Montauk Renewables, Inc. (NASDAQ:MNTK) Q1 2024 Earnings Call Transcript

Montauk Renewables, Inc. (NASDAQ:MNTK) Q1 2024 Earnings Call Transcript May 11, 2024

Montauk Renewables, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, everyone, and thank you for participating in today's conference call. I would like to turn the call over to Mr. John Ciroli as he provides some important cautions regarding forward-looking statements and non-GAAP financial measures contained in the earning materials or made on this call. John, please go ahead.

John Ciroli: Thank you, and good afternoon, everyone. Welcome to Montauk Renewables Earnings Conference Call to review the First Quarter 2024 Financial and Operating Results and Developments. I'm John Ciroli, Chief Legal Officer and Secretary at Montauk. Joining me today are Sean McClain, Montauk's President and Chief Executive Officer to discuss business development, and Kevin Van Asdalan, Chief Financial Officer, to discuss our first quarter 2024 financial and operating results. At this time, I would like to direct your attention to our forward-looking disclosure statement. During this call, certain comments we make constitute forward-looking statements, and as such, involve a number of assumptions, risks, and uncertainties that could cause the company's actual results or performance to differ materially from those expressed in or implied by such forward-looking statements.

These risk factors and uncertainties are detailed in Montauk Renewables SEC filings. Our remarks today may also include non-GAAP financial measures. We present EBITDA and adjusted EBITDA metrics because we believe measures the 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. 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 and in our first quarter 2024 earnings press release in Form 10-Q issued and filed this afternoon, which are available on our website at ir.montaukrenewables.com.

After our remarks, we will open the call to questions. We ask that you please keep the one question to accommodate as many questions as possible. And with that, I'll turn the call over to Sean.

Sean McClain: Thank you, John. Good day, everyone. And thank you for joining our call. To begin with development, my comments will be focused on updates regarding our Pico dairy digestion capacity increase and our Turkey, North Carolina Montauk Ag Renewables, Swine Waste Energy Project, both of which were also discussed during our 2023 year-end call a short two months ago. As we ended 2023, we had commissioned the first of our two new digesters in our new expanded reception pit in our Pico dairy cluster project. During the first quarter of 2024, we completed the commissioning of the second and final digester. With the digestion expansion project now fully commissioned, we expect a continued ramp-up in production through the second quarter of 2024.

The Pico expansion project increased digestion capacity by approximately 60% to better match the unchanged processing capacity of the project's RNG facility. The new digestion capacity is expected to be fully utilized once the dairy provides our contractual third and final increase in feedstock volumes in 2025. In the first quarter of 2024, our RNG production at the Pico facility increased approximately 39% compared to the first quarter of 2023. I will now provide an update regarding our North Carolina Swine-to-Waste Energy Development Montauk Ag Renewables. We have substantially completed the engineering and are preparing to initiate the commissioning activities of our first reactor processing line at our Turkey North Carolina location. We expect commissioning to continue through the end of June 2024.

Our development progress has positioned us to be able to enter into a full engineering procurement and construction contract related to the first phase full build-outs to satisfy our Duke REC agreement. We have also placed orders for various significant components, many of which have long lead times, related to the construction of the additional reactors. We expect this new EPC contract to assist us in meeting our rolling commissioning schedule through late 2025. To support the first phase rolling commissioning schedule and ultimately our Duke REC agreement, we continue to pursue feedstock agreements. During the first quarter of 2024, we have contracted with a farming group in our late stage discussions with multiple others. We continue to thoughtfully bring partners under agreement targeting approximately 120,000 hog spaces to ultimately satisfy our Duke REC agreement.

A critical part of our development progress in North Carolina includes the continued optimization of our feedstock collection equipment and methodologies. Our collection process includes installing equipment on our feedstock supplier farms, which are under long-term agreements, as well as processes and equipment for processing waste through multiple phases of solid concentration on both the farm site as well as our centralized processing facility at Turkey North Carolina. We continue to progress with an amendment to the new renewable energy facility, the NREF designation our project received late 2023 that can optimize the generation of RECs. We expected a decision on this amendment in 2024, which is a critical path item in the timing of the utility infrastructure design and other balance of plant componentry at our Turkey, North Carolina facility.

As discussed in our 2023 year-end results call on March 2024, we reached an agreement with one of our landfill hosts to exit our gas rights and advancing their expiration, impacting one of our smaller renewable electric generation operating facilities. The strategic decision to exit this facility was influenced by mid-2024 expiration of an above-market power purchase agreement, the elimination of decommissioning asset removal for site restoration obligations, the agreed consideration of proceeds of $1 million, being well in excess of the carrying value of the project, and the offer to extend our gas rights at two of our existing RNG operating facilities, Atascocita and Coastal Plains, for an additional five years each. Through the contractual effective data disagreement, though it is October 1, 2024, in March 2024, we elected to cease operations at this facility as the electrical utility provider is performing upgrades which would require us to invest additional capital.

This decision is expected to have a positive effect on 2024 results due to our projected monthly loss on operations following the expiration of the project's power purchase agreement. Finally, I'd like to highlight and outline what we view to be the strong underlying fundamentals of Montauk, particularly in light of the share price volatility experienced during 2024. I will not, however, comment on the stock price worth trading volumes. Nearly all of Montauk's portfolio of 14 operating projects nationwide are hosted by large and growing host businesses. Our integrated relationship approach with these host businesses helps us strategically to continue to secure recurring renewals of our gas rights at these facilities. The company is winning new competitive project opportunities and is invited to participate in a diverse selection of new opportunities.

We are focused on diversifying our comprehensive business model, including the feedstocks we process, the commodities we produce, the federal and state attributes we generate, the method by which we monetize our commodities and attributes, and the way in which we acquire our project feedstock requirements. We have a demonstrated history of successful project execution and remain intently focused on attractive growth opportunities. Specifically, we have announced a series of committed development projects that are expected to increase our production capacity by 6,900 MMBtus a day, 2.5 million MMBtus annually, and additional development projects that are expected to advance the benefit of our existing facilities through the monetization of biogenic carbon dioxide and further diversify our feedstock processing to include waste from industrialized [indiscernible].

On an annual basis, we have been net income and operating cash flow positives since 2022. We maintain the financial discipline that provides us the opportunity to patiently enhance our profit from the sale of our rent attributes by placing them directly with large RFS obligated parties and synchronizing those transactions to the purchasing cadence of those large obligated parties. We ended the first quarter of 2024 with more than $60 million in cash on our balance sheet, an undrawn revolving credit facility with $117.5 million of availability and a credit syndication to which we can approach the utilization of accordion finance options and which has separately project finance development. We remain fully integrated, operate and maintain examples of multiple commercially viable biomethane processing technologies and continue to build upon four decades of experience in optimizing the collection of beneficial use of processing of feedstocks through nationwide variability of host business practices, climate impacts, and feedstock constituents.

Montauk's focus has been and continues to be on maximizing long-term shareholder value. We continue to believe our development strategy best supports that focus. Lastly, regarding the RFS, the EPA has set the RVO at 1.90 million D3 RINs for 2024, implying a monthly D3 generation run rates higher than what the industry has achieved to date through 2024. We also note that the EPA has announced that it will not use waiver authority for the 2024 RVO. We believe those factors can support strong 2024 price levels for RINs. And with that, I will turn the call over to Kevin.

Kevin Van Asdalan: Thank you, Sean. I will be discussing our first quarter 2024 financial and operating results. Please refer to our earnings press release and a supplemental slide that has been posted to our website for additional information. Our profitability is highly dependent on the market price and environmental attributes, including the market price of RINs. As we self-market a significant portion of our RINs, a strategic decision not to commit to transfer available RINs during a period will impact our revenue and operating profit. We strategically determined not to transfer all available D3 RINs generated and available for transfer during the first quarter of 2024 based on our internal expectations related to the price of D3 RINs. As a result, we have approximately 3.4 million RINs remaining in inventory from 2024 first quarter gas production.

We did sell approximately 3.9 million RINs representing all RINs from our 2023 gas production. We have not entered into commitments to transfer RINs in inventory, or RINs expected to be generated from forecasted future production. The average second quarter through the first few days of May D3 RIN price was approximately $3.28. Total revenues in the first quarter of 2024 were $38.8 million, an increase of $19.6 million or 102.5% compared to $19.2 million in the first quarter of 2023. The primary driver for this increase relates to an increase of 4.9 million RINs sold in the first quarter of 2024 compared to the first quarter of 2023 due to our decision to not sell RINs in the first quarter of 2023 due to our belief that the first quarter of 2023 D3 RIN index volatility was temporary.

Of the 7.9 million RINs sold in the first quarter of 2024, 4.0 million related to 2024 RNG production. Also contributing to the increase is an increase in realized RIN pricing during the first quarter of 2024 to $3.25 compared to $2.01 in the first quarter of 2023. Total general and administrative expenses were $9.4 million in the first quarter of 2024 flat compared to $9.5 million in the first quarter of 2023. Employee-related costs, including stock-based compensation, were $5.7 million in the first quarter of 2024, an increase of $0.7 million or 14.6% compared to $5.0 million in the first quarter of 2023. Our corporate insurance premiums increased approximately $0.2 million or 12.2% in the first quarter of 2024 compared to the first quarter of 2023.

Our professional fees decreased approximately $1 million or 48.7% compared to the first quarter of 2023. Turning to our segment operating metrics, I'll begin by reviewing our renewable natural gas segment. We produced 1.4 million MMBtu of RNG during the first quarter of 2024, an increase of less than 0.1 million or 4.4% as compared to 1.4 million during the first quarter of 2023. Our postal facility produced 38,000 more MMBtu in the first quarter of 2024 compared to the first quarter of 2023 as a result of plan processing, equipment improvements, and well-filled operational enhancements. Our McCarty facility produced 24,000 more MMBtu in the first quarter of 2024 as compared to the first quarter of 2023 as a result of well-filled enhancements by our landfill host.

Our Galveston facility produced 19,000 MMBtu more in the first quarter of 2024 compared to the first quarter of 2023 as a result of temporary reduction and feedback inlet during modifications to process equipment in the first quarter of 2023. Our Pico facility produced 9,000 MMBtu more in the first quarter of 2024 compared to the first quarter of 2023 as a result of commissioning our Dairy Digestion expansion project. Offsetting the improvements was our Rumpke facility which produced 55,000 MMBtu less in the first quarter of 2024 compared to the first quarter of 2023 as a result of the process equipment failure that occurred during the first quarter of 2024. Revenues from the renewable natural gas segment during the first quarter of 2024 were $34.0 million, an increase of $19.2 million or 129.9% compared to $14.8 million during the first quarter of 2023.

Average commodity pricing for natural gas for the first quarter of 2024 was 34.5% lower than the prior year period. During the first quarter of 2024, we self-marketed 7.9 million RINs representing a 4.9 million increase for 167.5% compared to 2.9 million RINs self-marketed during the first quarter of 2023. Average pricing realized when RIN sales during the first quarter of 2024 was $3.25 as compared to $2.01 during the first quarter of 2023, an increase of 61.7%. This compares to the average D3 RIN index price for the first quarter of 2024 of $3.12, being approximately 53.7% higher than the average D3 RIN index price for the first quarter of 2023 of $2.03. On March 31, 2024, we had approximately 0.4 million MMBtus available for RIN generation and had approximately 3.4 million RINs generated and unsold.

We had approximately 0.4 million MMBtus available for RIN generation and had approximately 8.3 million RINs generated and unsold at March 31, 2023. Our operating and maintenance expenses for our RNG facilities during the first quarter of 2024 were $12.1 million, an increase of 0.8 million, or 7%, compared to 11.3 million during the first quarter of 2023. Our RNG facilities reported increased total segment utility expenses of approximately $0.1 million during the first quarter of 2024 as compared to the first quarter of 2023. Other RNG operating and maintenance expenses increased approximately $0.7 million during the first quarter of 2024 as compared to the first quarter of 2023, primarily as a result of timing related to annual facility preventative maintenance.

We produced approximately 54,000 megawatt hours in renewable electricity during the first quarter of 2024, an increase of approximately 8,000 megawatt hours, or 17.4%, compared to 46,000 megawatt hours during the first quarter of 2023. Our security facility produced approximately 3,000 megawatt hours more in the first quarter of 2024, compared to the first quarter of 2023, as a result of the completion of prior period engine maintenance. Our Bowerman facility produced approximately 3,000 megawatt hours more in the first quarter of 2024, compared to the first quarter of 2023, primarily related to the timing of original equipment manufacturer preventative engine maintenance. Revenues from the renewable electricity facilities during the first quarter of 2024 were $4.8 million, an increase of $0.4 million, or 9.8%, compared to #4.4 million during the first quarter of 2023.

The increase is primarily driven by the increase in volumes. Our renewable electricity generation, operating and maintenance expenses during the first quarter of 2024 were $2.3 million, a decrease of $0.6 million, or 19.9%, compared to $2.9 million during the first quarter of 2023. Our Bowerman facility operating and maintenance expenses decreased approximately $0.3 million, which was primarily driven by the timing of annual OEM preventative maintenance expenses. Our security facility operating and maintenance expenses decreased approximately $0.3 million, which was driven by the non-recurring reversal of our asset retirement obligation liability related to the sale of the site. During the first quarter of 2024, we reported impairments of $0.5 million, an increase of less than $0.1 million, or 17.1%, compared to $0.5 million in the first quarter of 2023.

The specifically identified impairment losses in the first quarter of 2024 primarily relate to the remaining book value of assets due to our decision to cease operations at the security facility. We also impaired various RNG equipment that was deemed obsolete for current operations. The first quarter of 2023 impairment relates to specifically identified feedstock processing machine components at an RNG site that was not in operational use. We did not report any impairments related to our cash flow assessments. Operating income for the first quarter of 2024 was $2.4 million, an increase of $16.5 million, or 116.7%, compared to an operating loss of $14.2 million for the first quarter of 2023. RNG operating income for the first quarter of 2024 was $11.6 million, an increase of $15.9 million, or 370.2%, compared to an operating loss of $4.3 million for the first quarter of 2023.

Renewable electricity generation operating income for the first quarter of 2024 was $0.4 million, an increase of $0.6 million, compared to an operating loss of $0.2 million for the first quarter of 2023. Turning to the balance sheet, at March 31, 2024, $62.0 million was outstanding under our term limit. As of March 31, 2024, the company's capacity available for borrowing under the revolving credit facility remained at $117.5 million. During the first quarter of 2024, we generated $14.3 million of cash from operating activities, a 220.7% increase from the prior year of fiscal quarter ended March 31, 2023, of cash used in operating activities of $11.8 million. Based on our estimate of the present value of our Pico earn out obligation, we recorded a decrease of $0.8 million to the liability at March 31, 2024.

This decrease was recorded through our RNG segment royalty expense. In the first quarter of 2024, our capital expenditures were approximately $22.0 million, of which $12.0 million, $4.3 million, $1.7 million, $1.5 million, and $1.3 million were related to the ongoing development of Montauk Ag Renewables, our second Apex facility, the Blue Granite RNG project, our Bowerman RNG project, and the Pico Digestion capacity increase respectively. We also acquired approximately 42 acres of property in Turkey, North Carolina, which shares the property line of our existing property as we continue to strategically plan for the Montauk Ag renewables development. As of March 31, 2024, we had cash and cash equivalents of approximately $63.3 million. Adjusted EBITDA for the first quarter of 2024 was $9.5 million, an increase of $17.9 million or 212.7% compared to adjusted EBITDA of a negative $8.4 million for the first quarter of 2023.

EBITDA for the first quarter of 2024 was $8.9 million, an increase of $17.8 million compared to EBITDA of a negative $9.0 million for the first quarter of 2023. Net income for the first fiscal quarter of 2024 increased $5.6 million, or 148.8% compared to net income for the first quarter of 2023. Our income tax expense increased approximately $12.5 million, or 103.4% for the first quarter of 2024 as compared to the first quarter of 2023. The difference in effective tax rates between the 2024 first quarter and the 2023 first quarter primarily relate to the increase in pre-tax income for the first quarter of 2024 as compared to the first quarter of 2023. I'll now turn the call back over to Sean.

Sean McClain: Thank you, Kevin. In closing, and though we don't provide guidance as to our internal expectations on the market price of environmental attributes, including the market price of D3 RINs, we are reaffirming our full-year 2024 outlook provided in March 2024. For 2024, we expect our RNG production volumes to range between 5.8 and 6.1 million MMBtu with corresponding RNG revenues to range between $195 and $215 million. We expect our 2024 renewable electricity production volumes to range between 190 and 200,000 megawatt hours with corresponding renewable electricity revenue to range between $18 million and $19 million. And with that, we will pause for any questions.

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