Greetings, and welcome to the Arq Fourth Quarter 2025 Earnings Call [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Anthony Nathan, Head of Investor Relations. Thank you, sir. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us today for our fourth quarter and full year 2025 earnings results call. With me on the call today are Bob Rasmus, Arq's Chief Executive Officer; and Stacia Hansen, Arq's 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 period ended December 31, 2025, 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. The decisions we're announcing this morning require significant detail, and we'll be providing you with that today. So let me address the most significant update directly. After extensive additional evaluation and testing, we have made the decision to pause our GAC production project to conduct a comprehensive engineering and production process optimization review of the best path forward. I am confident it is the right decision for maximizing shareholder value and the long-term success of this company. So I'm going to walk you through exactly why we've reached this conclusion. I'm going to spend time on this, more time than you might expect because I think it's critical that you understand not just where we are today, but how we got here, what problems we've solved, what challenges remain, why we have made this decision and what our path forward looks like. Then I'll turn to PAC, which continues to perform extremely well and provides a growing profitable foundation for the company. But first, let's start with granular activated carbon. We are pausing GAC production to conduct a comprehensive engineering and production process assessment of the optimal path forward. We do not have a firm time line for completion. Our goal is to complete it as quickly as possible, ideally by our next earnings call. Let me be clear about what this means practically. There will be no GAC production in 2026. Our assessment will help determine when we can expect material GAC production to resume. While disappointing, it's the reality of where we are. Let me walk you through the specific technical challenges we have faced thus far. First, the original design flaws. Our former engineering firm with whom we remain in active litigation created fundamental design…

Thanks, Bob. We delivered strong financial results during the fourth quarter and full year of 2025, albeit offset by the frustrating impact of GAC start-up costs in the second half of the year. Revenue grew 10% year-over-year for the second year running to approximately $120 million. This was driven primarily by solid improvements in our average selling price and volumes. Gross margin for the year was 27.9%, representing a negative impact of GAC ramp-up costs, offsetting the otherwise positive momentum in PAC pricing and cost efficiencies. We delivered $13.2 million in adjusted EBITDA in 2025, a very impressive 26% improvement compared to 2024. This underlines the ongoing and sustained improvements we have made to our PAC business, which built on the progress of 2024 and which we believe will continue again through 2026. Now turning to our discussion of the fourth quarter. Revenue totaled $29.4 million, up around 8% on the same period, driven in part by a 7% quarter-over-quarter growth in our average selling price and positive changes in our product mix. Our gross margin for the quarter was 13.6% compared to 36% reported in the prior year period. Again, a reflection of the painful impact of our GAC ramp-up costs. It is also worth noting that the lower level of take-or-pay contracts collected in Q4 2025 versus Q4 2024 underscores the improved demand for our products. Net loss was $50 million in the fourth quarter of 2025 compared to a net loss of $1.3 million in Q4 of 2024. We generated positive adjusted EBITDA of approximately $0.3 million in the fourth quarter of 2025 compared to the adjusted EBITDA of $3.8 million in the same period during 2024. Both these changes versus the prior year were primarily driven by the costs associated with the ramp-up of our GAC…

Thanks, Stacia. Before we turn to questions, let me leave you with the key takeaways that should frame how you think about Arq going forward. First, we are pausing GAC to conduct a comprehensive engineering and production process optimization review of the development of the GAC business. This is a disciplined capital allocation decision, not a reflection of lost confidence in the market opportunity. Second, our PAC business is profitable, growing and provides a stable foundation. We have over a decade of operating experience, clear visibility into demand and strong customer relationship. The $17 million to $20 million adjusted EBITDA guidance we're providing for 2026 is based on this proven business, and we're confident in our ability to deliver it. Third, we're taking our pain upfront rather than spreading it across multiple quarters, and we're making the difficult decisions necessary to position this company for sustainable success. I'm confident that we're making the right decisions for the long-term value of this business. And as I am always keen to remind you, both I and many members of the Board and management team are significant shareholders. We must not overlook that we have a profitable core operation. We have experienced leadership in place to optimize it, and we have the discipline to make smart capital allocation decisions rather than continuing down a path that may not generate acceptable returns. We're committed to rebuilding your confidence through consistent execution. That starts with delivering on our 2026 path guidance, and it continues with providing you with a clear, well-supported plan for GAC when our assessment is complete. With that, I'll hand it back to our moderator to open for questions.

[Operator Instructions] Our first question comes from the line of Gerry Sweeney with ROTH Capital Partners.

Thanks for all the detail. I appreciate it. I'm just going to start off. Anything that you see today that would prevent you from not pursuing GAC. I understand there's costs associated with some of these changes and opportunities. But our channel checks continuously indicate there's an extreme amount of demand for GAC on a go-forward basis. The demand characteristics are very positive. And I think even some of the larger competitors have had issues expanding some of their facilities and have taken a year, if not 18 months longer than anticipated. But just curious if there's anything that would stop you from pursuing GAC.

Really, the answer is an emphatic no. The market fundamentals, as you just articulated, and I tried to express in the prepared remarks, the market is in an extreme undersupply versus excess demand imbalance. We expect that imbalance to persist for many years to come, and that's even before the PFAS regulations formally come into effect. Pricing continues to rise, and there are barriers to entry for both greenfield entrants as well as existing players. And so that we -- I don't see any reasonable alternative other than -- or I should say not reasonable alternative, but any alternative, but that we would go forward because the market fundamentals are so great, and we're so well positioned to capture that once we use this pause to further refine what modifications are necessary to be able to attack the market.

Got it. Switching gears to PAC. Obviously, lots of visibility into contracts, which is great, I mean, especially for this year and even into next year. But I think in your press release, you did highlight or mention that there are some regulatory undercurrents that I think that have been ebbing and flowing, let's say. Anything -- any commentary on that in terms of any potential changes on that front that you're seeing?

So 2 things. As you mentioned, we've got excellent visibility on the PAC business with 96% of our expected volumes or targeted volumes for 2026 already contracted and 75% for 2027. So we like the way that business is positioned for future growth. As it relates to potential regulatory uncertainty, there really isn't regulatory uncertainty. There was some discussion from the EPA about new regulations that have been pushed further back, but that was not a rollback of existing regulations. So therefore, no effect on our existing PAC business.

Understood. And then one last question. Guidance, $17 million to $20 million; CapEx, $8 million to $10 million. You back out some interest costs. I think that implies maybe some free cash flow of $4 million or $5 million to upwards to $8 million. Is that back of the envelope? It does appear that you're going to be free cash flow -- generating free cash flow for the year. And is there anything else that we should be thinking about on the balance sheet?

I think your math is good in terms of calculations. We expect the PAC business to be a free cash flow generator. We are doing the biennial plant turnaround scheduled for April. That's going to be about $3 million. That's included in that CapEx guidance as it relates to that. So next year, we would expect that maintenance CapEx for the PAC business to be even less and to generate even more free cash flow.

One more quick question. Obviously, there's a little bit of excess capacity still at Red River. I think it's 150-ish, you're running around $120 million, $125 million. If hot summer, lots of power generation, power -- I mean, AI is driving that to some degree, but there's potential upside. you have capacity to supply the market if there's more upside demand. Is that correct?

That's absolutely correct. As I mentioned in my prepared remarks, when we bring on the 25 million pounds of GAC, we don't expect that to cannibalize PAC production at all. So we definitely have room in this interim period to further expand the PAC volumes and take advantage of high nat gas prices, increased electricity demand as it relates to AI and data centers and/or any weather-related increase in power demand. But again, PG&I, while it's an important component of the PAC business, is just a component of the PAC business.

Our next question comes from the line of Aaron Spychalla with Craig-Hallum Capital Group.

Maybe first for me, I appreciate all the color. Just kind of want to square it with what we heard in April -- back in November. So just want to confirm on the thermal oxidizer side of things, it sounded like you were looking to purchase a new one of those and thought that, that could take care of some of the issues now. It sounds like it's more on the off-gas side of things and making sure you have the proper kind of capacity and equipment there. But at this point, I just want to confirm, you think that those issues are solvable. It's just still trying to take a step back and determine the right path forward from a cost and capital standpoint?

Yes, absolutely, Aaron. I think what you're referring to is in our remarks last November, I mentioned that we expected to spend about $8 million to $10 million for a thermal oxidizer, and that was the case. But what we did is we decided to take a proactive approach to ensure that if we spent that $8 million to $10 million, we would solve the problems associated with getting production from 15 million pounds to 25 million pounds. Part of that proactive approach was the addition of Eric Robinson to our team. While he formally was added as Senior VP, Operations at the beginning of March, he's been serving as a consultant to us since late 2025. But what really happens is we needed so much more than just a thermal oxidizer. We need a complete air quality control system, which means heat recovery, acid gas removal, particulate control, et cetera. And the reason that was determined again was we decided to do that proactive approach that we had conducted kiln off-gas testing by a third-party lab right ahead of Christmas. And the results of that found that the kiln off-gas contained heavier tire fractions than anticipated from the original flawed engineering design. In essence, this heavier tire would require additional heat and air inputs to the thermal oxidizer at the higher 25 million pound throughput rates. And the existing off-gas system, the afterburner sulfur scrubber downstream of the thermal oxidizer wouldn't be able to handle the extra heat and gas volume. The net result is we need to install an entirely new separate off-gas train comprising the new thermal oxidizer we discussed back in November, along with some additional items like water quencher, heat exchanger, wet scrubber, ID fan, a new stack. And as a result of all this is why we've hit the pause button so we can use this optimization period to refine the recommendations, and that will determine the final timing and cost. I apologize for being so long-winded, but I understand people's frustration, and I wanted to be able to provide detail for your answer.

No, I appreciate that. And then maybe second, on the third-party feedstock switching there, you kind of in your commentary, talked about often exceeding industry benchmarks. So I just want to kind of confirm, you feel comfortable with the switch in the feedstock and kind of the resulting product. It's just about, again, solving the equipment and kind of the production line dynamics.

Absolutely, we feel comfortable. We've done testing of the material. And in fact, we originally evaluated over 55 potential feedstocks. We narrowed that down to 13, did extensive and even more extensive testing on those feedstocks. We narrowed that down to 7. We further narrowed it down to 5 that were essentially interchangeable as it relates to that. So we've done testing of the material. It's a proven process in the industry, and we know this is going to work.

Our next question comes from the line of Jason Tilchen with Canaccord Genuity.

The guidance implies PAC ASP growth of sort of 1% at the midpoint. Obviously, you're lapping very strong growth from the past few years. But curious, what are some of the puts and takes to consider with that range of pricing expectations relative to recent trends?

Sure. We've seen excellent pricing growth on our ASP over the last 9, 10, 12 quarters. As we have said in previous calls that, that pace -- that double-digit pace of price increases had to moderate. We still expect to see price increases from the base business and also as we expand into more value-added markets, which are more highly engineered and sell at much higher prices than the -- than our ASP, our more commodity-like sales.

Okay. Great. That's very helpful. And one quick follow-up. In the release, you also talked about some of the alternative applications for the Corbin Wetcake and those continuing to advance. Perhaps you could just maybe expand a bit more about how those developments are trending.

Sure. Really, alternative uses for the carbon feedstock really come down to asphalt emulsion, synthetic graphite, graphene and potentially isolating rare earth minerals or critical elements as part of the washing process. The most advanced is the asphalt emulsion. We've completed with a third-party asphalt company that the initial round of testing, we've progressed to the next round recently. So we're making good progress there. However, I think it would be premature to expect significant revenues from asphalt emulsion in 2026 from Corbin. Synthetic graphite and graphene are more longer term. We're working with several firms and including the government doing and conducting research in that regard. And I would put those as potential, but I'd say more sizzle than steak or sirloin.

Our next question comes from the line of Peter Gastreich with Water Tower Research.

I do appreciate the detail and clear action plan. Can you hear me?

Yes, absolutely.

Okay. Great. So yes, I appreciate the detail and the clear action plan here, and it's great to see the formal forward guidance, including the operating metrics coming through as well. Just a couple of questions. In the past, you've mentioned that there are tariff benefits for domestic producers like Arq. Just kind of curious if you are realizing that now? And is any of your EBITDA guidance for this year taking into account effective tariff benefit just because it would seem there would be some good operational leverage there if that is the case.

The guidance we provided reflects steady-state business and doesn't give any benefit from tariffs and the imposition of tariffs on our competitors, most of whom import material from overseas.

Okay. Great. And just a little bit more on the contract volume visibility of 75% for 2027 and 43% for 2028. Just for some context, would you characterize that as a typical your visibility for you? Or is that stronger than usual? It would appear that you're in a very good place just looking at this year, given that your outlook is that is for PAC volumes to be rising.

I'd say it's the usual position that we are in. We have an extremely high renewal rate, thanks to the quality of Jeanette McQueeney and her sales team. We typically renew 86% or more on average of our contracts. Some of those contracts are multiyear, some are 1 year, some are 2 years. So hence, the visibility profile. But we would expect that when we get to this same time next year that we would have similar numbers going out the next 3 years.

Okay. And just one more question. I recognize you might not be able to answer this, but just regarding any potential litigation recovery in the future, would you be looking for start-up costs or lost revenues in terms of damages? Or are we still in kind of a wait-and-see mode right now?

As we mentioned, the lawsuit is ongoing, and it's our policy not to comment on the particulars of active litigation. But I will say that we feel very confident in our position.

Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Rasmus for any final comments.

Thanks, Melissa. In closing, I want to emphasize that our PAC business has been transformed from a cash consumer to a cash generator, one which after maintenance CapEx creates free cash flow to help fund our GAC expansion. Our PAC business had a good 2025 and 2026 will be very good as it relates to the PAC business. The company, even without GAC is profitable, is growing and has visibility to sustain the PAC growth. It isn't a hockey stick style growth, but it's steady growth. Demand for GAC is not an issue. There's definitely a demand-supply imbalance that has persisted, and we think will continue to persist for many years. In addition, there are regulatory benefits and barriers to entry, which will delay any new entrant or greenfield expansion for many, many years. For Arq and investors, the upside is about refining what is needed to complete Line 1, execute on the build and successfully produce GAC. Bringing on experienced activated carbon operating management in the form of Eric Robinson and others will help further improve the business and mitigate that execution risk. Thank you very much, and we look forward to providing updates on our next quarterly call.

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