Q2 2022 Advanced Emissions Solutions Inc Earnings Call

of 41% for the second consecutive quarter. Our gross margin also improved to 19.5% compared to 15.4% in the prior year.

Our second quarter production volume exceeded expectations, which is important to note since our second quarter is traditionally seasonally slower and thus is an important inventory building period. This has allowed us to increase our inventory position in advance of moving into the warmer summer months of our seasonally strong third quarter.

Our bottom line performance was slightly below breakeven as we reported a net loss of $0.3 million compared to net income of $16.6 million in 2021.

Our consolidated adjusted EBITDA totaled $2.2 million compared to $21.2 million in the prior year. Keep in mind that the year-over-year variance is primarily a function of equity earnings from our investments in tenuem group and tenuem services in the prior year.

However, both metrics saw solid sequential improvement when compared to the first quarter results of a net loss of 3 million dollars and adjusted EBITDA of 0.9 million dollars.

Tenuum's second quarter distributions to ADES totaled 3.1 million, which was in line with expectations as Tenuum continues to wind down its operations.

Regarding our capital allocation, our priority remains to organically invest in our manufacturing capabilities to maximize production, improve the operating profile of our manufacturing assets, and fulfill customer obligations.

We ended the quarter with an aggregate cash balance, including restricted cash of $90.8 million, and our only remaining debt outstanding are finance leases.

totaling $5.2 million.

I know that many of you are anxiously awaiting news regarding the results of our strategic review. We are pleased with the progress of our strategic review process and will hopefully be in a position to provide additional updates in the very near term.

We are encouraged with both the current status of negotiations as well as the option available to us.

However, we will not be providing further comments on this topic until we have something definitive to share.

Turning to our outlook for the remainder of the year, we expect our top line to remain strong as demand for our activated carbon technologies has been robust, and we continue to improve our overall contractual terms on contracts.

As we have discussed before, 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 and inflationary challenges that are applying upward pressure on costs related to transportation, freight, and other necessary product inputs.

We continue to strive to mitigate these cost pressures through price increases and overall improvement in commercial contracts related to our consumable products as those contracts allow.

We have successfully renewed existing contracts and one new business with more favorable, overall commercial terms compared to historical contracts.

As a result, our average selling price has tended higher over the past few quarters, which helps to offset pressures related to inventory, logistics, and overall cost increases.

We are optimistic that we can continue to make further improvements to successfully navigate the inflationary cost environment we are in.

We continue to see utilities that had previously leveraged production tax credits to meet emissions standards switch to other methods of meeting requisite emissions limits.

While the refined coal facilities have reached the end of their tax credit generation period, many will remain in place and may utilize our front-end chemistry for their feedstock coal. This helps drive incremental revenue and margin on a go-forward basis, providing an additional offset to the aforementioned margin headwinds and cost pressures.

We have successfully transitioned many of these customers to our front end technology and have also seen an increase in usage.

of our activated carbon products at certain customers.

Our solutions remain competitive, so much so that no previous tenuum customers that continue to utilize a front-end solution were lost during the transition from refined coal.

With that, I will turn the call over to Morgan to review our second quarter and first half financial performance in greater detail.

Thank you, Greg. Slide 4 provides a snapshot of our second quarter and six month financial performance.

Second quarter revenues and cost of revenues were $24.7 million and $19.9 million, respectively, compared to $21.1 million and $14.7 million for the second quarter of 2021.

For the six months ending June 30th, revenues and cost of revenues were $51.1 million and $41.4 million respectively, compared to $43.7 million and $28.7 million for the first half of 2021. For more information, visit www.fema.gov

The revenue improvement is primarily the result of higher sales of consumable products, which more than offset the loss of royalty earnings from the former refined coal segment in the prairie year.

Second quarter other operating expenses were $7.6 million compared to $5.9 million for the second quarter of 2021.

First half other operating expenses were $15.8 million compared to $14.2 million in the prior year.

The 2021 other operating expenses included a gain recognized on the change of estimate of the company's asset retirement obligations of $1.9 million.

Second quarter earnings from equity method investments were $2.4 million compared to $21.4 million in the second quarter of 2021.

First half earnings from equity method investments totaled $3.2 million compared to $39.7 million in 2021.

The declines were the result of all remaining invested refined coal facilities reaching the end of their tax credit generation period as of December 31, 2021.

Second quarter interest expense was $0.1 million compared to $0.5 million in the second quarter of 2021.

First half interest expense was $0.2 million compared to $1.3 million in the prior year.

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 any income tax expense or benefit for the second quarter of 2022 compared to income tax expense of $4.9 million for the second quarter of 2021.

We also did not recognize any income tax expense or benefit for the six-month period versus $9.4 million expense in the prior year.

The company reported a net loss of $0.3 million for the second quarter of 2022, compared to net income of $16.6 million for the second quarter of 2021.

First half net loss was $3.4 million compared to net income of $30.3 million in the prior year.

Again, the decline was primarily due to lower earnings from equity method investments as a result of the wind down of the tenuous investments.

Second quarter consolidated adjusted EBITDA was $2.2 million compared to $21.2 million in the prior year.

For the six-month period ended June 30, 2022, the consolidated adjusted EBITDA was $3.1 million compared to $47.4 million for the six-month period ending June 30, 2021.

The decline in adjusted EBITDA was also the result of the decline in earnings from the former RC segment, which contributed $24.1 million of adjusted EBITDA during the second quarter of 2021 and $51.3 million for the first half of 2021.

The decline in earnings from the former RC segment is being slightly offset by improved gross margin on our consumables revenue in 2022 due to price increases that we have been able to achieve.

Cash balances as of June 30, 2022, including restricted cash, totaled $90.8 million compared to $88.8 million as of December 31, 2021.

The company's only debt outstanding are finance lease obligations, which totaled $5.2 million at the quarter end.

As of quarter end, our total obligation related to reclamation activities for the Marshall Mine and Five Forks Mine stood at $8.5 million.

The reclamation work performed at Marshall Mine has gone extremely well and is under budget.

With that, I will turn the call back 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.

We possess a diversified commercial in-market mix, which is the result of 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.

Our team continues to build upon the progress in these adjacent markets.

which are also the subject.

of regulatory compliance thresholds and purification standards. We continue to see strong customer interests and other growing market opportunities utilizing both existing and developing product technologies and capabilities that may provide earnings opportunities in areas where we had not previously competed.

Emerging areas that may provide these additional opportunities include 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 over our production assets.

and when combined with the advantage of our vertically integrated feedstock technology and customer commercial expertise 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 that our strong financial and operating platform have us well positioned going forward.

For the full year 2022, we expect our revenues to be comparable with 2021, even with the impact of no longer earning royalties, with the potential for incremental growth as demand remains high for our customers and as we continue to improve our overall customer and product mix.

And finally, slide six outlines our priorities for 2022.

Our first priority is to enhance 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 manufacturing facilities.

This includes driving high utilization rates and optimizing product mix to further enhance its long-term profitability. In addition, we will continue to optimize our customer mix and structurally upgrade our customer contracts with more favorable terms. This will involve ongoing improvement to pricing as well as expanding volume commitments and protections.

Aside from our core focus within the activated carbon markets, we will also look to further diversify product and customer mix through ongoing investment in new product development.

Lastly, we will continue to evaluate opportunities to improve our operations and earning profile.

Our second priority is to utilize our cash flows and assets to drive shareholder value. We will invest organically to enhance the operating profile at Red River, and we will continue to push to conclude our strategic review in a manner that maximizes shareholder value.

With that, I'll turn the call back over to Ryan to move us into Q&A.

Thanks, Greg. As we've done on 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.

submitted your questions. And we invite all listeners to submit their questions going forward. Our first question, roughly how much incremental revenue have you realized from transitioning utilities that had previously leveraged the production tax credits to your front-end technology?

This year on an annualized basis, we would expect to generate incremental revenues of approximately 5 million related to those utilities that have previously utilized the front end or a technology for production tax credits.

Our second question is, are you planning any additional price increases for activated carbon products, and how much volume is up for renewal before year-end that you feel confident you can renew and improve the contractual terms?

Ryan, as we previously discussed, our contracts are generally our longer term in nature with the turnover of our contractual portfolio occurring over the course of three to four years based on the general contact durations within our existing customer base.

As such, we will continue to develop strong commercial and technical relationships with our customers and work to improve our overall commercial terms as contracts are renewed or new businesses won.

And our final question, can you provide any additional updates on the strategic review process and how long are you willing to let this process play out?

As previously mentioned today, we are pleased with the progress of our strategic review process and will hopefully be in a position to provide additional updates in the very near term. We are encouraged with both the current status of negotiations as well as the option available to us.

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

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.

All right. Thank you. Thank you.

Thank you everyone for joining today's call you may now disconnect your lines and have a lovely day.

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We are courage, both the curren status of thenegotiationations as well the opt of available to us. However, we will not be provideing for their comments. On top and IL. We have something to? ited to year Turning. two our outlook for the remainder of or year. We expect our top line to remain strong as the mand for activated carbon technologies has been bust and we continue to improve our overall contractual terms on contracts, as we have discussed. four our margins are expected to remain pressure ue the inven condations in the expected fourll year Act of incremental carbon purchases to supplement inventory, as well as ad supply change inflation ary chall es that appoint pressure on sts related to Trans ortation and other necessary product in putts. We continue to strive itigate these cost pressures, price increases and overall improvement. Commercial contracts related to our consumable productix, as those contract allow. We have successfully re new existing contracts and one new business with more favorable overall commercial terms compared to TOR? ical contracts. As a result our selling price Ed high or over the P? quarars, which helps to offset pressures related to inventory justics and overall cost increases. We are optim the we ue to make further improvements to successfully NAV igate the inflation ary cost by. We are in. We continue to see utilities previous verage production tax credits a mission stand to other method meet re missitionions limits. While the ref facilities of reach the end their TA Red generation period, many will remain place and the utilize our on in mis for their Fe Co. this helps rive incremental revenue and margin. A four bases provide in itional offset to the a four mention margin windins and cost pressuers. We have successfully transition many of these customers to our on in technology and have also seen in increase usage of our activated carbon produs customers. Our solutions remain comparedtit some what that no previous 10 customers that continue to utilize a on in solution were loss uring the transition from five Co. with that I will turn the call over a moreg review: our second quarter and first half financial performman andin tail Greg Slide four provide of our second quarter and six Mon financial performanments. Second arter revenues cost ofrevenues were 20, four $7 thousand and teen $9 thousand expectively comp to twoy one point one million and 4: teen seven thousand for the second quarter of two thousand and 20: one for the six month end 30 revenues cost ofrevenues were fifty one point one million dollars and Forty one point four million expectively, compared to Forty three $7 thousand and twoy 8, seven thousand for the first half of two thousand and 20: one the revenue improvement primarily the result of prior sales of consumable products which more offset the loss of Al earnings and the 4? Er re fin segments. In the prior second quarter other operating expenses were seven point six million dollars compared to five $9 thousand for the second quarter of two thousand and 20: one first other operating expenses were fifteen $8 thousand compared to fourteen point two million in the prior year. The 20- twentyone other operating expenses included: G re on the change of imment of the companyies asset retirement obligations of 1, $9 thousand. Second quarter earnings equity method investments were two point four million dollars compared to two 20, one point four million dollars and the second quarter of thousand and twentyone. First earnings equity meth investments total three point two million doll comp to 30, nine point seven mill in two thousand and 20. the decline: the result of all remaining invested fin co facilities re ing the and of their tax tax credit generation period. As of the CEM 30 first, two thousand and 20. second quarter interest expense was zero point one million dollars compared to Ero point five million in the second quarter of two thousand and 20. first half interest expense: zero point two million compared to 1, three thousand in the prior year. The decrease interest expense primarily D by the fu payment the company I year term onean during the second quarter of two thousand and 20: one the company to not re any income tax expense or benefit for the second quarter of two thousand and 20: two compared to income tax expense of 4, $9 thousand for the second quarter of 2020 one. We also not re ize any comp tax expense or benefit for the six Mon period first es nine point four million expense andin the prior year the company reportter and net loss of zero, $3 thousand for the second quarter of 2020: two comp to net income of $16.6 million. For the second quarter of two thousand and 20: one first loss was three point four million dollars compared to income of 30, three thousand in the prior year. Again the decline primarily due to lower earnings equity method investment.s as a results of the: one of the 10 investments. Second quarter consolidated adjusted EBITDA was point two million doll compared to 20, one point two million in the prior year. For the six th period and une 30, two thousand and 20: two that consolidated adjusted EBITDA was $3.1 million compared to Forty seven point four mill for the six Mon period ending UN ending 30, two thousand and 20. the decline in adjusted EBITDA was also the results of the cline earnings. The former our C segment, with conributated two 20, four point one million of adjusted EBIT during the second quarter of 2020: one and fift, y 1, three thousand for the first half of two thousand and 20: one the decline in earnings from the former. Our C segment is being slightly offset by impro Ross margin on our consumab revenuue in two thousand two 20, two due to price increases that we have able to, ie cash balanes as of 30, twotwentthousand 20 2, incluuding striced cash, total inety $8 thousand compared to 80 8, eight thousand. As of the CEM 30, first two thousand and 20, the companyies only B out standing. Our finance ase obligations which total five point two million dollars, as of arter end as a cour, arter and our total obligation related reclamation activities for the marcial M and 5, four Min OD eight point five million dollars. The reclimation work form, marcial nine ex tre ly well and under budget we that I will turn the call. Thank moreg. Slide five reflect the activated carbon th Anal and market opportunities we have been discussing where we are curren Act orhave ident a five future th opportunities. We possess first, five commercial in market mix which is the result of consider time ill expanding our commercial and technical relation and conducting product est new potental customers in the ion and water markets. Our teen continue to build upon theprogress and J markets which are also the subject regulate or liance, ress holds and ifications standard. We continue to see strong customer interest and other market opportunities utilizing both existing and developing CT technologies and capabilities that may provide earning opportunities and area where we not previously competed, a marging is that may provide the additional opportunities and ude our esting within the ground water remediation market. We remain ced about the opportun, given our ven, our gress date, mar condition, the P three years provement, the est and CL? Ure of or production assets and when bined, the vantage of grated Fe technology and custommer commercial exp.er t have a allowed to manage distrry head windins than most other producers. We and expected to continue to be a leading prov of choice these activated carbon technologies and believe that our strong financial operating form had well position forward. For the ll year ythousand 2- twentytwo, we expect our revenues to be comp? Arable two and 20 1, even with the Act of no longer earning ya, l which the potentional for incremental growth as the mand remain high, whereor our customers and as we continue to improve our overall customer and product mix and find. Slide six outlineines our priorityities for two thousand andtwo twent two our first priority is to hand long term profitabil of our River and manufacturing operations. We will this by continue to optimize our highly ficition, low cost manufacturing facilities. This includes driving high utilization rates and optimizing product mi. Further handance, long term profitability and addition, we will continue to optimize our custommer IX and structally up grate our customer contract. Favorable terms, the volve on going improvement to pricing as well as expanding volu commitendments, proteions a our cour focus within the tivated carbon markets. We will also urther ver five CT and tomer mix on going investment in new CT development. Lastly, we will continue to valueuate opportunities to improve our operations and earning profallow. Our second priority: utilize our cash's and assets to drive shareholder value. We will invest or Gan ically to hance the perating profile Red re and we will continue to ush to conude our strategic review a or maximize a shareholder value. We, with that, turn the call over to move to Q Greg and we done arters Ed to ation quest the the contrress call ress re yesterday after pressrele the M questions, all their quested going forward. Our first quested: how incremental revenue utilility that previous leverage produ X credits to year tech nology. This year, on nualize basis we expected generate incremental revenues of a pro five million or ated to those utilities that a previously utilize technology production tax cred. Our second: our plan additional price increases or activated car products and how new four year the tractual terms ban, as we previously discussed our contract generally. Our longer term: eight Ure which the ter over of our contrual full occuring overthe course of 3, four years Ed on the general contract urations within our existing customer base as we will continue to develop strong commercial and technical relation of our customers and work to improve our overall commercial terms as conacts our renewed or new businesses. y oneand our final quested: provide additional update strategic view process and how longer will process play outas previously mention to today, we are pleased with the progress of our strategic review process and will hopefully bein a position to provide additional dates in the very near term. We are courage with both the curren status of the negotiations as well as the option available to and subm questions. Turn the call G close. Mars thanks an and thanks to every one ining the call. The morning and for year ue report. We four updating everyy one next quar one jo ing today, line a.