Q1 2021 Advanced Emissions Solutions Inc Earnings Call
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Good day, and thank you for standing by welcome for bed Bath emissions solutions for one 2021 earnings call. At this time all participants 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 Ryan Coleman Investor Relations. Please.
Go ahead.
Thank you and good morning, everyone and thanks for joining us today for our first quarter 2021 earnings results call.
With me on the call today are Greg Mark and interim President and Chief Executive Officer, and Treasurer and margin fields, Vice President of accounting. This conference call is being webcast live within the investors 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 may contact health.
IR group for Investor Relations support at 312 for four five to 87 now let me remind you that the presentation and remarks made today include 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 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 presentation, and our form 10-Q for the quarter ended March 31, 2021, and other filings with the Securities and Exchange Commission, except as expressly required by the securities laws. The company undertakes no obligation to update on those factors or any forward looking statements to reflect future event.
Developments or changed circumstances or for any other reason. In addition, it's very important to review the presentation and today's remarks in conjunction with the GAAP references in the financial statements. So with that I'll turn the call over to Greg.
Okay.
Thanks, Brian.
Thanks to everyone for joining us this morning.
Before we begin I'd like to address a few items.
First I'd like to introduce and welcome Morgan field, our new Vice President of accounting.
As I mentioned on our fourth quarter call Crystal leaner retired at the end of March at which time mortgage joined US who will be leading our accounting team.
Morgan brings nearly 20 years of corporate accounting and public company experience. Most recently really can fulfill capacity at a liaison group.
We worked frequently with her on strategic projects over the past few years.
She joins us with an in depth knowledge of the company for <unk>.
Very excited to have her as an official member of the team.
Second a quick update on the previously announced incident at our Red River plant.
On April 22nd there was an unfortunate incident at our Red River manufacturing site in Louisiana that resulted in an isolated fire in one of the plants coal handling systems.
Fire resulted in non life threatening injury for two of our team members.
Thankfully the decisive action taken by both on site personnel as well as local first responders contained and limited the impacts that could have occurred that day.
Also after approximately one week of downtime plant is now fully operational.
We are also able to continue to meet our production requirements and client obligations through existing inventory.
Other sources without further interruption.
Based on the downtime, we estimate the cash flow impact, including maintenance and repairs capital expenditures inventory replacement due to loss production and up for items is not expected to exceed $3 million.
We continue to conduct our own internal investigation into the incident and we are working alongside regulators as needed.
Like to again, thank our team members for their Swift action that day and their commitment to the safety of all plant personnel.
And lastly, concurrent with our announcement of our first quarter results yesterday, we.
We announced that we had initiated a strategic alternatives review to evaluate a range of opportunities for the business and our effort to maximize shareholder value.
Talk a bit more about this decision in a moment.
With that let's go to our first quarter highlights on slide three.
Yesterday afternoon, we reported results that showed solid performance continuum group.
As well as the steady sequential and year over year improvement in our <unk> segment, resulting from the proactive efforts, we have made to strengthen that business.
Distributions and equity earnings were strong and both exceeded levels for the first quarter of 2020 for.
Royalty earnings on the <unk> segment's adjusted EBITDA, each grew by 33% and 37% respectively.
In our APC segment, our production and sales volumes have continued to rise that have exceeded our internal forecast for months now.
Revenue for the segment was nearly double that of the prior year.
Helped by the Cabot supply agreement, we announced in September as well as our growth in non power generation markets, such as water and certain industrial applications.
We also saw higher natural gas prices in the first quarter, partially driven by colder temperatures across the U S, which positively impacted the coal fired power generation and related demand for our products by those customers.
The improvements we have made with our capacity utilization is also allowing us to more efficiently capture the sophisticated nature of the plan as the segment's profitability much improved from one year ago.
Gross profit was $4 6 million compared to a loss of $2 $3 million last year.
Additionally, the segment EBITDA was $2 $2 million on the first quarter compared to a loss of $5 million last year.
From a consolidated perspective, our net income was $13 7 million for the first quarter compared to a loss of $1 9 million one year ago.
Net increase was predominantly the result of the increase in earnings from equity method investments as well as higher consumables revenue.
Our consolidated adjusted EBITDA was also favorably impacted on a $26 1 million compared to $10 8 million.
Regarding our capital allocation, we continue to prioritize debt reduction liquidity and investing organically to improve our manufacturing capabilities.
We reduced our term loan balance by $10 million in the quarter and have just $6 million remaining on that loan, which will be repaid quarter without any penalty.
We remain focused on cost containment and have taken actions during the year as appropriate maintaining.
Maintaining our pause on all non core capital spending and we will continue to evaluate our go forward cost structure relative to business activities.
Meanwhile, <unk> remains focused on margin.
As they align their cost structure to prepare to wind down the businesses with the planned exploration or production tax on the production tax credit generation period at the end of this year.
Our focus on cost management has allowed us to build a strong cash position. We now have $52 2 million with cash cash equivalents and restricted cash on our balance sheet that compares to $35 9 million as of December 31 2020.
Turning to our outlook, we expect to collect between $50 million on $60 million of after tax cash flows from our refined coal segment, which is net of our first quarter collections.
We expect to see further improvement in our <unk> segment as we are now turning to optimizing our current product mix to enhance the earnings profile of the segment.
And as I mentioned, we initiated a strategic alternatives process to evaluate the opportunities available to us to maximize shareholder value.
As we have discussed on our past several calls we have made great progress drilling our Red River plant capacity utilization diversifying our product mix.
And bolstering our financial position through our focus on repaying our term loan and growing our cash balances and we possess the premier asset in this industry.
We believe this leaves us with a unique opportunity to evaluate the options available to us from a position of strength.
We will of course continue to run this business with the efficiency and execution, we have been committed to the.
The intention is to complete the strategic review process in a timely fashion.
However.
There is no assurance that the review process will result in pursuing or completing any transaction.
We will provide updates as appropriate as the process unfolds.
Overall, we are happy with our start to 2021 and the steady improvement in our <unk> segment, we remain on a solid path to fortify our business for our post refinery future.
We expect the earnings profile of our APC segment to improve in 2021.
We have a solid line of sight for the $50 million to $60 million of after tax RC cash flows through the eventual wind down of tenured.
With that I'll turn the call over to Morgan to review, our first quarter financial performance in greater detail. Thank.
Thank you, Greg and that makes sense.
Keith, let's turn to slide for for our financials ABL.
First quarter earnings from equity method investments of $18 3 million.
Compared to $8 3 million in the first quarter of 2020.
The increase in earnings is first attributable can distributions reported.
Earnings as a result of distributions continue on growth being in excess of net carrying value of the investment.
And therefore excess distributions are recognized in equity method earnings in the period the distributions accounts.
Can you group also had increased R&D facility into three new R&D facilities added in 2020.
First quarter revenue totaled $21 1 million compared to $12 3 million in the prior year The Inc.
<unk> revenue was primarily the result of higher sales of consumables, which increased 85% compared to last year as well as higher royalty income which grew 33.
First quarter rate.
Continuing on growth before.
Ian compared to $3 million for the first quarter of 2020.
Royalty income is based upon a percentage of the per ton pretax margin inclusive of impacts related to depreciation.
And other allocable expenses.
We currently on 23 R&D facility.
With 17 net are generating royalties at a higher rate per ton than last year.
First quarter net income was $13 7 million for 75 cents per fully diluted share compared to a net loss of $1 9 million or <unk> 11 per fully diluted share in the first quarter of 2000.
The increase in net income was primarily driven by the increase in earnings from equity method investments as well as by higher consumables revenue and royalty earnings.
First quarter consolidated adjusted EBITDA was $26 1 million compared to $10 8 million in 2020.
The increase is driven by the increased distributions continue on as well as higher consumables revenue compared to the first quarter of 2020.
We ended the quarter with a cash balance inclusive of restricted cash at $52 2 million, an increase of $16 3 million compared to $35 9 million as of December 31, two.
20.
$10 million of our cash remains restricted related to the terms of our surety bond and $6 million related to borrowing requirements.
We have also continued to pay down the balance of our term loan and made a $10 million payment.
To reduce the principal down to $6 million.
As Greg mentioned, we expect to pay out the final $6 million here in the second quarter.
Total borrowings now stand at $14 million compared to $24 million at year end 2020.
That $14 million is comprised of the 6 million term loans $3 3 million funds that were secured from the SBA potentially forgivable loan program. While the remainder is comprised of finance leases.
Overall, we are pleased with the improved financial position as we remain focused on our cost structure continue to build our cash balance reduced our outstanding borrowings and improve the earnings profile of the <unk> segment.
We expect the <unk> segment total revenue to grow at least until our production commitments related to the supply agreements, we have signed with Cabot and continue to optimize our product mix.
We expect that topline growth to yield better operating leverage and margin for funding on.
Now turn the call back to Gregg for closing remarks.
Thank you Morgan turning to slide five you can see our expected future RC cash flows.
Based on the 23 invested facilities as of quarter end and cash distributions received during the first quarter.
We are updating our expectation of future after tax free cash flows to the company.
<unk> $50 million on $60 million.
Absent an unexpected change for the duration of the section 45 tax credit generation period continuum does not expect to obtain additional tax equity investors for any incremental facilities.
Slide six reflects the apd growth channels, we have been discussing.
Where we are either currently active or have identified for future opportunities.
When we acquired carbon solutions in December of 2018, we immediately became the go to provider of activated carbon solutions for power plants that needed to meet Mercury Air Toxics standards.
And for that title coal fired generation has declined faster than both industry forecasts as well as our forecast at the time of the acquisition.
Abundant alternative fuel sources and competitively priced natural gas.
Led to coal to gas switching.
To counter the headwinds to our business associated with that dynamic we engaged in an aggressive effort to diversify our.
And the commercial applications for our products, 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 continue to grow and exceed our forecast.
We are also seeing early successes other drilling market opportunities utilizing both existing and developing product technologies and capabilities.
That may provide earnings opportunities in areas, where the historical carbon solutions business had not competed.
The Abd segment's recent performance and ongoing strength has obviously been positively impacted by the agreements we have entered into with cash.
As a reminder, in September we entered into a 15 year agreement to supply cabinet North the Cabot North American subsidiary with lignite activated carbon products, including pack in GAAP.
In addition.
In February we announced that we had entered into a settlement agreement with Cabot to supply the.
For Cabot European subsidiary with lignite activated carbon products and other aes proprietary products used for mercury removal and utility and industrial coal fired power plants in Europe, Turkey, the middle East and Africa.
We believe that geographic expansion offered by agreement is an important step to further diversifying our revenue mix. It further utilizing the plants capacity, while also providing downside protection related to the ongoing pressure on power generation in North America.
These two supply agreements validate our competitive position in the market as well as the opportunity we see for our products going forward and we are fortunate to have an established and committed business partner and Cabot going forward.
These diversification efforts also played a critical role in growing our utilization rate to a level more in line with our longer term run rate, which is resulting in the improved profitability. We are now seeing for the segment.
As a result of our internal actions in addition to the North American Cabot supply agreement.
The <unk> segment is yielding material incremental volume and better operating leverage at our Red River plant, while also expanding our end customer markets 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 and scale of our assets.
Looking ahead, we believe additional opportunities will present themselves and our competitive position in the industry leaves us well positioned to capitalize on them.
Slide seven provides an update on our capital allocation program.
We implemented our shareholder return initiatives during the second quarter of 2017.
And since that time have returned $106 $4 million to shareholders via dividends and share repurchases.
We've also paid down $64 million of the $70 million term loans that funded the acquisition of carbon solutions.
In the near term paid off the term loan liquidity invested in our APC segment and shareholder value maximization through the strategic alternatives process will remain priorities.
And finally slide eight reiterate our priorities for the remainder of the year.
Our first priority is to continue to protect our net RC cash flows continuum is 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.
Our capacity to generate improved operating leverage.
This will be meeting our commitments to our supply agreements with <unk>.
Identified opportunities to improve earnings potential for customer and product mix and maintaining their focus on our cost structure relative to go forward business activities.
Lastly, we are also we are reiterating our near term capital allocation.
Focus on risk mitigation.
Cash preservation as well as necessary organic investment in 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.
We will also aim to complete the strategic alternatives review process in a timely manner.
While ensuring we continue to run our business efficiently.
With that I'll turn the call back over to Ryan to move us to Q&A.
Thanks, Greg as many of you may have seen we included at the bottom of the conference call announcement press release as well as Yesterdays earnings press release and invitation to submit your questions ahead of time to be on today's call. Thank you for those of you who send your questions for future reference we will likely continue this practice on upcoming earnings call and invite you to.
Submit your questions next time.
With that our first question that we received reads as follows net of the $6 million remaining on the term loans can you give us a sense of where the roughly $50 million of RC cash flows will be deployed this year why not re institute, a smaller dividend at $2 million to $3 million per quarter.
Our total billings are 14 million. So net net figure we're focused on continuing to improve our manufacturing operations and our related financial performance. So that we continue to be able to meet our customer commitments such as the Cabot supply agreement.
Additionally, as with any manufacturing operation there is also.
Maintenance capex for the operating facilities, which we estimate to be about $5 million on a normalized basis.
Additionally, as we mentioned we've announced the strategic alternatives review. So it is unlikely that we would reinstate the dividend or shareholder return component of our capital allocation until that process has concluded.
Have a contingent.
Could have a potential continuous shareholder return.
Once we have greater clarity on that front, we can evaluate the next step forward and the best way to maximize shareholder value.
The next question is what is the current product mix between power generation industrial and water applications and how does that compare to when you bought 80 day carbon solutions in 2018.
Thanks Ryan.
We generally think about our product mix and for broad buckets power generation industrial water and then lastly, the volumes related to our supply agreements.
Although we don't disclose the breakdown between our product mix, we can say that as of today, we have diversified away from the structurally more challenged power generation market and.
And we're selling into a much more balanced mix of commercial markets.
Our continued growth our forecasted volumes for 2021 of the highest and most diversified we have owned the plant.
And then final question its been two five years since the carbon solutions acquisition. We now just have three quarters left of collecting the refined coal cash flows now that youre at a capacity utilization rate more in line with longer term expectations can you provide a rough estimate of the EBITDA margin profile of the.
The APC segment or what is your target margin for that business.
So on the two years preceding our acquisition of carbon solutions. The business operated at an adjusted EBITDA margin of just less than about 20%.
We have discussed the decline in coal fired power generation pressure on selling prices and our need to immediately pivot to adjacent markets hampered the productivity of the Red River plant.
After several quarters of operating losses that have improved our target utilization rate, we reported an adjusted EBITDA margin for.
For the APC segment on <unk>.
14% in Q1 here.
And it continues to trend in the right direction.
Additionally, as we cycle through inventory that was produced at higher cost per unit.
Past periods, we expect the margin to continue to grow from the increased utilization of the plant.
And then over the longer term.
We can continue to operate the business and improve margins as we more fully capture the sophisticated nature of the plant.
Improved customer and product mix.
And continue to evaluate ways to improve our operations.
Thanks, Craig and thanks again for those of you that submitted your questions I'll turn the call back to Greg for his closing remarks.
Thanks, Brian and thanks to everyone for joining the call. This morning and for your continued support.
I look forward to updating everyone throughout 2021.
This concludes today's conference call. Thank you for participating you may now disconnect.
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