Q1 2022 Advanced Emissions Solutions Inc Earnings Call
His remarks in conjunction with the GAAP references in the financial statements.
I would like to turn the call over to Greg.
Thank you Ryan and thanks to everyone for joining us this morning.
Before we discuss our results I would like to take a moment to remind everyone listening that as of December 31 2021.
All of the remaining refined coal facilities reached the end of their respective tax credit generation periods.
As a result, we will no longer have separate reportable segments for our investments with <unk> group continuum services, and I will and will only report our results on a consolidated basis going forward.
Turning to our first quarter highlights on slide three.
Demand for our activated carbon technologies remained strong throughout the first quarter supported by both macroeconomic and industry factors sales of consumable products were $26 4 million.
Which reflects year over year growth of 42%.
Our gross margin was 18, 5% compared to 24, 6% in the prior year as the need to supplement production with third party sources of activated carbon.
To meet customer demand increases our average product cost as the average cost of third party activated carbon purchases is higher than the cost of producing comparable products in house.
We recorded a net loss for the period of $3 million compared to net income of $13 7 million in the prior year.
Adjusted EBITDA was <unk> 9 million compared to $26 1 million on a year over year basis the.
The declines in both earnings and adjusted EBITDA are most materially the direct result of our reduced distributions and earnings from <unk> group continuum services compared to the prior year due to the wind down of our former refined coal segment.
<unk> first quarter 2022 distributions to Ada Es totaled $2 5 million, which was in line with our expectations.
With strong capacity utilization at our operating facilities, we continue to source supplemental inventory from third parties to meet sustained customer demand importantly production volume at our Red River plant exceeded our internal expectations for the quarter.
Allowing us to increase inventory levels within the quarter as we prepare for the seasonally strong upcoming summer months.
As a result, we are feeling incrementally more comfortable with our inventory position and our ability to more efficiently meet customer obligations.
However, we do anticipate general inventory tightness in supply chain challenges to remain in effect throughout 2022.
And we expect these cost pressures to continue to impact margins for the remainder of the year.
We are working to offset these cost pressures through price increases related to our consumable products.
<unk> announced over the past 12 months, we have maintained high renewal rates on current contracts and we have been pleased with our ability to negotiate more favorable contractual terms as those contracts have come up for renewal or as new business opportunities are pursued.
As a result, we have seen our average selling price trend higher over the past few quarters, which is partially offsetting cost pressures related to areas such as inventory and logistics.
The more holistic structural changes that we're 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.
However, as we discussed in March the turnover of our contractual portfolio would generally occur over the course of three years to four years based on general contract durations within our customer base.
Regarding our capital allocation, our priority remains the organic investment in our manufacturing capabilities to ensure production.
Improving the operating profile of our manufacturing assets and fulfilling customer obligations.
We ended the first quarter with a cash balance, including restricted cash of $89 $8 million and our only remaining debt outstanding our finance lease liabilities totaling $3 9 million.
As it relates to our strategic review, we remain pleased with the ongoing progress to evaluate opportunities available to us to maximize shareholder value. We have stated since day one that there is no timetable for the conclusion of this process and then its continuation has in no way impeded our day to day operations.
It attracted from our focus on enhancing the long term profitability of our Red River plant.
We are encouraged with where that process currently stands and we will provide updates as appropriate going forward.
Turning to our outlook for the remainder of 2022.
We expect our topline to remains strong as demand for our activated carbon technologies has been robust and we continue to improve our overall contractual terms on contracts.
As stated previously our margins are expected to remain under pressure due to tight inventory conditions and the anticipated full year impact of incremental carbon purchases to supplement inventory as well as broader supply chain challenges that are applying upward pressure on costs related to transportation and freight.
As well as other necessary product inputs.
As I mentioned, we continue to seek to offset these pressures through overall improvements in commercial terms product mix optimization and top grading our overall customer mix.
Our inventory position has improved incrementally and we are cautiously optimistic in our ability to realize further improvements in the coming quarters.
Lastly.
We expect to collect net after tax cash flows from <unk>.
Between <unk> $5 million to $1 million in the second quarter of 2022 10.
<unk> is currently in the process of winding down its business at the end of the section 45 tax credit generation period occurred at the end of 2021.
Utilities that had previously leveraged the production tax credits to meet emission standards are transitioning to other 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 and some may be utilized for the application of our front end chemistry to feedstock coal.
A number of these utility customers have already begun to purchase our front end technology or activated carbon products.
Which will help to drive incremental revenue and margin on a go forward basis.
We continue to transition these customers to our front end technology and activated carbon products and our solutions are competitive.
No previous 10, new <unk> customers that continue to utilize a front end solution were lost during the transition from refined coal as.
As such we are pleased with our progress to date and the adoption of our products.
With that I will turn the call over to Morgan to review, our first quarter financial performance in greater detail.
Thank you Greg.
<unk> or provide a snapshot of our first quarter financial performance.
First quarter revenues and cost of revenues were $26 $4 million and $21 $5 million, respectively, compared to $22 $6 million and $14 million for the first quarter of 2021.
The increase in revenue was the result of a $7 $9 million increase in the sales of consumable products, which more than offset the revenue benefit of $4 $1 million in prior year royalty earnings from that form our refined coal segment.
We collected our final royalty payment during the first quarter of 2022 related to royalties earned in the fourth quarter of 2021.
First quarter other operating expenses were $8 2 million compared to $8 3 million for the first quarter of 2021 the.
The decline was primarily the result of lower depreciation and amortization expense, which was partially offset by higher payroll and benefits as well as higher legal and professional fees generally related to the strategic process.
First quarter earnings from equity method investments were <unk> 8 million compared to $18 3 million for the first quarter of 2021 the.
The decrease in earnings from equity method investments is the result of all remaining invested refined coal facilities, reaching the end of their tax generation period as of December 31, 2021.
First quarter interest expense was <unk> $1 million compared to zero point $8 million in the first quarter of 2021.
The decrease in interest expense was primarily driven by the full repayment of the company's senior term loan during the second quarter of 2021.
The company did not recognize income tax benefit or expense for the first quarter of 2022 compared to income tax expense of $4 $5 million for the first quarter of 2021.
The company reported a net loss of $3 million for the first quarter of 2022 compared to net income of $13 7 million for the first quarter of 2021.
The change was primarily driven by lower earnings from equity method investments as a result of the wind down of the <unk> investments.
First quarter consolidated adjusted EBITDA was <unk> 9 million compared to $26 1 million in the prior year.
The decrease in adjusted EBITDA was primarily the result of a decline in earnings from the former RC segment related to our <unk> investment, which contributed $27 2 million of adjusted EBITDA during the first quarter of 2021.
As of March 31, 2022, our cash balances, including restricted cash totaled $89 8 million, an increase of $1 million compared to the prior year.
The restricted cash stems from our surety bond and the requirement to post collateral of $10 million for the.
<unk> do under the reclamation contract related to the mine in Marshall, Texas.
The company's only debt outstanding our finance lease obligations, which totaled $3 $9 million as of the end of the quarter.
Our total obligation related to reclamation activities for the Marshal in five Forks mine currently stands at $8 $3 million.
Reclamation activity at the Marshall mine remains ahead of schedule and as a result, we have attained cumulative savings to date of approximately $2 $7 million.
Additionally, due to Norwich change of control occurring in the first quarter, we collected $10 $6 million of reimbursements related to <unk> share of the Marshall mine reclamation cost shared capital payments and other amounts owed from nor it to a third party.
And now I will turn the call back over to Greg.
Thank you Morgan slide five reflects the activated carbon growth channels and market opportunities. We have been discussing where we are either currently active or have identified future growth opportunities.
Historically, we have 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 for considerable time and effort growing and expanding our commercial and technical relationships.
Ducting product tests with new potential customers.
In the industrial and water markets.
We remain fully committed to our business partners and will continue to invest in expanding and further developing these relationships. Our team continues to build upon the progress in these adjacent markets, which are also subject to regulatory compliance thresholds and purification standards.
We also continued to see strong customer interest in other growing market opportunity 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 previously competed.
Emerging areas may provide these additional opportunities.
Includes which includes our testing within the groundwater remediation market.
We remain excited about this opportunity given our progress to date.
Market conditions over the past three years have proven the best in class nature of our assets and have allowed us to manage industry headwinds better than most other producers we are and expect to continue to be a leading provider of choice for these activated carbon technologies and believe our strong financial position and superior asset.
<unk> have us well positioned going forward.
For the full year 2022, we expect our consumables revenue to be comparable with 2021 with the potential for incremental growth as high demand.
For our power generation customers continues and as we continue to see an overall improvement in customer and product mix.
And finally slide nine outlines our priorities for 2022.
Our first priority is to ensure the long term profitability of our Red River plant and manufacturing operations.
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. Additionally.
Additionally, 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 relating to building back inventory levels and overall supply chain challenges.
Aside from our core focus within the activated carbon markets. We have historically served 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.
Lastly, we will remain vigilant for additional rationalization opportunities.
Supply agreements to improve our overall market share.
Our second priority is to allocate our cash flows and assets to drive shareholder value, we will invest organically to enhance the operating profile of Red River and we will work to seek a conclusion to our strategic alternatives review that maximizes shareholder value.
With that I will 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. Thank you to those views those of you who continue to send in your question and we invite all listeners to submit their questions going forward.
Our first question when would you expect outsourcing of activated carbon from third parties to end and is there anything aes can do to grow capacity in the meantime.
Okay.
We expect to continue to purchase carbons from third parties at higher levels throughout the remainder of 2022 when compared to historical periods.
We will continue to evaluate market conditions normalized inventory levels in internal production capabilities as we plan for 2023, which will help us estimate the required levels of third party sourcing that will likely be needed going forward.
As it relates to growing capacity, we continue to work to improve and optimize the Red River facility production capabilities and have seen volume improvements. During Q1 of 2022 that have allowed us to increase our inventory levels, while meeting current demand we.
We'll continue to optimize our plant operations in order to realize higher production capacities through the remainder of the year and into the future.
Okay.
Our second question is there cost sharing with Cabot for obtaining the potentially high cost outsourced product and is there anything related to cabot's change in control that could alter the terms of the master supply agreement.
Each year the prices for the products sold to north formerly known as Cabot.
Re evaluated and adjusted for the following year based on anticipated volumes the impacts of such volumes on product mix manufacturing and related production costs.
Regarding the second part of the question.
Aside from the applicable change of control payments that have occurred during the first quarter of 2022.
Which were contemplated when the master supply agreement was originally executed we continue to operate under the terms of the master supply agreement as written as we were required to fulfill our obligations to nor it.
And our third question, it's now been one year since the strategic review announcement with no public updates is there anything that you can offer investors on the direction of the strategic review process.
Okay.
It's a great question, while we are certainly sympathetic to investor desire for more detail regarding the status of our strategic review. We are also very appreciative of their patients.
It has always been our desire and intention to provide updates as appropriate and required by public company regulations.
That being said, we have no timeline for the processes ultimate conclusion.
It is very difficult to predict the timing or the evolution of a process like this given the sensitivity of the discussions involved as well as the need to preserve certain confidentiality.
While the process has drawn out the fact remains.
That we are pleased with where things stand within the process and are hopeful that we can provide an update soon.
Despite the duration of the process. It has not detracted from our ability to run the business as demonstrated by the results and operational improvements achieved within the business during this past year.
Thank you, Greg and thanks, again to everyone who submitted their questions I will turn the call back over to Greg for closing remarks.
Okay.
Thanks, Brian 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 lines.
Okay.