Arq, Inc.

Good morning, everyone, and thank you for joining us today for our first quarter 2024 earnings results call. With me on the call today are Bob Rasmus, ARC's Chief Executive Officer and President, as well as Stacia Hansen, ARC's Treasurer and Chief Accounting Officer. This conference call is being webcasted live with 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 website, and you can contact ARC's investor relations team at investors at arc.com. Let me remind you that the presentation and remarks made today include forward-looking statements 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 two of today's slide presentation in our Form 10Q for the quarter ended March 31, 2024, and other filings with the Securities and Exchange Commission. Except as expressly required by the securities law, 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 reasons. In addition, it is especially important to review the presentation and today's remarks in conjunction with the gap references in the financial statements. With that, I would like to turn the call over to Bob.

Thank you, Anthony, and thanks to everyone for joining us this morning. I'm proud to report that for the first quarter of 2024, we maintained the strong momentum which began building in the second half of last year. Our latest quarterly performance reflects continued top-line growth and improved margins driven by higher pricing and cost management. Our performance in the first quarter of 2024 versus 2023 is even more impressive given lower volumes caused by a very mild winter. These efforts resulted in the continued financial improvement to our foundational PAC business and ongoing progress related to our granular activated carbon expansion. I am also excited about signing our first granular contract. I will provide more details on this milestone event later in my remarks. Our first quarter results evidence the clear momentum and improvements we are delivering across the business. They also demonstrate that these changes are taking root. The best evidence of our business optimization and transformation was our strong gross margin performance. At 37%, our gross margin was more than double the prior year period. We are also proud to have delivered a 4% increase in revenues versus last year, despite lower volumes due to the impact of a very mild winter and lower natural gas prices in our power generation business. While adjusted EBITDA was negative $1.1 million, we reported our third consecutive quarter of year-over-year growth in adjusted EBITDA and fourth consecutive quarter of double digit year-over-year percentage growth in average selling price. Adjusted EBITDA was impacted by spending $1.6 million in R&D. This represents a $1 million increase over the prior year. The increase in R&D spending was directly related to product qualification testing with lead adopters as part of our ongoing GAC contracting process. While a negative impact for the quarter, it was an investment with tremendous near and long-term benefits. It is because of these in-depth technical discussions that we were able to sign our first granular contract and are confident in our ability to pre-contract the entire 25 million pounds of granular activated carbon prior to beginning production. As we've outlined previously, the performance of our PAC business is correlated with natural gas prices. This year's milder than normal winter led to lower natural gas pricing. As a consequence, demand for electricity generated from coal-fired power, the end market for a majority of our PAC solutions was reduced. The 6% decline in year-over-year volumes was offset by a 16% increase in our ASP versus the prior year. The increase in average selling price when combined with our manufacturing cost reduction initiatives resulted in our achieving the previously mentioned 37% gross margin. It's also worth noting that our first quarter performance and a portion of our second quarter are generally seasonally softer quarters for our business. I am very proud of our team delivering revenue growth year on year while also continuing to fundamentally improve margins and profitability across the business. From an operational perspective, we performed well, and I commend the team for their ongoing focus, operational cost management, and execution efficiency. As an aside, one pertinent example of outstanding execution is the recently completed plant turnaround at our Red River facility. The plant turnaround occurs every two years. This year, we shut down the plant for two weeks to conduct regular plant maintenance and tie in certain systems and components for our GAC expansion. The turnaround was completed safely, on time, and on budget. Progress is rarely linear and the sustainable improvements we are realizing are clearly evident in all aspects of our business and financial performance. While I do not expect our PAC operations to transform to a high-growth business for us, we have made undeniable progress and are in a fundamentally different position to where we were 12 or even six months ago. As a result, I continue to expect that our PAC business will be cash generative for full year 2024, marking a critical achievement to the go-forward strength of our business and generation of shareholder value. As I mentioned previously, the combination of a mild winter and low natural gas prices had a negative effect on our power generation volumes. However, low natural gas prices are not the only factor in reduced demand for coal-fired electrical power. Alternative energies such as biogas and biomethane are new and growing power sources. This is actually good for ARC and for GAC demand. Renewable natural gas must be purified before it can enter the grid or pipeline system. The contaminants removed are primarily, but not exclusively, sulfur. The producers must use GAC to remove contaminants. Again, another reason why we are bullish on the demand for our GAC solutions. This provides an excellent lead-in to an update on our latest GAC expansion progress. Construction at our Red River facility is proceeding well, and we remain on schedule for targeted commissioning in the fourth quarter of this year. To facilitate this, I'm delighted to confirm that we are now actively commissioning our Corbin facility. Corbin is where we will produce our purified bituminous waste feedstock to be used in the production of our unique GAC products at Red River. Commissioning is progressing as planned, and we expect to conclude the process in May. Today, we are updating our full-year 2024 CapEx forecast to a range of $60 to $70 million, reflecting an increase of $5 to $10 million versus our previously communicated guidance range of between $55 and $60 million. The update is driven by higher-than-expected CapEx for our strategic Red River Phase I expansion, specifically increase steel and concrete costs and requirements versus original estimates. Of the $60 to $70 million in 2024 CAPEX, we expect Red River Phase I CAPEX to represent $55 to $60 million of that amount. Our team is working continuously and intensely to identify cost savings and execute on ways to reduce some of the overall project increase. We are making every effort to ensure that there are no further changes in our spending plan. At this point, it is logical for an investor to ask, CapEx has risen continuously for the last several quarters. What confidence do you have that there won't be further increases? And what contingencies do you now have in place in that eventuality? The majority of the previous increases are related to poor services provided by external parties previously contracted to manage and engineer the project that I mentioned on our last earnings call. The latest increase is due to these external parties significantly underestimating certain requirements of the project. This substantially increased the scale and cost of the amount of steel and concrete needed. Based on our previous experiences, we have now included a contingency factor to our new guidance range that we hope not to require but should mean that we finally draw a line under possible further increases. We intend to fund our CapEx with a mix of cash on hand, cash generation, ongoing cost reduction initiatives, potential prepayments on GAC contracts, and a planned refinancing and expansion of our existing term loan. Most importantly, and this is critical, even when accounting for this latest CapEx forecast, we remain extremely confident in this project having a three-year or less payback. Simply stated, this remains a great investment opportunity that will drive attractive returns and fundamentally alter the growth trajectory and long-term prospects for our business. And we continue to believe that we will not require the sale of any equity to achieve this. Our confidence in reaching these target investment returns are not just hypothetical. Earlier today, we announced a strategic milestone with the signing of our first ever granular activated carbon contract. The contract accounts for approximately 5 million pounds of annual GAC production, or approximately 20% of our targeted initial nameplate capacity. The contract price is attractive and represents a multiple of our average PAC pricing. This is a tremendous achievement and provides third-party validation of our strategy and expanded solutions offering. The signing of our first GAC contract amplifies our confidence in both our broader granular activated carbon strategy and our specific product potential. The contract also further de-risks the strategic expansion of our Red River plant. We remain in active discussions with additional customers regarding our remaining GAC capacity. Based on those discussions, we are confident in our ability to enter into additional contracts for the facility's full 25 million pound capacity ahead of final commissioning later this year and look forward to providing further updates in the near term. Let's now turn to a discussion of exciting and even transformational regulatory news that has been released since we last spoke with you on our fourth quarter earnings call in March. As many of you are likely aware, on April 10th, the EPA issued a landmark decision to implement the first ever national legally enforceable drinking water regulations on PFAS or forever chemicals. The regulation significantly lowers permissible levels of these types of chemicals in the U.S. drinking water by over 90% from prior EPA guidance. These changes mark a pivotal moment in ongoing and increasing efforts to safeguard public health and preserve environmental integrity. At AHRQ, we recognize this as a monumental opportunity. The new standards set by the EPA are expected to drive even stronger near and long-term demand for effective remediation products, particularly granular activated carbon. As demand escalates due to these stricter regulations, AHRQ is strategically well positioned not just to participate but to lead the market with our unique GAC products and innovative solutions. We articulated our enthusiasm following the announcement. emphasizing that this regulatory shift paves the way for stronger demand for our products and contributes to a cleaner future with materially higher quality water in our communities. We estimate that the EPA's new benchmarks will catalyze a three to five times increase in GAC demand over the coming five years within the water market alone. We believe the current water sector demand is roughly 170 million pounds. At the conservative end of our estimates, this equates to total water sector demand of in excess of 500 million pounds of annual demand versus the current 170 million pounds. Clearly, this increase in demand is well in excess of current and anticipated supply. As outlined on slide nine of our latest investor presentation, historical market data circa 2021-2022 estimates a GAC supply deficit of between approximately 50 and 115 million pounds between 2025 and 2029. Importantly, this data does not factor in the significant increases in demand driven by the EPA's recently announced regulations. We estimate that normal market growth, when combined with municipalities seeking to comply with the new EPA regulations in advance of the 2029 deadline, will potentially result in 370 million pounds of excess demand versus current supply. With this supply and demand backdrop, we believe prices could continue to materially improve versus our business plan estimates, and even the pricing reflected in our inaugural supply contract. We believe the regulatory landscape for PFAS continues to dramatically change, not just nationally, but globally. The level and intensity of discussions and focus on the topic is palpable, and we're proud to be at the center of this critical global initiative. We anticipate similar regulations to those recently announced by the EPA will be adopted in other markets around the world. This will further expand our addressable market and opportunities for growth. We remain dedicated to our mission of enabling customers to meet these evolving regulations through our innovative technologies. As I noted earlier, the ongoing construction of our new 25 million pound GAC facility is progressing on schedule for commissioning in the fourth quarter of this year. This expansion will significantly enhance our production capacity and fortify our supply chain, ensuring we meet both current and future demands. While we remain keenly focused on developing phase one of our strategic growth project at Red River, we are actively assessing the viability of a second 25 million pound at Red River. This remains in the planning stages, but importantly, we have already secured all necessary permits to quickly execute on a Red River phase two project. We believe the combination of market-ready product, existing site location, and necessary permits in place puts us several years ahead of any potential competition, which will undoubtedly be attractive to the market should demand and pricing improve as we expect. With that, I will hand it over to Stacia to discuss the latest financials in greater detail.

Thanks, Bob, and thanks, everybody, for joining us today. We delivered strong financial results during the first quarter, with revenue growing 4% year over year, driven largely by enhanced contract terms, including 16% growth in average selling price and positive changes in product mix, partially offset by a 6% decline in volumes. Our gross margin in the quarter was approximately 37%, more than double the 17% reported in prior year period. As a result, in the first quarter, we achieved the fourth consecutive quarter of double-digit year-over-year percentage growth in ASP and also reduced our net loss over the prior year period. Adjusted EBITDA loss improved year-over-year to $1.1 million compared to an adjusted EBITDA loss of $7.7 million in the prior year period. Net loss was $3.4 million compared to a net loss of $7.5 million in Q1 of 2023. I would note that these improvements have come in what is a seasonally weak quarter for the company and on the back of what was a very mild winter. To achieve these enhancements against a backdrop of lower volumes as a result of contract enhancements we flagged in the second half of 2023 is especially encouraging. Again, our average selling price for the quarter improved 16% year over year. We continue to eliminate negative margin contracts as we focus on profitability over volumes and at the end of the first quarter have reduced loss making contracts to roughly 3% of volumes versus roughly 24% in 2022 and approximately 13% in 2023. Selling general and administrative expenses totaled $7.7 million, reflecting a reduction of approximately $3.6 million versus the prior year period, driven by a reduction in payroll and benefit expenses, as well as legal and professional fees, offset by a higher board compensation and rent and occupancy expenses. Research and development costs for the first quarter totaled $1.6 million compared to approximately $0.7 million in the prior year period. Year-over-year growth in R&D was primarily driven by conducting product qualification testing in the first quarter of 2024 with potential lead GAC adopters. Based on today's GAC contract announcement, we believe this reflects a very smart use of our capital. Overall and on an annualized basis, our performance demonstrates our ability to operate our PAC business in a way that contributes positively to our economic position while further enabling us to pursue and execute on high growth, high margin opportunities with our expanding GAC business. As Bob mentioned, we fully anticipate that our PAC business will be cash-generative in 2024, and with it, we'll have a much more secure foundational business on which we can add more rewarding GAC opportunities. Turning to the balance sheet, we ended the first quarter with cash of $44 million, with a change versus last year and quarter driven by ongoing strategic investments and expansion at Corbin and Red River. As Bob noted earlier, we updated our 2024 CapEx forecast to a range of $60 to $70 million, of which Red River Phase I is expected to account for $55 to $60 million. To echo Bob's comments, we remain extremely confident in our ability to fund our CapEx needs via our existing cash, cash generation, ongoing cost reduction initiatives, potential prepayments on GAC contracts, and perhaps most pertinently, our planned refinancing and expansion of our term loan, all without the requirement of further equity. With regards to this previously discussed refinancing, I am happy to confirm that we have appointed advisors to execute this transaction, and our initial conversations with potential lenders support our confidence into entering into a new agreement with Enhanced Economics within the next few months. Further, we expect to gain even greater flexibility with an expansion of the facility supported by our current low debt position and improved and highly attractive future cash flow profile. With that, I will turn things back to Bob.