Arq, Inc. Q3 FY2025 earnings call

• PAC business: Third quarter prices increased ~7% vs prior year and 6% vs last quarter. Trailing 12-month adjusted EBITDA is $16.7 million, a significant improvement from the negative $8.7 million at the start of the turnaround. The PAC business is now capable of fully funding maintenance capital needs and has further room for improvement.
• GAC ramp-up: Impacted by design issues and Corbin feedstock variability; now expected to reach full capacity mid-2026. Working on refining processing methodology and exploring feedstock alternatives like blending with drier coal. Successfully produced and sold commercial GAC volumes, with spot inquiries at prices above contract rates.
• Alternative product avenues: Testing asphalt (early indications show potential to improve asphalt performance), purified coal (signed nonbinding MOU for testing as coal substitute), rare earth minerals (working with DOE on government funding for testing), and synthetic graphite (pursuing government funding to evaluate commercial potential).
• Financials: Revenue for third quarter was $35.1 million. Gross margin 28.8% due to GAC fixed production costs. Adjusted EBITDA $5.2 million vs prior year's $9 million. Net loss $700k vs net income $1.6 million in Q3 2024. SG&A expenses $4.6 million, down 43% y-o-y. R&D costs $2.6 million, up from $800k in prior year quarter.

The PAC business delivered a strong quarter with third quarter adjusted EBITDA of $5.2 million. Trailing 12-month adjusted EBITDA is $16.7 million, driven by 7% year-on-year average selling price strength and a 43% reduction in SG&A expenses. The granular activated carbon (GAC) segment achieved first commercial production and generated first revenues but operated well below capacity, with expected full capacity reached around mid-2026. Third quarter financial results were impacted by GAC operating below capacity and nonrecurring inefficiencies from GAC ramp-up.

• Full year 2025 CapEx forecast remains between $8 million and $12 million.
• Expect profitability for GAC to improve as volumes ramp and production efficiencies are achieved.
• PAC expected to continue improving with volume increases, ongoing ASP growth, and further SG&A discipline.

• Delays in GAC ramp-up due to design issues and Corbin feedstock variability, impacting financial results.
• High fixed costs associated with early GAC production leading to lower margins in the short term.
• Competitive risks related to not disclosing certain financial and operational details to maintain competitive advantage.

Q: How much GAC are you producing at spec and where are you today vs nameplate capacity?

A: Producing less than desired, on spec, but specific production numbers not disclosed. Suboptimal volumes impacting gross margin and financial results.

Q: Can you produce GAC at breakeven while testing alternatives or will it be a drag until problem solved?

A: Costs associated with GAC ramp-up are greater than anticipated. Progress not linear; blending drier feedstock is being evaluated to help reach profitability faster.

Q: What gives confidence in hitting mid-2026 GAC targets?

A: Need to install a purpose-built thermal oxidizer to support 25 million pounds of production. Lead time for construction and installation of this unit is why target is mid-2026. Investment of $8-10 million for the new oxidizer, funded as 2026 CapEx.

Q: Risk or penalties associated with GAC contracted customers for delay?

A: Customers have been great, worked with to amend orders/ordering cadence, and all GAC contracts 1 year or less have been extended.

Q: Are PAC price increases purely from PAC or include GAC spot volumes?

A: All 7% price increases are from PAC business, as focus is on meeting contracted orders for GAC.

Q: How much SG&A reduction can be sustained and why reclassified to R&D?

A: SG&A reductions are sustainable. Reclassification to R&D was for preproduction volumes during GAC commissioning; now most cost runs through COGS. Margin negatively impacted by GAC fixed costs spread over fewer volumes.

Q: Gross margin cadence for next quarters?

A: Likely similar to Q3 in next quarters until GAC volume increases to spread fixed costs, with PAC improvement potentially offsetting some drag.