Arq, Inc. (NASDAQ:ARQ) Q1 2024 Earnings Call Transcript

Arq, Inc. (NASDAQ:ARQ) Q1 2024 Earnings Call Transcript May 9, 2024

Arq, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Arq First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, there will be a question and answer session. [Operator Instructions] I would now like to turn the call over to Anthony Nathan, head of Investor Relations. Please go ahead.

Anthony Nathan: 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 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 investor@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-Q for the year ended March 31, 2024 and other filings with the Securities and Exchange Commission. Except as expressly required by 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 in 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.

Robert Rasmus: 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’m also excited about signing our first granular contract. I will provide more details on this milestone event later in my remarks.

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Q&A Session

Our first quarter results evidence 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 and 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 an investment with tremendous near and long-term benefits. It is because of these in-depth technical discussions that we were able to sign our first granular contract and are confident in our ability to pre-contract the entire 25 million pounds of granular activated carbon prior to beginning production. As we have outlined previously, the performance of our PAC business is correlated with natural gas prices. This year’s milder than normal winter led to lower natural gas pricing. As a consequence demand for electricity generated from coal-fired power.

The end market for a majority of our PAC solutions was reduced. The 6% decline in year-over-year volumes was offset by a 16% increase in our ASP versus the prior year. The increase in average selling price when combined with our manufacturing cost reduction initiatives resulted in our achieving the previously mentioned 37% gross margin. It is also worth noting that our first quarter performance and a portion of our second quarter are generally seasonally softer quarters for our business. I’m very proud of our team delivering revenue growth year on year while also continuing to fundamentally improve margins and profitability across the business. From an operational perspective, we performed well, and I commend the team for their ongoing focus, operational cost management and execution efficiency.

As an aside, one pertinent example of outstanding execution is the recently completed plant turnaround at our Red River facility. The plant around occurs every two years. This year, we shut down the plant for two weeks to conduct regular plant maintenance and tie in certain systems and components for our GAC expansion. The turnaround was completed safely on time and on budget. Progress is rarely linear and the sustainable improvements we are realizing are clearly evident in all aspects of our business and financial performance. While I do not expect our PAC operations to transform to a high growth business for us, we have made undeniable progress and are in a fundamentally different position to where we were 12 or even six months ago. As a result, I continue to expect that our PAC business will be cash generative for full year 2024, marking a critical achievement to the go forward strength of our business and generation of shareholder value.

As I mentioned previously, the combination of a mild winter and low natural gas prices had a negative effect on our power generation volumes. However, low natural gas prices are not the only factor in reduced demand for coal-fired electrical power. Alternative energy, such as biogas and bio methane are new and growing power sources. This is actually good for Arq and for GAC demand; renewable natural gas must be purified before it can enter the grid or pipeline system. The contaminants removed are primarily but not exclusively sulfur. The producers must use GAC to remove contaminants. Again, another reason why we are bullish on the demand for our GAC solutions. This provides an excellent lead in to an update on our latest GAC expansion progress.

Construction at our Red River facility is proceeding well and we remain on schedule for targeted commissioning in the fourth quarter of this year. To facilitate this, I’m delighted to confirm that we are now actively commissioning our Corbin facility. Corbin is where we will produce our purified bituminous waste feed stock to be used in the production of our unique GAC products at Red River. Commissioning is progressing as planned and we expect to conclude the process in May. Today, we are updating our full year 2024 CapEx forecast to a range of $60 million to $70 million, reflecting an increase of $5 million to $10 million versus our previously communicated guidance range of between $55 million and $60 million. The update is driven by higher than expected CapEx for our strategic Red River at Phase 1 expansion, specifically increased steel and concrete costs and requirements versus original estimates.

Of the $60 million to $70 million in 2024 CapEx, we expect Red River Phase 1 CapEx to represent $55 million to $60 million of that amount. Our team is working continuously and intensely to identify cost savings and execute on ways to reduce some of the overall project increase. We are making every effort to ensure that there are no further changes in our spending plan. At this point, it is logical for an investor to ask CapEx has risen continuously for the last several quarters. What confidence do you have that there won’t be further increases? And what contingencies do you now have in place in that eventuality? The majority of the previous increases are related to poor services provided by external parties previously contracted to manage and engineer the project that I mentioned on our last earnings call.

The latest increase is due to these external parties significantly underestimating certain requirements of the project. This substantially increased the scale and cost of the amount of steel and concrete needed. Based on our previous experiences, we have now included a contingency factor to our new guidance range that we hope not to require, but should mean that we finally draw a line under possible further increases. We intend to fund our CapEx with a mix of cash on hand, cash generation, ongoing cost reduction initiatives, potential prepayments on GAC contracts, and a planned refinancing and expansion of our existing term loan. Most importantly, and this is critical, even when accounting for this latest CapEx forecast, we remain extremely confident in this project having a three year or less payback.