Good morning. Thank you for attending today's Advanced Emissions Solutions Q1 2023 Earnings Conference Call. My name is Alexis, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to Ryan Coleman with Investor Relations. You may proceed

Thank you, and good morning, everyone, and thank you for joining us today for our first quarter 2023 earnings results call. With me on the call are Greg Marken, Chief Executive Officer and President; as well as Morgan Field's, Chief Accounting Officer. This conference call is being webcasted 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 Alpha IR Group for Investor Relations support at (312) 445-2870. Let me remind you that the presentation and remarks made 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-Q for the quarter ended March 31, 2023 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 changed 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. Please turn to Slide 3 of today's presentation, which provides our Q1 highlights. With that, I'd like to turn the call over to Greg.

Thank you, Ryan, and thanks to everyone for joining us this morning. I'd like to start by providing a high level review of our first quarter, then discuss some of the initial steps we have taken to advance our business plan related to the Arq transaction and related integration. Our first quarter consumables revenue was $20.8 million compared to $26.4 million in the prior year, which was below our expectations as significantly lower natural gas prices relative to the last 18 months to 24 months impacted demand among our power generation customers. The potential for persistently lower natural gas prices could have an ongoing adverse impact on demand from our power generation customers and operations at Red River. However, more importantly, this economic environment underscores the importance of our acquisition of Arq and our transformation strategy to begin producing new granular activated carbon or GAC products going forward, thus reducing our reliance on certain markets and industries over time and broadening the addressable markets for our activated carbon technologies. Although, this transition will take time due to the capital improvements required, we believe that we will be able to operate a highly utilized asset base during this transition period and we'll be well-positioned to diversify the end markets we sell to and capitalize on the broader, long-term growth opportunities available within the GAC markets. The near-term impact of lower sales volumes from Red River were partially offset by our ongoing price initiatives and commercial wins in water and industrial markets. As a reminder, we have focused our sales strategy on higher value opportunities with improved economic and commercial terms. We expect that this approach coupled with continued efforts in our pricing strategy will help offset portions of the softer volumes in our legacy markets. During 2023, we expect that our…

Thank you, Greg. Slide 4 provides a snapshot of our first quarter financial results. First quarter revenues and cost of revenues were $20.8 million and $17.2 million, respectively, compared to $26.4 million and $21.5 million for the first quarter of 2022. The revenue decline was the result of lower sales of consumable products due to lower natural gas prices, which negatively impacted demand from our power generation customers. The reduced demand was partially offset by higher average selling prices for consumable products. First quarter other operating expenses were $11.5 million compared to $8.2 million for the first quarter of 2022. The increase was mainly the result of higher legal and professional fees associated with the conclusion of the company's strategic review process and closing of the Arq acquisition as well as additional payroll and benefit costs and overall operating expenses due to Arq activities after the acquisition. The increase was partially offset by a $2.7 million gain on the sale of Marshall Mine. As Greg mentioned, we are already taking actions to achieve our expected go-forward operating cost structure for the combined company. This involves integrating the organization in order to realize cost synergies and efficiencies across the organization. First quarter operating loss was $7.8 million compared to $3.3 million in the prior year. The decline was mainly the result of lower consumables revenue driven by the previously mentioned factors, and the incremental transaction and integration costs of $3.6 million associated with the acquisition of Arq. First quarter interest expense totaled $0.5 million compared to $0.1 million in the prior year. The increase was driven by $0.3 million of incremental interest expense related to the company's new $10 million term loan as well as the interest relating to the Arq's previously existing term loan. The company recorded a small income…

Thanks, Morgan. Slide 5 shows the strong foundation we continue to build upon to become a leading environmental solutions provider. We are currently a top three producer of activated carbon products in North America with a market share of approximately 17%. However, we are currently able to only serve an estimated 30% to 35% of the activated carbon market with our lignite based portfolio of products. Post acquisition, utilizing both our existing lignite based feedstock and Arq powder as a bituminous-based feedstock we will be well-positioned to provide activated carbon products that could serve more than 80% of the North American activated carbon market. This will inherently reduce our exposure to certain end markets and leave us less susceptible to headwinds that we are currently experiencing in our existing business. Additionally, as we complete the growth capital projects to integrate Arq powder, we will reposition the utilization and capabilities of our existing assets towards GAC products that generally provide higher value and higher margin opportunities in markets that are expected to continue to have growth in demand for years to come. We have proven sales channels and more than 100 current customers, many of which, provide potential entry points for the expanded markets we will enter as we look to accelerate our sales of GAC products when the capital improvements at our facilities are completed. Our commercial and technical teams have a proven track record of success in new markets. We expect our historical track record to continue to drive accelerated market acceptance of our new GAC and overall suite of activated carbon products and ultimately enhance our ability to win new business in these emerging market segments. We will be the only vertically integrated activated carbon producer in North America for our primary feedstock needs from material sourcing to…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Gerard Sweeney with ROTH Capital Partners. You may proceed.

Good morning, Greg and Morgan. Thanks for taking the call.

Good morning, Gerry.

I have a couple of questions. I wanted to start on the capital project side. We have Corbin and Red River and want to ask about them independently. So one of the risks that we're watching is just timeline of investments and sort of what are the gating factors or key milestones to make sure those projects stay on time for completion production, et cetera. So could you maybe just outline each or Corbin and separately for Red River, what are some of the key areas that we should be looking at for investments in, and meeting those milestones? Obviously, I think Red River is going to be a little bit more, I don't want to say challenging, but there is probably a little more risk or a little bit more challenge Red River than Corbin? Thanks.

Yeah. So Gerry, obviously, let me start with Corbin. I do think you're right. This is a bit more straightforward of a project. Overall timeline, we're looking to the end of Q1 of 2024 to have all of the kind of collective projects related to Corbin complete. As I mentioned, we are on track, but we did commence the three major capital projects during the first quarter immediately upon completing the acquisition. The first thing, I’ll kind of break it into three general areas, the equipment to increase the water processing capabilities, which will be key to the throughput and the ongoing operations. It just requires a high level of water coming through the plant, it is a closed loop, but we needed to increase the capabilities there. The second component would be the further automation of the plant to enable more reliable and efficient operations. When Arq initially built it, it was partially automated. And we're going to finish that off to make sure that once we come online that we have a much more automated plant that would be more in line with Red River. And then the final one would be the equipment handling to take the finished product and take it whether it's the Red River or another finished customer. With all of those, we are on track with the detailed project plan. Specifically, in the first quarter here, we did have the engineers, the contractors and equipment all selected for Corbin and have the long lead items purchased or, are in the process of doing so. So pleased with where we are with Corbin. As it relates to Red River, you are right. This one is the bigger project of the two, obviously, more money and a bit more complicated. But the technology and equipment for the shaping and heating processes to ultimately produce the GAC products in conjunction with our existing furnace capabilities. Those projects are well underway. I think key milestones here in the first quarter where, we completed the detailed engineering and further testing to support the filing of the permit from a -- with the regulatory agencies in the second quarter, and we're on track to do that, still tracking on an overall project basis to have that done by the end of the third quarter of 2024 from Red River. So I think collectively, very, very pleased. We're off to a good start, but it is important that we continue to execute on a weekly basis through the duration of these projects.

Got it. Switching gears to the engaging lead customers. So obviously, you're getting Red River, Corbin up and running. But in the background, as you said, Joe and Oscar sort of hit the street, getting the word out on the granular activated carbon product. Can you give a little bit more detail as to what some of that -- I call it seeding the market, what it entails. So you are municipalities or end customers come in and testing the materials, just understanding how you're maybe getting some of these customers comfortable with the product and getting them prepped for its arrival?

Yeah. So I think I'll break down into a couple of components, Gerry, but very good question. From a -- just what we're doing kind of actively in the marketplace attending and speaking at conferences, I think the relationship development component is really critical. And so we're going to invest time and energy to do that over this period until we come online, but making sure that we have the right relationships and those are key. The other things that we're doing, we are engaging with both municipal water customers along with other lead adopters. We're doing pilot scale and a little larger quantity testing to validate the product performance, everything that we saw as we went through the diligence process, so we're actually having them do testing. And we'll do that across multiple end markets with multiple customers. Municipal water, it's a little bit more of a transparent process. The lead adopters in another category that will be some longer-term relationships. But all of it will involve testing, and we're undertaking that right now.

Got it. Any initial feedback or still too early?

Yeah. The feedback has been very, very consistent, Gerry with what we kind of put out in some previous presentations, product performs really, really well. It's very high quality. And so we're seeing some very, very good results across multiple industries, which we're very excited about.

Got it. Switching gears to Arq powder. There's -- you mentioned, I think, in your prepared remarks, there's also an opportunity there. And we've talked about, I think, it was fuel, asphalt, things like that. Where does that sort of fall into the opportunity chain or as we look at it?

Yeah. So a final outlet for Arq Powder, it is important, Gerry. But if I would order it in relative timing and ability to get to market I think the known one for sure is activated carbon. Arq Powder can definitively serve as a feedstock to allow us to do that. We need to continue to go through the technical and commercial development related to other Arq Powder outlets. I think Arq has done a lot of really good work, but there are still additional hurdles and a little bit more proving out of the potential outlets. I think it's important because ultimately, it will result in full utilization of the Corbin facility if we're able to do that. But there's additional technical and commercial work that needs to be done to get over those hurdles. And that timing is probably a little more uncertain.

Okay. That's fair. And then just one thing I wanted to confirm, right? So I think in the quarter, if I heard it right, there was about $4.4 million of professional fees, merger costs, et cetera. And this was not backed out of the $7.7 million EBITDA loss, is that correct?

That's correct, Gerry. There is a footnote below it, where it does give that information, but that is correct.

Got it. I just want to make – okay. Got it. Okay. That’s it for me. I appreciate it. Thanks for all the answers.

Yeah. Thanks for jumping on Gerry. Appreciate it.

Thank you for your question. [Operator Instructions] There are currently no further questions in queue. I will now pass the line back to the management team for closing or additional remarks.

Thank you, and thanks to everyone for joining the call this morning. Our business plan for the new ADES is underway and we are excited about the company's prospects to becoming an environmental technology leader. We look forward to speaking with everyone soon and updating everyone on our next call.

That concludes the Advanced Emission Solutions Q1 2023 earnings conference call. Thank you for your participation. You may now disconnect your lines.