Advanced Emissions Solutions, Inc.
Q2 2018 Earnings Call Transcript

Published: 7 Aug 2018

[Operator:]

Good morning, my name is Denise and I will be your conference operator today. At this time, I'd like to welcome 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. [Operator Instructions]. Thank you. Ryan Coleman, Investor Relations, you may begin your conference.

[Ryan Coleman:]

Thank you, Denise. Good morning everyone and thank you for joining us today for our second quarter earnings results call. With me on the call today are Heath Sampson, President and Chief Executive Officer and Greg Marken, Chief Financial Officer. This call is being webcast live in 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 the 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 and/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-Q for the quarter ended June 30, 2018 and other filings with the Securities and Exchange Commission. Except as expressly required by 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 Form 10-Q and the GAAP references in the financial statements. So with that, I would like to turn the call over to Heath Sampson. Heath?

[L. Heath Sampson:]

Thanks Ryan and thanks to everyone for joining us this morning. Let's begin on Slide 3 and review our second quarter. The second quarter was highlighted by the previously announced June addition of a third party tax equity investor for an RC facility. This facility is royalty bearing to us as we expect all future invested facilities to be and is located at a power plant that has historically burned roughly 3.3 million tons of coal per year. This facility was also one of the two previously discussed facilities that had entered the installation phase. Given successful addition there are plans to move more facilities into the installation phase which I'll discuss in greater detail later in the call. We also continue to return capital to our shareholders. Our quarterly dividend program and share repurchase authorization combined to return $12.6 million during the second quarter bringing the first half of the year total to $19.4 million. This shareholder return program remains a commitment as we declared our third quarter dividend yesterday which will be paid on September 6th to shareholders of record at business close on August 20th. Our narrowing focus of supporting Tinuum continues to translate in the form of higher distributions and royalties which in turn bolstered our cash position despite the cash used on share repurchases and dividends during the first half of the year. To further increase our future cash levels we took the proactive restructuring steps during the quarter to continue to realign our business with our newly identified strategic focus. These steps included a workforce reduction as well as non-discretionary spending reduction. While these restructuring measures has led to some charges during the second quarter and will result in charges during the third quarter they are necessary steps to be taken to ultimately drive at our stated cash cost goal of $8 million to $10 million per year net of contributions from chemicals. Overall I'm pleased with the progress made during the first half of the year. We've taken great strides to right size our cost structure, to align to our renewed priorities. Bolstered distributions and royalty payments within additional RC facility and to return much of the value to shareholders through our capital return efforts. I will provide additional detail later in the call but first I would like to turn the call over to our CFO, Greg Marken who will review our second quarter and first half financial results. Greg?

[Greg Marken:]

Thank you Heath. Let's start on Slide 5 to review our financial results. Our cost containment efforts coupled with stronger distributions from Tinuum continued to facilitate the rise in our cash levels. As of June 30, 2018 cash and cash equivalents totaled $32.2 million which is a $1.5 million increase from December 31, 2017. This increase is inclusive of the $19.4 million utilized during the first six months of the year to pay our two quarterly dividends as well as repurchase common shares under our authorized share repurchase program. Total distributions from Tinuum were 14.7 million during the second quarter of 2018 and 28.2 million during the first half of the year. These represent increases of 40% and 12% respectively from the comparable periods in the prior year. The increases in distribution were driven by four additional invested refined coal facilities contracted with tax equity investors during the second half of 2017 and the first half of 2018. Total revenues for the quarter were $4.3 million, a decrease from $27.3 million during the second quarter of 2017. Revenues for the first half of 2018 totaled a $8.2 million compared to $36.5 million during the first half of 2017. The year-over-year declines in revenue were primarily due to the recognition of all remaining equipment systems effective with the adoption of the new revenue accounting standard ASC 606 through an opening adjustment equity on January 1, 2018. The decreases in revenue were partially offset by higher royalty earnings from Tinuum. Royalty earnings during the second quarter were $3.5 million an 89% increase from the prior year while royalty earnings during the first half of 2018 totaled $6.8 million an 86% increase from the first half of 2017. The increases were driven by the aforementioned four additional investor refined coal facilities all of which are royalty bearing to the company. As a reminder we expect for all future RC facilities to be royalty bearing. Operating costs during the second quarter exclusive of cost of sales were $5.1 million. This represents a year-over-year increase of $1.1 million significantly due to the restructuring charges. These restructuring charges were largely payroll and benefit costs related to severance payments and workforce reductions. As Heath briefly mentioned these steps were necessary actions to be taken in accordance with our new strategic priorities to align our personnel with the current needs of our business. These changes net of contributions from previous chemical wins are allowing us to progress towards our $8 million to $10 million annual cash cost. Consolidated pretax income and net income for the quarter were $13.9 million and $15.3 million respectively. These represent year-over-year increases of 39% and 139% driven by higher distributions and royalties as well as lower tax expense. The higher net income levels coupled with the lower number of common shares outstanding resulted in fully diluted earnings per share of $0.75 in the quarter, a significant increase from $0.29 in the second quarter of 2017. I'll now turn the call back over to Heath to walk through our go forward strategy.

[L. Heath Sampson:]

Thanks Greg. I'd like to take a moment to discuss refined coal and review our strategy before taking your questions. Let's turn to Slide 7 to discuss the refined coal backdrop. We along with Tinuum continue to maintain the thesis that the refined coal environment as a result of some of the significant developments last year is supportive of obtaining future third party tax equity investors. We've seen the cadence of progression in our discussions with existing and potential investors and remain optimistic in Tinuum's ability to secure additional investors for remaining units and we are confident in their ability to obtain additional investors in 2018. Let's move on to Slide 8, this slide shows the current invested in operational facilities versus the non-invested facilities that are not operating. As of June 30th Tinuum has leased or sold 18 facilities with remaining 10 facilities either installed and awaiting a tax equity investor or waiting for a utility and a tax equity investor. As shown on the right side of this slide there is still sufficient potential capacity for Tinuum to substantially increase production provided a substantial number of the remaining facilities can be leased or sold as is our expectation. In the prior quarter we discussed the proactive steps Tinuum was taking to commence engineering and construction of two refined coal facilities in anticipation of future contract closures. For clarity fully installed facilities are located at utility and are simply awaiting a tax equity investor. Uninstalled facilities require installation costs often between $4 million and $6 million before they can be fully operational once the tax equity investor is secured. While some already installed facilities are available, the reality is that current discussions continue to indicate to us that different tax equity investors prefer facilities to be at particular utilities for various operational and risk management purposes. The additional invested refined coal facility with a third party tax equity investor in June involved one of the two facilities Tinuum had begun to install during the prior quarter. We believe this contract closure serves as a testament to the prudence of taking these proactive steps. As a result and to give us the best chance to secure investors for the remaining facilities there are further plans to begin engineering and construction on additional facilities. While bearing a portion of this upfront cost does lower projected short-term cash flow somewhat, we believe it is worth the cost. While there is no guarantee that we will secure tax equity investors for these facilities, our confidence in the market lends us the conviction that Tinuum will be able to secure tax equity investors for these idle facilities. We and Tinuum continue to work on a daily basis to obtain these additional tax equity investors and I'm encouraged by the progress we made and the positive impacts we believe we will have related to shareholder value in 2018 and beyond. Slide 9 provides the quarter-by-quarter breakdown of Tinuum invested and retain tonnage volumes. As a reminder, retained tonnage is tonnage Tinuum operates on its own member's behalf. Tinuum pays the operating expenses but its members also receive the tax benefits. You'll see that the sequential tonnage has increased as it was positively impacted by the increased number of invested facilities. These increases and related increases in cash payments from Tinuum will continue to allow us to execute our capital allocation initiatives as we collect future cash flows. Our top priority again is to assist Tinuum in obtaining more investors as fast as possible and build on the cash payments we received through 2021. Slide 10 shows the royalty versus non-royalty schedule. As a reminder the number of royalty bearing facilities is greater than non-royalty bearing facilities, a change that occurred during the middle of 2017. And as Greg mentioned all future invested RC facilities are expected to be at higher utilities that are royalty bearing to the company. Let's continue to slide 12 where you will see our updated expectations for future cash flows through 2021. As of June 30, 2018 we are expecting between $225 million and $250 million in cash flows, net of taxes and interest expense through 2021. This figure is based on 18 currently invested facilities and does not reflect the expectation of additional future facilities becoming operational and invested with a third party. Any future invested facilities which is the main focus of ours would add to these current expectations. Flipping to Slide 13 this shows our trailing 12 months of capital return to shareholders. Since the inception of our capital allocation program during the second quarter of 2017, we have paid out $25.9 million dollars in the form of dividends while utilizing an additional $25.5 million to repurchase common shares. Our quarterly dividend program alone amounts to roughly $21 million returned to our shareholders each year. As we have continued to reiterate, distributing value to our shareholders remains a top priority and we are -- and we will opportunistically evaluate ways to drive further shareholder value. Additionally as of June 30, 2018 the company has repurchased approximately 2.5 million shares or approximately 11% of the shares outstanding as of March 31, 2017 for a cumulative total of $25.5 million. Finally since the inception of the capital allocation program and returning $51.4 million to shareholders or over $2.30 per share as shown on Slide 13, the company's stock prices still increased approximately 19% during the same time period. Let me conclude today again by discussing our 2018 goals and priorities in Slide 14. We remain focused on helping Tinuum obtain tax equity investors for its remaining RC facilities, helping Tinuum ensure operational performance to allow production and sale of refined coal by tax equity investors while also helping to ensure stickiness of RC investors through strong customer relationships. Streamlining and optimizing the deployment of EC chemical revenues to support our RC efforts and public platform, executing against our capital allocation program to distribute and create value for our shareholders, and finally evaluating alternative options to monetize tax assets and build upon our existing platforms. On the issue of tax assets I'd like to mention that the tax asset protection plans as voted on the June 19th Shareholder Meeting was extended through December 2019. As a reminder this is a critical protection so as not to trigger a change in ownership as defined by the IRS. This allows us to preserve the value of the tax deferred assets on our balance sheet and evaluate ways to monetize them sometime in the future. Our first half of the year was marked by progress towards each of these data priorities and I'm excited to build on them in the second half of the year. With that we will open the line for questions. Operator.

[Operator:]

[Operator Instructions]. Your first question comes from Sameer Joshi with H.C. Wainwright, the line is open.

[Sameer Joshi:]

Thanks, good morning Heath and Greg.

[L. Heath Sampson:]

Good morning.

[Sameer Joshi:]

Starting off with the other unit that was under construction, what to order -- what are the total monies spent on that and what is the expected timeline of that coming online and then being sold?

[Greg Marken:]

Yeah, so the cost for that was somewhere between $4 million to $6 million. It will be consistent with that, it's right -- it is closer $6 million range on that one. It's a larger facility. Well we are TBD [ph] on the timing on that specific one. We're looking forward to getting it closed as fast as possible. Like I said we do expect additional closures in 2018, that maybe one of them or maybe one that we close later than that. So we won't give individual guidance on individual facilities, we just do it on a macro basis and I feel good getting more closed so, hopefully soon on that one too.

[Sameer Joshi:]

Okay, you also mentioned there are some other facilities like you will start construction on certain facilities but then investors may be interested in certain other geographies, how do you decide which location to start construction on?

[L. Heath Sampson:]

Yeah, the first thing is to make sure that we have partnered with the utility that's large enough. Again we're looking for around that 4 million tons per year, that's ideal. Sometimes it's a little bit less than that sometimes it's a little bit more than that so finding a large enough utility. And then a utility that ensures that we will have a consistent burn for the remaining life of 2021. And then the second item is from the investor's standpoint to ensure that utility is a good counterparty. So, when we identify that utility we are making sure that it is a solid utility and then we partner with that investor to ensure that they are comfortable with that utility. So it really is a back and forth collaborative effort with us, the investor and the utility as a whole. That's how we select the ones that we go to.

[Sameer Joshi:]

Okay, so I think as I understand you do have identified an investor for this one remaining one facility that is under construction?

[L. Heath Sampson:]

Yes, so we have other ones that are also under construction and we have utilities I mean, sorry, investors circled for those. The second one that I talked about, we do not have an investor for that one yet. We have a few that are looking at it so I hope to update you as the months progress that we've got one circled for that remaining one that we just finished up with. But again I may be repeating myself, we have other ones that are under construction and we do have investors circled for those which is why I'm optimistic about getting more closed in 2018.

[Sameer Joshi:]

Understood, I get the landscape. One of the things I noticed was that the expected future cash flows from RC business, that range has been reduced from 250 to 275 down to 225 to 250 whereas in the quarter there was around only $15 million to $17 million of cash flow from these. So, is there any other reason than that?

[Greg Marken:]

There are give and takes in business plans at the Tinuum level purchases, the installations when those occur and we don't yet have investors contracted. And so that obviously reduces the known or expected future cash flows at this time. But obviously with the inflows to us during the quarter offset by the new facility we ended up in the new range.

[L. Heath Sampson:]

Yeah, just to put a little color on what Greg said, that normally as you've seen each quarter that cash flow is just decreased by the distributions we got. But in this quarter because of the installations that we are making and because of some other operational commitments we have made to ensure that we have future ability to serve our customers, those cash flows are down a little bit relative to what they've been in the past. But all in anticipation of ensuring that we get more customers and produce more refined coal. So I don't view it as a negative, I view it is as an investment ensuring that we continue to grow.

[Operator:]

[Operator Instructions]. There are no further questions queued up at this time, I will turn the call back over to Ryan -- sorry, Heath Sampson.

[L. Heath Sampson:]

Great, okay, well thanks again to everyone for your time today and your continued support. I look forward to updating you on the progress next quarter, have a great day everyone.

[Operator:]

This concludes today's conference call. You may now disconnect.