Arq, Inc. Q3 FY2024 earnings call

• PAC business: Successfully turned around financial and operating performance, with ASP up 15% in Q3 2024, gross margins improved by 800 basis points to 39%, and has good visibility on PAC contract renewals especially in the PG&I sector. - GAC business: Made strides with 60% of nameplate capacity contracted, in advanced negotiations for remaining capacity, Red River facility construction on budget and on track, with potential to increase capacity by 10% - 20% without additional CapEx. - Equity raise: Decided to issue equity instead of term loan refinancing due to unfavorable terms, successfully raised approximately $44 million, expanding institutional investor base and balance sheet flexibility. - Red River facility: Modular commissioning underway, with 100% of steel and concrete installed and over 95% of equipment in place, allowing derisking and troubleshooting.

The PAC business achieved record operating revenue of approximately $35 million in Q3 2024 with adjusted EBITDA of approximately $5 million. Gross margins were approximately 39%, up approximately 800 basis points year - over - year. ASP for the PAC business in Q3 2024 was 15% higher than the same quarter last year. Revenue increased by nearly $5 million or nearly 17% over the same period last year. For the GAC business, it is now contracted for approximately 15 million pounds of annual GAC product, or approximately 60% of the 25 million pound nameplate capacity, and is in advanced stages of negotiations for the remaining nameplate capacity.

• 2024 CapEx forecast is $60 million to $70 million, with $20 million to $25 million expected to be spent in Q4 2024. - Aim to achieve full run rate production at Red River by the end of Q1 2025. - Expect to achieve potential 10% - 20% increase in Red River's capacity on a run rate basis during the third quarter of 2025. - Anticipate confirming potential timing for Phase 2 of GAC expansion in the first half of 2025. - Plan to provide financial guidance sometime next year following GAC production ramp and full run rate determination.

• Equity issuance risks: Terms of term loan refinancing became unfavorable with non - call provisions, high cash flow sweeps, etc. - Red River commissioning risks: Stuff always goes wrong when commissioning a new plant, though efforts are in place to shorten the cycle. - Market demand risks: Uncertainty in market demand for GAC products and PAC contract renewals. - Cost risks: Potential inflationary factors affecting Phase 2 CapEx.

Q: Just wanted to start, you provided a lot of details in your prepared remarks, so I only have a few questions. But starting on the GAC side and commissioning at Red River, you gave us a little bit of a time line. But just from a risk standpoint, I just want to understand maybe some of the major hurdles that remain in terms of getting Red River up and commissioning and into production.

A: Sure, Gerry. A couple of things. As I mentioned, we basically got 100% of the structural steel and cement completed. We've got 95% or more of the equipment installed. What we're basically doing now is final electrical and piping of that. But the great thing about this expansion is we're able to conduct modular commissioning. And what I mean by that is we don't have to wait until everything is in place, everything is wired, all the piping is done to flip a switch and every machine and every bit of machinery starts whirring and turning, if you will. We're able to commission things on a modular basis. And for instance, we've already done the feeder into the furnace and a couple other items. And that's important because it allows us to derisk and troubleshoot items that as if -- or as opposed, I should say, to doing everything all at once. So stuff always goes wrong when you commission a new plant but I'm comfortable that we're on top of it and that we're going to be able to shorten that commissioning and debugging cycle.

Q: It's Graham from Water Tower Research. Just to follow up on what Gerry said. Thank you. You gave a lot of detail in the prepared comments but also the slide deck, so thank you for that. Looking at the new GAC contracts, what were the end markets that were driving that? And have you seen any changes from the beginning of the year to now?

A: Thanks, Graham. Really a variety of markets. One of the things we've tried to do is to get a spread of, if you will, industry risk or have a broad portfolio. We could contract the entire 25 million pounds right now in the water market. But we think it's the best course for shareholders, both in terms of the industry portfolio as well as pricing is to get a variety of industries. So we've got respirating equipment. We've got municipal water. We've got equipment manufacturers. We've got RNG people we're talking to. It's really across a wide variety of industries with whom we're speaking with.