Q2 2021 Advanced Emissions Solutions Inc Earnings Call

Okay.

Of course.

[music].

Come to the advanced emissions solutions Q2, 2021 earnings conference call.

At this time all participants are in a listen only mode.

Please be advised the today's conference is being recorded.

The required any further assistance please press star zero.

I would now like to hand, the conference over to your Speaker today, Ryan Coleman Investor Relations. Thank you. Please go ahead.

Thank you and good morning, everyone and thanks for joining us today for our second quarter 'twenty on the earnings results call with me today are Greg Martin interim President and Chief Executive Officer of Treasurer, and Morgan fields, the president of account.

This call is being webcast live within the Investor section of our website and of downloadable version of the presentation is available there as well a webcast replay will also be available on our site and you can contact Alpha IR group for Investor Relations support at 3.1 to $4.45 to 8.7 out of your mind, you that the presentation and remarks made.

Today include forward looking statements as defined in section 21, <unk> 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 of 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 2 of today's slide presentation in our form 10-Q for the quarter ended June 32021, and other filings with the Securities and Exchange Commission.

<unk> expressly required by 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 of the region.

In addition, it is very important to review of the presentation and today's remarks in conjunction with the GAAP references in the financial statements with that I'd like to turn the call over to Greg.

Thank you Ryan and thanks to everyone for joining us this morning.

Yesterday after the close of the markets, we reported our second quarter results, which are highlighted on slide 3.

Our refined coal segment delivered another strong quarter of distributions, which were 34% higher than the prior year.

<unk> earnings were also higher in the segment's operating income was more than double the prior year period.

The segment's adjusted EBITDA improved over the second quarter of 2020 by 33%.

The refined coal segment's strong results are largely being driven by the increase in invested RC facilities year over year as well as the warmer than normal summer season across much of the U S. Coupled with the continued higher natural gas prices.

In our <unk> segment, our sales volumes have continued to rise and have exceeded our internal forecast for several months of the road rep.

Revenue for the segment was roughly twice that of the prior year driven driven by the realization of the Cabot supply agreement, we announced in September of last year as well as growth in non power generation markets, such as water and certain industrial applications. However, most of the outperformance compared to our expectations during the second quarter.

It was driven by our power generation customers, who have been and continued to be affected by high natural gas prices and warmer weather both of which positively impact our product demand and results in the <unk> segment.

Yes.

In addition, I would like to take a moment to acknowledge and reaffirm our commitment to continuing to diversify and grow the business to reduce our exposure to the longer term uncertainty related to coal fired power generation in North America.

The first half of the year. Our team has worked closely with an industry, leading channel partner within the growing soil and groundwater remediation market.

I am pleased to share that our team has developed new activated carbon technologies, which we believe will allow us to differentiate our participation.

We look forward to sharing more details regarding this growth initiative as we work closely with our channel partner to accelerate field demonstration of advanced product prototypes later this year.

Our gross profit for the APC segment in the quarter was $2.7 million. Despite the plant turnaround and the impacts of the plant incident compared to just zero point $8 million last year, which was not impacted by of plant turnaround.

These results and the strong gross margin improvement relative to revenue growth demonstrating the inherent operating leverage of our business and are highly sophisticated plant and vertically integrated operations.

The incremental volumes, we have achieved to date of driven our capacity utilization to a level of much more in line with our long term expectations and the result is improved profitability. We anticipate plant utilization to remain strong as we continue to support increased demand through the balance of the year. The segment's adjusted EBITDA totaled <unk> $3 million.

Compared to a loss of $2.3 million in the prior year.

Now let me provide a quick update on the previously announced incident at our Red River plant.

As we stated last quarter the plant realized approximately 1 week of downtime, but was quickly back up and fully operational.

We were able to continue to meet our customer demand through existing inventory and other sources without further interruption.

Ultimately the direct cash flow impact of the internet, including maintenance and repairs capital expenditures inventory replacement and other items was consistent with our expectation that it would not exceed $3 million.

Those extra costs did create some margin compression in the second quarter relative to the prior period, despite very strong volumes.

In addition, because we were forced to cure inventories through alternative sources during that downtime our cost per pound to produce was higher than the prior quarter at.

At this time, we expect these impacts to create some margin pressure through the remainder of the year as we cycle through the higher cost per pound of inventory and continue to purchase inventory to supplement production due to the significant increases in demand we have seen in the power generation segment.

That said customer orders in total volumes have been incredibly strong over the past several months and we are very pleased with both the segments improved performance as well as the future prospects.

We continue to expect improvement relative to last year.

We achieved consolidated net income of $16.6 million in the quarter or <unk> 90 per fully diluted share and adjusted EBITDA of $21.2 million.

Both were significantly better than last year, and as we announced in June we paid off the remaining balance of our 3 year term loan used to fund the acquisition of carbon solutions prior.

Prior to the stated maturity.

Also as we disclosed in late July we received notice that the $3.3 million PPP loan. We received in 2020 has been forgiven.

As a result, aside from equipment and facility leases, we are debt free and continue to build a strong cash position.

We will continue to prioritize organic investment in our manufacturing capabilities to ensure that we meet customer demand. We will also continue to prioritize our near term liquidity position as we work through both the schedule and of our RC segment and our strategic alternatives review.

Many of them continue with the continues to align their cost structure to prepare for the planned exploration of the production tax credit generation period at the end of the year.

Turning to our outlook after cash distributions received in the second quarter. We are updating our forecast for after tax cash flows from <unk> to be between $30 million $40 million.

We remain focused on improving the profitability of our <unk> segment.

And expect our efforts over the last several quarters to yield improvements on that front.

We are optimizing our current product mix to enhance the earnings profile of the segment as well as instituting price increases for all of our activated carbon products to help drive better earnings performance as well as the offset inflationary pressures.

And lastly, we are progressing in our strategic alternatives review to evaluate the opportunities available to us to maximize shareholder value.

As we have discussed during the past several calls we have made great progress in growing our Red River plant capacity utilization.

Diversifying our product mix into the water and industrial applications.

Bolstering our financial position through our focus on repaying our term loan and growing our cash balances.

We believe this provides us with a unique opportunity to evaluate the options available to us.

A position of strength.

Overall, we have been pleased with the nature of the discussions up to this point and we will provide updates as appropriate as the process unfolds.

At present, there is no timetable for the completion of that process.

Overall, we are happy with our financial performance for the first half of the year. Our RC segment is delivering strong equity earnings and distributions. Our APC segment is operating the best It has since we purchased the assets customer demand remains high we continue to build cash and we are in a strong financial position going forward.

With that I'll turn the call over to Morgan to review, our second quarter financial performance in greater detail.

Thank you Greg.

Slide 4 shows the snapshot of our second quarter financial performance.

Second quarter earnings from equity method investments were $21.4 million compared to $8.2 million for the <unk>.

Second quarter of 2020.

The increase in earnings is mainly attributable to distributions recorded into earnings as a result.

Cumulative distributions continuum growth exceeding the carrying value of the investment.

As a result of excess distributions are recognized as equity method earnings in the period in which the distributions occur.

The group has also increased distributions due to any of the 3 new RC facilities added in 2020.

Second quarter revenue and cost of revenue were $19.6 million and $13.3 million, respectively, compared to $11.5 million and $7.4 million in the second quarter of 2020.

The increase in revenue was primarily the result of higher sales of consumables as well as higher royalty income.

Second quarter royalty earnings continuum growth were $3.7 million compared to $3.3 million for the second quarter of 2020.

The increase was primarily a result of the greater number of invested royalty bearing facilities compared to the prior year.

Royalty income is based upon the percentage of the per ton pretax margin inclusive of the impacts related to depreciation expense and other allocable expenses.

As of June 32021, continuum had 22, RC investor facility with 18 that are generating royalties.

Second quarter net income was $16.6 million or <unk> 90 per fully diluted share compared to a net loss of $23.8 million or a loss of $1.32 per share for the second quarter of 2020.

The net loss in the second quarter of the prior year resulted from a pre tax noncash impairment charge of $26.1 million related to our apt's assets.

Second quarter consolidated adjusted EBITDA was $21.2 million compared to $12.2 million in 2020.

The increase in adjusted EBITDA was driven by the increase in distributions continue on as well as higher consumable earnings compared to the second quarter of 2020.

We ended the second quarter with the cash balance, including restricted cash totaling $37.3 million, an increase of $21.4 million compared to $35.9 million as of December 31, 2020.

Of note $10 million of cash remains restricted related to the terms of our surety bond pertaining to the reclamation activities at Marshall line.

Also as Greg mentioned in June we announced that we fully repaid our 3 year term loan prior to the stated maturity.

As of June 32021 of the total borrowings stood at $8 million, which is mainly comprised of finance leases and the PPP loan, which was something subsequently forgiven in the third quarter.

Subsequent to the forgiveness, our outstanding borrowings with the $5 million compared to total borrowings of $24 million at the end of the year of 2020.

Second quarter other operating expenses were $5.9 million compared to $35.1 million at the.

In the second quarter of 2020.

As mentioned earlier the prior year period includes the pre tax noncash impairment expense of $26.1 million. Excluding this impairment expense other operating expenses totaled $9 million for the second quarter of 2020.

The decrease was primarily driven by a decline in payroll expenses as well as lower general and administrative expenses.

As a reminder, we do not expect a significant reduction in our run rate operating expenses upon the wind down of the RC business.

That business is run by separate management team and we have already reduced resources that were specific continuum over the past couple of years.

Given the visibility of the year end date for the expiration of the production tax credit can you has already taken the necessary steps to rightsize their cost structure over the past several quarters.

Overall, our capital allocation approach will remain unchanged, we expect to continue to focus on near term liquidity, ensuring our manufacturing capability and maximizing shareholder value.

Our RC segment will deliver another $30 million to $40 million of cash flow and we expect our top line performance in our APC segment to remain strong.

Now I'll turn the call back to Greg for his closing remarks.

Thank you Morgan and turning to slide 5 you can see the expected future RC cash flows during.

During the second quarter, 1 invested RC facility reached the end of the scheduled expiration of its 10 year tax credit life as such we now have 22 invested RC facilities.

Absent an unexpected change in the duration of the section 45 tax credit generation period continuum does not expect to obtain additional tax equity investors for any incremental facilities and the remaining facilities tax credit generation periods will expire by the end of the year.

Slide 6 reflects the HPT segment growth channels, we have been discussing where we are either currently active or have identified as future opportunities when.

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.

We already had existing relationships with many of those power plants and we knew that we had the opportunity to sell the suite of emissions control technologies into those relationships, even more so when refined coal rolled off.

During that time.

Coal fired power generation declined faster than both industry forecasts as well as our forecast at the time of the acquisition had predicted.

Abundant alternative renewable energy sources, and competitively price natural gas led to power generation facilities switching from coal to natural gas.

Thus, we were forced to pivot and diversify the mix of end markets, we were selling into sooner than we had anticipated. We have spent considerable time and effort building out our internal sales team conducting product tests with new potential customers in the water and industrial channels.

However, this year, we have seen a significant rebound in the power generation market.

Alternative fuel source of pricing has provided a tailwind the coal fired dispatch, thus driving demand for our products.

As we pivoted during 2019 and beyond we have generated significant traction in other markets.

Industries, such as manufacturing and waste management that are also subject to emissions restrictions. We are also seeing better than expected share gains in water purification and continue to grow and exceed our forecast in that area.

We are also seeing early successes and 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.

Has not competed.

I remain encouraged by our progress within the remediation market segment and look forward to the completion of several site field demonstrations by the end of the year.

The <unk> segment's recent performance and ongoing strength has obviously been positively impacted by the 2 supply agreements we entered into with Cabot.

The 15 year agreement to supply it.

North American subsidiary with the lignite activated carbon products has helped our volume tremendously and allowed us to better leverage the low cost characteristics of the plant.

In addition, we announced in February that we had entered into a separate agreement to supply a cabinet European subsidiary with lignite activated carbon products and other aes proprietary products used for mercury removal and.

The utility and industrial coal fired power plants in the EMEA region.

Driven by regulations that will impact the market beginning in the second half of 2021 and beyond.

We believe that the potential geographic expansion offered by this agreement is an opportunistic step to further diversifying our revenue mix and further maximizing the utilization of the plants capacity, while also providing downside protection related to ongoing pressures on coal fired power generation in North America.

These 2 supply agreements validate our competitive position in the market as.

As well as the opportunity we see for our product solutions going forward.

We are fortunate to have an established and committed business partner and Cabot going forward.

As a result of our internal actions in.

In addition to the North American Cabinet supply agreement the AP.

<unk> segment is yielding material incremental volume and better operating leverage at our Red River plant, while also expanding our commercial and market to.

To create a much more balanced mix of applications.

We continue to see increased demand within these end market applications. We are supporting which is also contributing to higher plant utilization rates on a go forward basis.

With this demand as well as the high demand due to warmer weather and higher natural gas prices. There continues to be pressure on our inventory levels and meeting customer demand.

Out of the world the need for sophisticated pollution control solutions growth, we expect to be a leading provider of choice for these technologies.

Given our expertise and the quality and scale of our plan.

We believe our strong financial position and assets leaves us well positioned to pursue and develop additional opportunities.

Slide 7 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 over $106 million to shareholders via dividends and share repurchases.

As we have stated already we fully repaid our term loan prior to the state of maturity and.

<unk> retains significant liquidity and flexibility to pursue our organic investment in our <unk> segment.

And to maximize shareholder value through the strategic alternatives process.

And finally <unk>.

Slide 8 reiterate our priorities for the remainder of the year.

Our first priority is to continue to protect our net RC cash flows and optimize the $30 million to $40 million.

We will simultaneously leverage our vertically integrated <unk> segment and its best in class Red River plant to optimize our product mix to generate improved operating leverage.

Of this will be meeting our commitments to our agreements with customers.

Identifying opportunities to improve earnings potential.

The customer and product mix optimization and maintaining the focus on our cost structure relative to go forward business activities.

Lastly, we are reiterating our near term capital allocation focused on cash preservation as well as necessary organic investment and our activated carbon business as we approach the end of the RC business and progress through our strategic review.

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 saw similar to last quarter. We included at the bottom of the conference call announcement press release as well as of yesterday afternoons earnings press release and invitation to submit questions ahead of time to the App on the call. Thank you to those of you who send your questions will likely continue the practice on upcoming earnings calls and we invite you to.

Your question next quarter as well the <unk>.

First question, how significant is the margin compression youre expecting in the APC segment. If demand remains robust is there a chance youll need to procure inventory from alternative sources for longer than you expect.

Yeah.

The margin compression is creating a drag to the segment's operating profit.

At this time, we expect that to be the case through the end of the year.

The segment's top line remained strong and is growing every quarter.

As that top line growth, we are generating better operating leverage that is allowing us to offset some of these margin pressures so that is helping a bit.

Right now our main priority is meeting demand from customers and ensuring that we are delivering product.

If meeting customer demand requires continuing to procure inventory from outside sources, then that is what we will do.

But we continue to expect improvement in the segment once we work through the impacts of the downtime and the higher cost inventory.

Our second question when would you expect your supply agreement with the European Cabinet subsidiary to begin to provide the financial benefit.

Thanks, Brian.

There are pending regulations in the EU that we are expecting to come on line during the latter half of the year as we said earlier.

As those regulations are implemented and enforced we expect that there will be of market for activated carbon products for companies that will be bound by those emissions limits.

There will likely be a period of product testing requirements before we begin to realize any commercial benefit, but our agreement with cabot's European subsidiary of insurers our opportunity to participate in the market and the cabinet will be the exclusive until reseller of our products within that EMEA region.

The if opportunities to provide our products are presented and those are the best options for our customer and product mix. We believe those opportunities will likely occur in 2022 and beyond.

And the third and final question. We received is there anything in the proposed infrastructure Bill as it currently stands related to water treatment and water infrastructure, where aes could stand the benefit.

Based on the bipartisan infrastructure Bill.

We could possibly benefit related to the delivery of clean water to underserved communities.

Rival Nations and schools.

However, actual funding and probability of qualifying is still uncertain. So we can't truly ascertain any benefit or tailwind at this point.

In the event that there is we believe we would be well positioned to benefit given the quality of our assets and our current position in the municipal water market.

Yeah.

Thanks, Greg and thanks, again to everyone, who submitted your questions I'll turn the call back over to Greg for any final remarks.

Thanks, Brian and thanks to everyone for joining the call. This morning and for your continued support.

Look forward to updating everyone next quarter.

This concludes today's conference call. Thank you for participating you may now disconnect.

Hi.

Yes.

Okay.

Okay.

Revenue.

And of course.

Moving on.

Okay.

Okay.

Okay.

Sure.

No.

Your line.

Okay.

Okay.

Okay.

Okay.

Yes.

Okay.

Yes.

Okay.