2023-08-22 17:46:20 ET
Summary
- Advanced Emissions Solutions reported sequentially improved quarterly results with higher gross margins and decreased cash usage from operating activities.
- However, elevated second half capex requirements in combination with ongoing cash burn from operations could leave the company with insufficient funds going into 2024.
- Surprise CEO change in combination with a subsequently announced full-scale business review has been adding to uncertainty.
- Considering increased uncertainty and the potential requirement to raise additional capital before the end of Q4, I am reiterating my "Sell" rating on the shares.
Note:
I have covered Advanced Emissions Solutions, Inc. ( ADES ) previously, so investors should view this as an update to my earlier articles on the company.
Two weeks ago, Advanced Emissions Solutions or "ADES" reported its second quarter of operations following the recent combination with Arq Limited or "Arq" - an emerging environmental technology company that converts coal mining waste into a micro-fine carbon powder ("Arq Powder") for use in environmentally sustainable products:
Company Presentation
While Arq has constructed a $80 million processing plant in Kentucky with the ability to process over 100,000 tons of mining waste per year and received investments from Peabody Energy ( BTU ), Vitol and Mitsubishi ( MSBHF ), the company has not generated any revenue to date.
In fact, the combined business requires substantial, additional capital expenditures to position the company for growth.
Until the end of next year, ADES expects to invest an aggregate $95 million to upgrade existing infrastructure at its Red River activated carbon plant and Arq's production plant in Corbin, Kentucky.
While low natural gas prices continues to impact demand from power generation customers, Advanced Emissions Solutions reported sequentially improved gross margins and materially decreased cash usage from operations:
After accounting for capital expenditures, the company recorded negative free cash flow of $10.4 million and finished the quarter with $58.8 million in unrestricted cash.
Adjusted for the $5 million minimum liquidity covenant governing the company's related-party term loan, liquidity at quarter-end calculated to $53.8 million.
ADES reiterated expectations for full-year capital expenditures of between $40 million and $45 million which in combination with anticipated cash burn from operations could leave the company with insufficient funds going into 2024.
The Company expects to incur between $40 to 45 million in capital expenditures in 2023, driven by enhanced manufacturing and processing capabilities to enable future granular activated carbon production and amounts for the completed plant turnaround, as well as the completion of certain planned projects that were started in 2022 and were scheduled to be completed during the turnaround. First half capital expenditures totaled $10.4 million compared to $2.9 million in the prior year. The increase was the result of initial costs of the growth capital projects as well as higher spend associated with the annual turnaround.
On the conference call, the company's new CEO , Robert Rasmus, announced a number of initiatives to better position the company for the future:
We are (...) conducting a full review of our capital spending cadence to optimize that spend in the most efficient manner and ensure we hit our project milestones. We have also begun to take actions to achieve the planned go-forward operating cost structure of the combined company, such as streamlining personnel and systems, optimizing overall operations, as well as other items.
We will continue to evaluate ways to simplify the overall organization and operations while maintaining the ability to achieve the growth initiatives inherent in our business plan.
(...)
Over the next 60-plus days, we will be conducting a review of all aspects of our business with the goal of optimizing costs and productivity. As we execute and as appropriate, I will provide clear and candid guidance of our milestones while highlighting opportunities as well as risks.
To be perfectly honest, I was surprised by the abrupt CEO change in July and actually have a hard time finding comfort in the apparent requirement to conduct a full-scale review of the business just months after closing on a perceived transformative acquisition.
Please note that ADES already had to make substantial changes to its original merger expectations with projected capex requirements increasing by more than 25% to $95 million.
Considering some increased uncertainty from the announced review and the likely requirement to raise additional capital before the end of Q4, I am reiterating my " Sell " rating on the shares.
Bottom Line
While Advanced Emissions Solutions Inc. reported sequentially improved quarterly results with higher gross margins and lower cash burn from operations, anticipated cash usage for the second half of the year is likely to leave the company with insufficient funds going into 2024.
Even if actual cash usage turns out to be somewhat lower, I would expect ADES to raise additional capital in Q4 at the latest point in order to avoid going concern language in the company's 2023 annual report on form 10-K.
With the abrupt CEO change and subsequently announced business review adding to uncertainty, investors should continue to avoid the shares or even consider selling existing positions.
For further details see:
Advanced Emissions Solutions: Sell On Increased Uncertainty And Risk Of Near-Term Dilution