Charah Solutions, Inc. (NYSE:CHRA) Q3 2022 Earnings Conference Call November 15, 2022 8:30 AM ET
Steve Brehm – Vice President-Legal Affairs and Corporate Secretary
Jonathan Batarse – President and Chief Executive Officer
Joe Skidmore – Chief Financial Officer and Treasurer
Conference Call Participants
Brian Butler – Stifel
Good day, and welcome to the Charah Solutions Third Quarter 2022 Financial Results Conference Call. Please note today’s conference is being recorded. [Operator Instructions] After the speakers remarks there will a question-and-answer session. [Operator Instructions]
Thank you. At this time I would like to turn the conference over to Steve Brehm, Vice President of Legal Affairs and Corporate Secretary. Mr. Brehm, you may begin your conference.
Thank you, operator. Good morning, everyone, and thank you for joining us today. We appreciate your participation in our third quarter 2022 earnings call and look forward to sharing our prepared remarks and answering your questions.
Joining me today on the call are Charah Solutions new President, Chief Executive Officer and Director, Jonathan Batarse; and new Chief Financial Officer and Treasurer, Joe Skidmore. Following their prepared remarks, we will conduct the customary question-and-answer session.
We hope you’ve had a chance to review the press release we issued yesterday after the market closed. If not, you can find the press release and a supplemental investor presentation you may follow during our prepared remarks on the Investors section of our website at www.charah.com or ir.charah.com.
Before we begin, I’d like to remind you that our remarks regarding Charah Solutions include statements that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those disclosed in our earnings releases and conference calls. Those risks include, among others, matters we have described in our earnings press release as well as in our filings with the Securities and Exchange Commission, including our quarterly reports on Form 10-Q and our Annual Report on Form 10-K. We disclaim any obligation to update these forward-looking statements, except as required by law.
During this conference call, we will refer to certain non-GAAP financial measures. We provide reconciliations to the nearest applicable GAAP measures in our earnings press release and supplemental presentation.
Before I turn the call over, I'd like to thank Scott Sewell for his service to Charah Solutions and leadership as the company expanded our product suite. We wish Scott well in his endeavors. I'd also like to welcome our new CEO, Jonathan Batarse and congratulate Joe Skidmore on his promotion to CFO.
Jonathan joined us about a month ago and has already contributed greatly as we have worked on measures to improve our business. With more than 25 years of corporate finance and executive leadership experience in the engineering and construction industries, Jonathan has significant experience driving operational excellence for engineering and construction projects. Joe joined Charah Solutions with almost a decade of audit experience, serving both public and private clients with a variety of industries, including those in the industrial manufacturing sector. While at the company, he assumed roles of increasing responsibilities most recently as corporate controller for two years.
Thanks, Steve and thanks to everyone for joining us on our call this morning. I'm excited to join Charah Solutions at this pivotal juncture. We enable utilities to meet and exceed their ESG goals by remediating ash ponds, managing coal ash operations, recycling fly ash, selling raw materials and solving environmental risks. I joined the company because we have a world-class team focused on delivering leading ESG solutions for our customers growing needs.
Every day, Charah improves our community by producing sustainable environmental solutions for our customers by remediating the environmental risks and recycling what was previously considered unusable. These innovative solutions have and will continue to create tailwinds for our business. As a company, we will focus on three priorities as we build upon the heritage established at Charah.
First and foremost, we will always prioritize the safety of our people. We are committed to the safety and wellbeing of our employees at work, at home, and at play, 24/7, 365 days a year. We are a people organization from our site operators to our support teams our people are the heartbeat of this company.
Second, we will continue to grow through our commitment to providing our customers with environmentally responsible, innovative, and customized solutions. Third, we will improve profitability through both increasing commercial rigor and risk assessment for new work and improving our project management oversight tools and processes. As a team, we are committed to continual improvements that drafts sustainable growth and improve financial performance of the company. With the strong market environment related to the regulatory tailwinds, we continue to be optimistic that our market opportunity will expand.
I'll review our recent developments that position us for long-term growth. Since reporting our second quarter results, we have fortified our balance sheet to support future growth. Increased new contract awards, strengthened our leadership team, completed certain legacy loss projects that have created a drag on our performance for 2022, and implemented processes to improve our commercial operation and financial rigor and oversight.
While I'm encouraged by these achievements, I'll acknowledge we are disappointed by our financial results. During the third quarter, these challenges discussed in previous quarters continue to impact the gross profit and the bottom line. The three multi-year legacy loss projects, the ash pond closure project in Arkansas, the landfill construction project in Kentucky, and the fly ash and bottom ash pond closure project in Missouri continue to drag on gross profit.
While pleased that we have completed these projects and moved them to the demobilization phase, we incurred additional expenses during their quarter. Regarding the two long-term beneficial use projects hindered by supply chain and logistics challenges that we've previously discussed. We have suspended work on the one with the greatest impact to the bottom line until we reach a resolution with the customer. We are in discussions with the customer to jointly agree on a path forward. The ultimate outcome could have a material impact on our backlog. Therefore, we have decided not to disclose backlog until we agree on a path forward.
The drag from these projects have been costly. To that end, we have taken measures and continue to implement corrective actions to avoid similar situations. As I noted at the onset of this call, we have increased commercial operation and financial rigor for new project assessments. Additionally, we are reviewing and making necessary improvements to our project management tools and processes to identify and mitigate project execution risk as they occur.
It was necessary to strengthen our balance sheet to support current projects and growth. We worked with our lead investor, Bernhard Capital Partners, to raise $30 million in gross proceeds. We believe this support validates the market opportunities ahead and creates a runway to accelerate growth. Also, during the quarter, we secured wins from new and existing customers. New contract awards grew by $42 million.
We remain excited about our EnviroSource beneficiation technology. However, like all of our projects, we are reviewing opportunities with a critical eye to ensure the economics are favorable. Earlier this year, we announced an EnviroSource project that we were awarded and actively working to finalize contract documents. Because of the construction nature of this project, inflationary pressures and supply chain constraints, the underlying economics are challenging. Therefore, the finalization of the contract is delayed. When we disclose new contract awards in the future, we’ll ensure they only include binding awards.
In addition, as we reviewed our pending bid pipeline metric, we found certain pending bids that represented potential projects that were outdated and likely to be rebid. Therefore, for the time being, we removed them from the total pending bid pipeline, which represents bids we have submitted but have not yet been awarded. As of mid-November, the pending bid pipeline is approximately 1.5 billion. Our tracking pipeline, which represents anticipated requests for proposals that are projected to be awarded over the next two years, has grown based on market activity to be approximately 11.1 billion through mid-November.
Before we review the third quarter results in detail, I’d like to recognize Joe’s Skidmore. During his tenure at Charah, he has demonstrated financial acumen and leadership. I look forward to his expanded contribution as our CFO.
Yesterday, we also announced changes to the Board. We are pleased Bob Decensi accepted the role as Executive Chairman. Bob has decades of experience in the power industry, including senior management roles at four major utilities. Most recently, he has served as CEO and Director of BHI Energy, a utility services company that provides engineering, construction, and maintenance to the power generation and power delivery markets. Under Bob’s leadership, BHI grew from a single service offering platform to an industry leading integrated platform capable of servicing every asset owned by utility from the point of generation through the entire power delivery life cycle.
We also thank Jack Blossman for his leadership and are pleased he will continue to serve as a Director. Additionally, we are fortunate to have Bill Varner join us as an Independent Director. He brings over 30 years of experience leading manufacturing and service companies through both operating turnarounds and growth strategies. We look forward to their guidance as we implement our improvement plans.
With that, I’ll turn the call over to Joe to discuss our financial results.
Thanks, Jonathan. I believe in Charah’s value proposition and I am glad to be serving with greater responsibility at this time. As discussed, the prior challenges continue to impact the financial results. However, we are encouraged by our sequential improvement over the second quarter of 2022, which I’ll review now.
Revenue was $81.5 million, up compared to $77.1 million for the second quarter of 2022, primarily related to an increase in construction contracts. Gross profit was $2.9 million compared to $2.7 million for the second quarter of 2022. Both periods included expenses associated with the completion of the three legacy projects, as well as continued challenges resulting from supply chain and logistics issues related to two large beneficial use projects as previously discussed.
General and administrative expenses were $9.5 million compared to $9.2 million in the second quarter of 2022, primarily attributable to the timing of certain expenses. The net impact of other items within operating income was a net loss of $30.2 million compared to net income of $1.8 million in the second quarter of 2022, primarily attributable to a decrease in scrap sale volume at Gibbons Creek and an increase in ownership and other costs including accretion expense resulting from the Avon Lake and Cheswick environmental risk transfer acquisitions.
Net loss attributable to Charah Solutions was $13.4 million compared to $9.6 million for the second quarter of 2022. Adjusted EBITDA with negative $0.6 million compared to positive adjusted EBITDA $2.8 million for the second quarter of 2022.
For the nine-month period ended September 30, 2022, our results were as follows. Revenue increased to $224.7 million compared to $199.8 million for the nine months ended September 30, 2021, driven by growth in all of our revenue streams.
Net loss attributable to Charah Solutions with $35 million compared to $7.1 million in the nine months ended September 30, 2021, and adjusted EBITDA was $2.5 million compared to $26.4 million for the nine months ended September 30, 2021.
Turning to our balance sheet. At September 30, 2022, we had $7.7 million of cash on hand, $2.7 million of borrowing capacity under our credit agreement and $4 million of borrowing capacity under our term-loan agreement for a total liquidity of $14.4 million. On November 8, we drew down the remaining $4 million on the term loan agreement to fund operating activities.
On November 14, we entered into a private placement with a BCP affiliate to sell Series B Preferred Stock for net proceeds of $28.8 million. In conjunction with a preferred stock investment, the company entered into a binding agreement to convert the outstanding balance of $20 million, the commitment fee of $1 million and all applicable accrued interest under its term loan agreement into an entity that owns a 100% of the Gibbons Creek and Cheswick land.
Together with the remaining availability under the asset-based lending credit agreement, these transactions will strengthen the company’s balance sheet and provide additional resources to achieve the long-term working capital needs of the company.
Looking ahead, we are assessing all aspects of the company, including ongoing projects and future opportunities. Therefore, we are suspending guidance and will revisit it in the future. Finally, we announced this morning that the Board authorized a one-for-ten reverse stock split.
With that, I’ll turn the call back to Jonathan.
Thanks, Joe. For over 35 years, we have provided ESG solutions to the power generation suppliers. Our ash remediation, recycling, and management, raw material sales and environmental risk solutions have set industry standards and delivered leading technology. We have taken and continue to take actions to improve the profitability of our projects. Having set a solid foundation for long-term growth, we expect to benefit from the positive tailwinds in 2023, which we believe will deliver value to our shareholders. Thank you again for your interest and participation.
With that operator, let’s begin the question-and-answer session.
[Operator Instructions] Your first question comes from the line of Brian Butler with Stifel.
Good morning. Can you guys hear me?
Good morning. Good morning, Brian.
Great. Thanks for taking my questions. The first one, I guess on the guidance suspension, what – I guess what makes the next 1.5 months unpredictable that we can’t get some level of guidance. And then I guess follow-up would be what needs to happen to reinstate guidance for 2023?
Yes, Brian, as we mentioned in our opening comments for Joe and I, we just want to be able to look at the projects, look at the opportunities that we have coming up, make sure we have guidance, that it’s guidance, that it’s accurate and informative to everyone.
As we look long-term, when would be able to, when would we be able to restate guidance? I kind of refer to some of our opening remarks. We want to focus on the building blocks of safety clients and predictability and our profit margins, predictability and our profitability overall as a company. We talked a little bit about that in our opening comments. We want to make sure we have the right commercial rigor on the front-end of reviewing opportunities, make sure we have the right project management tools and processes as we’re working through projects.
And also probably goes without saying what we’re reviewing the cost structure of the business to ensure that we can be as cost efficient as possible, which will help improve our profitability and also help us be more competitive as we win and pursue other opportunities. So, I can’t commit to a date that will restart guidance. I can just commit to; we’re going to focus on the things that are going to create stability in our profits and in our business that will allow us to provide guidance in the future.
Okay. And then on your suspended contract that you discussed, how big of a drag was it in the third quarter and maybe year-to-date, and as you work through with the client on fixing that, is that a something that can be remedied in 2022? Or is that going to be rolling to 2023?
Yes, thanks Brian. In terms of the drag on the profitability and both quarter-to-date and year-to-date, I can’t specifically comment on the one beneficial use contract, but overall as a group the two beneficial use contracts that have a drag on our profitability, directly impact from a quarter-to-date perspective around a little over $2 million. And from a year-to-date perspective $9 million. I will say the one that we’ve suspended is the, the larger of the two contracts and is the makes up that vast majority of that loss. And I’ll now turn it over to Jonathan.
I’ll tell you, as we have discussions, with the customer – there’s some cost that we’ve committed and it could be equipment cost and those type of things that we’re continuing to redeploy to other projects and make sure they’re utilized as best as possible. So there could be a little bit of continued cost going into the fourth quarter and potentially going into next year. We’re trying to reduce the cost that we have associated with that project as quickly as possible.
I’m not sure and can’t commit right now as to when or whether we’ll restart operations on this project. It would just need to be something that’s mutually beneficial for us and for the customer. And we continue to have good dialogue with the customer, but can’t commit to when we would restart and what that would look like. We just do it our best to reduce costs and get equipment utilized at other projects.
Okay. That’s helpful. And on EnviroSource on that, that contract yet to be finalized, I guess how delayed is that? I mean, EnviroSource has been a long process. Is that now, a late 2023 or 2022? How should we think about that piece of business?
Well, let me talk about EnviroSource as a whole and then we’ll talk about this specific opportunity. So, we love the technology. It works, it has great applicability and a lot of different areas can help solve some problems for our utilities. Great [ph] to work, we have to have a balanced risk approach with the utility partner. In this particular contract, there was too much risk, economic risk that we were bearing around construction and really offtake risk and those type of things, which with the inflationary market that we’re in put pressure on pricing, put pressure on financing, put pressure on schedule, and then again, the long-term risk that we have with the offtake.
So, I can’t answer when this project will or will go forward, but we are continuing to progress conversations with a couple of other customers that, I can’t commit to a timeline, but those conversations are a little bit more in the balanced risk approach. So, as we continue to move those conversations forward. We hope to have good news in the future that, that we have other EnviroSource opportunities that are getting or nearing the finish line.
Okay. And then on ERT, can we maybe look at what contracts that have been awarded, I guess what opportunity or what potential EBITDA can be generated from that piece of business and cash flow? Because they’re not always linked, but what over the next, I guess year, maybe longer just kind of put that in perspective on the magnitude of that ERT and maybe any help you can give on timing of some of those flows.
Yes, I can speak on the ones. I’ll start with kind of the ones that we have currently signed to date and that are in our and our book of business right now. So essentially we, as you all are aware, we have the Gibbons Creek, Avon Lake and Cheswick ERT project. As we look at Gibbons Creek, that’s kind of wrapped up in terms of the scrap sales, whereas Avon Lake and Cheswick, we are ramping up. So, as we look to kind of the remainder of this year in terms of opportunities it’s going to be limited to those three projects with obviously Avon Lake Cheswick providing some of the cash flow, whereas Gibbons Creek we’re still performing those remediation activities. And so as we look at the three collectively, we’re looking at a pretty much a breakeven adjusted EBITDA and cash flow for the remaining of the year. If we look into 2023, we will be both – we will have contribution adjusted EBITDA wise and cash flow. But the majority of those will be from those three projects.
Yes. As we look to the future ERT opportunities, we’re actively pursuing, identifying and pursuing and working on again, the next generation or the next life cycle of ERT projects. But right now I can’t commit to when one, when the next one will be awarded the timing of that award, the magnitude of the award. But it continues to be a priority for us. Because we see a lot of value in what we can bring to our utility customers and helping them remediate these properties and manage that environmental risk. It’s good for the customer, it’s good for our utility partners, it’s good for us. So, we’re excited about the ERT project, but can’t commit to the timing of the next award.
Okay. And then one last one maybe on accounting, just on a fully, if everything is converted, what would be the fully diluted share count post? All the capital adjustments you’ve made here?
Yes, Brian we’re working through the, I guess detailed analysis of that, but overall we’re looking at about 6,500 shares fully diluted after, if we can assume – convergent of all the preferred stock in place.
Okay. Thank you very much for taking my questions.
There are no further questions at this time. I will turn the call over to Jonathan Batarse for closing remarks.
Thank you everyone for joining today. As I said earlier, this is an exciting opportunity. Personally, it’s an exciting opportunity for the team here at Charah. We look forward to creating value for our shareholders as we focus on, again safety for our employees, growing our business by continuing to partner and provide excellent service to our customers and creating stability and our profitability going forward by increasing our commercial rigor on new opportunities, ensuring we’ve got the proper tools and processes in place to, to identify and mitigate risk at the project level. And again, ensuring that we have the most efficient cost structure possible, so that we can improve profitability and be competitive in future awards. Thank you for your time and your continued interest in our business.
Thank you for participating. This concludes today’s conference. You may disconnect at this time.