Charah Solutions, Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Mar 2021

[Operator:]

Good morning, ladies and gentlemen. And welcome to Charah Solutions, Inc.’s Fourth Quarter 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 now like to 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 fourth quarter 2020 earnings call and we look forward to sharing our prepared remarks and answering your questions.

[Scott Sewell:]

Thank you, 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 year end performance. This morning, I’ll briefly review our 2020 accomplishments, provide an update on current business developments and update you on our pipeline of opportunities. I’ll then transition the call to Roger to review our financial performance during the year and an update on our 2021 guidance. As highlighted in a press release, we had a record year in 2020, with $715 million of new awards. Our new awards for 2020 were up approximately 66% from the $430 million of awards booked in 2019, our previous record year. We saw new business award activity pick up significantly during the fourth quarter of 2020 and that momentum has accelerated as we begin 2021. From the fourth quarter through today, we have converted just over $1 billion of our pending bids pipeline until the new long-term awards, including $433 million of new business awarded in the fourth quarter of 2020 underpinned by the Dominion Energy beneficial use project.

[Roger Shannon:]

Thanks, Scott. I’ll continue with a review of our financial results and provide an update on our balance sheet, liquidity and 2021 guidance. During the fourth quarter of 2020, we realigned our operating segments into one reportable segment to reflect the suite of end-to-end services we offer our utilities and power generation partners and how our chief operating decision maker reviews consolidated financial information to evaluate results of operations, assess performance and allocate resources. As the company now has a single operating segment, all of our required financial segment information can be found in the consolidated financial statements and our press release and our annual report on Form 10-K. Our prior year results have been reclassified to conform to this presentation. Please refer to our annual report on Form 10-K filed with the SEC on March 24, 2021 for further details regarding our segment realignment. I’ll now start with a review of our fourth quarter results. Revenue increased $10.7 million or 19.5% for the three months ended December 31, 2020 to $65.7 million, as compared to $55 million for the three months ended December 31, 2019, due primarily to an increase in remediation and compliance revenue from new project work, partially offset by a decrease in byproduct sales revenue, resulting from lower plants ash production that we believe was due to lower demand as a result of the COVID-19 pandemic. Gross profit decreased $3.5 million or 44.4% for the three months ended December 31, 2020, to $4.4 million, compared to $7.9 million in the three months ended December 31, 2019. The decrease in gross profit was primarily due to an inventory reduction associated with slow moving stockpiles at two of our locations and lower revenue associated with our byproduct sales offerings, partially offset by an increase in remediation and compliance revenues from new projects starting in 2020. The inventory valuation reductions are related to impairments of slow moving granulated blast furnace slag stockpiles associated with the grinding activities at two of our locations, which I will discuss in more detail later.

[Scott Sewell:]

Thanks, Roger. In closing, we hope you agree that our growth in contract awards, expansion of service offerings and laser focus on environmental sustainability 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 the long-term value, while positioning ourselves to take advantage of the expanding market opportunities. Importantly, we are closely aligned with our power generation partners’ environmental remediation and sustainability initiatives, which should provide Charah Solutions with significant growth potential for many years to come. Thank you, again, for your interest and participation. And with that, Operator, let’s begin the Q&A session.

[Operator:]

Your first question is from Michael Hoffman with Stifel. Your line is open.

[Michael Hoffman:]

Thank you very much for taking the questions. If I start with just a reconciling the -- you use to have Allied, you don’t have Allied and just comparing numbers, you had originally a $583 million award level in ‘19 and the difference between what you’re showing on your slide at the $430 million is Allied related awards and that’s the difference?

[Roger Shannon:]

Yeah. Good morning, Michael. Absolutely. That’s the difference…

[Michael Hoffman:]

Okay.

[Roger Shannon:]

That’s the difference from what we previously reported.

[Michael Hoffman:]

Great. And then when I think about adding that $430 million and the $715 million, all in the last two years, so $1.1 billion and change almost $1.2 billion. What’s your suggestion to us if we have to make a living modeling? How we -- what’s the burn rate of that or the duration of the cadence as it peels off into revenues?

[Scott Sewell:]

Yeah. So I think that’s one of the things that we’ve been really excited about with the awards that we’ve been winning is their longer term nature versus previous historic contracts that we had that were two years or three years in nature. The more -- majority of these awards we brought on are eight years to 10 years, I would say, so I mean, it’s a longer term than previously. So I think from a burn perspective, I would go with seven -- maybe seven years, Michael.

[Michael Hoffman:]

Okay. And the simple math is divided by seven and then if you keep growing this, I just keep stacking it up. I mean, that’s the way to think about it, right?

[Scott Sewell:]

Yeah. Absolutely. And we’re -- I mean, we’re going to ramp these projects through this year and they’re going to be pretty flat once they reach kind of a plateau for the next seven years.

[Michael Hoffman:]

Right. And now, again, why you’ve aggregated everything together, but before you had done that, we use to talked about fossil byproduct remediation, and obviously, nuclear, and the fossil was sort of a -- the day-to-day operations is about a $70-ish million business growing a few percentage points a year. That’s still the right way to think about that?

[Scott Sewell:]

Yeah. So we haven’t really discussed that too much. There’s some information in the K. Roger, you want to discuss where you can find some of that?

[Roger Shannon:]

Yeah. So we break down the revenue from -- by the types of service. And so you can see, like, we look at Note 4 in the K, for 2020, product sales -- byproduct sales were about $85 million from cust -- construction contracts about $81 million and the services $67 million. So that gets you to your $232 million.

[Scott Sewell:]

Yes. That would be a historical look at it, Michael. But I think on a go forward basis, you’re going to see the remediation work continue, when you think about our mix, remediation is going to continue to grow.

[Roger Shannon:]

Yeah.

[Michael Hoffman:]

And that’s -- that would be remediation would go into the construction contracts?

[Scott Sewell:]

Yeah. Yes.

[Roger Shannon:]

Yes.

[Scott Sewell:]

As well as byproduct sales, those two…

[Roger Shannon:]

Yeah.

[Scott Sewell:]

…and I think we’ve spoken to it a lot here in our prepared remarks, just our excitement around the growth opportunities in both of those areas right now, it’s pretty tremendous.

[Michael Hoffman:]

Right. And so the two drivers in the product sales will be the Dominion award, when that starts to kick in. So there’s some mobilization dollars that show up in there in ‘21, but then the real byproduct selling number shows up in ‘22, right?

[Scott Sewell:]

That’s correct.

[Michael Hoffman:]

Okay.

[Scott Sewell:]

That’s going to stop in ‘22, as well as just with this infrastructure spend that we see right now, our ability to use our multi-source network to grow the byproduct sales side of the business is going to be very significant for us.

[Michael Hoffman:]

And it will take me a while to stop saying MP618.

[Scott Sewell:]

No. No. No.

[Michael Hoffman:]

But -- do you still -- well, you got me so using it now I got to expunge it.

[Scott Sewell:]

Yeah.

[Michael Hoffman:]

Do you expect to cite one of those this year?

[Scott Sewell:]

That’s our goal. We’re in some significant talks right now on that EnviroSource and really see some opportunities. I know we have spoken about in the past, I think, just some difficulties with COVID and just getting the financing set up for it kind of delayed us a little bit here, but the customer interest is at an all time high there.

[Roger Shannon:]

So we are…

[Michael Hoffman:]

Okay. Go ahead, sorry.

[Roger Shannon:]

So we are talking about we are -- I’m sorry, Michael, like we talked about before we are still advancing the conversations with a specific customer kind of getting farther down the road of getting to agreement on that and we do feel like we have made some pretty significant progress in the financing as well. So, I think, we do expect to be able to announce one of these in 2021.

[Michael Hoffman:]

Okay. And that was going to be my follow up to that is, you -- so you have found a source of project financing, where it would look somewhat similar to a normal project financing of 60% to 80% project finance and the rest is your equity?

[Scott Sewell:]

Yeah. I mean, I think, those numbers are roughly correct. I’d say, probably more, 70% to 80% project finance. Our Board needed 20% to 30% equity area. We are -- I think we’ve honed in on a couple of good opportunities for project finance. I can’t say that we’ve signed a contract yet on that. But is -- as you’ve seen over the course of the year, we’ve made significant improvement in our balance sheet, leverage numbers and our liquidity. So those conversations are a lot easier to have now, when we’re talking about project finance opportunities, as well as, just some other structures. Now, as once we -- we are seeing additional opportunities from customers to where there is more interest in customer type financing, again, not ready to announce that sort of thing yet, but through some new relationships we’re kind of starting to see that a little bit.

[Michael Hoffman:]

Fair enough. Can you help us with some things that we would need to do for modeling, like, what -- what’s the base capital number that we should think of and then had -- if I made my own decision to add one of these, what do I use as a starting revenue number?

[Scott Sewell:]

Yeah. Michael, that’s going to vary from site-to-site, and probably, something that we haven’t shared for -- also for some competitive reasons as well from a CapEx perspective and from a revenue perspective. So let us -- let’s think on the right way to model that. But really, I think, as we think about ‘21, there wouldn’t be any impact to ‘21 even if we were to sign one this year, because it is about a 12-month construction lead time. So anything we do this year would impact 2022 and beyond and we’ll make sure far enough in advance that we get you the right information there.

[Michael Hoffman:]

Okay. Fair enough. And then, is there any visibility on Dominion releasing the remediation portion of that work that they want to do it, what they call, Chesterfield?

[Scott Sewell:]

Well, yes, Chesterfield and not -- I am really not in a position to speak for Dominion. But I would say it’s going to have to be awarded prior to our contract being able to ship ask, so you would -- one would expect it would be in this calendar year.

[Michael Hoffman:]

And on a practical basis based on your contract and you’re supposed to be getting ash by beginning of ‘22. When that have to happen pretty soon in order for whoever gets it to actually start doing enough work that they can deliver you ash?

[Scott Sewell:]

It would. I mean, again, that would be.

[Michael Hoffman:]

That’s sort of logical way to think about it?

[Scott Sewell:]

It will be the logical way to think about it.

[Michael Hoffman:]

Okay.

[Scott Sewell:]

But, again, I can’t speak for Dominion.

[Michael Hoffman:]

Got it. And then, Roger, an accounting issue, why not be able to walk down some of the goodwill versus intangibles when Allied goes? What was behind that?

[Roger Shannon:]

We did. We have made a carve-out of part of the goodwill over to Allied. We did that separation, so let me pull that section up in the K, so you can look at Note 3 of discontinued operations. So it’s like $12 million was carved out, Michael, over and went with the goodwill, so up to $12 million in goodwill went over with Allied as part of discontinued operations.

[Michael Hoffman:]

Okay. That’s all on my part. Thanks. Oh, well, last one, yeah, I am assuming all the free cash is going to be used to repay debt?

[Roger Shannon:]

Yeah. Yeah.

[Michael Hoffman:]

Yeah. Okay. So that puts you at the midpoint of your guidance, if you take your slide, pay down the debt. Just with the cash -- free cash flow you are sub 3 times. Am I -- did I did that math wrong?

[Roger Shannon:]

You did not do that math wrong.

[Michael Hoffman:]

Okay.

[Roger Shannon:]

Yeah.

[Michael Hoffman:]

That’s what I thought. Okay.

[Roger Shannon:]

Great.

[Michael Hoffman:]

Okay. Thanks.

[Scott Sewell:]

Yeah. Thank you, Michael. Thanks for your continued interest in the business. Much appreciate it.

[Michael Hoffman:]

Well, you got a nice business. So it’s fun to do.

[Roger Shannon:]

Yeah.

[Scott Sewell:]

Thank you.

[Operator:]

We have no further questions at this time. I will turn the call back to presenters for closing remarks.

[Scott Sewell:]

Okay. Great. Thank you, Operator, and thanks everyone for listening today. We appreciate everyone’s interest in Charah and look forward to a great 2021. We have get a lot of momentum and excited about being able to get everybody back on the phone here in a couple months and report out on Q1. So thank you.

[Operator:]

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