Advanced Emissions Solutions, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Advanced Emissions Solutions Q4 2020 Earnings Call. At this time, all participant lines are in a listen-only mode. I would now like to hand the conference over to your speaker today Investor Relations. Thank you. Please go ahead.

[Unidentified Company Representative:]

Thank you. Good morning everyone, and thank you for joining us today for our fourth quarter and full-year 2020 earnings results call. With me on the call today are Greg Marken, Interim President, Chief Executive Officer and Treasurer; and Chris Bellino, Chief Accounting Officer. This call is being webcast 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 the site and you can contact Alpha IR Group for Investor Relations support at 312-445-2870.

[Greg Marken:]

Thanks a lot and thanks to everyone for joining us this morning. Before we begin, I would like to take a moment to thank Chris Bellino, who has joined me on our past few earnings calls and will be retiring at the end of the month. Chris has been with ADES for six years and has served in a variety of roles during that time, and has been integral to the Company's success. We wish her well in retirement and thank her for her service to the Company. After market close yesterday, we published our fourth quarter and full-year results that were aligned with our expectations. Tinuum was able to complete two additional transactions in the fourth quarter, bringing our investment facilities up to 23 now, which continues to support our forecasts and after-tax cash flows and our investment in our go forward strategy as a provider of choice for activated carbon solutions. The performance of our activated carbon business exceeded the fourth quarter of 2019, and we are carrying encouraging business momentum into 2021. We once again beat our internal volume forecasts are now turning to optimizing our current product mix to enhance the earnings profile of the segment. And just last month, we announced a second supply agreement with Cabot to sell our activated carbon and other products through Cabot sales channels in Europe, the Middle East and Africa, which is incremental to the 15-year master supply agreement we announced in September.

[Chris Bellino:]

Thank you, Greg. Let's turn to Slide 4 for our financial review. Fourth quarter earnings through equity method investments were 5 million compared to 12.1 million for the fourth quarter of 2019. Full year earnings and equity method investments were 31 million compared to 69.2 million in 2019. The decline in earnings from equity method investments during the fourth quarter and full year was due to low earnings continually grew, primarily driven by higher depreciation on all two new and group RC facilities.

[Greg Marken:]

Thank you, Chris. Turning to Slide 5, you can see the expected future RC cash flows. Based on the 20 invested facilities at the quarter end and cash distributions received during the fourth quarter, we are updating our expectation of future after-tax RC cash flows to ADES to be between $70 million and $90 million. Absent an unexpected change to the duration of the section 45 tax credit, Tinuum does not expect to obtain additional tax equity investors for any incremental facilities. Slide 6 reflects the growth channels we have been discussing where we are either currently active or have identified as future opportunities. When we acquired Carbon Solutions in December of 2018, we immediately became the go to provider of activated carbon solutions for coal-fired power plants that needed to meet mercury air toxic standards. Since that time, coal-fired power generation has declined faster than ours and even the EIA's initial expectations. Cheap and abundant alternative fuel sources led to coal to gas switching, and we responded by engaging more aggressive diversification efforts to lower our reliance on power generation. We were very aggressive in an effort to obtain new volume wins and increase the capacity utilization of the plant. We since have generated solid traction in other markets industries such as manufacturing and waste management that are bound by admission casts. We are also seeing better than expected share gains in water purification and we have an active and robust funnel of bids currently in place. We are now producing activated carbon more efficiently as we are capitalizing on the low cost nature of the asset and seeing important improvements to our margin profile. Unfortunately, our total volume has remained under pressure, as these adjacent markets have not been able to fully offset the decline in power generation. However, the two announcements we have made with Cabot are important steps towards building our total volumes, raising the plant's capacity utilization in generating better results in our APC segment. We're also seeing early successes and other growing market opportunities, utilizing product technologies and capabilities that may provide additional volumes in areas where the historical carbon solutions business has not completed. The two Cabot deals allow us to scale our production and fully realize the low cost nature of the plant, which in turn makes us more competitive in markets we pursue that opens doors to new markets altogether. The customer and market diversification will be a main priority in 2021 to lay the foundation for this business for years to come. The agreement is also an example of some of the rationalization we have discussed and expect to continue to see in the activated carbon space. We continue to believe that additional opportunities will present themselves and we stand well positioned to be a participant given the sophistication and flexibility offered by our Red River plant. Slide 7 provides a quick recap of the terms and the impact of the supply agreements were raised with Cabot. In September, we entered into a 15 year agreement to supply cabinet with lignite activated carbon products, including pack and gas. This announcement is an important step toward the creation of a company's post refined coal future. This will allow us to secure material incremental volume and better capture the low cost manufacturing capabilities of our plant. It also expands our customer market product portfolio beyond our current suite of products and capabilities and will allow us to enter through Cabot customer relationships and end market users a broader range of pack and gas opportunities. This deal is a testament to the quality of the activated carbon assets we possess and is an example of the opportunities available to us to grow and scale this business. We have begun fulfilling our commitments to outline within the agreement and we expect to cycle through existing inventory balances that were produced at much lower overall volumes relative to the largely fixed cost manufacturing base before the end of 2021. Ultimately, as a result of this agreement, we expect to see incremental annual revenue growth of 30% to 40,% incremental annual growth of $10 million to $15 million, and a reduction of our power generation exposure to less than 50% of our product portfolio. We began supplying Cabot with activated carbon products immediately on October 1st. We also took over Cabot's lignite mine that previously supplied Cabot's Marshall Texas facility. Reclamation activities related to this mine began immediately and outside of a very pause last month due to the Texas weather events, those activities have proceeded as planned. We still expect that 70% of the reclamation costs will be completed in the first 24 months, and Cabot will share in the cost to complete these activities. As I mentioned, subsequent to that agreement, we announced last month that we have entered into a five year supply agreement with Cabot EMEA subsidiary. As part of that agreement, Cabot will be exclusive and sole reseller of the products within EMEA. The expansion of our products and technologies to international markets and applications is an important milestone for ADES, and furthers our belief for the further future potential of the business. The broaden relationship with a trusted and global partner like Cabot is also a testament to the assets quality as well as the product portfolio. As the world's need for sophisticated pollution control solutions growth, we expect to be a provider of choice for these technologies, given our expertise and the quality of our plants. Looking ahead, we believe additional opportunities will present themselves and our competitive positions we have in the industry leaves us in a good position to capitalize on them. Slide 8 provides an update on our capital allocation program. We implemented our shareholder return initiatives during the second quarter of 2017. And since that time, we have returned 106.4 million to shareholders via dividends and share repurchases. We also paid out 54 million of the 70 million term loan that funded the acquisition of carbon solutions in late 2018. In the near-term, preserving our liquidity position and debt reduction will remain priorities as the term loan is subject to mandatory quarterly principal payments of $6 million. We expect to pay off the balance of the loan prior to its Q4 2021 maturity. And finally, Slide 9 reiterates our priorities for the remainder of the year. Our first priority is to continue to protect our net RC cash flows. Tinuum is taking action to ensure they continue to produce products while also updating their organization and cost structure for the upcoming winding down of operations. We will simultaneously leverage our Red River plant and its best-in-class characteristics to optimize our capacity to generate improve operating leverage. Part of this will be accelerating production to meet our commitments to our supply agreements with Cabot. Identified opportunities to improve earnings potential through customer and product mix and maintaining focus on our cost structure relative to go forward business activities. Lastly, we are reiterating our near-term capital allocation, focused on risk mitigation, cash preservation, as well as necessary organic investments in our activated carbon business. We will continue to deleverage but the shareholder return component of our capital allocation plan remains on hold to preserve liquidity and ensure we are investing behind our strategic initiatives. With that, thanks again everyone for joining the call this morning and for your continued support. Stay healthy, and we look forward to our next update.

[End of Q&A:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.