Greetings, and welcome to the Arq Q4 and Full Year 2024 Earnings Call. [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.

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 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 within 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 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 10-K 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 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. 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 portion 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 1/4 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 Arq's profitability and future opportunities, ensuring a lasting transition. As part of this process, we have 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…

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 the 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…

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 as 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.

[Operator Instructions] The first question is from Gerry Sweeney from ROTH Capital Partners.

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?

Absolutely. And let me talk a little bit about the commissioning process because that relates directly to the ramp-up process.

Probably should have said commissioning, sorry.

Yes. No, that's okay. I knew what you meant on that. 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 essentially where we introduce the Arq wet cake 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 carbon 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 are -- they're essentially activated under very specific thermal properties. And the final stage is Zone 6, where we screen and inventory 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 can 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 sound being still long-winded, but hopefully, that answers your question.

Now 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 they're around $450. There 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?

So nat gas pricing, once nat gas gets above $3.50, $4, 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 the -- 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 and what we had expected.

Got it. Third question, I'll jump back in the 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 Ford. I think I've shared my channel checks with you and the market is becoming increasingly undersupplied. But can you discuss CapEx for 2025 and maybe the build-out of Line 2. There's probably some moving parts, time line of building, cost, cash flow, overall liquidity. How do we look at that? And just to level set, I think from a balance sheet perspective, you're in very good shape with Line 1. But as we look out to Line 2, I think there's some moving parts, payment and funding, et cetera. I just wanted to see if you could put any details around that.

No, sure. There's, I think, 3 or 4 questions in that question. I think the -- 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 a comment relates to contracting, if you will, is that the demand we're contracting for, 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've said and 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.

Bob, really appreciate it.

I think that answers all your questions.

Yes, absolutely. Thanks.

The next question is from George Gianarikas from Canaccord Genuity.

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 -- or not necessarily delay but push out the contract signings that you're doing with the water utilities. Just curious as to whether you could share what the economic differential is there that you're waiting to do that.

Yes. No, 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, derisk it from investors' minds. But also, I think it makes strong business sense to defer that for other diversification into other markets from just, as I say, risk mitigation, not concentrating solely on one market. The other is that 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 and 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.

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?

The best way is my auth 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.

And then maybe a 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?

There's -- I believe that we should -- operating 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 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 relating to the PG&I segment due to the cold winter are also helping cost absorption, which will help margins as well.

The next question is from Peter Gastreich from Water Tower Research.

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, which -- can you just confirm that there will not be any associated CapEx for that?

So I think when you say go forward with additional capacity for Phase 1, I think what you're referring to is the -- what we believe is that we'll be able to produce more than the -- what we referred to as the 25 million pounds of nameplate capacity. So one, we think that is eminently achievable. And 2, I can confirm that, that will not entail any additional CapEx to achieve those amounts.

Okay. And earlier, I just want to understand, it sounds like it is within possibility that it could be more than 20%.

That's correct. 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.

Okay. That's great. 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 of outages or 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.

That's correct. So the boiler shutdown, and I'll come back to answering the fourth quarter. The 2 unplanned shutdowns were related to the boiler. The first is we noted that a seal wasn't working properly. And when you're working at temperatures in excess of 1,700 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 #1 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 to cool down the apparatus from the 1,700 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's going to -- 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 Q3 -- excuse me, Q4 2023 in take-or-pay contracts plus some accounting reversals, that accrual reversals on expenses that favorably impacted those results in '23. In '24, 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 1-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 optics, you say it was down. It was actually a very good strong operating result.

Okay. Great. I'll just sneak in one more question here and get back in the queue. Are there any tariff implications for the U.S. activated carpet market? I understand that your supply chain is fully integrated in domestic. But just curious if there are broader implications for the industry? And if so, how would that impact Arq?

So tariffs are beneficial to us because as we've always emphasized and you pointed out, we are 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 cost 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.

The next question is from Tim Moore from Clear Street.

Congratulations with the progress in the turnaround. My first question is on GAC utilization, Bob. You mentioned, I think you said $60 million is 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 will be a bit slower than that?

So the -- a couple of things I just want to clarify. So it's 16 million pounds of the 25 million pounds. I think you may have spent said 70 million and that may have been conflating the $75 million cost target to produce.

Yes. Apologize.

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 and give -- 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'd hope to be able to bring that forward on that, and we'll be working diligently to be able to do that.

Okay. Fair enough. Yes. So I was just thinking, should we assume that the contracted amount you mentioned today could be the June revenue amount.

Well, so yes, no, absolutely. I mean, 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.

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, can you be getting 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 for this.

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.

That's terrific. And I think investors have 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're going to 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 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 for Line 2? Do you think that will be December, January? Is it that far out, you think?

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. So -- and as I say, conversations with our existing customers 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 utilities 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 to motion as we complete those testings and that occur 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.

That's great, Bob. Yes. No, that's definitely a kicker. That probably your highest margin market, asphalt.

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

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 Path 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.

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