Q4 2021 Advanced Emissions Solutions Inc Earnings Call
And at the time of contract renewal have been pleased with our ability to realign product pricing and overall contractual terms to better reflect current market conditions.
These structural changes, we are making to our commercial contracts, including improved pricing take or pay obligations increased lead times and volume protections will better position the company for long term success.
In addition, we expect these structural changes to drive a steady upward trend in our average selling price over time.
As current contracts are renegotiated <unk>, new business is one which is helping to partially offset current raw material and logistics cost pressures along with changes in customer mix due to permanent plant closures among certain power generation customers.
Within our RC segment, all of <unk> invested refined coal facilities reached the end of their tax credit generation period as of December 31, 2021.
<unk> is currently in the process of winding down its business as it completes the reclamation activities for certain refined coal facilities, which we expect to complete be completed sometime during Q3 of 2022.
During the fourth quarter continuum distributions to Aes were aligned with our expectations and totaled $7 3 million compared.
Compared to $20 2 million in the prior year Royall.
Royalty earnings from <unk> group in the fourth quarter were $2 5 million compared to $3 5 million in the prior year fourth quarter refined coal segment adjusted EBIT in the fourth quarter was $9 6 million compared.
Compared to 23, 5% in 2020.
The declines in royalty earnings and adjusted EBITDA are the result of fewer invested RC facilities at some of those facilities reached the end of their tax credit generation period at earlier dates in 2021.
For the total company consolidated revenue was $25 $8 million in the quarter, an increase of 30% led by the strong performance of our <unk> segment.
Our improved margins helped drive net income of $5 8 million or.
Or <unk> 31 per diluted share.
Compared to zero point $4 million or <unk> <unk> per share in the prior year.
Consolidated adjusted EBITDA was $9 1 million compared to $23 4 million in the prior year driven by changes in the RC segment.
Our balance sheet remains debt free exclusive of finance leases utilized in operations and as a result, our cash position grew significantly during 2021.
Cash balances, including restricted cash totaled $88 8 million as of the end of the year, which is an increase of $6 $6 million from the end of Q3 and nearly two five times higher than the end of 2020.
Our capital allocation priority remains the organic investment in our manufacturing assets to meet customer demand and improve operating capabilities. As we proceed with our strategic review.
Net of our cash flows collected in Q4, we are updating our projected after tax cash flows from the RC segment to be between 4 million and $5 million during the first half of 2022.
That cash flow guidance is inclusive of associated wind down costs from <unk>.
Those utilities that had previously leveraged the production tax credits to meet emission standards will need to pivot to another method or methods of meeting the requisite emissions limits. While these refined coal facilities have reached the end of their tax credit generation period. Many will remain in place to be utilized for the application of our front end chemistry.
Free to feedstock Cole <unk>.
Any of these utilities have already begun to purchase our front end technology or activated carbon products, which will help drive incremental revenue and margin within our <unk> segment on a go forward basis.
We are early in the process of transitioning these customers to our front end technology and activated carbon products. However, our solutions remain competitive and no previous <unk> customers that continue to utilize our front end solution were lost during the transition from refined coal.
As such we are pleased with our progress to date and the adoption of our products.
Within our <unk> segment, we expect our topline to remain very strong in 2022 as demand has been robust our margins are expected to remain under pressure due to tight inventory conditions and the expected full year impact of incremental carbon purchases to supplement inventory as well as broader supply chain challenges.
That are putting upward pressures on costs related to transportation and freight as well as other necessary product inputs.
As I mentioned, we will seek to offset these pressures through continued price increases and overall improvements in commercial terms.
Mix optimization and top grading, our overall customer mix within our <unk> segment, but it remains clear that the segment is realizing its low cost attributes.
Lastly, as it relates to our strategic review, we remain pleased with the ongoing progress to evaluate the opportunities available to us to maximize shareholder value. As a reminder, we have no timetable for the conclusion of this process, but are focused on completing the process in an efficient manner.
In the meantime, we remain focused on our priorities around enhancing the long term profitability of our <unk> segment.
With that I'll turn the call over to Morgan to review, our fourth quarter and full year financial performance in greater detail.
Thank you Greg.
Slide four provides a snapshot of our fourth quarter and full year financial performance.
Fourth quarter earnings from equity method investments were $6 $8 million compared to $5 million for the fourth quarter of 2020.
Full year earnings from equity method investments were $68 7 million compared to $31 million for 2020 the.
The increases in earnings our first attributable to distributions recorded into earnings as a result of distributions continuum group being in excess of the carrying value of the investment.
Therefore excess distributions are recognized as equity method earnings in the period in which the distributions occur.
Can you on group also had an increased number of RC facilities for the majority of 2021 due to three new facilities added during 2020.
All of the facilities have sent six generating refined coal tax credits as of December 31, 2021.
Fourth quarter revenues and cost of revenues were $25 $8 million and $16 9 million, respectively, compared with $19 7 million and $12 1 million for the fourth quarter of 2024.
Full year revenues and cost of revenues were 21 for 2021 were $103 million and $65 $6 million, respectively, compared with $67 4 million and $50 4 million in 2020.
The increase in revenue for both the fourth quarter and full year were the result of higher sales of consumables.
Fourth quarter gross margin was 34% compared to 39% in the prior year full year gross margin was 35% compared to 25% in 2020.
Of note as disclosed in the 10-K, we have corrected the previously reported 2020 in 2021 consumable revenue and cost of revenue amounts related to accounting for freight the curve.
<unk> resulted in a gross up of our revenue and cost of revenue figures with no impact to gross margin or any other financial metric.
Fourth quarter net income was $5 8 million compared to $4 million for the fourth quarter of 2020.
The increase was driven by improved operating income in the <unk> segment, while partially being offset by an increase in income tax expense in the previous year.
Full year net income was $64 million compared to a net loss of $20 3 million in 2020.
The net loss in the prior year was driven by an impairment charge of $26 $1 million that was incurred during the second quarter of 2020.
Fourth quarter consolidated adjusted EBITDA was $9 1 million compared to $23 4 million in 2020.
Full year consolidated adjusted EBITDA was $84 9 million compared to $55 $1 million the.
The increases in adjusted EBITDA were largely driven by higher consumables revenue and higher equity earnings compared to 2020.
As of year end cash balances, including restricted cash totaled $88 $8 million, an increase of $52 $8 million compared to prior year.
The restricted cash stems from our surety bond and the requirement to post collateral of $10 million for the obligations due under the reclamation contract related to the mine in Marshall, Texas.
The company's only debt outstanding our finance lease obligations, which totaled $4 $2 million as of year end.
For the full year capital expenditures inclusive of mine development costs totaled $7 $6 million compared to $7 5 million in 2020.
Our total obligation related to the reclamation activities for Marshall and <unk> mines currently stands at $10 million Rechler.
Reclamation activity at the Marshall Mine is ahead of schedule and as a result, we have attained cumulative savings to date of approximately $2 $7 million.
Additionally, as of December 31, 2021, we also possessed an offsetting evil ball from Cabot for future reclamation reimbursement.
Due to cabot's change of control occurring in the first quarter of 2022, we collected $10 $6 million related to cabot's share of the Marshall mine reclamation activities and shared capital payments.
Fourth quarter operating expenses totaled $8 $1 million compared to $6 1 million for 2020.
The increase in the fourth quarter was primarily driven by higher payroll expense and higher depreciation and amortization, partially offset by lower legal and professional fees as well as lower general and administrative costs.
Full year operating expenses were $29 $9 million compared to $57 9 million in the prior year.
Full year operating expenses for the prior year includes the impairment charge of $26 $1 million.
Overall, our capital allocation approach will remain unchanged, we expect to continue to focus on near term liquidity and prioritize the organic investment in our manufacturing capabilities are.
Our RC segment will deliver between four and $5 million in the first half of the year and we expect our top line performance in our <unk> segment to remain strong as we manage inventory tightness to protect our margins.
I'll now turn the call back to Greg.
Thank you Morgan turning to slide five which reflects the <unk> segment growth channels and market opportunities. We have been discussing where we are either currently active or have identified future opportunities.
We have historically been the north American provider of choice in the Mercury removal market related to power generation.
Today, we possess a much more diversified commercial end market mix after considerable time and effort growing and expanding our commercial and technical relationships and conducting product tests with new potential customers in the industrial and water markets to capitalize on current and future opportunities.
We remain fully committed to our business partners and will continue to invest in expanding and growing these relationships.
Our team continues to build upon the progress in these adjacent markets that are also subject to regulatory compliance thresholds in purification standards.
We also continue to see strong customer interest and other drilling market opportunities utilizing both existing and developing product technologies and capabilities that may provide earnings opportunities in areas, where the legacy carbon solutions business had not competed.
Emerging areas that may provide these additional opportunities includes our ongoing partnership in testing with Cascade environmental for the groundwater remediation market, which we remain encouraged about given our progress to date.
Market conditions over the past three years have proven the best in class nature of our assets.
Have allowed us to manage industry headwinds better than most other producers. We are expect to continue to be a leading provider of choice for these activated carbon technologies and believe our strong financial position and assets leave us well positioned going forward.
For the full year 2022, we would expect our consumables revenue to be at least consistent with 2021 with the potential for incremental growth as demand remains high for power generation customers and we continue to improve our overall customer and product mix.
And finally slide six introduces our priorities for 2022.
Our first priority is to enhance the long term profitability of our <unk> segment.
We will do this by continuing to optimize our highly efficient low cost and world class manufacturing facilities. This includes driving high utilization rates and optimizing product mix to further enhance the long term profitability of our <unk> segment.
<unk>, we will work to enhance our customer mix and structurally upgrade our customer contract terms.
This will involve ongoing improvement to pricing as well as expanding volume commitments and protections, which will allow us to offset headwinds we may face related to building back inventory and overall supply chain challenges.
Aside from our historical core focuses within the activated carbon market markets, we observed we.
We will also work to accelerate the progress we made in 2021 and look to further diversify product and customer mix through ongoing investment in new product development.
And lastly, we will remain vigilant through additional rational rationalization opportunities and supply agreements to improve our market share.
Our second priority is to allocate our cash flows and assets to drive shareholder value, we will invest in the APC segment strategic initiatives I just discussed. Additionally, we will work to seek a conclusion to our strategic alternatives review that maximizes shareholder value.
With that I'll turn the call back over to Ryan to move us to Q&A.
Thanks, Greg similar to past quarters. We included an invitation to submit questions ahead of time at the bottom of the conference call announcement press release as well as yesterday Afternoon's earnings press release. Thanks for those of you who sent your questions and we invite all listeners to continue to submit their question on future quarter calls.
Our first question reads the exploration of the tax credit generation period for the RC facilities officially kill any prospect of the section 45 tax credit extension.
Technically no there is nothing unique about the tax credit generation expiring that automatically excludes any possibility of an extension.
However, we have been very clear for several quarters now that we do not expect an extension of the tax credit program and that and that view remains unchanged.
Where are you sourcing external inventory for AC products from and are you continuing to sell that externally sourced product at economically feasible rates.
We primarily source a series of products from other domestic activated carbon manufacturers, we won't disclose the margin profile for that incremental product. We are sourcing, but we are meeting our customer commitments working to once again increase our inventories and our consolidated margins for the entirety of the Apd.
<unk> continues to trend upward, which is what we're focused on.
And third question reads approximately how much of the existing volume throughput is contracted at levels significantly below market rates I E does not yet reflect the 10% to 15% price increase announced on March 29, 2021, what is the approximate timeline to having these vol.
<unk> re priced or re contracted at rates more reflective of current market prices.
So during 2021, we renewed our one contracts that updated the overall commercial terms related to approximately 30% of our customer contracts exclusive of the Cabot now known as the master supply agreement.
As we have historically discussed our contracts generally range in term from one to four years dependent upon the end markets.
Thus the overall turnover in the contract portfolio will take time, but we would expect to renew or win contracts. During 2022 that would update commercial terms related to an additional 10% to 15% of our business.
Yeah.
Our fourth question could you provide an update to the testing being done on products within the groundwater remediation market with Cascade environmental what would a commercial.
Products for that market do for the PT business.
During early 'twenty, two we along with our partners have been able to start supplying products for test sites and we expect further information related to those activities in the coming quarter.
Relative to our existing activated carbon and chemicals business. We believe these opportunities if the product and commercial sales channels are successful have the potential to change and improve the long term earnings profile of the company.
And our last question do the Cabot contracts have escalators that increase with inflation.
On an annual basis, the pricing is updated to reflect the estimated cost plus amounts on a product by product basis. According to the supply agreement.
Thus as applicable costs do change over time, so will the pricing of products.
Thank you, Greg and thanks again to everyone for submitting the questions I'll turn the call back over to Greg for his closing remarks.
Yeah.
Thanks, Ryan and thanks to everyone for joining the call. This morning and for your continued support we look forward to updating everyone next quarter.
This concludes today's call. Thank you for joining you may now disconnect your line.
Okay.