Q3 2019 Earnings Call
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I'd now like to hand, the conference overdue Speaker today, Brian Coleman Investor Relations. Thank you. Please go ahead.
Thank you Rob good morning, everyone and thank you for joining us today for our third quarter 2019 earnings results call with me on the call. This morning are Heath, Sampson, President and Chief Executive Officer, and Greg Mark in Chief Financial Officer. This conference call is being webcast lives in the Investor section of our website and a downloadable version of today's presentation is available there.
As well a webcast replay will also be available on our site and you can contact Alpha IR group for Investor Relations support at three one to four or 520 870.
We remind you that the presentation and remarks made today includes forward looking statements as defined in section 21, each 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 factors identified on slide two of today's slide presentation in our Form 10-Q for the quarter ended September Thirtyth 2019, and other filings with the Securities and Exchange Commission, except as expressly required by Securities Law. The company undertakes no obligation to update those factors or any forward looking.
Statements to reflect future events developments or changed circumstances for for any other reason.
Addition, very important to review the presentation in today's remarks in conjunction with the gap references in the financial statements. So with that I'd like to turn the call over to Heath Sampson heap.
Thanks, Ryan and thanks, everyone for joining us. This morning, let's begin on slide three and review our third quarter RC distributions from Tinuum group as well as our RC segment operating income were both strong and inline with our expectations during the quarter, both were significantly higher than the prior year driven primarily by.
The five additional invested RC facilities that we have added since then.
During the third quarter alone, we added two facilities, bringing our year to date contracted tonnage to roughly 15 million and comfortably exceeding our previous he got a 12 million incremental tons.
In our PGK segment, our results were hampered by many of the same issues. We outlined during the second quarter call coal dispatch has been weak and cheap fuel source alternatives to call have had a significant impact on our core marker.
Mercury capture for coal fired power generation.
This market is where we are best position today, the P.G.I. segment and the these cheap alternative fuels I've heard our volumes.
However, there are adjacent opportunities agnostic to coal burn that we have been aggressively pursuing and having success. For example, we've identified several industrial and municipal customers, who have activated carbon needs and we are winning incremental and incremental volume in these areas.
The widespread use and versatility of activated carbon as a pure find agent allows us to flexibility to not be relied on a single market application. So we will continue to pursue customers and opportunities where we are competitive.
Although we do not yet have all the products we have the most important competitive advantage.
Largest in lowest cost manufacturing plant and as a reminder, originally cop [noise] nearly $400 million to Bill I'll talk about these new opportunities later in the call.
We have executed inline with our expectations commercially, but the coal fired power market hampered our third quarter results for our P.G.I. segment. Although we are disappointed with the short term market impact we remain excited about our long run expectations due to our unique competitive advantages, we are waiting and renewing contracts well above.
Historical levels.
Our third quarter performance, coupled with our current and expected third quarter wins will ensure we have a strong base a full year volume going into 2020.
In the meantime, we're continuing to generate strong net cash flows in our RC segment.
Which facilitates organic investment in the business as well as other capital allocation priorities.
We are reducing our term loan balance and returning cash to shareholders through our quarterly dividend and opportunistic share buybacks.
Looking ahead, the opportunity presented to us by a market leading activated carbon assets continue to have significant significant long term potential.
Ongoing positive feedback from customers around her offering offering high retention rate and new customer wins have us encouraged.
The pollution control market for coal fired power remains fragmented and most sub scale providers are unable to gain market share or even survive.
As such we will continue to evaluate key opportunities to capitalize on the platform rehab.
The platform remains uniquely strategic underutilized asset that provides multiple ways to drive future growth and shareholder value.
I'll discuss our forward vision in greater detail after Greg reviews, our third quarter Greg.
Thanks Heath, let's start on slide four for our third quarter financial results.
Earnings from equity method investments totaled $14.4 million compared to $9.7 million in the prior year.
The significant increase was driven by five incremental RC facilities invested since the third quarter of 2018 with total equity earnings of 57.1 billion compared to 37.9 million on a full year basis.
As a reminder, tenuous adoption of the new revenue and lease accounting rules also impacted this increase.
We recorded a cumulative adjustment of $28.8 million related to the company's percentage of Tinuum groups cumulative effect adjustment that increase tenuous retained earnings but those amounts now will not impact our future earnings.
We no longer have cumulative cash distributions in excess of our cumulative pro rata share opinion groups that income.
Therefore, we recognize equity earnings by recording a pro rata share opinions that income rather than based on cash distributions during 2019.
I want you also reiterate that this accounting standard adoption does not affect the timing or total potential future cash flows from our RC segment from Tinuum.
Third quarter consolidated revenue of $19.1 billion was also significantly higher than 5.1 million one year ago, driven by the meaningful contribution from carbon solutions consumables and additional royalty bearing RC facilities.
Revenue in the nine month period ended September 32019 totaled $54 million compared to 13.3 million in the comparable period in 2018.
Within that consolidated revenue third quarter consumables revenue totaled 14.8 million.
This was significantly higher than the prior year again, driven by the carbon solutions contributions.
Third quarter royalty earnings were also higher year over year totaling 4.4 million versus 4.1 million in 2018.
Oil the earnings in the nine months ended Septemberthirty 2019 totaled 12.8 million compared to 10.9 million.
In 2018. This increase is a result of the additional royalty bearing facilities invested.
As of September 32019, there were 16 royalty bearing facilities operating compared to just 11 during the third quarter of 2018.
Our non cost of revenue operating expense was higher year over year, driven by greater SGN, a costs, which are largely related to the combined personnel of both entities as well as the integration efforts related to the acquisition of carbon solutions net personnel synergies achieved earlier this year.
More specifically third quarter other operating expenses were 9.6 million compared to 4.2 million in third quarter of 2018.
On a year to date basis other operating expenses totaled 25.9 billion compared to 14.3 million in the third quarter of 2018.
Depreciation expense contributed 2 million and 4.6 million of these increases in their respective periods.
Pre tax income for the third quarter was 10.5 million versus 9.4 million in the third quarter of 2018 net income for the third quarter was 3.9 million compared to net income of 5.5 million in third quarter of 2018.
The decrease was driven by substantially higher income tax expense compared to prior year, driven by increasing the valuation allowance for deferred tax assets.
On a year to date basis earnings were negatively impacted by $5 million, but none of this impact was in the quarter related to the amortization of a step up and basis of acquired finished goods inventory in connection with purchase accounting adjustments.
Net income during the first nine months totaled 26.4 million, a 7% decrease from 28.5 million.
During the first nine months.
Calvin 18.
The changes the net income during the third quarter and first nine months were primarily driven by higher interest expense and tax expense. During the current year periods, partially offset by higher equity earnings from Tinuum compared to the same periods in 2018.
Consolidated EBITDA for the third quarter was 14.2 million an increase of 4.4 million over the third quarter of 2018 consolidated EBITDA for the nine month period ended September 32019 totaled $52 million compared to 34.9 million in the comparable period in 2018.
Our total cash position as of September 32019 was $20.2 million, which 5 million as restricted as a result of the term loan undertaken to acquire carbon solutions.
Total cash was down from level seen at the end of 2018 for a few reasons drivers include dividend payments debt repayment capex and year to date cash usage from share repurchases of $2.9 million.
In November 2018, the board authorized a $20 million share repurchase program on top of our previous repurchase authorization.
Over the last two years, we have demonstrated our willingness to opportunistically repurchase stock in the open market, having now reduced our share count to well under 19 million and we expect to continue to act opportunistically going forward.
To this point as announced yesterday the board authorized an increase in the amount available in this stock repurchase program to $10 million and the program will remain in effect until all amounts are utilized or the program is otherwise modified by the board.
Lastly, as of September 32019, the outstanding principal balance of the senior term loan was $46 million.
Senior term loan is used to finance our acquisition of carbon solutions and is subject to quarterly principal payments of $6 million that began on March 1st of this year.
During the third quarter, we made an $8 million principal payment in a previously expressed our expectation to pay off this loan in less than the straight stated three year term.
I'll now turn the call back over to Keith.
Thanks, Greg I'd like to take a moment to discuss our outlook turning to slide five you can see the update to our expected future RC cash flows.
As of September Thirtyth 2019, we are updating our expected net RC cash flows to a range between 150 million to $175 million to Ats through the end of 2021.
This range is after $23 million of RFP distributions collected during the third quarter and inclusive of the two units added during this period I.
Unlike most quarters for changes to our forward our fee cash flow guidance is typically related to netting the amount of distributions collected versus incremental tonnage added that third quarter saw a few different moving parts all in all they amounted to an approximate 6% contraction to our contracted cash flows.
Before I summarize the puts and takes I must remind everyone that this reduction is for contracted amounts as of September thirtyth as we do not increase these cash growth for anything we may expect to that.
First throughout the current year, there has been a broad based reduction in coal consumption largely due to lower natural gas prices as well as unusually lower temperatures during the first half of 2019.
As a result of the reduction in coal consumption during the third quarter Tinuum group restructured RC facility contract leases with with its largest customer which will decrease lease payments beginning in the third quarter of 2018.
Second there were two plant closures that were announced by utility during the third quarter were Tinuum had and invested RC facility on site.
One particular closure in Illinois was sponsored by our regulatory settlement that required to large power company company to quickly shut down two gigawatts of co firepower by the end of this year well the closure was not expected tinuum proactively working to relocate some of this particular tax equity investors investment at.
New utility site and retain a portion of the previously expected cash flows. However, as these potential cash flows from relocation or not yet contracted they are not included within our future cash flow estimates, we look forward to updating you on our progress here.
Finally during the third quarter can you an updated estimate for acid useful lives related to RC facilities.
The impacts the amount of does.
This impacts the amount of depreciation expense during the period of Q3 2019 through the end of 2021 and decreases royalty earnings at the royalties are based upon refined coal payment less expensive less expensive inc. inclusive of depreciation as a result of the higher depreciation weeks.
Spect, our future royalty earnings to be approximately 35 cents per tonne as opposed to the previous 40 cents per ton estimate.
As always future incremental invested RC facilities will positively impact our expectation of future earnings and distributions.
To this point can you have had active ongoing conversations with potential tax equity investors for additional facilities.
Should these deals be finalized they have the potential to add an additional six to 9 million in annual today.
In addition to these more probable opportunity opportunities tinuum has installed or partially install facilities totaling another five to 8 million tons that need to have clear specific near term milestones past before we can handicap the likelihood of closure these milestones need to be passed lastly.
There are other willing investors that are in the early stages with that they provide future incremental tonnage as such we continue to be optimistic related to tenure with the ability to obtain incremental cash flows through additional RC facility closures as well as the potential to locate the RC facilities that were closed that utilities that announced.
There were announced earlier.
Let's flip to slide stick and review the growth opportunities for our new assets.
This slide shows our roadmap for the new Ats and how we plan to leverage our new assets to become the North American leader in Mercury control and activated carbon within multiple diversified industries.
As we briefly discuss the entire coal fired power market, which includes very large utilities in mining companies were hindered by the poor coal fired power dispatch in both the quarter and this entire year. This directly negatively impact our consumable product sales in the PGTI segment.
However, with a broader view our discussions with both both existing and potential future customers are leaving us excited about our position to market that we are winning it with the wins we have had in 2019, our run rate volume, it's already 15% to 20% higher going into 2020.
The Mercury control market in North America is competitive and that's more than a few changes over the past years. Many coal fired power generation generators are increasingly cost conscious and no longer have the bandwidth resources to compete a signal at a significant scale.
There are now looking for a fewer strategic vendors, who can provide more for less.
With our combined offerings, we are best positioned to be the supplier choice for this changing power market.
While the co firepower coal fired power Mark market has being pressured in recent years, we see our total addressable Mercury control market expanded by approximately 25% in 2021 in 2022 as refined coal expires and utility seek alternative cleansing mechanisms for coal.
Currently treated by refined coal.
Also as I briefly mentioned industrial markets walk up while competitive are not impacted by Colbert and must also comply with applicable emission regulations.
We have been expanding our customer base here and have realign more sales and product personnel to this error area. Early this year, we have talked about a significant win of a customer and our commercial team continues to identify opportunities in this area that we believe our existing products could occur address.
We also expect additional theres diversification as we grow the municipal water business and look forward to updating you on our progress after the fourth quarter as we have many opportunities in November December .
These are the type of wins, we expect to replicate moving forward to drive volumes into 2020. Additionally, our high renewal rates and new wins are validating that our combined offerings provide new new volume as a combined platform.
As a reminder, these contracts are typically longer than one year and must and we must wait to compete as these contracts come up for bed.
That being said the second half of this year has more bids in the first half a 2019 and we expect those to translate to better volumes as well.
Just recently, we were able to obtain multiple wins in both the power generation and industrial markets.
That will be significant to setting the stage to improve volumes and performance in 2020 again, just with the wins, we had today our base is 15% to 20% higher.
Next we are also position today to achieve further penetration into the municipal water treatment market. This marked provides an immediately addressable adjacent market to grow within it has also highly fragmented space comprised of many producers and resellers to.
To better position ourselves in this space, we have made incremental capital investment to advance product performance and have focused of existing personnel here.
We've already seen these investments pay off and believe this will lead to positive longer term results within the municipal water activated carbon market.
Longer term, <expletive> and consistent with our belief in the purchase of the carbon solution assets as the low cost manufacturer coupled with our commercial in R&D expertise, we will work to optimize a portfolio that drives higher growth across a broader spectrum of the activated carbon market.
In summary, we are encouraged by the momentum of bids and opportunities here in the second happening here and expect to capitalize them as we progress through 2020.
In the meantime, our strong projected future cash flows in excess of the term loan balance offers incredible flexibility as we provisioned positioned ourselves for the future of this operation.
Moving to slide seven reviews, our capital allocation program.
Since the start of the capital allocation program in the second quarter 2017. The company has paid nearly $50 million in dividends and utilize capital of over $44 million to repurchase shares.
We paid our third quarter dividend on September six and the fourth quarter dividend declared yesterday will be paid on December 13th.
As Greg mentioned, we made another $8 million payment this quarter against the principle of our term loan, bringing our year to date.
Debt reduction to $24 million and our remaining debt balance to $46 million.
We expect to continue to pay down our debt, while parent our quarterly dividend and opportunistic share repurchases. These initiatives remain a key focus of ours and we believe we generate cash flows to both honor our capital return commitments and invest in the business.
Finally, let's close with a 2019 priorities on slide eight as always our ongoing commitment to leasing additional RC facilities and supporting can you mean these efforts to secure tax equity investors is unchanged maximizing RC cash flows will continue to be our first focus at the cash flows from this.
Partnership are utilized to honor our capital allocation commitments.
Our second strategic goal will be the ongoing integration and expansion of our newly acquired assets people and operations to immediately capture share in the North American Mercury control market and municipal water activated carbon market. We will also evaluate and pursue the adjacent attractive opportunities in other verticals, which are beginning to do which we are beginning to do now.
And finally, we will continue to return capital to our shareholders through our dividend program as well as the opportunistic repurchasing of outstanding shares.
So with that we will take question.
Thank you as a reminder that would be star one on your telephone keypad. If you would like to ask a question.
We'll pause for just a moment compile acuity roster.
Again, I start one if you'd like to ask a question. Your first question comes from the line of mail from H.C. Wainwright. Your line is open.
Good morning, everyone and thank you for taking my questions social here.
Just.
Looking at the RC engineering side of the business.
With all of these.
Drivers in play right now, including weather competitive factors.
Thanks.
When we look for Q1 9, your expectations for that quarter was what you saw in the third quarter.
I mean should we anticipate similar performance in the fourth quarter relative to the third quarter.
Yes, so the.
Just to backup a little bit when when we were entering really this year and the end of last year.
We thought that refined coal and.
Investments would decline because there is around two years left.
We.
We're right we're right in some sense, but in the other side of things we were surprised by how there are additional investors they want to take advantage of.
Of.
Refined coal even for these last two years, so we guided to 12 million ton.
A few quarters ago, we overachieved that and then we thought we would be done. However, we're not and we gave some numbers that we are in current discussions with now that we expect to quote and even beyond that theres a few other than we expect to close beyond that so we're pleasantly surprised that our pipeline is full and we should have.
More closures beyond what we are our disclosing today, so well have that those cash flows that we just talked about here at 150 to 175, and we hope to add on those based on the tonnage that we talked about a little bit earlier.
Understood.
These two RC units that are expiring in the fourth quarter.
Are these available to.
Maybe new investors or these done.
Yeah.
Yes, they're done in only one of those was installed.
The other 2019 was not in our cash flows nor installed.
So and we've always had that in our cash flow.
Projections and it's in that 20 in that 150 to 170 minus 5 million that we talked about so yes, there expired at the end of this year.
Got it.
And then.
Quarter, you've talked about plant maintenance impacting you'd have some performance are those.
For its out of the we now and are you kind of functioning at the levels you were looking to.
Yeah, Yeah as expected we knew we had to make.
Investments to ensure that our manufacturing assets were what we wanted to be so we made those onetime investments to get to the plant to where we wanted to so we expect a more normal run rate going forward.
And then.
The BJ side of things.
Right now, we're still sort of in the Mercury as our key product line Nuno monkey related offerings.
What.
In terms of it product roadmap.
Can we look for in terms of new.
Brought into solutions are working on in the timeline for you know maybe introducing these.
Yes, yes, so I can't Mercury, though as though it was hurt this year by just coal fired power going down we are still well positioned to gain market share. In addition, what I, what we talked about as refined coal rolls off that market is going to expand right now we estimated to be approximately 25 per.
And expansion. So we are in a really good position to capitalize on that so, though though it may seem that the mercury control market.
Under pressure and it is.
Because of our capabilities because of our asset that will continue to be a strategic part for us and we will continue to see growth opportunity within that that being said and we talked about this it does make sense for us to diversify one because we have to see the asset and we have the.
They'll ability to expand coupled with that with our technical expertise, we are able to move into adjacent markets already we've been doing that whether that's the industrial market.
Or in the municipal water market that is our current focus right now, but there's a lot of opportunities beyond that so we are taking it.
As fast as we can but still be very deliberate to ensure that we protect our current business and make sure that when we are grabbing this new business that sticky for us. So again the as you you may or may not know the activated carbon market is very large.
And we're excited about the future and we'll continue to execute as we articulated in our in our strategy outlook.
Understood.
That's an ivy its appreciated I'll take my other questions offline. Thank you.
Thank you.
And again that star one if you would like to ask a question.
And we have no further questions at this time I turn the call back Super centers.
Great. So thank you everyone for your time today and your continued support.
I really look forward to updating you all the next quarter have a great to everyone.
Ladies and gentlemen, thank you for your participation. This concludes today's conference call you may now disconnect.