Q2 2019 Earnings Call
Everyone to the advanced emissions solutions Q2 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 during that time. Please press Star then one on your telephone keypad. If you would like to withdraw your question. Please press the pound key. Thank you I would now like to turn the call over to Ryan Coleman Investor Relations you May begin your conference.
Thank you Mariano good morning, everyone and thanks for joining US this morning for our second quarter 2019 earnings results call with me on the call. This morning are Heath, Sampson, President and Chief Executive Officer, and Greg Marken, Chief Financial Officer. This conference call is being webcast live in the Investor section of our website at a downloadable version of todays 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 31244 or five to 87 I'll. 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 in our Form 10-Q for the quarter ended June Thirtyth 2019, 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's very important to review the presentation and today's remarks in conjunction with the GAAP references in the financial statements.
So with that I'll turn the call over to Heath Sampson Heath.
Thanks, Ryan and thanks, everyone for joining us this morning, let's begin on slide three and review our second quarter.
Our focus during the second quarter was unchanged as we continue to assist Tinuum group and securing third party tax equity investors for the remaining RC facilities.
And integrating our acquired assets with our existing pollution control platform as such and as previously announced in May Tinuum was able to secure a tax equity investor for an additional RC facility. This marks the second closure during 2019 and brings the total number of invested facility to 21.
At the end of last year, we outlined a path to adding 12 million incremental tons in 2019, and so far we have added over half of that goal or 6.5 million ton.
Based on current discussions with preset perspective investors, we maintained a line of sight toward adding the remaining five and a half to 6 million tons. This month.
We also have line of sight to additional closures in 2019.
Additionally, equity earnings from Tony on were significantly higher than one year ago at three facilities have been invested since the second quarter of last year.
In our PGS segment, we continue to be very pleased with the integration of the carbon solutions team in products as well as the execution to perform it of the assets.
Retention rates with existing customers remained at 89% and the feedback we are receiving from customers continues to be encouraging.
The combination of our legacy technology know, how and industry relationships combined with our new activated carbon solutions are positioning us as the platform of choice.
In fact during the second quarter, we re signed a large industrial customer the carbon solutions had lost prior to the acquisition.
We have made investments in technology and team and have even begun to see traction with adjacent market penetration.
The steps we have taken to align these newly acquired products with our existing platform are helping to position this world class, but once distressed assets for years of growth.
Unfortunately, our second quarter came in a bit softer than our expectations. The second quarter included our planned plant turnaround and is historically seasonal due to low coal fire power demand.
This time of year, along with late in the third quarter utilities will often have periods of downtime due to planned maintenance.
Additionally, mild weather across the country, coupled with cheap fuel sources that serve as coal alternatives for electricity, let christi generation magnified the impact of coal dispatch during the period.
This is shown in the recently updated forecast by the U.S. Energy information administration in which we revised downward which was revised downward by 7%. It's December 20 forecast of 2019 coal fired electricity generating units.
Lower coal dispatch effects, the entirety of our business.
So while we are happy with our execution. We are not pleased that our customers did not operate and did not buy our products.
June was the most challenging month for coal fired dispatch across the country by July but July has recovered.
Consistent with previous years, the third quarter is off to a better start to the second quarter at this point. Additionally, we have more new contract opportunities in the second half of this year.
The bottom line is that we remain everybody is excited about the potential for this business and amazing asset base. As we were earlier this year as I said positive feedback from customers around our offerings high retention rates and new customer wins have us encouraged.
This general PGTI, an overall pollution control market for coal fire power market remains fragmented fragmented.
And we will continue to evaluate key opportunities to capitalize on it.
On the platform that we have.
No company is better positioned than us to take advantage of this disruption.
The PGTI platform remains a uniquely strategic underutilized asset that provides multiple ways to drive future growth and shareholder value.
Ill discuss the longer term vision for these new assets after Greg reviews, our second quarter results.
Greg.
Thanks Keith.
Let's start on slide five for our second quarter financial review.
Earnings from equity method investments totaled $20.9 million compared to 15.9 million in the prior year. This significant increase was driven by three additional invested RC facilities since the second quarter of 2018 with total equity earnings of $42.6 million compared to 28.1 million on a full year basis also contributing to the increase was 10 UAMS adoption of the new revenue and lease accounting rules that we mentioned on the first quarter call.
We recorded a cumulative adjustment of $28.8 million related to the company's percentage of Tinuum groups.
Cumulative effect adjustment that increased Tinuum retained earnings.
But those amounts as part of that adjustment will not impact our future earnings.
We no longer have cumulative cash distributions in excess of our cumulative pro rata share of Tinuum group's net income.
Therefore, we recognize equity earnings by recording our pro rata share of tenure of that income rather than based upon cash distributions in the second quarter.
I want to also reiterate that this adjustment does not affect the timing of our total projected future cash flows.
For our RC segment from Tinuum.
Second quarter consolidated revenue of $15.6 million was also significantly higher than 4.3 million one year ago, driven by the contribution from carbon solutions consumables and additional royalty bearing RC facilities.
Within our consolidated revenue second quarter consumables.
Totalled 11.4 million.
This was significantly higher than the prior year of 700000 again, driven by the carbon solutions contribution.
Second quarter royalty earnings were higher year over year totaling 4.2 million versus 3.5 million in 2018.
Royalty earnings in the first half of 2019 totaled $8.4 million compared to $6.8 million in the comparable period in 2018.
This increase is a result of the additional royalty bearing facility is invested.
Currently there are 14 royalty bearing facilities that are operating compared to just 11 during the second quarter of 2018.
The long term earnings expectation for royalties continues to be roughly 40 cents per ton and all future closures are expected to be royalty bearing to us.
Our non-GAAP cost of revenue operating expenses were higher year over year second quarter. Other operating expenses were $7.5 million compared to $5.1 million in the second quarter of 2018.
First half other operating expenses totaled $16.3 million compared to 2.8 million in the first half of 2018.
The increase during the second quarter and first half of 2019 were driven by higher legal and professional and general and administrative costs incurred as well as depreciation and amortization depletion and accretion expenses.
Resulting in $2.4 million and $5.8 million of the increase respectively related to the carbon solutions acquisition.
Net income for the second quarter was $8.1 million down from $15.3 million in the second quarter of 2018.
Second quarter earnings were negatively impacted by a $1.4 million swing related to the amortization of the step up in the basis of acquired finished goods inventory in connection repurchase purchase accounting adjustments, we discussed on our first quarter call.
This step up in basis will have a total negative impact to earnings of $5 million during 2019.
All of which impacted the financial metrics during the first and second quarters.
Net income was also negatively impacted by a larger tax expense of $6.6 million compared to a tax benefit of $1.3 million in the second quarter of 2018.
This variance was largely a result of an increase in the valuation allowance against our deferred tax assets during the second quarter of 2019.
Net income during the first six months totaled $22.5 million, a 2% decrease from $23 million during the first six months of 2018.
The decrease in net income for the first six months of 2019 was primarily driven by higher interest expense non cost of revenue expenses and income taxes.
Which were largely offset by higher consumables revenue, resulting from the contribution of the PGTI segment.
Higher earnings from Tinuum, resulting from additional refined coal facilities.
As well as higher royalty income from the refined coal business.
Consolidated EBITDA for the second quarter was $17.4 million, an increase of 3 million over the second quarter of 2018.
The increase was driven by increased earnings before interest and taxes.
As well as higher expense related to interest and depreciation and amortization type expenses as well as income taxes.
Our total cash position as of June 32019 was $20.4 million.
Of which 5 million as restricted as a result of the term loan undertaken to acquire carbon solutions.
Total cash was down from levels seen at the end of 2018 for a few reasons. Most significantly we have made 16 million of principal payments related to the term loan during 2019 of which 10 million occurred during the second quarter.
Also the first and second quarters saw cash cash usage from dividends and share repurchases that combined for more than $12 million.
Back in November the board authorized a 20 million dollar share repurchase program on top of our previous repurchase authorization.
Over the last two years, we have demonstrated our willingness to opportunistically repurchase stock in the open market, having now reduced our share count to well under $19 million and we expect to continue to act opportunistically going forward.
Lastly, as of June 32019, total current and long term debt, which is comprised of our term loan and finance leases totaled $58 million.
We reduced the principal balance on our term loan from $70 million as of the end of the year to 54 million as of June 32019.
The senior term loan was used to finance our acquisition of carbon solutions and is subject to quarterly principal payments of $6 million that began on March Onest 2019.
During the quarter, we made over $10 million and principal payments and a previously expressed our expectation to pay off this loan in less than the stated three year term.
I'll now turn the call back over to Heath.
Thank you, Greg I'd like to take a moment to discuss our future outlook.
Turning to slide seven you can see our usual representation of the number of invested facilities versus the number waiting for a tax equity investor for waiting to be installed.
As of today, we have 21 invested facilities and seven uninvested.
To maximize this refined coal opportunity and secure additional investors for the remaining units to noon has been proactive installing facilities in preparation for investment and two are currently in the installation phase during 20, not 18, Tinuum spent roughly $17 million related to capital expenditures nearly all of which was engineering and installation costs.
Genuine and its members, including US would certainly not be incurring these costs. If we were not confident that they will translate into future invested RC facilities.
We expect 2019 to be similar from a capex perspective.
We have active ongoing conversations with potential tax equity investors for a handful of facilities.
We expect to add an additional 5.5 to 6 million in annual tons to Terniums totaled this month fulfilling our commitment to adding incremental tonnage of approximately $12 million on an annual run rate basis.
Let's turn to slide nine for an update of our expected future RC cash flows.
As of June 32019, and inclusive of 21 refined coal facilities invested with third party investors. We are updating our expected net RC cash flows to range between $175 million and $200 million to 80 EPS through the end of 2021.
This has been our number one priority and our commitment to leasing or selling the idle units is unaffected by our integration and scaling of our PGTI segment.
Also recall that the refined coal business is run by an experienced management team with involvement from its owners, including us for oversight and strategic guidance.
This structure will allow us to continue execute and refined coal, while devoting the necessary resources to simultaneously integrate and grow our new assets.
Let's flip to slide 10, and review the growth opportunities for our new assets.
This slide shows our roadmap for the new Ats and how we plan to leverage our new asset to become the North American leader in Mercury control and activated carbon within multiple diversified industry.
As we briefly discussed the entire coal fire power market.
Which includes very large utilities and mining companies were surprised by the unusually for coal fired dispatched in Q2, this directly and negative negatively impacted our consumable product sales.
However, with a broader view, our discussions with both existing and potential future customers are leaving us encouraged about our position in the market that we are winning it.
We have executed better than our competitors as represented by our high renewal rates and new wins, which validates that our combined offer offering provide new value as a combined platform.
These are the type of wins, we expect to replicate moving forward to drive volumes into 2020.
As a reminder, these contracts typically are longer than one year, and we must wait to compete as these contracts come up for bid.
The second half of this year have more bids than the first half of 2019, and we look forward to updating you as we progress through the year.
We are we are already attractively positioned for long term profitable growth due to the completion of our leading position in this segment. The Mercury control market in North America is competitive and has seen more than a few changes over the past years as coal burn has shifted to natural gas.
As a result, many coal fired power generators have dramatically reduced head count and are continuously looking for cost savings.
They simply do not have the bandwidth to resources anymore to compete at at significant scale.
They are now looking for fewer strategic vendors that can provide more for less with our combined offerings. We are best positioned to be the supplier choice for this changing power market.
Gaining incremental share within the North American Mercury control market by driving performance either by pricing power or premium service or product is a top priority.
As a reminder, the mercury market is expected to expand 20% to 35% and 2021 and 2022 as refined coal expires.
We are thankful to the developers in utilities, we've invested time and money to develop refined coal many years ago as their efforts created the platform for many pollution control technology to use today.
Like any tax incentive program to benefit society like refined coal does the industry deserves the benefits from the tax incentive program currently refined coal as the solution for many facilities.
And many need these benefits to continue.
However, when these incentive expires, we are best positioned to service them.
Next we're also positioned today to achieve further penetration into the municipal water treatment market. This market provides an immediately addressable adjacent market to grow within that is also highly fragmented space comprised of many producers and sellers.
To better position ourselves in this space, we have made incremental capital investments to invent the product performance and have a focused and that focus some of our existing personnel here and believe this will lead to positive long term results within water activated carbon.
Longer term, we aim to grow our share in industries that command premium products and Thats premium pricing and margin, we see a significant opportunity in the broader consumer and commercial water market as everyone has seen over the years in the press clean water is increasingly in demand both here and across the globe. This market command higher margins by approximately 20% to 25% compared to Mercury control and as higher expected growth rates.
However, entering this market would require upgrades to the existing facility or combination of feedstock and the associated capital investment. So these opportunities we have a vision for the future.
In addition to position ourselves as the leader for North American Mercury capture and activated carbon and pursuing adjacent market opportunities such as water. We will also evaluate international markets as Mercury control regulations outside the U.S. mature like they currently are in Europe , as well as adjacent segments like oil and gas food and beverage industrial and consumer markets.
The broader water market and other specialized adjacent markets have higher growth rates and higher margins.
As I previously mentioned this general PCI and overall activated carbon market remains fragmented and we will continue to evaluate key opportunities to capitalize on the platform that we have whether they be near term or longer term opportunities.
One note regarding our activated carbon assets that most significantly impact the PGTI segment and the Q2 results is that we had a period of scheduled downtime for planned mate planned maintenance during the second quarter.
These scheduled Downtimes our plan for.
Planned for and occur every 18 to 24 month for a period of two to three weeks.
The efforts of our people to complete this work during the second quarter with incredible quality on allows this asset to remain the best in class.
I'd like to take a moment to.
To review, what we have seen since the acquisition of carbon solutions and how we think the second half of the year will come together.
As we reflect on the past seven eight months since the acquisition the RFP landscape integration of new assets and the go to market approach of the activated carbon opportunities have exceeded our expectations.
The momentum in the RC business has foster to closures this year and as I said, we expect to meet our 12 million ton commitment this month.
I'm also encouraged about tinuum pipeline and the prospect of additional closures in 2019.
Turning to PGTI, the $2.5 million of operating synergies, we outlined when we purchase carbon solutions have been achieved.
And with the combination of our existing platform the business is yielding attractive opportunities for both our legacy technology as well as the activated carbon platform.
Although we are pleased with our execution the downward revision for expected coal fired generation released by the EIA is a key input we look at when forecasting future expectations internally. So we have been assessing that change and the ultimate effect. It has on short term outlook for our specialty chemical business.
Revenues have been fairly flat, thus far but we still maintain the conviction that we have an opportunity to grow this business in 2020 and beyond as we outlined for you earlier.
Carbon solutions, where the business through the market downturn was generating between $5 million to $6 million in EBITDA at the time of the acquisition and we have long believed that this asset given its underutilized capacity and efficient nature is capable of far better performance.
That said, we're still evaluating volumes and production costs, which ultimately led to margins below what we have seen as the long term potential of this business. However, we have tremendous leverage as a combined entity to drive volumes higher and be competitive across different markets.
As we look to the remainder of this year, we continue to expect to have new customers starting in the second half of the year, which will allow our activated carbon assets to yield results with higher revenue and margin than the first half of 2019.
And we will look to expand that profitability into 2020 and beyond.
In the meantime, our strong projected future cash flows in excess of a lot of our term loan balance offers us incredible flexibility.
As we position ourselves for future and scale that for the future and scale. This operation.
Moving to slide 11, let's review our capital allocation approach.
Since the start of the capital allocation program in the second quarter of 2017, the company has paid $45 million in dividends.
And utilize capital of over $44 million to repurchase shares.
We paid our second quarter dividend on June seven and our third quarter quarter dividend declared yesterday will be paid on September six.
As Greg mentioned, we made roughly $10 million in principle payments this quarter on our term loan and we expect to continue to continue aggressively aggressively pay down our debt, while maintaining our commitment to dividend and opportunistic share repurchases. These initiatives remain a key focus of ours and we believe we generate sufficient cash flows to both honor our capital return commitments and invest in the new business.
Finally, let's review our 2019 priorities on slide 12.
As always our ongoing commitment to leasing additional RC facilities and supporting Tinuum in their efforts to secure tax equity investors is unchanged.
Maximizing our cash flows will continue to be our first focus.
As the cash flows from this partnership are utilized to on our capital allocation commitments.
Our second strategic goal will be the integration of our newly acquired assets people and operations to immediately capture share in the North American Mercury control and municipal water activated carbon market.
We will also evaluate and pursue the adjacent attractive opportunities in other verticals, which we are beginning to do now.
And finally, we will continue to return capital to our shareholders through our continued commitment to our dividend program as well as the opportunistic repurchasing of outstanding shares.
So with that we'll take questions.
At this time I would like to remind everyone in order to ask a question. Please press star and then the number one on your telephone keypad, we'll pause for a brief moment to compile the culinary roster.
Okay.
Your first question comes from Sameer Joshi with H.C. Wainwright Your line is open.
Oh, good morning, Hey, Greg Thanks for taking my call.
Oh any questions.
Just a clarification on the right of course is the commentary I think in the write up you mentioned Glen doing around or is that the same as the plant maintenance. The two to three week plant maintenance you mentioned.
Yes, they are synonymous in the industry that you turn around and I just to clarify that the closure. So both are synonymous.
Okay got it thanks.
Oh on the on the RC front or or other on the Tinuum front Ah yes.
Has there been any change in the cost structure of it in terms of operating costs and distributions. Also you mentioned there was capex of 17 million last year and do you expect similar levels. This year.
What portion of that Capex has already been.
Spent.
So do you have that Greg.
For the 17 million yet so it's going to be consistent with.
With last year because of the facilities that we have in place.
Greg flipping through that what was the what was the first part of your question again you know the other question was about just the cross operating cost structure there.
Yeah, there any costs that are different than say a year ago.
So on the on the first part there is no no material change their cost structure and what they're doing and then the second part of your question related to Capex.
It's a little over 9 million has already been spent on a year to date basis and that's included in the liquidity disclosure within the 10-Q as well.
Right and so Oh, there in conjunction with that are you also mentioned that.
An additional facility will be Oh, we like you would be 12 million ton.
This month.
Ah so that takes into account this as well.
It does.
Okay.
And that that Capex for something that's going to close this month has already been incurred that's within that 9 million.
Right right understood.
And then on the EBITDA front towards the end of your presentation, you mentioned around $5 million to $6 million EBITDA from carbon solutions.
Was that was this at the time of acquisition or was this the annualized Oh first your expectation for you.
Oh that was at the time of the acquisition you know as the market was going through the downturn and all those things that's where they were performing.
And so what is the target for this year or it doesn't not been disclosed.
Yeah, we're we're not disclosing what the target is going to be this year.
Mainly because.
Of the refined coal business trying to get the refined coal business predicted for 2019 is challenging pitched large dollar amount and the timing really matters, coupled that with what we're seeing in the business. It didn't make sense to give that that broader kind of 2019 guide and we think it would be unproductive. We can we as you see we we still give the cash forecast for tenuous.
I mean, we are we still do that but the broader market I think it makes sense to really understand the longer term strategy.
And couple that with the guidance. So that's why we have decided not to kind of give some type 19 guidance. We didn't think it was productive right now, but like we tell like I also said on the call with the asset in the acquisition and our ability to execute I feel the same if not better than when we made the acquisition so.
As we get through that bumpy time to do with coal dispatch, we look forward to coming up the latter part of this year, especially in the 2020 to be well positioned.
Like we said when we initially made this acquisition.
Understood.
And then last one sort of a complex question or own question.
Looking forward at the industry is that there are markets that you're targeting the broader want.
Watermark and international Mercury control markets.
Can you give us oh, an a and <unk>.
<unk> an idea of the size of these markets and.
What is your expected.
Sure I don't know if that market and what is the timeline youre kind of getting to achieve that.
Yeah. So the so that first the markets that we're look at specifically international and the municipal water market. Why we are in excited about those because our current capabilities and our current products can service those markets. So that makes sense to go into those places first the international side, it's primarily in Europe and those are just beginning they actually don't have to start being in compliance till 2021.
So we are we are pursuing what we're going to be there.
That market is.
It's fairly broad it.
It's about a third of what the U.S. market is for Mercury control perspective, but that's continuing to mature so it's significant and it would be meaningful as we move through the next number of months and quarters, we'll get tighter and what we think the expectation is there, but it is significant and it will will drive value if we can get into that market.
The water market, specifically the municipal water market.
It depends how you segment it we've disclosed in the past that it's around.
200 to 300 million pounds per year, our segment is smaller than that.
And that's the segment we are attacking so are obviously international we don't have any volume our mercury volume I mean, our water market is really low as well. So we will see strong growth rates in both of those markets as they begin to mature.
As we get into them and we see success, we'll give more updates on what the size and the opportunity for us to get into them are the purpose of us talking about them because they're areas that we haven't looked at and our current capabilities can get into though.
So we wanted to make sure we are transparent that there is broader opportunity.
And again, we'll update on what the what the size and our addressable component are going to be in later quarters.
Understood. So it is a mid to longer term target mark.
Yeah, there's some there's near term right now in the municipal side, we're selling into that and we are winning contracts within that.
But we will win it so and we expect this year to be good but really this is new for us.
So I'd like to articulate.
Sometime when we when we can say, okay. Here's what our revenue is now and here is what the future is going to be so we just need some time to make sure. We can execute and then provide a key tight guidelines for we think the expectations are further so it's not it's not made or even long term I mean, if the water is happening today.
Understood.
I know like I said close last question, but just one more clarification.
In addition to the 12 million a target that you have that you. This month are there any should we expect additional installs are deployments over the next two.
Corpus.
Yeah, we're and I'm going to sound like a broken record, but but I feel really good about additional closures like I said in the script.
When the timing with refined coal where unless it's really tight like we like we were just announcing that we feel good about what it's going to close this month for us to to really get tied on when the timing is going to be and our conviction around it will just update you when we get closer but we are in it we are spending money. We have a lot of discussion. So we feel good about the prospect of additional closures in 2019.
But we'll give an update on timing as we as we get closer.
Great. Thanks, a lucky and Ah Thanks for taking my thank you.
There are no further questions at this time I will now turn the call back over to Heath for closing remarks.
Well, thanks to everybody for your time today, we really appreciate you joining and we look forward to updating you next quarter take care.
This concludes today's conference call you may now disconnect.