Arq, Inc. (ARQ) Q2 2025 Earnings Call Transcript

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Overview

The earnings call highlights strong financial performance with a 25% revenue increase, improved EBITDA, and cost reductions. The Q&A session reveals optimism in GAC and RNG markets, with plans for expansion and higher margins. The new contract and PAC business improvements further boost sentiment. Despite some uncertainties in timelines and costs, the overall outlook is positive, especially with significant market opportunities and no equity issuance. Given these factors, the stock is likely to see a positive movement in the short term.

Key Financial Performance

Revenue $29 million, a 13% year-over-year increase driven by enhanced contract terms, including 9% growth in average selling price and an increase in volumes.

Gross Margin Approximately 33%, slightly higher than the second quarter of 2024, attributed to the turnaround of the PAC business and improved profitability.

Adjusted EBITDA $3.7 million, more than 3x the $1.1 million in the prior year period, driven by enhanced contract terms and operational improvements.

Net Loss $2.1 million compared to $2 million in Q2 2024, primarily due to costs incurred in preproduction feedstock used in the commissioning of the GAC line.

Selling, General and Administrative Expenses $5.9 million, a reduction of approximately 16% versus the prior year period, driven by reductions in payroll, benefits, and general administrative expenses.

Research and Development Costs Increased by 190% or $1.8 million compared to Q2 2024, primarily due to the commissioning of the GAC line.

Cash $15 million in total cash, with approximately $7 million unrestricted, impacted by trailing CapEx spend at Red River and buildup of inventory and critical spare parts.

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Operating Highlights

Granular Activated Carbon (GAC) Line Commissioning: Successfully commissioned the first GAC line at Red River, with a nameplate capacity of 25 million pounds. Initial sales have already been made, validating market demand and product quality.

Granular Activated Carbon (GAC) Market Opportunity: The GAC market is experiencing supply shortages with steady 3%-5% annual growth. Regulatory changes related to PFAS could increase demand by 3x to 5x. Renewable natural gas (RNG) applications also present significant growth potential.

Market Diversification: Reduced exposure to the mercury emissions market to under 40% of volumes, while expanding into new applications and markets for powdered and granular activated carbon.

Regulatory Environment: EPA regulatory changes and PFAS-related requirements are expected to drive significant demand for GAC. The company is also exploring partnerships with the Department of Energy for rare earth minerals and synthetic graphite.

PAC Business Turnaround: Achieved a fifth consecutive quarter of positive adjusted EBITDA, with a 3x improvement compared to the same quarter last year. Focused on cost reduction and operational optimization.

Cost Management: Identified opportunities to reduce operational and corporate costs, contributing to enhanced financial performance.

Future Expansion Plans: Planning to make a final investment decision on a second GAC line by the end of 2025, leveraging lessons learned from Phase 1.

Strategic Focus: Focused on ramping up Phase 1 GAC production to nameplate capacity and securing customer contracts to fill capacity.

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Risk or Challenges

Regulatory Uncertainty: The EPA's suggested delay in full PFAS regulation implementation from 2029 to 2031 has caused investor concern. This delay reflects supply constraints and could impact the timing of demand growth for granular activated carbon (GAC).

Operational Ramp-Up Challenges: The company faces challenges in ramping up production of its first GAC line to nameplate capacity within the anticipated 6-month timeline. Extended commissioning periods and potential operational inefficiencies could delay this process.

Market Supply Constraints: Persistent supply shortages in the GAC market, coupled with minimal new capacity entering the market, create risks of not meeting growing demand, especially with anticipated spikes from PFAS-related requirements and renewable natural gas (RNG) applications.

Customer Demand Uncertainty: While initial GAC sales have been made, the company is still finalizing customer trial results and negotiating contracts to fill remaining Phase 1 capacity. Delays or failures in securing these contracts could impact revenue projections.

Financial Risks: The company incurred $1.9 million in costs associated with preproduction feedstock for the GAC line commissioning, contributing to a net loss of $2.1 million in Q2 2025. This highlights financial pressures during the ramp-up phase.

Dependence on External Financing: The company’s plans for a second GAC line depend on achieving smooth operational performance, securing customer demand, and establishing a clear path to financing. Any delays or challenges in these areas could hinder expansion plans.

Economic and Competitive Pressures: The company operates in a tight and competitive market, which, while favorable for pricing, also increases pressure to maintain operational efficiency and secure market share.

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Guidance & Outlook

Granular Activated Carbon (GAC) Line Ramp-Up: The first GAC line at Red River has been commissioned and is expected to reach nameplate capacity of 25 million pounds within 6 months. The company is focused on ramping up production and refining processes to maximize margins and value.

Future Expansion Plans: The company aims to make a final investment decision on a second GAC line by the end of 2025. This decision depends on achieving smooth operational performance from Phase 1, securing customer demand, and establishing a clear path to financing.

Market Demand and Growth: The GAC market is experiencing persistent supply shortages with steady 3%-5% annual growth from existing demand drivers. Regulatory changes related to PFAS could increase demand by 3x to 5x. Renewable natural gas (RNG) applications are also expected to drive significant demand growth, potentially requiring an additional 45 million to 400 million pounds of GAC by 2030.

Regulatory Environment: The EPA's potential extension of PFAS regulation implementation from 2029 to 2031 is seen as a pragmatic approach to address supply constraints. The company views this as an opportunity to align with regulatory requirements and strengthen its market position.

Capital Expenditures (CapEx): The company reiterates its 2025 CapEx forecast of $8 million to $12 million, which will be funded through existing cash, cash generation, and cost reduction initiatives.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:Can you elaborate on the key milestones for the Red River commissioning process and the expected developments over the next 6 months?

A:The operations team is focused on reaching the full 25 million pounds nameplate capacity or higher within 6 months. The process involves completing commissioning, initiating sales, and making operational tweaks to improve production rates incrementally. Margins will improve as production increases.

Q:What are the expected costs for adding Line 2 at Red River, and how do they compare to Line 1?

A:The costs for Line 2 are being finalized and will be determined in the next 4-5 months. Design enhancements are expected to shorten the process and lower costs compared to Line 1. The costs are not expected to exceed those of Line 1 and are likely to be lower.

Q:What is the timeline for moving from initial sales for testing to contracts in the RNG market, and what is the balance between water-related and RNG product sales?

A:The timeline for moving to contracts varies from 1 to 6-8 months, depending on customer testing requirements. The company aims for a balanced portfolio between water and RNG markets to diversify risk, with RNG offering higher pricing and margins.

Q:What was the impact of the commissioning process on gross margins, and how are preproduction costs being handled?

A:$1.9 million in preproduction costs were reclassified to R&D expenses. Additional costs related to commissioning were included in cost of sales but were not significant enough to require adjustments. Margins for the PAC business are expected to be above 33% going forward.

Q:What are the opportunities for further improvements in the PAC business, particularly in terms of ASP and market diversification?

A:The company is reducing reliance on the mercury market and expanding into higher-priced markets. ASP has increased by an average of 16% over the last 8 quarters, with continued momentum expected as the company enters new markets.

Q:What are the preliminary results of in situ testing for the RNG market, and how does the product compare to competitors?

A:Initial testing indicates the product performs significantly better than competitors. The company is holding back capacity for the RNG market due to its higher pricing and margins, despite being able to contract all capacity in the water market.

Q:What is the potential for exceeding the 25 million pounds nameplate capacity for Phase 1, and when will this be determined?

A:The company aspires to exceed the 25 million pounds capacity but will only know once full capacity is reached. This will be determined within the next 6 months.

Q:What is the expected timeline for equipment ordering and construction for Line 2, and will it be faster than Phase 1?

A:The timeline for Line 2 is expected to be roughly 12 months from the financial investment decision to commissioning. The process should be faster than Phase 1 due to lessons learned and optimizations.

Q:How does the company plan to finance Line 2, and will equity issuance be required?

A:The company plans to finance Line 2 through cash flow, cost-cutting initiatives, and debt availability. There is no intention to issue further equity.

Q:Has the Big Beautiful Bill influenced demand from RNG customers?

A:While the bill may have added to demand, the RNG market was already attractive and strong. The company is not relying on the bill for market growth.

Q:What is the scale and uniqueness of the asphalt emulsion market opportunity, and what is the timeline for a decision?

A:The asphalt emulsion market is immense and could consume all current production capacity. The product is unique to Arq due to its patent-protected process. The company is in the testing phase with a leading U.S. asphalt company, and the timeline for a decision depends on testing outcomes.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the costs for Line 2, stating that they are still being finalized. Additionally, they did not commit to a timeline for determining the potential to exceed the 25 million pounds capacity for Phase 1, only stating it would be within 6 months. The response to the impact of the Big Beautiful Bill on RNG demand was also vague, as they did not quantify or clearly separate its influence from organic demand.

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Earnings Word Cloud

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The earnings call highlights significant EBITDA improvement and a strong market demand outlook. However, production challenges, especially with the GAC line, and higher ramp-up costs are concerning. The Q&A reveals management's evasiveness on specific metrics, impacting sentiment. While long-term prospects are positive due to market fundamentals and cost optimization, short-term issues like suboptimal production and financial strain weigh down the outlook. Thus, the stock price reaction is expected to be neutral over the next two weeks.

Arq, Inc. (ARQ) Q2 2025 Earnings Call Transcript

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The earnings call presents a mixed sentiment. Positive aspects include a 10% revenue increase, improved gross margin, and a significant reduction in SG&A expenses. However, a net loss in Q4 2024, exceeding CapEx, and unclear management responses on key projects temper enthusiasm. The Q&A section reveals concerns about PAC sales and unplanned shutdowns, which may affect investor confidence. The lack of financial guidance and market cap data further adds uncertainty, leading to a neutral prediction for stock price movement.

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