Advanced Emissions Solutions, Inc. (ADES) on Q4 2021 Results - Earnings Call Transcript
Operator: Hello all, and a warm welcome to the Advanced Emissions Solutions Q4 2021 Earnings Call. My name is Lydia, and I will be your operator today. It's my pleasure to now hand you over to our host, Ryan Coleman with Investor Relations. Please go ahead when you're ready.
Ryan Coleman: Thank you, Lydia. Good morning, everyone, and thank you for joining us today for our fourth quarter and full year 2021 earnings results call. With me on the call today are Greg Marken, Chief Executive Officer, President and Treasurer; as well as Morgan Fields, Chief Accounting Officer. This conference call is being webcasted live within the Investor Section of the 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 312-445-2870. Let me remind you that the presentation and remarks made today include forward-looking statements as defined in Section 21E 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 2 of today's slide presentation, in our Form 10-K for the year ended December 31, 2021 and other filings with the Securities and Exchange Commission. Except as expressly required by securities laws, the company undertakes no obligation to update these factors or any forward-looking statements to reflect future events, developments or exchange circumstances or for any other reason. In addition, it is very 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 Greg.
Greg Marken: Thank you, Ryan, and thanks to everyone for joining us this morning. Yesterday, after the close of markets, we reported our fourth quarter and full year results, which are highlighted on Slide 3. We closed 2021 with another strong quarter from our APT segment, which led to a record year for revenue as well as production volume at our Red River plant. High prices for alternative energy sources like natural gas have elevated demand for our activated carbon products from Power Gen customers, while we continue to grow within the industrial and water markets. Fourth quarter revenue for the APT segment totaled $23.3 million, an increase of 43% compared to the prior year. With capacity utilization high and strong revenue growth, we saw a much-improved operating leverage. Fourth quarter gross margin for the APT segment was 27.4% compared to 25.9% in the prior year. In addition, operating income was $0.8 million compared to $0.7 million in the prior year, which translates to an operating margin improvement of 20 basis points. APT segment adjusted EBITDA totaled $1.9 million compared to $2.3 million in the fourth quarter of 2020. Our segment margins, while significantly better on a full year basis than the prior year, remain pressured by the higher cost per unit we are currently experiencing as a result of sourcing external inventory to meet high customer demand. The requirements-based provisions of many of our customer contracts provide significant benefits. The contracts make us an exclusive provider of activated carbon products to each of our customers. However, when demand rises, we must fulfill that incremental demand. This, coupled with the scheduled turnaround activity in Q2 2021 as well as other operating challenges we experienced during portions of the year, created tight inventory conditions throughout the year. With this as a backdrop as well as much higher natural gas prices leading to gas to coal switching, we continue to work to build back inventories to a satisfactory level, while meeting customer demand as we move into the new year. In addition, we are not immune from the global supply chain bottlenecks being experienced around the world, which is both complicating the process and increasing our raw material sourcing costs for our products. Having dealt with this inventory tightness and supply chain challenges for the past two quarters, we have proven our ability to navigate this landscape effectively. We continue to fully meet contractual obligations related to the elevated levels of customer demand. Additionally, we’ve maintained very high renewal rates with existing customers, and at the time of contract renewal, have been pleased with our ability to realign product pricing and overall contractual terms to better reflect current market conditions. These structural changes we are making to our commercial contracts, including improved pricing, take-or-pay obligations, increased lead times and volume protections will better position the company for long-term success. In addition, we expect these structural changes to drive a steady upward trend in our average selling price over time as current contracts are renegotiated and/or new business is won, which is helping to partially offset current raw material and logistics cost pressures along with changes in customer mix due to permanent plant closures among certain power generation customers. Within our RC segment, all of Tinuum's invested refined coal facilities reached the end of their tax credit generation period as of December 31, 2021. Tinuum is currently in the process of winding down its business as it completes the reclamation activities for certain refined coal facilities, which we expect to be completed sometime during Q3 of 2022. During the fourth quarter, Tinuum distributions to ADES were aligned with our expectations and totaled $7.3 million compared to $20.2 million in the prior year. Royalty earnings from Tinuum Group in the fourth quarter were $2.5 million compared to $3.5 million in the prior year. Fourth quarter refined coal segment adjusted EBITDA in the fourth quarter was $9.6 million compared to 23.5% in 2020. The declines in royalty earnings and adjusted EBITDA are the result of fewer invested RC facilities at some of those facilities reached the end of their tax credit generation period at earlier dates in 2021. For the total company, consolidated revenue was $25.8 million in the quarter, an increase of 30%, led by the strong performance of our APT segment. Our improved margins helped drive net income of $5.8 million or $0.31 per diluted share compared to $0.4 million or $0.02 per share in the prior year. Consolidated adjusted EBITDA was $9.1 million compared to $23.4 million in the prior year, driven by changes in the RC segment. Our balance sheet remains debt free, exclusive of finance leases, utilized in operations. And as a result, our cash position grew significantly during 2021. Cash balances, including restricted cash totaled $88.8 million as of the end of the year, which is an increase of $6.6 million from the end of Q3 and nearly 2.5x higher than the end of 2020. Our capital allocation priority remains the organic investment in our manufacturing assets to meet customer demand and improve operating capabilities as we proceed with our strategic review. Net of our cash flows collected in Q4, we are updating our projected after-tax cash flows from the RC segment to be between $4 million and $5 million during the first half of 2022. That cash flow guidance is inclusive of associated wind-down costs from Tinuum. Those utilities that had previously leveraged the production tax credits to meet emission standards will need to pivot to another method or methods of meeting the requisite emissions limits. While these refined coal facilities have reached the end of their tax credit generation period, many will remain in place to be utilized for the application of our front-end chemistry to feedstock coal. Many of these utilities have already begun to purchase our front-end technology or activated carbon products, which will help drive incremental revenue and margin within our APT segment on a go-forward basis. We are early in the process of transitioning these customers to our front-end technology and activated carbon products. However, our solutions remain competitive and no previous Tinuum customers that continue to utilize a front-end solution were lost during the transition from refined coal. As such, we are pleased with our progress to date and the adoption of our products. Within our APT segment, we expect our top line to remain very strong in 2022 as demand has been robust. Our margins are expected to remain under pressure due to tight inventory conditions and the expected full year impact of incremental carbon purchases to supplement inventory as well as broader supply chain challenges that are putting upward pressures on costs related to transportation and freight as well as other necessary product inputs. As I mentioned, we will seek to offset these pressures through continued price increases and overall improvements in commercial terms, product mix optimization and top grading our overall customer mix within our APT segment, but it remains clear that the segment is realizing its low-cost attributes. Lastly, as it relates to our strategic review, we remain pleased with the ongoing progress to evaluate the opportunities available to us to maximize shareholder value. As a reminder, we have no time table for the conclusion of this process, but are focused on completing the process in an efficient manner. In the meantime, we remain focused on our priorities around enhancing the long-term profitability of our APT segment. With that, I will turn the call over to Morgan to review our fourth quarter and full year financial performance in greater detail.
Morgan Fields: Thank you, Greg. Slide 4 provides a snapshot of our fourth quarter and full year financial performance. Fourth quarter earnings from equity method investments were $6.8 million compared to $5 million for the fourth quarter of 2020. Full year earnings from equity method investments were $68.7 million compared to $31 million for 2020. The increases in earnings are first attributable to distributions recorded into earnings as a result of distributions from Tinuum Group mainly in excess of the carrying value of the investment. Therefore, excess distributions are recognized as equity method earnings in the period in which the distributions occur. Tinuum Group also had an increased number of RC facilities for the majority of 2021 due to three new facilities added during 2020. All of the facilities have since ceased generating refined coal tax credits as of December 31, 2021. Fourth quarter revenues and cost of revenues were $25.8 million and $16.9 million, respectively, compared with $19.7 million and $12.1 million for the fourth quarter of 2020. Full year revenues and cost of revenues for '21 -- for 2021 were $100.3 million and $65.6 million, respectively, compared with $67.4 million and $50.4 million in 2020. The increase in revenue for both the fourth quarter and full year were the result of higher sales of consumables. Fourth quarter gross margin was 34% compared to 39% in the prior year. Full year gross margin was 35% compared to 25% in 2020. Of note, as disclosed in the 10-K, we have corrected the previously reported 2020 and 2021 consumable revenue and cost of revenue amounts related to accounting for freight. The correction resulted in a gross up of our revenue and cost of revenue figures with no impact to gross margin or any other financial metric. Fourth quarter net income was $5.8 million compared to $0.4 million for the fourth quarter of 2020. The increase was driven by improved operating income in the APT segment, while partially being offset by an increase in income tax expense in the previous year. Full year net income was $60.4 million compared to a net loss of $20.3 million in 2020. The net loss in the prior year was driven by an impairment charge of $26.1 million that was incurred during the second quarter of 2020. Fourth quarter consolidated adjusted EBITDA was $9.1 million compared to $23.4 million in 2020. Full year consolidated adjusted EBITDA was $84.9 million compared to $55.1 million. The increases in adjusted EBITDA were largely driven by higher consumables revenue and higher equity earnings compared to 2020. As of year-end, cash balances, including restricted cash, totaled $88.8 million, an increase of $52.8 million compared to prior year. The restricted cash stems from our surety bond and the requirement to post collateral of $10 million for the obligations due under the reclamation contract related to the mine in Marshall, Texas. The company's only debt outstanding are finance lease obligations, which totaled $4.2 million as of year-end. For the full year, capital expenditures inclusive of mine development costs, totaled $7.6 million compared to $7.5 million in 2020. Our total obligation related to the reclamation activities for the Marshall and Five Forks mines currently stands at $10 million. Reclamation activity at the Marshall Mine is ahead of schedule, and as a result, we’ve attained cumulative savings to date of approximately $2.7 million. Additionally, as of December 31, 2021, we also possessed an offsetting receivable from Cabot for future reclamation reimbursement. Due to Cabot change of control occurring in the first quarter of 2022, we collected $10.6 million related to Cabot share of the Marshall Mine reclamation activities and shared capital payments. Fourth quarter operating expenses totaled $8.1 million compared to $6.1 million for 2020. The increase in the fourth quarter was primarily driven by higher payroll expense and higher depreciation and amortization partially offset by lower legal and professional fees as well as lower general and administrative costs. Full year operating expenses were $29.9 million compared to $57.9 million in the prior year. Full year operating expenses for the prior year includes the impairment charge of $26.1 million. Overall, our capital allocation approach will remain unchanged. We expect to continue to focus on near-term liquidity and prioritize the organic investment in our manufacturing capabilities. Our RC segment will deliver between $4 million and $5 million in the first half of the year, and we expect our top line performance in our APT segment to remain strong as we manage inventory tightness to protect our margins. I will now turn the call back to Greg.
Greg Marken: Thank you, Morgan. Turning to Slide 5, which reflects the APT segment growth channels and market opportunities we’ve been discussing where we are either currently active or have identified future opportunities. We have historically been the North American provider of choice in the mercury removal market related to power generation. Today, we possess a much more diversified commercial end market mix after considerable time and effort growing and expanding our commercial and technical relationships and conducting product tests with new potential customers in the industrial and water markets to capitalize on current and future opportunities. We remain fully committed to our business partners, and we will continue to invest in expanding and growing these relationships. Our team continues to build upon the progress in these adjacent markets that are also subject to regulatory compliance thresholds and purification standards. We also continue to see strong customer interest in other growing market opportunities, utilizing both existing and developing product technologies and capabilities that may provide earnings opportunities in areas where the legacy Carbon Solutions business had not competed. Emerging areas that may provide these additional opportunities includes our ongoing partnership and testing with Cascade Environmental for the groundwater remediation market, which we remain encouraged about given our progress to date. Market conditions over the past 3 years have proven the best-in-class nature of our assets and have allowed us to manage industry headwinds better than most other producers. We are and expect to continue to be a leading provider of choice for these activated carbon technologies and believe our strong financial position and assets leave us well-positioned going forward. For the full year 2022, we would expect our consumables revenue to be at least consistent with 2021, with the potential for incremental growth as demand remains high for power generation customers, and we continue to improve our overall customer and product mix. And finally, Slide 6 introduces our priorities for 2022. Our first priority is to enhance the long-term profitability of our APT segment. We will do this by continuing to optimize our highly efficient, low-cost and world-class manufacturing facilities. This includes driving high utilization rates and optimizing product mix to further enhance the long-term profitability of our APT segment. Additionally, we will work to enhance our customer mix and structurally upgrade our customer contract terms. This will involve ongoing improvement to pricing as well as expanding volume commitments and protections, which will allow us to offset headwinds we may face related to building back inventory and overall supply chain challenges. Aside from our historical core focuses within the activated carbon markets, we have served, we will also work to accelerate the progress we made in 2021 and look to further diversify product and customer mix through ongoing investment in new product development. And lastly, we will remain vigilant for additional rationalization opportunities and supply agreements to improve our market share. Our second priority is to allocate our cash flows and assets to drive shareholder value. We will invest in the APT segment strategic initiatives I just discussed. Additionally, we will work to seek a conclusion to our strategic alternatives review that maximizes shareholder value. With that, I will turn the call back over to Ryan to move us to Q&A.
A - Ryan Coleman: Thanks, Greg. Similar to past quarters, we included an invitation to submit questions ahead of time at the bottom of the conference call announcement press release as well as yesterday afternoon's earnings press release. Thanks for those of you who sent your questions, and we invite all listeners to continue to submit their questions on future quarter calls. Our first question reads, does the expiration of the tax credit generation period for the RC facilities officially kill any prospect of a Section 45 tax credit extension?
Greg Marken: Technically, no, there's nothing unique about the tax credit generation expiring that automatically excludes any possibility of an extension. However, we’ve been very clear for several quarters now that we do not expect an extension of the tax credit program, and that view remains unchanged.
Ryan Coleman: Where are you sourcing external inventory for AC products from, and are you continuing to sell that externally sourced product at economically feasible rates?
Greg Marken: We primarily source a series of products from other domestic activated carbon manufacturers. We won't disclose the margin profile for that incremental product we are sourcing, but we are meeting our customer commitments, working to once again increase our inventories and our consolidated margins for the entirety of the APT segment continues to trend upward, which is what we are focused on.
Ryan Coleman: Our third question reads, approximately how much of the existing volume throughput is contracted at levels significantly below market rates, i.e., does not yet reflect the 10% to 15% price increase announced on March 29, 2021. And what is the approximate time line to having these volumes repriced or re-contracted at rates more reflective of current market prices?
Greg Marken: So, during 2021, we renewed or won contracts that updated the overall commercial terms related to approximately 30% of our customer contracts, exclusive of the Cabot now known as the North master supply agreement. As we have historically discussed, our contracts generally range and turn from 1 to 4 years, dependent upon the end markets. Thus, the overall turnover in the contract portfolio will take time, but we would expect to renew or win contracts during 2022 that would update commercial terms related to an additional 10% to 15% of our business.
Ryan Coleman: Our fourth question, could you provide an update to the testing being done on products within the groundwater remediation market with Cascade Environmental? What were the commercial product for that market do for the APT business?
Greg Marken: During early '22, we, along with our partners, have been able to start supplying product for test sites, and we expect further information related to those activities in the coming quarter. Relative to our existing activated carbon and chemicals business, we believe these opportunities, if the product and commercial sales channels are successful, have the potential to change and improve the long-term earnings profile as a company.
Ryan Coleman: And our last question, do the Cabot contracts have escalators that increase with inflation?
Greg Marken: On an annual basis, the pricing is updated to reflect the estimated cost-plus amounts on a product-by-product basis according to the supply agreement. Thus, as applicable costs do change over time, so will the pricing of products.
Ryan Coleman: Thank you, Greg, and thanks again to everyone for submitting the questions. I will turn the call back over to Greg for his closing remarks.
Greg Marken: Thanks, Ryan, and thanks to everyone for joining the call this morning and for your continued support. We look forward to updating everyone next quarter.
Operator: This concludes today's call. Thank you for joining. You may now disconnect your lines.
