Q4 2020 Advanced Emissions Solutions Inc Earnings Call
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Good day.
Ladies and gentlemen, thank you for standing by and welcome to the advanced emissions solutions Q4, 2020 earnings call. At this time all participants lines are in a listen only mode. If you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today.
Why it <unk> Investor relations. Thank you. Please go ahead.
Thank you good morning, everyone and thank you for joining us today for our fourth quarter and full year 2020 earnings results call.
With me on the call today are Greg Mark and interim President and Chief Executive Officer, and Treasurer, <unk>, Chief Accounting Officer.
This call is being webcast live within the Investor section of our website and a downloadable version of today's presentation.
Favorable there as well the Wildcats replay will also be available on our site and you can contact the Alpha IR group for Investor Relations support at 312 or four or five to 870.
Let me remind you that the presentation normal March per day.
<unk> forward looking statements as defined in section 21 E 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 fit from materially from those expressed in or.
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 presentation, and our form 10-K for the year ended December.
31, 2020, and other filings with the Securities and Exchange Commission, except as expressly required by the securities laws. 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 is very important to review the presentation and today's remarks in conjunction with the GAAP references in the financial statements. So with that I'd like to turn the call over to Greg.
Thanks Wyatt.
And thanks to everyone for joining us this morning.
Before we begin I would like to take a moment to thank Crystal Lino, who is joining me on our past few earnings calls and will be retiring at the end of the month.
Chris has been with <unk> for six years and has served in a variety of roles during that time and has been integral to the company's success.
We wish her well in retirement and thank her for her service to the company.
After market closed yesterday, we published our fourth quarter and full year results that were aligned with our expectations.
<unk> was able to complete two additional transactions in the fourth quarter, bringing our invested facilities up to 23, now which continues to support our forecast of after tax cash flows and our investment in our go forward strategy as a provider of choice for activated carbon solutions.
The performance of our activated carbon business exceeded the fourth quarter of 2019, and we are currently carrying.
Carrying encouraging business momentum into 2021, we once again beat our internal volume forecast and are now turning to optimizing our current product mix to enhance the earnings profile of the segment.
And just last month, we announced a second supply agreement with Cabot to sell our activated carbon and other products through cabinet sales channels in Europe, the middle East and Africa, which is incremental to the 15 year Master supply agreement, we announced in September.
I'll talk more about the detailed strategy and progress around these two agreements, but first let's turn to slide three for a high level review of the quarter and year.
Fourth quarter distribution, continuing totaled $22 million during the quarter and royalty income totaled 35 or $3 5 million full.
Full year distributions totaled $62 4 million in full year royalties were $13 4 million.
Fourth quarter distribution continuum, we're up 18% based on new facility closures over the last year.
On an annual basis, the lower full year distributions were the result of renegotiated contracts in the third quarter of 2019 that resulted in lower net lease payments of the company and timing of cash distributions from <unk>.
As we have discussed on past earnings calls given the impacts of timing of revenue recognition in accelerated non cash depreciation by tenure in our equity earnings in 2020 were significantly reduced compared to the cash distributions we received.
Of that we believe adjusted RC segment EBITDA helps to portray an additional year over year comparison of the earnings and associated cash flows of the segment.
<unk> segment adjusted EBITDA for the fourth quarter increased 15% to $23 5 million compared to Q4 of last year.
Full year RC segment, adjusted EBITDA was $74 6 million compared to $89 3 million in 2019.
Moving to the activated carbon business I'd like to point out that we have renamed this segment to better reflect its long term positioning and more expansive scope, we expect our solutions to serve far more markets than where we originally provided products upon acquiring carbon solutions.
So what we previously called power generation and industrials or Pgi has now been updated to advanced purification technologies or <unk> for short.
In the <unk> segment, our fourth quarter revenue was up roughly 25% to $14 9 million, while our segment operating income was <unk> $7 million.
Adjusted EBITDA in the segment was $2 3 million an improvement against a $1 4 million adjusted EBITDA loss in Q4 of last year.
Our APC segment saw another strong quarter of execution with our existing customers and was positively impacted by the Cabot supply agreement are.
Our main focus over the past several quarters has been filling the plants capacity.
Having now obtained the capacity utilization level more in line with our longer term run rate. We are now beginning to pivot to a broader focus of moving upstream in terms of customer and product mix. This involves identifying margin accretive volume opportunities, which will enhance the margin and earnings profile of this segment overtime.
Similar to the RC segment competing alternative fuel sources also contributed to weakness in this segment in fiscal 2020. However, we have been able to largely offset this volume pressure as we have greatly diversified our product mix away from coal fired power generation with the success, we have had in <unk>.
Industrial and water markets. In addition to the Cabot supply agreement.
We also saw higher natural gas prices during the fourth quarter as well as the early months of 2021, partially driven by colder temperatures across the U S, which positively impacted coal fired power generation and related demand for certain of our products by those customers.
On that note I would like to take a moment to acknowledge the energy crisis that occurred in Texas.
And the weather impacts across the southern Plains.
From an operational perspective, we were forced to limit certain operations most significantly due to transportation constraints.
Related to both incoming raw materials and outdoor and finished product.
Although we lost some product production due to these weather conditions, we had sufficient inventory to supply in situations that transportation and driver availability would allow and we have since resumed normal operations our.
Our people did an amazing job of keeping our operations going and working with customers to deliver product ultimately supporting the power generation and water markets to be able to continue serving their customers.
From a consolidated perspective, our net income was <unk> 4 million for the fourth quarter, while our full year consolidated net loss was $23 million.
That full year net loss was mainly the result of a $26 million impairment charge that we incurred in the second quarter as well as income tax expense driven by an increase from the deferred tax asset valuation allowance.
Our consolidated adjusted EBITDA was $23 4 million in the fourth quarter and $55 1 million in fiscal 2020 compared to $14 9 million Inc.
<unk> $66 5 million in the prior year periods, respectively.
Regarding our capital allocation, we continue to prioritize debt reduction and cash preservation.
We reduced our long term loan balance to $16 million during the fourth quarter and we expect to pay off the remaining balance before Q4 of this year, we remain focused on cost containment, maintaining our pause on our non core capital spending and we will continue to evaluate our go forward cost structure relative to business activities.
Our focus was to prioritize liquidity and organic investment to ensure manufacturing capabilities and we are pleased to say that we did not experience any significant business or manufacturing interruptions.
During the year, we also restricted corporate travel largely related to the pandemic and limited back filling open positions. In addition to other measures certain of these savings were offset by expenses, we incurred throughout the year related to completing product testing and other matters related to securing the Cabot supply agreement.
Prospective as these impacts year over year, we reduced our other operating expenses by roughly 25% fourth quarter over fourth quarter and by 7% for the full year.
Our focus on expense management helped to strengthen our balance sheet in 2020, our year end cash balances, including restricted cash totaled $35 9 million, an increase of $18 9 million from the prior year.
However, working towards improvement in margins and EBITDA and a continued focus on cost structure will be key as we move into 2021.
After the end of the fourth quarter on February 4th we announced that we had entered into an agreement with Cabot to supply a cabinet European subsidiary with lignite activated carbon products and other.
Ada Es proprietary products used for mercury removal and utility and industrial coal fired power plants in Europe, Turkey, the middle East and Africa.
This agreement is separate and incremental to the 15 year supply agreement, we announced with Cabot back in September.
The two supply agreements, we have announced over the past six months are a testament to the Red River plants competitive position in the market as well as the opportunity we see for our product solutions going forward.
Upon signing the Cabot supply agreement at the end of September we immediately began fulfilling our product commitments related to that agreement and we are beginning to see the positive benefits of that deal.
Collective agreements are an important step towards diversifying the revenue streams, we will generate from the plant and capturing the value of the assets.
We are fortunate to have in establishing committed business partner and Cabot going forward.
We expect the supply agreements with Cabot to materially improve the economics from our activated carbon assets in our consolidated financial performance.
As we ramp up production over the next year, we expect that we will reduce our power generation exposure to less than 50% of our portfolio.
While it's still too early to quantify the potential economic impact of the EMEA agreement, we announced last month Mercury and other pollutants control regulations are coming online in the EU in 2021 and beyond this creates a vital need for solutions like ours to ensure the industries are abiding by these new regulations.
We expect to gain a clearer understanding of the financial impact as those regulations come online.
We are confident that the geographic expansion offered by the agreement is an important step to further diversifying our revenue mix and further utilizing the plants capacity, while also providing downside protection related to the ongoing pressure on power generation in North America.
In addition to the diversification provided by these agreements we are simultaneously continuing to bid and non power generation markets.
Our current business and product portfolio remains very much tied to power.
The market remains challenged by cheap alternative fuel sources and the impact from the pandemic.
We have spent considerable time and effort organically building out our product capabilities and internal sales infrastructure.
And our offering has grown increasingly competitive and non power generation markets like industrial and municipal water.
As a result of these efforts more we have more than doubled our water related volumes on an annualized basis year over year.
It remains a smaller portion of our overall portfolio, but it is encouraging progress.
But as I said earlier to ensure the longer term profitability and viability of the assets moving forward, we need to continue to increase both the diversification of our product mix as well as our customer mix.
The addition of new applications products and customers will provide us better balanced in the segment and we will improve our margins as we scale the business over time.
Overall I am pleased with the strategic success, we have achieved this year.
With our activated carbon assets and the groundwork we are laying for a post refined coal future. We expect the earnings profile of our <unk> segment to improve in 2021, and we have a solid line of sight to the $70 million to $90 million of after tax.
<unk> coal cash flows.
I'll talk more about our strategy and outlook, but first I'd like to turn the call over to Chris to review, our fourth quarter and full year financial performance.
Thank you Greg.
Let's turn to slide four for our financial review.
Fourth quarter earnings from equity method investments were 5 million compared to $12 1 million for the fourth quarter of 2019 full.
Full year earnings from equity method investments were 31 million compared to $69 2 million in 2019, the decline in earnings from equity method investments during the fourth quarter and full year was due to lower earnings from <unk> group, primarily driven by higher depreciation.
All 10 million group RC facility as a result of the reduction in the estimated useful lives during the third quarter of 2019, as well as Kingdom group restructuring RC facility leases with its largest customer.
Each decreased net lease payments and equity earnings beginning beginning in the three months ended September 30 of 2019.
Fourth quarter revenue totaled $18 4 million compared to $16 million in the fourth quarter of 2019. The increase in revenue was primarily the result of higher consumables revenue driven by increased volume at our Red River plant.
Third to the fourth quarter of 2019 full year revenue totaled 61, 6 million compared to $71 million in 2019 net.
Climb in the year.
Revenue was the result of lower royalty income and lower consumables revenue due to product and customer mix, partially offset by the fourth quarter impacts of increased volume from the cabinet supply agreement.
Fourth quarter royalty earnings continuing growth was three 5 million compared to $4 1 million in the fourth quarter of 2019 full year royalty earnings totaled $13 4 million compared to $16 9 million in 2019 royalty income is based upon that.
Percentage per ton pretax margin inclusive of impacts related to depreciation expense and other allocable expenses, the lower royalty earnings in the fourth quarter and full year due to increased depreciation and lower rent payments continuum, which also impacted the companies.
Equity earnings.
As we have stated royalty earnings are expected to be negatively impacted due to these changes in 2021.
After the two refined coal transaction, we announced during the fourth quarter. We now have 23 refined coal facilities invested with 17 better generating loyalty.
Fourth quarter 2020, net income was <unk> 4 million compared to $9 1 million.
The decline in net income was primarily driven by lower earnings from equity method investments as well as changes in tax expense full year 2020, net loss was $20 3 million compared to net income of $35 5 million in 2019.
The decline in net income for the year was driven by an impairment charge.
$6 1 million, which the company incurred in the second quarter of 2020.
Excluding these impairment charge in 2020 pre tax income would have been approximately $12 4 million versus a $13 8 million loss.
Fourth quarter 2020, consolidated adjusted EBITDA was $22 4 million compared to $14 9 million in 2019. The increase was driven by increased revenues in our APC segment, and higher depreciation and amortization expense within our RC segment.
Full year 2020, consolidated adjusted EBITDA was $55 1 million compared to $66 5 million in 2019. The decrease in full year consolidated adjusted EBITDA was largely driven by lower cash distributions continue lower royalty income and lower net Rev.
The news from consumables.
We ended the year with cash balance inclusive of restricted cash of 35.
And an increase of $18 9 million.
Compared to the end of 2019.
We have also continued to pay down the balance of our term loan Omega 6 million principal payment to reduce the cash.
<unk> balance, which includes the current portion down to $16 million.
Total borrowings now stand at $24 million compared to $44 million at the end of 2019.
That 24 million net.
Comprised of $16 million term loan.
$3 3 million of funds that we secured from the SBA potentially forgivable loan program, while the remainder is comprised of finance leases.
Overall, we are pleased with our financial position as we continue to build our cash balance we expect to pay off the remaining $16 million term loan balance before Q4 2021 maturity.
Confident that our future forecasted net after tax RC cash flows will be in the range of $70 million to $90 million.
We also expect our financial performance to improve particularly within our consumables business and lease with sales.
Our production commitments related to the supply agreements, we have signed with Cabot and optimize our product mix.
With that I will now turn it back to Greg for his closing remarks.
Thank you Chris.
Turning to slide five you can see the expected future RC cash flows.
Based on the 23 invested facilities as of quarter end.
And cash distributions received during the fourth quarter, we are updating our expectations of future after tax RC cash flows to Ada es to be between $70 million and $90 million.
Absent an unexpected change to the duration.
Of the section 45 tax credits pendulum does not expect to obtain additional tax equity investors for any incremental facilities.
Slide six reflects the growth channels, we have been discussing where we are either currently active or have identified as future opportunities.
When we acquired carbon solutions in December of 2018, we immediately became the go to provider of activated carbon solutions for coal fired power plants that needed to meet Mercury Air Toxics standards since that time coal fired power generation has declined faster than ours and even the eia's initial expectations.
Cheap and abundant alternative fuel sources lead to coal to gas switching and we responded by engaging more aggressive diversification efforts to lower our reliance on power generation.
We were very aggressive in an effort to obtain new volume wins and increase the capacity utilization of the plant.
We since have generated solid traction in other markets industries, such as manufacturing and waste management that are bound by emissions caps. We are also seeing better than expected share gains in water purification and we have an active and robust funnel of bids currently in place.
We are now producing activated carbon more efficiently as we are capitalizing on the low cost nature of the assets and seeing important improvements to our margin profile.
Unfortunately, our total volume has remained under pressure as these adjacent markets have not been able to fully offset the decline in power generation.
However, the two announcements we have made with Cabot are important steps towards building our total volumes.
Raising the plant's capacity utilization from generating better results in our APC segment.
We are also seeing early successes and other drilling market opportunities utilizing product technologies and capabilities that may provide additional volumes in areas, where the historical carbon solutions business has not competed.
The two cabinet deals allow us to scale, our production and fully realize the low cost nature of the plant, which in turn makes us more competitive in markets, we pursue and opened the doors to new markets altogether the.
The customer and market diversification will be a main priority in 2021 to lay the foundation for this business for years to come.
The agreement is also an example of some of the rationalization, we have discussed and expect to continue to see in the activated carbon space. We continue to believe that additional opportunities will present themselves and we stand well positioned to be a participant given the sophistication from flexibility offered by our Red River plant.
Slide seven provides a quick recap of the terms and the impact of the supply agreements we've reached with Cabot.
In September we entered into a 15 year agreement to supply cabinet with lignite activated carbon products, including packing Jack.
This announcement is an important step towards the creation of the Companys post refined coal future.
This will allow us to secure material incremental volume and better capture the low cost manufacturing capabilities of our plant. It also expands our end customer market.
Product portfolio beyond our current suite of products and capabilities and will allow us to enter through cabot's customer relationships and end user end market users a broader range of pack and gas opportunities. This deal is a testament to the quality of the activated carbon assets. We possess in as an example of the opportunity is available available to us.
To grow and scale this business.
We have begun fulfilling our commitments outlined within the agreement and we expect to cycle through existing inventory balances that were produced at much lower overall volumes relative to the largely fixed cost manufacturing base before the end of 2021.
Ultimately as a result of this agreement, we expect to see incremental annual revenue growth of 30% to 40%.
Incremental annual EBITDA growth of $10 million to $15 million.
And a reduction of our power generation exposure to less than 50% of our product portfolio.
We began supplying cabinet with activated carbon products immediately on October one. We also took over cabot's lignite mine that previously supplied Cabot's Marshall, Texas facility Rec.
Reclamation activities related to this mine began immediately and outside of a brief pause last month due to the Texas weather events. Those activities have proceeded as planned we still expect that 70% of the reclamation cost will be completed in the first 24 months and Cabot will share in the cost to complete these activities.
As I mentioned subsequent to that agreement, we announced last month that we have entered into a five year supply agreement with Cabot's EMEA subsidiary as part of that agreement cabinet will be exclusive in Seoul reseller of the products within EMEA the expansion of our products and technologies to international markets and applications is an important milestone.
For Ada Es and furthers our belief for the further future potential of the business.
The broadened our relationship with a trusted and global partner like Cabot is also a testament to the assets quality as well as the product portfolio.
As the world's need for sophisticated pollution control solutions growth, we expect to be a provider of choice for these technologies, given our expertise and the quality of our plant.
Looking ahead, we believe additional opportunities will present themselves and our competitive position we have in the industry leaves us in a good position to capitalize on them.
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 also paid down $54 million of the $70 million term loan that funded the acquisition of carbon solutions in late 2018 in the near term.
Preserving our liquidity position and debt reduction will remain priorities as the term loan is subject to mandatory quarterly principal payments of $6 million.
We expect to pay off the balance of the loan prior to its Q4 2021 maturity.
And finally slide nine reiterates our priorities for the remainder of the year.
Our first priority is to continue to protect our net RC cash flows continue them as taking actions to ensure they continue to produce product. While also updating their organization and cost structure for the upcoming winding down of operations.
We will simultaneously leverage our Red River plant and its best in class characteristics to optimize our capacity to generate improved operating leverage.
Part of this will be accelerating production to meet our commitments to our supply agreements with Cabot.
Identified opportunities to improve earnings potential through customer and product mix.
And maintaining a focus on our cost structure relative to go forward business activities.
Lastly, we are reiterating our near term capital allocation focused on risk mitigation.
Cash preservation as well as necessary organic investment and our activated carbon business.
We will continue to deleverage, but the shareholder return component of our capital allocation plan remains on hold to preserve liquidity and ensure we are investing behind our strategic initiatives.
With that thanks again, everyone for joining the call. This morning and for your continued support.
Stay healthy and we look forward to our next update.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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