Q3 2024 Arq Inc Earnings Call
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Hello, and thank you for standing by at this time I'd like to welcome everyone to debt. He argues third quarter 'twenty threat, if our earnings call.
Speaker Change: All lines have been placed on mute to prevent any background noise. After just speakers who likes there will be a question and answer session. If you would like to ask a question. During this time simply press star followed would be the number one on your telephone keypad.
If you would like to withdraw your question Press Star one again.
Thank you as a reminder, this call is being recorded.
Speaker Change: I will now turn the conference over to Anthony Nathan Head of Investor Relations for E. Argue. Please go ahead Sir.
Anthony Nathan: Thank you operator.
Speaker Change: Good morning, everyone and thank you for joining us today for our third quarter 2024 earnings result school.
Speaker Change: With me on the call today are Bob Rasmus, Chief Executive Officer, President as well as Stacey Hudson.
Speaker Change: And Chief Accounting Officer.
Speaker Change: This conference call is being webcast live within the investors section of our website.
Speaker Change: Downloadable version of today's presentation is available there as well.
Anthony Nathan: Replay will also be available outside and you've got to.
Anthony Nathan: Investor Relations team at investors <unk> com.
Anthony Nathan: Let me remind you that the presentation and remarks made today include forward looking statements as defined in section 20 <unk> of the Securities Exchange Act. These statements are based on information currently available to us and involve risks and uncertainties that could cause actual results.
Anthony Nathan: And business prospects and opportunities.
Anthony Nathan: To differ materially from those expressed in or implied by these statements.
Anthony Nathan: These risks and uncertainties include but are not limited to those factors identified on slide two of today's slide presentation, and our Form 10-Q for the quarter ended September 32024, and other filings with the Securities and Exchange Commission.
Anthony Nathan: Except as expressly required by the 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.
Anthony Nathan: 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 Paul.
Paul: 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, where we've been where we stand now and where we're headed look.
Anthony Nathan: Looking back over the past 15 months I'm incredibly proud of our team and everything we've achieved.
Anthony Nathan: We have successfully executed a complete turnaround in the financial and operating performance of our foundational pack business.
Anthony Nathan: Net result, underpins our business with attractive cash flows the springboard our growth.
Anthony Nathan: We approached the turnaround with a nothing is sacred mindful. This strategy helped transform a consistently loss, making business into not just a profitable business today, but a sustainably profitable business over the longer term.
Anthony Nathan: That brings up the second highlight I'd like to make the strides forward, we continue to make in our exciting GIC growth business.
Anthony Nathan: Shortly following my appointment we offered to you our commitment to drive robust contracting activity as we execute on our growth initiatives.
Anthony Nathan: I am excited to confirm today that we are now contracted for approximately 15 million pounds of annual GAC products or approximately 60% of our 25 million pound nameplate capacity.
Anthony Nathan: Clearly validating the value of our product solution and strategy.
Anthony Nathan: Moreover, we are in advanced stages of negotiations for the remaining nameplate capacity.
Anthony Nathan: First to complete this by the time, we achieve a full run rate of 25 million pounds, which is targeted for the end of Q1 2025.
Anthony Nathan: We also have identified the potential for Red River, who deliver production capabilities above our nameplate capacity and I'll have more on that shortly.
Anthony Nathan: Third I'd like to highlight the progress we've made with regards to funding our exciting set of growth initiatives.
Anthony Nathan: We have raised approximately $44 million of total capital via strategic equity raise in May and September of this year at a volume weighted average price of roughly $5 75.
Anthony Nathan: While our thinking around equity issuance has evolved alongside the market and our opportunity set I would emphasize that the average issuance price across these two strategic offerings is more than three six times higher than the day I joined.
Anthony Nathan: The quality and depth of our Investor base has also improved significantly alongside a nearly fivefold increase in our market capitalization to approximately $250 million today.
Anthony Nathan: We have also fundamentally improved the quality of our earnings stream and balance sheet.
Anthony Nathan: As a result, we are well positioned to execute on further expansion of our GIC capability.
Anthony Nathan: So in summary, I look back on these last 15 months with great great, we've implemented sustainable and impactful changes to our operations.
Anthony Nathan: Driven immediate improvements and set the stage for long term financial success.
Anthony Nathan: Virtually all of our peers are not obligated to report any metrics and providing elaborate detail on pricing would put us at a competitive disadvantage that said I'm pleased to confirm that recent contracts can be quite strong and attractive pricing. Additionally, I would point out that there are significant.
Speaker Change: Susan pricing across various industry applications. This underscores the importance of diversifying our customer base across different sectors.
Speaker Change: Given our strong contracting progress year to date, we are confident in contracting our remaining production by the time nameplate capacity run rate is achieved in Q1 2025 and are in advanced negotiations to do so however, we may ultimately determined to be advantageous to hold back.
Speaker Change: A small portion of production approximately three to 5 million pounds to pursue alternative market with higher pricing potential even if they require longer qualification processes.
Speaker Change: For instance, the <unk> opportunity, which I detailed on the last call differs from the peak vast customer base and that RMG customers typically preferred sample large scale product that their sites, meaning we need to be in production before completing final testing.
Speaker Change: Again for clarity, we remain confident in our ability to fully contract Red River by first production, but we are likely to utilize the time between now and achieving nameplate capacity to optimize how we're contracting to maximize shareholder value.
Speaker Change: As such we will remain focused but flexible.
Speaker Change: <unk> currently aimed to have 100% of our product contracted by the time, our 25 million pound nameplate capacity run rate is achieved in Q1 2025, if I believe in the coming months that holding back small quantity could secure better pricing I will pursue that course as both the CEO of <unk>.
Speaker Change: Shareholder I believe in the importance of providing accurate guidance, but I also recognize that we shouldnt be rigid with targets.
Speaker Change: Flexibility offers a better long term outcome, we should adapt accordingly to maximize value for shareholders.
Speaker Change: While discussing guidance and before turning things over to <unk> I'd like to reiterate some of our key initiatives and milestones, which we target achieving by year end.
Speaker Change: First I expect we will continue optimizing the past business as the entire company works to identify cost savings while the sales team continues its steady progress in expanding into adjacent markets and securing pricing improvements second with carbon fully commissioned in a waiting red river to follow suit we.
Speaker Change: Steady state production net carbon to begin shortly allowing us to stockpile feedstock for use at Red River.
Speaker Change: Additionally, we will start to explore cost reduction opportunities that corbin, which will be a key focus for 2025.
Speaker Change: Third we will continue the modular commissioning of Red River, which is already underway, while not every milestone will be announced when you may provide an end of year update if appropriate giving the market a clear sense of progress as we move into 2025 with.
Speaker Change: With critical elements of the build complete advancements at Red River are significant and will accelerate through completion.
Speaker Change: And as discussed we have identified the potential to increase read rivers 25 million nameplate capacity by 10% to 20% and believe we could achieve this on a run rate basis during the third quarter of 2025.
Speaker Change: And fourth we will continue entering into new GAC contracts ahead of startup and ramp further informing our strategy related to a potential phase two.
Speaker Change: With that in mind, I will hand over to <unk> to discuss the latest financials in greater detail.
Speaker Change: 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 was our sixth consecutive quarter of <unk>.
Speaker Change: Double digit year over year performance on the ASP team and positive changes in product mix as well as a 5% increase in consumable volume.
Speaker Change: Our gross margin in the quarter was approximately 39% up approximately 800 basis points versus that 31% margins reported in the prior year period.
Speaker Change: We generated positive adjusted EBITDA of approximately $5 $1 million compared to an adjusted EBITDA of $800000 in the prior year period.
Speaker Change: Net income was $1 $6 million, a significant improvement versus a net loss of $2 2 million in Q3 of 2023.
Speaker Change: As I mentioned earlier average selling price for the quarter improved 14% year over year, we continue to eliminate negative margin contracts as we focused on profitability over volume.
Speaker Change: As previously guided on our last call, we have obvious loss, making contracts for roughly 2% of volume versus roughly 24% in 2022 on approximately 13% in 2023.
Speaker Change: We have now amended the sole remaining loss, making contracts with what would be a net contributor in 2025.
Speaker Change: Selling general and administrative expenses totaled $8 $1 million.
Speaker Change: 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.
Speaker Change: Third quarter results included approximately $400000 of nonrecurring items related to severance and fees associated with our financing efforts.
Speaker Change: Research and development costs for the third quarter increased 23% compared to the prior year period.
Speaker Change: As in Q3 of 2024 year over year increases in R&D were primarily driven by conducting further product qualification platform with potential GIC adopters.
Speaker Change: Overall and on an annualized basis, our performance demonstrates our ability to operate our Pac business in a way that contribute positively to our economic position.
Speaker Change: I'll further, enabling us to pursue and execute on high growth and high margin opportunities with our expanding GNP business.
Speaker Change: We remain extremely confident that the past 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 more rewarding GAC opportunity.
Speaker Change: And turning to the balance sheet. We ended the third quarter with total cash of 57 $4 million of which approximately $49 million of unrestricted.
Speaker Change: This change versus last quarter was driven by the net proceeds from our recent operating rate totaling approximately $26 $7 million on partially offset by the expenditures that red river consuming approximately $16 $5 million.
Speaker Change: Today, we are reiterating our 2020 for Capex forecast of $60 million to $70 million with 20 to 25 million expected to be spent in the fourth quarter of this year.
Speaker Change: We continue to expect to fund our capex needs via our existing cash cash generation and ongoing cost reduction initiatives and the potential prepayment on GAC contracts.
Speaker Change: On a final note I would repeat Bob comment that post our equity raise we are now in a materially stronger position with regards to our discussions on possible lender.
Speaker Change: And anticipate completing some court of ABL facility in the near term, which would potentially enable us to remove both the expense of the FTE term loan, which we took out as part of the historical arc LTV transaction as well as to smooth the working capital profile of the business as we move from first production preferred sale.
Speaker Change: With that I will turn things back to Bob.
Bob Rasmus: Thanks, Stacia before my closing remarks, and opening it up for Q&A I'd like to add one more important component of the financial discussion.
Speaker Change: 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.
Speaker Change: Sometime next year following the completion ramp up of GSE 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.
Speaker Change: <unk> 2025 earnings cycle in May.
Speaker Change: In conclusion. This was really strong quarter, which has left me very pleased but by 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 pack business.
Speaker Change: 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 the GAC expansion at Red River.
Speaker Change: If we can continue with the progress we have already achieved and I think 2025 will be a game changing year for us Im 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.
Speaker Change: As well as the engagements from equity research analysts who are also starting to see the potential.
Speaker Change: As we continue to execute and as the story continues to gain a wider audience than 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.
Anthony Nathan: Yeah.
Speaker Change: Thank you we will now begin the question and answer session. If you have dialed in and it was like to ask a question. This press star one on your telephone keypad to Asia, Han and Randy Keys, if he would like to withdraw your question simply press Star one again.
Anthony Nathan: If you are called upon to answer your question in relation to you via loud speakers on your device. Please pickup your handset and ensure that your phone is not on mute when asking your question.
Speaker Change: And your first question comes from the line of Gerry Sweeney with Roth Capital. Your line is open.
Anthony Nathan: Yeah.
Anthony Nathan: Yeah.
Anthony Nathan: Yeah.
Anthony Nathan: Okay.
Anthony Nathan: Just wanted to start.
Speaker Change: You provided a lot of details in your prepared remarks so.
Speaker Change: I only have a few questions, but starting on the GIC side.
Speaker Change: And commissioning at Red Red River, you gave us a little bit of timeline, but just from a risk standpoint, I just wanted to understand maybe some of the major hurdles that remain.
Speaker Change: In terms of getting Red River up and commissioning into production.
Speaker Change: Sure Jerry.
Speaker Change: 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.
Speaker Change: That with the Great thing about this expansion is we're able to conduct a 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 wearing in turn.
Speaker Change: If you will we're able to commission and things on a modular basis and for instance, we have already done the feeder into the furnace in a couple of other items and that's important because it allows us to derisk and troubleshoot items that as if it were as opposed I should say to do.
Speaker Change: Going everything all at once so Stefan.
Speaker Change: Stuff always goes wrong, when you Commission, a new plant, but I'm comfortable that we're on top of that and that we're going to be able to shorten that commissioning and debugging cycle.
Anthony Nathan: Gotcha.
Speaker Change: I just wanted to confirm.
Speaker Change: And I apologize if I'm wrong on this but did you say 25 million pounds of production.
Anthony Nathan: I'm assuming by the end of Q1 is I just wanted to clarify that.
Speaker Change: Oh yeah.
Anthony Nathan: Yeah. So the ideal is to be at full.
Anthony Nathan: So run rate production at the end of Q1, that's our goal.
Anthony Nathan: One that relies on when we started up and the debugging process, but that's our goal and that's what we're working towards.
Anthony Nathan: And again, and then potentially the D tuning in production enhancements.
Anthony Nathan: In the third quarter impacting potentially the fourth quarter.
Speaker Change: 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.
Speaker Change: Terms of how.
Anthony Nathan: How we've optimized production, what we've done to be able to determine whether that amount is 10%, 15% or 20%.
Anthony Nathan: Our goal is to be able to get that extra in the third quarter getting some impact in the third quarter hopefully in the fourth quarter.
Anthony Nathan: 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.
Anthony Nathan: And on that front, I mean, I understand D tuning the product comes out at an extremely high quality.
Anthony Nathan:
Speaker Change: How does D tuning take place is it less time in the killing so you can put more product through.
Anthony Nathan: Once they get a little bit more detail on that front as well.
Speaker Change: That's essentially yet it's less time in the kiln just change some of that formula in terms of what we do and literally what button buttons, we push when and what levers we'd call. Its a complex process, but one we're very comfortable with the science and technology behind.
Speaker Change: Got it and then final question just switching gears to the <unk> side.
Speaker Change: Natural gas was actually low 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.
Anthony Nathan: And I'm curious have you any thoughts on what would that could do to the Pac business as well.
Speaker Change: 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 past businesses both optimized.
Anthony Nathan: In the <unk> segment as well as the expansion into adjacent markets, which reduces our reliance or previous overall emphasis on the <unk> market. So.