Advanced Emissions Solutions, Inc.

Hello all and a warm welcome to the Advanced Emissions Solutions Q4 2021 earnings call. My name is Lydia and I'll be your operator today. It's my pleasure to now hand you over to our host, Ryan Coleman with Investor Relations. Please go ahead when you're ready.

Thank you, Lydia. Good morning, everyone, and thank you for joining us today for our fourth quarter and full year 2021 earnings results call. With me on the call today are Greg Markin, Chief Executive Officer, President and Treasurer, as well as Morgan Fields, Chief Accounting Officer. This conference call is being webcast live within the investor section of the 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 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-K for the year ended December 31, 2021, and other filings of the Securities and Exchange Commission. Except as expressly required by securities laws, the company undertakes no obligation to update these factors or any forward-looking statements to reflect future events, developments, or change circumstances, or for any other reasons. In addition, it is very important to review the presentation and today's remarks in conjunction with the GAAP references in the financial statements. With that, I'd like to turn the call over to Greg.

Thank you, Ryan, and thanks to everyone for joining us this morning. Yesterday, after the close of markets, we reported our fourth quarter and full year results, which are highlighted on slide three. We closed 2021 with another strong quarter from our APT segment. which led to a record year for revenue as well as production volume at a Red River plant. High prices for alternative energy sources like natural gas have elevated the demand for our activated carbon products from PowerGen customers while we continue to grow within the industrial and water markets. Fourth quarter revenue for the APT segment totaled $23.3 million, an increase of 43% compared to the prior year. With capacity utilization high and strong revenue growth, we saw much improved operating leverage. Fourth quarter gross margin for the APT segment was 27.4% compared to 25.9% in the prior year. In addition, operating income was $0.8 million compared to 0.7 million in the prior year, which translates to an operating margin improvement of 20 basis points. APT segment adjusted EBITDA totaled $1.9 million compared to 2.3 million in the fourth quarter of 2020. Our segment margins, while significantly better on a full year basis than the prior year, remain pressured by the higher cost per unit we are currently experiencing as a result of sourcing external inventory to meet high customer demand. The requirements-based provisions of many of our customer contracts provide significant benefits. The contracts make us an exclusive provider of activated carbon products to each of our customers. However, when demand rises, we must fulfill that incremental demand. Coupled with the scheduled turnaround activity in Q2 2021, as well as other operating challenges we experienced during portions of the year, created tight inventory conditions throughout the year. With this as a backdrop, as well as much higher natural gas prices leading to gas to coal switching, we continue to work to build back inventories to a satisfactory level while meeting customer demand as we move into the new year. In addition, we are not immune from the global supply chain bottlenecks being experienced around the world, which is both complicating the process and increasing our raw material sourcing costs for our products. Having dealt with this inventory tightness and supply chain challenges for the past two quarters, we have proven our ability to navigate this landscape effectively. We continue to fully meet contractual obligations related to the elevated levels of customer demand. Additionally, We have maintained very high renewal rates with existing customers, and at the time of contract renewal have been pleased with our ability to realign product pricing and overall contractual terms to better reflect current market conditions. These structural changes we are making to our commercial contracts, including improved pricing, take or pay obligations, increased lead times, and volume protections, will better position the company for long-term success. In addition, we expect these structural changes to drive a steady upward trend in our average selling price over time as current contracts are renegotiated and or new business is won, which is helping to partially offset current raw material and logistics cost pressures along with changes in customer mix due to permanent plant closures among certain power generation customers. Within our RC segment, all of Tenuum's invested refined coal facilities reached the end of their tax credit generation period as of December 31st, 2021. Tenuum is currently in the process of winding down its business as it completes the reclamation activities for certain refined coal facilities, which we expect to be completed sometime during Q3 of 2022. During the fourth quarter, 10 UM distributions to ADES were aligned with our expectations and totaled $7.3 million compared to 20.2 million in the prior year. Royalty earnings from 10 UM group in the fourth quarter were $2.5 million compared to 3.5 million in the prior year. Fourth quarter refined coal segment adjusted EBIT in the fourth quarter was $9.6 million compared to 23.5 in 2020. The declines in royalty earnings and adjusted EBITDA are the result of fewer invested RC facilities, as some of those facilities reached the end of their tax credit generation period at earlier dates in 2021. For the total company, consolidated revenue was $25.8 million in the quarter, an increase of 30%, led by the strong performance of our APT segment. Our improved margins helped drive net income of $5.8 million, or 31 cents per diluted share. compared to $0.4 million or $0.02 per share in the prior year. Consolidated adjusted EBITDA was $9.1 million compared to $23.4 million in the prior year, driven by changes in the RC segment. Our balance sheet remains debt-free exclusive of finance leases utilized in operations. And as a result, our cash position grew significantly during 2021. Cash balances, including restricted cash, totaled $88.8 million as of the end of the year, which is an increase of $6.6 million from the end of Q3 and nearly 2.5 times higher than the end of 2020. Our capital allocation priority remains the organic investment in our manufacturing assets to meet customer demand and improve operating capabilities as we proceed with our strategic review. Net of our cash flows collected in Q4, we are updating our projected after-tax cash flows from the RC segment to be between $4 million and $5 million during the first half of 2022. That cash flow guidance is inclusive of associated wind-down costs from Tenuum. Those utilities that had previously leveraged the production tax credits to meet emission standards will need to pivot to another method or methods of meeting the requisite emissions limits. While these refined coal facilities have reached the end of their tax credit generation period, many will remain in place to be utilized for the application of our front-end chemistry to feed stock coal. Many of these utilities have already begun to purchase our front-end technology or activated carbon products, which will help drive incremental revenue and margin within our APT segment on a go-forward basis. We are early in the process of transitioning these customers to our front-end technology and activated carbon products. Our solutions remain competitive and no previous Tenuum customers that continue to utilize a front end solution were lost during the transition from refined coal. As such, we are pleased with our progress to date and the adoption of our products. Within our APT segment, we expect our top line to remain very strong in 2022 as demand has been robust. Our margins are expected to remain under pressure due to tight inventory conditions and the expected full year impact of incremental carbon purchases to supplement inventory, as well as broader supply chain challenges that are putting upward pressures on costs related to transportation and freight, as well as other necessary product inputs. As I mentioned, we will seek to offset these pressures through continued price increases and overall improvements in commercial terms, product mix optimization, and top grading our overall customer mix within our APT segment. but it remains clear that the segment is realizing its low-cost attributes. Lastly, as it relates to our strategic review, we remain pleased with the ongoing progress to evaluate the opportunities available to us to maximize shareholder value. As a reminder, we have no timetable for the conclusion of this process, but are focused on completing the process in an efficient manner. In the meantime, we remain focused on our priorities around enhancing the long-term profitability of our APT segment. With that, I'll turn the call over to Morgan to review our fourth quarter and full year financial performance in greater detail.