Advanced Emissions Solutions, Inc. (NASDAQ:ADES) Q1 2023 Earnings Call Transcript May 10, 2023

Advanced Emissions Solutions, Inc. misses on earnings expectations. Reported EPS is $-0.32 EPS, expectations were $-0.1.

Operator: Good morning. Thank you for attending today’s Advanced Emissions Solutions Q1 2023 Earnings Conference Call. My name is Alexis, and I will be your moderator for today’s call. All lines will be muted during the presentation portion of the call, with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to Ryan Coleman with Investor Relations. You may proceed

Ryan Coleman: Thank you, and good morning, everyone, and thank you for joining us today for our first quarter 2023 earnings results call. With me on the call are Greg Marken, Chief Executive Officer and President; as well as Morgan Field’s, Chief Accounting Officer. This conference call is being webcasted live within 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 Alpha IR Group for Investor Relations support at (312) 445-2870. Let me remind you that the presentation and remarks made 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-Q for the quarter ended March 31, 2023 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 is especially important to review the presentation and today’s remarks in conjunction with the GAAP references in the financial statements. Please turn to Slide 3 of today’s presentation, which provides our Q1 highlights. With that, I’d like to turn the call over to Greg.

Greg Marken: Thank you, Ryan, and thanks to everyone for joining us this morning. I’d like to start by providing a high level review of our first quarter, then discuss some of the initial steps we have taken to advance our business plan related to the Arq transaction and related integration. Our first quarter consumables revenue was $20.8 million compared to $26.4 million in the prior year, which was below our expectations as significantly lower natural gas prices relative to the last 18 months to 24 months impacted demand among our power generation customers. The potential for persistently lower natural gas prices could have an ongoing adverse impact on demand from our power generation customers and operations at Red River.

However, more importantly, this economic environment underscores the importance of our acquisition of Arq and our transformation strategy to begin producing new granular activated carbon or GAC products going forward, thus reducing our reliance on certain markets and industries over time and broadening the addressable markets for our activated carbon technologies. Although, this transition will take time due to the capital improvements required, we believe that we will be able to operate a highly utilized asset base during this transition period and we’ll be well-positioned to diversify the end markets we sell to and capitalize on the broader, long-term growth opportunities available within the GAC markets. The near-term impact of lower sales volumes from Red River were partially offset by our ongoing price initiatives and commercial wins in water and industrial markets.

As a reminder, we have focused our sales strategy on higher value opportunities with improved economic and commercial terms. We expect that this approach coupled with continued efforts in our pricing strategy will help offset portions of the softer volumes in our legacy markets. During 2023, we expect that our margins will continue to be pressured by the higher cost per unit of production, resulting from decreased power generation volumes compared to expectations. External sourcing of supplemental carbon, albeit at reduced volumes as well as inflationary impacts on a number of operational costs. In April, we completed our regularly scheduled plant turnaround event that occurs on a periodic basis, typically every 18 months to 24 months and last for approximately two weeks.

We were pleased with the planning and execution of the plant turnaround by our team and we have returned to normal operations on our anticipated time line. During the turnaround, we continue to meet all customer obligations with inventory on hand and did not encounter any commercial disruptions. In March, we completed the sale of Marshall Mine to Caddo Creek Resources Company and recognized a gain of $2.7 million. The removal of the asset retirement obligation associated with the Marshall Mine allows us to continue to de-risk our balance sheet as we focus on our future initiatives related to the Arq assets and integration as well as freed up approximately $2.3 million of restricted cash that was previously held as cash collateral pursuant to our bonding program.

Upon the closing of the Arq acquisition, we welcomed three new board members from the legacy Arq business. Julian McIntyre, Jeremy Blank and Richard Campbell-Breeden, each brings valuable experience that will be critical to the execution of our business plan. We also announced last month that Laurie Bergman will join our Board in June as an Independent Director and will serve as the Chair of our Audit Committee. Laurie is a proven financial executive with highly relevant industry experience and we look forward to her leadership as we execute on the next phase of the business strategy. Turning to our capital plan and cost update. During Q1, we commenced the initial capital projects to upgrade the Corbin and Red River plants, which will facilitate our future ability to produce commercial scale GAC and leverage our new high performance and vertically integrated bituminous based feedstock.

At Corbin, engineers, contractors and equipment have been selected related to the major components of the capital project and purchasing of long lead items is underway. At Red River, where we anticipate spending the majority of the capital, we made progress related to equipment scoping and have completed engineering steps necessary to keep us on track to move forward with permitting at the applicable regulatory agencies during the second quarter. These collective initial capital projects are on track and we believe these investments will ultimately lead to a more diversified commercial portfolio with a path towards improved and sustainable economic performance for our business on a long-term basis. Consistent with our plan, we expect that the aggregate growth CapEx related to these projects will be between $45 million and $50 million, of which roughly $27 million to $30 million will be incurred in the current year.

Our total CapEx spend for 2023 is expected to be between $40 million and $45 million with the balance relating to our regularly scheduled plant turnaround and other capital projects. We’ve also begun to take actions to achieve the planned go-forward operating cost structure for the combined company, such as streamlining personnel and systems, optimizing overall operations as well as other items. We will continue to evaluate ways to simplify the overall organization and operations but are on track to achieving a go-forward cost structure consistent with our plans, while maintaining the ability to achieve the growth initiatives inherent in our business plan. In addition to commencing the initial capital improvements to the Red River and Corbin facilities, we are simultaneously focused on expanding the sales channels to identify and secure lead GAC customers once commercial production of GAC products utilizing Arq powder begins.

Part of that process involves engaging in a more visible and proactive marketing approach to increase awareness of our company and our overall suite of environmental technologies that we will bring to potential customers. During the first quarter, our Chief Technology Officer, Joe Wong; and our Vice President of Sales, Oscar Velasquez participated in multiple technical speaking engagements and conferences designed to strengthen our remediation market base, discuss our product applications and drive awareness around our suite of current and potential products, including GAC, PAC and colloidal carbons. We expect to participate in future events in order to demonstrate the expanded joint product portfolio and capabilities of the combined company.

And lastly, we remain focused on developing opportunities for emerging markets and applications for Arq powder, which will continue to derisk the business by diversifying our revenue mix. We are pleased to have completed the acquisition of Arq during the first quarter, which we believe is the right step in driving long-term growth and value creation. Our combined company will enjoy a diverse portfolio of products and customers in a much larger addressable market due to an enhanced feedstock portfolio and production capabilities, which will result in higher margin opportunities within the activated carbon market as well as providing access to additional potential revenue streams that would have been previously unattainable for our business as previously positioned.

I’ll talk a little bit more about our milestones for 2023. But first, I’d like to turn the call over to Morgan to review our first quarter results in greater detail.

Morgan Fields: Thank you, Greg. Slide 4 provides a snapshot of our first quarter financial results. First quarter revenues and cost of revenues were $20.8 million and $17.2 million, respectively, compared to $26.4 million and $21.5 million for the first quarter of 2022. The revenue decline was the result of lower sales of consumable products due to lower natural gas prices, which negatively impacted demand from our power generation customers. The reduced demand was partially offset by higher average selling prices for consumable products. First quarter other operating expenses were $11.5 million compared to $8.2 million for the first quarter of 2022. The increase was mainly the result of higher legal and professional fees associated with the conclusion of the company’s strategic review process and closing of the Arq acquisition as well as additional payroll and benefit costs and overall operating expenses due to Arq activities after the acquisition.

The increase was partially offset by a $2.7 million gain on the sale of Marshall Mine. As Greg mentioned, we are already taking actions to achieve our expected go-forward operating cost structure for the combined company. This involves integrating the organization in order to realize cost synergies and efficiencies across the organization. First quarter operating loss was $7.8 million compared to $3.3 million in the prior year. The decline was mainly the result of lower consumables revenue driven by the previously mentioned factors, and the incremental transaction and integration costs of $3.6 million associated with the acquisition of Arq. First quarter interest expense totaled $0.5 million compared to $0.1 million in the prior year. The increase was driven by $0.3 million of incremental interest expense related to the company’s new $10 million term loan as well as the interest relating to the Arq’s previously existing term loan.

The company recorded a small income tax benefit for the first quarter of 2023 compared to no income tax expense for the first quarter of the prior year. First quarter net loss was $7.5 million or $0.32 per diluted share compared to a net loss of $3 million or $0.17 per share in the prior year. As discussed, the decline was the result of lower operating earnings, driven by lower consumable sales. First quarter consolidated adjusted EBITDA was a loss of $7.7 million compared to positive adjusted EBITDA of $0.9 million in 2022. The decline in consolidated adjusted EBITDA was mainly the result of the larger year-over-year net loss, which included $4.4 million of transaction and integration costs related to the acquisition compared to $0.8 million in the prior year.

The current year also includes $0.9 million of incremental Arq payroll and benefit costs since the date of the acquisition relative to the prior year. Cash balances as of March 31, 2023 including restricted cash, totaled $79.1 million compared to $76.4 million, as of December 31, 2022. Total debt inclusive of financing leases, as of March 31, 2023 totaled $21.7 million compared to $4.6 million, as of December 31, 2022. The increase was driven by the term loan entered into in conjunction with the acquisition as well as the assumption of the previously existing Arq term loan. As Greg mentioned, the sale of the Marshall Mine closed in March. As a result, the asset retirement obligation was removed from our balance sheet and all future cash flows — outflows associated with the reclamation of the mine were transferred to the buyer.

In April, we received the release of approximately $2.3 million of restricted cash, which was previously held in escrow as collateral for the surety bond portfolio. First quarter capital expenditures totaled $3.6 million compared to $1.5 million in the prior year. The increase was the result of initial cost of the capital growth projects as well as higher spend in anticipation of our periodic plant turnaround. As Greg stated, we expect to incur between $40 million and $45 million in capital expenditures in 2023, driven by enhanced capabilities to ensure GAC production, an amount for the plant turnaround, as well as the completion of other capital projects, including certain planned capital projects that were started in 2022 and will be completed during the first half of 2023.

With that, I’ll now turn the call back to Greg.

Greg Marken: Thanks, Morgan. Slide 5 shows the strong foundation we continue to build upon to become a leading environmental solutions provider. We are currently a top three producer of activated carbon products in North America with a market share of approximately 17%. However, we are currently able to only serve an estimated 30% to 35% of the activated carbon market with our lignite based portfolio of products. Post acquisition, utilizing both our existing lignite based feedstock and Arq powder as a bituminous-based feedstock we will be well-positioned to provide activated carbon products that could serve more than 80% of the North American activated carbon market. This will inherently reduce our exposure to certain end markets and leave us less susceptible to headwinds that we are currently experiencing in our existing business.

Additionally, as we complete the growth capital projects to integrate Arq powder, we will reposition the utilization and capabilities of our existing assets towards GAC products that generally provide higher value and higher margin opportunities in markets that are expected to continue to have growth in demand for years to come. We have proven sales channels and more than 100 current customers, many of which, provide potential entry points for the expanded markets we will enter as we look to accelerate our sales of GAC products when the capital improvements at our facilities are completed. Our commercial and technical teams have a proven track record of success in new markets. We expect our historical track record to continue to drive accelerated market acceptance of our new GAC and overall suite of activated carbon products and ultimately enhance our ability to win new business in these emerging market segments.

We will be the only vertically integrated activated carbon producer in North America for our primary feedstock needs from material sourcing to manufacturing to distribution. We expect this integration to yield sustainable long-term cost advantages and provide a distinct competitive advantage when production of GAC products from Arq powder begins in 2024. And lastly, we are well positioned to benefit from a changing regulatory landscape as the need to control and remediate the release of harmful chemicals into our air and water evolves. We continue to develop products to be potential solutions to emerging soil and groundwater regulations focused on forever chemicals such as PFOS. We expect to further expand upon and utilize our improved ESG profile to support and contribute to our customers’ sustainability goals in a world increasingly focused on the preservation of its natural resources.

Overall, the new combined company provides us with a longer-term, sustainable and diversified product mix and facilitates participation in higher margin activated carbon products and end markets. Finally, Slide 6 lists our areas of focus for 2023. First and foremost, we will continue to operate our Red River plant as we have while looking to continue to grow and improve our existing business. We are focused on maintaining high renewal rates with existing customers and being focused in our bidding process in order to align new and renewed contracts to maximize our top line opportunities. As it relates to Arq, our first priority will be the integration of the Arq team, assets and operations. We are pleased with the integration efforts to date and are encouraged by the enthusiasm of our collective teams to begin executing our combined transformative business plan.

Operationally, our key focus will be on progressing the capital work to optimize both the Corbin and Red River facilities for industrial scale production of Arq powder and GAC products. The most significant of these modifications relates to the Red River plant and includes the installation of new shaping and heat treatment processes to enable the processing of bituminous-based feedstock to manufacture new and higher value GAC products. The capital projects will not interrupt our ongoing manufacturing operations or sales opportunities. Our focus will also be on securing lead customers in building our sales channels within the North American market for GAC and other emerging products. We expect to undertake further product testing with potential customers for GAC and other activated carbon products, which we believe will provide an opportunity to capitalize on the expanded capabilities in 2024 when the initial growth capital improvements are completed.

Additionally, we will continue to progress the technical feasibility of other potential products for emerging markets during 2023 and beyond. To conclude, while our first quarter results were down compared to our prior year, it underscores the importance of securing a bituminous-based feedstock in acquiring Arq. The combined company will be able to pursue end markets served by both powder and granular activated carbon products, greatly expanding our market breadth and reducing our reliance on power generation and when complete will position the business to be the only completely vertically integrated, activated carbon provider for our primary feedstock needs from primary material to distribution. This market expansion, diversification of our product portfolio and cost competitive position of the new company are all expected to create a materially improved earnings profile and a more resilient company.

With that, I will turn the call back over to our operator to move us to Q&A.

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Gerard Sweeney with ROTH Capital Partners. You may proceed.

Operator: Thank you for your question. [Operator Instructions] There are currently no further questions in queue. I will now pass the line back to the management team for closing or additional remarks.

Greg Marken: Thank you, and thanks to everyone for joining the call this morning. Our business plan for the new ADES is underway and we are excited about the company’s prospects to becoming an environmental technology leader. We look forward to speaking with everyone soon and updating everyone on our next call.

Operator: That concludes the Advanced Emission Solutions Q1 2023 earnings conference call. Thank you for your participation. You may now disconnect your lines.