Arq, Inc. (NASDAQ:ARQ) Q4 2023 Earnings Call Transcript

Turning to Slide 8. We were very active during the fourth quarter with our strategic GAC expansion and these efforts have continued full steam ahead into the start of 2024. As noted earlier, construction and commissioning at Corbin and Red River continued at pace during the quarter and into the first quarter, and we remain on track with regards to timing for both projects. The LSR agreement signed in the fourth quarter evidences our focus on and intend to expand our geographic exposure. The EU is just as focused as the US when it comes to water regulations and we are engaged in expanding our product reach in this attractive and growing market segment. Prices in Europe are much higher than in North America. In addition, demand which is growing far exceeds supply.

This creates a highly attractive market environment and significant growth opportunity for us. Recently, we announced the successful amendment of our existing NORD agreement. The amendment provides material benefits to Arq and is yet another example of our relentless focus on improving profitability and operational efficiencies. Moving to Slide 9. This highlights a busy start to the year and will continue throughout 2024. Beyond the operational milestones, which I have already referenced, we continue to engage in and advance important sales related discussions. We previously identified and are actively working with a large number of lead adopters to prequalify our GAC products. We have received excellent feedback from our discussions. And we have continued to advance those discussions to either the next level of testing or contract negotiations.

We remain confident in our ability to convert our discussions to sales contracts ahead of our fourth quarter completion and continue to expect contracting out our 25 million pound expansion ahead of first production. We will continue to provide you with timely updates as we have them. As we turn to Slide 10, you will see two main market segments of our business across our PAC and GAC portfolio. Our PAC portfolio serves as an important foundation asset and one where we will continue to optimize profitability while expanding into higher value and higher margin market. The optimization of our PAC business is now almost complete and the results are tangible and visible in our financial performance. We have a strong market position as a result of our first rate team, facilities and products and we expect to be able to drive these strong fundamentals further.

We have proven that PAC can be a cash contributor and I am excited about its ability to contribute to our growth and value creation over the long term. Turning to our evolving granular activated carbon business. This opportunity provides materially more attractive returns and a unique chance to leverage our existing assets and resources. We believe we have the most advanced activated carbon plant in North America and are now trying to deliver new supply into a growing and attractive market, benefiting from sustainable tailwinds. Our GAC business will further differentiate Arq as a business and investment, and I’m excited about the growth investments we’re making in 2024 and beyond. Turning now to Slide 11. It is important to reiterate our key differentiators.

By combining Arq’s technology for recycling bituminous coal waste, with our state of the art processing facility and existing R&D and sales teams, we are able to offer customers a highly differentiated solution in a fully vertically integrated supply chain. By using coal waste is our GAC feedstock, we enjoy material environmental benefits versus conventional products, which are typically produced by mining virgin coal. We’re committed to playing our part in driving greater sustainability in our industry and believe this will continue to become even more important to our customers. But it’s not just qualitative differences that we see, our business also drives significant and unique financial advantages. First, by using our own waste product, we reduced our GAC feedstock supply risk.

Second, we benefit from more competitive sourcing versus the incumbent approach of mined coal. Third, we lower operating costs, including our ability to be a net provider to the electrical grid at our Red River plant. And finally, we avoid potential negative import factors such as variable freight, tariff and duty costs. As we move to Slide 12, here we highlight the growing attention of PFAS or forever chemicals, which we expect to serve as critical tailwinds for our GAC business over the near and long term. It’s not just us and our customers that are focused on this important topic. Public awareness of PFAS contamination and related dangers is growing, while domestic and global regulation continues to advance. We expect these structural changes to how we live as a society will drive even greater demand for our products and solutions.

Moving to Slide 13. We believe the GAC market remains significantly undersupplied at a time when demand is expected to significantly increase. Just a few weeks ago in February, the EPA provided an update, which highlighted the scope of their ambition to significantly reduce the presence of PFAS in our communities. These initial proposals are expected to be fleshed out in the coming weeks according to the EPA. Should these proposals, which includes a nearly 95% reduction in currently permissible PFAS amounts become formal regulations, it would serve as a major catalyst for even greater demand for our products and solutions. To provide context, if currently proposed regulations were enacted, this could generate an increase in demand for granular activated carbon products of 3 times to 4 times within the municipal water market alone above the current approximate 170 million pounds annual usage.