Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the transmission solutions Q4, 2019 earnings call.
At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question answer session.
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I would like to have the conference over to your speaker today rank woman Investor Relations. Thank you. Please go ahead.
Thank you Chris Good morning, everyone and thanks for joining us today for our fourth quarter and for your 2019 earnings results call with me on the call today or keep Sampson, President and Chief Executive Officer, and Greg Mark in Chief Financial Officer, just calls being webcast live within the Investor section of our website and a downloadable version of todays.
Isn't station is available there as well a webcast replay will also be available on our site you can contact the Alpha IR group for Investor Relations support at three one to four four or five to eight seven.
I'd remind you that the presentation and remarks made today includes forward looking statements as defined in section 21 E. 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 imply.
By these statements. These risks and uncertainties include but are not limited to those factors identified on slide two today's slide presentation in our form 10-K for the year end December 31, 2019, and other filings with Securities and Exchange Commission, except as expressly required by Securities Law. The company undertakes no obligation.
Okay, those factors or any forward looking statements to reflect future events or developments or changed circumstances for for any other.
In addition, it is 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 turn call over to Houston.
Thanks, Ryan and thanks to everyone for joining us this morning.
Before we get started I want to empathize with everyone that is trying to manage through this cobot 19 pandemic.
Although health and safety, our most pressing to everyone the financial market and many of our shareholders are also under extreme pressure to manage their portfolios.
I will touch in how we think about covert 19 or operations later in the call.
Let's now begin on slide three M. review, our fourth quarter in here.
Within our refined coal segment, we saw record distributions, Virginia for the full year that were 40% higher than 2018.
The increase was driven by four additional operating facilities that were added in 2019, which brought roughly 15 million incremental tons during the year.
All four of these facilities were also royalty bearing which drove the 12% increase in royalties compared to 2018.
Despite the full year increases both distributions and royalties were lower in the fourth quarter.
The fourth quarter decline was driven by significant decreases in coal fired power generation.
This resulted in restructured lease contracts between 10, you want me to its largest customer and the closure of to utilities that tinuum had refined coal facilities that.
All of it all of which we discussed on the third quarter call.
That being said.
We are not done adding refined coal volume in 2020.
At the same time, we also expect additional headwinds due to due to poor coal fired power generation.
As such it is not prudent to announce how much net incremental volume we expect in 2020.
Well update incremental volume expectation at each deal happens.
In our P.G.I. segment, we made significant strategic and commercial progress throughout the year, but we were disappointed with the financial performance of these assets in 2019, almost exclusively due to poor coal fired power dispatch.
Although aggregate power generation remained flat compared to 2018 cheap alternative fuel sources, coupled with mild weather weather in both the winter and summer months resulted in approximate declined a 15% of coal fired power generation, the U.S. and 29 team.
Well depressed coal burn affects the entirety of our business does a sharper effect on or more nascent P.G.I. segment.
As a result of these headwinds total volumes and revenues were materially lower than anticipated.
We've been responding by focusing on what we can control managing costs and diversifying the business.
Overall, we executed well in 2019 and were able to secure long term agreements for 92% of the customers that were up for renewal.
We achieved the highest win rate in company history on the new opportunities at 60%.
So why we're not able to overcome the decline in coal fire power. These are encouraging developments as we look forward to the long term potential and the competitive <unk> competitive position of these cornerstone assets.
It is clear that we offer highly competitive activated carbon solutions in this marketplace.
Our P.G.I. assets remain some of the best in industry. They are underutilized and we have a plan to help them realize their full potential.
What are the key components of that plan is a heightened focus on non coal market and we have identified several additional industrial and water market opportunity that allow us to further diversify our product portfolio.
We spent much of 2019 building out the internal infrastructure in sales team to better pursue and compete within these non coal markets.
We expect those efforts to build on our existing momentum into 2020.
We also believe the competitive landscape within the activated carbon industry will ultimately trend toward rationalization among market participants in the supply and demand equilibrium.
We expect to be best position to strategically capitalize on those changes in the meantime, we remain acutely focused on the segment on winning share in markets, where we have the right to win.
Filling our plant capacity with more diversified revenue stream.
And leveraging our complete product solutions package I'll talk more about our outlook for the P.G.I. segment later in the call.
Moving to our capital allocation priorities in 2019, we continue to return significant capital to our equity holders as we delivered over $24 million to our shareholders during the year through our dividend program and share repurchases.
November the board authorized additional dollars for share repurchases and we continue to purchase Opportunistically.
In aggregate, we spent roughly $5.8 million and 2019 to repurchase 533000 outstanding shares.
Lastly, we are reaffirming even after our normal quarterly distributions, our net cash flow <unk> outlook from the RC segment to total between 150 million in a $175 million through the end of 2021.
In the near term we are focused on completing our current incremental volume opportunity.
However, we are also at a point, where we need to plan for the refined coffee.
They shouldn't in 2022.
There's an opportunity to save money by streamlining operations renegotiating contracts and reducing cost a walk everyone through the pushes and pulls on that later in the call.
Before I hand, the call to Greg like could take a moment to think Ron Eller can do on CEO, who recently announced his retirement.
Ron leadership has been instrumental to the success of this business and we wish him a happy and healthy retirement.
Rick Dad will be stepping into replace Ron is tinuum CEO, Rick pretty busy previously served as Tuniu Tinuum CFO and thus we have worked closely with Rick for several years.
The transition what smooth and we look forward to continue to work with Rick and the tenure one team.
I will discuss our forward outlook in greater detail after Greg reviews, our fourth quarter and full year full year results Greg.
Thanks Heath, let's start on slide four for our financial review.
Earnings from equity method investments totaled $12 million in 2019 compared to $16 million in the fourth quarter of last year, while full year earnings were significantly higher at 69 million compared to 54 million in 2018.
That's Heath mentioned the full year increase was driven by the for incremental refined coal facilities invested with third parties in 2019 compared to 2018.
Partially offset by lower net lease payments and equity earnings from Tinuum beginning in the period ended Septemberthirty 2019, as well as the unexpected closure or to utilities in the third quarter were tinuum had operating facilities.
Also on January Onest of 2019, Tinuum adopted the new revenue and lease accounting rules, we recorded a cumulative adjustment.
$27.4 million related to our company's percentage of Tinuum groups cumulative effect adjustment that increased our retained earnings but those amounts will now not impact future earnings.
[noise] Ats no longer has cumulative cash distributions in excess of our cumulative pro rata share opinion group's net income therefore, the company recognize equity earnings by recording our pro rata share opinion group's net income rather the based on cash distributions for the year ended December 31 2019.
However in 2020, we expect our GAAP equity earnings will be significantly less than 2019 due to tinuum, having recognize two refined coal facility transactions as point in time sale during 2019.
In addition to the impacts of 10, new EMS change and depreciable lives for refined coal facilities, the closure of to utilities and third quarter were tinuum had operating facilities and lower net lease payments due from their largest customer.
However, this does not affect the timing or the total projected future cash flows from or RC segment, and we expect to see cash distribution significantly exceed GAAP earnings from our equity method investments in both 2020 and 2021.
Revenue for the fourth quarter and full year were both higher than 2018.
Fourth quarter revenue totaled 16 million versus 11 million in 2018, while 40 full year revenue of 70 million was higher than 24 million in 2018.
The increases were driven by consumable revenue as a result of the full year impact of the carbon solutions acquisition and to a lesser extent by higher royalty earnings for the full year.
Well piece totaled $4.1 billion in the fourth quarter and $16.9 million for the full year, lower by 4% and higher by 12% year over year, respectively.
During 2019, we had 16 RC facilities generating royalties to the company compared to 12 during 2018, which drove the full year increase.
The fourth quarter decline was again as Keith mentioned, a result of the impacts of the lower net lease payments due from Tinuum largest customer and tenuous change in depreciable lives for refined coal facilities.
Royalty income is based upon a percentage of the perfect on pre tax margin inclusive of impacts related to depreciation expense and other allocable expenses.
Our long term royalty earnings expectations were updated as part of that restructuring from roughly 40 cents to 25 to 30 cents per ton based on Colbert expectations within the refined coal contracts going forward.
Net income was higher in the fourth quarter compared to the prior year driven by lower income tax expense year over year, which was caused by a decrease in the valuation allowance for our deferred tax assets.
Full year net income was $35.5 million in 2019 flat when compared to 2018.
Net income was impacted by higher equity method earnings and margin contribution from sales, but was offset by higher operating expenses due to the full year impacted the carbon solutions operation.
Integration legal and depreciation and amortization expenses.
Earnings were also negatively impacted by $5 million on a full year basis related to the amortization of a step up and basis of acquired finished goods inventory in connection with purchase accounting adjustments.
Fourth quarter, EBITDA was $10 million compared to 14 million in 2018. The decline was the result of lower equity earnings and operating earnings compared to the prior year full year EBITDA was higher at 62 million compared to 49 million in 2018, the full year increase was driven by significantly higher depreciation.
And amortization expense and higher interest expense in 2019 compared to 2018.
At the end of 2018, we entered into a 70 million dollar three year senior term loan to fund the acquisition of carbon solutions.
This term loan has mandatory amortization requirements subject to quarterly principal payments of $6 million, which began in March 2019.
During the fourth quarter, we made a $6 million principal payment, reducing the term loan principal balance, including the current portion to $40 million as of the end of the year.
In 2019, we made principal payments totaling $30 million, we continue to expect to pay off this balance in less than its stated term of three years.
We ended the year with total cash.
$17.1 million compared to 23.8 million at the end of 2018, and 20.2 million as of September Thirtyth. This year.
The largest driver of the reduction in our cash balance was the use of capital to reduce the outstanding balance in our term loan.
Repurchases of outstanding shares dividends paid and higher operating cost and capital expenditures related to the acquisition of carbon solutions have also contributed to the change.
We also continue to classify $5 million this cash as long term restricted cash due to restrictions from the term loan.
Our outstanding share Count currently sits just above 18 million as a result of the share repurchase activity, we engaged in during the year.
Throughout the year, we repurchased approximately 533000 shares for total consideration to $5.8 million, including 277000 shares repurchased in the fourth quarter.
For $2.9 billion.
We have always remained opportunistic in reducing our share count and we'll evaluate opportunities to buy back shares going forward.
As he mentioned the board approved an additional $7.1 million in November.
As of the ended the year, we have just over $7 million remaining I'll now turn the call back over to heat.
Thanks, Greg I'd like to take a moment to discuss our outlook before taking questions.
Turning to slide five you can see our expected future RC cash flows based on the 20 invested facilities as of yearend and even after our normal quarterly distributions. We are reaffirming our expectation of $150 million to $175 million of after tax cash flows to ats to the end of 2021.
As a reminder, these this 20 facility number was updated in September of last year due to the unexpected closure of to utilities during the third quarter sites at which Tinuum had to invested RC facilities.
The reduction also included the two facilities that were placed in service in 2009, and thus met their tenure expiration date during the fourth quarter.
Only one of these two facilities were invested in operated and given that these economic expirations. We are also expected. They have always been included in our forward cash flow guidance.
As noted earlier, we also believe that we have line of sight into adding incremental volume in 2020 and look forward to disclose the them as they occur.
Well, we will continue to engage with existing and potential tax equity partners for incremental investment in refined coal. It's important that we also plan for the refined coal see station.
We have just two years remaining for refined coal business with some incremental growth expected as such Tinuum, we'll look to save money, while ensuring that consistently produce refined coal. Additionally, we will also respond to the quickly changing coal fired power generation declined by reducing cash cost we will target.
At least $5 million and reductions on an annualized basis, while optimizing our products and manufacturing processes.
We need to do both lower costs and diversify our product offerings.
Turning to slide six we outlined some of what we see is the key opportunities for us to maximize the potential of our activated carbon assets.
As expected but.
But not at this velocity coal fired power generation continues to decline, which has forced us to turn to the adjacent market opportunities earlier than planned.
We've talked about some of the non coal industrial applications for activated carbon we where we have begun to gain traction with our products.
These are industry that are similarly bound by regulation and the application of our products in those markets have been head of our initial expectation.
We have also build out the internal infrastructure to better compete within the municipal water market.
Our product portfolio and commercial strategy in these water market is greatly improved and we are carrying solid momentum in these markets as we expect to see more fruitful results in 2020.
Back throughout 2017 in 2018, we talked about the highly fragmented nature of the emissions control market. We operated today the activated carbon industry remains highly fragmented and market route rationalization will be a key catalyst for growth as we expand into new markets.
As this market rationalization occurrence, we believe will be in the best position to capitalize on the emerging opportunities given the high quality and cost advantaged characteristics of the assets we possess in this market.
[noise] flipping to slide seven.
We have added the slide to show the changing projections for the coal fired power Mark in the us.
You can see how incorrect the government agency experts have been and how quickly these expectations have fallen each forecast here.
And specifically the precipitated precipitous decline expected in 2020 from when we underwrote this asset in December 2018.
This unexpected decline was the result of the convergence of four factors.
One sustained low natural gas prices to renewables coming to meaningful scale.
Three lower overall power demand.
And for societal governmental and business pressure against coal.
While coal fired power generation is falling faster is that it is expected to remain 10% to 15% of the grid by 2030 based upon the U.S. energy information administration estimates.
Those remaining utilities will need long term stable server service providers that bring a full suite of emission control solution and we expect to be that provider.
The figure in the right hand side of the slide is our internal estimates around how we intend to diversify products away from coal fire power generation you can see that we made significant progress during 2019 towards diversifying our revenue stream and we expect to continue that success in the coming quarters as we expand our capability and.
Currently coal based activated carbon products constitute roughly 20% of the activated carbon market in the U.S. So there is ample market size an opportunity to gain additional share.
As part of our focus to fill our plants capacity. We have maintained ongoing negotiations with parties that will allow us to greatly increase the current volumes and utilization rates for the asset.
These discussions are fluid, but would allow us to leverage the low cost nature of the plant remember as we add volume we can leverage our fixed cost structure, which allows approximately 60 cents up every dollar to go to our bottom line.
Additionally, as I previously mentioned as the market is changing we will quickly adapt and will align our cash costs with or overall business to the current market dynamics.
We possess the premier asset in the industry and while 2019 got got off to a rocky start the long term capability. The these assets in the viability of the growing future market opportunities are unchanged.
We expect to be a significant player in the near adjacent markets and we are entering 2020 with a clear path to value creation because of these investments we've made and the innovations we have accomplished in 2019.
We did not meet RPG segment results, but we exceeded our refined coal expectations, even after two plant closures import coal fired power dispatch.
In short our short term 29 results were solid because of refined coal.
But in our emerging PGTI segment, we need to continue to maintain share and opportunistically grow in our dynamic dynamic core market and accelerate growth into the other markets in order to claim long term success beyond 2021.
On slide eight we recap the progress of our shareholder return program of our balanced capital approach. We have now returned over $100 million to shareholders. Since since mid 2017 between our dividend program and share repurchase authorization.
In recent quarters debt reduction has become a more critical component of this capital allocation as we aim to pay off the term loan balance in less than the three year term.
But we are committed to continuing to distribute value for equity holders.
Finally, let me introduce our 2020 initiatives on slide nine.
Priorities continue to increase and protect our net RC cash flows. This priority is unchanged at the cash flow strength continue to facilitate our capital allocation program, including the investment in our broader PGTI initiatives.
Our second key initiative will be to leverage our plants, you utilization and low cost advantages.
This will entail filling the plans volume with incremental wins in the new and growing market opportunities we spoke about.
As well as remaining village and for additional opportunities upon the expected market rationalization as well as reducing cash costs.
And finally, we remain committed to returning capital to our shareholders. While also paying down our senior term loan and strategically investing in carbon solutions.
Before we take questions as it relates to covert 19, we have not had any business interruption as a result with the situation.
Obviously conditions are changing daily if not by the hour and we are evaluating these changes as needed. So far we've seen no direct personal impact to our staff, nor Tinuum staff, who safety will remain our number one priority we intend to them are communicating with our point as well as business partners to place ourselves.
The best preventative position possible, while also preparing contingency plans for varying degrees of potential the business disruption.
Tinuum domestically bait and used many of the same chemicals as we do additionally, they have ample inventory stored in the U.S.
We're also you domestically focused business with a highly efficient and vertically integrated supply chain.
The supply stability offered by the proximity ever mine, coupled with our local distribution hub helps insulate us from many potential disruptions and actually offers us an opportunity to service those customers, who may be seen temporary dislocations in their supply chain nothing no us we will continue to street divestiture.
Relation with the seriousness dessert deserves and respond to any changes as appropriate.
So with that we'll take questions.
Thank you.
Reminder, to ask a question for me to press Star one on your telephone and to withdraw your question press the founder housekeeping.
First question is run by mid dialysis H.C. Wainwright Your line is open.
Thank you good morning, everyone.
Good morning, Justin.
Good morning, just to begin with are there any other group plant closure as expected.
Projections.
No there or not.
The two in 2019, specifically one was surprised but based on what we're seeing in the state that these are facilities are located.
We don't foresee anything happening nor are we projected any more closures.
Got it in your slides, you're indicating you might add one more than 20 greedy.
Do you think there's an opportunity to add more than.
Yeah. So.
We do think that Theres opportunity, we're in discussions to add more than one.
So but really the next six months are probably the most critical point for us to adding those additional.
Facilities as well as additional volume and as I noted committing to what that incremental volumes going to means from a financial perspective.
Similar to we've had in the past, but we're also evaluating this dynamic co firepower dispatch so we'll announce.
Kind of what we think that that incremental volumes going to be.
As each of those deals happened over the next coming month.
Understood.
In terms of your efforts to lower operating costs, what exactly you always focused on is it personnel or any other aspect of the operations.
It's across the board it's personnel, it's all the normal SJ costs that you'd expect to be reducing from legal to consulting and then even and is not in our our cost estimates will continue to get efficient whether that's on the product optimization side or manufacturing side. So it is across the board.
So.
Then when you're looking at nonworking related growth opportunities.
Walter has been sort of one area of focus.
Going to return contribution from you know these efforts how long should be though is it.
<unk> two years will be how far we are you from getting actually this is.
2019 was a very important year for us we invested a lot in equipment and processes and have improved our product capabilities as well as realigned our commercial stuff.
So 2020, we expect a significant increase in.
In these in these opportunities and look forward to giving updates as each quarter goes by.
Just a reminder, why that.
Why we feel good about the opportunity to continue to grow there is really because of this manufacturing assets that we have.
If you remember that that that had an investment of over 400 million dollar and it's the newest asset in the North America So for us.
We have the cornerstone asset and the capability to make activated carbon so really for us it was understanding the markets rounding out our application capabilities and then some nominal investments to ensure that we can properly test and we did all that in 2019. So again, we're really encouraged about this year and seeing meaningful.
Growth in that and it was we had a we had a graphic on one of the slides that that showed that it's not complete guidance, but it is aligned to what we think this this growth that we expect primarily water and industrial products from Mercury again expect a lot of that in 29 in 2020.
Understood.
That's one Andreas thank you so much okay. Thank you.
There are no further questions at this time I'll turn the call back to Mr. Sampson for any closing remarks.
Well, great well, thanks, everybody for joining the tall call today and your continued support we look forward to updating you all next quarter have a great to everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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