Arq, Inc.

Greetings and welcome to the ARC second quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Anthony Nathan, Head of Investor Relations for ARC. Thank you. You may begin.

Thank you, Operator. Good morning, everyone, and thank you for joining us today for our second 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 within 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 can contact our investor relations team at investors at arc.com. 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 applied 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 June 30th, 2024 and other filings with the S Securities and Exchange Commission. Except as expressly required by the 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 especially important to review the presentation and today's remarks in conjunction with the gut 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. To start today's call, I'd like to share a high-level review of our second quarter divided into four key sections. Our financial results, progress on GAC contracting, progress on our strategic growth projects, and an update on our capital position. First, driven by our ongoing strategic evolution and transformation, we reported another quarter of strong and sustainably enhanced financial performance. Once again, revenue improved over the prior year, reflecting an annual increase of 24% to $25.4 million. This was driven in part by our fifth consecutive quarter of double-digit year-over-year percentage growth in average selling price. We realized attractive gross margins of 32%, reflecting an improvement of more than 700 basis points over the same period last year, as we continue to sustainably drive costs down across our business and focus on optimizing our PAC portfolio. We generated positive EBITDA during the quarter of approximately $450,000, marking the fourth consecutive quarter of year-over-year improvement and evidencing the benefits of our initiatives to drive greater profitability in our foundational PAC business. This positive adjusted EBITDA performance is very much in line with our expectations and demonstrates the positive directional trend of our legacy business. Importantly, these results were achieved despite a strategic acceleration of certain of our biennial maintenance activities in April, which accounted for approximately $1.4 million of cost during the quarter. Of note, if we were to exclude this cost out of our cost of goods sold, gross margin would have been even better. Our plant shutdown activities and expenses related to physically connecting the GAC facility to our legacy Red River plant will enable us to capture multiple operational synergies. The next scheduled full plant maintenance will now occur in 2026 versus 2025 as would have been the case without our strategic decision to accelerate this year. As a reminder, the first two quarters of the year generally reflect seasonally weak periods, but we were encouraged at the strong and improving activity we saw during the second quarter, which provides strong momentum as we head into our seasonally stronger quarters during the second half. We continue to expect our PAC business to be cash flow generative for the full year, creating a solid foundation on which to layer our accretive higher margin GAC revenues and cash flows. Second, we're following through on our commitment to secure additional contracts at our Red River GAC facility. We are now 52% contracted on our nameplate capacity with roughly six months left to initial production. evidencing the strong demand for our differentiated products and solutions. Our agreements continue to reflect attractive pricing for products that are materially accretive to our foundational PAC portfolio, further supporting the capital we're investing in this exciting growth portion of our business. Third, our key growth projects are on track. At our Corbin facility, we commenced commissioning early during the second quarter, and began producing initial purified bituminous coal waste feedstock for quality control and specification testing, which will wrap up ahead of our first production at Red River. And at our Red River GAC facility, we remain on track for Q4 commissioning as well as first deliveries in Q1 of 2025. Today, we are reiterating our full 2024 capital investment forecast of $60 to $70 million. We expect our investment in these projects will generate payback in approximately three years. Fourth, we continue to bolster our capital position while strategically investing in our ongoing transformation. This includes an opportunistic capital raise completed in May with a $15 million pipe raise completed with an institutional investor. This unsolicited investment further bolstered our liquidity position as we continue to invest in transformational projects with highly attractive expected returns. And related to our previously discussed refinancing, we announced today that we recently signed a non-binding term sheet that would materially expand the size of the facility while further enhancing liquidity. More on that in just a bit. I'd now like to hit on a few other notable recent events. We were pleased to recently announce that ARC has been added to both the Broad Market Russell 3000 Index and the Russell 2000 Index. This inclusion is a significant achievement for us and reflects the hard work and dedication of our entire team. Being part of these widely recognized and respected benchmarks for US stock market performance, is a testament to our company's growth and evolution. It underscores the success of our strategic initiatives and our ongoing transformation into a leading environmental technology company. As you are likely aware, Russell indexes are widely used by investment managers and institutional investors for index funds and as benchmarks for active investment strategies. We anticipate that our inclusion in the Russell family of indices will bring several benefits, including broadened exposure to the investment community and greater liquidity in our stock. During our first quarter earnings call in May, we were proud to announce our inaugural GAC supply contract, marking a tremendous milestone in our strategic evolution. In the months since our last earnings call, we have continued to make progress in our commitment of entering into additional contracts for GAC supply at our Red River facility. As I noted earlier, we've recently secured significant additional contracted volumes for GAC supply, bringing up our total contracted demand to 13 million pounds per annum when fully scaled up. This represents 52% of our expanded nameplate capacity of 25 million pounds at Red River. It's worth noting that we've achieved this milestone roughly six months ahead of our first deliveries, which remain on target for Q1 2025. These GAC contracts have attractive pricing, especially compared to our legacy PATH products, and not only affirm strong market demand, but validate our GAC products and strategy. They also reflect the market's recognition of the potential of our superior offerings and environmental technology. These GAC sales are set to significantly grow our total revenue base and expand our margins. Given the limited supply of high-quality, fully integrated, domestically produced granular activated carbon in the market and our ongoing customer discussions, we're confident in our ability to fully contract our remaining nameplate capacity before production begins demonstrating how our unique, high-quality, environmentally friendly feedstock resonates with the market. As we advance even closer to the financial opportunity represented by our growth into GAC products, it's perhaps worth discussing further how we view the sector. As we flagged in our first quarter results, we believe the regulatory changes put in place by the EPA in April are likely to have a material, long-term effect on demand for GAC products, given the increasing focus on efforts to remove PFAS or forever chemicals from our nation's water supplies. To reiterate, we believe that if you assume all existing water suppliers must reduce their PFAS contamination from 70 parts per trillion to just four parts per trillion, the limitations outlined in the new regulations This will require each user to consume between three to five times more granular activated carbon. Taking this further, we believe this leads to a supply gap of approximately 370 million pounds by 2030, or put another way, a potential supply gap greater than the entire North American GHC market today. And it is not just our forecast that imply this level of supply shortfall and market tightness. A recent research report published by Goldman Sachs included several notable figures that I'll highlight today. First, according to the report of the roughly 153,000 public water systems in the US as of 2023, approximately 35% will require PFAS treatment facilities over the next several five to six years, up from 10% today. Second, they estimate that the US drinking water PFAS treatment market is estimated to reach $2 billion per year by 2030, which is roughly 10 times larger than the market size in 2023. Third, the report states that given granular activated carbons advantages versus traditional products and solutions, GAC's market penetration rate for PFAS treatment could reach approximately 80% by 2030. And fourth, the replacement cycle for PFAS removal equipment is expected to increase by twofold for groundwater and fourfold for surface water versus historical usage levels. Together, we believe this evidence is further independent support for a market whose fundamentals will continue to support our business and its growth strategy over the near and long term. I remain a firm believer that where economic opportunities of this size arise, capital will flow. And we fully anticipate that incremental supply will fill some of this gap. But crucially, we have a critical and strategic first mover advantage. We believe it will take at least two to three years for new supply to come online, given permitting, financing, and construction timelines. Further, we believe that the cost to build greenfield sites today is between $5 to $7 per pound of production, dramatically impacting the economics others can realize through their investment dollars. Brownfield sites may be less expensive at between $3 to $5 per pound of production, but this is still indicative of major capital outlay in a market that has been typically slow to react in terms of capacity. Based on these round numbers, we believe it is reasonable to conclude that our plant assets are worth multiples of our market cap. Let's turn now to a brief discussion of the regulatory environment, particularly in light of the upcoming election cycle. Irrespective of the outcome in November, the level of demand that we had seen for PFAS-facing GAC solutions prior to the latest EPA regulatory changes makes us very confident that demand is fundamentally customer-led rather than regulatory-driven. While it is clearly not my place to opine on political outcomes, I would note that there were two areas of environmental regulations that the previous Republican administration did support, and one of them was the PFAS action plan, a PFAS strategy. That being said, the municipal water market slash PFAS market is not the sole or primary driver of our expansion into granular activated carbon. Our sales team has made great strides to ensure our GAC contract pipeline represents a true portfolio of opportunities and not just PFAS-related customers. As we previously announced, our second GAC contract was with a company specializing in in the manufacturing of personal and industrial air purification devices. This is an entirely separate subsector reflecting compelling diversification as well as attractive pricing. Another sector that I want to briefly touch on is the GAC demand relating to renewable or biogas production. Renewable natural gas, or RNG, is essentially biogas derived from the thermal gasification or biodecomposition and digestion of organic matter. The organic matter can come from livestock waste, landfills, water, sludge, food waste, and other organic waste operations. The RNG in turn has to be processed to purity standards before being introduced to the pipeline grid and this processing includes the removal of sulfur-containing components such as hydrogen sulfide or H2S and silicone-containing impurities. Specific to sulfur and silicone impurities, granular activated carbon is the leading technology used by biogas producers globally for their removal. Lab-scale testing has continually confirmed the efficacy and tunability of our specialty ARF GACs achieving up to 150% the removal performance of currently applied GHCs and alternative metal oxide-based sorbents. Early testing and collaboration with a large market-leading biogas producer has been very positive. In a growing market like renewable biogas purification, Being able to reliably grow with the market, provide a consistent supply, and ability to support products commercially, supply chain-wise and through technology collaborations, can be a key differentiator, all things we are poised and capable of doing. I reference this market for two reasons. One, because it demonstrates that our growth business is not just tied to the fortunes of PFAS-related regulations. And two, because not only is the RNG market another rapidly growing industry, but it is also one which is dominated by producers who have massive engineering expertise and capital budgets to facilitate this expansion. To give you some idea of the scale, in the EU today, there are some 1,300 biogas sites already in production, and this figure is estimated to be growing at roughly 20% per year. In terms of energy production, and to give you an idea of scale, this equates to more than 120 million barrels of oil equivalent per annum. In the US, where the industry was slower to start, the figure is closer to 12 million barrels of oil equivalent per annum, but growing quickly and rapidly catching up. We are focused on multiple industries and end users across a wide swath of the market. This diversity of customers can help eliminate reliance on any one segment or sector. In turn, our customers' focus is on being able to secure product from a fully integrated supplier of granular activated carbon who also offers best-in-class performance. Our ability to provide incremental environmental benefits as well makes us a very compelling offering. We remain extremely excited about this space continue to see strong demand across the board, and anticipate updating the market as we win more contracts over the coming months. As we mentioned previously, our CapEx guidance for FOIA 2024 remains in line with our previously committed guidance of between $60 and $70 million. We continue to aggressively seek and identify opportunities to reduce our expenditures and have been successful in capturing multiple savings as a result. I would emphasize that our 2024 capital spending forecast remains unchanged despite the negative impacts associated with the unprecedented rain in the region of our Red River facility. These conditions have contributed to a construction delay of roughly six to seven weeks. Our team is working actively to identify solutions to claw back some of these delays. And as of today, we remain confident in achieving first deliveries in Q1 2022 as previously forecasted. Related to capital spend, and as we previously mentioned, we took the decision in April to implement our maintenance program, which we typically execute every two years. The logic for this decision was that we wanted to do it ahead of our expansion into GAC production so that we could minimize downtime once we are at nameplate capacity in 2025. I believe this will prove to be a prudent decision, and although it drove approximately $1.4 million of costs that we were not able to capitalize during the second quarter, we are highly confident the near and long-term benefits will far outweigh this. As I noted earlier, we have signed a non-binding term sheet to refinance the company's existing term loan that would materially expand the size of the facility while further enhancing liquidity. We continue to be conservative in our assumptions, and the contemplated facility is sized to fully finance our capital investment and working capital requirements as relates to our ongoing granular activated carbon projects. which we expect to contribute quickly to our cash flow generation. With that, I will hand over to Stacia to discuss the latest financials in greater detail.