Greg Marken - Interim President, Chief Executive Officer, Treasurer Morgan Fields - President of Accounting Ryan Coleman - Investor Relations

Good day, and thank you for standing by. Welcome to the Advanced Emissions Solutions, Q2 2021 Earnings Conference Call. At this time all participants are in listen-only mode. Please be advised that today’s conference is bring recorded. . I would now like to hand the conference over to your speaker today, Ryan Coleman, Investor Relations. Thank you. Please go ahead.

Thank you and good morning everyone and thanks for joining us today for our second quarter 2021 earnings results call. With me on the call today are Greg Marken, Interim President, Chief Executive Officer and Treasurer; and Morgan Fields, the President of Accounting. This conference call is being webcast live in the Investor 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 may contact Health 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 are include, but are not limited to, those factors identified on slide two of today's slide presentation in our form 10-Q for the quarter ended June 30, 2021, 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 forward-looking statements to reflect future events, developments or change circumstances or for any other reason. In addition, it is very important to review the presentation and today's remarks in conjunction with GAAP references in the financial statements. With that, I'll like to turn the call over to Greg.

Thank you, Ryan, and thanks to everyone for joining us this morning. Yesterday after the close of markets we reported our second quarter results, which are highlighted on slide three. Our Refined Coal segment delivered another strong quarter of distributions, which were 34% higher than the prior year. Royalty earnings were also higher and the segment's operating income was more than double the prior year period. The segment's adjusted EBITDA improved over the second quarter of 2020 by 33%. The Refined Coal segment’s strong results are largely being driven by the increase in invested RC facilities year-over-year, as well as the warmer than normal summer season across much of the U.S., coupled with the continued higher natural gas prices. In our APT segment, our sales volumes have continued to rise and have exceeded our internal forecast for several months in a row. Revenue for the segment was roughly twice that of the prior year, driven by the realization of the Cabot supply agreement we announced in September of last year, as well as growth in non-power generation markets such as water and certain industrial applications. However, most of the outperformance compared to our expectations during the second quarter was driven by our power generation customers who have been and continue to be affected by high, natural gas prices and warmer weather, both of which positively impact our product demand and results in the APT segment. In addition, I would like to take a moment to acknowledge and reaffirm our commitment to continuing to diversify and grow the business, to reduce our exposure to the longer term uncertainty related to coal-fired power generation in North America. Through the first half of the year, our team has worked closely with an industry leading channel partner within the growing soil and groundwater remediation…

Thank you, Greg. Slide four shows a snapshot of our second quarter financial performance. Second quarter earnings from equity method investments were $21.4 million compared to $8.2 million for the second quarter of 2020. The increase in earnings is mainly attributable to distributions recorded into earnings as a result of cumulative distributions from continuum group, exceeding the carrying value of the investment. As a result, excess distributions are recognized as equity method earnings in the period in which the distributions occur. Tinuum Group has also increased distributions due to the three new RC facilities added in 2020. Second quarter revenues and cost of revenues were $19.6 million and $13.3 million respectively, compared to $11.5 million and $7.4 million in the second quarter of 2020. The increase in revenue was primarily the result of higher sales of consumables, as well as higher royalty income. Second quarter royalty earnings from Tinuum Group were $3.7 million compared to $3.3 million for the second quarter of 2020. The increase was primarily a result of the greater number of invested royalty bearing facilities compared to the prior year. Royalty income is based upon a percentage of the per ton pre-tax margin, inclusive of impacts related to depreciation expense and other allocable expenses. As of June 30, 2021 Tinuum had 22 RC invested facilities with 18 that are generating royalties. Second quarter net income was $16.6 million or $0.90 per fully diluted share compared to a net loss of $23.8 million or a loss of $1.32 per share of the second quarter of 2020. The net loss in the second quarter of the prior year resulted from a pretax tax, non-cash impairment charge of $26.1 million related to our APT assets. Second quarter consolidated adjusted EBITDA was $21.2 million compared to $12.2 million in 2020. The…

Thank you, Morgan. Turning to slide five, you can see the expected future RC cash flows. During the second quarter, one invested RC facility reached the end of its scheduled expiration of its 10 year tax credit life. As such, we now have 22 invested RC facilities. Absent and unexpected change in the duration of the Section 45 Tax Credit Generation period, Tinuum does not expect to obtain additional tax equity investors for any incremental facilities and the remaining facilities tax credit generation periods will expire by the end of the year. Slide six reflects the APT segment growth channels we have been discussing, where we are either currently active or have identified as future opportunities. When we acquired Carbon Solutions in December of 2018, we immediately became the go-to provider of Activated Carbon Solutions for power plants that needed to meet mercury air toxic standards. We already had existing relationships with many of those power plans and we knew that we had the opportunity to sell the suite of emissions control technologies into those relationships, even more so when refined coal rolled off. During that time, coal fired power generation declined faster than both industry forecast as well as our forecast at the time of the acquisition had predicted. Abundant alternative renewable energy sources and competitively priced natural gas led to power generation facility switching from coal to natural gas. Thus, we were forced to pivot and diversify the mix of end markets we were selling into sooner than we had anticipated. We have spent considerable time and effort building out our internal sales team, conducting product tests with new potential customers in the water and industrial channels. However, this year we have seen a significant rebound in the power generation market as alternative fuel source pricing has provided…

Thanks Greg. As many as you saw, similar the last quarter we included at the bottom of the conference call announcement press release, as well as yesterday afternoon’s earnings press release, an invitation to submit questions ahead of time to be asked on the call. Thank you to those you who sent your questions. We'll likely continue this practice on upcoming earnings calls and we invite you to submit your questions next quarter as well. The first question, how significant is the margin compression you're expecting in the APT segment? If demand remains robust, is there a chance you will need to procure inventory from alternative sources for longer than you expect?

The margin compression is creating a drag to the segment's operating profit. At this time, we expect that to be the case till the end of the year. The segment's top line remains strong and is growing every quarter. As that topline grows, we are generating better operating leverage that is allowing us to offset some of these margin pressures, so that is helping a bit. Right now our main priority is meeting demand from customers and ensuring that we are delivering product. If meeting customer demand requires continuing to procure inventory from outside sources, then that is what we will do. But we continue to expect improvement in the segment once we work through the impacts of the downtime and the higher cost inventory.

Our second question, when would you expect your supply agreement with the European Cabot subsidiary to begin to provide a financial benefit?

Thanks Ryan. There are pending regulations in the EU that we are expecting to come online during the latter half of the year as we said earlier. As those regulations are implemented and enforced, we expect that there will be a market for our activated carbon products for companies that will be bound by those emissions limits. There will likely be a period of product testing requirements before we begin to realize any commercial benefit, but our agreement with Cabots European subsidiary ensures our opportunity to participate in the market and that Cabot will be the exclusive and sole reseller of our products within that EMEA region. If opportunities provide and our products are presented and those are the best options for our customer and product mix, we believe those opportunities will likely occur in 2022 and beyond.

And the third and final question we received, is there anything in the proposed infrastructure bill as it currently stands related to water treatment and water infrastructure where ADES could stand to benefit?

Based on the bipartisan infrastructure bill, we could possibly benefit related to the delivery of clean water to underserved communities, tribal nations and schools. However, actual funding and probability of qualifying is still uncertain, so we can't truly ascertain any benefit or tailwind at this point. In the event that there is, we believe we would be well positioned to benefit given the quality of our assets and our current position in the municipal water market.

Thanks Greg and thanks again to everyone who submitted your question. I'll turn the call back over to Greg for any final remarks.

Thanks Ryan, and thanks to everyone for joining the call this morning, and for your continued support. I look forward to updating everyone next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.