Q2 2020 Advanced Emissions Solutions Inc Earnings Call
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Good morning, everyone and thank you for joining us today for our second quarter 2020 earnings results call with me on the call today, or Greg, marking interim President and Chief Executive Officer.
Treasurer, and Chris Bellino, Chief Accounting Officer. This conference call is being webcast live within 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 conduct you can contact Alpha IR group for Investor Relations support at three one to four four.
Five to eight seven I'll.
Let me remind you that the presentation and remarks made today includes forward looking statements as defined in section 21, each of the Securities and Exchange Act.
Based on information currently available to us and involve risks and uncertainties that could cause actual future results performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements. These risks and uncertainties include but are not limited to those factors identified on slide two of today's slide.
These integration in our form 10-Q for the quarter ended June 32020, and other filings with the Securities and Exchange Commission, except as expressly required by securities laws of the company undertakes no obligation to update those factors or any forward looking statements to reflect future events developments or changed circumstances or.
For any other reason.
In addition, it's very important to review the presentation in today's remarks in conjunction with the GAAP references in the financial statement, so with that I'd like to turn the call over to Greg.
Thanks, Ryan and thanks to everyone for joining us this morning.
Before we begin I'd like to introduce our Chief Accounting Officer, Chris fully know who is joining me on this morning's call. Chris has been with 80 EPS for five years and has been in valuable to us serving in a variety of role during that time.
We will continue to join me on earnings conference call that they serve in the interim CEO role.
I'd also like to give a brief update on our mitigation efforts related to the pandemic.
We are proud to continue to operate as an essential service provider.
And our focusing on things within our control to respond appropriately to the economic disruption, resulting from the crisis.
Our number one priority will always be our employee health and safety and we have taken measures to protect our team.
We have updated safer workplace protocols and are continuing to offer our employees the ability to work from home where possible.
When it became apparent to us that our operations could be interrupted we sequestered certain operating plant personnel to build inventory balances in advance of any potential disruption.
Our goal was to ensure that we would have sufficient inventory to properly serve our central customers in the event that the point where to experience a cobot outbreak and acquire a temporary pause in our operations, which has been seen throughout the country in certain manufacturing environment. During this pandemic.
Thankfully, we have not experienced this type of event to date. However, these actions have allowed us to continue to meet our customers' needs and we remain in frequent contact with these customers to ensure that they meet their emissions control and purification requirements.
We also took steps to protect our financial position.
Evaluated our capital structure and all non core capital spending.
Our focus was to prioritize liquidity inorganic investment to ensure manufacturing capabilities.
In accordance with that focus we paused I'll share repurchases and suspended our dividend.
We have also restricting corporate travel and limited back filling open positions. In addition to other majors.
And as previously discussed we applied for and were granted a 3.3 million dollar loan through the FDA to ensure we were able to retain our workforce through the early stages of this crisis.
The impact of that is recorded in our financial statements of debt, though we expect the loan to be forgiven and recorded as debt forgiveness in the income statement once the debt forgiveness process can be completed.
Let's turn to slide three for a high level review of our second quarter.
We'll start with our refined coal or the RC segment.
Tinuum distributions to EPS for the second quarter were 15.4 million, which is 17% lower than last year.
The lower distributions were the result of renegotiated contracts in third quarter of 2019 at Tinuum that resulted in lower net lease payments to the company.
Also contributing to the decline has been the decrease colburn driven by Chief alternative energy sources as well as by the lower aggregate energy demand in the us from lower overall economic activity.
During the second quarter.
Our RC segment operating income in the second quarter was 10.8 million compared to 24.6 million in the prior year again driven by lower.
Earnings from Tinuum as well as point in time recognition during the second quarter of 2019.
Related to incremental RC facilities contracted during that period.
As we have discussed on past earnings calls given the impacts.
Of timing of revenue recognition in accelerated noncash depreciation by Tinuum, our equity earnings are significantly reduced compared to the cash distributions we will receive.
As a result of this we believe adjusted refined coal segment EBITDA helps to portray in additional year over year comparison of the earnings and associated cash flows of the segment.
RC segment adjusted EBITDA in the second quarter was 18.1 million compared to 22.6 million in the prior year.
In our PGTI segment, our financial performance also remains challenged by lower aggregate power generation and cold this batch as well as changes in product mix.
During the quarter, we took an impairment charge of roughly 26 million related to long lived assets of which 23 million was related to the PGTI segment.
Chris will cover the circumstances of that impairment in greater detail in a moment.
In the meantime, our focus here remains on areas, where we have the right to win filling the plant's capacity and leveraging our holistic solutions package.
Our execution has remained strong despite lower volumes and we expect to continue to maintain high renewal rates with our existing customers.
While the financial performance of the segment has been below our initial expectations. We remain confident in the quality of the asset in our position in the marketplace as a provider of choice.
I will talk more about this after the financial review.
From a consolidated perspective, our net loss in the second quarter was 23.8 million, primarily driven by the aforementioned impairment charge.
Excluding this impairment charge net income would have been 2.3 million for the second quarter and 0.4 million for the first half of the year.
Our consolidated adjusted EBITDA was 12.3 million compared to 15.1 million in the prior year.
Pertaining to our capital allocation, we are continuing to prioritize debt reduction and cash preservation during the pandemic.
We remain focused on cost containment and improve our overall liquidity position from last quarter.
Looking ahead, we are updating our projected after tax cash flows from the RC segment to be between 100 million and 125 million through the end of 2021.
And remember that our financials are provided as of the close of the second quarter.
And thus this does not include the additional refined coal transactions, we announced in July we estimate that these two transactions will provide additional future cash flows to Ats of 5 million to 7 million due to additional rent payments and savings of Tinuum operating costs.
Although we expect coal fired power generation to remain down through the rest of 2020, driven by record low natural gas prices and increasing renewable energy generating capacity, we still see select opportunities for both of our segments.
In our RC segment, our primary goal is to protect our projected refined coal cash flow stream and to seek to add to those cash flows were able.
These distributions will continue to facilitate our capital allocation plans as we work to improve performance on our activated carbon assets.
In our PGS segment, we remain intently focused on finding ways to build a plant capacity and wind volumes, where we are most competitive.
Due to the challenging market conditions during the last 12 months, we've been working to strategically secure additional volumes to fill our red River plant to better capture the low cost nature of the asset and improve its earnings profile. We have spent considerable time and effort building out our product capabilities and internal sales infrastructure and we are beginning to have success on nuclear.
Contract awards for material supply agreements in markets outside of power generation.
So far this year, we are in line, where we were expected to be with our growing water business and we continue to see encouraging traction with industrial markets.
We remain focused on identifying other non power generation markets to diversify away from the power generation applications for activated carbon.
With that I'd like to turn the call over to Chris who will review, our second quarter and year to date financial performance.
Thank you, Greg, let's turn to slide for financial review.
Starting with our earnings from equity method investments those second quarter earnings from equity equity method investments totaled 8.2 million.
Compared to 20.9 million for the second quarter of 2018.
First half earnings from equity method investments were 16.4 million.
Paired to 42.6 million for the first half of 2018.
The decreases during the second quarter in first half were mainly the result of lower earnings continue in group.
Resulting from decreased aggregate coal fired power generation higher depreciation and all kidney group RC facilities as a result of a reduction in their estimated useful lives during the third quarter. Two how's that 2019 decrease is also result opinion groups pre.
Restructuring of its RC facility leases with its largest customer.
This decrease net lease payments in equity earnings beginning in Q3 2019 also contributing to the declines with the impact at point in time revenue recognition of certain RC contracts by Tinuum group during 2000 1919 compared to the current year.
Moving on to revenues net loss and net income the second quarter consolidated revenue was 11.5 million compared to 15.6 million units second quarter 2018, first half revenue was 23.7 million compared to 34.9 in the first half of chief.
Thousand 19 decreases in rapidly with primary primarily the result of lower consumable revenue and lower volumes that we need to be negatively impacted by low coal fired power dispatch and overall decreases in power generation driving reaches demand as well as lower royalty income.
Second quarter royalty.
Teen group, Triquint 3 million compared to 4.2 million for the second quarter 2018.
First half royalty earnings from Tinuum group was 6.4 million compared to 8.4 million for the first half of 2019.
Royalty income is based upon a percentage of it per tonne per tax margin inclusive of impacts related to depreciation expense and other allocable expenses the lower royalty earnings in the first half were due to increased depreciation and lower rent payments continue which also impacted.
Companies equity earnings.
Well the earnings are expected to be negatively impacted due to these changes in both 2020 and in 2021.
As of June Thirtyth 2020, we had 20 RC facilities is that invested with 16 that are generating royalties, which does not include the previously announced transactions during the month of July.
During the quarter to complete recorded consolidated pretax noncash impairment charge of 26.1 million. The majority of this charge roughly 23 million was related to our PG segments long lived asset group such it certainly plant in mind related long lived assets.
Yes.
Consolidated net loss during the second quarter was 23.81 compared to net profit at 8.1 million in 2019.
First half net loss was 25.7 million compared to net income 22.5 million last year decreases in income primarily driven by the April mentions impairment charge and lower earnings from Tim.
Excluding this impairment charge net income was 2.3 million for the second quarter of this year end point 4 million for that first half of this year as well.
Consolidated adjusted EBITDA was 12.3 million for the second quarter compared to 15.1.
Slide 19.
First half consolidated adjusted EBITDA was 23.1 million compared to 33.1 million in 2018.
The decreases in consolidated adjusted EBITDA were driven by lower earnings and distributions from equity method investment.
This was partially offset by higher depreciation and amortization expense.
In terms of cash we ended the second quarter with a cash balance inclusive inclusive of restricted cash of 21.7 million an increase of 8.4 point 7 million.
This year end Decemberthirty, one 2018, the 5 million in long term restricted cash needs due to conditions related to the to the term loan, which we will continue to focus on cash preservation and ensuring that we have profitably profit liquidity to serve our customers.
Popping up with an update on current term debt of the company during the second quarter, we made a $6 million principal payment under term loan.
Reducing the principal balance, including the current portion to 28 million as of June Thirtyth 2020.
Total borrowings came in at 36 million compared to 44 million at year end 2019, 36 million is comprised of the 28 million dollar term loan and 3.3 million funds that we secured from the SBH potentially forgivable loan.
Ground.
While the remainder is comprised of capital leases.
Thank you now I'm going to turn it back over to Greg.
Remarks.
Thank you Chris.
Turning to slide five you can see our expected future refined coal cash flows.
Based on the 20 invested facilities and cash distributions received during the second quarter, we're updating our expectation of after tax cash flows to EPS to be between 100 million and $125 million through the end of 2021.
Tinuum continues to remain in active discussions with potential tax equity investors in our pipeline.
As I mentioned this total does not include two previously announced July transactions, which we expect to add between five to 7 million of additional cash flows to this total.
Exclusive of a tax credit extension, we have just six quarters remaining with our refined coal business as such Tinuum is taking appropriate steps to adjust its cost structure, while ensuring that their assets reliably produce refined coal.
Naturally we are also responding and we'll look to lower our cash cost dedicated to the refined coal segment.
Slide six reflects the opportunities we have identified and continue to execute against for our activated carbon assets as we have discussed in prior calls we always underwritten declining coal dispatch in our assumptions when we acquired the activated carbon assets. However, the rate of decline in both 2019 and again, thus far in 20.
Tony has been faster than our initial expectations.
This declining aggregate coal fire dispatch has prevented us from filling our Red River plant to greater capacity with power generation volume.
In response, we are proactively accelerated our focus on other adjacent market opportunities.
We have done significant work since the acquisition of carbon solutions in December of 2018 to respond to this changing landscape. We have talked about some of the non power generation industrial applications for activated carbon where we have gained traction with our products.
The success, we have seen here has continued and we remain on track with our forecasts and water market.
While the total volume we have one in these markets has been unable to fully offset the decline in power generation. We are seeing early signs of our competitive position in the marketplace and are encouraged by the trajectory of our role in these adjacent markets.
We're also seeing early successes and other growing market opportunities utilizing existing product technologies and capabilities that may provide additional volumes in areas, where the historical carbon solutions business had not competed.
The efforts by our team to continue to identify new areas to compete within our overall competitive market is key to managing through this time period.
Additionally, there remains potential for an improved environment from the first half from 2020 due to increased power generation demand higher natural gas prices and impacts from the economy slowly opening.
Coupled with the work the team has done related to industrial and water applications.
We also expect supply and demand to ultimately rationalizing the industry in the coming years, which may include restructurings in M&A.
Given today's imbalanced market, we are evaluating strategic opportunities to increase and diversify our addressable markets.
We believe will be in position to capitalize on the opportunities given the premier.
Quality and cost advantageous nature of the assets we possess in this market.
Which has the potential to increase our earnings profile.
Slide seven shows the changing projections for coal fired power in the us.
The graph on the left side reflects the steep downward revisions to coal fired power generation expectations from the.
In response 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 I said these efforts are already well underway and we are encouraged by early successes.
In spite of the decline in the power generation market emissions control regulations, whether they are enforced at the state or federal level will continue to remain in place.
As such certain industries and power utilities will remain bound by emission caps and we'll need steady long term providers of a full suite of emissions control solutions to service holistic partners to meet regulatory hurdles.
We expect to be that provider, given our quality asset base existing customer relationships and technological expertise.
As we have mentioned we are currently an ongoing negotiations with external 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 the larger opportunities in our pipeline. This would greatly increase the current utilization rates for the asset diversify the customer base, including decrease in exposure to power generation markets and more fully leveraged the low cost nature of the plan.
We believe the fixed cost absorption absorption that would result from.
This these contracts would greatly improve the profitability and efficiency of the Red River plant.
We feel as though we have made great progress since our last update in May and this work remains of the highest strategic importance for us.
Slide eight provides an update on our capital allocation program.
We implemented our shareholder return initiatives during the second quarter of 2017 and since that time, we have returned $106.4 million to shareholders via dividends and share repurchases. We've also pay down 42 million of the 70 million term loan the funded the acquisition of carbon solutions in late 2018.
As we discussed last quarter in order to improve our financial flexibility, we suspended our quarterly cash dividend and put a pause on share repurchases.
These initiatives were important pillars of our capital allocation plan.
So we did not make the decision lightly but ultimately it was important to preserve the roughly 5 million per quarter as we work our way through this crisis.
In the near term debt reduction will remain a priority as the term loan is subject to mandatory quarterly principal payments of $6 million.
We continue to expect to pay off a full balance of alone prior to the end date of December 31 2021.
And finally slide nine outlines our priorities for the remainder of the year.
Our first priority is to continue to maximize and protect our net refined coal cash flows.
Although tinuum is marching towards the end of the tax credit generation period, there remain incremental opportunities for invested facilities, while simultaneously adjusting their cost structure.
We will also continue to leverage the best in class asset, we have to win where our products and capabilities allow us to do so this will entail filling the plant's capacity with incremental wins in the market opportunities you spoke about as well as continuing to seek additional opportunities upon the expected market rationalization, while reducing cash costs.
As such we are on track to our previously provided target of at least $5 million introductions on an annualized basis, while optimizing optimizing our products and manufacturing processes.
These cost mitigation actions were put into place before the current prices. So their exclusive of any cost changes related to the pandemic.
Lastly, we've shifted our near term capital allocation focused risk mitigation and cash preservation.
We will continue to deleverage.
But the shareholder return component of our capital allocation plan remains on hold to preserve liquidity.
With that we will take your questions.
At this time, if he would like to ask your question. Please press Star then the number one on your telephone keypad.
Again that is starting to the number one on your telephone keypad. If you would like to ask a question and we'll pause for just a moment.
And there are no questions at this time I would like to turn the call back over to Greg for closing remarks.
Thanks again, everyone for joining the call. This morning for your continued support stay healthy and we look forward to providing our next update.
This concludes today's conference call you may now disconnect.
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