Good morning. My name is Casey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Advanced Emissions Solutions Q2 2017 Earnings Call. [Operator Instructions] Thank you. Ryan Coleman, Alpha IR Group, you may begin your conference.

Thank you, Casey. Good morning, everyone, and thanks for joining us today for our second quarter 2017 earnings results call. With me on the call today are Heath Sampson, President and CEO; as well as Greg Marken, Chief Accounting Officer. This conference call is being webcast live within the investors section of our website. A webcast replay will also be available on our site, and you can contact the Alpha IR Group for IR 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 and/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 quarterly report on Form 10-Q for the quarter ended June 30, 2017 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 to everyone for joining us this morning. Let's start on Slide 3 with a brief recap of our second quarter. I'm pleased to report that the most recent quarter was marked by progressive developments in our Refined Coal or RC pipeline as well as the completion of major shareholder return initiatives. Distributions from Tinuum were $10.5 million during the quarter, in line with our expectations. Distributions for Tinuum for the first half of the year were $25.2 million, well above the $20.8 million for the comparable period last year. We also continued to develop our Emissions Control or EC segment. Specifically, our chemicals business resulted in revenue growth of 38% year-over-year. As we have previously discussed, we do expect sequential quarterly performance within the chemicals business to be somewhat lumpy as we continue to expand our sales channel and learn, as is characteristic of any new business. But the good news is, we remain excited about the quality of our offerings, their place in the market and a long-term potential for the consumable chemicals. We'll talk more about this later in the presentation. We also continue to reduce the company's operating structure as indirect operating cost fell by 48% compared to the second quarter 1 year ago. These cost-reduction initiatives continue to bolster our cash position, which currently sits at $26.4 million. A figure that has doubled since the end of 2016. And remember, that's after the completion of our recent share purchase -- repurchase. Along those lines, this healthy liquidity facilitates the capital return program as well as our organic investment in the EC business. The wheels of this shareholder centric capital allocation plan were put into motion last quarter, as we successfully completed our tender offer, which allowed us to repurchase nearly 1.4 million outstanding shares and implemented a new recurring quarterly dividend of $0.25 per share. In aggregate, over $18 million were returned to shareholders in the recent months alone, and returning value will continue to be a strategic priority going forward. Overall, I'm pleased with the progress we are making and the momentum that continues to build. I'm also excited to highlight the announcement we made last week on the closure of a new RC project called RCM3. This project will be jointly owned between a third-party investor, Tinuum Group and members of Tinuum Group. The location of the RC facility is at a utility that has historically burned in excess of 3.5 million tons of coal per year and this RC facility will be royalty-bearing. This transaction provides initial evidence of an improving refined coal tax equity market. Although the rental income cash will be mostly offset by operating the retained portion, we'll have the benefit of the royalty stream, who'll also receive lucrative tax benefits that we can use to offset future tax obligations. I'd now like to turn the call over to Greg Marken, who will review our second quarter financial results. Greg?

Thank you, Heath. We'll start on Slide 5 to review our second quarter financial results. Let's begin with total revenue, which came in at $25.5 million for the quarter, a significant increase from the $9 million for the same period last year. This increase, as mentioned, was due to the expected realization of equipment sales revenue. This quarter was the last quarter marked by significant equipment sales revenue as future quarters through 2018 are expected to include the runoff of our backlog with many other remaining contracts at lower margins. Revenue derived from our chemicals business was $0.9 million for the period, up 38% year-over-year, though down sequentially from our big first quarter. This sequential decrease was largely due to a customer that refrained from purchases during the quarter as they had excess product on hand and continued to evaluate overall operations of their utility related to emissions compliance. Despite this sequential drop in revenue, margins in our chemicals business inched up to 24%, which was higher than the first quarter. As we have previously discussed, ongoing field testing of these chemicals with customers have kept some downward pressure on margin. But we fully expect to be back in the 30% to 40% range by early 2018 as the business matures. Additionally, we believe these reduced margins on smaller-scale contracts provide us a great opportunity to transition to recurring purchases with these same customers. Earnings from equity method investments were $10.2 million for the second quarter, which is down slightly from the $13.8 million 1 year ago, though still strong. We generated $1.9 million in royalty earnings from Tinuum, a 179% increase year-over-year and a sequential increase from the $1.8 million generated during the first quarter of 2017. We also continue to control costs as our indirect operating cost for…

Thanks, Greg. I'd like to take a moment to review our go-forward strategy in each of our business segments. Let's start on Slide 8, and focus first on the RC segment and the environment they're in. I'd like to take a few minutes to update all of you on some interesting developments that occurred during the last few months in the tax equity environment. As many of you may recall from our first quarter earnings call, the market was essentially frozen for the last 12 months to 18 months. The closures we had during this period were from already current investors. Us and our competitors could not attract new tax equity investor during this period because of the rumored adverse IRS ruling. Although the market was aware last quarter, this IRS ruling made via a technical advice memorandum or TAM was officially published last month. The TAM added clarity around the IRS treatment for these contracts and outlines that tax equity investors must have an economic interest in the project in order for the investment to be valid. In other words, there must be a true investor taking economic risks and be subject to both upside opportunity and downside losses. We believe the TAM validated Tinuum's tax equity investment structure contrary to the structure that was subject in the TAM. This relatively recent IRS clarity and reinvigorated business development process have culminated into an optimistic outlook for the back half of 2017 and 2018. And while the political climate remains clouded, we believe it remains marginally beneficial for us. The current administration has articulated its support for the coal industry as well as domestic energy in general. Please turn to Slide 9, as I'd like to remind all of our investors generally how our RC projects work economically. When we…

[Operator Instructions] And your first question comes from the line of Sameer Joshi with Rodman & Renshaw.

My first question relates to the Tinuum distributions. They were sequentially lower and also lower compared to previous years. So what is like reason for that?

Yes, Sameer, the distribution is actually kind of accelerated. Some of the distributions from Q2 to Q1, so when we actually look year-over-year on a full year basis, we are up. But during the second quarter, one of those distributions had been pushed forward into Q1 already.

So going forward, if you do not have any additional RC facilities then your Q -- rather 1H results would be replicated in 2H?

Yes, so maybe I'll just repeat again. So we just pushed 1 into the earlier. So quarter-on-quarter, from our current business only, you should expect that to be consistent with the average of Q1 and Q2.

And then you said that you expect acceleration of deployment. How many more RC units do you -- well, aspirationally, would like to install during the rest of the year? And do you realistically believe could install in the rest of the year? Or rather bring on...

Yes, our goal is to get all of them installed, right? But like I said before, based on what's happening in the marketplace, and based on what the group at Tinuum's doing, I feel really optimistic about the remainder of this year. I'm not going to predict how many right now. But if we continue to execute and what's in our pipeline does flow through to closures, I feel good about the remaining part of 2017. And then we'll work hard through 2018 to get a number of those additional ones closed. So our goal is to continue to get all 14, and again, I feel good about 2017 getting some of those closed and getting more closed in 2018. And again, we'll update you like we do every time when one closes within the couple of days of that closure.

Moving on to the equipment systems COGS, in particular, I guess, this quarter was one of the biggest quarters and the rest of the remainder equipment will be lower. But the COGS this quarter were more than we had expected for equipment sales. Should we expect similar levels for the remainder? Or what was the reason for this?

Yes, Sameer, so these were systems related to our historical BCSI business. And all of those contracts have been at lower margins than our ACI systems. The remaining contracts within the pipeline are these DSI systems from that BCSI business and we would expect decreased margins from here forward related to anything running through the P&L.

But probably pretty consistent with what you're seeing in this quarter.

And it will be mitigated by the chemical sales, which, I guess, are at higher margin?

Correct.

Okay. Moving to the macro, I know you mentioned the tax equity clarification as well as coal regulation, but where do you see the actual coal deployment, the RC deployment in the longer term in the current environment?

Yes. So for our current facilities and future facilities? Or do you just -- or is it based on our current facilities? Or are you just talking broader in general?

I'm talking about broader but also the fixed uninstalled facilities, how does it affect those installations?

Yes. So first from a broader perspective. Coal-fired power plants really is mainly affected by natural gas. And then really over the last, call it, five to 10 years, there's been a lot of shutdowns within the coal firepower place. That's basically solidified now. So those are our planned shutdowns that are happening for the future. We really kind of settled in on what the future coal-fired power plants going to be for North America. And then, with where natural gas is and where it's expected to be, we'd expect coal to be at what it's burning now or potentially even up higher. So that's my belief as well as the broader market's belief. So that's the macro side of it. From a more micro perspective, where our facilities are, we're very conscious of where we are placing our facilities to ensure that it is the most consistent and predictable burn. So the facilities that we're currently installed at, that's where we're at. The ones that we have installed or even uninstalled, we will make sure before they are up and running with the tax equity investor, we are selecting the site that is going to be the most predictable. So from a more micro perspective, I'd view us being fairly consistent and optimistic on the burns that we have previously had and the burns will be consistent and in line with the forecast that we've given before. So said in different way, I don't foresee macro, or even from a micro perspective, to have a negative impact on our future burn that we expect to have. If there was a facility that was under pressure, and that has happened in the past, we can move it. So that takes time and a little bit of cost structure. We can do that. But again, we feel good about where our facilities are. And especially now, us and the Tinuum team, and the investor that would be coming in, we'll select a site that they feel confident about that will ensure that that burn is consistent through 2021.

No, we agree with what you just said, just wanted to make sure what the management thought. Just one last question to the M&A opportunities. You mentioned you were looking for synergies as well as revenue synergies but the current companies target that you're looking at did not meet that criteria. So how is that process being run? And when should we expect any news on that front?

Yes. So that process is mainly being run internally from us. And we are facilitating discussions with vary relationships, primarily a number of investment banks, they're in the space that we want to look. We have not hired anybody that's dedicated to us right now. We are doing it mainly internally and with our relationships. The deals that we did see did meet -- did not meet our criteria. And again, we're being patient and deliberate on that. But at the same time diligent. So we'll evaluate over these next number of months whether or not we're making traction. If we're not making traction on finding stuff that meets our criteria and then is that our board would feel appropriate. We'll have a different approach, and we'll update you in these next quarter or couple quarters if we're not making progress in finding anybody.

And your next question is from the line of Kevin McKenna with Stifel. Your line is open.

My first question, can you tell me about the process that the utilities take when they are changing the chemicals that they use for cleaning the air? And how you assist them with that process?

Yes. Well, first -- so this is related to the Emissions Control business and our -- primarily our mercury control chemicals. And just to backup a little bit, as a reminder, many of these utilities had to be in compliance with these regulations back in 2015 and 2016. So the majority, if not all of these utilities, already had a solution in place. So now, we are coming in after the fact, displacing these current technologies that are in place. So if you understand utilities, they have something that works. So we have to prove that these also work and also will be cheaper and easier to run going forward. So that requires a heavy sales process to begin with, one, and then what happens next is really kind of prove it. So once we get through the sales process, we actually have to test it. And testing either lasts a couple of months, or in some cases, almost a year. And then from that process, they have to go through necessary permitting, approvals by owners and then make the switch. So it really is a long extended sales process. I can tell you from the tests that we have run, our product does work better and is more cost effective. But it is taking longer than we thought because of the process that I just outlined. To give you one more example, which is why I'm encouraged about us eventually achieving our market share, we have been testing with a few isolated clients for this large utility. And these tests have gone well. But now, instead of these individual plants buying, there is a broader RSP by the broader utility as a whole because of the results. So, although that's encouraging, potentially, we get more other power plants, it extends the sales cycle. So hopefully, that's a little more insight into the process that utilities go through and the sales cycle that we're involved in.

It is. And my next question on the RC closure, how are the terms of this different? And do you see more of these types of closures in the future? And what does that kind of mean in terms of upfront cash versus going-forward cash?

Yes. So the terms of this deal are similar with all our previous deals. The difference with this one is that we only fill half of it. And because of that half -- in that structure, it will -- it might occur again and we're looking to potentially sell this other half right now. But likely going forward, we will be selling the facilities or leasing the facilities outright. For Tinuum, we're doing that outright. So I wouldn't expect kind of a half sale to be the common going-forward structure. But -- so with -- so getting down to this current facility that we did lease or sell around 50%, because of us having to retain those -- the other half of that facility, the cash flows are almost a push. The way you should view this as cash flow neutral but we will be receiving royalty income as well as generating tax credits. That's the way to view it. But again, going forward, we hope to excel or lease facilities 100% as opposed to this 50% structure.

If you have time, that does kind of lead into my other question, which is, if you could give me a little color on the NOLs that you've generated and the value to shareholders for that?

So you can see in our tax footnote, the specific NOLs and tax assets that we have. And we can maybe, on a separate time, walk you through how that foot note works. Because it's a little complicated because we have some reserved, and again, a couple of quarters ago released some. So we do have a bunch of assets currently on our books. And then for this current facility, we will be generating tax assets as well consistent with what we've done in the past. So -- maybe give us a call later and I can walk you through that, it's a little more nuanced on how to do it. So I don't mean to avoid your question but it's pretty detailed.

Your next question comes from the line of Shantanu Agrawal from BlackRock.

Great quarter guys. Your comments on this earnings release and on this conference call are bit more bullish in finding new tax equity investors for the Refined Coal business. I was hoping you could go a little deeper and explain some of this bullishness. What exactly are you seeing the pipeline that makes you bullish? How much of this is related to the IRS TAM? And if it really is coming down to the IRS TAM versus some other things you're seeing in the pipeline, can you be a little bit more specific about the TAM? And how it advantages ADD -- ADES or disadvantages competitors?

Yes. So let me go back to when this IRS TAM was rumored in the marketplace, about 18 months ago or 2015. And just give you a specific examples, we were in discussions with various parties and when that came into the marketplace, they backed out. So these conversations stopped because even though we are comfortable with our structure and our current attorneys were comfortable with the structure, the uncertainty stopped these new investors from continuing the conversations. Not only did that happen with us, that really happened with a lot of our competitors as well. So that's specific examples of the start of this challenge that we had in the marketplace. So through these -- through those last, call it, 18 to 12 months, our discussions really stopped and then we even couldn't get a lot of them going, primarily with new tax equity investors for that time period. We were able to close on current deals with current tax equity investors because, again, they're sophisticated, they understand the structure and were able to close. But we, and our competitors, really had a tough time finding new tax equity investors. Fast-forward to really last quarter when this really came into the marketplace, and even now, over the last month, when this has been published, though there has been a lot of discussion around the market, what was going to happen, now we know for sure what has happened. That uncertainty went away because of the publication. So now they believe what we're saying. So we have really reengaged with those people that we stopped engaging with a number of months ago and have started many new conversations over the last couple of quarters as well. So -- and then couple that with we are always getting, and here and…

Following up on that answer. So sounds like there's 2 benefits, one, the TAM coming out on its own as kind of unlocked a frozen market. And then a secondary reason you kind of just alluded to is that the TAM is more positive for Advanced Emissions or Tinuum structure than competitors. I just want to be clear that, that is the case that I understood your comments correctly so the TAM is kind of more positive for you and potentially negative for others?

Yes. Potentially -- I think for maybe one competitor and maybe some isolated competitors. In general, there's probably three big players in the States including us. One of them is actually in good shape too. So in general, across the marketplace, including the majority of our competitors, the TAM is positive. I think there's an isolated competitor and maybe some isolated incidents that it's not an advantage.

And the people you're talking to in your pipeline, they understand the TAM, they're sophisticated party? So it's reasonable to assume that release of the TAM is a positive catalyst for your pipeline?

Yes. So it is. But if you read the TAM or if you're in this environment, there really is a lot of educating that we need. The Tinuum folks that are experts, the attorneys in this field that are experts to really handhold many of these large corporations. Even if they've been in tax equity, to make sure they understand this. So yes, they are sophisticated and they do understand it but it still requires a lot of handholding and business development and educating on our side and Tinuum's side.

Your next question comes from the line of Steve Roberts with NorthPointe Capital. Your line is open.

Just a couple of quick accounting questions on something on the chemicals. On the share count going forward, if we use 20.8 million, is that going to be the right number?

Yes, the 21.8 million would be the right number.

Margin? What's that sorry?

Are you talking share count, Steve?

Yes, share count. Number of shares outstanding or diluted share.

Number of shares. Sorry, I thought you were talking about chemical business.

Yes. I mean, the 21.8 million, 21.9 million is right there. Obviously, when you do the weighted average, it impacts your calculation. You don't get an exact number, but you're correct in that.

If you just bought back 1.4 million shares, shouldn't that be going down?

It has gone down. And so I guess, the outstanding at August 1 is officially 21.1 million on the front of the queue. I'm sorry about that.

And then on the legal and professional cost, are those just normal ongoing cost of a public company? Or are those something special because of all the issues you've had the last several years?

The majority is normal. We're still working through stuff. So I don't think it's completely normalized. But it's down significantly. But call it next year, it'll be down a little bit more and more in line with just normal stuff. So we're still working through some legacy issues. So we have a little more opportunity in there.

And then thanks for the update on the chemical business, but it seems like right now maybe have just two customers there. Is that right? I mean if one customer...

No, we have more than two customers. We have added some smaller customers over the last number of months. So we have more than two customers. We're...

And are all the customers in just testing phase? No one's really used it on a full-scale basis yet?

Our current customers are using it on a full-scale basis but they're smaller. We have a number of other ones that are using it in the testing phase and those, a little bit would be in those numbers. To get over these next, call it, two to three quarters, we should see some really proof on how these tests are going and how these sales processes and RFP processes that we are encouraging are coming about. So we'll get more detailed in the customers and how it works as we get more significant ones over the next kind of two to three quarters.

And it sounds like you're selling it as a lower-cost solution as opposed to a lower-cost per pound product. Is that right?

Yes. So if you are comparing our solution to other competitors' solutions, you really have to do a lot of normalization for pounds or tonnage. But if you just normalize for all of that, we have to be more cost effective. So our solution -- and this is how we got to our -- what we think we can penetrate in the market. And really doing a bottoms-up analysis of these specific plants. And we selected those plants based on us being less expensive, less corrosion resulting in less operating, maintenance costs and then more effective. So those are the kind of the three benefits that allowed us to do these tests and what we expect to sell into over these next couple of months and quarters. But it has to be cheaper.

On a per pound basis, so you are selling at a premium, right?

No, we're not. So -- well, if you're trying to -- maybe it would make sense to talk broader around this because there's different solutions that are out there. There is direct halogen type competitors that definitely require a lot more solution per pound. So -- and then there's other products that you -- that aren't halogens that have a totally different cost structure. But just to kind of reiterate, when you normalize for all that, when you think about the requirements that these people or utilities have to meet these regulations, to meet those regulations, we can do it better and cheaper than competitors out there. And in those specific plants, we need to do that in order to win. But maybe if you want a little more, we can dive into kind of how the economics work and how the chemistry works and the different products work on an offline conversation, if that's something you want to do.

And we have time for one further question and that question comes from the line of Patrick Wolff, private investor. Your line is open.

I have a couple of questions, it's around a section of the extra future cash flows for ADES 2017 priorities. So if you could first turn to Slide 16, this graph projected cash flows, could you just explain what -- like when you say cash flows of $225 million to $250 million to ADES in total, that's free cash flow, that's cash net of everything that the company, you expect, will receive. Is that right?

Yes. That is absolutely right. That's a very good point. I'm glad. Thanks for clarifying that. That is free cash flow all in ADES. I can tell you in those future projections, we don't have -- we're not going to get detailed on this. We don't have a lot of upside on the EC business because I don't think that that's the prudent thing to do right now. So the majority of that cash flow is coming -- free cash flow is coming from Tinuum distributions to us over the next four to five years.

So second question, one of your bullet points here, each additional Refined Coal facility could add between $5 million to $7 million annually, and you note that does not include the facility that you just sold. You explained that you actually sold only 50%. You so far have not really -- I mean, sort of a naive reading of that would say, well if you sold 50% of that and it could sell -- it could add $5 million to $7 million, then I guess this new one could add $2.5 million to $3.5 million annually. Is that accurate? Or should we be thinking about it differently?

Yes, so very good question. Let me break it down a little bit more. So on the surface, from a rent payment perspective, yes, that would be $2.5 million to $3.5 million coming to us. But we have retained, or in essence, ourselves, are also operating the other half. And the cost of operating that other half basically offset that $2.5 million to $3.5 million. But we will be getting royalty income as well as tax benefits from that. So we're looking to -- we like the tax credits because I think they're very valuable to us. Our partners maybe don't like them as much. So we're looking to sell or lease the other 50%. And then it would jump back up to getting that $5 million to $7 million. So from a macro perspective, because of that, just look that, that is a push on cash flow.

So you've avoided, so far, quantifying in any sort of precise way what the benefit is to the company and to shareholders. Would you like to do that? Or do you feel it's not something you can really quantify?

Okay. So just -- the royalty payment is approximately $0.40 per ton that we get. And the tax benefits, if you go back to the slide that I talk about the RC environment. Page 9. And you go to the left side, we are, in essence, an investor on 50% of that. So you'll get that kind of $6.90 per ton in production tax credits and $2.40-ish per ton in NOLs. So those will be building with our percentage ownership in that facility. So those are that would get in the company.

So if I understand what you said, based on the production of this new RC facility, you'll be receiving $0.40 per ton. Now when you talked about cash flow being a push, that royalty, is that essentially profit that's over and above this cash flow being a push?

Yes.

And then you'll also be getting tax credits?

Tax credits and the necessary NOLs as well. That's correct.

And then the last question I have for you, it basically just goes around capital allocation a little bit more generally. I am puzzled why you have initiated this regular dividend. So you have a share price that is somewhat volatile, it sort of goes between somewhat cheap and pretty cheap recently. I think hopefully we can all agree that the recent share buyback was done at a good price. As a shareholder, it's not just tax efficient to a bunch of shareholders to have accretive share purchases versus purchase dividends, it also adds meaningfully more shareholder value if you can buy at attractive prices. And meanwhile, in terms of the dividend per se, I mean, you can obviously always do a special dividend at some point in the future, when and if you think it's appropriate. But you have sort of a short-lived asset over the next 4, 5 years. I mean, this is not Coca-Cola that people presume we're going to be drinking for 40 years, right? It's a short-lived asset for several years and then you've got this nascent business you're trying to grow and you're looking for intelligent M&A. Why pay this very high dividend? I would much rather see that capital go to buying back shares when they get cheap. And then you keep the rest of the cash in order to do something intelligent when you can find it. And if you can't, you can always give it back to the shareholders at some point when it's appropriate.

Yes, I really do understand your opinion there. And I get a lot of that feedback from various people. On the other hand, I get a lot of feedback the opposite way that people wanted this dividend. So we try to have a balanced approach with the $0.25 per quarter per share amount. Though it may seem high to our current stock price relative to the cash flow that we're going to have coming in each year. Just from our base business, one could argue, and some shareholders have argued that it is low. But I think we try to have a balanced approach to that and I completely appreciate what you're saying and understand it. But there is a different opinion. So right now, we try to be balanced in that. Our goal is to evaluate this each quarter going forward and we'll make decisions going forward. So I hear you, but there's other sides to that coin as well.

And there are no further questions at this time. I will turn the call back to Heath Sampson for closing remarks.

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

And ladies and gentlemen, this concludes today's conference call. You may now disconnect.