Arq Inc (ARQ) 2018 Q1 法說會逐字稿

Good morning. My name is Andrew, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Advanced Emissions Solutions, Inc. Q1 2018 Earnings Call. (Operator Instructions) Thank you. Ryan Coleman, you may begin your conference.

Thank you, Andrew. Good morning, everyone, and thanks for joining us today for our first quarter 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 in 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 Group for IR support at (312) 445-2870.

I'll remind you today that the presentation and remarks made 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, those factors identified on Slide 2 of today's slide presentation, in our Form 10-Q for the quarter ended March 31, 2018, 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 other 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 Form 10-Q and the GAAP references in the financial statements. So with that, I'd like to turn the call over to Heath Sampson. Heath?

Thanks, Ryan, and thanks, everyone, for joining us this morning. Let's begin on Slide 3 and review some of the highlights of our first quarter. We continue to return value to shareholders through the ongoing execution of our shareholder return initiatives. Between our quarterly dividend and the recently expanded stock repurchase plan, we returned $6.8 million to shareholders during the first calendar quarter. Our first quarter dividend was paid on March 8. And yesterday, we declared our second quarter dividend to be paid on June 8.

Distributions from Tinuum remains strong and in line with our expectations, in total, $13.5 million for the quarter. While this represents a slight decrease compared to the last year on the surface, first quarter distributions 1 year ago included a prepayment to Tinuum, which was subsequently distributed to its equity members. Absent the prepayment distribution in the prior year, first quarter distributions from Tinuum would've increased year-over-year. In addition, and consistent with our renewed priorities moving forward, we continued to align our resources in the most efficient manner. We reduced our indirect operating cost structure by 3% year-over-year, and are making progress toward our $8 million to $10 million per year cash cost structure, net of contribution from chemical wins. These changes have sustained and increased our strong cash position, which continues to expand despite our shareholder distribution, and grants us the flexibility to both drive shareholder returns through repurchases and dividends.

Looking ahead, our first priority will continue to be supporting Tinuum and identifying tax equity investors for the remaining Refined Coal facilities. We have been pleased with the recent cadence of discussions with current and potential investors in our pipeline. And as a result, Tinuum has taken a proactive measure to install 2 [idle] facilities in anticipation of future closures. I'll provide more detail on this front later in the call.

Overall, we continue to feel very good about our momentum moving forward. We believe the Refined Coal backdrop is conducive to future closures, and we are taking the proper steps to focus on lean efficiency and driving return for our shareholders.

I will now turn the call over to Greg Marken, who will review our first quarter financial results.

Thank you, Heath. Let's start on Slide 5 to review our financial results. Our lean operating cost structure, coupled with strong distributions from Tinuum, continue to sustain and grow our robust cash position. As of March 31, 2018, cash and cash equivalents totaled $34.8 million, a $4.1 million increase since December 31, 2017, which is inclusive of the $6.8 million utilized in our dividend program and expanded stock repurchase plan during the period.

Total distributions from Tinuum were $13.5 million during the first quarter, a slight decrease from the $14.7 million in the comparable period 1 year ago. However, as Heath mentioned, this decrease was due to a lease of an RC facility that included a prepayment to Tinuum, which was then distributed to its equity members during the first quarter of 2017. Absent that distribution, total distributions would have been 13% higher year-over-year, driven by an increased number of invested Refined Coal facilities.

Total revenues for the first quarter were $3.9 million compared to $9.1 million in the first quarter of 2017. The decrease was driven by lower chemical revenues as well as lower equipment sales revenues, which will be de minimis moving forward, as we have completed our contractual obligations for those legacy contracts. These decreases were partially offset as royalties nearly doubled to $3.2 million, an increase of 84%. Similarly, the increase in royalty earnings was due to 4 additional royalty bearing units invested during the entirety of Q1 2018 compared to the first quarter of 2017. As a reminder, we expect for all future RC facilities to be royalty-bearing to the company.

Also, as mentioned on the prior earnings call, the company adopted a new revenue recognition standard on January 1, 2018. As a result of this change, all remaining balances of material equipment sales contracts were recognized through an opening balance sheet adjustment, and will not impact revenues or margins in 2018. Thus, we do not expect material equipment revenues in the future, as utilities have already purchased and installed ACI and DSI equipment systems to assist in achieving compliance with regulatory standards.

We are also continuing to evaluate our overall operating cost structure and making adjustments to best align our resources with our strategic priorities. Indirect operating expenses for the first quarter totaled $5 million, a decrease of about 3% from the prior year. Additionally, last week, we announced leadership changes as well as a planned workforce reduction to align the company's personnel resources with the current needs of the business. These changes, coupled with EC contributions, will set the stage to achieve our cash cost goals on an annualized basis.

Pretax income for the quarter totaled $10.2 million, a 27% decrease from $14.1 million 1 year ago. The decrease was driven by lower equity earnings, equipment sales and chemical revenues, partially offset by higher royalties. Net income for the first quarter totaled $7.7 million compared to $8.7 million 1 year ago. The decreased change compared to pretax income year-over-year was due to lower tax expense during the first quarter of 2018 compared to the same period in 2017, most significantly impacted by the reduced federal tax rate.

I'll now turn the call back over to Heath to walk through our go-forward strategy.

Thanks, Greg. I would like to take a moment to discuss Refined Coal and review our strategy before taking your questions.

Let's turn to Slide 7 to discuss the Refined Coal backdrop. We, along with Tinuum, continue to maintain the thesis that the Refined Coal environment has resulted from significant development earlier this year and supportive of obtaining future third-party tax equity investors. We've seen the cadence of progression or discussion with existing and potential investors, and remain confident in Tinuum's ability to secure additional investors.

Let's move on to Slide 8. This slide shows the current invested and operational facilities versus the non-invested facilities that are not operating. As of March 31, Tinuum had leased or sold 17 facilities, with the remaining 11 facilities either installed and waiting a tax equity investor or waiting for a utility and a tax equity investor. Again, the most significant challenge here does not necessarily lie within identifying the utilities, but rather in identifying and in securing tax equity investors.

As shown on the right side of the slide, there's still potential for Tinuum to substantially increase production, provided substantial number of the remaining facilities can be leased or sold, as is our expectation. As a result of that expectation, and as briefly mentioned earlier, Tinuum has decided to take the proactive measure of installing 2 Refined Coal facilities in anticipation of obtaining future tax equity investors for those Refined Coal facilities. Consistent with historical experience, Tinuum expects installation costs to be between $4 million and $6 million per facility.

While there are certainly no guarantees that we will secure investors for the facilities, as evidenced in the past, we would not be taking this proactive step and deploying this cash if we were not confident in future closures. So while using cash today will impact our stated future cash flow guidance as we bear part of the installation costs, we believe it's prudent to prepare today for future operations.

Slide 9 provides the quarter-by-quarter breakdown of Tinuum operating volumes and retained tonnage. As a reminder, retained tonnage is tonnage Tinuum operates on its own B members' behalf. Tinuum pays the operators' expenses, but its members also receive the tax benefits. You'll see that a sequential tonnage has increased, as it was positively impacted by the increased number of invested facilities. These increases and related increases in cash payments for Tinuum will continue to allow us to execute our capital allocation initiatives as we collect future cash flows. Our top priority, again, is to assist Tinuum in obtaining more investors as fast as possible, and build on the cash payments we receive through 2021.

Slide 10 shows the royalty versus non-royalty schedule. As a reminder, the number of royalty-bearing facilities is greater than the non-royalty-bearing facilities, a change that occurred in the middle of 2017. Again, all our future invested RC facilities are expected to be at power utilities that are royalty-bearing to the company.

Let's continue to Slide 12, where you'll see our updated expectations for future cash flows through 2021. As of March 31, 2018, we are expecting between $250 million and $275 million in cash flows, net of taxes and interest expense from Tinuum through 2021. This figure is based on the 17 currently invested facilities and does not reflect the expectation of additional future RCs becoming invested with a third party. Any future invested facilities, which is our main focus, would add to these levels. Again, this range was recently raised by more than 20% as of December 31, 2017, to reflect the 2 additional facilities in November of last year as well as the effects of corporate tax reform.

Flipping to Slide 13. This shows our trailing 12 months of capital returned to shareholders. Over the past 4 quarters, we have paid out $20.8 million in the form of quarterly dividend payments. We utilized an additional $18 million to repurchase shares through our stock repurchase plan in Dutch tender offer. As we've guided on previous calls, returning capital to shareholders continue to be a priority moving forward, and we are opportunistically evaluating additional ways to just do that. Subsequent to March 31, 2018, the company has repurchased approximately 392,000 shares for $4.3 million.

Let me conclude today by, again, discussing our 2018 goals and priorities for Slide 14. We remain focused on helping Tinuum obtain tax equity investors for its remaining RC facilities; helping Tinuum ensure operational performance to allow production and sale of Refined Coal by tax equity investors, while also helping to ensure the stickiness of RC investors through strong customer relationships; streamlining and optimizing the deployment of EC chemical revenues to support our RC efforts and public platform; executing against our balanced capital allocation program to distribute and create value for shareholders; and finally, evaluating alternative options to monetize tax assets and build upon our existing platform.

Our first quarter of the new year is marked by progress toward each of these priorities, and I'm excited to build on this throughout the year. I'd like to, once again, thank our shareholders for your ongoing support.

With that, we'll open the line for questions. Operator?

(Operator Instructions) There are no questions at this time. I will now turn the call back over to the presenters.

Well, thanks, again, everyone, for your time today and your continued support. I look forward to updating you all on the progress. Have a great day, everyone.

This concludes today's conference call. You may now disconnect.