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spk01: hello and welcome to the advanced emissions solutions first quarter 2022 earnings call my name is lauren and i will be coordinating your call today i will now hand you over to host ryan coleman with investor relations to begin ryan please go ahead thank you lauren and good morning everyone thank you for joining us today for our first quarter 2022 earnings results call with me on the call today are greg markin chief executive officer president and treasurer
spk03: as well as Morgan Fields, Chief Accounting Officer. This conference call is being webcasted live within the investor section of our website. A downloadable version of today's presentation is available there as well. A webcast replay will also be available on the 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 10Q for the quarter ended March 31st, 2022, and other filings with the Securities and Exchange Commission. Except as expressly required by 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 is especially important to review the presentation and today's remarks in conjunction with the GAAP references in the financial statements. With that, I would like to turn the call over to Greg.
spk04: Thank you, Ryan, and thanks to everyone for joining us this morning. Before we discuss our results, I would like to take a moment to remind everyone listening that as of December 31, 2021, all of the remaining refined coal facilities reach the end of their respective tax credit generation periods. As a result, we will no longer have separate reportable segments for our investments with Tenuum Group and Tenuum Services and will only report our results on a consolidated basis going forward. Turning to our first quarter highlights on slide three. Demand for our activated carbon technologies remained strong throughout the first quarter supported by both macroeconomic and industry factors. Sales of consumable products were $26.4 million, which reflects year-over-year growth of 42%. Our gross margin was 18.5% compared to 24.6% in the prior year as the need to supplement production with third-party sources of activated carbon to meet customer demand increases our average product cost as the average cost of third-party activated carbon purchases is higher than the cost of producing comparable products in-house. We recorded a net loss for the period of $3 million compared to net income of $13.7 million in the prior year. Adjusted EBITDA was $0.9 million compared to $26.1 million on a year-over-year basis. The declines in both earnings and adjusted EBITDA are most materially the direct result of our reduced distributions and earnings from Tenuum Group and Tenuum Services compared to the prior year due to the wind down of our former refined coal segment. Tenuum's first quarter 2022 distributions to ADES totaled $2.5 million, which was in line with our expectations. With strong capacity utilization at our operating facilities, we continue to source supplemental inventory from third parties to meet sustained customer demand. Importantly, production volume at our Red River plant exceeded our internal expectations for the quarter, allowing us to increase inventory levels within the quarter as we prepare for the seasonally strong upcoming summer months. As a result, we are feeling incrementally more comfortable with our inventory position and our ability to more efficiently meet customer obligations. However, we do anticipate general inventory tightness and supply chain challenges to remain in effect throughout 2022, and we expect these cost pressures to continue to impact margins for the remainder of the year. We are working to offset these cost pressures through price increases related to our consumable products previously announced over the past 12 months. We have maintained high renewal rates on current contracts and we have been pleased with our ability to negotiate more favorable contractual terms as those contracts have come up for renewal or as new business opportunities are pursued. As a result, we have seen our average selling price trend higher over the past few quarters, which is partially offsetting cost pressures related to areas such as inventory and logistics. The more holistic structural changes that 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. However, as we discussed in March, the turnover of our contractual portfolio would generally occur over the course of three to four years based on general contract durations within our customer base. Regarding our capital allocation, our priority remains the organic investment in our manufacturing capabilities to ensure production, improving the operating profile of our manufacturing assets, and fulfilling customer obligations. We ended the first quarter with a cash balance, including restricted cash, of $89.8 million, and our only remaining debt outstanding are finance lease liabilities, totaling $3.9 million. As it relates to our strategic review, We remain pleased with the ongoing progress to evaluate opportunities available to us to maximize shareholder value. We have stated since day one that there is no timetable for the conclusion of this process and that its continuation has in no way impeded our day-to-day operations or detracted from our focus on enhancing the long-term profitability of our Red River plant. We are encouraged with where the process currently stands and will provide updates as appropriate going forward. Turning to our outlook for the remainder of 2022, we expect our top line to remain strong as demand for our activated carbon technologies has been robust and we continue to improve our overall contractual terms on contracts. As stated previously, our margins are expected to remain under pressure due to tight inventory conditions and the anticipated full year impact of incremental carbon purchases to supplement inventory. as well as broader supply chain challenges that are applying upward pressure on costs related to transportation and freight, as well as other necessary product inputs. As I mentioned, we continue to seek to offset these pressures through overall improvements in commercial terms, product mix optimization, and top grading our overall customer mix. Our inventory position has improved incrementally, and we are cautiously optimistic in our ability to realize further improvements in the coming quarters. Lastly, we expect to collect net after-tax cash flows from Tenuum of between $0.5 to $1 million in the second quarter of 2022. Tenuum is currently in the process of winding down its business as the end of the Section 45 tax credit generation period occurred at the end of 2021. Utilities that had previously leveraged the production tax credits to meet emission standards are transitioning to other methods of meeting requisite emissions limits. While these refined coal facilities have reached the end of their tax credit generation period, many will remain in place and some may be utilized for the application of our front end chemistry to feedstock coal. A number of these utility customers have already begun to purchase our front end technology or activated carbon products, which will help to drive incremental revenue and margin on a go forward basis. We continue to transition these customers to our front end technology and activated carbon products in our solutions are competitive. No previous 10UM 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 in the adoption of our products. With that, I will turn the call over to Morgan to review our first quarter financial performance in greater detail.
spk02: Thank you, Greg. Slide four provides a snapshot of our first quarter financial performance. First quarter revenues and cost of revenues were $26.4 million and $21.5 million, respectively, compared to $22.6 million and $14 million for the first quarter of 2021. The increase in revenue was the result of a $7.9 million increase in the sales of consumable products, which more than offset the revenue benefit of $4.1 million in prior year royalty earnings from the former refined coal segment. We collected our final royalty payment during the first quarter of 2022 related to royalties earned in the fourth quarter of 2021. First quarter other operating expenses were $8.2 million compared to $8.3 million for the first quarter of 2021. The decline was primarily the result of lower depreciation amortization expense, which was partially offset by higher payroll and benefits, as well as higher legal and professional fees, generally related to the strategic process. First quarter earnings from equity method investments were $0.8 million compared to $18.3 million for the first quarter of 2021. The decrease in earnings from equity method investments is the result of all remaining invested refined coal facilities reaching the end of their tax generation period as of December 31, 2021. First quarter interest expense was $0.1 million compared to $0.8 million in the first quarter of 2021. The decrease in interest expense was primarily driven by the full repayment of the company's senior term loan during the second quarter of 2021. The company did not recognize income tax benefit or expense for the first quarter of 2022 compared to income tax expense of $4.5 million for the first quarter of 2021. The company reported a net loss of $3 million for the first quarter of 2022 compared to net income of $13.7 million for the first quarter of 2021. The change was primarily driven by lower earnings from equity method investments as a result of the wind down of the tenuum investments. First quarter consolidated adjusted EBITDA was $0.9 million compared to $26.1 million in the prior year. The decrease in adjusted EBITDA was primarily the result of a decline in earnings from the former RC segment related to our tenuum investments, which contributed $27.2 million of adjusted EBITDA during the first quarter of 2021. As of March 31, 2022, our cash balances, including restricted cash, totaled $89.8 million, an increase of $1 million compared to the prior year. The restricted cash stems from our surety bond and the requirement to post collateral of $10 million for the obligations due under the reclamation contract related to the mine in Marshall, Texas. The company's only debt outstanding are finance lease obligations, which totaled $3.9 million as of the end of the quarter. Our total obligation related to reclamation activities for the Marshall and Five Forks mines currently stands at $8.3 million. Reclamation activity at the Marshall Mine remains ahead of schedule, and as a result, we have attained cumulative savings to date of approximately $2.7 million. Additionally, due to Norwich's change of control occurring in the first quarter, we collected $10.6 million of reimbursements related to Norwich's share of the Marshall Mine reclamation costs, shared capital payments, and other amounts owed from Norwich to a third party. And now I will turn the call back over to Greg.
spk04: Thank you, Morgan. Slide 5 reflects the activated carbon growth channels and market opportunities we have been discussing, where we are either currently active or have identified future growth opportunities. Historically, we have been the North American provider of choice in the mercury removal market related to power generation. Today we possess a much more diversified commercial in-market mix. After considerable time and effort, growing and expanding our commercial and technical relationships, and conducting product tests with new potential customers in the industrial and water markets. We remain fully committed to our business partners and will continue to invest in expanding and further developing these relationships. Our team continues to build upon the progress in these adjacent markets, which are also subject to regulatory compliance thresholds and purification standards. We also continue to see strong customer interest in other growing market opportunities utilizing both existing and developing product technologies and capabilities that may provide earnings opportunities in areas where the legacy carbon solutions business had not previously competed. Emerging areas may provide these additional opportunities, which includes our testing within the groundwater remediation market. We remain excited about this opportunity given our progress to date. Market conditions over the past three years have proven the best in class nature of our assets and have allowed us to manage industry headwinds better than most other producers. We are and expect to continue to be a leading provider of choice for these activated carbon technologies and believe our strong financial position and superior assets have us well positioned going forward. For the full year 2022, we expect our consumables revenue to be comparable with 2021 with the potential for incremental growth as high demand for our power generation customers continues and as we continue to see an overall improvement in customer and product mix. And finally, slide nine outlines our priorities for 2022. Our first priority is to ensure the long-term profitability of our Red River plant and manufacturing operations. We will do this by continuing to optimize our highly efficient, low-cost, and world-class manufacturing facilities. This includes driving high utilization rates and optimizing product mix to further enhance the long-term profitability. Additionally, we will work to enhance our customer mix and structurally upgrade our customer contract terms. This will involve ongoing improvement to pricing as well as expanding volume commitments and protections which will allow us to offset headwinds we may face relating to building back inventory levels and overall supply chain challenges. Aside from our core focus within the activated carbon markets we have historically served, we will also work to accelerate the progress we made in 2021 and look to further diversify product and customer mix through ongoing investment in new product development. Lastly, we will remain vigilant for additional rationalization opportunities and supply agreements to improve our overall market share. Our second priority is to allocate our cash flows and assets to drive shareholder value. We will invest organically to enhance the operating profile at Red River, and we will work to seek a conclusion to our strategic alternatives review that maximizes shareholder value. With that, I will turn the call back over to Ryan to move us to Q&A.
spk03: Thanks, Greg. Similar to past quarters, we included an invitation to submit questions ahead of time at the bottom of the conference call announcement press release, as well as yesterday afternoon's earnings press release. Thank you to those of you who continue to send in your questions, and we invite all listeners to submit their questions going forward. Our first question, when would you expect outsourcing of activated carbon from third parties to end, and is there anything ADES can do to grow capacity in the meantime?
spk04: We expect to continue to purchase carbons from third parties at higher levels throughout the remainder of 2022 when compared to historical periods. We will continue to evaluate market conditions, normalized inventory levels, and internal production capabilities as we plan for 2023, which will help us estimate the required levels of third party sourcing that will likely be needed going forward. As it relates to growing capacity, We continue to work to improve and optimize the Red River facility production capabilities and have seen volume improvements during Q1 of 2022 that have allowed us to increase our inventory levels while meeting current demand. We will continue to optimize our plant operations in order to realize higher production capacities through the remainder of the year and into the future.
spk03: Our second question, is there cost sharing with Cabot for obtaining the potentially high cost outsourced product? And is there anything related to Cabot's change in control that could alter the terms of the master supply agreement?
spk04: Each year, the prices for the products sold to NORIT, formerly known as Cabot, are reevaluated and adjusted for the following year based on anticipated volumes, the impacts of such volumes on product mix manufacturing, and related production costs. Regarding the second part of the question, aside from the applicable change in control payments that have occurred during the first quarter of 2022, which were contemplated when the master supply agreement was originally executed, we continue to operate under the terms of the master supply agreement as written as we are required to fulfill our obligations to NORIT.
spk03: And our third question, it's now been one year since the strategic review announcement with no public updates. Is there anything that you can offer investors on the direction of the strategic review process? It's a great question.
spk04: While we are certainly sympathetic to investors' desire for more detail regarding the status of our strategic review, we are also very appreciative of their patience. It has always been our desire and intention to provide updates as appropriate, and required by public company regulations. That being said, we have no timeline for the process's ultimate conclusion. It is very difficult to predict the timing or the evolution of a process like this, given the sensitivity of the discussions involved, as well as the need to preserve certain confidentialities. While the process has drawn out, the fact remains that we are pleased with where things stand within the process and are hopeful that we can provide an update soon. Despite the duration of the process, it has not detracted from our ability to run the business as demonstrated by the results and operational improvements achieved within the business during this past year.
spk03: Thank you, Greg. And thanks again to everyone who submitted their questions. I'll turn the call back over to Greg for closing remarks.
spk04: Thanks, Ryan. And thanks to everyone for joining the call this morning and for your continued support. We look forward to updating everyone next quarter.
spk01: This concludes today's call. Thank you for joining. You may now disconnect your lines.
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