Arq(ARQ) - 2024 Q1 - Quarterly Results

Executive Summary & Company Overview Q1 2024 Performance Highlights Arq Corporation achieved significant year-over-year performance improvement in Q1 2024, primarily driven by enhanced PAC gross margins, securing its first GAC contract, and progressing the Red River expansion project on schedule for Q4 2024 commissioning - Q1 2024 performance significantly improved year-over-year, primarily due to enhanced PAC gross margins[1] - Successfully signed the first GAC contract, securing 20% of capacity with attractive pricing[1] - The Red River expansion project is on schedule for commissioning in Q4 2024, with an expected payback period of three years or less[1] Financial Highlights Q1 2024 Key Financial Metrics In Q1 2024, Arq's revenue grew 4% year-over-year to $21.7 million, driven by a 16% increase in average selling price (ASP) and optimized product mix, despite a 6% decline in volume, while gross margin doubled to 37%, with significant reductions in net loss and adjusted EBITDA loss, reflecting improved profitability Q1 2024 Key Financial Metrics | Metric | Q1 2024 (Million USD) | Q1 2023 (Million USD) | YoY Change | Notes | | :--- | :---: | :---: | :---: | :--- | | Revenue | 21.7 | 20.8 | +4% | ASP increased 16%, product mix optimized, offsetting 6% volume decline | | Gross Margin | 37% | 17% | +20 percentage points | Driven by ASP increase and operational cost management | | Net Loss | (3.4) | (7.5) | Improved 4.1 | Significant improvement | | Adjusted EBITDA Loss | (1.1) | (7.7) | Improved 6.6 | Significant improvement | | Cash and Restricted Cash (End of Period) | 44.0 | 54.2 | -10.2 | Primarily for Red River and Corbin facility investments | | FY 2024 Capex Forecast | 60-70 | 55-60 (Original Forecast) | +5-10 | Primarily due to increased steel and concrete costs for Red River expansion | - Average Selling Price (ASP) achieved double-digit year-over-year growth for the fourth consecutive quarter, increasing by approximately 16% in Q1 2024[4] Recent Business Highlights Strategic and Operational Achievements The company achieved several key strategic and operational advancements in Q1 2024, including signing its first GAC supply contract, initiating Corbin facility commissioning, progressing the Red River GAC facility expansion, and benefiting from new EPA PFAS drinking water regulations expected to drive market demand - Signed the first Granular Activated Carbon (GAC) supply contract with a customer, projecting 5 million pounds of annual supply at pricing significantly above average PAC prices, with deliveries expected to commence in Q1 2025[4] - The Corbin facility began commissioning in April 2024, expected to complete in May, supporting asphalt waste feedstock for Red River GAC production[4] - Strategic expansion of the Red River GAC facility continues to progress, with construction on track for commissioning in Q4 2024 as planned[4] - The U.S. Environmental Protection Agency (EPA) issued its first national primary drinking water regulation for six PFAS compounds, significantly lowering permissible PFAS levels and expected to drive strong demand for Arq solutions and GAC products[4] - Advisors have been appointed to plan the refinancing and expansion of the company's term loan[4] CEO Commentary Business Momentum and Strategic Validation CEO Bob Rasmus highlighted significant Q1 progress, achieving revenue growth and margin expansion, with expectations for continued full-year financial improvement, while the first GAC contract validates the company's strategy, and new EPA regulations reinforce Arq's critical role in environmental solutions - CEO Bob Rasmus stated that Q1 results demonstrate clear business momentum and improvement, with revenue growth and margin expansion driven by higher pricing and cost management[5] - Full-year financial performance is expected to continue improving, with the foundational PAC business projected to be cash flow positive for FY 2024[5] - The signing of the first GAC supply contract is a significant strategic milestone, validating the company's strategy and expanded solutions while de-risking the Red River plant expansion[5] - New EPA drinking water regulations uniquely position the company to help businesses meet stricter requirements, with investments significantly improving the growth trajectory and making Arq a key enabler of environmental integrity goals in the U.S. and globally[5] First Quarter 2024 Results Revenue Performance Q1 2024 revenue reached $21.7 million, a 4% year-over-year increase, primarily driven by a significant rise in average selling price (ASP) and a favorable product mix, despite a 6% decline in sales volume Revenue Performance | Metric | Q1 2024 (Million USD) | Q1 2023 (Million USD) | YoY Change | | :--- | :---: | :---: | :---: | | Revenue | 21.7 | 20.8 | +4% | | Average Selling Price (ASP) | Approx 16% increase | - | - | | Sales Volume | 6% decrease | - | - | Cost of Revenue and Gross Margin Q1 2024 cost of revenue decreased 20% year-over-year to $13.7 million, primarily due to ongoing operational cost management, with gross margin consequently doubling to 37%, up from 17% in the prior year period Cost of Revenue and Gross Margin | Metric | Q1 2024 (Million USD) | Q1 2023 (Million USD) | YoY Change | | :--- | :---: | :---: | :---: | | Cost of Revenue | 13.7 | 17.2 | -20% | | Gross Margin | 37% | 17% | +20 percentage points | Operating Expenses In Q1 2024, selling, general, and administrative (SG&A) expenses significantly decreased, while research and development (R&D) expenses increased due to product qualification testing Operating Expenses | Metric | Q1 2024 (Million USD) | Q1 2023 (Million USD) | YoY Change | | :--- | :---: | :---: | :---: | | Selling, General and Administrative Expenses | 7.7 | 11.3 | -3.6 | | Research and Development Expenses | 1.6 | 0.7 | +0.9 | - SG&A expenses decreased primarily due to reductions in salaries and benefits, and legal and professional service fees, partially offset by increased board compensation and rent expenses[8] - R&D expenses increased primarily due to product qualification testing with potential early adopters during the GAC contract signing process[9] Operating Loss Q1 2024 operating loss narrowed to $3.0 million, a significant improvement from $7.8 million in the prior year, primarily driven by cost reductions and higher product sales pricing Operating Loss | Metric | Q1 2024 (Million USD) | Q1 2023 (Million USD) | YoY Change | | :--- | :---: | :---: | :---: | | Operating Loss | (3.0) | (7.8) | Improved 4.8 | Interest Expense and Income Tax Q1 2024 interest expense increased to $0.8 million, primarily from a $10 million term loan related to the February 2023 Arq acquisition, with income tax expense being negligible in both quarters Interest Expense and Income Tax | Metric | Q1 2024 (Million USD) | Q1 2023 (Million USD) | YoY Change | | :--- | :---: | :---: | :---: | | Interest Expense | 0.8 | 0.5 | +0.3 | | Income Tax Expense | 0 | 0 | 0 | Net Loss and EPS Q1 2024 net loss was $3.4 million, with a diluted loss per share of $0.09, a significant improvement from the prior year's $7.5 million net loss and $0.32 diluted loss per share, driven by improved gross margin and reduced SG&A costs Net Loss and EPS | Metric | Q1 2024 (Million USD) | Q1 2023 (Million USD) | YoY Change | | :--- | :---: | :---: | :---: | | Net Loss | (3.4) | (7.5) | Improved 4.1 | | Diluted Loss Per Share | (0.09) | (0.32) | Improved 0.23 | Adjusted EBITDA Loss Q1 2024 adjusted EBITDA loss narrowed to $1.1 million, a substantial improvement from $7.7 million in the prior year, primarily due to reduced net loss and increased net interest expense Adjusted EBITDA Loss | Metric | Q1 2024 (Million USD) | Q1 2023 (Million USD) | YoY Change | | :--- | :---: | :---: | :---: | | Adjusted EBITDA Loss | (1.1) | (7.7) | Improved 6.6 | Capex and Balance Sheet Capital Expenditures and Cash Position Q1 2024 capital expenditures increased to $9.6 million, primarily for the expansion of Red River and Corbin facilities, with total cash and restricted cash at period-end being $44.0 million, a decrease from year-end 2023, reflecting strategic capital outlays Capital Expenditures | Metric | Q1 2024 (Million USD) | Q1 2023 (Million USD) | YoY Change | | :--- | :---: | :---: | :---: | | Capital Expenditures | 9.6 | 3.5 | +6.1 | Cash and Debt Position | Metric | March 31, 2024 (Million USD) | December 31, 2023 (Million USD) | QoQ Change | | :--- | :---: | :---: | :---: | | Cash and Restricted Cash | 44.0 | 54.2 | -10.2 | | Total Debt (including finance leases) | 20.7 | 20.9 | -0.2 | - Increased capital expenditures were primarily for the ongoing expansion of the Red River and Corbin facilities[15] - Total debt slightly decreased, primarily due to principal payments made during the quarter[16] Strategic Investments and Updated 2024 Capex Forecast Updated 2024 Capex Forecast The company raised its full-year 2024 capital expenditure forecast to $60-70 million, an increase of $5-10 million from previous guidance, primarily due to higher-than-expected steel and concrete costs for the Red River Phase 1 expansion, while reaffirming the investment payback period is expected to be three years or less Updated 2024 Capex Forecast | Metric | Updated FY 2024 Forecast (Million USD) | Previous Forecast (Million USD) | Change (Million USD) | | :--- | :---: | :---: | :---: | | Total Capital Expenditures | 60-70 | 55-60 | +5-10 | | Red River Phase 1 Expansion Project | 55-60 | - | - | - The increase in capital expenditures is primarily driven by increased steel and concrete requirements and costs for the Red River Phase 1 expansion project[18] - The company expects to fund 2024 capital expenditures through existing cash, cash generation, cost reductions, potential customer prepayments, and the refinancing and expansion of its term loan[19] Conference Call and Webcast Information Q1 2024 Earnings Call Details Arq Corporation has scheduled a conference call for Thursday, May 9, 2024, at 9:00 AM ET to discuss Q1 2024 results, with investors able to register to participate via webcast on the company's website or through a designated link, or by phone - The conference call is scheduled for Thursday, May 9, 2024, at 9:00 AM ET[20] - Participation in the webcast is available via the investor relations section of Arq's website or through the registration link: **https://www.webcast-eqs.com/login/arq050924**[20](index=20&type=chunk) - Dial-in numbers are (800) 867-4593 (domestic U.S.) or (785) 424-1037 (international)[20] About Arq Company Profile Arq (NASDAQ: ARQ) is a diversified environmental technology company dedicated to producing products that contribute to a cleaner and safer planet and actively reduce environmental impact, as North America's only vertically integrated producer of activated carbon products, offering innovative, hard-to-source, and high-demand products - Arq is a diversified environmental technology company whose products aim to enable a cleaner, safer planet and reduce environmental impact[21] - The company is North America's only vertically integrated producer of activated carbon products, providing reliable domestic supply and innovative offerings[21] - The company leverages its expertise to develop breakthrough solutions for removing harmful chemicals and pollutants from water, land, and air[21] Caution on Forward-Looking Statements Forward-Looking Statements Disclaimer This press release contains forward-looking statements as defined by Section 21E of the Securities Exchange Act of 1934, concerning the company's future activities, events, or developments, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations, and investors should consult the company's SEC filings for further risk discussions - This press release contains forward-looking statements intended to identify future activities, events, or developments[22] - Forward-looking statements involve various risks and uncertainties, including but not limited to regulatory changes, economic conditions, market demand, competition, technological difficulties, financing capabilities, and inflation impacts, which could cause actual results to differ materially from expectations[22][23] - Investors should consult the company's SEC filings, particularly risk factor disclosures, for additional discussion of risks and uncertainties related to the company's business and securities ownership[23] Financial Statements Condensed Consolidated Balance Sheets As of March 31, 2024, the company's total assets were $229.8 million, total liabilities were $54.6 million, and total shareholders' equity was $175.2 million, with both total assets and total liabilities slightly decreasing compared to December 31, 2023 Condensed Consolidated Balance Sheets | Metric (Thousand USD) | March 31, 2024 | December 31, 2023 | | :--- | :---: | :---: | | ASSETS | | | | Cash | 35,227 | 45,361 | | Total current assets | 72,038 | 86,461 | | Property, plant and equipment, net | 103,645 | 94,649 | | Total assets | 229,798 | 235,502 | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | Total current liabilities | 21,967 | 23,048 | | Long-term debt | 18,127 | 18,274 | | Total liabilities | 54,634 | 57,102 | | Total stockholders’ equity | 175,164 | 178,400 | Condensed Consolidated Statements of Operations In Q1 2024, the company achieved $21.7 million in revenue, a 4% increase year-over-year, with cost control and improved gross margins leading to significant reductions in both operating loss and net loss, and diluted loss per share decreasing to $0.09 Condensed Consolidated Statements of Operations | Metric (Thousand USD) | Q1 2024 | Q1 2023 | | :--- | :---: | :---: | | Revenue | 21,740 | 20,805 | | Cost of revenue (exclusive of depreciation and amortization) | 13,713 | 17,175 | | Selling, general and administrative expenses | 7,666 | 11,283 | | Research and development expenses | 1,625 | 732 | | Operating loss | (2,980) | (7,827) | | Net loss | (3,419) | (7,508) | | Basic loss per share | (0.09) | (0.32) | | Diluted loss per share | (0.09) | (0.32) | Condensed Consolidated Statements of Cash Flows In Q1 2024, operating activities generated $0.526 million in cash, investing activities had a net outflow of $9.6 million, and financing activities had a net outflow of $1.0 million, with total cash and restricted cash at period-end being $44.0 million, a $10.1 million decrease from the beginning of the period Condensed Consolidated Statements of Cash Flows | Metric (Thousand USD) | Q1 2024 | Q1 2023 | | :--- | :---: | :---: | | Net cash provided by (used in) operating activities | 526 | (17,705) | | Net cash used in investing activities | (9,647) | (2,897) | | Net cash provided by (used in) financing activities | (1,013) | 23,260 | | Cash and restricted cash (end of period) | 44,019 | 79,090 | - Operating cash flow turned positive, reflecting improved operational efficiency[31] - Increased cash outflow from investing activities was primarily for the acquisition of property, plant, and intangible assets, reflecting strategic capital expenditures in the Red River and Corbin facilities[31] Non-GAAP Financial Measures Reconciliation EBITDA and Adjusted EBITDA Reconciliation The company provides EBITDA and Adjusted EBITDA as non-GAAP financial measures to supplement GAAP net loss, believing these metrics better reflect core operational performance, with Q1 2024 Adjusted EBITDA loss significantly narrowing to $1.1 million - EBITDA is defined as earnings before interest, taxes, depreciation, and amortization, with Adjusted EBITDA further adjusting for non-cash items like equity in earnings of unconsolidated affiliates and gain on sale of assets[32] - The company believes non-GAAP measures assist management in evaluating operational performance and facilitate comparisons of operating results across periods by excluding certain expenses, gains, and losses that may vary widely[33] EBITDA and Adjusted EBITDA Reconciliation | Metric (Thousand USD) | Q1 2024 | Q1 2023 | | :--- | :---: | :---: | | Net loss | (3,419) | (7,508) | | Depreciation, amortization, depletion and accretion | 1,716 | 2,137 | | Interest expense, net | 432 | 289 | | EBITDA loss | (1,144) | (4,988) | | Adjusted EBITDA loss | (1,144) | (7,683) |