Q2 2023 Advanced Emissions Solutions Inc Earnings Call

Ladies and gentlemen, thank you for standing by my name is Brent and I will be your conference operator today at this time I would like to welcome everyone to the advanced emissions solutions second quarter 2023 earnings Conference call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session.

If you would like to ask a question at that time simply press star followed by the number one on your telephone keypad.

If you would like to withdraw your question again press Star one thank you.

Now my pleasure to turn today's call over to Ryan Coleman Investor Relations. Please go ahead.

Good morning, everyone and thank you for joining us today for our second quarter 2023 earnings results call with me on the call today are Bob Rasmus, our new Chief Executive Officer, and President as well as Morgan fields, Our 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 contact Alpha IR group for Investor Relations support at three one to four or five to eight seven.

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 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, and our Form 10-Q for the quarter ended June 32023, and other filings with the Securities and Exchange Commission.

Except as expressly required by the 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. In addition, 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 would like to turn the call over to Bob. Thank you Ryan and thanks to everyone for joining us. This morning, I am happy to be here today and this is my first earnings call with Ada Es. In addition to discussing the company's second quarter results I want to introduce myself and provide some color as to why I am so.

So excited to have joined the Ada Es team.

One of the biggest challenges the world faces is the preservation reuse and recycling of our finite natural resources, such as our clean air water and soil.

The strain that the world's consumption and economic growth places on these resources is only expected to grow I believe ADF as potential.

Potential to combine small technical knowhow with environmentally sustainable practices can help solve some of these big challenges in a unique way to the shared benefit our society and our shareholders.

As such when first approached I was intrigued by the opportunity potential and challenge the combination of Ada Es has created the only sustainable and vertically integrated operator in the North American activated carbon market.

When the plant expansion completed and I'll have more about that later.

Yes, we will produce a unique and high value activated carbon products for sale into a marketplace, which is currently under supplied and still growing.

Wrestling this opportunity can deliver significant shareholder returns, while also providing material environmental benefits.

We have a very talented group of people as well as the infrastructure and facilities to execute our plan in a low risk manner.

These factors alongside the company in my mind being materially misunderstood and undervalued made this an opportunity and challenge to compelling to ignore.

I was delighted to accept the board's offer to join as CEO with my first day being July 17th I was also equally happy to demonstrate my belief in the potential of what we are building here at a D. E. S by purchasing 950000 shares of stock and receiving a minimal salary.

Taking most of my compensation in the form of equity and equity related items.

Doing so I am very well aligned with our shareholders' interests I.

I will talk a little bit more about our priorities and plans for 2023 and beyond but first I would like to turn the call over to Morgan to review, our second quarter results in greater detail Morgan.

Thank you Bob.

On slide four offers a high level review of our second quarter.

One of our biggest focus areas for this for this quarter has been the integration of arc as of today, we have substantially completed the integration of the arc team systems and assets.

As mentioned on our last call. We also successfully completed the regular scheduled plant turnaround activity in April without disruption. We are very pleased with the planning and the execution of the plant turnarounds.

Our second quarter consumables revenue was $24 million compared to $24 7 million in the prior year.

That figure was well below our expectations as significantly lower natural gas prices relative to 2022 impacted volumes from our power generation customers.

Despite the lower volumes by focusing on new markets, maintaining costs and seeing higher average selling prices, we had a better gross margin on a per pound basis in the second quarter compared to the first quarter.

Looking out to the second half of the year the potential for lower natural gas prices could continue to have an adverse impact on demand from our power generation customers and our top line we.

We will continue to seek to offset this youre a gradual step up in our average selling price for our overall portfolio along with wins in non power generation markets.

Turning to our capital plan and cost update the capital projects to upgrade the corvette and Red River plants will facilitate our future ability to produce commercial scale granular activated carbon products and leverage our new high performance vertically integrated bituminous based feedstock the capital.

Projects remain on schedule and are progressing as expected.

At Corbin engineers contractors and equipment have been selected related to the major components of the capital project and purchasing of long lead time items is underway.

At Red River, where we anticipate spending the majority of the planned capital we have applied for the last permit required to begin construction.

<unk> is moving along as planned we continue to expect to incur between 40 and $45 million in capital expenditures in 2023, driven by enhanced capabilities to able teacher granular activated carbon production.

Mounts for the completed plant turnaround as well as the completion of other capital projects that we started in 2022.

We are also conducting a full review of our capital spending cadence to optimize that spend in the most efficient manner and ensure we hit our project milestones.

We have also begun to take actions to achieve the planned go forward operating cost structure of 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 while maintaining.

Painting, the ability to achieve the growth initiatives inherent in our business plan.

Slide five provides a more detailed look at our second quarter financial results.

Second quarter revenue totaled $24 million compared to $24 $7 million in the second quarter of 2022.

First half revenue totaled $41 3 million compared to $51 1 million for the comparable period.

In the prior year.

The revenue declines were the result of lower sales of consumable products due to lower natural gas prices, which negatively impacted the company's power generation customers.

The decline was partially offset by higher average selling prices for consumable prep.

The improved margins are a result of being able to optimize the plant while focusing on reducing operating costs.

Second quarter other operating expenses were $11 2 million compared to $7 6 million for the second quarter of 2022.

First half other operating expenses were $22 7 million compared to $15 8 million in the prior year.

The increases were mainly the result of higher payroll and benefit expenses as well as higher legal and professional fees associated with the Companys strategic review process and closing the acquisition of substantially all of the subsidiaries of arc.

Operating loss in the quarter was $6 1 million compared to $2 7 million in the prior year.

First half operating losses totaled $13 9 million compared to an operating loss of $6 1 million in the prior year.

The declines were mainly the result of lower consumer both revenue and higher operating expenses.

Second quarter interest expense was <unk> 8 million compared to <unk> 1 million in the second quarter of 2022.

First half interest expense was $1 4 million compared to <unk> 2 million in the prior year period.

The increases were mainly the result of the incremental interest expense on the company's $10 million term loan incurred as part of the acquisition of arc and the assumption of the term loan as part of the arc acquisition.

We did not recognize any income tax expense or benefit for the second quarter of 2023 or 2022.

We recognized a small income tax benefit during the first half of the year versus not recognizing any income tax expense or benefit in the prior year period.

Second quarter net loss was $5 $9 million compared to a net loss of <unk> 3 million in the prior year.

First half net loss was $13 4 million.

Compared to a net loss of $3 4 million in the prior year the.

The declines were the result of lower operating earnings.

Second quarter, adjusted EBITDA loss was $3 million compared to adjusted EBITDA of $2 2 million in the prior year.

First half adjusted EBITDA loss was $10 7 million compared to adjusted EBITDA of $3 1 million for the comparable period in 2022.

The decline in adjusted EBITDA was mainly the result of the larger net loss, which included $4 9 million of transaction and integration costs related to the acquisition.

<unk> balances as of June 32023, including restricted cash totaled $67 $6 million compared to $76 4 million as of December 31, 2022.

As a reminder, in April we received a release of approximately $2 $3 million a restricted cash which was previously held in escrow as collateral for the surety bond portfolio related to Marshal mine.

Total debt inclusive of financing leases as of June 32023 totaled $21 $4 million compared to $4 6 million as of December 31, 2022.

The increase was driven by the term loan entered into as part of the acquisition as well as the assumption of the arc loan acquired.

First half capital expenditures totaled $10 4 million compared to $2 9 million in the prior year the.

The increase was the result of the initial cost of the capital growth projects as well as the higher spend associated with our periodic plant turnaround, which was completed in the second quarter.

With that I'll turn the call back to Bob. Thank you Morgan I'll close with a brief review of our priorities going forward.

As mentioned earlier, the combination of Iot and <unk> has transformed both companies.

Our goal is to make ADM, the safest lowest cost and most profitable company in the industry. We wanted to do this while completing the transformation from a late night powder activated carbon focus to an integrated and diversified feedstock producer of powdered and granular activated carbon products.

With an emphasis on the high value bituminous granular products. It is a simple goal, but it's going to require hard work and attention to all details both big and small my absolute focus will be on execution, starting with the capital projects to expand our production capabilities at Red River and <unk>.

Orben, all while running our existing businesses in the most efficient manner.

The sophisticated nature of the Red River in Corbin facilities, coupled with the unique patented process for converting coal waste into a unique high quality bituminous based feedstock for granular activated carbon provides an incredible runway for growth and a highly attractive opportunity.

Vital to our success will also be implementing our strategy to commercialize our new granular activated carbon product our best in class R&D group and our outstanding commercial team had been working hand in hand, securing lead customers for granular activated carbon and other emerging products.

<unk> building the sales channel and getting our products pre qualified from a technical standpoint is critical to ensuring we are prepared to immediately begin earning trusted supplier status.

Upon reaching full scale production.

Discussions with customers are encouraging.

Customers are excited about both the technical capabilities of <unk> products and as the supply resource Crucially. These discussions also indicate demand continues to exceed supply.

We have a very strong foundation to build upon there are clearly some things we as a team can do better over the next 60 plus days, we will be conducting a review of all aspects of our business with the goal of optimizing cost and productivity.

As we execute and as appropriate I will provide clear on agenda guidance of our milestones, while highlighting opportunities as well as risks.

As an investor looking from the outside in you never quite know what the reality of a company will be but having seen the inner workings of Ada Es in my first few weeks on the job I firmly believe that the opportunity is just as compelling as I surmised if not more so.

The companys unique assets and capabilities, along with our capital expansion plans and serve as a solid foundation as we take the first steps along this path to reiterate our goal is to be the safest lowest operating cost most profitable company in the industry.

I'm excited to get going with the team and I look forward to sharing more detailed updates and milestones in the future with that I will turn the call back over to our moderator to move us to Q&A.

At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad.

Your first question is from the line of Gerry Sweeney with Roth Capital. Your line is open.

Good morning, Bob, Oregon, Bob and Morgan I'm, sorry, Thanks for taking my call. This morning.

Happy to do it good morning Gerry.

Bob I know you've only been there a couple of weeks so.

Just a couple of questions and I understand that you may not may not be able to answer that as in depth due to the timing right.

I'll start with the first one obviously capex transforming Red River Corbin enter facilities that can produce.

Two minutes activated carbon that's the angle just curious or maybe some key milestones that we should we as investors should keep an eye on to make sure. This project.

It's on track for the next 12 18 24 months.

Sure there are several key milestones and one of the things before I tell you what the current milestones.

As we mentioned in our remarks, we're conducting a thorough review of the process. The whole goal is designed to both.

Excuse me expedite and optimize the timeline how can we pull the timeline forward because what we're doing we have a great product we have a unique product we're going to bring the marketplace. When we have our expanded capabilities and it's a market, which we have mentioned, which is inherently short and under supplied and growing and that's before we even the <unk>.

Fast regulations are promulgated and come into effect at the end of the year.

So it's really two separate portions in segments of the plant expansion. One is the carbon project that is less.

<unk>.

We basically are in the process of implementing that and we expect to begin the <unk>.

Commissioning that during the first quarter of next year 2020 for the most recent milestone as we have mentioned is as it relates to the Red River, which is far more extensive in terms of what we have to do we've applied for the final permit that will allow us to begin construction once received we.

We expect to have that absolutely no later than the end of September although hopefully it will be much sooner.

That point, we have all the drawings and engineering, we will get the final construction bids and the current timeline is to begin the commissioning of that Red River plant in the latter part of the fourth quarter of 2024.

Got it okay.

And then secondarily, obviously you did touch upon this in well obviously acute key important aspect of this customers.

And you touched upon it in your remarks.

Just curious if you can give us an idea of maybe what that pipeline.

Potential pipeline.

Customers look like.

Are you actually pre qualifying today or is that in the process just want to understand how this is all sort of developing in the background.

Sure I'm going to answer both the question you asked in a slightly different question.

So I'll come back to the granular, but in terms of our customers as we mentioned clearly natural gas prices are low and that's affecting demand for our powder.

Carbon business as it relates to coal fired plants. So one of the things. We've done is we've been able to increase the average selling price and increased actually the margin by we're concentrating on new markets, there specifically water and the remediation markets. This is both a short term and a long term tactic as it relate.

To the powdered business as it relates to the granular activated carbon business as I mentioned in my remarks, our R&D team and our commercial team has been working hand in hand with customers to be able to get pre qualified from a technical standpoint, we have active programs in place in terms of product development.

That are with our technology team, whereby we have been able to supply quantities of our granular activated carbon to potential customers to their labs were pretty qualification testing and then right now the results and the conversations we've been having with our customers are have gone very well.

Got it.

Can we circle back.

Two the powdered activated carbon to start transitioning to I think you said some of the water markets just curious as to maybe how large that.

How much capacity could you sell into the water market as opposed to the power market.

On the powder side.

We're always looking to optimize our sales mix what provides us the both short term in terms of the best margin and long term in terms of viability in the marketplace.

And so one of the reasons, we wanted to get into the granular market is that it's growing as I mentioned, it's under supplied we expect it to continue to grow and we expect both the water and the remediation markets for powder to begin that begin but to continue to grow as well. So in terms of quantifying it's difficult for me to provide you numbers right now.

But it is a market that is important to us to continue to expand our presence.

And it's growing right.

Correct.

Got it okay I appreciate it.

Thanks for your time and.

Good luck in the coverage out.

Via email connect with at some point next couple weeks as well so thank you.

That would be great. Thank you Gerry.

There are no further questions at this time I will now turn the call back over to the CEO Bob Rasmus.

Thanks, Brent and thank you to everyone for joining the call. This morning, we look forward to updating you next quarter on the exciting and continued transformation of Ada Es.

Ladies and gentlemen, thank you for participating. This concludes today's conference call you may now disconnect.

Please wait the conference will begin shortly.

Yes.

Sure.

[music].

Okay.

[music].

Yeah.

Yes.

Yeah.

[music].