Advanced Emissions Solutions, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Advanced Emissions Solutions Q4 2020 earnings call. At this time, all participants' lines are in a listen-only mode. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Wyatt Turk, Investor Relations. Thank you. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us today for our fourth quarter and full year 2020 earnings results call. With me on the call today are Greg Markin, interim president, chief executive officer and treasurer, and Chris Bellino, chief accounting officer. This call is being webcast live within the investor section of our website, and a downloadable version of today's presentation is available there as well. A webcast replay will also be available on our site, and you can contact Alpha R Group for investor relations support at 312-445-2870. Let me remind you that the presentation or remarks made today include four looking statements defined in Section 21E of the Security Exchange Act. These statements are based on information currently available to us and involve risks and uncertainties that could cause actual future results, performance, and business prospects and opportunities that differ materially from those expressed in or implied by these statements. These risks and uncertainties include, but are not limited to, those factors identified on slide two of today's slide presentation. And our Form 10-K for the year ended December 31st, 2020, and other filings with the Securities and Exchange Commission. Except as expressly required by the securities laws, the company undertakes no obligation to update those factors or any forward-looking statements to reflect future events, developments, or change circumstances, or for any other reason. In addition, it is very important to review the presentation and today's remarks in conjunction with the GAAP references in the financial statements. So with that, I'd like to turn the call over to Greg. Thanks, Wyatt.

And thanks to everyone for joining us this morning. Before we begin, I would like to take a moment to thank Chris Bolino, who has joined me on our past few earnings calls and will be retiring at the end of the month. Chris has been with ADES for six years and has served in a variety of roles during that time and has been integral to the company's success. We wish her well in retirement and thank her for her service to the company. After market closed yesterday, we published our fourth quarter and full year results that were aligned with our expectations. Tenuum was able to complete two additional transactions in the fourth quarter, bringing our invested facilities up to 23 now, which continues to support our forecasted after-tax cash flows and our investment in our go-forward strategy as a provider of choice for activated carbon solutions. The performance of our activated carbon business exceeded the fourth quarter of 2019 and we are carrying encouraging business momentum into 2021. We once again beat our internal volume forecast and are now turning to optimizing our current product mix to enhance the earnings profile of the segment. And just last month, we announced a second supply agreement with Cabot to sell our activated carbon and other products through Cabot sales channels in Europe, the Middle East, and Africa, which is incremental to the 15-year master supply agreement we announced in September. I'll talk more about the details, strategy, and progress around these two agreements, but first let's turn to slide three for a high-level review of the quarter and year. Fourth quarter distributions from Tenuum totaled $20.2 million during the quarter, and royalty income totaled $3.5 million. Full year distributions totaled $62.4 million and full year royalties were $13.4 million. Fourth quarter distributions from Tenuum were up 18% based on new facility closures over the last year. On an annual basis, the lower full year distributions were the result of renegotiated contracts in the third quarter of 2019 that resulted in lower net lease payments to the company and timing of cash distributions from Tenuum. As we have discussed on past earnings calls, given the impacts of timing of revenue recognition and accelerated non-cash depreciation by tenuum, our equity earnings in 2020 were significantly reduced compared to the cash distributions we received. Because of that, we believe adjusted RC segment EBITDA helps to portray an additional year-over-year comparison of the earnings and associated cash flows of the segment. RC segment adjusted EBITDA for the fourth quarter increased 15% to 23.5 million compared to Q4 of last year. Full year RC segment adjusted EBITDA was 74.6 million compared to 89.3 million in 2019. Moving to the activated carbon business, I'd like to point out that we've renamed this segment to better reflect its long-term positioning and more expansive scope. We expect our solutions to serve far more markets than where we originally provided products upon acquiring carbon solutions. So what we previously called Power Generation and Industrials, or PGI, has now been updated to Advanced Purification Technologies, or APT for short. In the APT segment, our fourth quarter revenue was up roughly 25% to $14.9 million, while our segment operating income was $0.7 million. Adjusted EBITDA in the segment was $2.3 million, and improvement against a 1.4 million adjusted EBITDA loss in Q4 of last year. Our APT segment saw another strong quarter of execution with our existing customers and was positively impacted by the Cabot supply agreement. Our main focus over the past several quarters has been filling the plant's capacity. Having now obtained the capacity utilization level more in line with our longer term run rate, we are now beginning to pivot to a broader focus of moving upstream in terms of customer and product mix. This involves identifying margin accretive volume opportunities, which will enhance the margin and earnings profiles of the segment over time. Similar to the RC segment, competing alternative fuel sources also contributed to weakness in this segment in fiscal 2020. However, we have been able to largely offset this volume pressure as we have greatly diversified our product mix away from coal-fired power generation with the success we have had in industrial and water markets in addition to the Cabot Supply Agreement. We also saw higher natural gas prices during the fourth quarter as well as the early months of 2021, partially driven by colder temperatures across the U.S., which positively impacted coal-fired power generation and related demand for certain of our products by those customers. On that note, I would like to take a moment to acknowledge the energy crisis that occurred in Texas and the weather impacts across the southern plains. From an operational perspective, we were forced to limit certain operations, most significantly due to transportation constraints related to both incoming raw materials and outgoing finished product. Although we lost some product production due to these weather conditions, We had sufficient inventory to supply in situations that transportation and driver availability would allow, and we have since resumed normal operations. Our people did an amazing job of keeping our operations going and working with customers to deliver product, ultimately supporting the power generation and water markets to be able to continue serving their customers. From a consolidated perspective, our net income was $0.4 million for the fourth quarter, while our full year consolidated net loss was $20.3 million. That full year net loss was mainly the result of a $26 million impairment charge that we incurred in the second quarter, as well as income tax expense driven by an increase in the deferred tax asset valuation allowance. Our consolidated adjusted EBITDA was $23.4 million in the fourth quarter and $55.1 million in fiscal 2020. compared to $14.9 million and $66.5 million in the prior year periods, respectively. Regarding our capital allocation, we continue to prioritize debt reduction and cash preservation. We reduced our long-term loan balance to $16 million during the fourth quarter, and we expect to pay off the remaining balance before Q4 of this year. We remain focused on cost containment, maintaining our pause on all non-core capital spending, and we'll continue to evaluate our go-forward cost structure relative to business activities. Our focus was to prioritize liquidity and organic investment to ensure manufacturing capabilities, and we are pleased to say that we did not experience any significant business or manufacturing interruptions. During the year, we also restricted corporate travel, largely related to the pandemic, and limited backfilling open positions, in addition to other measures. Certain of these savings were offset by expenses we incurred throughout the year related to completing product testing and other matters related to securing the Cabot supply agreement. Irrespective of these impacts year over year, we reduced our other operating expenses by roughly 25% fourth quarter over fourth quarter and by 7% for the full year. Our focus on expense management helped us strengthen our balance sheet in 2020. our year-end cash balances, including restricted cash, totaled $35.9 million, an increase of $18.9 million from the prior year. However, working towards improvement in margins and EBITDA and a continued focus on cost structure will be key as we move into 2021. After the end of the fourth quarter, on February 4th, we announced that we had entered into an agreement with Cabot to supply a Cabot European subsidiary with Lignite activated carbon products and other ADES proprietary products used for mercury removal in utility and industrial coal-fired power plants in Europe, Turkey, the Middle East, and Africa. This agreement is separate and incremental to the 15-year supply agreement we announced with Cabot back in September. The two supply agreements we have announced over the past six months are a testament to the Red River plant's competitive position in the market, as well as the opportunity we see for our product solutions going forward. Upon signing the Cabot Supply Agreement at the end of September, we immediately began fulfilling our product commitments related to that agreement, and we are beginning to see the positive benefits of that deal. These collective agreements are an important step towards diversifying the revenue streams we will generate from the plant and capturing the value of the assets. We are fortunate to have an established and committed business partner in Cabot going forward. We expect the supply agreements with Cabot to materially improve the economics of our activated carbon assets and our consolidated financial performance. As we ramp up production over the next year, we expect that we will reduce our power generation exposure to less than 50% of our portfolio. While it's still too early to quantify the potential economic impact of the EMEA agreement we announced last month, mercury and other pollutant control regulations are coming online in the EU in 2021 and beyond. This creates a vital need for solutions like ours to ensure that industries are abiding by these new regulations. We expect to gain a clearer understanding of the financial impact as those regulations come online. However, we are confident that the geographic expansion offered by the agreement is an important step to further diversifying our revenue mix and further utilizing the plant's capacity, while also providing downside protection related to the ongoing pressure on power generation in North America. In addition to the diversification provided by these agreements, we are simultaneously continuing to bid in non-power generation markets, but our current business and product portfolio remains very much tied to power. The market remains challenged by cheap alternative fuel sources and the impact of the pandemic. We have spent considerable time and effort organically building out our product capabilities and internal sales infrastructure, and our offering has grown increasingly competitive in non-power generation markets like industrials and municipal water. As a result of these efforts, we have more than doubled our water-related volumes on an annualized basis year over year. It remains a smaller portion of our overall portfolio, but it is encouraging progress. But as I said earlier, to ensure the longer-term profitability and viability of the assets moving forward, we need to continue to increase both the diversification of our product mix as well as our customer mix. The addition of new applications, products, and customers will provide us better balance in the segment and will improve our margins as we scale the business over time. Overall, I am pleased with the strategic success we have achieved this year with our activated carbon assets and the groundwork we are laying for our post-refined coal future. We expect the earnings profile of our APT segment to improve in 2021, and we have a solid line of sight to the $70 to $90 million of after-tax refined coal cash flows. I'll talk more about our strategy and outlook, but first I'd like to turn the call over to Chris to review our fourth quarter and full year financial performance.