Good day, and welcome to the Arq First Quarter 2024 Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. Should you require operator assistance, you may press star zero. I would now like to turn the call over to Anthony Nathan, Head of Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone, and thank you for joining us today for our first quarter 2024 earnings results call. With me on the call today are Bob 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 with the Investors 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 website, and you can contact Arq's investor relations team at investors@arq.com. Let me remind you that presentation 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 10-Q for the quarter ended March 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 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. I'm proud to report that for the first quarter of 2024, we maintained the strong momentum which began building in the second half of last year. Our latest quarterly performance reflects continued top line growth and improved margins driven by higher pricing and cost management. Our performance in the first quarter of 2024 versus 2023 is even more impressive given lower volumes caused by a very mild winter. These efforts resulted in the continued financial improvement to our foundational PAC business and ongoing progress related to our granular activated carbon expansion. I am also excited about signing our first granular contract. I will provide more details on this milestone event later in my remarks. Our first quarter results evidenced the clear momentum and improvements we are delivering across the business. They also demonstrate that these changes are taking root. The best evidence of our business optimization and transformation was our strong gross margin performance. At 37%, our gross margin was more than double the prior year period. We are also proud to have delivered a 4% increase in revenues versus last year despite lower volumes due to the impact of a very mild winter and lower natural gas prices in our power generation business. While adjusted EBITDA was negative $1.1 million, we reported our third consecutive quarter of year-over-year growth in adjusted EBITDA and fourth consecutive quarter of double-digit year-over-year percentage growth in average selling price. Adjusted EBITDA was impacted by spending $1.6 million in R&D. This represents a $1 million increase over the prior year. The increase in R&D spending was directly related to product qualification testing with lead adopters as part of our ongoing GAC contracting process. While a negative impact for the quarter, it was…

Thanks, Bob, and thanks, everybody, for joining us today. We delivered strong financial results during the first quarter, with revenue growing 4% year-over-year, driven largely by enhanced contract terms, including 16% growth in average selling price and positive changes in product mix, partially offset by a 6% decline in volumes. Our gross margin in the quarter was approximately 37%, more than double the 17% reported in prior year period. As a result, in the first quarter, we achieved the fourth consecutive quarter of double-digit year-over-year percentage growth in ASP and also reduced our net loss over the prior year period. Adjusted EBITDA loss improved year-over-year to $1.1 million compared to an adjusted EBITDA loss of $7.7 million in the prior year period. Net loss was $3.4 million compared to a net loss of $7.5 million in Q1 of 2023. I would note that these improvements have come in what is a seasonally weak quarter for the company and on the back of what was a very mild winter. To achieve these enhancements against the backdrop of lower volumes as a result of contract enhancements we flagged in the second half of 2023, is especially encouraging. Again, our average selling price for the quarter improved 16% year-over-year. We continue to eliminate negative margin contracts as we focus on profitability over volume. And at the end of the first quarter have reduced loss-making contracts to roughly 3% of volumes versus roughly 24% in 2022 and approximately 13% in 2023. Selling, general and administrative expenses totaled $7.7 million, reflecting a reduction of approximately $3.6 million versus the prior year period. Driven by a reduction in payroll and benefit expenses as well as legal and professional fees offset by a higher board compensation and rent and occupancy expenses. Research and development costs for the…

Thanks, Stacia. The first quarter marked a period of steady progress on all fronts. The sustainable improvements in our financial profile and overall profitability are evident, and I remain confident in our PAC business being cash flow positive in 2024, driven by our portfolio improvements and our ongoing cost reduction initiatives. Our focus is increasingly shifting towards executing on our GAC expansion at Red River and our ongoing transformation to an environmental technology company. We are extremely proud of our ability to enter into our first GAC contract and look forward to providing further updates on additional contract progress as it occurs. I'd like to conclude by emphasizing our 4 key focus areas for the year ahead. First, we remain focused on maximizing the value of our foundational PAC business. We've made incredible progress on this front and have transformed the business to a cash flow contributor. As we exit the last of the remaining loss-making contracts, we will focus on entering into additional higher value markets like soil and groundwater remediation and municipal water. By enhancing our product mix, we aim to achieve higher prices, and in doing so, further improve the quality and financial contribution of our PAC business. Second, we remain focused on winning further GAC customers and contracts. We are very proud of reaching a strategic milestone with our first contract. We look forward to delivering continued execution on this front. The market is strong and getting stronger by the day, and we remain in a prime position to help companies meet the tighter regulatory regime here in the U.S. and globally. Third, we look forward to concluding the commissioning at Corbin this quarter. By utilizing Arq's technology for recycling bituminous coal waste, we are able to offer customers a highly differentiated solution in a fully…

(Operator Instructions) We'll go first to Gerry Sweeney with Roth Capital.

I was wondering, obviously you have the contract that you announced, but I wanted to see if you could maybe discuss the market, what's going on out there, sales initiatives. Obviously, with the PFAS regulations coming down the pike, other people must be seeing this GAC deficit coming. Just curious as to how many people you're talking to, the funnel, the -- just maybe even the tone and tenor of people looking for new contracts?

Sure. As we've spoken in the past that the market for activated carbon in general, not just granular, is very opaque. One of the things we set out to do early on was we identified over 100 potential lead adopters for our granular product. And we -- and they were across a wide variety of industries. And so, what we did is we went out and marketed to them, brought up our technical specifications, brought them samples. And that's in essence what we did in terms of our increased R&D expense. And that helped us form an even better view of market and market demand. The market is, as we've mentioned before, is undersupplied. Demand was continuing to grow even before the PFAS regulations were promulgated. I think the best indication of demand is that we're able to contract approximately 20% of our future granular production 6 to 8 months in advance of beginning that production and that we are in very active and final stages of negotiations on several other contracts. Hopefully, that provides the color you were looking for.

Yes. And also, just speaking of the contract, that 5 million pounds, reading your press release on that, it sounds as though that's actually with maybe an environmental service provider, not necessarily a water utility. And you discussed looking for different end markets, not necessarily selling entirely to the water utilities. I'm assuming I read that correctly on the environmental service provider. And is that actually a better pricing opportunity than the water utility side?

I think that one, we don't comment on the specifics of individual contracts, but you are correct that it is not a municipal water utility. We view municipal water utilities as a stable. Everyone knows that's where the market is and that there are going to be substantially increased needs in terms of demand to meet the upcoming PFAS regulations. But there are a wide variety of other users of granular activated carbon at what we consider even higher pricing and higher margin than what the water utility market is going to be.

I would suspect that environmental side, as it's probably front and center, people want to deal with PFAS whether it's coming leachate from landfills or industrial sites. I would imagine that would, as you were saying, that probably has significantly better pricing opportunities than dare I say boring water utility market?

I wouldn't say the water utility market is boring because it's certainly a core component of both the powdered business and the granular activated carbon business. But as you correctly point out, there are a wide variety of uses. It's not just eliminating PFAS from municipal water treatment facilities. It also relates to groundwater soil contamination, preventing groundwater from -- that is contaminated, trapping those contaminants before they leach out of the soil and into the drinking water or into the creeks and streams and rivers of the various communities. There's also biogas, biomethane. There are a wide, wide variety of applications. And again, that's what makes the granular business so attractive. It's been turbocharged by and will be turbocharged by the EPA PFAS regulations, but that's far from the only component of the increasing demand for granular activated carbon.

Got it. And then switching gears to the PAC side, obviously, multiple quarters of price expansion. I think you even alluded to in your remarks that there are a couple of lower price, lower end contracts that will roll off. Curious as to how much more opportunity on pricing there is on the PAC side. Improvement.

No, at some point, the pace of price increases has to abate. You can't maintain double-digit price increases forever. I wish we could, but it's certainly not realistic. But it's really a testament to the quality of our business development team, how they've been able to repackage those former loss-making contracts and get the average selling price increase. But one component of the price increase is not just better relationship management, but it's also penetrating new markets such as there still is a usage for PAC in groundwater remediation, soil remediation. And we've been able to tap these attractive new markets, which have higher average selling price than the traditional coal-fired power plant scrubbing those emissions. It's a combination of factors. It's improving the price points on our existing power generation business as well as the expansion into new markets which carry higher prices.

Just curious on the PAC groundwater remediation opportunity, is that PFAS related? Or is that just other opportunities?

It's other opportunities. It's removing dioxins and furans and things like that, other than PFAS from the existing groundwater, or excuse me, in soil.

Got it. And the final question for me. Phase 2, obviously the contract that you just announced certainly validates what's going on with Phase 1 at Red River. What would be sort of the calculus in terms of when you pull the trigger? I'm assuming when. Maybe I should say if you pull the trigger. What would the calculus and sort of gate be to make that final decision?

Yes, sure. It's really a combination of factors. And this is a demand pull business opportunity. It's not something we would or will not -- we're not going to build it on spec. I think we need to be fully contracted or extremely close to selling out all of our existing 25 million pounds of expansion production. We need to have clear line of sight to being able to pre-contract and/or confidence in being able to contract the second line. We would also need to ensure we have adequate liquidity and capital. We certainly wouldn't want to jeopardize our success in transforming the foundational PAC business and the growth trajectory and the cash flows of the developing granular activated line. If you think about it, one of my main goals in my roughly 9 months at Arq has been to derisk shareholders' investment while offering really a growth opportunity through the expansion into granular. Hence, our laser focus on precontracting our granular production and transforming the PAC business. What all that translates into is we're not going to go out and do some daredevil stunt to expand. We're going to continue to be prudent in terms of how we allocate capital and we grow the business.

Understood. I appreciate it. That's it for me. Thank you.

We'll turn now to Marc Silverberg with ICR for additional questions and comments.

Thank you. Bob, I think we're going to turn to a few questions that we received from investors overnight and earlier this morning. And so first, can you please add a bit more detail on the CapEx change that you disclosed with the earnings last night? And related to that, what would you say is the risk of a further increase to expected spending for Red River Phase I?

Sure. The CapEx creep is fairly simple. The number of caissons and pilings were underestimated by approximately 300%. The additional construction costs plus the increased steel and cement and the added contingency resulted in the new guidance we just gave. As it relates to further risk, I'll reiterate what I mentioned in my prepared remarks. Our team has been working and continues to work assiduously to identify cost savings and any other ways we can reduce some of the overall project cost and the cost increase. We're also making every effort to ensure that we don't have any additional upward changes in our spending plans. Those factors, plus the new contingency that we factored into our guidance range should mean that I won't be on this call next quarter announcing another increase in CapEx. I have to say, I dislike having to relay this type of information as much as you like hearing it. That being said, this is still an outstanding investment. Even with the increased cost, we foresee a 3 year or less payback. We have signed our first contract for approximately 20% of our GAC capabilities 6 to 8 months in advance of initial production. We have clear line of sight and visibility to signing additional contracts, so I still feel very, very good about this investment.

Great. Second question we got was related to the refinancing. You indicated that the refinancing process is underway. Given the scale of forecasted CapEx for 2024 and taking into account cash generation expected in your legacy PAC business, how much debt do you think the balance sheet can handle? And what is the maximum that you will be prepared to add in terms of potential capacity?

Based on our current business and factoring in projected future cash flow and the value of our assets, because I think we have an under levered balance sheet, and you look at the replacement cost of our plants is well over $500 million. What that translates into is we want to take sufficient incremental debt to really ensure the completion of the project on time and to help us maintain and ensure we have adequate overall liquidity. Any incremental debt that we take on, we would still have a very low EBITDA to debt multiple based on our 2025 EBITDA.

I appreciate that, Bob. Another question we received was regarding the GAC contract that was announced yesterday, and I know Gerry had asked questions regarding counterparty there. Is there any additional information you could provide in terms of the terms on the contract? And second, and related to that, maybe your confidence in contracting out the remaining capacity for Phase 1 by the end of the year as you previously targeted?

Sure. As I mentioned to Gerry, we don't and never will comment on the specifics of individual contracts. As it relates to pricing, I will say the pricing is attractive, and it's a multiple of our average PAC pricing. That's consistent with our business plan and our communications. And I will say that the pricing on the contract offers excellent value and returns to Arq as well as our customer. In terms of confidence, based on our current contract negotiations and the fact that we already have a signed contract for 20% of our future granular activated carbon capacity 6 to 8 months in advance, I was and I continue to remain very, very confident in our ability to contract the remaining capacity prior to production.

Thanks, Bob. We have one more here that we received overnight regarding volumes. Volumes were down year-over-year for the first quarter of the year. Can you provide any color on how volumes are perhaps shaping up thus far for the second quarter?

Sure. The first quarter was certainly tough from a volume standpoint. We've seen a nice rebound in April. May, we're what, 9 days into it has started out on a nice trajectory as well. And what we're really seeing as it relates to volume is the fruits of our efforts to further diversify our PAC business to markets other than coal-fired power plants.

Thank you. We'll now turn back to Bob Rasmus for any additional or closing comments.

Thank you, Jamie. In summary, we're pleased with where we are, but we're certainly not pausing as is there's plenty of opportunity ahead for Arq. I look forward to providing further updates on our second quarter call or as events dictate. Thank you for your interest in Arq, and we look forward to speaking again soon. Thank you.

Once again, ladies and gentlemen, that will conclude today's call. Thank you for your participation. You may disconnect at this time.