Title

Presentation

Operator: Hello, and welcome to the Advanced Emissions Solutions Q4 2022 Earnings Call. My name is Lauren, and I will be coordinating your call today. . I will now hand you over to your host, Ryan Coleman with Investor Relations to begin. Ryan, please go ahead.

Ryan Coleman: Thank you. Good morning, everyone. Thank you for joining us today for the fourth quarter and full year 2022 earnings results call. With me on the call this morning are Greg Marken, Chief Executive Officer, President and Treasurer; as well as Morgan Fields, Chief Accounting Officer. This call is being webcasted live within the Investors section of our website and the downloadable version of todays presentation is available there as well. A webcast replay will also be available on our site. 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 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, in our Form 10-K for the year ended December 31, 2022, 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 retain circumstances or for any other reason.

In addition, it is especially important to review the presentation and today’s remarks in conjunction with the GAAP references in the financial statements. With that, I’ll turn the call over to Greg.

Greg Marken: Thank you, Ryan, and thanks to everyone for joining us this morning. This is our first earnings call since the closing of the Arq acquisition, and as such, I’d like to extend a special welcome to our new team members from Arq as well as any new shareholders who are joining on today’s call. We are truly excited as we begin executing our new plan to transform and capitalize on the complementary nature of our combined assets and teams to become a diversified, leading environmental technology company. I’ll cover more on this transformative plan, which will begin in 2023, but first, I’d like to review our fourth quarter and full year 2022 results. We delivered a solid fourth quarter of consumable sales and production at Red River, which culminated in a record full year revenue performance, exceeding our original expectations for 2022.

Consumables revenue for the quarter was $23.4 million compared to $23.2 million in the prior year. Our fourth quarter production and sales revenue remained strong. However, the volumes were not as strong as what we had seen in prior quarters with the elevated average natural gas pricing experienced early in the year. The declining natural gas prices during much of the fourth quarter lowered demand from our power generation customers, which we have continued to see during the first quarter of 2023. Our full year total revenue of $103 million represents a year-over-year increase compared to the prior year, despite $14 million of royalties from our Tinuum investments in 2021 that did not occur in 2022 due to the conclusion of the Section 45 tax credit generation period at the end of 2021.

Looking solely at our consumables revenues, they increased 20% year-over-year due to a combination of strong demand from power generation customers, pricing initiatives and product — product mix improvements. For the quarter, we reported a net loss of $3.2 million compared to net income of $5.8 million in 2021. We recorded an adjusted EBITDA loss of $1.2 million compared to adjusted EBITDA of $9.1 million in 2021. The variance in year-over-year results is primarily the effect of the wind down of our Tinuum investments in 2021 and additional costs in the current year related to our strategic process. Our Red River production volume during the quarter was lower than anticipated due to incremental unplanned downtime for maintenance. However, our full year 2022 production volume, including the impact of blended carbons, exceeded our overall expectations.

While our operations may continue to remain constrained at various points by tight manufacturing capacity, sourcing of product from third parties and the overall inflationary environment, we continue to improve our inventory position, both from an overall volume and product mix perspective. We ended the year with a strong cash position of $76.4 million, which will facilitate our capital expenditure plans for 2023. Those efforts will be focused on growth projects related to the Arq acquisition as well as ongoing organic investment in our manufacturing assets to continue to enable high production and operational rates from those assets. As a reminder, in September, we announced that we had reached an agreement to sell Marshall Mine to Caddo Creek Resource company, subject to certain closing conditions.

This transaction will allow us to continue to derisk our balance sheet as we focus on our future initiatives related to the Arq assets and integration. Upon closing, the asset retirement obligation and other liabilities, which totaled approximately $4.9 million as of year-end, will be removed from our balance sheet. In addition, we expect a portion of our restricted cash to be released as that asset retirement obligation goes away. We continue to expect that the Marshall Mine transaction will close during the first half of this year. Turning to our outlook for 2023. We expect a strong top line as we balance internal actions around pricing initiatives and a diverse sales and commercial pipeline, though we acknowledge that persistently lower natural gas prices could hinder demand and revenue performance from our power generation customers and therefore, could also impact other markets.

Also of note, our regularly scheduled plant maintenance activity that occurs every 2 years is scheduled to take place in April. The associated downtime is expected to last approximately 2 weeks, which is normal for a maintenance exercise of this nature. As we have planned for this downtime, we will ensure that we have sufficient inventory on hand to continue to meet customer demand and minimize any disruption during this period. During 2023, we expect that our margins will continue to be pressured by the higher cost per unit of production as a result of the routine plant turnaround, external sourcing of supplemental carbon, albeit at reduced volumes, as well as inflationary aspects on a number of operational costs. We are attempting to alleviate these manufacturing cost pressures through increased average selling price and positive changes in our product mix, as well as targeting markets and end-use customers with improved economics.

We continue to be encouraged by our ability to realign contracts with current market conditions when possible, and as a result, our ASP continues to trend higher. As mentioned, we are also commencing capital projects to modify the Red River and Corbin sites in order to enable commercial-scale GAC and Arq powder production. In addition, we are taking other technical and commercial steps to position the combined business for success, when production and sales of GAC products derived from Arq powder ultimately begin. We believe these ongoing investments and efforts will lead to a more diversified commercial portfolio with a path towards improved and sustainable economic performance for our business on a long-term basis. I’ll discuss these initiatives in more detail later on the call.

And finally, for the full year, we are forecasting approximately $106 million in revenue and an EBITDA loss of roughly $6 million, excluding onetime acquisition costs. With that, I will turn the call over to Morgan to review our financial performance in greater detail.

Morgan Fields: Thank you, Greg. Slide 4 provides a snapshot of our fourth quarter and full year financial performance. Fourth quarter revenue and cost of revenue were $23.4 million and $17.5 million, respectively, compared to $25.8 million and $16.9 million in 2021. Revenues and — revenues and cost of revenues for the full year were $103 million and $80.5 million, respectively, compared to $100.3 million and $65.6 million in 2021. The increase in revenue was primarily driven by higher sales of consumable products as well as successful pricing initiatives, which were partially offset by the nonrecurrence of royalty earnings from Tinuum investments that we recognized in 2021. Product volumes in 2022 were higher in power generation, primarily due to higher natural gas prices compared to the prior year, which contributed to increased demand for our products, although that benefit faded in the fourth quarter as natural gas prices began to decline.

Fourth quarter, other operating expenses were $9.3 million compared to $8.1 million for the fourth quarter of 2021. Other operating expenses for the total year totaled $34.6 million compared to $29.9 million in the prior year. The increase is mainly the result of higher legal and professional fees associated with the company’s strategic review process as well as the gain on the change in estimate for the asset retirement obligation that occurred in 2021. This was partially offset by the lower payroll and benefits expense. Fourth quarter earnings from equity method investments totaled $3 million compared to $6.8 million in the prior year. For the full year, earnings from equity method investments totaled $3.5 million compared to $68.7 million in 2021.

The decline was the result of all remaining invested refined coal facilities reaching the end of their tax credit generation period as of December 31, 2021. The company does not expect any material distributions from Tinuum investments going forward. The company recognized $0.2 million of income tax expense for the fourth quarter and full year 2022 compared to income tax expense of $1.7 million for the fourth quarter of 2021 and income tax expense of $15.7 million in the full year 2021. Fourth quarter net loss was $3.2 million or $0.17 per diluted share compared to positive net income of $5.8 million or $0.31 per diluted share in the prior year. The company recorded a net loss of $8.9 million or $0.48 per diluted share during the full year compared to a positive net income of $60.4 million or $3.27 per diluted share in 2021.

Fourth quarter adjusted EBITDA was a loss of $1.2 million compared to a positive $9.1 million in the prior year while full year adjusted EBITDA was $1.3 million compared to $84.9 million in the prior year. The declines in net income and adjusted EBITDA were again due to lower earnings from equity method investments as a result of the wind down of the Tinuum investment. Cash balances as of December 31, including restricted cash, totaled $76.4 million compared to $88.8 million as of December 31, 2021. As of December 31, 2022, the company’s only debt outstanding were finance lease obligation, which totaled $4.6 million. Full year CapEx was $9.5 million compared to $7.5 million in 2021. We anticipate an elevated level of CapEx in 2023 between $40 million and $45 million, driven by enhanced capabilities to enable future GAC production and amounts for the planned plant turnaround as well as the completion of certain planned projects, that were started in 2022 and are scheduled to be completed during the turnaround.

As Greg mentioned, we expect the sale of Marshall Mine to close during the first half of the year. As previously discussed, we anticipate paying roughly $2.4 million to Caddo Creek, subject to certain adjustments, which will eliminate the asset retirement obligation from our balance sheet and remove all future cash outflows associated with the reclamation of the mine. We also expect a portion of our restricted cash to be released upon closing of the transaction. Lastly, upon the completion of the Arq acquisition, we expect to retain approximately $86 million of our existing federal tax credits, which may be — utilized to offset future federal tax payments that we may owe as the business grows in the coming years. I’ll now turn the call back to Greg.

Greg Marken: Thanks, Morgan. Slide 5 again highlights the synergistic nature of the combined ADES and Arq businesses. Pre-acquisition, ADES was a top 3 producer of activated carbon products in North America with the ability to potentially serve an estimated 35% of the activated carbon market with our lignite-based portfolio of products. Post-acquisition, utilizing both ADES’s existing lignite-based feedstock and Arq powder as a bituminous-based feedstock, the combined company will be well positioned to provide activated carbon products that serve more than 80% of the North American activated carbon markets, and we’ll do so through an expanded focus in Granular Activated Carbon, or GAC products, which will generally provide higher value and higher-margin opportunities.

We will benefit from our strong existing customer base, and we will be able to pursue new, diverse and high-growth end markets served by both powder and GAC products. This diversification of our product offering will mitigate longer-term headwinds that our existing lignite-focused business would otherwise encounter, specifically within the declining coal-fired power generation market. As such, this acquisition provides us with a longer-term, sustainable and diversified product mix and facilitates participation in higher-margin activated carbon products and end markets. In addition, we expect the acquisition to yield a competitive advantage via product performance, longer-term sustainable product cost and environmental benefits compared to other activated carbon producers.

The competitive value of securing a high-quality domestically sourced feedstock that is cost competitive and vertically integrated into the combined operations — and that has been shown to create high-performance products is significant. We will be the only North American activated carbon manufacturer that controls 100% of of its primary feedstock needs, both through our existing resource operations as well as through the access to Arq powder. Further providing a platform for long-term success is the fact that Arq’s composition and processes for converting coal waste into Arq powder are patent protected. We believe that the combination of our existing technical, operating and sales capabilities presents reduced execution risk as we enhance the production capabilities of the business and transition to producing a broader range of products.

Our proven manufacturing assets, product technology, applications expertise, sales channels and customers within the activated carbon markets, when combined with Arq’s patented feedstock, Corbin facility and access to nonactivated carbon markets, provide a platform to transform our existing business as we know it today. And finally, Slide 6 provides our outlook and key milestones for 2023. First and foremost, we will continue to operate our Red River plant as we have historically while simultaneously looking to continue to grow and improve our existing business. We are focused on maintaining high renewal rates with existing GAC customers being selective within our bidding process and aligning our new contracts with market conditions to maximize our topline opportunities.

As it relates to our acquisition of Arq, our first priority will be the integration of the Arq team, assets and operations. We are pleased with the integration efforts to date and are encouraged by the enthusiasm of our teams to begin executing our combined transformative business plan. Operationally, our key focus will be on commencing the capital work to optimize both the Corbin and Red River facilities for industrial scale production of Arq powder and GAC products and developing the customer and sales channels entry into the GAC market. The most significant of these modifications relates to the Red River plant and includes the installation of shaping and heat treatment processes, enabling the processing of bituminous-based feedstock to manufacture new and higher-value GAC products.

We estimate that these 2023 growth-focused capital expenditures related to the initial phase of the business plan will be approximately $25 million to $30 million. It is important to note that PAC production at Red River and our deliveries to existing customers will not be interrupt — interrupted by these capital improvements. Our focus will also be on securing lead customers and building our sales channels within the North American market for both GAC and other emerging products. We expect to undertake further product testing in all of these areas, which we believe will provide an opportunity to capitalize on the expanded capabilities in 2024 when the initial capital improvements are completed. Financially, for the full year 2023, we expect to generate roughly $106 million of revenue and an EBITDA loss of roughly $6 million, excluding onetime costs associated with the acquisition.

To wrap up, we are very excited about the combined company and the opportunities ahead of us to meet the growing demands of the North American activated carbon market. The combined company will be able to pursue in market served by both powder and granular activated carbon products and will be only — completely vertically integrated, activated carbon provider from feedstock to distribution. The diversification within our activated carbon markets and the ability to compete in other markets, where our — environmentally beneficial products can be used in a variety of critical markets, will yield a diversified and materially stronger integrated business platform going forward. The result is a truly differentiated environmental technology company with new growth avenues and a path towards long-term sustainable profitability.

With that, I’ll turn the call back over to our operator to move us to Q&A.

Operator: . Our first question comes from Gerry Sweeney from ROTH Capital.

Gerard Sweeney: You touched upon this a little bit, but just — I’m curious about pricing and contracts. Could you give a little bit more detail on — maybe the contract, how often they roll? And do you have any contracts that were maybe longer dated, maybe 1 to 2 years that maybe — that have under market pricing that you could see improvement across, and — if possible?

Greg Marken: Yes. So generally, Gerry, the contracts within our portfolio are about 3 to 4 years in duration. So — on an average basis, I would say, we’d always have about 25% of the portfolio turning just based on kind of those numbers. When we think about the portfolio and — look at what we think might be current market pricing for the various products and those sort of things, I’d estimate that we probably have about 15% of our overall portfolio that may be below today’s existing market pricing — that — as those contracts come up, we’ll definitely work to renew — towards the market environment that we’re operating in.

Gerard Sweeney: Got you. And do all 15% of those contracts renew this year or some of it this year, next year, et cetera?

Greg Marken: I would say, some of those are a little further out, but there’s a good portion of those that will be this year, Gerry.

Gerard Sweeney: Got you. Okay. Switching gears, Marshall Mine, I think you had about $10 million of unrestricted cash — or I’m sorry, restricted cash on the balance sheet associated with — I’m not sure if all of that $10 million is Marshall Mine. But I’m curious as to how much could come unlocked this year? And if there’s other sort of gauge or milestone that unlock more in the future?

Morgan Fields: Yes, Gerry, we estimate that probably 50% to 70% of that restricted cash will come off as that restriction will be freed up when we close this transaction. To get to that point, we’re still going through all the regulatory approvals for that transaction. So we still think that’s going to close in the first half of 2023.

Gerard Sweeney: Okay. Got you. And then maybe a final question. Arq, I think it’s a great acquisition, vertically integrate you, opens up a larger addressable market, higher value market, et cetera. So one question, but maybe really 2 in actuality. Just curious as to when you can maybe start seeing some revenue from some of the Arq products? Now granted — this isn’t all activated carbon related as we’ve talked about in the past, but I just wanted to get an idea when some revenue may start to hit the income statement from Arq-related production of — the Arq powder?

Greg Marken: Right. So I think the plan, Gerry, is to materially complete most of the CapEx to enable us to start producing some product very early in the year next year out of the Corbin facility, and the Red River CapEx is going to take longer. So the first thing that we’re going to do this year is really work on the additional testing opportunities that we have to bring some Arq additive-based products to market. The desire would be to do that in the early portion of 2024, and then later in 2024, probably around the fourth quarter time period as long as all the capital expenditures at Red River go according to the timelines that we anticipate. And that’s going to be impacted by permitting and those sort of things that are out there, but that’s when we would expect to start generating some revenue from the GAC-related products.

Ryan Coleman: Greg and Gerry, We’ve also continued to include an invitation to submit questions ahead of time at the bottom of the conference call announcement press release and in yesterday afternoon’s earnings press release. Thank you to those of you who sent in questions, and we continue to invite listeners to submit questions in future quarters. One question that we received was about power generation customers and natural gas. What are your expectations for power generation customers and the overall PAC business, if natural gas pricing remains low? And how much exposure do you have related to this market?

Greg Marken: So Ryan, as we’re aware, natural gas pricing has the potential to materially impact the demand and products that are needed by our power generation customers. Contrary to the expectations from various third parties as well as our own expectations during the third and fourth quarters of last year, natural gas pricing has not remained at the anticipated pricing levels. Additionally, we’ve seen further declines here in the first quarter. This kind of goes back to exactly why we did the Arq transaction. This provides a bituminous-based feedstock that allows us to diversify in the markets in general, but then also to transition to more of a GAC-focused business on a longer-term basis, which will help us have a broader earnings profile and more sustainability. As we think about the current year, if natural gas does remain low, it will impact demand just as it positively impacted demand really for the last 1.5 years in those power generation customers.

Ryan Coleman: And then a final question. Can you talk a bit about the combined R&D efforts for the company? Where do development efforts stand for the Colloidal Carbon Product for soil and groundwater remediation?

Greg Marken: Okay. I’ll take both of those, Ryan. On a combined basis, we’ve begun the integration of our technology teams and have been very pleased with the power — of combining the strengths of the respective company’s technology efforts. The culture of tackling technology opportunities from idea to lab prototyping to customer engagement by both groups is very similar and focused. Specifically related to the development of our Colloidal Carbon, we have completed the development of our generation 1 product and have secured a manufacturing partner to produce commercial scale quantities. On a market front, we’ve also engaged various entities that are active within the marketplace, and we are prepared to provide them product that has been produced to meet their testing and treatment schedules.

Ryan Coleman: Thanks, Greg, and thanks again to everybody who submitted questions. I’ll turn the call back to Greg for any closing remarks here.

Greg Marken: Thank you, and thanks to everyone for joining the call this morning. We are eager to begin executing on our key actions for 2023 and plan to provide updates on these initiatives along the way. We look forward to speaking with everyone soon. Thanks.

Operator: This concludes today’s call. Thank you for joining. You may now disconnect.