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Advanced Emissions Solutions, Inc. (ADES 6.98%)
Q1Â 2019 Earnings Call
May. 07, 2019, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning. My name is Natalie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Advanced Emissions Solutions Q1 2019 Earnings 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 -- Investor Relations
Great, thank you Natalie. Good morning everyone and thank you for joining us today for our first quarter 2019 earnings results call. With me on the call today are Heath Sampson, President and Chief Executive Officer; and Greg Marken, Chief Financial Officer. This conference call is being webcast live within the Investor section of our website and the 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 today include forward-looking statements as defined in Section 21-E 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 or opportunities to differ materially from those expressed in or implied by these statements.
These risks and uncertainties include, but are not limited to the factors identified on slide two of today's slide presentation and our Form 10-Q for the quarter ended March 31, 2019 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 GAAP references in the financial statements.
So, with that I'd like to turn the call over to Heath Sampson, Heath?
Heath Sampson -- President and Chief Executive Officer
Thanks Ryan, and thanks to everyone for joining us this morning. Let's begin on slide three, and review our first quarter. During the quarter, we remained focused on maximizing RC cash flows and on the continued integration of Carbon Solutions into our new combined organization. We've remained -- we've renamed historical emissions control business, the Power Generation and Industrial segment and we'll be referring it to as PGI segment throughout this presentation.
As we stated last quarter, our strategy has not changed and we remain committed to our RC segment while integrating the Carbon Solutions business with our existing platform, as these two businesses are highly complementary segments. In the RC segment, distributions were in line with our expectations. Distributions were higher year-over-year, as a result of additional invested RC facilities in both the second half of 2018 as well as the previously announced closure in January 2019.
Additionally, equity earnings increased significantly year-over-year and was driven by the additional RC facilities, but was also impacted by the adoption of new accounting standards by Tinuum Group. Greg will review this change in greater detail in a moment, but the key takeaway is that there will be no impact to the total amount of cash we collect -- we expect to collect from Tinuum.
Our cash position was up slightly from the end of 2018, despite our dividend, further share repurchases, repayment of long-term borrowings and integration costs. We ended the first quarter with total cash balance of $25.9 million an increase of $2.1 million from the end of 2018. As it has been a key theme for several quarters now, we remain committed to returning capital to our shareholders. During the quarter, we paid our quarterly dividend and repurchased over 63,000 shares for a total of roughly $700,000. Going forward, we remain committed to the dividend, an opportunistic share buybacks under the authorization we announced in November.
As we look forward to the remainder of the year, our capital priorities remain focused on future RC closures, integrating and scaling the Carbon Solutions acquisition, opportunistic buybacks, dividend payments and paying down the debt. In the Refined Coal segment, the total number of invested facilities currently stands at 20. The new facility that Tinuum contracted in January, has a little over 3.5 million tons per year and as previously announced royalty bearing. As we progress into to 2019, we remain committed to adding 12 million incremental annual tons of refined coal in 2019. We delivered 3.5 million tons in January, expect another 3 million tons to 4 million tons next month, and plan to deliver the remaining prior to year end.
Let's now turn to the Power Generation and Industrials or PGI segment. The first quarter marked our first full quarter with our newly acquired activated carbon assets. In the first quarter, we've recognized segment revenue of $14.6 million. We are over four months into the acquisition and we are very pleased with the integration progress to date, as well as the initial successes we're beginning to see as a complete mercury control solutions provider.
Renewals with existing customers have been very encouraging, and the of sight to continued incremental wins is in front of us. Additionally, we continue to be encouraged by the overall reception to the combined company within the marketplace, and that believe we have a great long-term opportunity to significantly grow the PGI segment and fully utilize our best-in-class manufacturing plant and feedstock mine in northern Louisiana.
We remain excited by the activated carbon market within the power industry and other near adjacent markets. We see a pathway for growth that continues to match our near-term initial expectations and potentially exceed our longer term expectations. We're executing on our integration plan that is focused on true integration, not bolt-on integration. We are focused on eliminating duplication and creating one efficient financial and operating platform.
Although it has been, and will continue to be a lot of work, our employees are committed and excited about the future. Additionally, we have received direct positive customer feedback around our new full suite of product capabilities and we are beginning to see the competitive advantages of being a complete mercury control solutions provider in this marketplace. This feedback is simple -- is not simply talk, it has enabled us to renew over 90% of our contracts and win incremental volume. In fact, our customers are even asking us to help them beyond mercury control.
Before I turn the call over to Greg, I'd like to take a moment to welcome Brian Leen and Carol Eicher to our Board of Directors. Both have significant specialty chemicals experience and are highly respected executives. Brian joins us from the Carbon Solutions team and has nearly 25-years of experience in specialty chemicals industry in various commercial and business leadership roles. Today he's President and CEO of Gopher Resources, a leading provider of environmental solutions to the automotive and industrial battery production industry.
Carol brings a wealth of global manufacturing, operations, mergers and acquisitions experience from her CEO and other senior leadership at Innocor, Dow Chemical, DuPont, Rohm and Haas and Ashland Chemical. Carol also has deep Board of Director experience. She currently serves in a mid-sized private equity backed plastics company and Tennant, a large New York Stock Exchange chemical company. Both individuals will be incredibly valuable additions to our board, as we enter this next phase of creating long-term shareholder value.
With that, I'll turn the call over to Greg to cover the financial results from the first quarter.
Greg Marken -- Chief Financial Officer
Thanks Heath. Let's start on slide five for our first quarter financial review. Earnings from equity method investments were significantly higher as a result of the three additional facilities period over period and as Heath mentioned, a change in Tinuum's accounting practices. Tinuum Group adopted the new revenue and lease standards as of January 1, 2019. As a result, we recorded a cumulative adjustment of $28.8 million related to our company's percentage of Tinuum Group's cumulative effect adjustment that increased the company's retained earnings and investment balance related to Tinuum Group, as of the adoption date.
Based on the impacts of this adoption, we no longer have cumulative cash distributions in excess of our cumulative pro-rata share of Tinuum Group's net income. Therefore, we recognize equity earnings by recording our pro-rata share of Tinuum Group's net income, rather than income being based on cash distributions for the three months ended March 31, 2019. As Heath mentioned, this does not affect the timing or the total projected cash flows from Tinuum to the company, but affects the accounting treatment of our pro-rata share of earnings and the cash distributions.
Absent this accounting change, Tinuum Group's equity earnings would have equaled to $16.8 million, rather than $19.8 million. That increase is roughly 37% higher than equity earnings in the prior year, which totaled a $11.1 million.
In the PGI segment, consumables revenue was $14.6 million higher from the prior period, driven by the contributions from Carbon Solutions. This top line result was in line with our expectations. First quarter total company revenue and cost of revenue were $19.3 million and $14.1 million respectively, compared with $3.9 million and $0.6 million in the first quarter of 2018.
Revenue for the first -- revenues for the first quarter were higher year-over-year due to the impacts of the acquisition as well as higher royalty earnings coming from a greater number of royalty bearing RC facilities. In fact, royalty earnings from Tinuum a $4.2 million were over 30% higher, compared to the $3.2 million result in the prior year's quarter.
During the first quarter, we had 13 RC facilities generating royalties compared to 10 during the same period in 2018. As previously mentioned, the additional RC facility contract completed in January added to this total and as we have said, all future RC closures are expected to be royalty bearing units. Long term royalty earnings expectations continue to be roughly $0.40 per ton. As of March 31, 2019, expected future cash flows from Tinuum are projected to be between $200 million and $225 million through the end of 2021. We see potential to add to this cash flow with each additional facility, and as each incremental facility may come on, we have the potential to add between $5 million to $7 million per year to the company.
Our operating expenses were $8.8 million, compared to $5 million in the first quarter of 2018. The year-over-year increase is largely due to the acquisition of Carbon Solutions. In the PGI segment, our segment operating loss was $3.5 million a decrease of $2.5 million over the first quarter of 2018 and was negatively impacted by an adjustment of $3.4 million to cost of sales, due to an increase in the basis of inventory acquired related to purchase accounting.
Segment EBITDA was $1.4 million -- was a loss of $1.4 million, an increase of $0.5 million over the first quarter of 2018. Excluding the impacts of the purchase accounting adjustment, PGI segment operating income would have been a loss of $0.1 million, and PGI segment EBITDA would have been $2 million. As a reminder, the PGI business does contain seasonality, driven by overall power demand. Heath will discuss a bit more later but generally the third and fourth quarters will be the periods of the highest demand related to utility customers.
First quarter pre-tax net income was $16.1 million compared to $10.2 million for the prior year. Net income for the first quarter was $14.4 million compared to net income of $7.7 million for the first quarter of 2018. The increase in net income was driven by higher royalty earnings, consumables revenue, equity earnings and a lower income tax expense compared to 2018.
Looking at our cash position as of March 31, 2019 the company had total available cash of $20.7 million and restricted cash of $5.2 million for a total of $25.9 million, slightly higher than the $23.8 million as of December 31, 2018. This increase is inclusive of dividends paid in share repurchase activity, which totaled $5.3 million as well as principal and interest payments related to the term loan and capital leases. As a reminder on the restricted cash portion, the $5.2 million of long-term restricted cash remains primarily due to the minimum cash balance restriction stemming from the term loan.
Turning to a review of our debt. We entered into a $70 million three-year term loan to fund the acquisition of Carbon Solutions. This term loan has mandatory amortization requirements, which we will address largely through our Tinuum cash flows and we continue to believe we will pay down this loan prior to the end of the three-year term. During the quarter, we made our first $6 million quarterly principal payment. At quarter end, our remaining principal balance on the term loan was $64 million.
As previously mentioned, as of January 1, 2019 we adopted the newly lease standard that causes all entities to report, all leases on the balance sheet, not just financing leases. As such, we recorded an additional $7 million of leases as of January 1, 2019. Lastly, we will continue to be opportunistic with our share repurchase activity, based upon the currently authorized repurchase program, but we may also prioritize debt pay down in the shorter term.
Heath Sampson -- President and Chief Executive Officer
Well thanks Greg. I'd like to take a moment to discuss our future outlook. Let's turn to slide seven, and briefly discuss the refined coal backdrop. As we have previously discussed over the last several quarters, we continue to see tailwinds surrounding Tinuum's efforts to close additional facilities. These tailwinds are the result of IRS tax clarification achieved in early 2018, and increasing clarity on certain provisions within the tax bill, which has helped tax equity investors better understand the true impact of tax reform on their businesses.
On the other hand, our biggest challenge to obtaining new tax equity investors remains the public and political stigma of being associated with coal-fired power generation. Tinnum works hard to educate prospective investors that this tax incentive was instrumental in enabling the development of mercury control technologies and as a whole, refined coal truly helps reduce harmful emissions.
Turning to slide eight, you can see the number of invested facilities versus the number of waiting for tax equity investor are waiting to be installed as of March 31, 2019. So, as of today, we have 20 invested facilities and eight uninvested. To maximize this refined coal opportunity, and secure additional investors for the remaining units, Tinuum has proactively installed facilities, in preparation for investment, and two are currently in the installation phase.
During 2018, Tinuum had spent roughly $17 million related to capital expenditures, nearly all of which with engineering and installation costs. Tinuum and its members, including us would certainly not be incurring these costs if we were not confident that we will translate into future invested RC facilities. We have active ongoing conversations with potential tax equity investors for several facilities. Should we finalize deals on our current discussions, they have the potential to add additional 8 million tons to 9 million tons to Tinuum's total in 2019, bringing the full incremental annual tons to approximately 12 million.
Again, we expect to close an additional facility in the 3 million ton to 4 million ton range next month. Let's turn to slide 10 for an update of our expected future RC cash flows. As of March 31, 2019 an inclusive of 20 refined coal facilities invested with third-party investors. We are reaffirming our expected net RC cash flows to range between $200 million and $225 million to ADES through the end of 2021. This has been our number one priority, and our commitment to leasing or selling the idle units is unaffected by our integration and scaling of the PGI segment.
Also remember that the refined coal business is run by an experienced management team with involvement from its owners, including us, for oversight and strategic guidance. This structure will allow us to continue to executing refined coal, while devoting the resources necessary to simultaneously integrate and grow our assets.
Let's flip to slide 11 and quickly review our strategy. This slide shows our road map for the new ADES and how we plan to leverage our new assets to become the North American leader in activated carbon within multiple diversified industries. We are already attractively positioned for profitable growth due to the completion of our new leading position in the segment.
The mercury control market in North America is competitive; it has undergone many changes over the past few years as coal-burn has shifted to natural gas. As a result, many coal-fired power generation -- generators have dramatically reduced headcount and are continuously looking for cost savings. They simply do not have the bandwidth or resources anymore to compete at significant scale. They are now looking for fewer strategic vendors that can provide more for less.
We are best positioned to be the supplier of choice for this changing power market. Gaining incremental share within the North American mercury control market, by driving performance either by pricing power or premium service or products is priority number one.
Next, we are also positioned today to achieve further penetration into the municipal water treatment market. This is one 100 million pound demand environment in the US and is growing, providing immediate -- immediately addressable adjacent market to grow with it. It is also highly fragmented space, comprised of many producers and resellers. This initial opportunities market will not require any material incremental plan investment or expand our presence -- to expand our presence.
To better position ourselves in this space, we have focused a limited number of existing personnel here and believe this will lead to positive results. Longer term, we aim to grow our share in industries that command premium products and thus premium price points. We see a big opportunity in the broader consumer and commercial water market, estimated to be 310 million pounds per year.
As everyone has seen over the years, clean water is increasingly in demand both here and across the globe. This market commands higher margins by approximately 20% to 25% compared to mercury control, and has higher growth rates. However, entering this market would require upgrades in capital to the existing facility or more expensive feedstocks.
In addition to position ourselves as the leader for mercury -- North American mercury capture and activated carbon and pursuing adjacent market opportunities, such as water, we will also evaluate international markets as mercury control regulations outside the US mature, as well as adjacent segments, like oil and gas, food and beverage or other consumer products.
The broader water market and other more specialized adjacent market opportunities have higher growth rates and higher margins. Nothing the less, these initiatives of -- are initiatives of tomorrow, as we are focused immediately on organic growth within mercury control and municipal water.
One note regarding our activated carbon assets that most significantly impact the PGI segment, is that we will be entering a period of scheduled downtime for plant maintenance during the second quarter. These scheduled downtimes are expected, as they occur every 18 months to 24 months for a period of two to three weeks and are required to ensure our plant continues to be the best-in-class facility. In preparation for the scheduled downtime, we built sufficient inventory to service our customers appropriately.
As we mentioned last quarter, we will provide additional guidance for our consolidated company and PGI segment during our second quarter 2019 earnings call. However, it may be helpful to point out seasonality in this business for context to this quarter's results and expectations for the remainder of the year.
Coal-fired power dispatch is greatly affected by weather. Our largest customer footprint is in the lower Midwest and south, as such, the demand is high in the third quarter when air conditioning is needed. Additionally, the fourth quarter has high customer demand as the summer ends and the customers complete their year-end orders. The second quarter, followed by the first quarter are generally the slowest quarters for our business.
Additionally, we expect to have new customers starting up in the second half of the year. In summary, we expect the second half of the year to have higher revenue and margin than the first half. Again, we look forward to providing more guidance for the remainder of 2019, next quarter.
Moving to slide 12, let's recap our return of capital plan. Since the start of the capital allocation program in the second quarter of 2017, the company has paid over $40 million in dividends and utilized capital of over $42 million to repurchase shares. We paid our first quarter dividend on March 6 and our second quarter dividend declared yesterday will be paid on June 7. These initiatives remain a key focus of ours and we believe we generate sufficient cash flows to both honor our capital return commitments, and invest in the new business.
Finally, let's review our 2019 priorities on slide 13. Unchanged from prior years is our ongoing commitment to leasing RC facilities and supporting Tinuum in their effort to secure tax equity investors. Maximizing RC cash flows will continue to be our first focus. Our second strategic goal will be the integration of our newly acquired assets, people and operations to immediately capture share in the North American mercury control pack market. We will simultaneously evaluate and pursue adjacent attractive opportunities and higher growth verticals like water.
We see compelling opportunities to increase utilization rates, within our recently acquired assets and generate high margin revenue. And finally, we will continue to return capital to our shareholders through our continued commitment to our quarterly dividend program as well as the opportunistic repurchasing of outstanding shares.
So, with that I'll take a few questions.
Questions and Answers:
Operator
(Operator Instructions) And our first question comes from the line of Amit Dayal (ph), your line is open.
Amit -- Individual Investor -- Analyst
Thank you. Good morning, Heath.
Heath Sampson -- President and Chief Executive Officer
Good morning.
Amit -- Individual Investor -- Analyst
Great to see the progress being made across all fronts. Just around your comments about the 12 million roughly additional RC tons for the year, largely this is going to be driven by new unit deployments I believe, is that the right way to basically look at it? We've already done one, maybe we should look for three more units for the year?
Heath Sampson -- President and Chief Executive Officer
Yeah. No you're thinking of it right. So, just to clarify again, in -- early on in the year, we had a 3.5 million ton closure and I stated that we should close on another facility in that 3 million to 4 million range next month and then that leaves us to closures on a couple more facilities to get there, and we have line of sight into that with multiple different parties. So, we feel really good about making that 12 million ton commitment that we gave last year.
Amit -- Individual Investor -- Analyst
And just to clarify, you have potentially one closing next month, would you have sort of...
Heath Sampson -- President and Chief Executive Officer
Yes.
Amit -- Individual Investor -- Analyst
...two installed or in the process of being installed, so you'll have probably expectations the second one will close soon as well?
Heath Sampson -- President and Chief Executive Officer
Yeah. So, like all months and years predicting the timing of when closures happen, we have to get pretty close which is why I'm confident and talking about our closure next month. Outside of that what month it is, is a little difficult to predict. However, we do have good line of sight and are far along. So, I do expect additional closures before the end of 2019.
Amit -- Individual Investor -- Analyst
Understood. How does that impact sort of your royalties going forward from here? Because, I think you commented all of these units are expected to be royalty bearing, going forward that are going to be deployed, so should we expect royalties to potentially begin trending a little bit higher than where it was in the first quarter?
Heath Sampson -- President and Chief Executive Officer
Yes, it is correct. All future facilities will be royalty bearing, so as we add the facility, consistent with prior quarters -- our quarters and closures, it will proportionately increase just like it has in the past. So, royalties will trend up as we close on additional facilities.
Amit -- Individual Investor -- Analyst
Understood. And in regards to the CS integration, I think in the last call or maybe during the call around the acquisition, you had indicated efforts would be made to improve utilization from around 60% to 85% levels. Any progress on that front yet, or are you still working on all those things?
Heath Sampson -- President and Chief Executive Officer
Yeah. No -- a top priority for us, we have an incredible operation down in Lousiana both with the mine and then the plant and its underutilized, so that's a great opportunity for us to fill up that plant that remains to be a top priority for us and it is happening. So, I look forward to giving you a little more guidance on where we are with that and where we plan to be with that, but we are in line with what we thought when we initially made this acquisition.
Amit -- Individual Investor -- Analyst
Understood. Just one last one from me. I don't know if I heard this Greg, but you paid down $6 million of the $70 million associated with the acquisitions, so you're now at around $64 million related to that?
Heath Sampson -- President and Chief Executive Officer
Yes sir.
Amit -- Individual Investor -- Analyst
Okay. Perfect. Thank you Heath. That's all I have, congratulations.
Heath Sampson -- President and Chief Executive Officer
Yeah, thank you. That's great.
Operator
And our next question comes from the line of Sameer Joshi of H.C. Wainwright. Your line is open.
Sameer Joshi -- H.C. Wainwright -- Analyst
Good morning. Thanks for taking my questions.
Heath Sampson -- President and Chief Executive Officer
Good morning.
Sameer Joshi -- H.C. Wainwright -- Analyst
The first question is about the consumables cost of revenue, is that what we should expect going forward or does it have any overhead or fixed costs that we should be aware of?
Greg Marken -- Chief Financial Officer
Yes. So on the cost of revenue -- the one thing that we did highlight there is about $3.6 million in the consolidated results related to a step up in basis of purchase accounting, and we said in the Q that there's about $1.4 million more to come during the year. So, if you exclude those items that gives you a pretty good picture of your expectations as you look forward, but that does have the one-time purchase accounting adjustment in there.
Sameer Joshi -- H.C. Wainwright -- Analyst
So, it is -- the $14.1 million has the $3.6 million adjustment, is that correct?
Greg Marken -- Chief Financial Officer
On the cost of sale side, it does yes.
Sameer Joshi -- H.C. Wainwright -- Analyst
On the cost of -- yes, OK. And then on the operating expenses. I know they were higher because of one-time costs at $8.8 million, but on a continuing basis, do you expect this to revert back to like $7.5 million, $7.8 million level or how should we look at it?
Greg Marken -- Chief Financial Officer
It's going to be a little higher than where we historically were, given the fact that we have a much different operating organization than we used to. But, we have a very good expectation and we captured a bunch of savings already that we had built into our expectations during diligence, and we feel really good about where we're going to end up. We'll be able to provide a little more guidance on that next quarter.
Sameer Joshi -- H.C. Wainwright -- Analyst
Okay. But sequentially, it will be slightly lower than the $8.8 million just to make sure...
Greg Marken -- Chief Financial Officer
Yes. I think that's probably a pretty good way to look at.
Sameer Joshi -- H.C. Wainwright -- Analyst
Okay. On the Tinuum distributions, our projections were pretty conservative, and I guess it was because we were assuming additional costs to bring this on land including CapEx costs, but I guess, based on your slide eight, it seems a bunch of CapEx has already been incurred. So, should we expect distributions from Tinuum to be at these levels ex, any addition of new facilities?
Heath Sampson -- President and Chief Executive Officer
The distributions will be consistent. We do expect -- if we have additional facilities to install as it shows on slide eight, and we have an expectation that an investor is there, we -- Tinuum will spend CapEx, but those distributions sequential year-over-year will be higher, given the additional facilities, consistent with where we were in this quarter right.
Sameer Joshi -- H.C. Wainwright -- Analyst
Right, right. But weren't you -- at CapEx levels, at around $4 million to $5 million per facility or are those the numbers?
Heath Sampson -- President and Chief Executive Officer
Yeah, the $4 million to $6 million is the new (inaudible) on a new installation. Some of those facilities may have already been installed, and the work done in the latter half of last year. So, there's some time and that carries over period-over-period.
Sameer Joshi -- H.C. Wainwright -- Analyst
Okay. I think those are all the questions I had. Thanks.
Heath Sampson -- President and Chief Executive Officer
Great. Thank you.
Operator
And there are no further questions at this time.
Heath Sampson -- President and Chief Executive Officer
Right. Well, I thank you again everyone for the time today, and your continued support. I look forward to updating you all next quarter, and providing further color on our new business. Have a great day everyone.
Operator
This concludes today's conference call, you may now disconnect. Have a great day.
Duration: 31 minutes
Call participants:
Ryan Coleman -- Investor Relations
Heath Sampson -- President and Chief Executive Officer
Greg Marken -- Chief Financial Officer
Amit -- Individual Investor -- Analyst
Sameer Joshi -- H.C. Wainwright -- Analyst
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