the end of the quarter was $24 million and as a reminder, the sales order backlog is a snapshot at one moment in time, which varies from quarter-to-quarter. The sales order backlog increases by the value of new system sale contracts and is drawn down over time as the project progresses towards completion with amounts recognized in revenue. You should also note that sales order backlog does not include our Cascade H2S sales, service revenue or revenue from the company's agreement with say Biogas, that's a royalty like structure. As part of management's ongoing evaluation of its operations and strategic plan, we exited noncore parts of our business to increase the focus on growth of Greenlane's core, including our Cascade products and services. More specifically, subsequent to March 31, 2024, the company sold its wholly owned subsidiary, Greenlane Renewables U.K. Limited, which carried on the company's U.K. and European based legacy aftercare services business. For the first quarter, revenue generated was $0.5 million and the business incurred an adjusted EBITDA loss of $100,000 dollars. This transaction triggered a restatement of our financial statements to reflect this business as a discontinued operation and all comparisons for Q1 of 2024 against Q1 of 2023 reflect this adjustment. I'm encouraged by our progress during the quarter as we continue executing on our strategy and we continue to evaluate our operations and we'll look to extract further efficiencies as we focus on the core aspects of our business. We look forward to keeping our shareholders appraised of our progress and with that I will open the call to questions. Operator?
Operator: [Operator Instructions] The first question comes from Nicholas Boychuk with Cormark Securities. Please go ahead.
Nicholas Boychuk: Thanks. Good evening, guys. Can you expand on the ZEG royalties that started up this quarter? What are the details around the project or project that those royalties were derived from and how they're being calculated and really what we should be expecting in royalty revenue moving forward for the rest of the year?
Monty Balderston: Well, probably the easiest way to describe it is there's an assured portion of the royalty agreement and then there's an unassured portion of the royalty agreement. So right now we're in the firm piece of that contract and so, how it works is as units are delivered, we recognize a portion of that royalty. So, in Q1, the first unit was physically manufactured and the portion of our contribution towards that. So, our activities towards that were completed. And so, we were able to recognize the revenue on that and so, on the contract, there's a two-year term that's the fixed portion of it and so, we're a year in and we delivered the 1st unit. We expect ZEG to have a one or two units in the second half of the year, but obviously, they're still in progress on that and so when we complete those units, the revenue would be recognized on that as well. So, basically what you're seeing in Q1 is one unit under the fixed course of the contract. So you can do the math if it was two or three or four.
Nicholas Boychuk: Got it. That makes sense and is there a recurring component? So now that you've got this one suspended to the field, is there going to be a smaller ongoing recurring component that will come on the back of that as well?
Monty Balderston: Yes. So, we have a similar to our other projects, we get involved in the commissioning of the unit. We don't actually construct the unit, but we do the commissioning piece and so that's where you will see a smaller portion of revenue being recognized. I mean, it's not the size of the royalty, but for each unit we do have a service component to it and then depending on the situation, we hope to have an aftercare support agreement with those units as well.
Nicholas Boychuk: Okay and so you mentioned that there's going to be, call it, one or two more ZEG systems sold within the year. Have they given you any indication on what they need to see from you guys or just from their local market in order to really start to ramp up production towards that kind of bigger can that they previously suggested is there?
Ian Kane: Well, I think what you're seeing now is the first units delivered and with any supplier customer relationship, once they've got the units running, the customers get more and more accustomed to it and more interested in it. So, as I expect with any customer, as they're seeing the increased performance in delivery, they will be more interested in more units. So, we'll see. We'll watch this space.
Operator: The next question comes from Aaron MacNeil with TD Cowen. Please go ahead.
Aaron MacNeil: I think I'll try to follow on the last question. Good afternoon, guys. Thanks for taking the time. So, I know there's a minimum volume and commitment for the first two years. Can you say what that like the number of units is that we should expect?
Monty Balderston: The minimum commitment is five.
Aaron MacNeil: Five. Okay. And then once that minimum commitment is up, you've talked about 75 units over five years, like is that still something that you can reasonably expect or like how do you see this ramping up over time or Ian as you mentioned maybe it's that you need to demonstrate the first unit in the field before you have more visibility on that?
Monty Balderston: Well, I mean, it's really in our customers' hands more than our hands. So, I'm not saying we don't know anything about it, but it's we're not in control of how many units. Obviously, we want to see our customer be extremely successful, but perhaps the 75 might be a little aggressive within the timeframe that they're suggesting, but they've got the facilities to build the units set up. They've got the, for lack of better term, the floor plan on how to build it and the first unit has been fully constructed. So, they've gone through the growing pains, if you want to call it, on getting their idea set up and the unit that we're talking about is actually being commissioned here in the next 45 days. So, it's been moved to site and now it's for lack of a return being turned on and so, a lot of our customers we find want to go and see what you've already done. So now they're going to have one that's actually up and running here in the next few months. So I think you'll see some momentum from that and obviously, time will tell us how successful they'll be, but there's the minimum commitment, which we was kind of what we agreed to and then we have expectations that the momentum will continue to get stronger as they've got a proven unit feel that people can for lack of their term touch and taste and feel.
Aaron MacNeil: Got you. And in the prepared remarks, you talked about filling the backlog back up and the significant sales activity pipeline. I am wondering a couple of things on that front. First, can you comment on the pricing strategy like our historical margins, a good benchmark? And second, like can you give us a sense of how quickly you could recognize revenue? I know that you've said historically it's 9 to 24 months, but can you give us a sense of what you would expect for some of the projects you're chasing, how quickly that revenue would be recognized?
Ian Kane: Yes. So, from a backlog perspective, these larger projects, obviously, as we said previously, they do take there is a lower margin on them, so there certainly is that piece and revenue recognition, I'll let Monty cover that piece.
Monty Balderston: Yes. So, on revenue recognition, basically, it's your activities against the contract, right? So, as you complete the activities against the contract, you recognize the revenue and so, I mean, it's not straight line, but a significant portion of the work is done in the first, I would call it, let's call it six to eight months and then there's a slowdown period, while the unit gets constructed, because obviously we're not involved in the physical construction of the unit on-site, but then we come back in at the end to do the commissioning. So, it's a little bit front end loaded. So, on these projects, like for instance on the large project in Brazil that we're doing now, you've seen the revenue pop materially in Q4 and Q1 and it's largely related to that project being in the heavy lifting phase for lack of better term of the design and the construction of the components by our suppliers.
Aaron MacNeil: Got you, and then final question, as we think about updating the model for the aftercare services segment, I'm wondering if the performance in the quarter and the prior quarter comparable is indicative of the run rate, like you've got your revenue there and a modest loss on an EBITDA basis. Is that what we should sort of think about when we're adjusting the model on a go forward basis?
Monty Balderston: Yes. So to adjust the model, if you look at our P&L, the U.K. operation has been removed from the P&L and it shows up as a discontinued operation line at the bottom. So, the P&L that you're looking at for Q1 of this year and Q1 of last year reflects the U.K. operation being removed. So, you can kind of get a little bit of a sensation for or sense as to what the go forward business has achieved in the past. You could also in the note disclosure look to see that like you mentioned the business had $0.5 million of revenue, but on an EBITDA basis was slightly below zero. So our expectation is it's not a huge bottom line mover, but from a revenue standpoint, we're probably going to be short, somewhere between $0.5 million and $0.75 million a quarter, if you were to use the run rate previous when that business is included in our operations.
Ian Kane: Yes, let me just quickly touch on aftercare. You asked about aftercare's piece. We expect as we deliver commission these projects we have on the go at the moment, aftercare contracts will be signed with the various customers as we go. So that book should increase.
Monty Balderston: Yes. So what we're seeing is our U.K. business was starting to decline because obviously we had commissioned a new project in the U.K. in a long period of time. But the North America, we had a lot of upgrader work in the last two years and so those projects are now coming online and so that's where the recurring service revenue is going to grow. So basically, it's a shift of that activity from the U.K. to for the most part the United States.
Operator: We have a follow-up question from Nicholas Boychuk from Cormark Securities. Please go ahead.
Nicholas Boychuk: Thanks, guys. Just one quick follow-up here. Kind of curious how you're thinking about staffing levels right now. Obviously, you have to manage costs, but also kind of strike that balance to have enough people on hand to take advantage of that revenue opportunity you're looking at. What are your thoughts on the current cost profile and how is that going to evolve over the rest of the year?
Ian Kane: Yes. We will see some adjustments in cost over the next 6 months at the end of the day. Staffing profiles are mostly pretty stable as they are. And our model is, as we get more projects or less projects, we adjust as needed. So that's kind of our objective.
Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Darren Seed for any closing remarks. Please go ahead.
Darren Seed: Thank you for participating on today's call. We appreciate your questions as well as your ongoing interest and support and look forward to seeing you on the next conference call. Thanks everyone.
Operator: [Operator Closing Remarks].
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