Advanced Emissions Solutions, Inc. (NASDAQ:ADES)
Q1 2020 Earnings Call
May 12, 2020, 9:00 a.m. ET
- Prepared Remarks
- Questions and Answers
- Call Participants
Ladies and gentlemen, thank you for standing by, and welcome to the Advanced Emissions Solutions' Q1 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions].
I would now like to turn the call over to Ryan Coleman, Investor Relations. Please go ahead.
Ryan Coleman -- Associate
Thank you. Good morning, everyone, and thanks for joining us today for the first quarter 2020 earnings results call. With me on the call this morning 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 the website, and a downloadable version of today's presentation is available there as well. A webcast replay will also be available on the site, and you can contact Alpha IR 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 and 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 the factors identified on Slide 2 of today's slide presentation, in our Form 10-Q for the quarter ended March 31, 2020, and other filings with the Securities and Exchange Commission.
Except as expressly required by the 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'll turn the call over to Heath Sampson. Heath? Thanks, Ryan, and thanks to everyone for joining us this morning. I'd like to begin by extending my well wishes to you all. I hope you are all safe and healthy. Obviously, we are operating in a different world than we -- than just two short months ago when we held our fourth quarter earnings call. That rapid change has required a swift response, and Greg will cover the actions we've taken as a Company in a few minutes. Let's move on to Slide 3 and review our first quarter. Within our Refined Coal segment, distributions from Tinuum fell 12% compared to the first quarter of 2019. The decline was driven by significant decreases in coal-fired power generation over the past year, which resulted in restructuring lease contracts between Tinuum and its largest customer, and the closure of two utilities that Tinuum had refined coal facilities at; all of which, we initially discussed on the 2019 third quarter call. Data provided by the EIA indicates that coal-fired power dispatch in the first quarter of 2020 was down approximately 33% compared to the first three months of 2019. We expect additional headwinds due to poor coal-fired power generation to continue in 2020, along with decreases in aggregate energy demand brought about by the business shutdowns related to the pandemic. However, as we stated on our fourth quarter call, we continued to have line of sight into at least one additional refined coal closure in 2020, though the timing is difficult to determine given the current environment. Royalties were also lower due to increased depreciation and lower rent payments to Tinuum. Our RC segment adjusted EBITDA was down 15% compared to last year. This is the first quarter we have highlighted this metric, and we plan to continue to include it in the future. Given the impacts of timing and revenue recognition by Tinuum and accelerated non-cash depreciation by Tinuum, our equity earnings are significantly reduced compared to the cash distributions we will receive. We believe adjusted RC segment helps to portray an additional year-over-year comparison of earnings and associated cash flows of the segment. In our PGI segment, poor coal-fired power dispatch also continued to pressure our financial performance. Total volume and revenues were significantly lower than those in 2019, albeit in line with our updated expectations as a result of non-coal power generation sources increasing their percentage of the overall power supply. We have been responding by focusing on what we can control, reducing costs and diversifying the business. Execution and renewal rates with existing customers remain high, and we will undoubtedly maintain the premier asset in this industry. But increasing our penetration of non-coal markets like water and industrial applications will be a key determinant of the future success of this business. We feel confident in our internal sales team and infrastructure, as well as the product portfolio diversification that we have achieved thus far. We also believe that competitive landscape within the activated carbon industry will accelerate toward rationalization among market participants, given today's tough economic conditions, which may drive actions such as restructuring and M&A. If this does occur, given our industry-leading asset, we expect to be well-positioned to capitalize on those changes. In the meantime, we remain acutely focused in this segment on winning share in markets, where we have the right to win, filling our plant's capacity with more diversified revenue streams and leveraging our complete product solutions package. Moving to capital allocation. We returned roughly $4.7 million to our shareholders during the first quarter through our dividend program and share repurchases. We repurchased shares and paid our first quarter dividend on March 10th. However, as the pandemic has evolved and impacted financial markets and assets, our capital allocation priorities have as well. We have taken actions to reduce costs and have focused on cash conservation. As part of these actions, we are suspending the Company's quarterly dividend, which will allow us to preserve roughly $5 million per quarter. These actions, focused on risk mitigation and liquidity will protect our business today and put it in place for us to win tomorrow. Lastly, we are updating net of first quarter distributions, our net cash flow outlook for the RC segment to total between $125 million and $150 million through the end of 2021. In the near-term, we are focused on adding incremental tonnage where available -- where able. We are planning for the current expected cessation of RC cash flows at the end of next year. In our PGI segment, we would expect to improve performance in the second half of 2020 as the pandemic hopefully subsides and business conditions improve. Lastly, as previously announced, I submitted my intention to resign from the CEO position as well as the Board of Directors effective June 30 to pursue other interests. It has been a privilege to lead this Company through a difficult turnaround and a subsequent transformation. I am very proud of the team. I've helped build here and what we have accomplished together. ADES has the right team and the right collection of assets to take the next step to its transformation, and I look forward to seeing that success. I'd like to thank you all for your support over that time. Greg will be assuming the Interim CEO role, and having worked alongside for five years, I have the utmost confidence in his leadership ability, knowledge of the business, and of our customers. So with that, I'll turn the call over to Greg.
Greg Marken -- Chief Financial Officer
Thank you Heath. Let's start on Slide 4 as we discuss our responses to the current environment we all find ourselves in. Our first priority is and always will be the health and safety of our employees. We took proactive measures to protect our team, which included updating safe workplace protocols and offering work from home options where possible. For those team members that continued to work out of our physical locations, we undertook enhanced sanitation and cleaning measures, as well as social distancing guidelines in accordance with CDC guidelines. To date, we've had no known cases across our facilities, and we'll continue to follow best practices that emerge over the rest of the year to protect our people.
In addition to increasing our focus on safety, we've also taken steps to ensure business continuity. We support our country's electrical power plants and municipal water facilities, which are obviously critical and essential services. We remain in ongoing contact with them to best understand how to service their needs amid changing market conditions. This includes taking internal actions to protect our integrated supply chain and ensure a reliable supply of feedstock for uninterrupted supply of our activated carbon products. As part of this effort, we sequestered a portion of our onsite workforce at our Red River plant in Louisiana, which allowed that workforce to continue to operate our manufacturing capabilities and produce inventory sooner than we may have planned to ensure that we could provide product to our customers in case we were to experience an event that broadly impacted our workforce.
And finally, we bolstered our financial flexibility through a series of actions made both late in Q1, as well as thus far in Q2. We began by evaluating all non-core spending and by reevaluating our short-term capital allocation plans. First, in an effort to contain costs, we restricted all corporate travel and non-essential spending. We also reduced the cash retainer component of our Board's pay structure and withheld certain executive bonuses. Next, in terms of capital allocation we reprioritized initiatives in an effort to de-risk the business.
Debt reduction remains a top priority, and we remained committed to eliminating our debt in less than its stated three-year term. Additionally, we need to continue to prudently invest in our activated carbon assets to ensure manufacturing capabilities and execute against a handful of opportunities that could reduce available capacity at the plant if we're successful. However, given the uncertainty that the COVID-19 pandemic has caused, not just in the broader economy but across many of the end markets we serve, we need to suspend our quarterly dividend and evaluate any dollars we may allocate to share repurchases. This was a difficult decision and not one we took lightly. We will continue to evaluate our capital allocation plans as we have more visibility into how the economy begins to turn back on and as shelter-in-place ordinances are lifted in the coming months. These actions will help protect our near-term liquidity and offer the flexibility we need to navigate these uncertain times.
Let's now turn to Slide 5 for our financial review. First quarter earnings from equity method investments were $8.3 million, compared to $21.7 million for the first quarter of 2019. The decrease in earnings from equity method investments during the first quarter was primarily due to lower earnings from Tinuum Group, resulting from higher depreciation on all Tinuum Group refined coal facilities as a result of a reduction in their estimated useful lives during the third quarter of 2019 and due to Tinuum restructuring RC facility leases with its largest customer, which decreased net lease payments and equity earnings beginning in that same period.
This year, we expect that our GAAP equity earnings will be significantly less than 2019 due to Tinuum having recognized two refined coal facility transactions as point in time sales during 2019, in addition to the impacts I just discussed. As we have previously discussed, this does not affect the timing or the total projected future cash flows from our RC segment, and we also expect to see cash distributions significantly exceed GAAP earnings from our equity method investments in both 2020 and 2021.
First quarter revenues totaled $12.3 million, compared with $19.3 million in the first quarter of 2019. The decrease in revenues was primarily the result of lower consumables revenue resulting from lower volumes that were negatively impacted by low coal-fired power dispatch, driven by power generation from sources other than coal. These decreases were partially offset by incremental wins in industries not impacted by coal-fired power generation.
First quarter royalty earnings from Tinuum Group were $3 million, compared to $4.2 million for the first quarter of 2019. Royalty income is based upon a percentage of the per ton pre-tax margin, inclusive of impacts related to depreciation expense and other allocable expenses. The lower royalty earnings in the first quarter were due to the increased depreciation and lower payments to Tinuum. Royalty earnings are expected to be negatively impacted due to these changes in both 2020 and 2021.
Net loss for the first quarter was $1.9 million, compared to a net profit of $14.4 million in 2019. The decrease in net income was again primarily driven by lower earnings from equity method investments and changes in operating losses from the activated carbon business. Consolidated adjusted EBITDA was $10.8 million for the first quarter, compared to $18 million in 2019. The decrease in consolidated adjusted EBITDA was primarily driven by $13.4 million in lower earnings from equity method investments and changes in operating losses related to the activated carbon business.
We ended the first quarter with a cash balance inclusive of restricted cash of $17.2 million, an increase of $0.1 million since the end of the year. The $5 million in long-term restricted cash remains due to restrictions from the term loan. During the quarter, we made a $6 million principal payment on our term loan, reducing the principal balance, including the current portion to $34 million as of the end of the quarter. We continued to expect to pay off this balance in less than a stated term of three years. Total long-term borrowings inclusive of finance leases now sit at $38 million, compared to $44 million at year-end.
Turning to Slide 6, you can see our expected future RC cash flows. As Heath previously mentioned, based on the 20 invested facilities and cash distributions received during the quarter, we're updating our expectation of after-tax cash flows to ADES to be between $125 million and $150 million to the end of 2021. We also believe that we have line of sight into adding incremental volume in 2020. However, the direct and indirect impacts of COVID have negatively impacted timing related to this incremental volume.
Since we have under two years remaining with our refined coal business, Tinuum will look to efficiently manage its cost structure while ensuring that their assets reliably produce refined coal. We will respond accordingly and seek to reduce costs and continue to work toward our previously provided target of at least $5 million in reductions on an annualized basis, while optimizing our products and manufacturing processes. These cost containment initiatives were discussed on the fourth quarter call, so we see them as separate from any cost reduction initiatives related to the pandemic.
Turning to Slide 7, we outlined some of what we see as the key opportunities for us to maximize the potential of our activated carbon assets. As expected, but not at this velocity, coal-fired power generation continues to decline, which has forced us to accelerate our focus on other adjacent market opportunities earlier than planned. We have talked about some of the non-coal industrial applications for activated carbon, where we have seen traction with our products. These are industries that are similarly bound by regulations, and the application of our products in these markets continues to be ahead of our initial expectations.
We are also finding ourselves better able to compete within the municipal water market. Our product portfolio and commercial strategy in the water market is much improved from the time of the Carbon Solutions acquisition, and we expect to see higher performance here in 2020 than we did last year. We also expect supply and demand to ultimately rationalize in the industry in the coming years, which may include restructurings and M&A. That expected market rationalization will be a key catalyst for growth as we expand into new markets. As this occurs, we believe will be -- we will be in position to capitalize on the opportunities given the premier quality and cost advantageous nature of the assets we possess in the market.
Slide 8 shows the changing projections from coal-fired power in the U.S. As we discussed in the fourth quarter call, you can see the speed and magnitude of the change in the coal-fired power generation expectations. As these changes have occurred, it has caused us to increase our focus in obtaining incremental opportunities away from coal-fired power generation.
As such, the figure on the right hand side of the slide is our internal estimates around how we intend to diversify our products away from coal-fired power generation. As part of this focus, we have maintained ongoing negotiations with parties that would allow us to leverage the new product and capabilities that we have built over the last year. If we're successful in closing some of these larger opportunities in our pipeline, this would greatly increase the current volume levels and the utilization rates for the asset, diversify the customer base, and more fully leverage the low cost nature of the plan. Additionally as the market is changing, we will adapt and align cash cost from our overall business to current dynamics.
On Slide 9, we recap our capital allocation approach successes over the last 12 quarters. Since the start of this initiative in 2017, we have returned over $106 million to shareholders via dividends and share repurchases. However, given the current overall economic uncertainty, we have taken steps to enable improved financial flexibility, including the suspension of our quarterly cash dividend, as well as pause on our share repurchase activity. This will allow us to preserve $5 million per quarter in the near term, which we believe is the prudent action to take given today's uncertain economic situation. In the near-term, debt reduction will remain a priority as term loan is subject to mandatory quarterly principal payments of $6 million. We reevaluated our capital allocation initiatives as market conditions evolve.
Finally, let's review our 2020 priorities on Slide 10, keeping in mind that some of these have changed at least temporarily in light of the current crisis. Our first priority is unchanged, and it is to continue to add and protect our net refined coal cash flows. We will focus on optimizing our operational performance and reducing our costs, such that we maximize our future cash flow stream, which will continue to support our long-term capital allocation. Our second key priority also remains unchanged, as we look to leverage our Red River plants utilization and low-cost advantages. This will entail filling the plants volume capacity with incremental wins in these new and growing market opportunities we spoke about, as well as remaining vigilant for any additional opportunities upon the expected market rationalization, as well as reducing cash costs.
Lastly, we shifted our near-term capital allocation focus to risk mitigation and cash preservation. We will continue to deleverage, but ultimately the shareholder return component of our capital allocation initiatives are on pause in order to preserve near-term liquidity.
Before we take any questions, I think it's important that I thank Heath for the dedication and leadership he has brought to this organization. Heath began as our CFO roughly six years ago, at a time when the organization was late on its financial filings and lost in terms of its strategic direction. Within seven months Heath was asked to lead the Company as its CEO, his leadership got the Company financially compliant and stable, and his vision provided a path forward. A true testament to that success is on our capital allocation side, as we return more to shareholders through dividends and repurchases than what our market cap was in the middle of that turnaround time period.
Additionally, steps were taken to provide a path forward, including the significant expansion of invested refined coal facilities. Our refined coal assets while under some pressure due to coal-fired power generation will provide us potential cash flow generation to navigate these uncertain times. And our activated carbon assets and platform will provide the path to longer-term value on the end of 2021. So Heath, on behalf of our whole team here at ADES, our customers, partners and our investors, I'd like to thank you for everything you've done for us and this organization. It's been a true honor to work with you and most importantly for your friendship.
With that, we'll take your questions.
Questions and Answers:
[Operator Instructions] Your first question comes from Patricia Laurence, private investor. Your line is open. [Operator Instructions] Hey, there are no -- I can hear -- Okay, I'd now like to turn the call back over to our speakers, as there is no questions.
L. Heath Sampson -- President and Chief Executive Officer
Thanks again, everyone for joining the call this morning. We're all living through uncertain times and I truly hope you're all staying safe and healthy. While we have challenges to navigate, we retain a potentially strong cash generating segment in our RC business and a longer-term growth potential in our activated carbon, and other consumables and technology platform. We have the financial foundation and the tools to navigate this pandemic and win in the future, and we're looking forward to brighter days ahead. Have a great day.
[Operator Closing Remarks]
Duration: 24 minutes
Ryan Coleman -- Associate
Greg Marken -- Chief Financial Officer
L. Heath Sampson -- President and Chief Executive Officer