Advanced Emissions Solutions Inc. Q1 2023 Earnings Call
Good morning. Thank you for attending today's advanced emissions solutions Q1, 2023 earnings Conference call. My name is Alexis and I will be your moderator for today's call.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end if you will.
I'd like to ask a question. Please press star one on your telephone keypad I would now like to pass the conference over to Brian Coleman with Investor Relations You May proceed.
Thank you and good morning, everyone and thank you for joining us today for our first quarter 2023 earnings results call.
Me on the call today are Greg Marken, Chief Executive Officer, and President as well as Morgan fields, Chief Accounting Officer. This conference call is being webcast live within the investors section of our website and a downloadable version of today's presentation is available there as well a webcast replay will also be available on our site and you can.
Alpha IR group for Investor Relations support at three one to 445 to 870.
Let me remind you that the presentation and remarks made today.
<unk> forward looking statements as defined in section 21 E of the securities.
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 expressed in or implied by these statements.
These risks and uncertainties include but are not limited to.
Those factors identified on slide two of today's slide presentation in our Form 10-Q for the quarter ended March 31, 2023, and other filings with the Securities and Exchange Commission.
<unk> expressly required by Securities Law. 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. In addition, it is especially important to review the presentation and today's remarks in conjunction with the GAAP references in the financial statements.
Please turn to slide three of today's presentation, which provides our Q1 highlights with that I'd like to turn the call over to Greg.
Okay.
Thank you Ryan and thanks to everyone for joining us this morning I.
I'd like to start by providing a high level review of our first quarter than.
And then discuss some of the initial steps we have taken to advance our business plan related to the Ark transaction and related integration.
Our first quarter consumables revenue was $20 8 million compared to $26 4 million in the prior year, which was below our expectations as significantly lower natural gas prices relative to the last 18 to 24 months impacted demand among our power generation customers.
The potential for persistently lower natural gas prices could have an ongoing adverse impact on demand from our power generation customers and operations at Red River. However.
However, more importantly, this economic environment underscores the importance of our acquisition of arc and our transformation strategy to begin producing new granular activated carbon or gap products going forward, thus, reducing our reliance on certain markets and industries over time and broadening the address.
Markets for our activated carbon technologies.
Although this transition will take time due to the capital improvements required. We believe that we will be able to operate a highly utilized asset base. During this transition period and will be well positioned to diversify the end markets, we sell to and capitalize on the broader long term growth opportunities available within the gas markets.
The near term impact of lower sales volumes from Red River were partially offset by our ongoing price initiatives in commercial wins in water and industrial markets.
As a reminder, we have focused our sales strategy on higher value opportunities with improved economic and commercial terms.
We expect that this approach coupled with continued efforts in our pricing strategy will help offset portions of the softer volumes in our legacy markets.
During 2023, we expect that our margins will continue to be pressured by the higher cost per unit of production, resulting from decreased power generation volumes compared to expectations.
External sourcing of supplemental carbon, albeit at reduced volumes as well as inflationary impacts on a number of operational costs.
In April we completed our regularly scheduled plant turnaround event that occurs on a periodic basis. Typically every 18 to 24 months and last for approximately two weeks.
We were pleased with the planning and execution of the plant turnaround by our team and we have returned to normal operations on our anticipated timeline.
During the turnaround we continue to meet all customer obligations with inventory on hand, and did not encounter any commercial disruptions.
In March we completed the sale of Marshall mind to Caddo Creek resource company and recognized the gain of $2 $7 million.
The removal of the asset retirement obligation associated with the Marshal mine allows us to continue to de risk our balance sheet as we focus on our future initiatives related to the arc assets and integration as well as free up approximately $2 3 million of restricted cash that was previously held as cash collateral pursuant to our bonding program.
Okay.
Upon the closing of the arc acquisition, we welcomed three new board members from the legacy arc business.
Julian Mcintyre, Jeremy blank and Richard Campbell breeding.
Each brings valuable experience that will be critical to the execution of our business plan.
We also announced last month that Laurie Bergman will join our board in June as an independent director and will serve as the chair of our audit Committee.
Lori has a proven financial executive with highly relevant industry experience and we look forward to her leadership as we execute on the next phase of the business strategy.
Turning to our capital plan and cost update.
During Q1, we commenced the initial capital projects to upgrade the carbon and Red River plants, which will facilitate our future ability to produce commercial scale gas and leverage our new high performance and vertically integrated by two minutes based feedstock.
At Corbin engineers contractors and equipment have been selected related to the major components of the capital project and purchasing of long lead items is underway.
Okay.
Red River, where we anticipate spending the majority of the capital we made progress related to equipment scoping and completed engineering steps necessary to keep us on track to move forward with permitting at the applicable regulatory agencies during the second quarter.
These collective initial capital projects are on track and we believe these investments will ultimately lead to a more diversified commercial portfolio with a path towards improved and sustainable economic performance for our business on a long term basis.
Consistent with our plan, we expect that the aggregate growth capex related to these projects will be between $45 and $50 million.
Of which roughly 27% to $30 million will be incurred in the current year.
Our total Capex spend for 2023 is expected to be between $40 and $45 million with the balance relating to our regularly scheduled plant turnaround and other capital projects.
We've also begun to take actions to achieve the planned go forward operating cost structure for the combined company.
Such as streamlining personnel and systems optimizing overall operations as well as other items.
We will continue to evaluate ways to simplify the overall organization and operations, but are on track to achieving our go forward cost structure consistent with our plans, while maintaining the ability to achieve the growth initiatives inherent in our business plan.
In addition to commencing the initial capital improvements to the Red River in carbon facilities. We are simultaneously focused on expanding our sales channels to identify and secure lead get customers once commercial production of gas products utilizing arc powder begins.
Part of that process involves engaging in a more visible and proactive marketing approach to increase awareness of our company and our overall suite of environmental technologies that we will bring to potential customers during.
During the first quarter, our Chief Technology Officer, Joe <unk>, and our Vice President of sales Oscar Velasquez participated in multiple technical speaking engagements and conferences designed to strengthen our remediation market base discuss our product applications and drive awareness around our suite of current and potential products.
Including <unk>.
Pack and colloidal carbons.
We expect to participate in future events in order to demonstrate the expanded joint product.
Palio and capabilities of the combined company.
And lastly, we remain focused on developing opportunities for emerging markets and applications for arc powder, which will continue to derisk the business by diversifying our revenue mix.
We are pleased to have completed the acquisition of <unk> during the first quarter, which we believe is the right step in driving long term growth and value creation.
Our combined company will enjoy a diverse portfolio of products.
And customers in a much larger addressable market due to an enhanced feedstock portfolio and production capabilities, which will result in higher margin opportunities within the activated carbon market.
As well as providing access to additional potential revenue streams that would have been previously unattainable for our business as previously positioned.
I'll talk a little bit more about our milestones for 2023, but first I'd like to turn the call over to Morgan to review, our first quarter results in greater detail.
Thank you Greg slide.
Slide four provides a snapshot of our first quarter financial results.
First quarter revenues and cost of revenues were $28 million and $17 $2 million, respectively, compared to $26 4 million and $21 5 million for the first quarter of 2022.
The revenue decline was the result of lower sales of consumable products due to lower natural gas prices, which negatively impacted demand from our power generation customers.
The reduced demand was partially offset by higher average selling prices for consumable products.
First quarter other operating expenses were $11 $5 million compared to $8 $2 million for the first quarter of 2022.
The increase was mainly the result of higher legal and professional fees associated with the conclusion of the Companys strategic review process and closing of the Arctic arc acquisition.
<unk> as well as additional payroll and benefit costs and overall operating expenses due to arc activities. After the acquisition.
The increase was partially offset by a $2 $7 million gain on the sale of Marshall mine as.
As Greg mentioned, we are already taking actions to achieve our expected go forward operating cost structure for the combined company. This involves integrating the organization in order to realize cost synergies and efficiencies across the organization.
First quarter operating loss was $7 8 million compared to $3 3 million in the prior year. The decline was mainly the result of lower consumables revenue driven by the previously mentioned factors and the incremental transaction and integration costs of $3 6 million associated with the acquisition of arc.
First quarter interest expense totaled $5 million compared to $1 million in the prior year.
Increase was driven by <unk> 3 million of incremental interest expense related to the company's new $10 million term loan as well as the interest related.
Relating to the previously existing term loan.
The company recorded a small income tax benefit for the first quarter of 2023 compared to no income tax expense for the first quarter of the prior year.
First quarter net loss was $7 $5 million or <unk> 32 cents per diluted share compared to a net loss of $3 million or <unk> 17 per share in the prior year.
As discussed the decline was the result of lower operating earnings driven by lower consumable sales.
First quarter consolidated adjusted EBITDA was a loss of $7 $7 million compared to positive adjusted EBITDA.
$9 million in 2022.
The decline in consolidated adjusted EBITDA was mainly the result of a larger year over year net loss, which included $4 $4 million of transaction and integration costs related to the acquisition compared to $8 million in the prior year.
The current year also included $9 million of incremental arc payroll and benefit costs since the date of the acquisition relative to the prior year.
Cash balances as of March 31, 2023, including restricted cash totaled $79 $1 million compared to $76 4 million as of December 31, 2022.
Total debt inclusive of financing leases as of March 31, 2023 totaled $21 $7 million compared to $4 6 million as of December 31, 2022.
The increase was driven by the term loan entered into in conjunction with the acquisition as well as the assumption of the previous previously existing arc term loan.
As Greg mentioned the sale of the Marshall mine closed in March as a result, the asset retirement obligation was removed from our balance sheet and all future cash flows outflows associated with reclamation of the mine were transferred to the buyer.
In April we received the release of approximately $2 $3 million of restricted cash which was previously held in escrow as collateral for the surety bond portfolio.
First quarter capital expenditures totaled $3 $6 million compared to $1 5 million in the prior year.
The increase was the result of initial cost of the capital growth projects as well as higher spend in anticipation of our periodic plant turnaround at.
As Greg stated, we expect to incur between 40 and $45 million in capital expenditures in 2023, driven by enhanced capabilities to ensure gas production and amounts for the plant turnaround as well as the completion of other capital projects.
Including certain planned capital projects that were started in 2022 and will be completed during the first half of 2023.
With that I'll now I'll now turn the call back to Greg.
Thanks Morgan.
Slide five shows the strong foundation, we continue to build upon to become a leading environmental solutions provider.
We are currently a top three producer of activated carbon products in North America with a market share of approximately 17%.
However, we are currently able to only serve an estimated 30% to 35% of the activated carbon market with our lignite based portfolio of products.
Post acquisition utilizing both our existing lignite based feedstock and.
And art powder as bituminous based feedstock, we will be well positioned to provide activated carbon products that could serve more than 80% of the north American activated carbon market.
This will inherently reduce our exposure to certain end markets and leave us less susceptible to headwinds that we are currently experiencing in our existing business.
Additionally, as we complete the growth capital projects to integrate arc powder.
We will reposition the utilization and capabilities of our existing assets towards GAAP products that generally provide higher value and higher margin opportunities in markets that are expected to continue to have growth in demand for years to come.
We have proven sales channels in more than 100 current customers many of which provide potential entry points for the expanded markets. We will enter as we look to accelerate our sales of <unk> products when the capital improvements at our facilities are completed.
Our commercial and technical teams have a proven track record of success in new markets.
We expect our historical track record to continue to drive accelerated market acceptance of our new <unk> and overall suite of activated carbon products and ultimately enhance our ability to win new business in these emerging market segments.
We will be the only vertically integrated activated carbon producer in North America for our primary feedstock needs for material sourcing to manufacturing to distribution.
We expect this integration to yield sustainable long term cost advantages and provide a distinct competitive advantage when production of gas products from arc powder begins in 2024.
And lastly, we are well positioned to benefit from a changing regulatory landscape as the need to control and remediate the release of harmful chemicals into our air and water evolves.
We continue to develop products to be potential solutions to emerging soil and groundwater regulations focused on forever chemicals, such as <unk>.
We expect to further expand upon and utilize our improved ESG profile to support and.
And contribute to our customer sustainability goals in a world increasingly focused on the preservation of its natural resources.
Overall, the new combined company provides us with a longer term sustainable and diversified product mix and facilitates participation in higher margin activated carbon products and end markets.
Finally, slide six lists our areas of focus for 2023.
First and foremost we will continue to operate our Red River plant as we have while looking to continue to grow and improve our existing business.
We are focused on maintaining high renewal rates with existing customers and.
And being focused in our bidding process in order to align new and renewed contracts to maximize our top line opportunities.
As it relates to arc, our first priority will be the integration of the <unk> team assets and operations.
We are pleased with the integration efforts to date and are encouraged by the enthusiasm of our collective teams to begin executing our combined transformative business plan.
Operationally, our key focus will be on progressing the capital work to optimize both the carbon and Red River facilities for industrial scale production of arc powder and GAAP products.
The most significant of these modifications relates to the Red River plant and includes the installation of new shaping and heat treatment processes to enable the processing of bituminous based feedstock to manufacture new and higher value products. The.
The capital projects will not interrupt our ongoing manufacturing operations or sales opportunities.
Our focus will also be on securing lead customers and building our sales channels within the North American market for <unk> and other emerging products.
We expect to undertake further product testing with potential customers for gas and other activated carbon products, which we believe will provide an opportunity to capitalize on the expanded capabilities in 2024, when the initial growth capital improvements are completed.
Additionally, we will continue to progress the technical feasibility of other potential products for emerging markets during 2023 and beyond.
To conclude while our first quarter results were down compared to our prior year. It underscores the importance of securing a by two minutes based feedstock and acquiring art the.
The combined company will be able to pursue end market served by both powder and granular activated carbon products.
Expanding our market breadth and reducing our reliance on power generation and when complete will position the business to be the only completely vertically integrated activated carbon provider for a primary feedstock needs from.
From primary material to distribution.
This market expansion diversification of our product portfolio and cost competitive position of the new company are all expected to create a materially improved earnings profile and a more resilient company.
With that I will turn the call back over to our operator to move us to Q&A.
We will now begin the question and answer session. If you would like to ask a question. Please press star followed by one on your telephone keypad.
Any reason you would like to move that question. Please press star followed by two.
To ask a question press star one.
As a reminder, if you are using a speakerphone. Please remember to pick up your handset before asking your question.
Our first question comes from the line of Gerard Sweeney with Roth Capital Partners. You May proceed.
Good morning, Greg and Morgan, Thanks for taking my call.
Good morning, Jerry.
I have a couple of questions I want to start on the capital project side.
We have corp, and Red River.
And wanted to ask about them independently. So one of the risks that we're watching is just timeline of investments and sort of what are the gating factors or key milestones to make sure those projects.
Pay on time for completion production et cetera. So could you maybe just outline each for corvid and separately from Red River. What are some of the key areas that we should be looking at for investments in and meeting those milestones. Obviously I think red River is going to be a little bit more.
<unk>.
I don't want say challenging, but there's probably a little more risk of them a little bit more challenged round trip ever than corporate.
Yes.
So Jerry obviously, so let me start with Corbin.
I do think Youre right. This is <unk>.
Bit more straightforward of a project.
Overall timeline, we're looking to the end of Q1 of 2024 to have all of the.
Kind of collective projects related to carbon complete.
As I mentioned, we are on track, but we did commence the three major capital projects during the first quarter immediately upon completing the acquisition.
The first thing.
Kind of break it into three general areas the equipment to increase the water processing capabilities, which will be key to the throughput and the ongoing operations.
It just requires.
A high level of water coming through the plant. It is a closed loop, but we needed to increase the capabilities there.
The second component would be the further automation of the plant to enable more reliable and efficient operations.
When Ark initially built it was.
Partially automated.
And we're going to finish that off to make sure that once we come online that we have a much more automated plant that would be.
More in line with with Red River.
And then the final one would be the equipment handling to to take the finished product and take it whether it's a red river or another finished customer.
With all of those we are on track with the detailed project plan.
Specifically in the first quarter here, we did have the engineers the contractors and equipment all selected for Corbin.
And have the long lead items purchased or in the process of doing so so pleased with where we are with Corbin.
As it relates to Red River.
You are right. This one is the bigger project of the two obviously more money and a bit more complicated.
But the technology and equipment for the shaping and heating processes.
To ultimately produce the gas products.
In conjunction with our existing furnace capabilities.
Those projects are well underway.
I think key milestones here in the first quarter, where we completed the detailed engineering and further <unk> further testing to support the filing of the permit.
With the regulatory agencies in the second quarter and we're on track to do that.
Still tracking on an overall project basis too.
Have that done by the end of the third quarter of 2024 from Red River.
So I think collectively very very pleased we're off to a good start.
But it is important that we continue to execute on our.
On a weekly basis through the duration of these projects.
Got it.
Excuse me switching gears to the.
Engaging lead customers. So obviously.
Yeah.
Youre getting Red River Corp, and up and running in the background as you said.
Joe and Oscar sort of hit the street.
The word out.
Granular activated carbon products.
A little bit more detail as to what some of that.
I called seeding the market what it entails so you are municipalities where customers come in and testing the materials.
Just understanding how you're.
Maybe getting some of these customers comfortable with the product and getting our prep for its arrival.
Yes.
So I think I'll break it down in a couple of components, Jerry but very good question.
From a.
Just what were doing kind of actively in the marketplace attending and speaking at conferences I think the relationship development component is really critical.
And so we're going to invest.
Time time and energy to do that.
Over and over this period until we come online, but making sure that we have the right relationships.
And those are those are key the other the other things that we're doing we are engaging with both.
Miscible water customers along with other lead adopters.
We're doing pilot scale and.
Little larger quantity testing to <unk>.
<unk> the <unk>.
Performance everything that we saw as we went through the diligence process. So we're actually having them do testing.
And we will do that across multiple end markets with multiple customers.
Municipal water, that's a little bit more of a.
Transparent process.
The lead adopters and another category that will be some longer term relationships, but all of it will involve testing and we are undertaking that right now.
Got it any initial feedback or still too early.
The feedback has been very very consistent with what we've got to put out in some previous presentations.
Product performs really really well, it's very high quality.
And so we're seeing some.
Very very good results across multiple industries, which we're very excited about.
Got it.
Switching gears to arc powder.
There is you mentioned I think in your prepared remarks, there's also an opportunity to get there and we've talked about I think it was fuel asphalt things like that.
Where does that sort of fall into the.
Opportunity chain or.
As we look at it.
Yes.
So.
A final outlet for arc powder.
It is important Jerry but if I would order it in relative timing and ability to get to market.
Thanks.
The known one for sure is activated carbon.
Arc powder can definitively serve as a feedstock to allow us to do that.
We need to continue to go through the technical and commercial development related to other arc powder outlets I think arc had done a lot of really good work, but there are still additional hurdles and a little bit more proving out of the potential outlets.
I think it's important because ultimately it will result in full utilization of the carbon facility, if we're able to do that.
But there is additional technical and commercial work that needs to be done to get over those hurdles and that timing is probably a little more uncertain.
Okay, That's fair and then.
Just one thing I wanted to confirm right. So I think in the quarter.
I heard it right there was about $4 4 million of.
Professional fees merger costs et cetera, and this was not backed out of the $7 7 million EBITDA loss at <unk>.
Correct.
That's correct Gerry there is a footnote below it.
Where it does give that information.
That is correct.
Got it I just wanted to say, okay got it okay. That's it for me I appreciate it thanks for.
The answers Greg.
Yes, thanks for jumping on Jerry appreciate it.
Thank you for your question.
Again, if you would like to ask a question. Please press star followed by Gwen.
There are currently no further questions in queue I will now pass the line back to the management team for closing or additional remarks.
Thank you and thanks to everyone for joining the call. This morning, our business plan for the new Aes is underway and we are excited about the company's prospects to becoming an environmental technology leader, we look forward to speaking with everyone soon and updating everyone on our next call.
That concludes the advanced emissions solutions Q1, 2023 earnings conference call. Thank you for your participation you may now disconnect your lines.