Arq Inc (ARQ) 2018 Q2 法說會逐字稿

Good morning. My name is Denise, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Advanced Emissions Solutions Q2 Earnings Conference Call. (Operator Instructions) Thank you. Ryan Coleman, Investor Relations. You may begin your conference.

Thank you, Denise. Good morning, everyone, and thank you for joining us today for our second 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 call is being webcast live within the Investors section of our website, and a downloadable version of today's presentation is available there as well. A webcast replay will also be available on our site, and you can contact the 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 21E of the Securities Exchange Act. These statements are based on information currently available to us and involve risks and uncertainties that could cause actual future results, performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements. These risks and uncertainties include, but are not limited to, those factors identified on Slide 2 of today's slide presentation, and our Form 10-Q for the quarter ended June 30, 2018, 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 is 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. With that, I'd like to turn the call over to Heath Sampson. Heath?

Thanks, Ryan, and thanks to everyone for joining us this morning. Let's begin on Slide 3 and review our second quarter. The second quarter was highlighted by the previously announced June addition of a third-party tax equity investor for an RC facility. This facility is royalty-bearing to us as we expect all future invested facilities to be. And is located at a power plant that has historically burned roughly 3.3 million tons of coal per year. This facility was also one of the 2 previously discussed facilities that had entered the installation phase. Given successful addition, there are plans to move more facilities into the installation phase, which I'll discuss in greater detail later in the call. We also continue to return capital to our shareholders. Our quarterly dividend program and share repurchase authorization combined to return $12.6 million during the second quarter, bringing the first half of the year total to $19.4 million.

This shareholder return program remains a commitment as we declared our third quarterly dividend yesterday, which will be paid on September 6 to shareholders of record at business close on August 20. Our narrow focus on supporting Tinuum continues to translate in the form of higher distributions and royalties, which in turn bolstered our cash position despite the cash used on share repurchases and dividends during the first half of the year. To further increase our future cash levels, we took the proactive restructuring steps during the quarter to continue to realign our business with our newly identified strategic focus. These steps included a workforce reduction as well as nondiscretionary spending reductions. While these restructuring measures led to some charges during the second quarter and will result in charges during the third quarter, they are necessary steps to be taken to ultimately drive -- arrive at our stated cash cost goal of $8 million to $10 million per year, net of contributions from chemical wins.

Overall, I'm pleased with the progress made during the first half of the year. We've taken great strides to right size our cost structure to align to our renewed priorities. Bolstered distributions and royalty payments with an additional RC facility and to return much of the value to shareholders through our capital return efforts. I'll provide additional detail later in the call, but first, I'd like to turn the call over to our CFO, Greg Marken, who will review our second quarter and first half financial results. Greg?

Thank you, Heath. Let's start on Slide 5 to review our financial results. Our cost containment efforts coupled with stronger distributions from Tinuum continued to facilitate the rise in our cash levels. As of June 30, 2018, cash and cash equivalents totaled $32.2 million, which is a $1.5 million increase from December 31, 2017. This increase is inclusive of the $19.4 million utilized during the first six months of the year to pay our 2 quarterly dividends as well as repurchase common shares under our authorized share repurchase program. Total distributions from Tinuum were $14.7 million during the second quarter of 2018 and $28.2 million during the first half of the year. These represent increases of 40% and 12%, respectively from the comparable periods in the prior year. The increases in distributions were driven by 4 additional invested Refined Coal facilities contracted with tax equity investors during the second half of 2017 and the first half of 2018. Total revenues for the quarter were $4.3 million, a decrease from $27.3 million during the second quarter of 2017. Revenues for the first half of 2018 totaled $8.2 million, compared to $36.5 million during the first half of 2017. The year-over-year declines in revenue were primarily due to the recognition of all remaining equipment systems effective with the adoption of the new revenue accounting standard, ASC 606 through an opening adjustment to equity on January 1, 2018. The decreases in revenue were partially offset by higher royalty earnings from Tinuum. Royalty earnings during the second quarter were $3.5 million, an 89% increase from the prior year, while royalty earnings during the first half of 2018 totaled $6.8 million, an 86% increase from the first half of 2017. The increases were driven by the aforementioned 4 additional invested Refined Coal facilities, all of which are royalty-bearing to the company. As a reminder, we expect for all future RC facilities to be royalty-bearing. Operating costs during the second quarter, exclusive of cost of sales, were $5.1 million. This represents a year-over-year increase of $1.1 million, significantly due to the restructuring charges. These restructuring charges were largely payroll and benefit costs related to severance payments and workforce reductions. As Heath briefly mentioned, these steps were necessary actions to be taken in accordance with our new strategic priorities to align our personnel with the current needs of our business. These changes, net of contributions from previous chemical wins are allowing us to progress towards our $8 million to $10 million annual cash cost. Consolidated pretax income and net income for the quarter were $13.9 million and $15.3 million, respectively. These represent year-over-year increases of 39% and 139%, driven by higher distributions and royalties as well as lower tax expense. The higher net income levels coupled with the lower number of common shares outstanding resulted in fully diluted earnings per share of $0.75 in the quarter, a significant increase from $0.29 in the second quarter 2017. I'll now turn the call back over to Heath to walk through our go-forward strategy.

Thanks, Greg. I'd 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, continued to maintain the thesis that the Refined Coal environment as a result of some of the significant developments last year is supportive of obtaining future third-party tax equity investors. We've seen the cadence of progression in our discussions with existing and potential investors and remain optimistic in Tinuum's ability to secure additional investors for remaining units, and we are confident in their ability to obtain additional investors in 2018.

Let's move on to Slide 8. This slide shows the current invested and operational facilities versus the noninvested facilities that are not operating. As of June 30, Tinuum has leased or sold 18 facilities with remaining 10 facilities either installed and awaiting the tax-equity investor or waiting for a utility and a tax-equity investor. As shown on the right side of the slide, there's still sufficient potential capacity for Tinuum to substantially increase production, provided a substantial number of the remaining facilities can be leased or sold, as is our expectation. In the prior quarter, we discussed the proactive steps Tinuum was taking to commence engineering and construction of 2 Refined Coal facilities in anticipation of future contract closures. For clarity, fully installed facilities are located at utility and are simply awaiting the tax-equity investor. Uninstalled facilities require installations costs, often between $4 million and $6 million before they can be fully operational once the tax-equity investor is secured. While some already installed facilities are available, the reality is that current discussions continue to indicate to us that different tax-equity investors prefer facilities to be at particular utilities for various operational and risk management purposes. The additional invested Refined Coal facility with a third-party tax equity investor in June involved 1 of the 2 facilities Tinuum had begun to install during the prior quarter.

We believe this contract closure serves as a testament to the prudence of taking these proactive steps. As a result, and to give us the best chances to secure investors for the remaining facilities, there are further plans to begin engineering and construction on additional facilities. While bearing a portion of this upfront cost does lower projected short-term cash flow somewhat, we believe it is worth the cost.

While there's no guarantee that we will secure tax-equity investors for these facilities, our confidence in the market lends us the conviction that Tinuum will be able to secure tax-equity investors for these idle facilities. We and Tinuum continue to work on a daily basis to obtain these additional tax-equity investors, and I'm encouraged by the progress being made and the positive impacts, we believe, it will have related to shareholder value in 2018 and beyond.

Slide 9 provides the quarter-by-quarter breakdown of the Tinuum invested and retained tonnage volumes. As a reminder, retained tonnage is tonnage Tinuum operates on its own members' behalf. Tinuum pays the operating expenses, but its members also receive the tax benefits. You'll see that the 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 initiative 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 non-royalty bearing facilities, a change that occurred during the middle of 2017. And as Greg mentioned, all 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 June 30, 2018, we're expecting between $225 million and $250 million in cash flows, net of taxes and interest expense through 2021. This figure is based on 18 currently invested facilities and does not reflect the expectation of additional future facilities becoming operational and invested with a third party. Any future invested facilities, which is the main focus of ours, would add to these current expectations.

Flipping to Slide 13. This shows our trailing 12 months of capital return to shareholders. Since the inception of our capital allocation program during the second quarter of 2017, we have paid out $25.9 million in the form of dividend while utilizing an additional $25.5 million to repurchase common shares. Our quarterly dividend program alone amounts to roughly $21 million returned to our shareholders each year.

As we have continued to reiterate, distributing value to our shareholders remains a top priority, and we are -- and we will opportunistically evaluate ways to drive further shareholder value.

Additionally, as of June 30, 2018, the company has repurchased approximately 2.5 million shares or approximately 11% of the shares outstanding as of March 31, 2017 for a cumulative total of $25.5 million.

Finally, since the inception of the capital allocation program and returning $51.4 million to shareholders, or over $2.30 per share as shown on Slide 13, the company's stock price has still increased approximately 19% during the same time period.

Let me conclude today, again, by discussing our 2018 goals and priorities on 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 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 capital allocation program to distribute and create value for our shareholders; and finally, evaluating alternative options to monetize tax assets and build upon our existing platform. On the issue of tax assets, I'd like to mention that the tax asset protection plan as voted on at the -- on the June 19 shareholder meeting was extended through December 2019. As a reminder, this is a critical protection so as not to trigger a change in ownership as defined by the IRS. This allows us to preserve the value of the tax-deferred assets on our balance sheet and evaluate ways to monetize them some time in the future. Our first half of the year was marked by progress towards each of these stated priorities, and I'm excited to build on them in the second half of the year. With that, we'll open the line for questions. Operator?

(Operator Instructions) Your first question comes from Sameer Joshi with H.C. Wainwright.

Starting off with the other unit that was under construction, what are the total money spent on that? And what is the expected time line of that coming online and then being sold?

Yes. So the cost for that was somewhere between $4 million to $6 million. It will be consistent with that. It's right -- we're about in the -- closer to the $6 million range on that one. It's a larger facility. Well, we're TBD on the timing. We -- on that specific one we're looking forward to getting it closed as fast as possible. Like I said, we do expect additional closures in 2018. That may be one of them, or it may be one that we close later than that. So we won't give individual guidance on individual facilities. We just do it on a macro basis. And I feel good about getting more closed. So hopefully soon on that one too.

Okay. You also mentioned there are some other -- like you start construction on certain facilities, but then investors may be interested in certain other geographies. How do you decide which location to start construction on?

Yes. The first thing is to make sure that we have partnered with a utility that's large enough. We're -- again, we're looking for around that 4 million tons per year, that's ideal. Sometimes, it's a little bit less than that. Sometimes, it's a little bit more than that. So finding a large enough utility. And then a utility that ensures that we'll have a consistent burn for the remaining life of 2021. And then the second item is, from the investor's standpoint, to ensure that utility is a good counterparty. So when we identify that utility, we're making sure that it's a solid utility, and then we partner with that investor to ensure that they are comfortable with that utility. So it really is a back-and-forth collaborative effort with us, the investor and the utility as a whole. That's how we select the ones that we go to.

Okay. So I think, as I understand, you do have identified an investor for this 1, remaining 1 facility that is under construction?

Yes. So we have other ones that are also under construction, and we have utilities -- I mean, sorry, investors circled for those. The second one that I talked about, we do not have an investor for that one yet. We have a few that are looking at it. So I hope to update you in -- as the months progress that we've got 1 circled for that remaining one that we just finished up with. But again, I may be repeating myself, we have other ones that are under construction, and we do have investors circled for those, which is why I'm optimistic about getting more closed in 2018.

Understood. I get the landscape. One of the things I noticed was that the expected future cash flows from the RC business, that range has been reduced from $250 million to $275 million down to $225 million to $250 million, whereas in the quarter, there was around only $15 million, $17 million of cash flow from these. So is there any other reason than that?

There are give and takes in business plans at the Tinuum level, purchases, the installations, when those occur, and we don't yet have investors contracted. And so that obviously reduces the known or expected future cash flows at this time. But obviously, with the inflows to us during the quarter offset by the new facility, we ended up in the new range.

Yes. Just to put a little color on what Greg said, that -- normally, as you've seen each quarter that cash flow is just decreased by the distributions we got. But in this quarter, because of the installations that we are making and because of some other operational commitments we have made to ensure that we have a future ability to serve our customers, those cash flows are down a little bit relative to what they've been in the past, but all in anticipation of ensuring that we get more customers and produce more refined coal. So I don't view it as a negative. I view it as a -- as an investment ensuring that we continue to grow.

(Operator Instructions) There are no further questions queued up at this time. I'll turn the call back over to Ryan -- sorry, Heath Sampson.

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

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