Earnings Transcript for ADES - Q3 Fiscal Year 2024

Operator: Hello and thank you for standing by. At this time, I'd like to welcome everyone to the Arq Third Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. As a reminder, this call is being recorded. I will now turn the conference over to Anthony Nathan, Head of Investor Relations for Arq. Please go ahead, sir.

Anthony Nathan: Thank you, operator. Good morning everyone and thank you for joining us today for our third 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 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-Q for the quarter ended September 30, 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 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.

Robert Rasmus: Thank you, Anthony and thanks to everyone for joining us this morning. This was a really strong quarter. With that in mind, I'd like to start today by reflecting on our journey

Stacia Hansen: Thanks, Bob and thanks, everybody, for joining us today. We delivered strong financial results during the third quarter with revenue growing 17% year-over-year to $34.8 million. This is driven largely by enhanced contract terms, including 15% growth in average selling price. This is our 6th consecutive quarter of double digit year-over-year percentage growth in ASP and positive changes in product mix as well as a 5% increase in consumable volumes. Our gross margin in the quarter was approximately 39%, up approximately 800 basis points versus the 31% margins reported in the prior year period. We generated positive adjusted EBITDA of approximately $5.1 million compared to an adjusted EBITDA of $800,000 in the prior year period. Net income was $1.6 million, a significant improvement versus a net loss of $2.2 million in Q3 of 2023. As I mentioned earlier, average selling price for the quarter improved 15% year-over-year. We continue to eliminate negative margin contracts as we focused on profitability over volumes. And as previously guided on our last call, we have reduced loss-making contracts to roughly 2% of volume versus roughly 24% in 2022 and approximately 13% in 2023. We have now amended the sole remaining loss-making contract which will be a net contributor in 2025. Selling, general and administrative expenses totaled $8.1 million. This reflects a reduction of approximately 3% versus the prior year period, driven by a reduction in payroll and benefit expenses as well as legal and professional fees. Third quarter results included approximately $400,000 of non-recurring items related to severance and fees associated with our financing efforts. Research and development costs for the third quarter increased 23% compared to the prior year period. As in Q3 of 2024, year-over-year increases in R&D were primarily driven by conducting further product qualification testing with potential GAC adopters. Overall and on an annualized basis, our performance demonstrates our ability to operate our PAC business in a way that contributes positively to our economic position while further enabling us to pursue and execute on high-growth and high-margin opportunities within our expanding GAC business. We remain extremely confident that the PAC business will be cash generative in fiscal year 2024 and beyond and with it, we will have a much more secure foundational business on which we can add the more rewarding GAC opportunity. And turning to the balance sheet, we ended the third quarter with total cash of $57.4 million, of which approximately $49 million was unrestricted. This change versus last quarter was driven by the net proceeds from our recent equity raise totaling approximately $26.7 million and partially offset by the expenditures at Red River consuming approximately $16.5 million. Today, we are reiterating our 2024 CapEx forecast of $60 million to $70 million with $20 million to $25 million expected to be spent in the fourth quarter of this year. We continue to expect to fund our CapEx needs via our existing cash, cash generation, ongoing cost reduction initiatives and the potential prepayment on GAC contracts. On this final note, I would repeat Bob's comments that post our equity raise, we are now in a materially stronger position with regards to our discussions and possible lenders and anticipate completing some sort of ABL facility in the near term which will potentially enable us to remove both the expensive CFG term loan which we took out as part of the historical Arq Ltd transaction, as well as to smooth the working capital profile of the business as we move from first production to first sale. With that, I will turn things back to Bob.

Robert Rasmus: Thanks, Stacia. Before my closing remarks and opening it up for Q&A, I'd like to add one more important component to the financial discussion. As our business continues to transform and attract even more investor attention, we remain keen on providing better and more comprehensive information and disclosures to the market, enabling investors to more thoughtfully forecast and track our business and its performance. With this in mind, we anticipate providing financial guidance sometime next year following the completion, ramp-up of GAC production, achieving full run rate production and final determination of what amount over 25 million pounds we can produce. More information to come on timing and scope of that guidance but we preliminarily expect that to coincide with our first quarter 2025 earnings cycle in May. In conclusion, this was a really strong quarter which has left me very pleased but far, far from satisfied. I'm genuinely excited by the progress we have made but I also believe that we are just beginning to realize the potential of this opportunity. We plan on maintaining our focus as it relates to the PAC business. By doing so, we believe we can demonstrate that this is now a self-sustaining business. And of course, we need to be laser focused on execution as regards to GAC expansion at Red River. If we can continue with the progress we have already achieved, then I think 2025 will be a game changing year for us. I'm obviously biased but I think we have a great team, a great story which combined represent a fantastic opportunity. I'm very encouraged by the increasing level of investor interest we continue to receive as well as the engagements from equity research analysts who are also starting to see the potential. As we continue to execute and as the story continues to gain a wider audience, then I think the rest of 2024 and through 2025 and beyond will be a period of material value creation for all our stakeholders. With that, I will turn the call back over to our operator to move us to Q&A.

Operator: [Operator Instructions] And your first question comes from the line of Gerry Sweeney with ROTH Capital.

Gerry Sweeney: 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.

Robert Rasmus: 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.

Gerry Sweeney: Got you. I just want to confirm and I apologize if I'm wrong on this but did you say 25 million pounds of production, I'm assuming by the end of Q1? I just want to clarify that. Or run rate. Run rate.

Robert Rasmus: Yes. So the ideal is to be at full run rate production at the end of Q1. That's our goal on that. And it relies on when we start up and the debugging process. But that's our goal and that's what we're working towards.

Gerry Sweeney: And again and then potentially the detuning and production enhancements sometime in the third quarter impacting potentially the fourth quarter?

Robert Rasmus: Sure. No and I think that obviously we've got to reach full run rate production on the $25 million and then get the final determination in terms of how we've optimized production, what we've done to be able to determine whether that amount is 10%, 15% or 20%. Our goal is to be able to get that extra in the third quarter, getting some impact in the third quarter, hopefully and the fourth quarter. And we're comfortable we're going to achieve some type of optimization and enhancement over the $25 million. Otherwise, I wouldn't feel comfortable mentioning it.

Gerry Sweeney: And on that front, I understand detuning, the product comes out at as an extremely high quality. How does detuning take place? Is it less time in the kiln so you can put more product through? Just want to get a little bit more detail on that front as well.

Robert Rasmus: Yes, that's essentially it. It's less time in the kiln. Just change some of the formulas in terms of what we do and literally what buttons we push when and what levers we pull. It's a complex process but one we're very comfortable with the science and technology behind.

Gerry Sweeney: Got it. And then final question, just switching gears to the PAC side. Natural gas was actually very low this summer as compared to last year. Wondering if there were any headwinds on that front. Results were great but just wondering if there were -- if you had any headwinds due to natural gas pricing. And then secondarily, political landscape is changing and curious if you had any thoughts on what that could do to the PAC business as well.

Robert Rasmus: Sure. So as it relates to nat gas pricing, we've been facing nat gas headwinds for the power generation segment for quite some time, for well over a year. So this was nothing new for us. What you're really seeing in terms of our results from the PAC business is both optimizing the PG&I segment as well as the expansion into adjacent markets which reduces our reliance or previous overall emphasis on the PG&I market. So while nat gas prices were down, they've been down for a long time. It wasn't any additional headwinds that we faced versus prior quarters. As it relates to the election and uncertainty, we're glad the election is over and glad the uncertainty is eliminated. The market and investors really don't like uncertainty. And that if you look at the legislation that was passed by Congress authorizing the EPA to promulgate PFAS regulations, had very strong bipartisan support. And if you look at it, PFAS remediation is just one of many undersupplied and growing markets that we've designated for our granular activated carbon product. We really like how we're positioned both in the PFAS-related and other uses and outlets for our products. So we're glad the uncertainty for the election is over and it's no change, full speed ahead.

Operator: And your next question comes from the line of Graham Mattison with WRT.

Graham Mattison: 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?

Robert Rasmus: 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.

Graham Mattison: Got it. Great. And then a question on the RNG markets, because you talked about that earlier. Are you seeing any increase in demand there? And the reason I ask that is they're listening to some of the earnings calls from the other players out there in the market in terms of the people manufacturing the engines or providing natural gas fuel, they were very, very bullish as of late.

Robert Rasmus: Yes. No, we're seeing extremely strong demand in the RNG sector. The demand could consume the entire production line if we wanted it to, it's so strong. But we're really looking, again, as I mentioned with Gerry, to diversify the end markets and not rely on any particular one market but RNG demand and the pace of advanced contract negotiations is extremely strong and favorable.

Graham Mattison: Yes. That new 15-liter engine from Cummins is pretty much the game changer everyone's been waiting for there. Broadly speaking, as you look at the length of the contracts, how do they compare between PAC and GAC? Is there a difference of who's driving that and who the customers are and what are they looking for in terms of timing? And I realize you can't get into specifics on contracts, so broadly speaking.

Robert Rasmus: Right. So on the granular, again, we're looking for a mix. We've got some 1 year but we're looking for multiyear in general. The reason we've done the 1-year contract is we think pricing is going to improve. And again, along with getting a portfolio of industries, we also want to stagger the maturities of our contracts on the granular side. So it's anywhere from 1 year, excuse me, to 4 or 5 years. On the PAC side, again, it's a variety. Those are generally longer term, 3, 4, 5 years as it relates to that. And what drives and circling back and digressing on the granular side, we're the ones really driving that mix of maturity. The granular customers really want as long a contract as possible.

Graham Mattison: Got it. Great. And then one final question sort of on the housekeeping side. You added additional GAC contracts this quarter but didn't put out a press release. Is the right way to think about that going forward is that we'll hear updates on the incremental contracts at the quarters as opposed to looking for press releases?

Robert Rasmus: I think that's right. One, we wanted to just to let people know that, A, we've got a viable product at the beginning. B, the market knows that we have a viable contract. We're very pleased at where we are with the executed contracts on that. But we think what's the best way to do that is prudent is to do them in batches or mostly at quarter end. Or if we get the plant up and running and fully commissioned prior to doing any quarter end earnings call, we would put out an update on the contracts as well. But really, really like where we're positioned on the contracting side.

Graham Mattison: Yes. No, that makes sense. And it's now more normal course of business and just standard as opposed to like you're just starting a line. So that makes sense to do it that way. All right. Great. Well, congratulations on the great results.

Operator: There are no questions at this time. I will turn the call back over to Robert Rasmus for closing remarks.

Robert Rasmus: Thanks, Demi. And thank you, everyone, for joining us this morning. While we are very pleased with our results, we are far, far from satisfied. I look forward to providing our next update. Thank you all for your interest, your time and your attention.

Operator: And this does conclude the meeting. We thank you all for your participation. You may now disconnect.