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spk02: Good morning, ladies and gentlemen, and welcome to the Charis Solutions Incorporated second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After today's presentation, we will conduct a question and answer session, and instructions will be given at that time if you would like to ask a question. I would now like to hand the call over to Steve Brehm, Vice President of Legal Affairs and Corporate Secretary for Charis Solutions. Please go ahead.
spk03: Thank you, operator. Good morning, everyone, and thank you for joining us today. We appreciate your participation in our second quarter 2022 earnings call and look forward to sharing our prepared remarks and answering your questions. We hope you've had a chance to review the press release we issued yesterday after the market closed. If not, you can find the press release and a supplemental investor presentation you may follow during our prepared remarks on the investor section of our website at www.shara.com or ir.shara.com. Joining me today on the call are Scott Sewell, SHARA's President and Chief Executive Officer, and Roger Shannon, Chief Financial Officer and Treasurer. Following their prepared remarks, we will conduct the customary question and answer session. Before we begin, I would like to remind you that our remarks regarding SHARA solutions include statements that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause the actual results to be materially different from those disclosed in our earnings releases and conference calls. Those risks include, among others, matters we have described in our earnings press release, as well as in our filings with the Securities and Exchange Commission, including our quarterly reports on Form 10-Q and our annual report on Form 10-K. We disclaim any obligation to update these forward-looking statements, except as required by law. During this conference call, we will refer to certain non-GAAP financial measures. We provide reconciliations to the nearest applicable GAAP measures in our earnings press release and supplemental presentation. Now, I would like to turn the call over to Scott Sewell, our President and Chief Executive Officer.
spk01: Thanks, Steve, and thanks to everyone for joining us on our earnings call this morning. Today, I'll provide some context on our business's exciting transformation, including the announcement of an exciting milestone, commentary on our backlog of work, and new awards. After that, I'll turn the call over to Roger, who will discuss our financial results. As I look at Char Solutions' business today, I cannot help but be amazed at the evolution of our company, and more importantly, the incredible market opportunities we have in front of us. Shara Solutions is not the company it was at the time of our IPO in 2018, or even what it was two years ago. The old Shara had two primary earning streams, remediation and compliance, and byproduct services, or the old fossil services. Those are still great businesses and present great opportunities for us, but today's Shara is so much more. As of August 2022, we have five dynamic earnings streams, more than double what we had just two years ago. In the two new earnings streams, environmental risk transfer and environmental source ash beneficiation technology are positioned to drive the company to greater growth and profitability. After years of anticipation and much hard work to prove out the technology, finalize the design and negotiate the first deployment We are thrilled to announce that we have been awarded and the parties have agreed on the principal terms of a long term contract for EnviroSource with a major utility in the western United States for the first commercial deployment of our ash beneficiation technology. We expect the full agreement to be signed imminently and that we will begin construction on the first unit in the second half of 2022 with commissioning of the unit in 2023. This is a major step for Shara Solutions. Shara Solutions' environmental source technology makes formerly unusable fly ash stored in ponds and landfills marketable to ready-mix concrete producers to be beneficially used in the production of concrete, providing a superior product at a lower cost. By reducing the need for Portland cement, a leading contributor of greenhouse gases, we believe this environmentally sustainable recycling initiative will save over 500,000 tons of CO2 from entering the atmosphere on projects similar in size to our recent announcement. Deployment of our innovative EnviroSource technology should also help reduce groundwater risk in and around current ash storage facilities. We see this first EnviroSource contract and deployment as just the beginning. With an estimated $3 billion addressable market for environmentally friendly Portland cement substitutes, and as the efforts to reduce greenhouse gases in the U.S. continue to accelerate, we believe there are substantial opportunities across the U.S., and even internationally, to deploy our envirosource beneficiation technology to address this need. We are currently in discussions with additional potential customers, and we hope to be announcing several more deployments soon. We believe our envirosource technology will have a tremendous impact on the future of our business and make a significant positive impact for the environment. The second business and income stream we have developed over the past two years is our environmental risk transfer business. We have talked a lot recently about our environmental risk transfer, or ERT, business line and the outstanding growth and cash flow generating opportunities we see for this business. Shara is uniquely positioned to grow and capitalize on this business. We believe no other competitor can match the combination of our ash remediation domain knowledge, demolition and decommissioning capabilities, safety culture, project management experience, land development vision, and commitment to sustaining and improving the environment. Utility customers know they can trust the Shara Environmental Redevelopment Group to get the job done correctly. safely, efficiently, and quickly. We have proven our ability to do this. For the citizens of communities where these shuttered, ash contaminated plants sit, they know that we will deliver something they can be proud of. Something that will benefit all members of the community, drive economic impact, increase the tax base, and create jobs while sustainably redeveloping the site for the betterment of the environment. We have also seen that our ERT projects create compelling cash flows and earnings for our company. So much of the payoff comes at the end of the projects when we sell the real estate parcels. We do typically get significant cash contributions up front and throughout the project as we sell the recycled scrap. Layering in more of these projects will smooth out and further increase our cash flows. Our Givens Creek ERT project continues ahead of schedule. and we expect to close on the sales of the remaining parcels of land over the second half of 2022 and into 2023. Additionally, we expect to complete the remediation by early 2023. We expect that the sale of the remaining parcels will generate over $20 million of additional cash flow and around $10 million of earnings. During the second quarter, we finalized the acquisition of two new ERP projects, Avon Lake and Cheswick, from GenOn Energy. Both of these projects are moving ahead rapidly. In July, we partnered with the mayor of Avon Lake and members of the Avon Lake Community Investment Corporation to publicly unveil our once-in-a-lifetime lakefront transformation project overview and initial redevelopment options to the citizens of the city of Avon Lake. The 300 citizens who attended the meeting were excited about the vision, and we received tremendous local press coverage. In addition to the positive community impacts, the expected returns from the Avon Lake and Cheswick ERTs are exceeding our original expectations. Scrap and equipment sales at both projects began in July and will accelerate over the remainder of the year and all of 2023. On the Cheswick ERT, we received $36 million in restricted and unrestricted cash upfront. This was almost $5 million more than the value of the asset retirement obligations we assumed, even before considering the scrap and land values. Though we had hoped to recognize this gain immediately in the quarter, we did record a $4.5 million deferred gain on cash received for the land over and above the asset retirement obligations. We will recognize this gain into income over the next few years as we perform the ARO and monetize the land. This gain and cash provided benefits from the project even before the start of operations. While we may not see this type of gain on every project, this highlights the favorable returns we expect and are seeing with ERT projects and why we continue to devote more resources to win more jobs. Though we are very excited about the opportunities we expect from these two new streams of earnings, we are also very bullish on our legacy business categories, remediation and compliance, byproduct services, and raw materials. We are winning new awards and building our backlog, all while continuing to expect that the opportunities within our $75 billion astromediation addressable market will accelerate due to the stronger actions by the U.S. EPA and individual states. As a result of this, we are pleased to announce that our year-to-date new awards has increased to $328 million for 2022. In addition to our exciting environmental source award, Since our last earnings call we announced new remediation compliance and byproduct service awards with three different customers across four states. Including a nine year multi pond asher mediation project, one of the largest and longest term projects in the company's history with a long term major southeastern utility customer. As I said before, it comes down to execution. Not only on projects already awarded, but in building that backlog of work through diligent attention to winning new work, tracking RFPs, and engaging the market continuously. We've also been busy in this regard. We now have $3.5 billion in bids currently pending across RNC byproduct services, including the BioSource, and ERT business lines that we expect to be awarded in the near future. We are working hard to win our fair share of these pending bids, many of which will go into the backlog of work that I will discuss. I'm also very pleased to announce that since the end of the first quarter, the total value of our future opportunities we see being put out for bid in the next two years has expanded from $8 billion to over $10 billion across our lines of business. These are opportunities that we are tracking that we believe will be put out for bid. Since our last call, we have seen increased market activity with respect to customer interactions, inquiries, and RFPs following the slowdown earlier this year resulting from the January 11, 2022 EPA announcement. Opportunities across all four of our business categories, particularly our environmental risk transfer business, are increasing. and our pace of new awards is accelerating again. We also expect parcel sales from our Givens Creek ERT projects to resume in the second half, along with the startup and scrap sales from our new Avon Lake and Cheswick ERTs. For the first time this quarter, we have released our backlog of contracted work for our remediation and compliance and byproduct services business lines. The backlog stands at $1.55 billion of contracted work with a 14-year runway to 2036. It's important to recognize that ERT projects and raw material sales are not included in this backlog. Raw material sales are not in the backlog because these materials are not sold under long-term contracts. Historically, however, they have contributed approximately $35 million annually, and we do expect these raw material sales to continue well into the future and provide a steady stream of income and cash. In fact, we expect our raw material sales in 2022 will grow over 30% from last year. While our ERTs are contracted work, earnings from these projects are not recorded through revenue, as we often remind, but rather flow through other income from ERT we sell the parcels and assets of the projects on a cash flow equivalent basis we estimate our existing ERT projects in process to be approximately 215 million dollars communicating our backlog is important for several reasons one is to give an indication of the significant base of existing work that extends well to the future and to which we continue to add new awards the second reason is to indicate the confidence we have in our remediation compliance and byproduct service business lines and their ability to generate revenue and cash flow as our ERT and EnviroSource opportunities ramp up. We trust that you will find this disclosure helpful and we expect to report our backlog quarterly as projects progress and new awards are announced and contracted. In summary, things are moving in the right direction. Though our second quarter continued to be impacted by a few project challenges relating to two long-term beneficial use projects and a timing delay of income recognition on ERT projects being pushed, we closed out several projects that now allow our business to move forward, and we continue to expect strong improvement in the second half. I hope you will agree that Shara's opportunities have never been stronger. Our business is robust, Backlog is increasing. We've stabilized on hiring people. Our commitment to our environmental sustainability and safety culture is unwavering, and our industry-leading team remains focused on delivering for you, our shareholders. With that, I'll turn it over to Roger Shannon, our CFO, to discuss our financial results.
spk04: Thanks, Scott. I'll continue with a review of our financial results and provide an update on cash flow, balance sheet, liquidity, and our 2022 guidance. Revenue increased to $77.1 million for the second quarter of 2022 as compared to $63.5 million for the second quarter of 2021. This increase was primarily driven by increases in raw material sales of $5.2 million resulting from an increase in shipments, Byproduct services revenue of $4 million resulting from the net commencement of new project work and increased ash production. And remediation and compliance services revenue of $4.4 million from the net commencement of new project work and a full quarter impact to certain projects that began during the three months ended June 30 2021. Gross profit decreased to $2.7 million for the second quarter of 2022 as compared to $6.9 million for the second quarter of 2021. Gross profit and gross profit margin were directly affected by several factors. Increased costs associated with the completion and demobilization of three legacy projects, as previously discussed on our last earnings call, continued into the second quarter. However, two of the projects have now been completed and the third is substantially complete. Additionally, startup challenges resulting from supply chain and logistics issues relating to the two large beneficial use projects previously discussed continued in the quarter as expected. The company continues to forecast improvement in these long-term projects in the second half of the year. We continue to work closely with certain customers on contract adjustments for the previously identified issues relating to startup and logistical challenges on our long term beneficial use projects. We expect these contractual adjustments will improve profitability and cash flow during the second half of the year and throughout the remaining contract periods. We are also working with customers on billing milestones that we expect will provide recovery of certain costs incurred today. General and administrative expenses decreased to $9.2 million in the second quarter of 2022 as compared to $9.4 million in the second quarter of 2021, primarily attributable to the continued emphasis on corporate expense management through cost containment across general expenses and delays in positions being backfilled. Net loss attributable to Shara Solutions increased to $9.6 million for the second quarter of 2022 as compared to $4.2 million in the second quarter of 2021. The increase was primarily driven by the impact of the decrease in gross profit, as previously discussed, and an increase in interest expense net, primarily due to higher weighted average cost of capital associated with equipment financing and an increase in amortization of debt issuance costs. Adjusted EBITDA decreased to $2.8 million for the second quarter of 2022 as compared to $6.5 million for the second quarter of 2021 due to the impacts previously noted. For the six-month period ended June 30, 2022, our results were as follows. Revenue increased to $143.2 million for the six months ended June 30, 2022. as compared to $115.6 million for the six months into June 30, 2021. This increase was primarily driven by increases in remediation and compliance services revenue of $15.3 million from the net commencement of new project work, raw material sales of $10.7 million from an increase in shipments, and byproduct services revenue of $1.6 million from an increase in customer ash production. Gross profit decreased to a negative $1.1 million for the six months into June 30, 2022, as compared to $12.5 million for the six months into June 30, 2021. Gross profit and gross profit margin were directly impacted by the increased cost associated with the three legacy projects and the startup challenges at the two large beneficial use projects, as we have discussed previously. General and administrative expenses decreased to $18.2 million in the six months ended June 30, 2022, as compared to $18.8 million in the six months ended June 30, 2021, primarily attributable to the improved expense management previously mentioned. Net loss attributable to Schar Solutions increased to $21.6 million for the six months ended June 30th, 2022, as compared to $5.5 million in the six months ended June 30th of 2021. The increase was primarily driven by an impact from the decrease in gross profit as previously discussed, an increase in interest expense net primarily due to higher weighted average cost of capital associated with equipment financing and an increase in the amortization of debt issuance costs, and the absence of the recognition of a parcel transferred under a sales-type lease at an ERT project. These changes were partially offset by an increase of $4 million from positive factors in our Gibbons Creek ERT project, namely a gain on ARO settlements resulting from favorable differences between the estimated costs using the measurement of the fair value of the company's ARO and the actual cost incurred for our specific remediation tasks recognized on a proportional basis, and operating income from sales of real estate, property, and equipment, primarily driven by increased scrap sales at our Gibbons Creek ERT. Adjusted EBITDA decreased to $3.1 million for the six months into June 30, 2022, as compared to $16 million for the six months ended June 30, 2021, due to the impacts previously noted. Now looking at our cash flow. Operating cash flow was negative $13 million from the quarter ended June 30, 2022, as compared to a negative $3.8 million from the quarter ended June 30, 2021. This decrease was primarily driven by an increase in cash outflow this quarter associated with remediation of the Gibbons Creek AROs, for which cash was received in 2021, and the larger net loss as previously discussed. Recall that ARO cash used on our ERT projects is reflected in cash flow from operations, while the positive cash aspects of ERT projects, namely upfront cash received and sales of real and personal property are reflected in cash flows from investing. This results in a cash flow statement geography mismatch that we address through adjusted free cash flow. Adjusted free cash flow, which includes the gains on sale of real estate, property and equipment, net and upfront cash received from ERT projects, was $29.5 million for the quarter ended June 30, 2022. as compared to negative $1.3 million for the quarter ended June 30, 2021. This increase in adjusted free cash flow was primarily due to an increase in cash and restricted cash received from ERT transactions resulted from the closing of the Avon Lake and Cheswick asset purchase agreements and cash proceeds from scrap sales at Gibbons Creek, partially offset by the decrease in operating cash flows as previously discussed. Operating cash flow was negative $36.9 million for the six months ended June 30, 2022, as compared to positive $10.2 million for the six months ended June 30, 2021. This decrease was driven primarily by the larger net loss, as previously discussed, and an increase in the cash flows associated with remediation of the Gibbons Creek AROs for which cash was received in 2021. The adjusted free cash flow was $6.6 million for the six months ended June 30, 2022, as compared to $46.5 million for the six months ended June 30, 2021. The year-over-year decrease was primarily due to the decrease in operating cash flows, as previously discussed, partially offset by an increase in cash and restricted cash received from ERT transactions from the closing of Avon Lake and Cheswick asset purchase agreements and cash proceeds from scrap sales at Gibbons Creek. Now turning to our balance sheet. Our gross consolidated debt on June 30, 2022 was $175.3 million, which was an increase of $7.6 million from December 31, 2021. As of June 30, 2022, we had $7.1 million of cash on hand and borrowing capacity under our asset-based lending credit agreement of $17 million for total liquidity of $24.1 million. We had no borrowings outstanding under the credit agreement as of June 30, 2022. As of June 30, 2022, after taking into account the effect of Amendment No. 1 to the JPMorgan Credit Agreement, which I'll describe, the company would have met the financial covenant had it been in effect. On August 15, 2022, the company entered into Amendment No. 1 to the credit agreement with JPMorgan Chase Bank, its administrative agent, the lender's party thereto, and certain subsidiary guarantors named therein. The credit agreement amendment will, among other things, permit the company to include certain gains on ARO settlements and cash received for deferred gains from ERT projects in the calculation of the company's financial covenant and permit the company and certain of our subsidiaries to guarantee a term loan borrower's obligations under the term loan agreement, which I will describe next. As of August 15, 2022, based on undrawn letters of credit utilization of $10.7 million, borrowings of $9.5 million under the credit agreement, and applicable financial covenant requirements, springing covenants would become applicable if the company were to borrow more than approximately $1.8 million under the credit agreement. Further, on August 15th, the company, through its Gibbons Creek Environmental Redevelopment Group LLC subsidiary, entered into a senior secure term loan agreement with an affiliate of Bernhard Capital Partners Management LP, the company's majority voting shareholder. The term loan agreement allows GSERG to transfer the proceeds of any cash drawn under the loan to SHARA LLC. Borrowings under the term loan agreement accrue interest at 12% per annum with interest payments due on the first business day of each calendar quarter following the effective date of the term loan agreement and on the maturity date. The term loan agreement is secured by the remaining unsold parcels at the company's Gibbons Creek ERT project and is guaranteed on an unsecured basis by Shara Solutions Inc. and Shara LLC. The Term Loan Agreement is scheduled to mature upon the earlier of the sale of all the remaining Gibbons Creek parcels, or April 15, 2024, and provides for liquidity in an aggregate principal amount of up to $20 million. We were pleased to see Bernhard Capital Partners Management, LP, make this additional commitment to SHARA Solutions to provide additional liquidity while we manage the capital investment required to grow these exciting new streams of income for the company. After giving consideration to the term loan agreement and JPMorgan amendment, as of August 15, 2022, the company has liquidity of approximately $24.7 million Before incurring testing of the spring covenant under the credit agreement and approximately $32.1 million assuming full current availability of the credit agreement. Now I will address our updated guidance. In spite of the positive events and momentum we generated in the second quarter and since results for the second quarter came in under expectations. Timing expectations of income recognition from our ERTs, the continued underperformance during the quarter of three contracts, and increased ramp-up costs on two long-term beneficial use projects were largely responsible for this. As previously mentioned, we have now fully completed two of the projects and substantially completed the third legacy project. However, ramp-up costs from the two beginning projects are expected to continue and we expect for them to weigh on results until the previously mentioned contract adjustments are resolved. As a result, we have lowered guidance for our full year results. We now expect revenue for the year to be within a range of $310 million to $340 million, reduced from a range of $325 million to $365 million. Net loss attributable to Shara Solutions is now expected to be between $10 million and $30 million, previously between $8 million and $12 million. Adjusted EBITDA guidance has been reduced to a range of $25 million to $30 million from the previous guidance of $35 million to $40 million. An adjusted free cash flow for 2022 is now projected to be between $5 million and $10 from the previous projection of between $5 million and $15 million. While we remain very optimistic about the near-term prospects for SHARA, we believe that this revision downward was necessary in an effort to reflect the second quarter performance and how we see that translating into results going forward over the remainder of the year. Lastly, as we've discussed in our previous calls, our guidance is predicated on certain assumptions, which are discussed in more detail in our earnings release. With that, I'll turn the call back to Scott.
spk01: Thanks, Roger. Star Solutions has many positive tailwinds. The mounting backlog of work, which I just shared, innovative business lines to grow and accelerate, an environmental source in ERT, significant new awards, and market environment which seems to grow more positive with every passing week. However, as we focus on the positives, we can't turn a blind eye to the difficult portions of the business. The team and I are working to mitigate existing issues, accelerate the ramp of beneficial use projects, and execute on our existing contracts. This is necessary to allow all the pieces of our business to be most impactful and to maximize value for all our shareholders. We are all very focused on making this a reality while continuing to operate a business that we believe is well positioned for growth. Thank you again for your interest and participation. With that, operator, let's begin the question and answer session.
spk02: At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from a line of Michael Hoffman from Stiefel. Your line is open.
spk06: Hi, Scott, Roger. So I have to ask the tough one. This is the acknowledge the positives of going from three businesses to five, and then there's the but part of the question. The but part of the question is all of this good news, how do you get out of the way of the balance sheet to get this business going? starting to hit a revenue to profit conversion reliability. What is it going to take for that to happen?
spk01: Yeah. Good morning, Michael. And I appreciate the recognition on the new earnings streams and growing the business and everything else. But I think it's true. It's something that we've discussed on previous calls as well, that we've had some operational impacts in Q1 and Q2. but feel extremely confident about the way we're going to move forward in Q3 and Q4 and see that forward momentum that we talk about from a cash perspective and a performance perspective. So really it's just some of those legacy projects falling off and our teams executing as we move forward. We have, as we've noted, a great backlog to work off over the next several years and great contracts inside of that. that backlog and our team's going to perform on those. So it really comes down to performance at this point.
spk06: So if you backed out all this legacy headwind in 2Q, would you still have to have lowered guidance because of the ramping costs or would you have still been in the range but maybe at a lower end?
spk01: Yeah, I think we still would have been in the range but at the lower end. We talk a lot about, you know, we had a lot of ups and downs in the first half of the year, probably more downs than ups as it comes to the operations piece. But I think also kind of more critically as we talk about guidance adjustment, you know, timing delay in ERT earnings that we expected, you know, first half of the year, you know, whether we talk about the, you know, we referenced the deferred gain in there that we thought would have popped in this year and then just timing on parcel sales. So, yeah, you're exactly right. We would have been hopefully on the lower end of the range. And maybe even higher than that. So I think it's just an adjustment that we felt we had to make just because of, you know, really the timing issues related to ERT earnings and, you know, some of those kind of those drags from the first half of the year. But Q3 and Q4 are going to be very positive from an earnings perspective as well as cash flow perspectives. Okay, so you're halfway through this quarter.
spk06: Do you have absolute visibility that that third legacy will get done in 3Q, and therefore we truly can put this behind us?
spk01: Absolutely.
spk06: Okay, so the balance sheet, Roger, what are the covenant triggers at this point with all the amendments and what have you? What are we dealing with?
spk04: Yes, so the covenant trigger is a fixed charge covenant under the JP Morgan agreement that comes into effect when we reach a certain level of utilization under the line. And as I mentioned in my previous calls at 630, you know, we were about just under $2 million of availability before having to test that covenant. I also mentioned that You know, we did make an amendment to the JP Morgan agreement. And really, it's just kind of a technical amendment. When we first put that agreement in place, our ERT projects and learnings, if you will, were, you know, were still fairly new. And we didn't, you know, didn't really properly take into consideration, you know, what happens if we have a pickup on the ARO settlement, which we've had due to, you know, due to our performing efficiently and performing well. on these ERT projects. So we went back in and just kind of adjusted that so that we get credit for those ARO gains, since it is money that we didn't spend against the liability, as well as getting credit for the deferred gain that we talked about. So we talked about at the Cheswick facility, We received $36 million of cash and unrestricted cash up front. And this is really important. I'm glad you asked that question. It's the ARO that we recorded there. And again, we believe this is conservative, but the ARO we recorded is only $31 million. So we had $5 million excess of restricted and unrestricted cash received over and above the ARO. And that's even before taking into account the the value of the scrap and parcels that we're going to sell. So what that means is unlike at Gibbons Creek to where the ARO exceeded the cash received and we put that difference in the basis of the property here at Cheswick, that property is going to have zero basis. So everything we sell at Cheswick is going to be essentially 100% gain as we sell it. Plus, we had kind of $5 million excess cash up front i say all that to say we went back to the facility and said we get to you know we get to count that uh in in this uh covenant test and we get to count aro settlements looking backwards and so if i'm doing the math off of my own financials what what is that the ratio that i'm playing with that i have to watch so it needs to be that the ratio would be one to one so that's that is kind of fully described in our in our 10q uh the fixed charge coverage ratio would be one to one of course the challenge to that ratio so far this year has been the EBITDA. So we've, you know, actually we're rolling off some pretty good months from 2021 in the EBITDA calculation, and the 2022 year-to-date EBITDA has certainly been, as we discussed, depressed by the startup of the two beneficial use projects, which have been a drag, as Scott mentioned, as well as those three legacy projects. So that is the calculation that goes into the fixed charge of one-to-one. You know, for that reason, as we described, and also kind of given that we were expecting the Gibbons Creek parcel sales to occur in kind of the June and July timeframe, which would have been – we expect to have been over $21 million – we worked with a related party to kind of set up this, what I'm referring to is a monetization of that property. So we're able to enhance our liquidity as if those properties had closed, and then we're continuing to work on closing those in the second half.
spk06: Okay, and then in order to meet the guidance for at the midpoint, you got a pretty healthy second half. How do I... Think about the cadence. This is the EBITDA. I'm at the midpoint at $27 million. Basically, we've got around numbers $24 million you've got to earn in the second half. What's the cadence of that?
spk04: I think it's going to be, I do expect it's going to be very Q4 heavy. We've talked about some contract adjustments with customers related to the Beneficial Use Project Startup. those are ongoing and are proceeding well. I think, you know, just for conservatism, I would put that into, you know, kind of getting the settlement and cash on that in the fourth quarter of this year. And then, you know, again, I would give, just out of conservatism, I would give to the fourth quarter for the sale of those given parcels that would go into. Apart from that, It's just you can continue to operate and, you know, kind of proceed on schedule under our remaining jobs and contracts.
spk06: And one last one for me, and then I'll let – how much in the midpoint of guidance have you assumed for the settlement of, you know, the change orders?
spk04: We have not kind of given that number publicly. That's, I mean, for obvious reasons. Those conversations are still ongoing with the customers. So that's not something that we're able to state publicly. Okay. Thank you. Thanks, Michael.
spk02: And again, to ask a question, it is star 1 on your telephone keypad. Your next question comes from the line of Alex Riegel from B. Reilly Securities. Your line is open.
spk05: Good morning, Alex. Thank you. Good morning, and congratulations on the EnviroSource contract. Can you help us to better understand sort of the cash outlays in the near term on that and then the cash inflows and sort of what that timeline looks like?
spk04: Certainly. So we have, you know, as you can imagine when you're looking at such an exciting ESG type of product, we've been very fortunate, or project rather, we've been very fortunate to have a number of financing providers who want to be a part of that. It is a very compelling model that we've put together on EnviroSource. Without getting into too much detail, we have offers, term sheets on the table for a very high percentage of that financing that would be done under a capital lease secured by the EnviroSource equipment.
spk05: Okay, and is there any way you can kind of quantify that or help us to sort of understand the timeline of that?
spk04: Oh, sorry, sorry, the second half of the question. So, yeah, I mean, as we mentioned in the release, we expect the signing of the contract imminently. We're kind of administrative stages of kind of documentation and getting signatures. The expectations are that, you know, the purchase orders for the equipment will be placed in very, very soon within the next, I'd say within the next month or two. We've talked before that we expect that the construction timeline to be around 10 to 12 months. So we're looking at kind of the second half of 2023 upon commissioning of that. So there will be a startup in the later part of 2023 processing the ashes and selling that into the local market. We've talked before that a single train or a single line of the EnviroSource unit, which we expect this one to be, can process about 130,000 tons a year of spec fly ash material. So then you just have to look at what market that you're selling into. For this one that we're talking about, we would assume kind of an $80 to $85 a ton sales price of the spec fly ash, so you can do the math. you know, on that 130,000 tons per year. We mentioned it's a 10-year contract. I expect it to be, you know, to go out 10 years at that 130,000 tons a year and then kind of grow that $80 to $85 a ton sales price, you know, just kind of based on inflation over that 10-year period. So the cash, you know, to your question, would start coming in on sales in the back end of 2023. With it being financed, again, I'd say pretty much entirely under a capital lease structure with withdrawals as we make construction up until we commission it.
spk01: Alex, I'd just like to expand on one piece there that Roger said. He spoke about this being a one-unit system. I think we've kind of gotten lost in the discussions over time is that You know, one unit does about 130,000 tons per year. We have multiple opportunities out there. We get asked the question all the time, what's the opportunity set for EnviroSource? And we believe, you know, the next five years we could place, you know, at least 10 units on the ground. Maybe there's one unit at one site or maybe there's three units at one site. But definitely, you know, 10 units and, you know, kind of backing into the math that Roger was doing, I have one unit spending off $5 to $6 million a year in EBITDA. It's really an exciting piece of our business that we can bolt onto that backlog that we spoke to earlier.
spk05: That's great. And then as it relates to new awards, tracking pretty well this year, how do you think your new awards could play out by year end as a comparison to 2021?
spk01: As I stated before, the goal is always to beat and exceed the prior year. We're halfway through the year here and a little bit less than halfway to the 21 goal. We're still going to continue to drive our team. We do believe, and as we stated in prepared remarks, that we see an increase of activity here in the second half of the year. We're going to continue to push for that goal and push to exceed the 840 number from last year.
spk05: That's great. Thank you very much.
spk01: Great. Thanks, Alex.
spk02: Your next question comes from the line of Tony Bowers from Introact. Your line is open.
spk07: Morning, Tony. Hi, Scott. Hi, Roger. Yeah, congratulations on the momentum. I'm sure you're as frustrated as everyone else is at the various drags that keep sort of popping up and impacting your pull through. On the the backlog question. You talk about this being as much as out to 14 years, but where is the, if you were to profile it, where would the hump be in that business? It must have all these different layers of contracts. And what year on your current backlog profile would you expect that to generate sort of the highest impact to revenue? Is it out sort of three years or five years? Where's the the sweet spot.
spk01: Good question, Tony. Again, I know you guys have been asking for a while now for us to give backlog numbers. We feel really excited to be able to produce that for you and give you that information. I know it's been a little bit difficult to correlate new awards historically to backlog and how that trends. I think about it this way. We talked about 1.5 billion between now and 2036. The average life of the contract inside of that is about six years. And as the backlog kind of works off, we're not going to see a spike. Like you said, in year two or three, we're going to see a slow burn off of that backlog kind of trending towards that average six-year timeline. if that's helpful.
spk07: So in terms of what hinders you being able to execute on this faster, are there bottlenecks that you can do something about to accelerate the execution of it? And secondly, are we close to satisfying the demand for beneficial fly ash for the cement industry?
spk01: Sure. I'll take both those questions kind of in sequence there, staying with the backlog first. We really don't see any paths to accelerate that backlog and really don't see a need to accelerate that backlog because, again, the exciting piece of the backlog, at least for myself, is it just showcases and highlights the base book of work that we have. and that confidence that we have in our RNC and byproduct services business, which primarily make up that backlog. And then when we think about layering on the EnviroSource opportunity set that I just spoke to Alex about, and then just that robust pipeline of the ERT business, we're seeing great margin profile and great returns on just layering that on top of that backlog is what gets us excited and really not seeing a need to accelerate it in any way, but really just continue to layer on new income streams and earning streams on top of that. So just really glad we could give you guys that color and kind of share with you what excites us about the business. Then as it relates to Flyash, no, the demand is not being met in the market. And that's, again, one of the things that you think about the infrastructure bill out there and increased demand and need for concrete, increased demand and desire in green materials like a recycled fly ash, you know, all give us, you know, great positive momentum and thoughts around the market for fly ash consumption. So something we're really proud of, again, is, you know, recycling fly ash and putting it into a very high-demand market, something that we'll continue to do.
spk04: And, Tony, let me just add a couple things about the backlog, and we mentioned this, but I do want to, you know, emphasize it in Q&A. As we talk about the $1.55 billion, that does not include any ERT projects in that number, because when we talk about the $1.55, that is a revenue backlog, and, of course, ERT, income does not flow through revenue. So we gave a number of about $215 million of cash equivalent of ERT projects that are currently in flight. We've got bids outstanding for several more ERT that we're very optimistic about. And then, of course, the raw material sales is not in backlog either because those Contracts are typically a one-year type of arrangement or a short-term on the sale, but we mentioned that we're in the kind of $35 to $40 million range, and we have expectations of that growing. It's actually picked up significantly this year, so we see the raw materials growing by over 30% just based on historical results so far this year. So those are, I think, two pretty important considerations in the backlog. And then just to add to what Scott said, when we bid these jobs, these long-term jobs, you know, we work with the customer on the plan. And, you know, we have to work within their plant facility footprint, you know, within their landfill. So, you know, so we build these on what, you know, working with the customer is assumed to be the plan. ideal or maximum amount of realistic amount of ash that can be excavated out of the pond and then either placed in an on-site landfill or moved off-site or beneficially reused. Accelerating that would have implications beyond just us.
spk07: Is there anything about the nature of the new contracts that you're signing? This is on the remediation side. that should give us comfort that either the way it's written or the understanding that change orders may happen means that the risk of the profitability of those contracts is getting more favorable for you and shareholders in the future.
spk01: Yeah, Tony, I think the best way to answer that is we continue to be students of the industry and we continue to evolve over time and put different things into our contracts and terms to our contracts that help de-risk ongoing work for us. It's something we've been doing for years and it's something we're going to continue to do. I can only say that we learn every day from our contracts and build those into the new ones. We do feel that we are doing everything we can to de-risk and set up the company in the best way.
spk04: And I guess just to add to that, you know, we said this in first quarter, but one of the three, kind of the biggest of the three legacy contracts was a contract that was entered into in 2017. And, you know, that was just a very challenging contract over the five years. And then it has been put to bed, but not without great difficulty, especially as it concluded. And then as far as de-risking, I mean, just kind of a specific, we do, one of the things that we look at is the cash flow profiles as we get these contracts approved. So we do add or work to add different mechanisms in the front end of the contract to get cash flow started positively out of the gate and then hopefully keep it in that position. Now, obviously, we don't always, and we have it in those contracts that were problems being able to do that. But that is what we've worked for.
spk07: Well, we look forward to a fruitful second half. Thank you. Thank you, Tony.
spk02: And there are no further questions at this time. Mr. Scottswell, I turn the call back over to you for some final closing comments.
spk01: Great. Thank you, Operator. And thank you, everyone else, for your time today and your continued interest in the business. As you can see, we've got a lot of great opportunities in front of us, and we're going to continue to grow the business, do everything we can to produce positive results. So look forward to talking to you in the future. Thank you.
spk02: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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