Advanced Emissions Solutions, Inc.

Q1 2021 Earnings Conference Call

5/11/2021

spk01: And thank you for standing by. Welcome to the Advanced Admission Solutions Quarter 1 2021 Earnings Call. At this time, all participants are in a listen-only mode. If you require any further assistance, please press Start Zero. I would now like to hand the conference over to Ryan Coleman, Investor Relations. Please go ahead.
spk03: Thank you, and good morning, everyone. And thanks for joining us today for our first quarter 2021 earnings results call. With me on the call today are Greg Markin, Interim President, Chief Executive Officer and Treasurer, and Morgan Fields, Vice President of Accounting. This conference 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 may contact Alpha IR Group for investor relations support at 312-445-2870. Let me remind you that the presentation and remarks made today include forward-looking statements as defined in Section 21E of the Securities 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 to 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 in our Form 10-Q for the quarter ended March 31, 2021, 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 reasons. In addition, it's very important to review the presentation and today's remarks in conjunction with the GAAP references in the financial statements. So with that, I'll turn the call over to Greg.
spk04: Thanks, Brian, and thanks to everyone for joining us this morning. Before we begin, I'd like to address a few items. First, I'd like to introduce and welcome Morgan Fields, our new Vice President of Accounting. As I mentioned on our fourth quarter call, Chris Bellino retired at the end of March, at which time Morgan joined us and will be leading our accounting team. Morgan brings nearly 20 years of corporate accounting and public company experience, most recently in a consultant capacity at Eliasson Group, where we worked frequently with her on strategic projects over the past few years. Thus, she joins us with an in-depth knowledge of the company. We're very excited to have her as an official member of the team. Second, a quick update on the previously announced incident at our Red River plant. On April 22nd, there was an unfortunate incident at our Red River manufacturing site in Louisiana that resulted in an isolated fire in one of the plant's coal handling systems. The fire resulted in non-life-threatening injuries to two of our team members. Thankfully, the decisive action taken by both on-site personnel as well as local first responders contained and limited the impacts that could have occurred that day. Also, after approximately one week of downtime, the plant is now fully operational. We are also able to continue to meet our production requirements and client obligations through existing inventory and other sources without further interruption. Based on the downtime, we estimate the cash flow impact, including maintenance and repairs, capital expenditures, inventory replacement due to lost production and other items is not expected to exceed $3 million. We continue to conduct our own internal investigation into the incident and we are working alongside regulators as needed. I'd like to again thank our team members for their swift action that day and their commitment to the safety of all plant personnel. And lastly, concurrent with our announcement of our first quarter results yesterday, we announced that we had initiated a strategic alternatives review to evaluate a range of opportunities for the business in our effort to maximize shareholder value. I'll talk a bit more about this decision in a moment. With that, let's go to our first quarter highlights on slide three. Yesterday afternoon, we reported results that showed solid performance from Tenuum Group, as well as a steady sequential and year-over-year improvement in our APT segment resulting from the proactive efforts we have made to strengthen that business. Distributions and equity earnings were strong, and both exceeded levels from the first quarter of 2020. Loyalty earnings in the RC segment adjusted even as each grew by 33% and 37% respectively. In our APT segment, our production and sales volumes have continued to rise and have exceeded our internal forecast for four months now. The revenue for this segment was nearly double that of the prior year, helped by the Cabot supply agreement we announced in September, as well as our growth in non-power generation markets, such as water and certain industrial applications. We also saw higher natural gas prices in the first quarter, partially driven by colder temperatures across the U.S., which positively impacted the coal-powered power generation and related demand for our products by those customers. The improvements we have made with our capacity utilization is also allowing us to more efficiently capture the sophisticated nature of the plant as the segment's profitability has much improved from one year ago. Gross profit was $4.6 million compared to a loss of $2.3 million last year. Additionally, the segment's EBITDA was $2.2 million in the first quarter compared to a loss of $5 million last year. From a consolidated perspective, our net income was $13.7 million for the first quarter compared to a loss of $1.9 million one year ago. That increase was predominantly the result of the increase in earnings from equity method investments as well as higher consumables revenue. Our consolidated adjusted EBITDA was also favorably impacted and was $26.1 million compared to $10.8 million. Regarding our capital allocation, we continue to prioritize debt reduction, liquidity, and investing organically to improve our manufacturing capabilities. We reduced our term loan balance by $10 million in a quarter and have just $6 million remaining on that loan, which will be repaid this quarter without any penalty. We remain focused on cost containment and have taken actions during the year as appropriate, maintaining our pause on all non-core capital spending, and will continue to evaluate our go-forward cost structure relative to business activities. Meanwhile, Tenuum remains focused on much of the same as they align their cost structure to prepare to wind down the businesses with the planned expiration of the production tax credit generation period at the end of this year. Our focus on cost management has allowed us to build a strong cash position. We now have $52.2 million of cash, cash equivalents and restricted cash on our balance sheet. That compares to $35.9 million as of December 31, 2020. Turning to our outlook, we expect to collect between $50 million and $60 million of after-tax cash flows from our refined coal segment, which is net of our first quarter collections. We expect to see further improvement in our APT segment as we are now turning to optimizing our current product mix to enhance the earning profile of the segment. And as I mentioned, we initiated a strategic alternatives process to evaluate the opportunities available to us to maximize shareholder value. As we have discussed on our past several calls, we have made great progress growing our Red River Plants capacity utilization, diversifying our product mix, and bolstering our financial position through our focus on repaying our term loan and growing our cash balances. And we possess the premier asset in this industry. We believe this leads us with a unique opportunity to evaluate the options available to us from a position of strength. We will, of course, continue to run this business with the efficiency and execution we have been committed to. The intention is to complete the strategic review process in a timely fashion. However, there is no assurance that the review process will result in pursuing or completing any transaction. We will provide updates as appropriate as the process unfolds. Overall, we are happy with our start to 2021 and the steady improvement in our APT segment. We remain on a solid path to fortify our business for our post-refined future. We expect the earnings profile of our APT segment to improve in 2021, and we have a solid line of sight to the $50 to $60 million of after-tax RC cash flows through the eventual wind-down of tenuim. With that, I'll turn the call over to Morgan to review our first quarter financial performance in greater detail.
spk02: Thank you, Greg, and I'm excited to be part of this team. Let's turn to slide four for our financial review. First quarter earnings from equity method investments was $18.3 million compared to $8.3 million in the first quarter of 2020. The increase in earnings is first attributable to distributions requiring the earnings as a result of distribution continuum group being in excess of carrying value of the investment. and therefore excess distributions are recognized as equity method earnings in the period the distributions occur. Kenyon Group also had increased RC facilities due to three new RC facilities added in 2020. First quarter revenues totaled $21.1 million compared to $12.3 million in the prior year. The increase in revenue was primarily the result of higher sales of consumables, which increased 85% compared to last year, as well as higher royalty income, which grew 33%. First quarter royalty earnings continuum group were $4.1 million compared to $3 million for the first quarter of 2020. Royalty income is based upon a percentage of the per ton pre-tax margin, inclusive of impacts related to depreciation expense and other allocable expenses. We currently have 23 RFP facilities adjusted with 17 that are generating royalties at a higher rate per ton than last year at this time. First quarter net income was 13.7 million or 75 cents per fully diluted share compared to a net loss of 1.9 million or 11 cents per fully diluted share in the first quarter of 2020. The increase in net income was primarily driven by the increase in earnings from equity method investments as well as by higher consumables revenue and royalty earnings. First quarter consolidated adjusted EBITDA was $26.1 million compared to $10.8 million in 2020. The increase is driven by the increased distribution continuum as well as higher consumables revenue compared to the first quarter of 2020. We ended the quarter with a cash balance inclusive of restricted cash of $52.2 million an increase of $16.3 million compared to $35.9 million as of November 31, 2020. $10 million of our cash remains restricted related to the terms of our surety bonds, and $6 million is related to borrowing requirements. We have also continued to pay down the balance of our term loans and made a $10 million payment to reduce the principal bonds down to $6 million. As Greg mentioned, we expect to pay off the final $6 million here in the second quarter. Total borrowing can now stand at $14 million compared to $24 million at year-end 2020. That $14 million is comprised of the $6 million term loan, 3.3 million funds that were secured from the SBA's Potentially Forgivable Loan Program, while the remainder is comprised of finance leases. Overall, we are pleased with the improved financial position as we remain focused on our cost structure, continue to build our cash balance, reduce our outstanding borrowing, and improve the earnings profile of the APT segment. We expect the APT segment's total revenue to grow as we distill our production commitments related to the supplier agreements we have signed with Cabot and continue to optimize our product mix. We expect that top line growth to yield better operating leverage and margin performance. I'll now turn the call back to Greg for his closing remarks.
spk04: Thank you, Morgan. Turning to slide five, you can see our expected future RC cash flows. Based on the 23 investment facilities as a quarter end and cash distributions received during the first quarter, we are updating our expectation of future after-tax cash flows to the company between $50 million and $60 million. Absent an unexpected change to the duration of the Section 45 tax credit generation period, Tinuum does not expect to obtain additional tax equity investors for any incremental facilities. Slide 6 reflects the APT growth channels we have been discussing where we are either currently active or have identified as future opportunities. When we acquired Carbon Solutions in December of 2018, we immediately became the go-to provider of activated carbon solutions for power plants that needed to meet mercury air toxic standards. Since that time, coal-fired generation has declined faster in both industry forecasts as well as our forecasts at the time of the acquisition. Abundant alternative fuel sources and competitively priced natural gas led to coal-to-gas switching. To counter the headwinds to our business associated with that dynamic, we engaged in an aggressive effort to diversify our mix in the commercial applications for our products. We since have generated solid traction in other markets, industries such as manufacturing and waste management that are bound by emissions caps. We have also seen better than expected share gains in water purification, and we continue to grow and exceed our forecast. We are also seeing early successes, other growing market opportunities, utilizing both existing and developing product technologies and capabilities that may provide earnings opportunities in areas where the historical carbon solutions business had not competed. The APD segment's recent performance and ongoing strength has obviously been positively impacted by the two agreements we have entered into with Cabot. As a reminder, in September, we entered into a 15-year agreement to supply Cabot North Carolina the Cabot North American subsidiary with lignite-activated carbon products, including PAC and GAC. In addition, in February we announced that we had entered into a separate 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. We believe that geographic expansion offered by this 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. These two supply agreements validate our competitive position in the market, as well as the opportunity we see for our product solutions going forward, and we are fortunate to have an established and committed business partner in Cabot going forward. These diversification efforts also played a critical role in growing our utilization rate to a level more in line with our longer-term run rate, which is resulting in the improved profitability we are now seeing for the segment. As a result of our internal actions, in addition to the North American Cabot Supply Agreement, the APT segment is yielding material incremental volume and better operating leverage at our Red River plant, while also expanding our in-customer markets product portfolio. As the world's need for sophisticated pollution control solutions grows, we expect to be a provider of choice for these technologies given our expertise and the quality and scale of our assets. Looking ahead, we believe additional opportunities will present themselves and our competitive position in the industry leads us well positioned to capitalize on them. Slide seven provides an update on our capital allocation program. We implemented our shareholder return initiatives during the second quarter of 2017, and since that time have returned $106.4 million to shareholders via dividends and share repurchases. We've also paid down $64 million of the $70 million term loan that funded the acquisition of Carbon Solutions. In the near term, paying off the term loan liquidity, investing in our APT segment, and shareholder value maximization through the strategic alternatives process will remain priorities. And finally, slide eight reiterates our priorities for the remainder of the year. Our first priority is to continue to protect our net RC cash flows. Tenuum is taking actions to ensure they continue to produce product while also updating their organization and cost structure for the upcoming winding down of operations. We will simultaneously leverage our Red River plant and its best-in-class characteristics to optimize our capacity to generate improved operating leverage. Part of this will be meeting our commitments to our supply agreements with Cabot, identifying opportunities to improve earnings potential through customer and product mix, and maintaining the focus on our cost structure relative to go-forward business activities. Lastly, we are reiterating near-term capital allocation focused on risk mitigation, cash preservation, as well as necessary organic investment in our activated carbon business. We will continue to deleverage, but the shareholder return component of our capital allocation plan remains on hold to preserve liquidity and ensure we are investing behind our strategic initiatives. We will also aim to complete the strategic alternative review process in a timely manner while ensuring we continue to run our business efficiently. With that, I'll turn the call back over to Ryan to move us to Q&A.
spk03: As many of you may have seen, we included at the bottom of the conference call announcement press release, as well as yesterday's earnings press release, an invitation to submit your questions ahead of time to be asked on today's call. Thank you to those of you who sent your questions. For future reference, we will likely continue this practice on upcoming earnings calls and invite you to submit your questions next time. With that, our first question that we received reads as follows. Net of the $6 million remaining on the term loan, can you give us a sense of where the roughly $50 million of RC cash flows will be deployed this year? Why not reinstitute a smaller dividend at $2 to $3 million per quarter?
spk04: Our total savings are $14 million, so net of that figure, we're focused on continuing to improve our manufacturing operations and related financial performance. so that we continue to be able to meet our customer commitments, such as the Cabot supply agreement. Additionally, as with any manufacturing operation, there is also maintenance capex for the operating facility, which we estimate to be about $5 million on a normalized basis. Additionally, as we mentioned, we've announced a strategic alternatives review So it is unlikely that we would reinstate the dividend or shareholder return component of our capital allocation until that process has concluded and have a potential continuous shareholder return. Once we have greater clarity on that front, we can evaluate the next step forward and the best way to maximize shareholder value.
spk03: The next question is, what is the current product mix between power generation, industrial, and water applications, and how does that compare to when you bought ADA Carbon Solutions in 2018?
spk04: Thanks, Ryan. We generally think about our product mix in four broad buckets, power generation, industrial, water, and then lastly, the volumes related to our supply agreements. Although we don't disclose the breakdown between our product mix, we can say that as of today, we have diversified away from the structurally more challenged power generation market, and we're selling into a much more balanced mix of commercial markets. With our continued growth, our forecasted volumes for 2021 are the highest and most diversified we have owned the plant.
spk03: And then a final question. It's been two and a half years since the carbon solutions acquisition. We now just have three quarters left of collecting the refined coal cash flows. Now that you're at a capacity utilization rate more in line with longer-term expectations, can you provide a rough estimate of the EBITDA margin profile of the APT segment, or what is your target margin for that business?
spk04: So in the two years preceding our acquisition of Carbon Solutions, the business operated at an adjusted EBITDA margin of just less than about 20%. We have discussed the decline in coal-fired power generation, pressure on selling prices, and our need to immediately pivot to adjacent markets hampered the productivity of the Red River plant. After several quarters of operating losses and having improved our target utilization rate, we reported an adjusted EBITDA margin for the APT segment 13% in Q1 here. And it continues to trend in the right direction. Additionally, as we cycle through inventory that was produced at higher cost per unit in the past periods, we expect the margin to continue to grow from the increased utilization of the plant. And then over the longer term, we can continue to operate the business and improve margins as we more fully capture the sophisticated nature of the plant improve customer and product mix and continue to evaluate ways to improve our operations thanks greg and thanks again to those of you that submitted your questions i'll turn the call back to greg for his closing remarks thanks ryan and thanks to everyone for joining the call this morning and for your continued support i look forward to updating everyone throughout 2021.
spk01: This concludes it.
Disclaimer

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