Arq, Inc. (NASDAQ:ARQ) Q4 2023 Earnings Call Transcript

Arq, Inc. (NASDAQ:ARQ) Q4 2023 Earnings Call Transcript March 13, 2024

Arq, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to Arq’s Fourth Quarter and Full Year 2023 Earnings Call. At this time all participants will be in listen only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. Please note this conference is being recorded. I’ll now turn the call over to Ryan Coleman with Investor Relations. Thank you. You may now begin.

Ryan Coleman: Thank you, operator. Good morning, everyone. And thank you for joining us today for our fourth quarter and full year 2023 earnings results call. With me on the call today are Bob Rasmus, Arq’s Chief Executive Officer and President; as well as Kim Hansen, Arq’s VP of Finance. This conference call is being webcasted live within the Investors section of our Web site 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 Arq’s Investor Relations team at investor@arq.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.

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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-K for the year ended December 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 in 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.

Bob Rasmus: Thank you, Ryan. And thanks to everyone for joining us this morning. Let’s begin on Slide 3 of our presentation. We finished 2023 with strong momentum and are very pleased with the steps we have taken and continue to take to further improve our business. Our fourth quarter results clearly indicate the improving profitability of our existing business. We delivered a very solid quarter marked by revenue growth of 20% over the prior year, nearly doubled our gross margin to approximately 50% versus last year, generated strong cash flow from our PAC business in the form of $7.2 million of adjusted EBITDA, and we are excited to have achieved positive net income for the first time in eight quarters. As I have emphasized since joining, our absolute focus is on execution and maximizing shareholder value.

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Q&A Session

We remain dedicated to optimizing our PAC business, where in a short period of time, we have successfully enhanced the economics and overall profitability. While we pursue exciting and highly attractive opportunities in the granular activated carbon market, it’s crucial that our PAC business stand on its own from an economic perspective. In my remarks on our last earnings call, I stated that we wanted to improve the performance of our foundational PAC business. This was to be achieved by reducing costs, improving operating efficiencies, eliminating unfavorable or loss making relationships and focusing our sales efforts on the best opportunities to improve product mix and increase our average sales price. Our goal was to improve economics and overall profitability.

Our strong and encouraging fourth quarter performance reflect the results of those efforts. We increased our average selling price by [6%] versus last year and 18% sequentially. We eliminated negative margin contracts, of which we expect only one will be remaining by March 31st of this year. We enforced our take-or-pay contracts, recognizing $4.7 million in revenue in the fourth quarter. We also made excellent progress in expanding our penetration of the water PAC market. This is important as this market segment carries a higher ASP than our existing PGI segment. The PAC business is expected to generate net cash in 2024. As I have previously commented, we strive to partner with our customers. This is evident in our attractive retention rates, which as we mentioned last quarter, were greater than 90%.

We have maintained our high retention levels even while executing profitability enhancement actions over the last several quarters. To best serve our customers, we rely upon strength across our entire business. I am more confident than ever in the robust portfolio of opportunities we see ahead of us. Our platform provides the ability to better serve our customers [Technical Difficulty] in the future with a broad, innovative and growing product mix that meets their needs while driving value for our shareholders. Advancing a bit to Slide 6. While we had a very strong quarter and are very pleased with the steps we have taken and continue to take to further improve our business, there is one item which did not make me happy. While the timing for completion of our Red River facility remains on track, the cost to complete the first phase has risen.

We are today updating our [expected] CapEx for our strategic investment in our Red River facility. In addition to the $12 million of CapEx total, which we spent on the expansion as of year end 2023, we now forecast spending $45 million to $50 million on the Red River expansion in 2024 with a small remainder in 2025. This reflects total expected project spending for Red River Phase 1 of between $62 million and $67 million. This represents a midpoint increase in total project spending of approximately 36% versus our last forecast provided in January. So what are the components of the increase? Approximately 45% of the increase is due to increased construction costs. Previous assumptions did not adequately take into account inflation and moving to a six day a week, 10 hour a day construction schedule.

Another 45% was due to increased equipment costs. The remaining approximately 10% relates to various items, including engineering fees. A logical question to ask is how did this happen? The increased construction costs are attributable, as I mentioned, to inflation and an accelerated schedule. A portion of the rise in equipment cost is a result of design changes, which will increase efficiencies and ultimately volume. The other portion is a result of inaccurate estimate inputs from outside consultants, engineers who are managing the program for Arq. This was an issue that we uncovered in recent weeks and immediately took steps to address the problem In addition to implementing more comprehensive controls over the process moving forward, I am confident that our recent appointment of Deke Williamson as Arq’s Chief Operating Officer, will add further surety to quality, planning and execution around this critical project.

As I previously discussed, I have long known Deke and have firsthand seen his ability to execute projects with world class quality, precision and efficiency. We believe that we have now accounted for all changes to our forecasted spending and are comfortable in the updated project estimates we’ve communicated today. Despite this increase, we remain in a position to fund the project from cash on hand, cash generation, ongoing cost reduction initiatives, potential customer prepayments for GAC contracts and a planned refinancing and potential expansion of our term loan for which we already have a term sheet in place and importantly, we have no plans to dilute our existing shareholders by selling equity. While the news of the cost increase is disappointing, it should not detract from the overall attractiveness of the project.

Market prices for GAC continue to increase. We remain confident in our ability to contract our capacity prior to production. Also, we previously viewed the addition of granular activated carbon production capability as a pound for pound reduction in our PAC capability. With the additional efficiencies resulting from some of the design changes, which is partially responsible for increased equipment costs, we believe GAC volumes will be additive to our overall production capability on a pound-per-pound basis. Even with the cost increase, the overall investment economics remain attractive. I expect a three year or less payback while generating long term shareholder value. Turning back to Slide 3. We also continue to transform our business from an industrial manufacturing company to an environmental technology company.

Development at our Corbin facility remains within budget and on time for commissioning in early second quarter of 2024. Construction of our incremental 25 million pound GAC line at Red River commenced in October 2023 with commissioning targeted for the fourth quarter of this year. Looking at the broader business and market, I am happy to report that beyond the optimization of our legacy PAC business, we are also making very encouraging progress on multiple fronts of our wider and evolving product offering. We continue to see solid demand for our water focused PAC products which represent incremental higher value, higher margin opportunities. It’s important to note that our interest in European markets is reinforced by the existence of a strategically undersupplied market.