Q3 2022 Advanced Emissions Solutions Inc Earnings Call
[music].
Okay.
Okay.
[music].
Okay.
[music].
Yes.
Okay.
Okay.
Okay.
[music].
Good morning, ladies and gentlemen, welcome to the advanced emissions solutions Q3, 2022 earnings results call. My name is jacquie it out would be your moderator for today's call all lines will be muted during the presentation portion of the call I would now like to pass the conference over to you.
Host Ryan Coleman Investor Relations Ryan. Please go ahead.
Thank you and good morning, everyone. Thank you for joining us today for our third quarter 2022 earnings results call with me on the call. This morning are Greg Marken, Chief Executive Officer, President and Treasurer, as well as mortgage yield Chief accounting officer.
Conference call is being webcast live within the investors section of the website.
Today's presentation is available there as well.
Webcast replay will also be available on our site and you can contact Alpha IR group for Investor Relations support at three one to 445 to $8 seven zero.
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.
Breast in or implied by these statements.
These risks and uncertainties include but are not limited to those factors identified on slide two and three of today's slide presentation, and our Form 10-Q for the quarter ended September 32022, and other filings with Securities and Exchange Commission.
Except as 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 other reason.
Jim It is especially important to review the presentation and today's remarks in conjunction with the GAAP references in the financial statements with that I will turn the call over to Greg.
Thank you Ryan and thanks to everyone for joining us this morning.
Our third quarter showed another period of solid consumables revenue growth as macroeconomic conditions continue to support demand and revenue improvements from our power generation industrial and municipal water customers.
Consumables revenue for the quarter grew to $28 4 million compared to $26 7 million in the prior year, a 7% increase.
The growth was driven by increased volumes and improved pricing, partially offset by product mix.
Our consumables gross margin was 24, 1% in the quarter compared to 25, 2% in 2021.
On a year to date basis total sales volumes are significantly higher than the prior year, along with a much improved average selling price, which is driven consumables revenue growth of 27% compared to the first nine months of 2021.
For the quarter, we reported a net loss of $2 $4 million in 2022 compared to net income of $24 3 million in 2021 the.
The difference being due to the effect of <unk> investments in the prior year.
Our adjusted EBITDA loss was <unk> 5 million compared to adjusted EBITDA of $28 5 million in 2021, which again was the result of <unk> investment contributions in 2021.
As we have discussed on previous calls <unk> ceased operations as of December 31, 2021, as a result of the end of the section 45 tax credit generation period.
Yeah.
Our production volume at Red River was strong during the quarter and our inventory position modestly improved during the period.
However, inventory tightness in supply constraints continue to be a concern.
Additionally, our capital allocation priority remains the organic investment in our manufacturing assets to ensure we are able to meet customer demand and to continue to win attractive commercial opportunities within the market.
In September we announced that we reached an agreement to sell our Marshall mine to Caddo Creek Resource company.
On closing of the transaction, which we expect to occur in the first half of 2023, the asset retirement obligation and other liabilities.
Which are approximately $5 1 million as of quarter end will be removed from our balance sheet.
This is another positive step as we de risk our balance sheet and focus on our Red River operations and the proposed merger with arc.
We also expect the sale to result in the release of a portion of our restricted cash once the asset retirement obligation goes away.
Turning to our outlook, we continue to expect topline growth supported by macroeconomic factors and pricing initiatives as well as strong sales and a robust commercial pipeline.
Our total sales volumes year to date are higher than the prior year.
However, in the third quarter, our sales volumes were down slightly when compared to the second quarter, partially due to the scheduled plant retirements related to the power generation market.
As well as selective bidding on certain contracts.
We continue to manage volumes closely given continued strong demand for our products as well as ongoing challenges of sourcing certain third party carbons to support target inventory levels.
As a result, we are being selective regarding the volume commitments, we make carefully targeting our bidding activity focusing on price pricing initiatives and stepping up the overall earnings profile of our products.
Shortly after the end of the third quarter, we encountered mechanical issue in one of our furnaces at our Red River facility, which led to a week and a half of downtime for that unit.
The mechanical issue has been addressed and resolved however.
The associated downtime resulted in loss production and will affect our inventory position as we move into the end of the year.
Combining all of these factors, we will continue to supplement our inventory through external sources in order to meet high customer demand yet we do expect levels of purchase inventory in 2023 to be reduced compared to the current year, which we expect to have to have a positive impact on the margin profile of our consumer.
Carbon products going forward.
Our margins continued to be pressured by the higher cost per unit. We are currently experiencing as a result of this sourcing a supplemental carbon as well as inflationary impacts on a number of operational costs.
We expect these pressures to persist into 2023.
In addition, general supply chain bottleneck seen across the economy remain a headwind, causing an increase in certain product input costs and related transport costs as.
As well as negatively impacting the timing of receipt of various product inputs.
We are attempting to alleviate these manufacturing cost pressures through increased average selling price and positive changes in our product mix and targeting markets and contracts with better economics.
We remain pleased and encouraged by our ability to realign contracts to current market conditions when possible and as a result, our average selling price is trending higher.
In addition, our contract renewal rates with existing customers remains above 90%, which is a testament to both our sales and support teams as well as the efficacy of our activated carbon technologies.
With that I'll turn the call back over to Morgan to review, our financial performance in greater detail.
Thank you Greg slide.
Slide five provides a snapshot of our third quarter and nine months ended financial performance.
Third quarter consumables revenues and cost of revenues exclusive of depreciation and amortization were $28 $4 million and $21 $6 million, respectively, compared to $26 7 million and $20 million for the third quarter of 2021.
For the nine months ending September 30th consumables revenues and cost of revenue exclusive of depreciation and amortization were $79 $6 million and $63 million, respectively, compared to $26 2 million and $48 7 million for the first nine months of 2021.
The revenue increase quarter over quarter is due to a combination of higher sales volumes and improved pricing.
Year to date, our revenue growth is primarily driven by higher product volumes, which generated approximately $11 $2 million of revenue improvement.
Volumes in 2022 were higher in power generation, primarily due to higher natural gas prices compared to the prior year period.
Which contributed to increased demand for our products.
Year to date consumables revenues also increased by approximately $4 $3 million due to favorable selling prices of our products and by approximately $6 million due to favorable product mix.
Third quarter other operating expenses were $9 5 million compared to $7 6 million for the third quarter of 2021.
Trailing nine months other operating expenses were $25 $3 million compared to $21 8 million in the prior year.
The increases are mainly the result of higher legal and professional fees associated with the Companys strategic review process.
This was partially offset by lower payroll and benefits expense as well as the gain on change in estimate on the asset retirement obligation that was recorded in 2021.
We did not record any earnings from equity method investments in the third quarter compared to $22 $2 million in the third quarter of 2021.
Year to date earnings from equity method investments totaled $3 $2 million compared to $61 9 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.
Going forward, we do not we do not expect to collect any further distributions nor recognize any material earnings from our equity investments continue on.
Third quarter interest expense was $1 million compared to $1 million in the third quarter of 2021, while year to date interest expense was <unk> 2 million compared to $1 4 million in the prior year.
The decrease in interest expense for the year to date period was primarily driven by the full repayment of the Companys senior term loan during the second quarter of 2021.
The company did not recognize any income tax expense or benefit for the third quarter of 2020 compared to income tax expense of $4 $6 million for the third quarter of 2021.
We also did not recognize any income tax expense or benefit for the nine months period versus $14 million expense in the prior year.
The company reported a third quarter net loss of $2 $4 million or negative <unk> 13 per diluted share compared to net income of $24 3 million or $1 31 per share for the third quarter of 2021.
Year to date net loss was $5 8 million or negative <unk> 31 per diluted share versus a net income of $54 6 million or $2.96 per diluted share in 2021.
The declines on a quarterly and year to date basis, our again, primarily attributable to lower earnings from equity method investments as a result of the wind down of the <unk> investments.
Third quarter consolidated adjusted EBITDA loss was $5 million compared to positive EBITDA of $28 5 million in the prior year.
For the nine months period ended September 30th consolidated adjusted EBITDA was $2 $5 million compared to $75 8 million for the nine month period in the prior year.
The decline in adjusted EBITDA was mainly the result of the decline in royalties in equity earnings from <unk> investments, along with the increased legal and consulting fees related to the proposed merger.
Cash balances as of September 30th, including restricted cash totaled $85 $8 million compared to $88 8 million as of December 31, 2021.
The company's only debt outstanding our finance lease obligations, which totaled $4 $9 million as of quarter end.
Capex for the third quarter totaled $3 3 million compared to $1 4 million in the prior year.
Year to date, Capex was $6 5 million compared to $6 7 million in 2021, we.
We expect we expect to spend $4 9 million in Capex and mine development and mine development for the remainder of the year.
We anticipate an elevated level of Capex in 2023, including a planned shut down for scheduled maintenance and repairs that occurs every two years along with the completion of certain planned projects that have been postponed in 2022.
As Greg mentioned during the quarter, we entered into an agreement to sell Marshall mind to Caddo Creek Resources company.
We do not expect any cash infusion from the transaction.
Rather we will pay roughly $2 4 million to Caddo Creek subject to certain adjustments, which will limit look which will eliminate the asset retirement obligation from our balance sheet.
We also expect a portion of our restricted cash to be released upon closing of the transaction, which we anticipate will occur sometime in the first half of the year.
I'll now turn the call back to Greg.
Thank you Morgan as we have discussed our recent third quarter included a robust performance, both operationally and financially not only did we see continued high demand for our products and capitalized on improved pricing, but we also took steps to reduce risk to our business by selling the marshal mind inter.
Additionally, the quarter was highlighted by the announcement of our intent to merge with arc limited.
I would like to take a few minutes to reiterate the reasons why we are so excited about this transaction.
Broadly speaking the merger will be transformative to our company in a number of ways.
First it expands our commercial growth opportunities by enabling us to produce new GAAP products using arc powder as an ultra pure high value by two minutes based feedstock, thus, allowing us to participate and expanded and higher margin activated carbon markets.
As it relates to the market today, we believe that the current north American activated carbon market is structurally underserved.
The expansion of our product portfolio to include bituminous based GAAP products will allow us to address more than 80% of the north American activated carbon market.
The 35% that currently maybe addressable using our existing lignite based products in.
In other words, the merger with <unk> will provide a longer term sustainable and diversified product mix to compete in higher margin activated carbon markets.
However, the utilization of effect second feedstock will create the need to expand the production capabilities of our Red River facility.
Our Red River plant was not designed or constructed to include certain manufacturing processes necessary to produce bituminous based activated carbon.
Though we would have needed to have included many of these same capital upgrades to our planned over the long term to enable the processing of alternative feedstocks for our standalone growth the opportunity to immediately secure a vertically integrated and patent protected feedstock of superior quality makes this.
<unk> very unique and attractive.
In addition to the expanded activated carbon market opportunities. The merger also opens the door to new non activated carbon markets that arc is currently pursuing and that otherwise would not be available to us within our existing business.
These opportunities include additives for asphalt carbon black and marine fuel, providing additional growth and diversification for the combined company.
Second the merger provides us with a sustainable competitive advantage compared to other activated carbon producers by securing a high quality domestically sourced feedstock that is low cost vertically integrated into the combined operations and has been shown to create high performance products that are consistently.
Activated an extremely porous.
The results of product testing performed to date have been very positive and we expect to be able to monetize the value of our enhanced performance as we go to market.
The competitive value of securing our own domestic source of bituminous feedstock is significant as we will be the only north American activated menu activated carbon manufacturer that controls 100% of its primary feedstock needs.
The exclusive access to arc powder, and the fact that arch processes for converting coal waste into arc powder, our patent protected provided platform for maintaining a competitive cost position and long term success.
Art powder is low cost and it is derived from coal mine waste, which is both inexpensive to obtain an abundant and quantity.
There is likely more than 30 years' worth of feedstock material located at the carbon side alone with numerous other locations in the U S from which coal waste can be obtained and converted into arc powder using archs patent protected processes.
The combined company carries an attractive environmental social and governance profile through the utilization of waste as a feedstock.
<unk> and lower scope, one and scope two manufacturing emissions.
Promoting reclamation of property for future use.
And the generation of excess electricity from our current manufacturing processes that has returned to the grid.
Thus as activated carbon as utilized as a cleaning mechanism in products and processes throughout our everyday lives. The production of these unique products will enable a first of its kind cleaner activated carbon product.
While also contributing to the sustainability goals and priorities of our customers.
This platform for a sustainable competitive advantage through the expanded vertical integration of our business would not holistically be available to us exclusive of this transaction.
Yes.
Finally, the merger creates a compelling and attractive financial profile to improve our long term profitability and takes our earnings potential to a level that would not otherwise be attainable. If we were to continue as a single operating plant focused exclusively on producing lignite based products.
It promotes market diversification by shifting our exposure away from power generation and towards other higher margin growing markets.
Vertically aligning our gas production capabilities with a vertically integrated feedstock reduces our exposure to rising raw material cost and supply chain disruptions.
In addition, the competitive properties and cost advantages that our powder provides us an additive for asphalt carbon black and marine fuel combined with the existing strategic partnerships that arc has further increases our borrowing our financial performance upside.
Exclusive access to dual feedstocks as well as leveraging our existing world class manufacturing capabilities and existing customer base.
Laos us to enter new markets from a position of financial and operational strength.
To summarize we believe that the proposed transaction with art provides long term strategic shareholder value by.
Enabling commercial growth opportunities into expanded activated carbon and additional diverse markets.
Creating long term cost and competitive advantages through technology.
Vertical integration and environmental environmental benefits.
And enhancing long term profitability through entry into higher margin markets by leveraging existing operational capabilities.
We are excited to move forward with Ark and this combined endeavor and look forward to updating investors on its progress in the coming months.
Finally, slide seven outlines our priorities for 2022.
Our main priorities for the remainder of the year include working to achieve and efficient closing of our proposed merger with arc as well as continuing our efforts to enhance profitability at Red River.
This involves optimizing red river capacity utilization to fully recapped fully capture the low cost benefit of the plant and managing supply and inventory tightness to the best of our ability.
We will continue to diversify our product and customer mix via growth in industrial and water markets, while continuing to maintain and serve our power generation market.
We will continue to seek to mitigate cost pressures stemming from inventory sourcing and supply chain challenges through methodical step ups in pricing and overall commercial terms.
With that I'll turn the call back over to Ryan to move us into Q&A.
Thanks, Greg we continue to include an invitation to submit your questions ahead of time at the bottom of the conference call announcement press release and in yesterday Afternoon's earnings press release. Thank you for those of you who sent in your questions and we invite all listeners to submit their questions going forward. Our first question why merge with arc rather.
<unk> been a joint venture or licensing of the intellectual property.
We evaluated a number of different deal structures, but are confident that the merger with art provides the most value enhancing path forward.
The value of this merger lies in the ownership of the entire combined infrastructure, which captures funding for the capital improvements that would be necessary to utilize any bituminous based feedstock.
The long term cost advantages and security of owning the feedstock and production process.
And the growth opportunities available outside of activated carbon that would not otherwise be available to us.
As I mentioned by combining with Ark, we will be the only north American activated carbon producer that owns and controls its primary feedstock sources.
That insulates us from much of the price and supply risks that competitors are exposed to by purchasing feedstock on the open market.
Our second question, we're yet to see the true earnings potential of Red River as a standalone operation. So why pursue this merger before getting to that point.
Although we are currently operating in an environment that has provided strong demand for our lignite based products that may not always be the case as long term pressure on fossil generation remains in place.
We need to capitalize on opportunities to expand our feedstocks manufacturing capabilities and end markets that we serve during this period of favorable market conditions.
This transaction provides the opportunity to diversify into producing products that address over 80% of the north American activated carbon market, while doing so from a position of operational strength as we have a strong customer base and a highly utilized manufacturing plant.
This opportunity will allow us to continue to transform our business by serving faster growing and emerging gas markets relative to the markets. We currently serve and will accelerate our long term growth.
Our third question, how confident are you in the $75 million of required Capex forecast for the merged co in this environment of high inflation supply chain issues and material scarcity.
As with any companies capital expansion program macroeconomic conditions, including inflation and supply chain bottlenecks bottlenecks can definitely impact the ultimate cost and timing of completed capital projects.
We will closely monitor these factors and attempt to mitigate them as effectively as possible through value engineering.
Reject management and proactive scheduling of these expansion activities.
Today. This is our best estimate given the market conditions that exist as to what it will cost to expand and modify our Red River plant and <unk> carbon plant in support of our combined business plan.
And our fourth and final question, what is the status of the necessary regulatory filings and timelines related to the shareholder vote.
As many of you probably saw we filed the initial S. Four filing on November 4th.
Standard review process with the SEC will occur over the coming weeks and months.
And right now we do continue to believe that the shareholder vote would likely occur in Q1 of 2023.
Thanks, Craig and thanks, again to everyone, who submitted questions I will turn the call back over to Greg for any closing remarks.
Thank you Ryan and thanks to everyone for joining the call. This morning, we are truly excited about the ways in which we have continued to improve our business over the past nine months, both operationally and financially and believe the Ark merger will provide a unique opportunity to enhance our long term growth we look forward to ups.
To everyone next quarter.
That concludes the conference call. Thank you for your participation you may now disconnect your line.
Yeah.