Arq Inc (ARQ) 2005 Q2 法說會逐字稿

Good day, everyone and welcome to the ADA-ES second-quarter financial results conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are currently in a listen-only mode. This conference call contains forward-looking information within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The United States Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements in this document that are based on information the Company believes reasonable but such projections and statements involve significant uncertainty. Actual events or results including predicted revenue growth and award of additional commercial contracts could differ materially from those discussed in the forward-looking statements as a result of various factors including but not limited to changing market demand for ADA-ES chemicals and systems and changes in technology, federal funding, laws or regulation, availability of skilled personnel and other factors discussed in the Company's filings with the U.S. Securities and Exchange Commission. I will now turn the conference over to Mark McKinnies, CFO of ADA-ES. Please go ahead, Mr. McKinnies.

Thank you. Good morning, everyone and thank you for joining us for the ADA-ES second-quarter 2005 conference call. If you do not have a copy of the Company's earnings announcement please contact Beth Turner-Graziano at 303-734-1727 and one will be faxed or emailed to you immediately. In an effort to broaden communication to shareholders we are also webcasting this call.

First, I want to discuss the Company's financial performance for the second quarter and then our President, Mike Durham, will update you on the Company's overall performance for the quarter and prospects for growth. After that, we will open the call for your questions.

Revenues totaled $2.4 million for the second quarter, up 39% from 1.7 million in the 2004 quarter. Mercury Emission Control segment was the major driver of the revenue increase primarily due to greater Mercury measurement services which commenced in the third quarter of 2004 and generated $640,000 during the second quarter of 2005. Work under our several DOE and industry supported field demonstration projects continued generally at a pace in line with our expectations. These activities contributed approximately $2.2 million from $1.1 million, Mercury Emission Control revenues recognized for the first six months of 2005 and 2004 respectively.

Based on contracts in hand and other anticipated work, we expect total revenues for 2005 to grow by approximately 20%-30% over 2004 levels which was $8.4 million. However, that growth is based on obtaining a significant amount of new business in the second half of the year which as of this date is not under contract and may not materialize.

In terms of gross margin, we experienced an anticipated decline to 37% in the second quarter from 45% in the 2004 period. As noted previously, we expect the amount of time and materials-related work in fixed-price consulting for the near-term continued to represent an (technical difficulty) portion of revenues wherein the anticipated gross margins are lower than for our specialty chemical sales.

Research and development expenses in the second quarter were $75,000 less than the same period in 2004. The decrease reflects our lower levels of government cost sharing, government and industry supported contracts in 2005. We anticipate that future consolidated research and development expenses, except for those anticipated to be funded by the DOE contracts and others that may be awarded will grow at about 10% per year the next several years.

General and administrative expenses increased by 194,000 to 634,000 in the second quarter of 2005 from additions to our administrative staff, greater costs and corporate governance and corporate compliance and government compliance and NASDAQ listing fees. As a result of the previously mentioned margins and costs, we recognize an operating profit of $62,000 for the second quarter as compared to 54,000 in the same period in 2004.

Net income was $107,000, or $0.02 per diluted share, compared to 41,000, or $0.01 per diluted share, in the 2004 quarter. Cash flow provided by operations was $660,000 for the second quarter of 2005 compared to $526,000 for the same period in 2004. The increase was due to an increase in accounts payable receivable and other current assets which did not occur in 2005 but occurred in 2004. Our balance sheet remains strong with working capital of $3.9 million and other investments and securities of nearly 5.7 million. We have no long-term debt and shareholder equity totaled 12.8 million at June 30th. We believe we are well-positioned to take advantage of opportunities as the Mercury control market continues to grow and in other areas that Mike will discuss.

In summary, the Company continues to report significant growth and generate profit even when our major market is emerging. Fueled by funded R&D demonstrations and a profitable base business, we have been successful in not only growing revenues and maintaining profitability, we have also invested in field proven technology development that has confirmed our position as the market leader for the supplier of Mercury control systems and technologies. We have several contracts over the next two to three years that are expected to fund further technology development and strengthen the foundation while the commercial contracts for Mercury control are starting to come in. We expect to show healthy revenue growth in 2005 and be profitable for the year. Now I'd like to turn the call to Mike.

Thank you, Mark. As Mark mentioned, revenues from our Mercury control work are showing significant growth and we expect that this trend to continue as we transition from technology development demonstration activities into commercial sales. Last week, we announced we were awarded the nation's first permanent commercial Mercury control system for a new power plant. We expect that this award will be followed by several additional contracts over the next six months. Our commercial success is being driven by a comprehensive business plan that we established and implemented to develop the expertise, size, strength and resources to continue to be the market leader in Mercury control technology. This market is emerging from state, federal, EPA and legislative agendas to establish regulations to control Mercury emissions from the nation's 1100 coal-fired boilers. EPA and DOE studies have estimated that this will create a several billion dollar annual market which we expect to begin in earnest in 2008 to 2012 time frame.

Our announced strategy to lead this market is beginning to pay off in a number of aspects. We have successfully funded the development and demonstration of our technology while regulatory market drivers are being set in motion by winning numerous contracts from DOE and other directly from power companies to perform full-scale demonstrations of our technology. These programs, which cost approximately $2 million per site, have financed our growth, helped us establish our market position and provided us a mechanism to be profitable during this premarket period. To date, we have participated in 20 demonstrations at different plants across the country that represent a variety of equipment configurations and coal characteristics with several more scheduled to take place in 2005 to 2007. These programs will provide a revenue base for us of $3 to $4 million per year for the next three years. The experience and training generated by these programs have increased our ability to respond to the anticipated rapid growth of the Mercury control market. The expertise gained in installing and operating the equipment can now be applied to installing a permanent commercial system. In addition, these programs have provided performance data on a wide range of coal that allow us to sell commercial systems with guaranteed Mercury removal rates.

Let me now discuss the regulatory drivers for our Mercury control business and address both the near-term and long-term growth potential. The near-term market, which we define as 2005 to 2010, is being created by state regulations and consent decrees, the abundance of new coal power plants being built and new federal regulations on industrial coal-fired boilers that were passed last fall. State Mercury regulations are already in place in New Jersey, Massachusetts, Connecticut and Wisconsin and 10 other states are considering state limits on Mercury emission.

Additionally, the high price of natural gas and marginal electricity supplied in many areas has stimulated the development of various new coal-fired power plants. These plants are generally being required to achieve Mercury capture in excess of 80% to 90%. Much of the regulatory effort on Mercury capture comes as a result of success achieved in 88 demonstrations. With our recent technological advances, we can now achieve higher levels of control at lower cost than originally predicted. It makes it more feasible to pass the regulation when we can show 90% Mercury reduction is achievable with an increase in retail cost of electricity of only 1%.

In addition to the increased regulatory drivers, we have found that our demonstrations allow utilities to gain experience and comfort with our technology. As a result, we are reducing the resistance controlling Mercury. This is manifested by recent consent decrees that utilities have negotiated with their regulators in which they agreed to control Mercury at a number of plants. This is suggesting a significant increase in the near-term market. By 2010, our long-term growth will be defined by federal regulation that covers all of the coal-fired boilers. This regulation could come as a result of congressional legislation or a finalized administrative mandate from EPA. Most stakeholders, including utilities, environmental groups and technology suppliers, agree that the legislative route is preferred.

The Clean Air Mercury Rule, CAMR, that was announced in March is in the hands of the D.C. District Court as lawsuits were filed by several states and environmental groups because it does not require what they deem to be sufficient reductions in Mercury emissions. In addition, a number of senators are attempting to overturn this rule and EPA has announced that they are revisiting their conclusion that Mercury emitted by power plants is a non- hazardous pollutant. Our experts in Washington predict that the rule will not stand up to judicial review but will be remanded back to EPA to comply with the previous court order within the next year.

As the commercial business begins to take off, we expect an increasing pattern of revenue. First for engineering services, followed by equipment sales, then commissions from continuous sales of activated carbon. Providing engineering service is a strategic component of our comprehensive plan for leadership in the Mercury control market. More specifically, helping utilities determine how to approach Mercury control for each plant in their fleet. Through our new emission strategies division which began operating last July, we are providing key project management capabilities, engineering services, testing equipment and personnel. During 2004, our emission strategies division recognized over $350,000 in revenue. In the first half of 2005, emission strategies generated over $1 million in revenues while conducting tests at individual plants and performing comprehensive system studies for a number of utility groups. This important business provides us a mechanism to work with key customers to help them develop strategies to meet their Mercury control needs.

With new contracts for Mercury control systems, equipment sales will begin to contribute significantly to our revenue. For example, the first contract is for $1.5 million and requires equipment to be delivered by December. So nearly all of these revenues will be recognized this year. Because of the rapid turnaround for our equipment, six months for design, fabrication and installation, we will recognize revenues in the first two to three quarters after each new contract. The third component of our Mercury control revenues is due to commissions on sales of activated carbon which will occur once the equipment is installed and the plant is running. It is expected that chemical sales for the first few systems will occur in 2006.

Important for the Mercury control development is also being supplied by our two other specialty chemical products, Flue Gas Conditioning and ADA 249. In the second quarter, we signed a licensing agreement with ARKAY Technologies for a new specialty chemical product that covers a new sector of our market. Our specialty chemical productline continue to produce solid revenue. Although we expect minimal growth in this product area, the profit from the $2 to $3 million in annual revenues provides additional resources to develop technology for the larger market area.

Let me come close by briefly discussing the new opportunities that we are pursuing in 2005 to increase our market position and earnings potential. In March, EPA enacted the Clean Air Interstate Rule or CARE. CARE creates a market for technologies to both control the SO2 and NOx from power plants. Part of the market for CARE will be for plants that only need to trim their emissions by less than 50% and don't want to invest in large capital expenditures for old plants. This market for trim SOx and NOx control fits perfectly into our erasure (ph) and erasure blades business model in which all of our technologies have a low capital cost component and a special chemical that provides an annuity revenue store. We have been investigating new technologies for this application and we have R&D funds available through our $9 million clean coal contract with We Energies. That funding will provide the opportunity to develop innovative specialty chemicals for this market.

Secondly, we're currently confirming our exclusive commission agreement with NORIT for activated carbon with regard to timing responsibilities to meet the pending schedule Mercury market. As part of this process, we are investigating the potential for taking a financial stake in new activated carbon production facilities that will be needed to meet the expected increase in demand for Mercury control sorbents. A vertical integration of our business could result in a mechanism to increase our margin on future sales of activated carbon.

Thirdly, we have started putting together a program to develop a refined coal product as defined by the utility companies in the American Jobs Creation Act of 2004. This bill provides a tax credit approximately expected to be $5 per ton of coal for an improved coal that results in decreases in emissions of NOx SOx and Mercury. Dr. Nina French has joined ADA to lead this effort. Currently, we are putting together a key partnership to exploit this opportunity that could produce significant revenues for the Company starting in 2009. We hope to have guidance from the IRS on our plan before the end of the year.

The final area involved, the control of the greenhouse gas, carbon dioxide. We believe that because of international pressures, to CO2 will be the next big opportunity for emission control after Mercury. We decided that now is the time to enter this market to develop and demonstrate technology as this market develops over the next decade. We will use the same model that we used successfully to establish our position in the Mercury market. In the second quarter this year, we put together a team of technology experts, equipment fliers and large power companies and submitted a proposal to obtain government funding for the development of a promising new technology. We expect to know whether this project will be funded by the end of the year.

In summary, we continue to advance our business strategy to provide environmental technology and specialty chemicals to the power industry. We are experiencing tremendous growth and excitement in the Mercury control area which is fueling extension of the Company's capability, intellectual property and resources to meet this developing market. In addition, we have initiated activities on several potential new sources of revenue that may diversify our market and our technology offering. We thank you, our shareholders, for your continued support of ADA and we remain enthusiastic about your Company's future. I would now like to open the call up to questions.

(OPERATOR INSTRUCTIONS). Charles Baxter, a private investor.

Mike, you addressed the new contract on the Midwest utility but was described in your recent press release. What is your estimated completion date and beginning of operation of this utility?

Our completion date is -- we are -- that's the one I mentioned that we're scheduled to deliver and install in December. So on that contract, we will recognize all of those revenues. The plant I think will be up and running sometime in 2006.

Would that estimate the first half or second half of the year?

I'm not sure about the exact start-up date for the new plant.

John Theis (ph), Sudbury (ph) Associates.

You mentioned CO2 is the next large opportunity after Mercury and alluded to promising new technology. Is it analogous to the approach that you have been using with Mercury?

We have been looking for the right opportunity and the timing and we think the timing is right and we feel that both from just a pulse on the political pressures around CO2, which are international, and also the interest of the utilities. We have got a lot of utilities interested in participating in some programs. So we think the market is developing. Everything that we do, every product that we will create, because of the nature of our business model, we don't want to compete with hardware against the large equipment suppliers. We will find a way of providing a technology that, if it has got a large hardware component, we will have a partner to provide that hardware but we will find a way that has a continuous revenue source for a key part of that technology that ADA has. So any product we go into, the SOx, NOx, CO2, will all be based on that same model.

Good enough. We will stay tuned. Thank you much.

Steve Santos (ph) with RBC.

It looks like a very good quarter and we thank you. Just a couple of questions. Mike, the new contract that you referred to, you made mention that the equipment that you are providing will have the capacity to handle 6000 pounds a year of the powdered activated carbon. Can you give us any guess as to how much powdered activated carbon you required and what kind of revenue stream that level of or that type of plant might generate for ADA in terms of royalty income?

The equipment was designed for this 6000 tons a year because that was written into the air permit and basically the standard activated carbon delivered is about $1000 per ton. So that is about $6 million a year. I also mentioned in the announcement that the equipment will also be designed to use a lower amount of a new specialty product that We and NORIT have developed for this application and so what -- the equipment has to be capable of meeting what is in the air permit, the utilities held to using those kind of quantities or with the new product, which is a higher cost product with lower concentration, it can use both. So we don't know how that is going to play out, the interface of the technology and the regulation, but just as a broad example, this single plant will produce anywhere from probably $2 to $6 million a year in carbon sales and we get a 10% commission on that.

And this would be somewhat typical of the current design going into the new plant I would think?

Yes. That's the interesting part about this technology that when this project was bid three years ago, we didn't have this new product. Once the contract is awarded, the utility can take advantage of all the technological advances because it's the same equipment, the improvements are coming about in the chemical modifications of the activated carbon. So that is where we're adding value. As we continue to improve the product, even though this equipment was designed and put into a bit three years ago, it will reflect the capabilities of today's technology and in a year, even better technology.

So the revenue stream, 280 80 (ph), could be in the $1 million a year area on that?

It's the 200,000 to 600,000 per year (multiple speakers) commission.

Just another point. With your emissions monitoring business, which comprises a great deal of revenue this quarter, is this in relation to existing Mercury abatement target markets that you're talking to or is this also involving sales to existing plants that are looking for the monitoring devices and whatnot? I would think it would be a much broader market than you're speaking to outside of -- specifically with the Mercury abatement technology.

It is still our powerplant market and we are seeing this work coming from very strongly in the states that have recent regulations. But we are also seeing it from utilities in states that are not currently being regulated that want to put themselves in a position that they will then have the information on their specific plant so that once a federal regulation is in place they will be ready to act. So if across the country, both in regulated, when I say regulated states I'm talking about Mercury regulations and not utility regulations, and others in anticipation of a federal Mercury regulation. I don't know if that answers your question.

I think it doesn't. I guess the question I had is the market for the monitoring equipment could be actually broader than your probable market of Mercury abatement services.

Well, this is more than just monitoring. In fact, the revenues -- the highest source of revenue end up being for some demonstrations of the control equipment. So it is still all focused on demonstrating the -- determining what they're going to need to control Mercury and in many cases demonstrating what the capabilities of our equipment are.

Just one real quick point to conclude on my end. At your annual meeting, I spoke with Jeff Smith and he thought that the resolution of the federal guidelines in court may take two to possibly two and a half, three years. You are kind of thinking that it might be quicker than that. If there some anticipated acceleration of that resolution in court do you think?

I think what Jeff probably combined was the issues around the court -- the legal aspect and then once it gets thrown back to EPA, how long it is going to take within EPA to come up with the regulation. So I think we're talking about the same thing but I think within the year, we hope to have some ruling by the court that tell EPA what to do and they will have to wait and see what EPA responds to that.

I see. That should trigger some incremental additional interest from the industry I would think.

Yes.

Thank you very much, Mike. I appreciate the quarter.

(OPERATOR INSTRUCTIONS). Charles Zwickle (ph), a private investor.

A question on revenue. We are up first quarter, second quarter and half around 40%. We have this rate contract coming in in December for 1.5 million. Why are we expecting for the year only to be up 20% to 30% revenues. Are government contracts smaller in the second half or what is the reason for that or are we just conservative?

This is Mark. Let me answer that. I think part of your expectation there is correct. Some of the scheduling on the government contract work falls off in the second half of the year so there will not be some of that that we experienced last year. Although we expect the pace of the commercial contracts to pick up, those are not in hand yet and we're trying to be conservative and not provide overly optimistic guidance here. So we are still believing that there's going to be healthy growth there but wanted to just alert everyone that depending upon contracts -- receiving those contracts and we have little control over the exact timing of those. We were born in response mode.

There are no further questions. I will now turn the conference back to management.

Again, we thank you for your attention. We appreciate what following the Company and what we hope that you will see over the next few quarters is that we are definitely in this transition mode from these demonstration programs even though the demonstration programs will be here for the next to two three years. You will start to see this step up of commercial sales that will have an impact on our revenues and also provide a strong signal to the regulatory policymakers that commercial Mercury control technology is available and we are willing to supply it. So again, thank you for your attention.

Thank you.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.