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

Arq, Inc. (NASDAQ:ARQ) Q4 2024 Earnings Call Transcript March 6, 2025

Operator: Greetings and welcome to the ARQ Q4 and Full Year 2024 Earnings Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Anthony Nathan with Arq Investor Relations. Thank you. You may begin.

Anthony Nathan: Thank you, operator. Good morning, everyone, and thank you for joining us today for our fourth quarter and full year 2024 earnings results call. With me on the call today are Robert Rasmus, Arq’s Chief Executive Officer and President, as well as Stacia Hansen, Arq’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 Arq’s investor relations team at investors@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.

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 10K for the year ended December 31, 2024 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 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 GAAP references in the financial statements. With that, I’d like to turn the call over to Bob.

Robert Rasmus: Thank you, Anthony, and thanks to everyone for joining us this morning. As you can see from the results we’ve shared today, 2024 was a very good year for Arq. Our results for 2024 reflect a business, which has been successfully turned around into a cash flow contributor. We ended the year in a position of strength. In the fourth quarter, our average selling price increased by approximately 14%. We lowered our cost of capital and increased financial flexibility by refinancing our term loan, and we had another quarter of positive adjusted EBITDA. This was driven by continued strong operational execution in our foundational PAC business. Today’s results highlight the profound transformation of our foundational PAC business, demonstrating both its sustainability and ongoing evolution.

As I’ve often said, there’s no magic potion behind this success, just consistent laser-focused execution on the fundamentals, increasing operational efficiencies, expanding into new markets, increasing our ASP, all while driving down costs. Considering where we started when I took over as CEO in 2023, I’m immensely proud of the turnaround the team has delivered. From the beginning of 2023, we’ve transformed from a business losing money on nearly one-quarter of all volumes sold at the gross margin level to a business where every contract is profitable as of 2025. We’ve achieved this through a concerted, relentless, and ongoing effort throughout the organization to focus on shareholder returns. We’ve utilized our fully integrated domestic supply chain to ensure product availability, and we’ve expanded into new markets.

Our goal was and is to maximize our profitability and future opportunities, ensuring a lasting transition. As part of this process, we’ve successfully diversified our PAC business, increasing our presence in end markets like water, cement, and industrial sectors while reducing reliance on the power generation sector. We believe this ongoing effort positions out to grow future revenues and, more importantly profitability, and the numbers show it. Today, we were proud to report a 10% year-over-year increase in our revenues for full year 2024 to approximately $109 million. As many of you heard me say, I’m constantly urging our operating team to remember that every penny counts. Every penny saved in operating costs is nearly a million dollars added to our bottom line.

While I am proud of our ability to grow revenue in 2024, we were also successful in controlling our cost of goods sold increases to approximately 3%, enabling us to expand gross margins. Given the historic margins of the PAC business, this has been as critical as ASP increases to the turnaround we’ve achieved. It truly is a case where every penny counts, and I’m proud to report that we achieved an increase not just in our average selling price, but also in gross margin year-over-year, up approximately 410 basis points in fiscal year 2024 versus 2023. I strongly believe there is room for further improvement. Our PAC turnaround in 2024 is a major achievement and one in which I am very proud, but the turnaround is not a one-time event. Looking ahead, we continue to forecast ongoing sustainable improvements in the profitability of our foundational PAC business.

While the current trajectory remains positive, we recognize that at some point the curve will naturally begin to flatten. That said, we are still actively optimizing the business. There is room for further efficiencies through improved operations and strategic price increases, particularly as we continue our diversification into adjacent markets and explore product alternatives. While the pace of improvement may moderate over time, we remain focused on driving long-term growth and profitability. The reduction in operating costs is particularly encouraging, reinforcing my belief that our cost cutting strategy is delivering results. As I said, I strongly believe there is room for further improvement. In fact, we have already taken steps this quarter to further reduce our costs.

We also made significant progress in reducing SG&A, which I’ve long felt was disproportionately high for a business of our size. SG&A fell from approximately $34 million in 2023 to approximately $29 million in 2024, a reduction of about 15% year-over-year. The primary drivers were a reduction in payroll expenses and a decrease in legal costs, the majority of which related to the Arq acquisition completed in 2023, partially offset by an increase in franchise and used taxes, rent and occupancy expenses, construction-related labor, and licensing and fees. Importantly, this work is ongoing. We expect further efficiencies in SG&A reductions in 2025. We’ve laid the groundwork for a leaner, more efficient business while at the same time working to bring our new GAC product online with more cost savings expected to come.

Our PAC business serves as a crucial operational baseline, or as we call it a foundation, when combined with our exceptionally valuable asset base, conservatively estimated to have a replacement value of at least $0.5 billion, it creates a strong foundation for our business. From this foundation, we’ve been able to begin expanding into the more dynamic, higher-growth GAC segment. With higher pricing, ultimately anticipated better margins and corresponding stronger returns on capital, we believe the granular activated carbon business is our future growth engine. To this end, we were extremely pleased to attract approximately $42 million in new net equity investment during 2024. Equally important, our overall market capitalization more than doubled over the course of 2024, a clear testament to investor confidence in our PAC business, the transformative GAC opportunity, and the solid growth strategy we’ve implemented.

This improved investor confidence was further validated by the successful debt refinancing recently completed on December 27. This transaction allowed us to replace the expensive legacy $10 million CFG term loan with a more cost effective and substantially larger $30 million revolving asset back facility from Midcap Financial. By executing this refinancing, we’ve materially reduced our cost of capital. This refinancing was a key milestone we set for 2024. We’re pleased to have completed it successfully, reducing our costs and expanding our credit capacity. Coupled with the equity raised in 2024, we are now in a stronger and more flexible position. With a strong balance sheet, an appropriate debt structure, and a growing base of sophisticated institutional investors, I believe we’ve materially evolved as a business.

We entered 2025 in a significantly stronger position than 12 months ago. That being said, like any business, 2024 was not without its challenges. First, I’d specifically highlight CapEx for our GAC expansion at Red River. After a few increases in our expected spending announced throughout the year, we last estimated in November that our full year 2024 CapEx for this project would total $60 million to $70 million. However, Red River Project CapEx for the year totaled $80 million, which reflects $10 million above the high end of our most recent forecasts. As CEO, I own this cost increase. As CEO and a material shareholder, I am immensely frustrated. While we own our outcomes and our entire team operates daily with a clear understanding of accountability, many of these drivers were led by factors out of our direct control.

The $10 million overage was primarily driven by three factors. First, approximately $4 million to $5 million was due to issues with estimated requirements for small bar piping, including additional electrical work, switches, and related labor costs. This is one element of our recently announced suit against our former lead engineering contractor. Secondly, roughly $3 million to $4 million was driven by various smaller expenses incurred while pulling the process forward and working to derive a more timely completion. Finally, roughly $2 million was driven by higher than expected final invoices, including some that are disputed. I’d emphasize that a majority of the overages described above related to issues that should have been identified by our former partners.

Our team took decisive actions throughout last year, including taking almost all development activity in-house. Unfortunately, we’ve continued to feel the repercussions. We take responsibility for not identifying these errors even sooner, and our team remains focused on driving the project through completion and achieving the attractive target returns we continue to expect. While these challenges combined with weather-related issues during Q2 did impact Phase 1 of our GAC development. We do expect future phases to benefit from our learnings. We therefore believe that this should represent a high water mark and cost of construction as it relates to Phase 2 development and remain confident that we will be able to bring a second phase at $3 per pound of annual production or $75 million.

More recently, in the fourth quarter, we experienced 2 unplanned shutdowns at Red River of 1 week each. These unplanned outages related to boiler repairs that are now resolved, but did negatively impact margins during the period. Despite this, we still delivered strong results from our PAC business in Q4, including average selling price growth of 14% year-over-year. Net net, our foundational PAC business is in very good shape following the significant actions we’ve taken over the last several quarters. We believe it will continue to be a sustainable cash flow contributor on an annualized basis going forward. Switching now to the construction at Red River of our new GAC production line, we’re excited to announce that we expect to complete commissioning of the plant in the next few weeks, running the first product through the plant and producing on specification granular activated carbon.

This is a significant achievement by our operational team reflecting years of research, development, and successful execution, taking bituminous coal waste, converting it into purified carbon, and then using that as a feedstock to produce activated carbon, which is then used to reduce or even reverse harmful environmental liabilities like PFAS was previously thought impossible. Not only are we on the cusp of making this a reality, but we will be producing a product that has competitive advantages over technologies currently available in the market. As we’ve previously guided, while getting the first product out of the plant is a tremendous milestone, it will take time to ramp up production to our full nameplate capacity of 25 million pounds.

Based on our latest expectations, this ramp up phase will take approximately 3 months to 6 months, and we anticipate reaching nameplate capacity in the second half of 2025. Although we had originally hoped to achieve this a bit sooner and still might, we are adopting a further level of conservatism around our timeline forecasts, given the challenges we face today and our ongoing focus on doing what we said we’d do. We expect production levels to ramp up progressively during the second quarter, and we will continue to provide updates to the market as we reach key milestones. Realistically, we expect to achieve nameplate capacity around the middle of the second half of 2025, but we’ll provide updates as appropriate as our timelines become more defined.

Our goal of expanding production by 10% to 20% above nameplate capacity remains unchanged. The timing of defining the upside production run rate will be determined once nameplate capacity is achieved. Turning now to an update on our granular activated carbon contracting performance. During our Q3 earnings call, I expressed confidence in being fully contracted by the time we begin GAC production. While we remain fully capable of contracting all capacity and are currently contracted at approximately 16 million pounds today, 2 key factors have led us to take a more strategic approach. First, fully contracting now is not in the best long-term interest of our shareholders. Holding back a portion allows us to better align with our production ramp up while also entering more diverse markets, which we expect to drive stronger returns in both the near and long term.

Second, ongoing discussions with biogas and other industrial customers outside of PFAS-related applications indicate a strong preference for pilot scale testing at their facilities. With Red River now imminently operational, these tests are almost underway and results are expected within 1 month to 6 months, depending upon the application. Given that we anticipate more attractive pricing in these sectors, it makes sound business sense to reserve capacity for these contracts once testing is successfully completed and production is fully ramped. Overall, our confidence in selling everything we produce remains extremely high. Successful customer testing to date, both in our labs and independently reinforces this belief. Additionally, we are taking a disciplined approach to pricing, looking towards our products superior performance and the growing shortage of GAC supply in the market.

Shifting focus to our markets, a key area of investor attention has been the potential impact of regulatory changes, particularly following the PFAS-related regulations implemented in April 2024 under the Biden administration. Our discussions with customers suggest no concerns over a possible rollback. In fact, the trend appears to be moving in the opposite direction. Many municipalities are actively engaging to secure granular activated carbon supply in advance, anticipating rising demand and potential constraints. Public awareness of PFAS risks continues to grow, and major lawsuits against historical PFAS producers are further accelerating the industry’s response. For water utilities, this is not just about regulatory compliance. It’s also about strategic planning.

Given the potential for GAC supply shortages, customers are locking in contracts now to manage costs and avoid future price increases. A prime example is American Water, the largest U.S. water utility, which recently secured a nine-year GAC supply contract with one of our competitors. This development highlights 2 key trends. First, proactive supply security as water utilities are acting ahead of regulations, recognizing the long-term need to manage PFAS levels. And second, tighter market dynamics. Large long-term contracts are removing significant product from the market just as other companies are seeking supply. We view this as a positive signal for our business. Demand remains strong, and our disciplined approach to contracting positions us well to capitalize on these market dynamics.

As we enter the year ahead, we do so with both excitement and determination. This past year marked a transformational period for Arq as we successfully executed a full turnaround of our foundational PAC business. Now with our GAC line poised to begin production, we are focused on turning that progress into tangible results, bringing an attractive concept to life as a compelling reality. We see significant opportunities across diverse applications and pricing environments, and our strategy remains clear, maximize shareholder returns while mitigating risk. Product, customer, and geographic diversification will be key in achieving this. While our primary commercial focus this year is on activated carbon, I want to briefly highlight our asphalt project, which continues to make encouraging progress.

This opportunity excites us not only for its uncorrelated product diversity, but also for its potential for strong economics and operational efficiencies at our Corbin site. We are actively engaging with potential partners on a commercial testing program. While success is not guaranteed, our work to date gives us confidence in its potential, though commercialization is unlikely before 2026. As always, execution is the priority. You’ll hear me say this often, but our approach remains simple and effective. Expand our product lineup, reduce costs, increase our ASP and drive efficiencies. One final topic I’d like to touch on before handing over to discuss our financials is the topic of guidance, which we raised on our Q3 earnings call. This remains an item we are keen to introduce as we seek to create an even more informed investor base.

To this end, we remain entirely committed to providing guidance at the appropriate time, but as things stand, I believe the appropriate time to do that will be once we have better visibility on our GAC production ramp up at Red River. In the meantime, we’re pleased to have expanded our research coverage in what represents an increasingly robust consensus. We hope to expand our relationships and coverage following even more over the coming quarters. With that, I’ll hand it over to Stacia for a more detailed look at our financials.

Stacia Hansen: Thanks, Bob, and thanks everybody for joining us today. We delivered strong financial results during the fourth quarter and full year of 2024. 2024 was a significant year of growth for Arq. Revenue grew 10% year-over-year to approximately $109 million driven primarily by strong improvements in our average selling price, and was partially offset by a decrease in volume. Our focus on contract economics yielded a strong year-to-date gross margin of 36.2%, transforming our foundational PAC business from a starting point of nearly 1 in every 4 contracts generating a loss to generating $7.7 million in adjusted EBITDA in 2024. The fourth quarter marked our third consecutive quarter of adjusted EBITDA. We are determined to maintain this momentum in our PAC business moving forward into 2025.

Turning now to a discussion of the fourth quarter, revenue totaled $27 million driven largely by enhanced contract terms, including 14% quarter-over-quarter growth in our average selling price and positive changes in our product mix. This is our seventh consecutive quarter of double-digit year-over-year percentage growth in ASP. Our gross margin for fourth quarter was 36.3% compared to 49.8% reported in the prior year period. We point out for the fourth quarter of 2023 our gross margin benefited from recognizing higher revenue related to our take-or-pay agreements of $4.7 million versus $1.6 million in the current quarter, as well as other one-off items. It is worth noting that the lower level of take-or-pay agreements in 2024 related to volume increases resulted in improved demand for our products.

Net loss was $1.3 million in the fourth quarter of 2024 compared to net income of $3.3 million in Q4 of 2023. We generated positive adjusted EBITDA of approximately $3.3 million in the fourth quarter of 2024 compared to an adjusted EBITDA of $7.2 million in the same period during 2023. Both these changes versus the prior year were primarily driven by the decreases in revenue recognized related to our take-or-pay contracts, as well as a reduction in our compensation expense that positively impacted the fourth quarter of 2023. As I mentioned earlier, average selling price for the quarter improved 14% period-over-period. At the beginning of 2025, we have eliminated all negative margin contracts, which represented roughly 24% of volumes as we entered into 2023 and approximately 13% as we entered 2024.

Selling general and administrative expenses totaled $6 million reflecting a reduction of approximately 8% versus the prior year period, driven by a reduction in payroll and benefit expenses as well as legal and professional fees. Research and development costs for the fourth quarter also decreased 39% or approximately $460,000 compared to the prior year period. Decrease in R&D was primarily driven by conducting product qualification testing with potential lead GAC adopters in the fourth quarter of 2023. 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 opportunities with our expanding GAC business.

We remain extremely confident that our PAC business will continue to be cash generative in fiscal year 2025 and beyond. The strong annual performance of our PAC business in 2024 demonstrates its potential as a secure foundation on which we can continue to build our compelling GAC business. Turning to the balance sheet, we ended the fourth quarter with cash of $22.2 million, of which approximately $13.5 million is unrestricted. The change versus last quarter was driven by CapEx spend to complete the GAC line. As Bob mentioned, we successfully closed our revolving credit facility with Midcap Financial in late Q4 of 2024. An important milestone for several reasons. First, it allowed us to retire the costly $10 million CFG term loan, which had been on our balance sheet since the Legacy Arq acquisition in 2023.

The loan was secured against the majority of our assets, assets we now value at over $500 million. More importantly, it carried an extremely high cost of capital with a limited capacity of $10 million. In contrast, the new midcap facility boosts a $30 million capacity at a stated rate of less than 9% annually, effectively having our cost of capital while expanding our availability funding. As of December 31, 2024, we have drawn approximately $13.8 million on the revolving facility as we continue to use our credit availability in measured moderation. This facility not only strengthens our near-term liquidity, but provides us strategic capital flexibility as we look to the future with much more reasonable terms than the company’s prior related party fixed par debt.

We recognize that capital expenditures for Red River expansion increased meaningfully in 2024, and with the anticipated working capital needs in 2025 as we ramp up production, securing this facility, we’ve built a financial cushion helping offset CapEx overruns in Q4 of 2024 and manage potential working capital needs in 2025. With that said, we look back on 2024 with pride in our financial performance and are excited to enter 2025 with a strong financial foundation, and we are well positioned to execute on our growth strategy. With that, I will turn things back over to Bob.

Robert Rasmus: Thanks, Stacia. Before we move to Q&A, I want to leave you with a few key takeaways from today’s discussion. First, we have significantly strengthened our PAC business, reducing costs, improving efficiency, profitability, and cash flow generation. This remains a stable foundation for our growth initiatives and crucially one which we believe is now a sustainable cash flow producer. Second, our granular activated carbon expansion is on track with initial product out of the plant imminently and meaningful contracts secured. As in-situ testing is successfully completed, we are extremely well positioned to finalize negotiations to match contracting with the ramping up of production. Third, our disciplined financial strategy has reinforced our balance sheet, providing the flexibility to invest in growth while maintaining stability.

While the Q4 CapEx increase was frustrating, I am confident in our management of expenses moving forward, and we have sufficient liquidity to manage it. Finally, we remain focused on innovation, operational excellence, and customer engagement to drive long-term value. The granular activated carbon opportunity at Red River with additional phases in development represents a major growth avenue. Additionally, while our asphalt opportunity is in its early stages, we are encouraged by the progress and its potential is a future diversification of revenues and products. I want to thank our employees, partners, and shareholders for their continued support. 2024 brought both successes and challenges, and we navigated them well. As we enter 2025, I’m optimistic about what’s ahead and look forward to building on our momentum.

We are in a great and growing market, and Arq remains uniquely positioned as the only public pure play activated carbon company. Along these lines, I would like to remind investors that my share ownership and compensation make me fully aligned with shareholders. With that operator, let’s open the call for questions.

Q&A Session

Operator: [Operator Instructions] The first question is from Gerry Sweeney from ROTH Capital Partners. Please go ahead.

Gerry Sweeney: Good morning, Bob and Stacia. Thanks for taking my call.

Robert Rasmus: No problem, good morning Gerry.

Gerry Sweeney: First question, Red River ramp up phase, could you review the process and potential key milestones we should keep an eye out for? And then finally, will you provide updates as you go through that process?

Robert Rasmus: Absolutely, and let me talk a little bit about the commissioning process because that relates directly to the ramp up process.

Gerry Sweeney: [Multiple Speakers] commissioning right now?

Robert Rasmus: Yeah. No, that’s okay. I knew what you meant. The commissioning is not an all or nothing scenario and to provide some color or detail on the process we have broken down the operational steps and hence the commissioning into 6 functional zones. So zone 1 is the center where we introduced the Arq-WEP tape [ph] made at Corbin. Zone 2 is where we ensure that that feedstock is consistent with respect to moisture and certain other items to ensure we have stable raw material properties. Zone 3 is where we add additives to the granular activated carbon to the Corbin feedstock and re-agglomerate or essentially bring it back together, that combination to form our granular activated carbon shape. Zone 4 is the first of 2 high temperature heat treatment steps where the granules are heated to remove remaining moisture.

Zone 5 is the second of those 2 heat treatment steps where the active granules — essentially activated under very specific thermal properties, and the final stage is Zone 6 where we screen and inventory of the final GAC product. I’m not trying to bore everyone by going through this, but I think it’s germane to what we’re doing, and I want to emphasize that we have successfully completed all 6 zones and produce granular activated carbon. What we’re doing currently is fine tuning the process to ensure we maximize the efficiencies and ensure repeatability. Once we are absolutely confident, we have ensured repeatability, we’ll say that we are in full commercial production, but we have produced granular activated carbon and successfully on that, but we just want to make sure we can produce it on a repeatable scale.

So [indiscernible] long winded, but hopefully that answers your question.

Gerry Sweeney: More detail on that subject is important at this juncture, so I appreciate it. Switching gears slightly, natural gas PAC, natural gas prices have been going up, I think around 450. Dare I say potentially sustainable. I think there’s a lot of demand for natural gas, especially going into next year with LNG exports and the current administration, et cetera. Is this changing — the positively changing the landscape for PAC sales as we look into 2025 forward?

Robert Rasmus: So, nat gas pricing, once nat gas gets above $350, $400, we see switching on the part of utilities from nat gas to coal-fired generation, and we’ve seen that impacted in volumes, particularly in some of the initial months of 2025 so far. But while we have a leading market share in scrubbing mercury emissions from the power generation industry that is an area that is becoming less and less important to us as we expand into adjacent markets for the PAC business and those adjacent markets carry a higher margin. As we talk about PAC being foundational, the PG&I segment is foundational for our PAC business, and it’s nice to get those increased volumes, and that is additive to the results than what we had expected.

Gerry Sweeney: Got it. Third question, I’ll jump back in line. Great to see you talking about line 2, obviously we have to get the commissioning process up and going, but great to see line 2 and even forward. I think I’ve shared my channel text with you and the market is becoming increasingly under-supplied. But can you discuss CapEx for 2025 and maybe the build out of line 2? There’s probably some moving parts, timeline of building, cost, cash flow, overall liquidity. How do we look at that, and just the level that I think from a balance sheet perspective you’re in very good shape with line 1, but as we look at line 2, I think there’s some moving parts, payment and funding it, et cetera. I just wanted to see if you could put any details around that.

Robert Rasmus: Sure, there’s, I think 3 or 4 questions in that question, and I’ll try and answer each of them. So, CapEx that we expect for 2025 is kind of $8 million to $12 million in total. That includes maintenance CapEx as it relates to that. Obviously that doesn’t include anything for potential Phase 2 as it relates to that. Phase 2, the visibility on that, I think comment relates to contracting, if you will, is that the demand we’re contracting for Phase 1 is really only a small portion of our customers’ total expected demand. As our customers’ needs grow and our customers do expect significant growth in their GAC requirements, so does interest in Phase 2. And so one, as we said, I said in my prepared remarks that we want to ensure we have full production ramp up, full visibility, and we’ve been able to determine what amount over the 25 million pound nameplate capacity we are able to produce; is it 10%, 20%, 33%?

And once we have a firm handle on that plus additional visibility as the months go on, we’ll be in a better decision to make the FID on Phase 2. As it relates to financing Phase 2, it’s our belief that we’ll be able to use our balance sheet to do that, that the cash flow that we’re producing from the turnaround of the PAC business, the cash flow that we’ll generate from the GAC business, should allow us to fund that on balance sheet with debt.

Gerry Sweeney: Bob, really appreciate it.

Robert Rasmus: That answers all your questions.

Gerry Sweeney: Yep, absolutely, thanks.

Operator: The next question is from George Gianarikas from Canaccord Genuity. Please go ahead.

George Gianarikas: Thank you for taking my questions.

Robert Rasmus: Happy to do it, George.

George Gianarikas: Thank you. Could you possibly share what – maybe in broad strokes, what the magnitude of the differential is between the pricing you’re seeing for granular in water-related markets and in other markets that’s giving you the confidence that you want to sort of delay — not necessarily delay, but push out the contract signings that you’re doing with the water utilities, just curious as to whether you could show what the economic differential is there that you’re waiting to do that. Thank you.

Robert Rasmus: Yeah, absolutely. So, one point I’d like to make is that we could contract all of our remaining capacity right now in the water market. That would, in some respects, de-risk it from investors’ minds, but also I think it makes strong business sense to defer that for diversification into other markets from just, as I say, risk mitigation, not concentrating solely on one market. The other is that in a specific answer to your question, the pricing differential outside of the water markets for the adjacent markets that we’re discussing is on the magnitude of 20% to 40% or more as it relates to that. So we think it makes sound business sense, because the ramping up of our production matches what we believe will be the culmination of those in-situ field tests.

And as I mentioned, that’s the final step of negotiations in finalizing the contracts outside of the water market. We always have the water market we can fall back on, but you’re talking a 20% to 40% price differential by those other markets.

George Gianarikas: Thank you and maybe similarly, what are the — what’s the magnitude of the difference that you’re seeing between granular and PAC today in the marketplace. Thank you.

Robert Rasmus: You know, the best way is, my oft repeated maxim that pricing in granular is a multiple and in some cases depending upon the markets, a significant multiple of the average PAC pricing.

George Gianarikas: And then final question just on your OpEx for 2024, you did a nice job of bringing that down. How should we think about modeling that for this year? Thank you.

Robert Rasmus: I believe that we should operate in costs and SG&A. There’s still room for further improvement. As I mentioned, we’ve already taken actions in the first quarter of this year to reduce SG&A. I think there’s further room to go on both, and we’ll have a better view and a handle on that as we begin full scale production of the GAC as it relates to that. But also, as Gerry mentioned in his question that the additional volumes we’re seeing from related to the PG&I segment due to the cold weather are also helping cost absorption, which will help margins as well.

George Gianarikas: Thank you.

Robert Rasmus: Thank you, George.

Operator: The next question is from Peter Gastreich from Water Tower Research. Please go ahead.

Peter Gastreich: Thank you, good morning and congratulations on your results and thanks for the presentation. I really appreciate the details, especially on the CapEx review. First of all, I just have a follow-up question, earlier question on CapEx. I just wanted to confirm that if you do go forward with this additional capacity for Phase 1, can you just confirm that there will not be any associated CapEx for that?

Robert Rasmus: So I think when you say go forward with additional capacity for Phase 1, I think what you’re referring to is what we believe is that we’ll be able to produce more than what we refer to as the 25 million pounds of nameplate capacity. So one, we think that is eminently achievable, and two, I can confirm that that will not entail any additional CapEx to achieve those amounts.

Peter Gastreich: Okay thanks, and earlier, just want to understand, it sounds like it is within possibility that it could be more than 20%?

Robert Rasmus: That’s correct.

Peter Gastreich: Okay, great.

Robert Rasmus: Let me emphasize when I talk about payback on that, again it’s the — and talked about at $3 a pound at $75 million obviously it’s about 13% higher with the CapEx we’ve expended on that, that doesn’t include anything above the nameplate capacity of that 25 million pounds.

Peter Gastreich: Okay, that’s great, thank you. My second question is just about the, Q4 results. I wonder if you could give any color about what it would have looked like without the impact [indiscernible] take-or-pay and also regarding unplanned shutdowns, what would be a typical number of days Arq would experience in any given year? I think you mentioned that the unplanned shutdowns were around 2 weeks in the fourth quarter.

Robert Rasmus: That’s correct. So the boiler shutdown, and I’ll come back to answering the fourth quarter, the 2 one-week unplanned shutdowns were related to the boiler. The first as we noted that a seal wasn’t working properly, and when you’re working at temperatures in excess of 1700 degrees, you need to make sure that seal works properly. As we always talk about that our goal is to be the safest, lowest cost, and most profitable company in the industry. So safety is our absolute number one priority. So we made those repairs and then the repairs weren’t working as effectively as we initially expected, so we had to shut down again. The reason it takes 1 week, you say well how does repairing a boiler take a week? Well, the problem is you have cool down the apparatus from the 1700 degrees, make sure it’s a safe environment for people to enter, and then it takes some time to ramp up those temperatures to be able to begin production again.

So that’s why it takes fairly long when you have something to do with the boiler and repair. In terms of the results, if you look at it, we had approximately $4.7 million in Q4 2023 in take-or-pay contracts plus some accounting reversals — accrual reversals on expenses that favorably impacted those results in 2023. In 2024, we had, if you look at it, we had the 14% increase in our average selling price and if you take out the $4.7 million of take-or-pay on a production-to-production apples-to-apples basis, revenue was actually up and even with the 2 one-week unplanned outages, gross margin was roughly would have been the same; so, I think it was a really good result in the fourth quarter, although if you look at it from the first OpEx, you say it was down, it was actually a very good strong operating result.

Peter Gastreich: Okay great thank you very much. I’ll just sneak in one more question and get back in the queue. Are there any tariff implications for the U.S. activated carbon market? I understand that your supply chain is fully integrated and domestic, but just curious if there are broader implications for the industry and if so, how would that impact Arq?

Robert Rasmus: So tariffs are beneficial to us, because as we’ve always emphasized and you pointed out, we’re the only fully vertically integrated, fully domestic supply chain. That helps us in a number of ways and our customers in terms of product availability, reliability, and cost. And a lot of our competitors import product or raw material from overseas, which will be subject to tariffs. So, there’s the potential for costs going up to the industry due to our competitors, but our cost due to being fully domestic will not be rising. So it’s an opportunity for margin enhancement for us.

Peter Gastreich: Great, thank you very much.

Robert Rasmus: Thank you, Peter.

Operator: The next question is from Tim Moore from Clear Street. Please go ahead.

Tim Moore: Thanks and congratulations with the progress and the turnaround. My first question on GAC utilization, Bob, you mentioned, I think you said 60 million contracted, so that’s about 80% of the 75 million pounds. Is it fair to assume that you could probably get 80% utilization in the June quarter or do you think it’ll be a bit slower than that?

Robert Rasmus: So, couple of things I just want to clarify, so it’s 16 million pounds of the 25 million pounds, I think you may have [indiscernible] and this may have been conflating the $75 million cost target to produce [indiscernible] no problem. I just wanted to clarify on that. Production ramp up as I say, we’re producing GAC now on that, but we just want to get to the point where it’s repeatable and so we can then give the market an update, because I know the market is eager to get more detail and we’re eager to be able to provide the market with more detail as it relates to production ramp up and timing as it relates to that, we said our goal is sometime by the middle of the second half. We hope to be able to bring that forward on that, and we’ll be working diligently to be able to do that.

Tim Moore: Okay, fair enough. Yes, I was just thinking, should we assume that the contracted amount you mentioned today could be the June revenue amount.

Robert Rasmus: Well, absolutely. We expect revenue this quarter from the GAC and having it build into the second quarter as well as we begin ramping up production and we start selling under the contracts and through other spot market sales as well.

Tim Moore: Great. Next question, I think probably important for investors to know, until you do a line 2, whether that’s summer next year, whenever that is, we should be modeling no cannibalization of the PAC volumes right, because that’s the plan is no cannibalization in the first line, and if that’s the case, beginning PAC sales plus GAC sales, which could be up to, who knows, the blended price point almost double, is that how we should be thinking about everything? No cannibalization [indiscernible].

Robert Rasmus: Absolutely, there’s the GAC production as it is online is additive to our existing production at Red River. So not only will we see margin improvement from just the pricing as it relates to granular activated carbon production, but again also additional full cost absorption at Red River as well.

Tim Moore: And that’s terrific, and I think investors probably been underestimating the incremental margin there because you’ll be selling both of them at the same time. And then my last question is, just looking out, because everyone wants to know, what’s the growth driver late next year and the following year, and, they start asking about line 2, I know you haven’t committed to that yet, but it seems like it’s a high probability. So the question I have is. You mentioned commentary on that, starting some of those conversations, theoretically, you know, you want to make sure line 1 is working well, optimize it, get that all squared away, quality, execution. When would you expect to get comfort around, maybe getting enough percentage contracted to move forward with CapEx spending from line 2? Do you think that’ll be December or January, is it that far out you think?

Robert Rasmus: I think it’s in the second half of this year, the visibility, and we’re seeing such strong demand for the granular activated carbon product and the pricing. As I say, conversations with our existing customers, it’s that we’ve already contracted is only a portion of their anticipated needs going forward. So they expect more demand next year, as I mentioned in my prepared remarks, we’re actually seeing an acceleration of demand and interest in water — municipal water utility is complying with the PFAS regulations in advance. So I think that’s one component. So we would expect that in the second half. And as far as growth drivers for next year as well, there’s the potential for the asphalt motion, as we complete those testings and that has occurred throughout the year, and that is extremely attractive margins that we’ve modeled as well. But again, we’ve got to get through the testing phase on that.

Tim Moore: That’s great, Bob. I know that’s definitely a kicker that probably would be your highest margin market in asphalt. Well, thanks a lot. That’s it for my questions.

Robert Rasmus: Thank you.

Operator: There are no further questions at this time. I would like to turn the floor back over to Robert Rasmus, CEO for closing comments.

Robert Rasmus: Thank you, Sachi, and thank you to everyone for your time and interest in Arq. As I mentioned, I really like where we are today as a company. We have successfully transformed the foundational PAC business, and I think that turnaround is evident in our full year 2024 and fourth quarter 2024 financial results. As I mentioned, I also feel there’s still room to further optimize the PAC business going forward. In addition, we are imminently poised to begin full scale commercial production of our granular activated carbon products, so we look forward to providing that milestone update shortly and look forward to talking with you all soon.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.