Charah Solutions, Inc.
Q2 2020 Earnings Call Transcript

Published: 12 Aug 2020

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Charah Solutions Incorporated Second Quarter’s 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After today’s presentation, we will conduct a question-and-answer session and instructions will be given at that time if you would like to ask a question. I would like to now hand the conference over to Steve Brehm, Vice President of Legal Affairs and Corporate Secretary for Charah Solutions. Please go ahead.

[Steve Brehm:]

Thank you, operator. Good morning, everyone, and thank you for joining us today. We appreciate your participation in our second quarter 2020 earnings call and look forward to sharing our prepared remarks and answering your questions. We hope you have had a chance to review the press release we issued yesterday after the market closed. But if not, you can find the press release as well as a supplemental investor presentation, you may follow during our prepared remarks on the Investors section of our website at www.charah.com, or ir.charah.com. Joining me today on our call are Scott Sewell, President and Chief Executive Officer; and Roger Shannon, Chief Financial Officer and Treasurer. Following their prepared remarks, we will conduct the customary question-and-answer session. Before we begin, I would like to remind you that our remarks regarding Charah Solutions include statements that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause the actual results to be materially different from those disclosed in our earnings press releases and conference calls. Those risks include, among others, matters we have described in our earnings press release as well as in our filings with the Securities and Exchange Commission, including our quarterly reports on Form 10-Q and our annual reports on Form 10-K. We disclaim any obligation to update these forward-looking statements. During this conference call, we will refer to certain non-GAAP financial measures. We provide reconciliations to the nearest applicable GAAP measures in our earnings release and supplemental presentation. Again, thank you for joining us today. Now, I would like to turn the call over to Scott Sewell, our President and CEO. Scott?

[Scott Sewell:]

Thanks, Steve, and good morning, everyone. It's great to have you join us for our earnings call today. I'm happy to be speaking with you again and providing an update on our second quarter performance. This morning, I'll briefly review our second quarter accomplishments, provide an update on current business developments and update you on our pipeline of opportunities. I'll then transition the call to Roger for a review of our financial performance during the quarter and an update on our 2020 guidance. As we stated in the press release, our team continues to perform well in this challenging COVID-19 environment, and we are pleased with our progress as we continue working to improve our financial results. Based on our ability to continue to provide mission-critical services to our utility customers, we are continuing to hold our 2020 revenue and adjusted EBITDA guidance, which is underpinned by existing contracts. We are also encouraged by the additional $27.5 million in net cash provided by operating activities and the $27.3 million in free cash flow generated during the second quarter. Coupled with the increased liquidity and financial flexibility provided by our recent credit agreement amendment and our successful capital raise, we are seeing cash flow improvement through expense reductions and disciplined working capital management, all of which strengthen our ability to compete and capitalize on our expanding market of opportunities. Roger will speak more about that later. As highlighted in our press release, we continue to see significant increases in new award opportunities, resulting from our customers' announced and expected remediation initiatives. As of today, we have won $367 million in new business awards in 2020, with awards in both our Environmental Solutions and Maintenance and Technical Services segments. The recent uncertainties related to COVID-19 pandemic and the resulting impact on the U.S. economy may continue may continue to affect the timing of revenues and project awards in the near term, our customer base is growing and our geographic reach is expanding as customer motivation for our environmentally friendly customized solutions, through recycling and remediating coal ash, increases across the United States. We expect this growth in business opportunities to continue as utility companies increasingly develop and implement their plans to address the more than 1,000 regulatory mandated surface impoundment closures in the United States. The ongoing level of activity in our business development has never been higher in the history of the company. We now have approximately $5 billion in pending proposals and an additional $12 billion in near-term pipeline opportunities that we bid over the next two years. As we've discussed on previous calls, states are becoming more prescriptive as to the means and methods of ash pond remediation, and the Environmental Protection Agency continues working with several states to establish their own recycling permit programs. Further, the EPA continues to work on its regulatory requirements, beneficiation guidelines and ash impoundment closure deadlines. We continue to see these movements as positive for Charah Solutions. As the only full-service provider of mission-critical ash management operations, environmental remediation and compliance services, maintenance and added services and by-product sales for the utility industry, the company is ideally situated to partner with these utilities to deliver on their impoundment closure requirements and needs. Among the $5 billion of pending proposals that we have bid upon are proposals for significant projects at two major Southeast utilities that we expect them to make award announcements soon. Additionally, we will very soon be submitting proposals for a third major Southeast utility that recently announced intentions to proceed with large ash pond remediation projects. We remain optimistic about our by-product sales opportunities, driven by the expectations for greater infrastructure spend. As we continue to expand the reach of our MultiSource materials network and add new customers, we believe we are well positioned to exceed last year's record of $583 million in new awards this year. One of our recent new awards was with a new customer for nuclear outage and maintenance work through the Allied Power operations. As we discussed on our previous call, Allied Power completed 8 of the 12 nuclear maintenance outages for its largest customer during very challenging conditions caused by the COVID-19 pandemic. And this new award further reflects the high quality of mission-critical nondiscretionary nuclear outage maintenance services Allied provides. We are proud of the work that our Allied Power team performs, and we congratulate them on their growth and continued success. Our ability to continue to add new customers and new awards as well as our ability to provide essential daily operations and remediation services for our utility partners during this period of high uncertainty and disruption caused by the COVID-19 pandemic speaks to the resiliency of our team and the mission-critical nature of our services. As the situation surrounding COVID-19 pandemic continues to evolve, our highest priority remains the safety of our employees and customers. We remain committed to keeping our people safe, addressing our customers' needs and growing the business. But we have not observed any significant disruptions to our business to date. Due to the vital nature of our customers' operations, we continue to monitor the situation closely. Charah Solutions provides essential services to regulated utilities that must continue operating to provide power to the country, and we continue to believe that we are well prepared to protect our staff and ensure continuity of service to our customers during this challenging period. I'm very proud of the way we have partnered with our utility customers to maintain service continuity safely. And I want to again thank our dedicated Charah employees who are working every day to help utility customers keep providing electricity. Finally, on behalf of the entire Charah team, I want to again express our sincere gratitude to all first responders, medical personnel and all others who continue working tirelessly to address the consequences of this pandemic. With that, I'll turn it over to Roger, who will discuss our second quarter financial results, our outlook for 2020 in more detail and provide more clarity on our expectations in the current market environment. Roger?

[Roger Shannon:]

Thanks, Scott. I'll continue the review of our financial results and provide an update on our balance sheet, liquidity and 2020 outlook. Revenue increased $12.2 million or 10.1% for the three months ended June 30, 2020 to $133.1 million as compared to a $120.9 million for the three months ended June 30, 2019, driven by an increase in revenue in both segments. Gross profit increased $12.8 million or 619.8% for the three months ended June 30, 2020 to $10.7 million as compared to a gross loss of $2.1 million in the three months ended June 30, 2019. As a percentage of revenue, gross profit was 8.1% for the three months ended June 30, 2020 as compared to a gross loss of 1.7% for the three months ended June 30, 2019. We reported a net loss attributable to Charah Solutions for the three months ended June 30, 2020 of $3.5 million as compared to a loss of $18 million for the three months ended June 30, 2019. The improvement was primarily attributable to higher gross profit and lower general and administrative expenses, partially offset by a decrease in income tax benefit and an increase in interest expense net. The decrease in general and administrative expenses was primarily attributable to a $1.8 million insurance recovery received during the current period, cost-cutting measures implemented over the second quarter in response to the COVID-19 pandemic and other cost-saving initiatives. The increase in interest expense net was primarily attributable to higher interest rates and a paid-in-kind interest related to the amendment to our credit facility, partially offset by lower debt balances. Q2 2020 adjusted EBITDA of $7.5 million was up $9.9 million from the year ago period. This improvement was due primarily to higher gross profit and lower general and administrative expenses. Now, I will discuss results at our reporting segment level. In our Environmental Solutions segment, revenue increased $900,000 or 2.5% to $37.9 million as compared to $37 million for the three month ended June 30, 2019, primarily driven by the absence during the current period of the $10 million revenue reversal associated with the completion of the Brickhaven project resulting from the deemed termination during the second quarter of 2019. This increase was partially offset by project completions within our remediation and compliance service component and a decrease in by-product sales during the quarter. Environmental Solutions' gross profit increased $13.4 million or 146.1% to $4.2 million, as compared to a gross loss of $9.2 million for the three months ended June 30, 2019. In our Maintenance and Technical Services segment, revenue increased $11.3 million or 13.5% to $95.3 million as compared to $84 million for the three months ended June 30, 2019. The increase in revenue was primarily attributable to the additional spring nuclear outage work in the three months ended June 30, 2020, and an increase in revenue from our fossil services offerings. Maintenance and Technical Services' gross profit decreased $600,000, or 8.7%, to $6.5 million as compared to $7.1 million for the three months ended June 30, 2019, primarily attributable to a decrease in gross profit from our fossil services offerings. Turning to our balance sheet and liquidity. For Q2, our operating cash flow was $27.5 million. Cash provided by operations was driven primarily by the unwinding of the spring nuclear outage working capital builds and improved working capital dynamics within Environmental Solutions. CapEx for the quarter was $300,000, resulting in free cash flow of $27.3 million. At June 30, 2020, we had gross consolidated debt of $217.1 million. The decrease in total debt during the second quarter was primarily due to debt principal payments on our long-term loans. Our liquidity was approximately $41.3 million as of June 30, 2020. Next, I'll address our 2020 guidance update. As Scott mentioned, we are reaffirming our 2020 guidance that was provided during the year-end 2019 earnings call. That guidance was expectations of revenue of $560 million, a net loss of $15 million, adjusted EBITDA of $37 million and the expectation to be free cash flow positive. This guidance is based on existing contracts and our current expectations of no material worsening of the COVID-19 pandemic and specifically including, but not limited to, no material customer work stoppages, no significant employee absences and no government-mandated quarantines. Any worsening of the COVID-19 pandemic could materially affect our 2020 outlook. Our ability to manage through this difficult period with minimal disruptions and the momentum we are gaining from increased new awards, coupled with the expanding addressable market, has allowed us to reaffirm this guidance and gives me confidence in the future of Charah Solutions. With that, I'll turn the call back over to Scott.

[Scott Sewell:]

Thanks, Roger. In closing, we anticipate the growth of new contract awards, coupled with our existing contracts, will continue to position the company for long-term success. We remain committed to taking actions expected to preserve cash, support our balance sheet and enhance long-term value while positioning ourselves to take advantage of the expanding market opportunities. Importantly, we are closely aligned with our utility partners, environmental remediation and sustainability initiatives, which should provide Charah Solutions with significant growth potential for many years to come. Our activities during the second quarter demonstrate the positive momentum we are gaining from our success in winning new business at a record pace. These successes in winning new awards, along with our enhanced liquidity and financial flexibility, continue to expand our customers' confidence in our ability to bring our full suite of mission-critical services to meet their specialized needs. We believe we remain the environmental and maintenance service partner of choice for the power generation industry, with an exceptional quality, safety and compliance record. Thank you again for your interest and participation. And with that, operator, let's begin the Q&A session.

[Operator:]

[Operator Instructions] You have a question from Brian Butler with Stifel.

[Brian Butler:]

Hi, good morning. Thanks for taking my questions.

[Scott Sewell:]

Hey, good morning, Brian.

[Brian Butler:]

I just wanted to start on the first half results and then kind of the guidance and try to understand how you get from the first half results to the guidance. I mean it looks like revenues are kind of on pace, what you delivered, but EBITDA really needs to increase in the second half. Now I was hoping maybe you could help kind of break out what buckets really drive that in the second half to go from the $12 million in the first to reaching almost $24 million in the second.

[Scott Sewell:]

No. Good question. We assumed people will be asking that question. Roger will dive little bit deeper into it. But I think, as we – as you think about our record new awards in 2019 and kind of the ramp of those awards over time, a lot of that just starts to – it's been ramping in the beginning of 2020 and then will continue to really contribute here in the back half of the year. And we expect the same from the new awards we're getting here in 2020 will continue to contribute to 2021 as well. So that, also coupled with our continued cost savings initiatives from an SG&A perspective as well, continue to contribute even more significantly here to the back half of the year. Roger, do you want anything to add on to that?

[Roger Shannon:]

That's right. And Brian, we've consistently said that 2020 would be more second-half loaded. We did have higher revenue in the first half. And as we talked about after the first quarter, driven by the larger number of outages on our nuclear maintenance side, along with some increased scope there. As you know, that business is at a lower margin. As Scott said, we have new awards that are starting to kick in more in the second half of the year. So we would expect to see gross margin improvement over the second half of the year as those come on. So if you think about year-over-year, the second half, we're going to be increasing about $12 million or so. We expect roughly half of that to come from gross profit, gross margin – gross profit improvements and the other half from the SG&A cost-saving initiatives that we put in place beginning in 2019 and continuing over this year.

[Brian Butler:]

And on the gross profit side of that, is that just a mix? As these new projects come on, they are a higher mix?

[Roger Shannon:]

Yes. I mean these – right. So if you think about the – in MTS, the outage work that's at a lower gross profit, gross margin percentage, the contributions that have come over the second half will be at a higher gross margin. So the mix over the second half of the year will drive a lot of that gross profit improvement.

[Brian Butler:]

Is that higher margin sustainable with the new business awards that have come in? Or is it – when I think about a 2021 number, because the back half – you're looking at margins, EBITDA margins, somewhere around 9%, 9.5%. And does that – is that sustainable in 2021? Or does that come back down as you get the first half kind of moderated going forward?

[Roger Shannon:]

Well, it's going to fluctuate over the course of the year as we have the outage work, like we saw in the first quarter. We have higher revenues, more outages. It's going to be lower gross margin during that period. We have said, and we continue to believe, that gross margin will improve going forward. Where we see the growth in the business is in the remediation and compliance services, these remediation projects on the 1,000-plus unremediated impoundments that are required to be cleaned up. So yes, as we mentioned in the prepared remarks, the bulk of the work that we're bidding on and where we see the growth opportunity is in that remediation work. And that, certainly, as compared to the M&TS work, is at a significantly higher margin. So yes, I higher margin. So yes, I mean, we do see our margin increasing over time. We're not going to get into specific 2021 guides yet. But we're – as mentioned in the prepared remarks, we did pick up a new customer, a new contract on the M&TS side through our Allied business. So that business is continuing to grow. That said, we still see the bulk of our growth, I think, with the significant opportunity over the coming years from the remediation opportunities.

[Brian Butler:]

Okay. And when you think about the second half being stronger on the EBITDA with the gross profit improvement and the cost savings, how does that translate into cash flow? I guess, I mean, you had $8 million in the first half. Is that better in the second half? Or is there some other working capital movements that offset kind of what would be – what I would expect to be a stronger free cash flow driven by higher EBITDA.

[Scott Sewell:]

No, I think that's right. Your number is pretty close for the first half of the year. If you look at our cash flow statement, cash from operations is about $9 million. We had $27 million, a very strong quarter in Q2, driven by the unwind of the working capital from the large Q1 outage. I think we said in our guidance that we expect to be free cash flow positive for the year. I think in terms of just kind of quantifying that a little bit, I think we're probably thinking in the $20 million area for operating cash flow for 2020.

[Brian Butler:]

Okay. And then a couple of quick questions on just new awards. What has been your, I guess, new awards. What has been your, I guess, win rate when you look at the awards, the new business awards you had in 2019 and through the first seven months here of 2020? Scott Andrew Sewell – Charah

[Scott Sewell:]

Sure, Brian. The win rate is something that we haven't historically shared. However, we are getting a lot of great feedback from our customers. I think the wins this year already at that $367 million number at this point in the year. And some very strong confidence in some other potential new large, new awards here very soon, just highlights, again, our reputation, our position in the market. And we're going to continue to win our fair share of the business. But as far as a metric, it's something we have not historically shared.

[Brian Butler:]

I thought I'd ask. Last one on the new business. How should we think about the pace? I mean if you do exceed or even if you meet 2019, how should we think about this revenue contribution over the next few years? I mean is this over kind of a five-, six- year period, so you're going to be at a $200 million pace from these new awards? Or is this the average – taking a simple these new awards? Or is this the average – taking a simple average isn't the right way, and this is really going to be more heavily weighted towards the front or the back of that cycle?

[Scott Sewell:]

Yes. It's going to be – you're right in that five- to six-year average. I mean we were looking at some work right now that's 10-plus years. And then we have some other projects that are going to be 18 months to three years in nature. I think the simplest way is how you described it, which is take a five- to six-year average of the overall number. There'll be a couple of ramps in some areas and a couple of drawdowns in some other areas. But over time, it's going to be very flat contribution to the business. And that's really what we're looking for. We've worked hard to diversify our customer base, diversify our contract mix and really put on these longer-term predictable revenue streams coming from this long-term remediation work. And that's really what we're targeting right now and really what we hope to be announcing here very soon. And hopefully, you guys will continue to see it in our financial results. But I would really probably take that kind of that burn-off pace is more of a five to six years. I think you're spot on. And really, we're very optimistic where we stand right now. We talked about the – that expanding pipeline of opportunities. We're seeing more work right now than we've ever seen, roughly $5 billion in pending proposals out there and another two – or another $12 billion that we have visibility into in the pipeline to be about in the next two years, and that's what keeps us excited about the business. But if you think about that burn-off pace, you're right, it's probably more that five- to six-year range.

[Brian Butler:]

Great. Thank you very much for taking my questions.

[Scott Sewell:]

You are welcome. Thanks, Brian.

[Operator:]

[Operator Instructions] Any closing remark?

[Scott Sewell:]

Yes, just like to again thank everyone for their attendance today, their continued interest in the business. And hopefully, everyone is staying safe out there. And look forward to communicating some additional positive results here the next time we have the call here for the next quarter. So thanks, everyone, and we'll end the call there. Thank you.

[Operator:]

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