Arq, Inc.

Greetings and welcome to the ARC fourth quarter 2025 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 bar zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Anthony Nathan, Head of Investor Relations. Thank you, sir. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us today for our fourth quarter and full year 2025 earnings results call. With me on the call today are Bob Rasmus, ARC's chief executive officer, and Stacia Hansen, ARC's 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 ARC's investor relations team at investorsatarc.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 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 10K for the period ended December 31st, 2025, and other filings with the 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 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. With that, I would like to turn the call over to Bob.

Thank you, Anthony, and thanks to everyone for joining us this morning. The decisions we're announcing this morning require significant detail and we'll be providing you with that today. So, let me address the most significant update directly. After extensive additional evaluation and testing, we have made the decision to pause our GAC production project to conduct a comprehensive engineering and production process optimization review of the best path forward. I am confident it is the right decision for maximizing shareholder value and the long-term success of this company. So I'm going to walk you through exactly why we've reached this conclusion. I'm going to spend time on this, more time than you might expect, because I think it's critical that you understand not just where we are today, but how we got here, what problems we've solved, what challenges remain, why we have made this decision, and what our path forward looks like. Then I'll turn to Pat, which continues to perform extremely well and provide the growing profitable foundation for the company. But first, let's start with granular activated carbon. We are pausing GAC production to conduct a comprehensive engineering and production process assessment of the optimal path forward. We do not have a firm timeline for completion. Our goal is to complete it as quickly as possible, ideally by our next earnings call. Let me be clear about what this means practically. There will be no GAC production in 2026. Our assessment will help determine when we can expect material GAC production to resume. While disappointing, it's the reality of where we are. Let me walk you through the specific technical challenges we have faced thus far. First, the original design flaws. Our former engineering firm, with whom we remain in active litigation, created fundamental design flaws in the plant. These weren't minor issues. They include things like having structure and equipment elevations that are materially off, having around 320 feet of duct runs that allow gases to condense, material conveyance systems that are ill-designed for the product being handled, inadequate control systems for utility supplies, and so on. They were systemic problems that have manifested in different ways as we've attempted to commission and operate the facility. and they remain the root cause of initial cost overruns and timing delays versus the original budget. Second, moisture content. The Corbin Wet-Take feedstock's 40% moisture content created handling difficulties that were exacerbated by the ill-designed product handling systems at commercial scale. When received at Red River, this material becomes problematic as conveyance and handling can cause moisture to squeeze to the surface, making it sticky and inhibiting efficient production. Solving the challenges created by the variable moisture content was exacerbated by the design flaws. Third, design inefficiency. We identified inefficient design configurations, including numerous 90-degree angles in the material conveyance processes that exacerbated our operational challenges. Fourth, and most recently, the off-gas system design. The original design created an insufficiently heated off-gas duct of over 300 feet. When gases cooled in this ductwork, they condensed and solidified, requiring frequent shutdowns for cleaning and maintenance before we could restart production. This created a cycle of constant interruption. Fifth, we solved the off-gas system design via the installation of a thermal oxidizer. At the time, we had thought this was a complete solution, but with hindsight, it turned out to be just a partial solution. When we conducted testing in late December to determine the modifications necessary to the existing thermal oxidizer in order to reach our target of 25 million pounds production, it became apparent that the amount of gases, air and natural gas, needed to process the off-gas and destroy the tire was grossly underestimated by the original engineering design. The original engineering did not appropriately consider or conduct the proper analysis to identify the tire composition and excess amount of off-gas. This excess volume of resulted off-gas could not be handled by the existing plant afterburner system as originally designed by our former engineering firm. No amount of modification to the thermal oxidizer would overcome the initial off-gas system design efficiencies. Now I want to talk about the problems we have solved. We haven't been sitting idle. We've been methodically working to find solutions to these issues. Most recently, we addressed the moisture and design issues by making the strategic decision to transition to purchased domestic bituminous coal feedstocks. This is proven technology used successfully throughout the industry. Using bituminous proven performance coal feed stack eliminates the moisture-related production constraint, reduces freight costs significantly. Remember, we were essentially shipping water with the Corbin feed stack and improves yield through drier input materials. We address the off-gas system by bringing in a thermal oxidizer to properly handle the off-gases when charred granules are heated during carbonization. Meanwhile, our testing confirms that GAC product quality with purchased bituminous coal remains exceptionally high, often exceeding industry benchmarks, as a direct result of our patent-pending technology and technical know-how. And it is worth adding that customers don't view the feedstock source as a material factor in their purchasing decisions, so we remain entirely confident that it will not impact customer uptake. These weren't minor fixes. Each represented significant technical challenges that we methodically and systematically addressed. This brings me to why we're pausing now after addressing these other issues. As we prepared to execute the purchase coal conversion, we took what I call a proactive belt and suspenders approach. We brought in an independent outside testing firm to analyze our entire off-gas system and determine precisely what modifications would be necessary to scale from our current approximately 15 million pound capacity to our target production levels of 25 million pounds. The testing was conducted in December. We received results in late January, and those results revealed a constraint that hadn't previously been identified. The thermal oxidizer we brought in on short notice was only capable of handling the equivalent of 15 million pounds of annual production. The results of the December off-gas testing revealed that the existing plant off-gas system could not handle the excess volume of resultant gases from properly burning off all the tires and volatiles at the thermal oxidizer at production levels of 25 million pounds or higher. Now here's the economic reality that makes this a critical issue. Producing 15 million pounds of granular activated carbon does not provide sufficient returns on a standalone basis to make it economically attractive. The margins on the first pounds are significantly lower than the margins on subsequent pounds as we achieve production scale. The business case for GAC was always built around achieving 25 million pounds or more of production, and the return profile was predicated on the average margin across that higher volume. So it follows that a materially lower volume would not have as attractive a margin. At present, and due to the results of the off-gas testing previously described, We don't have sufficient clarity on what it would cost to get from 15 to 25 million pounds, or whether it even makes sense to stop at 25 million when 50 million pounds might be more economically attractive, given the benefits of scaling fixed costs. We have variables dependent upon variables. We have just received the final test results 10 days ago. We need to refine what the scaling will cost, what modifications will be required, and what the return profile looks like at different production levels. This is why we're pausing, not because we can't solve these problems. We remain committed to GAC, but we must first clarify our spending plans and operating strategy. We've reached a point where it would be imprudent to continue deploying capital without further refinement and a complete understanding of the path to overcome the current production challenges and reach economic production. We're not going to spend material capital on a front-end conversion to purchase bituminous coal until we have further refined the off-gas related variables, including cost, timing, and spending cadence, to ensure we have the risks sufficiently mitigated. Our job as stewards of your capital is to make disciplined decisions based on complete information not to continue down a path just because we've already invested in it. That's the sunk cost fallacy, and it's a trap we refuse to fall into. The engineering assessment we're conducting will answer several critical questions. What modifications are required of the thermal oxidizer and downstream off-gas treatment to achieve 25 million pounds of production? What would it cost to make those modifications? What is the timing required to make the necessary modification? Does it make more sense to target 25 million pounds or to jump directly to 50 million pounds? What are the return profiles at different production levels? With all that being said, I want to address the question of market fundamentals because I know some of you are wondering whether this pause reflects concerns about the GAC market opportunity itself. The answer is an emphatic no. GAC market fundamentals remains very strong, pricing continues at attractive levels, supply constraints persist, and despite the delays, our customer relationships remain solid, a testament to how tight the market is. We're seeing persistent supply shortages against steady annual growth from existing demand drivers, not even accounting for PFAS related requirements, that could add significant additional demand. The opportunity is real. We remain confident in the tremendous opportunity associated with granular activated carbon development. We're also taking a $45 million write-down on our carbon assets this quarter. This is an accounting measure that reflects our decision to idle carbon operations, given our decision to switch our GAC feedstock to purchase bituminous coal. The write-down is a non-cash charge. It doesn't affect our near-term cash flow or our ability to fund operations and growth initiatives. What it does reflect is our commitment to being conservative in our accounting and transparent about the challenges we're facing. We're continuing to advance alternative applications for Corbin-Wetgate, particularly asphalt and motion blending, where we progress to the next testing phase with encouraging results. but we don't expect that these applications will generate material cash flow in 2026. Given the repeated challenges we face, we have been making significant changes to upgrade our leadership team. We've appointed Eric Robinson as Senior Vice President of Operations. Eric is an industry veteran with direct experience optimizing activated carbon facilities, including our Red River plant. In 2012, when the Red River plant was struggling with post-construction production issues, Eric's work delivered 20% yield improvements, doubled production, and materially improved plant availability. Eric's expertise specifically addresses the types of plant ramp-up challenges we've encountered. His track record at this exact facility gives us confidence that he understands both the opportunities and the potential pitfalls. We've also hired an onsite process engineer with technical oversight to augment our Red River team reporting directly to Eric. The strengthened technical capability ensures we have the right expertise at the point of operation. With Eric's appointment and Corbin idling making us a single plant business, we no longer require a COO role. I want to thank Geek Williamson for his dedication since joining ARC. Deke played a pivotal role in enhancing our PAC operations to their current profitable state. On the financial leadership front, Jayvon Cannon no longer serves as our Chief Financial Officer. We have been interviewing CFO candidates with the intention to have an announcement shortly. Anthony Nason will become VP Finance. In addition to his current investor relations role, Anthony will also be responsible for strategic planning, financial analysis, and budgeting. Anthony's eight-year tenure with ARC, including oversight of all equity and credit financings in the ARC Limited ADS combination, now ARC, Inc., positions him well for this expanded role. Stacia Hansen continues as chief accounting officer responsible for accounting tax and financial reporting and will also serve as the company's principal financial officer. Last November, we also hired Jeanette McQueenie as senior vice president and head of sales. Jeanette has had a long and successful sales career with significant chemical and activated carbon sales experience. Jeanette is both a proven producer and a leader. In addition to her leadership abilities, Jeanette has brought the strategic orientation skills we were seeking. All of the changes just mentioned stem from our goal to upgrade the talent and performance level of our executive leadership team and company. Now let me turn to our PAC business. I've spent significant time on GAC because that's what's changing and that's what requires explanation. But it's important to recognize what hasn't changed, which is that we have a profitable growing PAC business that provides the foundation for this company. Our PAC business delivered exceptional performance in 2025. Full year revenues reached approximately $120 million, up 10% year over year, while reported adjusted EBITDA was $13 million, representing a 26% improvement over 2024. But that $13 million figure significantly understates the true performance of our PAC operations, and I want to be explicit about this. GAC startup costs, unplanned downtime, inefficient furnace utilization, and operational challenges cost us several million dollars in 2025. Let me break that down. Taking Corbin offline alone saves us several million dollars annually in operating costs. We incurred significant expenses from GAC startup associated with plugging issues and constant maintenance shutdowns. We produced non-sellable GAC product that consumed furnace hours without generating revenue in which added costs. We had operational inefficiencies and distractions from trying to commission a troubled facility. Even with the impact of certain of these GAC headwinds, our 2025 adjusted EBITDA was $13.2 million, which we believe highlights the true earning power of our PAC business. This context is critical because it explains our business model. We effectively operate by selling furnace hours. We have a finite number of hours we can run our furnaces each year, and we must make optimal decisions about how to allocate those hours. For the past year, we've been allocating furnace hours to GAC production that generated losses instead of profit. By pausing GAC, we're redirecting those furnace hours back to our proven, profitable PAC business. This isn't just about avoiding future GAC losses. It's about actively improving our near-term financial performance and optimizing our long-term potential. We have over 15 years of experience operating this PAC business. This is not a novel operation or an experimental process. It is a proven profitable business that we execute consistently. With Eric's activated carbon and experience at Red River, we believe we can further enhance this business. This performance reflects our strategic transformation, sustained volume growth, enhanced product mix, and continued pricing strength as we capture higher value, higher margin applications beyond traditional power markets. Our shift towards specialty products and engineered materials commanding premium pricing has fundamentally improved our business profile. The PAC market shows robust performance with excellent visibility. We have 96% contract visibility on 2026 targeted volumes, 75% visibility through 2027, and 43% through 2028. Our three-year customer retention rate of 86% demonstrates customer stability and loyalty. This is a stable, profitable business with long-term customer relationships and clear visibility into future demand. Now let me turn to guidance, which we're providing in detail for the first time. I recognize the irony of introducing guidance at the same time we're announcing a major project pause. I also recognize that some of you may be skeptical, given our track record with GAC over the past year. But here's the critical distinction. We're providing guidance on a business we've operated successfully for over 15 years, not on a novel facility we're still trying to commission. This is a proven operation with clear visibility into volumes, pricing, and costs. None of the factors contributing to our GAC challenges over the past year or so apply to our PAC business. With that in mind, we believe you, our investors, need a frame of reference to value this company. We're providing this detail so you can make an informed decision. With that said, for full year 2026, we anticipate revenue in the range of $120 to $125 million and adjusted EBITDA of $17 to $20 million. These projections assume no GAC contribution and are based entirely on our PAC business performance. We are also providing operational metrics that offer deeper insight into our business drivers. This includes PAC average selling price of 88 cents to 91 cents per pound compared to 89 cents in 2025 and 82 cents in 2024. Production volumes of 122 to 125 million pounds compared to 117 million pounds in 2025 and 111 million pounds in 2024. The pricing guidance reflects continued success in market diversification and value capture. We're not just selling commodity-packed products. We sell engineered products into specialty applications that command premium pricing. The volume growth demonstrates both market demand and our operational capabilities. And here's an important point. Causing GAC production creates additional pack furnace capacity, enabling higher pack production than we previously anticipated. Even with GAC phase one online and at capacity, we believe it would likely not require any reduction in pack production volumes, a significant operational advantage that preserves and extends the earnings power we're demonstrating in 2026. We expect additional revenues from other chemicals and products will contribute approximately 13 to 15% of total revenues consistent with 2025 and previous years. Now let me turn it over to Stacia to walk through the detailed financial results and provide additional context on our Q4 performance.