Q1 2020 Earnings Call
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[music]. Thank you good morning, everyone and thanks for joining us today for the first quarter 2020 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 call is being webcast live in the Investor section of the website and a downloadable version of today's prison.
Patient is available.
A webcast replay will also be available on the site and you can contact our IR for Investor Relations support at three one to four four or five to eight seven.
I'd remind you that the presentation in the remarks made today includes forward looking statements as defined in section 21, each other securities and Exchange Act. These statements are based on information currently available to us and involve risks and uncertainties that could cause actual future results performance business prospects and opportunities to differ materially from those expressed an orange.
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These risks and uncertainties include but are not limited to the factors identified on slide two of today's slide presentation.
Our form 10-Q for the quarter ended March 31, 2020, and other filings with the Securities and Exchange Commission.
Except as expressly required by the Securities laws Company undertakes no obligation to update those factors or any forward looking statements to reflect future a bunch developments were changed circumstances or for any or at least in addition, it's very important to review the presentation in today's remarks in conjunction with the gap references in the financial statements. So what.
I'll turn the call over to Heath Sampson you.
Thanks, Ryan and thanks to everyone for joining us this morning.
I'd like to begin by extending my wishes to wall I hope, you're all safe and healthy.
Obviously, we are operating in a different world. Then we then just two short months ago. When we held our fourth quarter earnings call that rapid change that's required to sit respond and Greg will cover the actions we've taken as a company in a few minutes.
Let's move on to slide three and review our first quarter.
Within our refined coal segment distributions from tenuous fell 12% compared to the first quarter of 2019.
The decline was driven by significant decreases in coal fired power generation over the past year, which resulted in restructuring lease contracts between tinuum and its largest customer.
And the close you're up to utilities. The 10, you Tinuum had refined coal facilities at.
All of which we initially discussed on the 2019 third quarter call.
Data provided by the EPA indicates that coal fired power dispatch in the first quarter 2020 was down approximately 33% compared to the first three month of 2019.
We expect additional headwinds due to poor poor code for power generation to continue in 2020.
Along with decreases in aggregate energy demand brought about by the business shut downs related to the pandemic.
However, as we stated on our fourth quarter call. We continue to have line of sight into at least one additional refined coal closure and 2020. So the timing is difficult to determine given the current environment.
Royalties were also lower due to increased depreciation and lower rent payments to tenuous.
Our our RCM segment, adjusted EBITDA was down 15% compared to last year.
This is the first quarter, we have highlighted this metric and we plan to continue to included in the future.
Given the impact of timing and revenue recognition by 10, you on an accelerated noncash depreciation by Ternium, our equity earnings are significant reduced compared to the cash distributions we were Steve.
We believe adjusted R&D segment helps to portray an additional year over year comparison of earnings and associated cash flows segment.
And our P.G.I. segment core core core poor coal coal fired power dispatch also continued to pressure our financial performance.
Total volume and revenue revenues were significantly lower than those in 2019, albeit inline with our updated expectations. As a result of non coal power generation sources, increasing their percentage of the overall power supply.
We have been respond responding by focusing on what we can control reducing cost and diversifying the business.
Execution and renewal rates with existing customers remain high and we will undoubtedly maintain the premier asset in this industry.
But increasing our penetration of noncore markets like water in industrial applications will be a key determinant of the future success of this business.
We feel confident in our internal sales team and infrastructure as well as the product portfolio diversification that we have achieved thus far.
We also believe the competitive landscape within the activated carbon is industry will accelerate toward rationalization among market participants given today's tough economic conditions.
Which may drive actions, such as restructuring and M&A.
This does a car Kurt given our industry, leading asset we expect to be well position to capitalize on those changes in the meantime, we remain acutely focused in this segment on winning share in markets, where we have the right to win.
So in our plants capacity with more diversified revenue stream and leveraging our complete product solutions package.
Moving to capital allocation returned roughly $4.7 million to our shareholders during the first quarter quarter through our dividend program and share repurchases.
We repurchased shares impede our first quarter dividend on March 10th.
However, as the pandemic has evolved and impacted financial markets an asset.
Our capital allocation priorities have as well.
We have taken actions to reduce cost and had focused dot and focused on cash conservation.
As part of these actions were suspended the company's quarterly dividend, which will allow us to presume preserve roughly $5 million per quarter. These actions focused on risk mitigation liquidity will protect our business today and put in place for us to win tomorrow.
Lastly, we updating net of first quarter distributions, our net cash flows outlook for the RC segment.
To total between 125 million in a $150 million through the end of 2021 in the near term near term, we are focused on adding incremental tonnage whatever but where were available we're able.
We are planning for the current expected see they shouldn't have RC cash flows at the end of next year in RPG I segment.
We would expect improved performance in the second half a 2020 that pandemic, hopefully subside and business conditions improve.
Lastly, as pre leased previously you know I submitted my intention to resign from the CEO position as well as the board of directors effective June 30 to pursue other interest.
And it's been a privilege to lead this company through a difficult turn around and the subsequent transformation I'm very proud of the team.
No I have helped build here and what we have accomplished together Ats has the right team and the right collection of assets to take the next step to its transformation and I look forward to seeing that success.
I'd like to thank you all for your support over that time, Greg will be assuming the interim CEO role and having worked alongside from five years I have the utmost competence in his leadership ability knowledge of that business and of our customers. So with that I'll turn the call over to Greg.
Thank you eat.
Let's start on slide four as we discuss our responses to the current environment, we all find ourselves in.
Our first priority is and always will be the health and safety of our employees.
We took proactive measures to protect our team, which included updating safe workplace protocols and offering work from home options where possible.
For those team members that continue to work out of our physical locations, we undertook enhanced sanitation and cleaning measures as well as social distancing guidelines in accordance with CDC guidelines.
To date, we've had no known cases across our facilities and we'll continue to follow the best practices that emerge over the rest of the year to protect our people.
In addition to increasing our focus on safety. We've also taken steps to ensure business continuity.
We support our country's electrical power plants and municipal water facilities, which are obviously critical and essential services.
We remain in ongoing contact with them to better understand how to service their needs amidst changing market conditions.
This includes taking internal actions to protect our integrated supply chain and ensure a reliable supply of feedstock for uninterrupted supply of our activated carbon products.
As part of this effort, we sequester a portion of our onsite workforce at our Red River plant in Louisiana, which allowed that workforce to continue to operate or manufacturing capabilities and produce inventory sooner than we may have planned to ensure that we could provide product to our customers in case, we work to experience to an experience an event that broadly impact.
And our workforce.
And finally, we bolstered our financial flexibility through a series of actions made both late in Q1 as well as thus far in Q2, we began by evaluating all noncore spending.
And by Reevaluating, our short term capital allocation plans.
First in an effort to contain cost we restricted all corporate travel and nonessential spending.
We also reduced the cash retainer component of our board's pay structure and withheld certain executive bonuses.
Next in terms of capital allocation, we reprioritized initiatives in an effort to de risk the business.
Debt reduction remains a top priority and we remain committed to eliminating our debt in less than its stated three year term.
Additionally, we need to continue to prudently investing or activated carbon assets to ensure manufacturing capabilities and ex again execute against a handful of opportunities.
That could reduce available capacity at the plant if we're successful.
However, given the uncertainty that the cobot 19 pandemic has caused not just in the broader economy, but across many of the end markets. We serve we need to suspend our quarterly dividend and evaluate any dollars, we may allocate to share repurchases.
This was a difficult decision and not one we took lightly.
We will continue to evaluate our capital allocation plans as we have more visibility into how the economy begins to turn back on and a shelter in place ordinances are lifted in the coming months.
These actions will help protect our near term liquidity and offer the flexibility we need to navigate these uncertain times.
Let's now turn to slide five for our financial review.
First quarter earnings from equity method investments were 8.3 million compared to 21.7 million for the first quarter of 2019.
The decrease in earnings from equity method investments during the first quarter was primarily due to lower earnings from Tinuum group, resulting from higher depreciation on all Tinuum group refined coal facilities as a result of a reduction in their estimated useful lives during the third quarter of 2019.
And do Tinuum restructuring RC facility leases with its largest customer which decreased net lease payments and equity earnings beginning in that same period.
This year, we expect that our GAAP equity earnings will be significantly less than 2019 due to tinuum haven't Rex having recognized two refined coal facility transactions as point in time sales. During 2019. In addition to the impacts I just discussed.
As we have previously discussed this does not affect the timing or the total projected future cash flows from RC segment, and we also expect to see cash distribution significantly exceed GAAP earnings.
From our equity method investments in both 2020 and 2021.
First quarter revenues totaled 12.3 million compared with 19.3 million in the first quarter of 2019.
The decrease in revenues was primarily the result of lower consumables revenue, resulting from lower volumes that were negatively impacted by low coal fired power dispatch driven by power generation from sources other than coal.
These decreases were partially offset by incremental wins in industries not impacted by coal fired power generation.
First quarter royalty earnings from Tinuum group were 3 million compared to 4.2 million for the first quarter of 2019.
Loyalty income is based upon a percentage of the per ton pre tax margin inclusive of impacts related to depreciation expense and other allocable expenses.
The lower royalty earnings in the first quarter were due to the increased depreciation and lower rent payments to tinuum.
Ltd earnings are expected to be negatively impacted due to these changes in both 2020 in 2021.
Net loss for the first quarter was 1.9 million compared to a net profit of 14.4 million in 2019.
The decrease in net income was again, primarily driven by lower earnings from equity method investments.
And changes in operating losses from the activated carbon business.
Consolidated adjusted EBITDA was 10.8 million for the first quarter compared to 18 million in 2019.
The decrease in consolidated adjusted EBITDA was primarily driven by 13.4 million.
Lower in lower earnings from equity method investments and changes in operating losses related to the activated carbon business.
We ended the first quarter with a cash balance inclusive of restricted cash of 17.2 million an increase of 0.1 million since the end of the year, the 5 million and long term restricted cash remains due to restrictions from the term loan.
During the quarter, we made a $6 million principal payment on our term loan reducing the principal balance, including the current portion to 34 million as of the ended the quarter.
We continue to expect to pay off this balance in less than a stated term of three years.
Total long term borrowings inclusive of finance leases now sit at 38 million compared to 44 million at year end.
Turning to slide six.
You can see our expected future RC cash flows.
As he previously mentioned based on the 20 invested facilities and cash distributions received during the quarter.
We're updating our expectation of after tax cash flows to 80, yes to be between 125 million and $150 million to the end of 2021.
We also believe that we have line of sight into adding incremental volume in 2020, however, the direct and indirect impacts of co bid have negatively impacted timing related to this incremental volume.
Since we have under two years remaining with our refined coal business Tinuum, we'll look to efficiently manage its cost structure, while ensuring that there are assets reliably produce refined coal.
We will respond accordingly, and seek to reduce costs.
And continued to work towards our previously provided target of at least $5 million introductions on an annualized basis, while optimizing our products and manufacturing processes.
These cost containment initiatives were discussed on the fourth quarter call.
So we see them as separate from any cost reduction initiatives related to the pandemic.
Turning to slide seven we outlined some of what we see as the key opportunities for us to maximize the potential of our activated carbon assets.
As expected, but not at this velocity coal fired power generation continues to decline, which has forced us to accelerate our focus on other adjacent market opportunities earlier than planned.
We have talked about some of the non coal industrial applications for activated carbon where we have seen traction with our products.
These are industries that are similarly bound by regulations and the application of our products. In these markets continues to be ahead of our initial expectations.
We're also finding ourselves better able to compete within the municipal water market.
Our product portfolio and commercial strategy in the water market is much improved from the time of the carbon solutions acquisition, and we expect to see higher performance here in 2020 than we did last year.
We also expect supply and demand to ultimately rationalizing the industry in the coming years, which may include restructurings in M&A.
That expected market rationalization will be a key catalyst for growth as we expand into new markets.
This occurs we believe will be we will be in position to capitalize on the opportunities given the premier quality and cost advantageous nature of the assets we possess in the market.
Slide eight shows the changing projection from coal fired power in the U.S. as we discussed in the fourth quarter call. You can see the speed of magnitude of the change in the coal fire power generation expectations.
As these changes have occurred it has caused us to increase our focus in obtaining incremental opportunities away from coal fired power generation.
As such the figure on the right hand side of the slide is our internal estimates around how we intend to diversify our products away from coal fired power generation.
As part of this focus we have maintained ongoing negotiations with parties that would allow us to leverage the new product and capabilities that we have built over the last year.
If were successful in closing some of these larger opportunities and our pipeline.
This would greatly increased the current volume levels and utilization rates for the asset diversify the customer base and more fully leveraged the low cost nature of the plant.
Additionally, as the market is changing we will it dropped and align cash costs from our overall business to current dynamics.
On slide nine we recap our capital allocation approach successes over the last 12 quarters.
Since the start of this initiative in 2017, we have returned over $106 million to shareholders via dividends and share repurchases.
However, given the current overall economic uncertainty, we've taken steps to enable improved financial flexibility, including the suspension of our quarterly cash dividend.
As well as pause on our share repurchase activity.
This will allow us to preserve $5 million per quarter in the near term, which we believe is the prudent action to take given today's uncertain economic situation.
In the near term debt reduction will remain a priority as term loan is subject to mandatory quarterly principal payments of $6 million.
We will reevaluate our capital allocation initiatives as market conditions evolve.
Finally, let's review our 2020 priorities on slide 10, keeping in mind that some of these of change at least temporarily in light of the current crisis.
Our first priority is unchanged and it is to continue to add and protect our net refined coal cash flows.
We will focus on optimizing our operational performance and reducing our costs such that we maximize our future cash flow stream, which will continue to support our long term capital allocation.
Our second key priority also remains unchanged as we look to leverage our Red River plant utilization and low cost advantages. This will entail filling the plants volume capacity with incremental wins.
In these new and growing market opportunities, we spoke about as well as remaining vigilant for any additional opportunities upon the expected market rationalization as well as reducing cash costs.
Lastly, we shifted our near term capital allocation focused to risk mitigation and cash preservation.
We will continue to de leverage but ultimately the shareholder return component of our capital allocation initiatives are on pause in order to preserve near term liquidity.
Before we take any questions I think it's important that I think key for the dedication and leadership. He has brought to this organization.
Keith began as our CFO roughly six years ago.
At a time when the organization was laid on its financial filings and lost in terms of the strategic direction.
Within seven months Heath was asked to lead the company has its CEO.
His leadership throughout the company financially compliant and stable and his vision provided a path forward a.
A true Testament to that success is on our capital allocation slide as we returned more shareholders through dividends and repurchases than what our market cap was in the middle of that turnaround time period.
Additionally, steps were taken to provide a path forward, including the significant significant expansion of invested refined coal facilities.
Our refined coal assets, while under some pressure due to coal fired power generation will provide us potential cash flow generation to navigate these uncertain times.
And our activated carbon assets and platform will provide the path to longer term value be on the end of 2021.
So he on behalf of our whole team here at 80, yes, our customers partners and our investors I'd like to thank you for everything you've done for us and this organization.
It's been a true honor to work with you.
And most importantly for your friendship.
With that we'll take your questions.
Ladies and gentlemen to ask a question. Please press Star then the number one on your telephone keypad pause for just a moment compiled acuity roster.
Your first question comes from Patricia Lorenz private Investor Your line is open.
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Thank you.
I'd now like to turn the call back over to speakers Theres No question.
Thanks again, everyone for joining the call. This morning, we're all living through uncertain times, when I truly hope, you're all stain safe and healthy while we have challenges to navigate we retain a potentially strong cash generating segment in our RC business and in longer term growth potential in our activated carbon and other consumable than tech.
LNG platform.
We have the financial foundation and the tools to navigate this pandemic and win in the future and we're looking forward to brighter days ahead.
Have a great day.
This concludes today's conference call you may now disconnect.