Earnings call: EnWave reports mixed Q1 2024 results, eyes growth

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Earnings call: EnWave reports mixed Q1 2024 results, eyes growth
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EnWave Corporation (ENW), a global leader in vacuum microwave dehydration technology, reported a decline in machine sales during its first quarter of 2024, leading to reduced revenue year-over-year. However, the company saw a significant increase in quarterly royalties, reaching a 2.5-year high of $480,000, as its royalty partners continued to commercialize REV dried products. Despite the sales slowdown, EnWave ended the quarter with a strong cash position and a net working capital surplus, while expressing optimism for future growth in diverse markets and the development of new snack products.

Key Takeaways

  • EnWave Corporation reported a decrease in machine sales, affecting revenue negatively.
  • Quarterly royalties reached a 2.5-year peak at $480,000, signaling robust commercial activity among royalty partners.
  • The company is actively seeking new partnerships in various food sectors and developing innovative shelf-stable products.
  • EnWave concluded Q1 2024 with $3.9 million in cash and a net working capital surplus of $7.6 million.
  • The company aims to secure more machine orders to achieve positive adjusted EBITDA and anticipates more cannabis sector projects in the US.

Company Outlook

  • EnWave is optimistic about future growth through diversified royalty streams and new market partnerships.
  • Development of new shelf-stable snack products, such as a soft crunch French fry, is underway.

Bearish Highlights

  • The company experienced a slow period in machine sales, impacting revenue negatively compared to the previous year.

Bullish Highlights

  • EnWave maintains a strong financial position with strict expense management.
  • The company is confident in securing additional machine orders to support growth and positive adjusted EBITDA.

Misses

  • EnWave needs to increase machine sales to surpass the five large-scale machines target for the fiscal year.

Q&A Highlights

  • In response to Bard Goemaere's inquiry, Dylan Murray confirmed that production of a contracted machine for BranchOut Foods has not started yet.
  • Brent Charleton indicated that the inventory of small machines is expected to drop due to upcoming projects.
  • The company is focusing on the US cannabis market, with recent trials involving Aurora and the pursuit of opportunities with competent operators.

EnWave Corporation, with its innovative drying technology, remains committed to expanding its global footprint and strengthening its financial health. While current challenges in machine sales pose hurdles, the company's strategic focus on new partnerships, product development, and market expansion, particularly in the cannabis sector, provides a positive outlook for stakeholders. EnWave's leadership team encourages interested parties to reach out for more detailed discussions on the company's direction and opportunities ahead.

Full transcript - None (NWVCF) Q1 2024:

Operator: Good morning, welcome to EnWave Corporation's Q1 2024 Earnings Conference Call. My name is Camilla, and I'll be your operator for today's call. Joining us for today's presentation are the company's President and CEO, Brent Charleton; and Dylan Murray, EnWave CFO. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask a questions. [Operator Instructions] Finally, I'd like to remind everyone that this call will be made available for replay via a link in the Investor Relations section of the company's website at www.enwave.net. Now, I'd like to turn the call over to EnWave CEO, Mr. Brent Charleton. Sir, please proceed.

Brent Charleton: Good morning to everyone who has joined us today to discuss EnWave Corporation's Q1 performance and more importantly, our outlook for the rest of fiscal 2024. Consistent with our past quarterly earnings calls, the information we will present today contains forward-looking information that is based on our management expectations, estimates, and projections. Our statements are not a guarantee of future performance and involve a number of risks, uncertainties and assumptions. Please consider the risk factors in the filings made by EnWave on SEDAR when reviewing this information. Also, all amounts discussed will be in Canadian dollars unless otherwise noted. EnWave's first fiscal quarter for 2024 demonstrated volatility in rating energy vacuum machine contracts as no new orders were received, which negatively impacted revenue. Currently, there are several active projects and potential orders for both 10 kilowatt and large-scale REV drying lines, which we hope to confirm in the near future. Quarterly royalties were the highest they've ever been in the past 2.5 years at $480,000 an increase of $67,000 year-over-year. Further, the percentage of royalties collected from REV dried product sales by our royalty partners versus the exclusivity top up payments made increased when compared to Q1 2023. This is a good indicator that the company is commercializing REV dried products continue to build their respective REV businesses. We monitor the use of all large-scale REV equipment through remote programs and have seen an uptick in usage. Now despite the absence of new machine sales in Q1, which should be no surprise to anybody, we continue to keep our expense structure tight and had a modest reduction in cash position. We will continue to operate in this manner, only making material investments when a clear return is highly probable. We are comfortable with our manufacturing capabilities and innovation competency, but we'll likely invest in a more robust sales structure this year. Our pipeline is strong and I'll speak to several developments in a moment, but we will not continue to accept the status quo, which is being typically 4 to 6 large scale machine sales over the past few years. If we achieve the status quo, we are breakeven business on an adjusted EBITDA basis. Many shareholders have asked for a more robust summary of the key projects we are working on with current and potential royalty partners. To begin, the installation of the 120-kilowatt REV machine at Bridgford Foods is scheduled to complete in March, enabling the U.S. Army to continue progressing a project to incorporate a dry cheesecake ration to pour it into many of their field ration packs. Concurrent with this work, Bridgford is evaluating a number of additional tool manufacturing projects and their own development and launch of commercial products. They've had a 10-kilowatt unit at their facility for more than a year and are very capable operators. I'm very much looking forward to witnessing their progress as we move forward over the coming quarters. The U.S. Army has also engaged BranchOut Foods and Michael Foods, other royalty partners of ours, among others to collaborate on additional ration inclusions. More hopefully to come on these projects later in the year. The second large REV line was recently commissioned in Japan for Calbee. Calbee launched a premium dried apple snack that did well during initial market trials and we anticipate broader domestic sales of the snack line and the potential expansion of their portfolio again in the coming quarters. Dole continues to commercialize their Good Crunch snack line in North America selling three SKUs currently. We remain optimistic about the future of this relationship given the high utilization rate of the 120-kilowatt REV machinery operating in Thailand and the new potential SKUs under development. Also, there has been intensive collaboration with additional royalty partners of ours to potentially support growing capacity needs in the near term. Moving forward, additional large scale REV orders may either come directly from Dole or other royalty partners who may full manufacture for the brand. Good Crunch is currently available online in North America and at many traditional grocery channels. Now many of our royalty partners using REV technology to produce dairy snack products are also making headway. Daily Foods in Canada has maxed out their capacity on their first 100-kilowatt unit and elected to maintain their exclusivity to produce cheese snacks here domestically. We hope they decide to increase their capacity in the coming quarters. Ashgrove in Australia is diversifying their formats of cheese snacks offered in their domestic market and Dairy Concepts Ireland launched their product line into the largest retailer in the UK, Mark and Spencer, and by all accounts, the sales continue to vastly exceed expectations. That being said, we're optimistic about their continued growth this year and the need for additional manufacturing capacity. Rancho Foods, which I mentioned in relation to the U. S. Army previously, is another royalty partner who has had some major recent wins. They landed repeat multimillion dollar contracts with the largest grocery retailers in the U.S. to sell their line of premium fruit and vegetable snacks. They engaged us to use our REVworx toll drying facility to make up the immediate shortfall in capacity and we anticipate that this toll drying contract will likely extend for most of this fiscal year. We are contracted to deliver a second large scale REV machine to branch out in the second half of 2024 to support this growth. Orto Al Sole of Italy has also expanded their domestic grocery distribution for their ultra-premium line of healthy snacks and Alarko of Turkey has communicated their goal of winning several major supply agreements with leading domestic brands this year. Those brands they've targeted they have close ongoing relations with and I feel that that's a highly probable goal to achieve. Alarko is one of the largest conglomerates in Turkey and they're actively investing to grow their REV business significantly. On the business-to-business ingredient front, Microdried, one of our most important royalty partners continues to build a meaningful business. They won supply contracts with many household brands in the cereal, craft beer, snack bar, smoothie and dairy application areas in North America and internationally. We operate three large scale lines currently. They're a top tier partner and we believe they have the capabilities to also grow in the coming years. In addition to the updates provided, there are many more royalty partners moving in the right direction. EnWave's portfolio of diversified royalty streams is growing and we expect that trend to continue. In our pipeline, we're actively courting new royalty partners in the pet treat, seafood and meat snacks space. There has been minimal penetration in these verticals to date and we're hopeful about our prospects to sign new licenses and sell REV machinery into these market segments in 2024. We've also been busy developing new commercially viable shelf stable snack products. The most recent breakthrough being a shelf stable soft crunch French fry that we are now pitching to every major potato product manufacturer or receiving positive feedback, meetings, follow-up and of course sampling of these products. We also have several new leads in the fruit and vegetable area. With increasing commercial success of Dole, Calbee and others. We're announcing shorter times between engagement and license agreement negotiation. I hope to be able to talk about these prospects as closed deals come in as soon as possible. I'll now ask Dylan to summarize Enwave detailed quarterly financial performance.

Dylan Murray: Thanks, Brent. Good morning, everyone, and thank you for joining us today. Please note that the figures I'll be going over today can be found in our press release from yesterday and in the financial statements and MD&A filed on SEDAR. And all amounts are in Canadian dollars unless otherwise noted. I will make reference to adjusted EBITDA, which is a non-IFRS financial measure. So, please refer to the non-IFRS financial measure disclosures and reconciliation to GAAP net income, both in the press release and in our MD&A. Also, please note that the comparative period I'll refer to throughout this presentation is the prior year Q1 ended December 31, 2022. Revenues for Q1 were $1.3 million compared to $2.8 million in Q1 2023, a decrease of $1.5 million or 55% and the decrease was primarily related to fewer machine sales and machines in fabrication during the period. The decrease in revenue was partially offset by third party royalty revenue, which was $480,000 in Q1 2024 compared to $413,000 in Q1 2023, an increase of $67,000 or 16%. Royalties grew due to increased partner product sales and production, offset by a decrease in exclusivity fees for the quarter. As our royalty partners grow their businesses and increase capacity utilization on REV equipment alongside new REV installations arising from new sales, we hope to see material royalty growth over the coming quarters. Gross margin for the company in Q1 2024 was 18% compared to 37% in Q1 2023. The decrease in margin was a result of fewer machine sales and machines and fabrication to absorb fixed overhead costs. SG&A expenses, including R&D, were $1.3 million for Q1 2024 compared to $1.6 million for Q1 2023, a decrease of $303,000 or 19%. The decrease primarily related to reduction in commissions to third party sales representatives and the concerted efforts to maintain discretionary spending. Adjusted EBITDA is a non-IFRS financial measure, so please refer to our MD&A for the reconciliation from GAAP net income to adjusted EBITDA. The company reported an adjusted EBITDA loss of $756 for Q1 2024 compared to adjusted EBITDA loss of $256,000 for Q1 2023, a decrease of $500,000. The decrease in adjusted EBITDA was primarily related to top line revenue, fewer machine sales and machines and fabrication during the period. And we finished Q1 2024 with cash and cash equivalents of $3.9 million and a net working capital surplus of $7.6 million as of December 31. Our balance sheet remains debt free.

Brent Charleton: Thanks for that commentary, Dylan. And as just noted, we were able to limit our cash burn through continued strict expense management. Timing of large-scale REV machine sales has been historically volatile and in Q1 we experienced a slow period. It's imperative that the frequency of new machine orders picks up in the coming months to ensure that the total number of large-scale machines sold this fiscal year surpasses five machines to status quo. The number needed timing and price dependent of course to yield positive adjusted EBITDA. With several active projects prospectively needing additional REV drying capacity this year, many of which large scale, we're optimistic about our prospects and I shared numerous royalty partner updates that I hope builds confidence amongst our stakeholder group regarding the future of EnWave. I certainly continue to be excited about our commercial opportunities. And now I'd like to open up the call for your questions. Operator, please provide the appropriate instructions.

Operator: Thank you [Operator Instructions]. If there are any outstanding questions at the end of the call, the company will be happy to take them by email at ir@enwave.net. Our first question today is from the line of Bart Goemaere with BeursTips. Please proceed with your question.

Bart Goemaere: Hi, Brent. This is Bard Goemaere from BeursTips in Belgium. I have a question regarding the installation pipeline in the MD&A. There seems to be one big machine of 120 kilowatts for BranchOut Food in production. But as I read in the MD&A under the revenue section, it stated that two big machines are under production and one small one. So can you please clarify this and state to me how many machines are under production right now and how many that you have in inventory that are not sold yet?

Dylan Murray: So, BranchOut Foods, what you're referring to and Brent mentioned in his commentary, there's a machine that's contracted to begin fabrication this summer of 2024. And at this time, fabrication of that machine has not started. In terms of your second question, how many machines do we have built in inventory? We continue to have that one large scale machine that was repatriated from NutraDried.

Bart Goemaere: Okay. And the number of small ones?

Brent Charleton: Number of small machines is in and around 10 at this point. Ten machines that either have come back from rental agreements or have are setting inventory. We have a few near-term projects with 10-kilowatt units that should significantly deplete that number, getting it down to below four machines, in the very near term. So multiple 10 kilowatts are likely to be needed for singular royalty partners to begin commercial production prior to respectively receiving a largescale machine thereafter. So, what we'd like to see of course is immediacy on the deployer 10 kilowatts to be used during the time period from purchase order, fabrication, delivery and commissioning of largescale machines, which as I just stated several of those opportunities are in our pipeline near term.

Bart Goemaere: Okay. And then a second question can give me an overview of the state of the cannabis market in the United States because it seems that the legislation is going to change over there. So do you feel in contact with cannabis companies in the United States that there is a change imminent?

Brent Charleton: I think the ability for us to generate new opportunities in the U.S. Cannabis market is not simply to do with the legislation changing for the positive on a federal basis. More so, it was about connecting with competent operators who had the available capital to do the trials and test work on the machinery. Now we've taken a different strategic path in offering 10-kilowatt units to all of the major multi state operators for test work. But even then they've been so inundated with trying to right size their own business and control expenses that it's really only been the past three to four months, we've had feedback and an appetite to move forward. So we announced recently Aurora a U.S. based cannabis company to trial our product. And we anticipate that additional projects like that will come to fruition this fiscal year, some of which with some of the bigger companies given that they finally see some calm waters ahead for their own operations.

Bart Goemaere: Okay. Thanks. I have no more further questions.

Operator: Thank you. I will turn the call back over to Brent Charleton, CEO, for any closing remarks.

Brent Charleton: I just want to thank everybody for joining today. If you have questions that you'd like to address directly offline, please do reach out to either Dylan or myself after the call either today or next week. This concludes today's teleconference.

Operator: Thank you. This concludes today's teleconference. [Operator Closing Remarks].

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