Q1 2025 Arq Inc Earnings Call
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Speaker Change: Greetings and welcome to the Oxford quoted 2025 earnings call.
Speaker Change: At this time all participants are in a listen only mode.
Speaker Change: A question and answer session will follow the formal presentation.
Speaker Change: If anyone should require operator assistance during the conference. Please press Star then zero on your telephone keypad.
Speaker Change: As a reminder, this conference is being recorded.
Speaker Change: It is now my pleasure to introduce your host Anthony Nice thing. Thank you you may begin.
Speaker Change: Thank you operator.
Speaker Change: Good morning, everyone and thank you for joining us today for our first quarter 2025 earnings results call.
Speaker Change: With me on the call today are Bob Rasmus, Chief Executive Officer and President.
Joe: Joe one of talks Chief Technology Officer.
Speaker Change: Stacey Hudson Ox, Treasurer, and Chief Accounting Officer.
Speaker Change: Well as Jay Voncannon, Chief Financial Officer.
Speaker Change: This conference call is being webcast live within the Investor section of our website and a downloadable version of today's presentation is available there as well.
Speaker Change: A webcast replay will also be available on our site and you can contact at <unk> Investor Relations team at investors, Oh don't call them.
Speaker Change: Let me.
Speaker Change: Mind, you that the presentation and remarks made today include forward looking statements as defined in section 20, <unk> of the Securities Exchange Act.
Speaker Change: 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.
Speaker Change: 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 March 31st 2025, and other filings with the Securities and Exchange Commission.
Speaker Change: 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.
Speaker Change: 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.
Bob Rasmus: Thank you Anthony and thanks to everyone for joining us. This morning, the first quarter of 2025 was another busy and productive period marked by continued progress in both our legacy pad business and our GIC growth initiative.
Speaker Change: As I've discussed on previous calls, we set out to transform our Pac business and our Q1 results clearly demonstrate that we've achieved this goal.
Speaker Change: With four consecutive quarters of positive adjusted EBITDA now behind US our focus has shifted to further cost optimization and strategic price management to enhance profitability.
Speaker Change: I'm confident that our foundational pack business can deliver double digit millions in annual EBIT that providing a robust foundation for our overall operations.
Speaker Change: This strong base allows us to pursue highly profitable growth initiatives and GAC asphalt rare earth minerals and other initiatives.
Speaker Change: Let me summarize our first quarter 2025 results, which we reported earlier today I'm pleased to share that we delivered another strong quarter characterized by robust volumes continued pricing strength and sustained margin improvement.
Speaker Change: We delivered revenue of $27.2 million in the quarter, an improvement of 25% over the prior year period.
Speaker Change: This was primarily driven by a 13% growth in our E. S. P.
Speaker Change: I sort of changes in product and customer mix and higher volumes.
Speaker Change: I'd also highlight that this marks our eighth consecutive quarter of achieving double digit year over year percentage growth in the E. S. P.
Speaker Change: Together these results showcase the ongoing and sustained turnaround of our Pac business.
Speaker Change: Demand for our pass products remains robust while recent administration policies may extend coal fired power plant operations, we continued to strategically diversify beyond Mercury emission solutions.
Speaker Change: This approach not only reduces our potential exposure to coal fired power plant demand fluctuations, but has proven effective in driving higher asp's through access to premium pricing markets.
Speaker Change: Beyond pricing improvements, we continue to maintain an unwavering focus on cost management.
Speaker Change: Building on our 'twenty 'twenty four initiatives, we've identified additional opportunities to reduce both operating cost and SG&A as evidenced once again in our first quarter results. As previously noted we believe our SG&A remains higher than appropriate for our size and our active.
Speaker Change: Pursuing additional reductions these.
Speaker Change: These efforts will not only further enhance near term profitability, but position us as a more efficient organization ready to capitalize on future growth.
Speaker Change: As a result of this double benefit relating to improve revenues and SG&A cost management, we were able to deliver gross margins of 36.4% roughly in line with the previous year gross margin for the first quarter of 'twenty 25 was relatively flat from the first.
Speaker Change: Quarter of 'twenty 'twenty, four while the quarter benefited from higher revenue pricing and favorable customer mix. This was offset by startup costs associated with the G. H Z line and a one time accounting adjustment in Q1 'twenty 'twenty four.
Speaker Change: We generated adjusted EBITDA of $4.1 million and positive net income, reflecting a phenomenal result, and again clear evidence of the turnaround we've executed.
Speaker Change: I'd note that the strong Q1 momentum has carried on into April traditionally a slower shoulder months.
Speaker Change: Volumes have been particularly encouraging up more than 25% versus last April <unk>.
Speaker Change: Additionally, we recently secured a landmark life of asset contract the second largest by value in company history with one of our major customers. This agreement delivers two key benefits and enhanced visibility into our Pac business and validation of our position as a trusted industry.
Speaker Change: Partner, our high customer retention rates, 95% in 'twenty 'twenty four for our power generation and industrial customers.
Speaker Change: <unk> the strength of our collaborative approach and the exceptional work of our sales and technical teams.
Speaker Change: In summary, our Pac business has evolved into a robust sustainably profitable foundation that positions us well to pursue higher growth opportunities and granular activated carbon and other initiatives.
Speaker Change: Turning to our G AC business, let's start with our commissioning update as announced yesterday evening, while we have and continue to make progress we still have some hurdles relating to completed commissioning of our first GAC production line at Red River.
Speaker Change: I understand that this is certainly a disappointment to investors as well as to me and the team at arc.
Speaker Change: As is normal with any plant commissioning process, we have faced certain mechanical issues when they ever risen we have successfully dealt with those mechanical equipment issues. The ongoing delay in commissioning completion, primarily relates to the shaping and binding of our product before killing the activation.
Speaker Change: While the ongoing turnaround of our foundational pack business is important and in my opinion impressive granular activated carbon production is key to turbocharging, our future growth.
Speaker Change: In order to provide as much transparency as possible for investors, we want to provide more technical detail on the status of our commissioning process.
Speaker Change: I appreciate how important it is for all investors to understand the remaining issue and for us to describe how we're going about fixing them.
Speaker Change: To that end I've asked our Chief Technology Officer, Joe Wong to briefly outline the situation Joe.
Joe Wong: Thanks, Bob.
Speaker Change: Our aim to keep this as simple as possible while I Hope me elaborating sufficiently for you all to have a firm understanding of where we're at.
Speaker Change: While we've been successful in commissioning the plant equipment, including the production of small noncommercial scale volumes, we haven't yet achieved the consistency necessary for commercial scale production.
Speaker Change: Specifically, while the granules initially formed properly they sometimes new structural integrity during shown processing.
Speaker Change: As Bob outlined on our results call in March we had been commissioning our new GSE line of Red River in a very methodical step by step process dividing the startup into six functional zones.
Speaker Change: Zone, one is where we introduce our highly purified bituminous feedstock from corvid.
Speaker Change: And I can confirm that all receiving and conveyance equipment is operating as designed.
Speaker Change: Zone, two is the feedstock preparation step where we verify that back to MS. Feedstock is consistent with respect to size and moisture level to ensure we have a stable raw material properties at the onset of our GAC process.
Speaker Change: And besides we have had to employ an additional chemical ingredient, which was not required in our initial testing to control of the surface properties of the feedstock to enhance binding efficiency in zone three.
Speaker Change: <unk> is also now fully commissioned.
Speaker Change: It sounds to me is is equipment that incorporates our GAC additives with the bituminous feedstock particles and Vietnam race or glues, the particles to pharma GAC shape.
Speaker Change: So to me, it's very complex and is where the remaining issue requiring resolution is located.
Speaker Change: So although further adjustments are required with respect to product binding and shaking to increase yield to allow for commercial scale production I can confirm that we have successfully provided hard and well formed GAC granules to zone four.
Speaker Change: So for US the first of two high temperature heat treatment steps whereby the granules from zone three are heated to remove remaining moisture carbonized granular as to concentrate the carbon content and activate the glue to fix the GAC shape.
Speaker Change: Just first seed treatments <unk> has operated to make on specification product.
Speaker Change: And while commission, we need further fine tuning to increase the throughput rate.
Speaker Change: Some five this is the second of the two heat treatment steps and count five reactivate. The grant is for himself for under very specific thermo profiles the scheme to create the activated GAC.
Speaker Change: We have successfully operated this heat treatment equipment, but not a consistent higher throughput rates.
Speaker Change: However, we are confident that this existing equipment that is already in use that very river can be readily adapted for consistent high through put a commercial scale G C processing.
Speaker Change: So fixes the final zone, where we screen and inventory to final GSE product.
Speaker Change: <unk> five <unk> six involves similar equipment to what we have been using at our facility for years, and we anticipate that there'll be no issues. When we operate when operated with our new GC products at commercial scale production.
Speaker Change: By stepping through each zone at the process, we have been able to isolate and resolved problem areas in a methodical and rigorous fashion.
Speaker Change: Much progress has been made with remaining details being tackled by a cross functional team as we ramp up through <unk> and.
Speaker Change: And identify efficiency improvements.
Speaker Change: While the majority of the process has been successfully commission clearly the challenges, which we have faced in zone three has not been trivial and have taken us longer than anticipated to resolve.
Speaker Change: We have identified.
Speaker Change: And the isolated the issues, we remain extremely confident in our ability to fine tune and fixed term and with that achieved deliver commercial scale production.
Bob Rasmus: Back to you Bob.
Thanks, Joe hopefully that summary is provided you all with a useful understanding of the process and how we have gone about commissioning as well as how we will overcome these challenges.
Speaker Change: In light of these challenges I can confirm that Q2 G. H Z production will likely be minimal with full commissioning and first commercial production now estimated by the end of the second quarter or early in the third quarter of 2025.
Speaker Change: While this represents a delay from our previous expectations were providing this guidance conservatively aiming to exceed rather than Miss these targets.
Speaker Change: Following commissioning completion and first commercial production, we continue to expect a three to six month ramp phase to reach nameplate capacity, which would extend the timeline to achieve full production capacity slightly beyond 2025.
Speaker Change: Well not our base case assumption, we're erring on the side of even greater conservatism.
Speaker Change: While inherited design errors from our previous contract or continued to contribute to some of our challenges. Let me clearly state that we accept responsibility and resolving these commissioning and first commercial production issues and commissioning you've faced both anticipated and unexpected.
Speaker Change: Challenges and we've encountered our share of both.
Speaker Change: As you know we provided our most recent update in March when we continue to expect production to commence later that month.
Speaker Change: While we acknowledge the short term delays, we encourage all of our stakeholders to remind themselves of the projects the long term potential spanning decades.
Speaker Change: Despite these setbacks I am proud of our Red River team's dedication and problem solving approach, which exemplifies the positive cultural transformation at out.
Speaker Change: Our entire team is working diligently to get this right and achieved successful commercial production and we will.
Speaker Change: I remain fully confident in our technology and its ability to drive tremendous economic and environmental value for our customers and stakeholders alike.
Speaker Change: I would stress that despite the commissioning challenges we have faced there are no fatal flaws as regards the application of our technology to reach commercial scale G AC production.
Speaker Change: On the market side GAC demand remains robust recent EPA administrator leaves Eldon is April 28th comments on P. Fast regulation aligned closely with our mission when he said and I quote we are tackling P. Fast from all of the a P. H program offices.
Speaker Change: Advancing research and testing stopping P fast from getting into drinking water systems, holding polluters accountable and providing certainty for passive receivers.
Speaker Change: This is just the start of the work we will do on P. Fast to ensure Americans have the cleanest air land and water.
Speaker Change: At <unk>, we are actively engaging with stakeholders to support these initiatives.
Speaker Change: We're seeing strong customer momentum and P fast mitigation adoption, where GAC is widely accepted as the industry leading solution.
Speaker Change: Along with growing demand from air filtration and renewable natural gas applications.
Speaker Change: Additionally, we're receiving numerous partnership inquiries from alternative technology providers.
Speaker Change: Regarding phase one contracting customer engagement remained strong while our Q4 update indicated that a significant portion of our initial Red River phase one production was allocated for customer Institute testing. These test have necessarily been postponed due to water.
Speaker Change: Recent updated timeline around commercial scale production.
Speaker Change: However, we remain confident in our ability to meet specification requirements and expect test completion and subsequent contract finalization to align well with our production ramp up in the second half of 2025.
Speaker Change: The broader market dynamics continue to favor our position, we see no meaningful progress on new supply capacity from competitors and given typical two to three year timeline for permitting funding and construction of new facilities, we expect the current supply demand imbalance.
Speaker Change: Assist through at least 'twenty, 'twenty, seven or 'twenty 'twenty eight.
Speaker Change: This timing is particularly advantageous as it coincides with anticipated demand acceleration ahead of the 2029 regulatory deadline, requiring P fast levels to be reduced to four parts per trillion.
Speaker Change: Our imminent market entry positions us ideally to capitalize on these favorable conditions.
Speaker Change: Next I'd like to address the recent tariff developments.
Speaker Change: While the situation continues to evolve these changes actually work to our overall advantage as the only domestic activated carbon producer with a fully vertically integrated supply chain, we hold a unique competitive position.
Speaker Change: These tariffs could adversely affect our competitors, who utilize imported feedstock our integrated supply chain, though initially developed with customer service in mind not tariffs.
Speaker Change: <unk>, just favorably to optimize our operational and financial performance.
Speaker Change: Guardian broader government policy April's EPA guidance suggests no material relaxation of P. Fast related drinking water regulations, we continue to see customers, taking proactive steps driven by sound business logic, given potential litigation risk and.
Speaker Change: <unk> costs were.
Speaker Change: We're also exploring an interesting opportunity aligned with the administration's focus on domestic rare earth minerals in graphite using our purification technology in carbon inventory, we're investigating the potential to extract rare earth minerals and produce synthetic graphite from our.
Speaker Change: Coal waste feedstock.
Speaker Change: While early stage this initiative along with our asphalt opportunity represents another promising growth Avenue. We're also exploring potential government funding to support the strategic initiative.
Speaker Change: In conclusion Q1 delivered exceptional results in our core pack business exceeding expectations and demonstrating sustainable momentum, while the GAC commissioning and first commercial scale production delays are disappointing we remain confident in the fundamental opportunity.
Stay Shut: And our ability to realize that opportunity, we look forward to providing further updates on commissioning progress in the coming months I'll now turn it over to stay shut for a detailed financial review.
Speaker Change: Thanks, Bob and thanks, everyone for joining us today.
Speaker Change: Arc again delivered strong financial results during the first quarter with revenue growing 25% year over year to $27.2 million.
Speaker Change: This was driven largely by enhanced contract terms, including 13% growth in average selling price.
Speaker Change: Favorable shifts in product mix as well as an increase in volumes.
Speaker Change: This quarter marks our eighth consecutive quarter of double digit year over year percentage growth in E. S. P.
Speaker Change: Our gross margin in the quarter was approximately 36, 4%, which is relatively consistent from the first quarter of 'twenty 'twenty four.
Bob Rasmus: As Bob mentioned gross margins were flat versus the prior year period as improved pricing and favorable customer mix was offset by startup costs associated with our G. AC line and a one time accounting adjustment in Q1 of 'twenty 'twenty four.
Bob Rasmus: Without that adjustment in the first quarter of 'twenty 'twenty four we believe gross margin would have been up approximately 5% over the prior year period.
Bob Rasmus: We generated positive adjusted EBITDA of approximately $4 $1 million compared to an adjusted EBITDA loss of $400000 in the prior year period.
Note that consistent with many market participants we have added back stock based compensation in Q1 of 2025 as part of our adjusted EBITDA calculation.
Bob Rasmus: And revise the Q1 'twenty 'twenty four adjusted EBIT of calculation for comparability.
Bob Rasmus: Net income was $200000 a significant improvement versus net loss of $3 $4 million in Q1 of 'twenty 'twenty four.
Bob Rasmus: 100% of our sales contracts are now net contributors in 2025.
Bob Rasmus: Focusing our efforts on profitability over volume led to this milestone.
Speaker Change: <unk> achievement in our pack portfolio, given that 24% of our volumes were lossmaking as of December 2022.
Speaker Change: Selling general and administrative expenses totaled $6 $1 million, reflecting a reduction of approximately 21% versus the prior year period.
Speaker Change: This reduction was driven by a reduction in payroll and benefits as well as general and administrative expenses.
Speaker Change: Now a portion of this decrease is attributable to our carbon facility, becoming operational in January of 2025, and that's payroll and benefit costs associated with this facility are now capitalized as inventory on our balance sheet versus being expensed within SG&A.
Speaker Change: Research and development costs for the first quarter decreased 46% compared to Q1 of 'twenty 'twenty four and the first quarter of 'twenty 'twenty four R&D spend was primarily driven by conducting further product qualification testing with potential lead T. A C adapters, but this has significantly decreased in Q1 of 2025 as menu.
Speaker Change: A doctor's completed this testing in the 'twenty 'twenty four period.
Speaker Change: Overall, our performance in Q1 of 2025 demonstrates our ability to operate our Pac business in a way that contributes positively to our economic position in it truly sustainable matter, while further enabling us to pursue and execute on high growth and high margin opportunities within our expanding T. A C business.
Speaker Change: We remain focused on enhancing the profitability of our Pac business.
Speaker Change: Even further and believe that it is now cash generative on an annualized basis.
Speaker Change: As Bob noted this pack legacy business turnaround secures, our foundational business onto which we are adding the higher growth G. H T opportunity.
Speaker Change: Turning to the balance sheet, we ended the first quarter with cash of $14 $8 million of which approximately $6 $3 million of unrestricted.
Speaker Change: The change versus last quarter was driven by trailing capex spend at Red River relating to the G. H T line and build out that are quite take inventory in critical spare part.
Speaker Change: Today, we are also reiterating our twenties twenty-five capex forecast of $8 million to $12 million.
Speaker Change: We continue to expect to fund our capex needs at the our existing cash cash generation and ongoing cost reduction initiatives.
Speaker Change: In addition, we have amended our agreement with mid cap to permit asking you that additional borrowings under that facility arising from delay in commissioning of the granular line.
Bob Rasmus: With that I will turn things back to Bob.
Bob Rasmus: Thanks, Stacia before opening things up for questions I wanted to highlight a really exciting update here at arc, namely the introduction of J Voncannon Arabs, New Chief Financial Officer Gaye.
Bob Rasmus: <unk> brings over 35 years of financial leadership experience, including his recent role as CFO at course Tech a multibillion dollar advanced engineering manufacturing business wholly owned by the course family, where he successfully guided the company through significant expansion and profitability improvements.
Bob Rasmus: Prior to that he spent more than two decades as a senior finance executive that Koch industries, overseeing major investment initiatives and strategic acquisitions, including the deployment of around $7.5 billion in investments.
Bob Rasmus: Jay will be based at our Greenwood village headquarters and will oversee all aspects of our financial strategy and operations, including planning accounting tax Treasury and internal audit.
Speaker Change: His extensive experience and strategic insight will be instrumental as we continue to transform and scale our business I'm confident that Jay's leadership will strengthen our finance organization and support our future growth with that let me turn it briefly over to Jay for a few comments Jay.
Speaker Change: Thanks, Bob Although I've only had my feet under the desk for about a month now I've been incredibly impressed by the team that I've met as Bob mentioned this was a very clear can't do metallic <unk>, which was a part of the culture of the entire organization and I'm extremely excited to be joining the company as it embarks on such a compelling growth trajectory with my experience.
Speaker Change: And financial strategy of course across similar businesses I am confident that I can further enhance the great work, which has already been started in the last year or so.
Speaker Change: Our priorities my initial focus is going to be on leveraging our cost position through the growth period, along with potential strategic initiatives with a great team already in place I'm very confident that together, we could further streamline and enhance both the current business and our future growth potential.
Speaker Change: Meanwhile, we look forward to meeting more shareholders and investors in due course and updating the market on our progress at the time of our next quarterly results with that I'll turn it back over to Bob.
Bob Rasmus: Thanks Jay.
Speaker Change: Closing the first quarter represented another quarter of strong progress our Pac business continues to excel and I'm confident in our ability to further expand its profitability.
Speaker Change: Turnaround strategy, we initiated in 2023 has largely been achieved so we'll continue optimizing performance.
Speaker Change: Importantly, I believe we've established a foundation for sustainable quarterly profitability.
Speaker Change: Looking ahead, we're positioned to complement this core business with a granular activated carbon opportunity.
Speaker Change: All the commissioning and commercial scale production delays are extremely frustrating I remain convinced of GAC as potential and our ability to deliver a higher growth profitability, the very opportunity our shareholders invested in.
Speaker Change: We believe we are close to resolving a commissioning and first scale production challenges after which we can begin production ramp up towards nameplate capacity.
Speaker Change: Our focus over the coming months will be on the efficient and timely completion of commissioning and first consistent commercial scale production conducting customer testing and securing additional contracts and of course, we'll continue to keep the market informed of material developments.
Speaker Change: Let me now turn the call over to our operator for Q&A.
Speaker Change: Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star and then one on your telephone keypad.
Speaker Change: Information time will indicate your line is in the question queue.
Speaker Change: If I start and then two if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment may be necessary to pick up your handset before pressing this talkies one moment. Please while we poll for question.
Speaker Change: The first question, we have is from Jamie Sweeney of Roth Capital Partners. Please go ahead.
Speaker Change: Oh, good morning graph Stacey good morning, Gerry I think I've got everyone there.
Speaker Change: Thanks for taking my call. This morning are obviously I, just I mean, I'm going to start with the.
Speaker Change: Commissioning process here and just wanted to understand the root cause.
Speaker Change: The inconsistency here a little bit better.
Speaker Change: So this I guess maybe.
Speaker Change: Rex towards Joe a little bit, but from the sounds of it you've broken the plane up in the six zones zone six of screening in inventory, so, it's probably not not necessarily critical but it sounds as though.
Speaker Change: We had identified the issue and my words not yours, maybe it becomes unstable you know in zone four where it's the first of the two is sort of heat activation processes and you have added a chemical and zone two to stabilize the process now you have to sort of.
Speaker Change: <unk>.
Speaker Change: That chemical additives may have changed how the product flows through or as Howard to activate it to enforce or you got it.
Speaker Change: Tweak some of the machinery so it's.
Speaker Change: Utilization increases so I mean, that's probably a very lehman claim in F. <unk>.
Speaker Change: Description of what's going on but I'm, just curious if I'm sort of on the right track here.
Speaker Change: I'd say, Jerry it's more than a layman ask explanation of what's going on it sounds like you'd participate essentially in our daily or twice daily meetings as it relates to commissioning in essence. That's correct. You know we have produced you know commercial scale production or IC.
Speaker Change: Small volumes, what we're looking to do is improve the efficiency of that operation and really what we're doing is fine tuning the process on the fine tuning mainly relates to zone, three which is the addition of that chemical additives, which essentially buy ins and helps Ria galore.
Right Yeah the process.
Joe Wong: Together in that respect and I think that you know what do I mean by fine tuning I mean, we're always looking and fine tuning or optimizing all areas of the production process and you know as Joe mentioned in his remarks and you obviously captured.
Matt: Hi, Matt.
Matt: Primary area of emphasis is related to optimizing zone three in zone three is as you discussed.
Matt: Where the equipment that incorporates the GAC additives with the bituminous feedstock and then glues them back together, our Ria Collaborates that yes. The adjustments that we're making are focused really on improving the consistency the efficiency the volume throughput and to speed up production.
Matt: We did reformulate slightly that binder to improve the consistency on that improve the efficiency and we're seeing results from that.
Matt: On on that front, obviously, there's a degree of.
Matt: Certainty on your confidence on your on your part that you were going to fix.
Matt: Fix it sooner rather than later.
Speaker Change: Can you give us some.
Matt: Sort of.
Speaker Change: Example, step functions that have.
Speaker Change: It gives you this confidence I mean, meaning you know you I think you reformulate it the new products.
Speaker Change: And.
Speaker Change: Does this mean.
Speaker Change: You're seeing high Utilizations, and then something's getting gummed up or you know again laminates terms, but I wanted to get a little bit more understanding of where some of this confidence is coming or are you starting to see increased utilization higher consistency at higher utilization things along those lines.
Speaker Change: Sure. So you know the main thing we're trying to do as I mentioned is you know increase the throughput and the consistency of that throughput.
Speaker Change: Again, we're able and have produced you know small noncommercial scale volumes of commercial scale volume excuse me, but what we're looking to do is produce that and a consistent uninterrupted basis and what we're seeing and what were the challenge we've been faced as we haven't been able to produce on an uninterrupted basis.
Speaker Change: There have been some you know either feed issues or we've had a a controller break down we had a belt issue now so it's again some of it is just regular stuff happens as it relates to commissioning and the other is just working to ensure a continuous.
Speaker Change: Uninterrupted quality process. So that we can say that we are in full commercial production. We have produced commercially but we just don't feel comfortable saying we're in full commercial production because we don't have that uninterrupted manufacturing process occurring for us.
Speaker Change: That uninterrupted and interrupt the process are you.
Speaker Change: Reducing.
Speaker Change: Some of the issues around it and the sort of checklist is getting smaller just again, just trying to get a little.
Speaker Change: A little bit more understanding on the confidence here.
Speaker Change: Yeah, So don't get me and so the real question is kind of I'm going to paraphrase or you know I don't mean to be a politician and answer a different question, but I think I'm trying to answer to the question that I think you're asking is that given the delays and challenges to date why am I confident that we're going to meet the new time lines and ramp up.
Speaker Change: Is that a fair synopsis.
Speaker Change: Sure, Yes, right and so you know and so along those lines you know I think it's important to talk about or discuss what we know we know the mechanical process works. We know we can and have produced you know small scale granular activated carbon we know.
Speaker Change: So we have to optimize the speed and consistency of our process to meet our production profile targets and you know as said previously that's part of what we're doing in relation to the fine tuning and so again, you're probably thinking how does all this relate to timing you know we are close and however, I know you've heard me.
Speaker Change: Say that before.
Speaker Change: On that and as Joe mentioned in his remarks, you know commissioning of this kind really isn't linear and we have learned from it in the past. So it's really hard to make tight predictions in terms of how long it might take to get there, but I know based on having missed our previous Ah.
Speaker Change: Announced died guidelines, we wanted to be conservative going forward and the result of that is that we had given a ride range. Our updated guidance that we provided today in our remarks and yesterday on the 8-K a.
Speaker Change: Which I want to stress that we hope we can hit sooner, but you know, hence if you look at it our statement of achieving full commercial scale production late in the second quarter or early in the third quarter I think is prudent but considering the challenges we face today and we've missed the deadline I think it's sensible that.
Speaker Change: We provide a range, which we're extremely confident of meeting or beating.
Speaker Change: Got it sorry, a long winded no no absolutely I could ask one more question and this one I will certainly be more articulate on because it's much easier to ask pack business, great margins I apologize I didn't get a chance to go through the 10-Q.
Speaker Change: Two things one curious if there was any take or pay benefit in the quarter and then.
Speaker Change: Secondarily, if they should could I I'm not sure if I caught it but was there a 5% drag on margins because of some of the startup activity on the G fee side.
Speaker Change: Hi, Terry Yeah, you are correct there are no take or pay impacts to that Q1 results and then to your second question. Yes, we estimated about a 5% gross margin pick up taking away the startup costs for the.
Speaker Change: G H T line in Q1 as long as that one time accounting adjustment in 2024.
Speaker Change: So we would have been over 40% gross margin standpoint too.
Speaker Change: Correct.
Speaker Change: Got it.
Speaker Change: Got it.
Speaker Change: I will jump back in line and I'm sure. There's other people waiting so thank you.
Speaker Change: The next question, we have some two which generally because of Canaccord Genuity. Please go ahead.
Speaker Change: Hi, good morning.
Speaker Change: Hi, Joe I'd like to ask.
Speaker Change: Hi.
Speaker Change: Questions along a similar line of that.
Speaker Change: This is the second delay over the last several months and I'm curious.
Speaker Change: Yes.
Speaker Change: Compartmentalize. It is this a question how confident are you that iteration just continued iteration.
Speaker Change: Through the process, we'll get you to the new timeline as opposed to having to throw.
Speaker Change: Additional dollars at the problem I'm, just trying to make sure that I understand exactly what's happening here.
Speaker Change: Sort of an engineering process that has to continue to be interested in as opposed to something that has to occur.
Speaker Change: Impact the capex profile for them Okay.
Speaker Change: Yeah. So I think yeah again, just to rephrase or paraphrase, there's kind of like is there a fatal flaw and no there isn't and absolutely not and then the question is you know why again why are we confident what are we doing what's going on that we don't have to spend a lot of other money increase capex.
Speaker Change: Et cetera is that fair you know summary.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: So one as I say again that don't.
Speaker Change: Don't mean to be redundant, but we end up we know we can we have and we are producing you know commercials.
Speaker Change: Small scale Ah.
Speaker Change: Granular activated carbon so that the ability to do that is not an issue you know I mentioned in my prepared remarks, we did have some challenges we had to overcome relate to equipment design relating to the original designed by Harris group. We've overcome all of those we know from a mechanical standpoint all of that the.
Speaker Change: Equipment, all works and it all works and so that's a validated and then you look at process integration, which is obviously another form of commissioning, which essentially means that you know ensuring the various zones and mechanical components, you know operate as one continuous integrated process and I can confirm.
Speaker Change: That's the case they do we have successfully input at the carbon what take feedstock into the system and we've successfully move that product through all the steps and have production results. You know so the takeaway is we know the system works, we can and we have produced product, but not just with us again being read.
Speaker Change: Done that consistency efficiency, the uninterrupted nature and so what we're really doing in my mind is and the team's mind and Jos mine and Geek Williamson Who's our Chief operating officer is optimizing the production at the rates and consistency. So we have continuous operation. So again I hate to be so.
Speaker Change: Long winded on answering that but we're very confident that it's not a design issue. It's just a fine tuning or tweaking of the process.
Speaker Change: Thank you and maybe I can switch gears, a little bit you mentioned.
Lisa Holden: Lisa Holden's comment.
Speaker Change: In your opening remarks I'm curious.
Speaker Change: So any signal that you received maybe from the administration that the 2029 deadline is still intact or are there.
Speaker Change: Despite the commentary around clean water there might be some changes to those.
Speaker Change: The deadlines that they put in place.
Speaker Change: Yeah, I was actually in D. C last week meeting with senior officials from the E. P. A a in fact it was the morning. After a zelda engine announcement had been made.
Speaker Change: And they see no delays going forward as it relates to are pushing back the P. Fast regulations and in fact, they were looking to further enhance those regulations and add more teeth and also to focus on the wastewater element not just the drinking water element of that so.
Speaker Change: I didn't get any indication either from Selden's remarks, or my meetings at the EPA that there was any expectation of a delay or softening the regulations.
Speaker Change: Thank you.
Speaker Change: The next question, we have from Tim Willi of two Street. Please go ahead.
Speaker Change: Thanks.
Speaker Change: Just one quick follow up on the G. C volumes commercialization delay yeah. Thanks for providing that update because that helps investors and you mentioned, Bob the postpone testing, but when you know how long is kind of a lead time, maybe for some of your largest contracted customers because of the P. Pos removal do they want 30 year.
Speaker Change: The 40.
Speaker Change: 40 days to test it out.
Speaker Change: The new output before they kind of come back and you switch on production just kind of curious how those conversations are going and do you have.
Speaker Change: An idea there of your lead times.
Speaker Change: Yeah. So we really on the P fast remover of municipal water side, we really don't have any testing issues are remaining testing issues as it relates to that aspect of the marketplace that you know where our product has been certified by customers in states and municipalities and so it's really just.
Speaker Change: Getting access to the production to be able to implement as they begin their P. Fast remediation. The lead time really more relates to the I N G segment, who prefer in CIT to testing a Miss we've mentioned previously.
Speaker Change: That's great that's really great clarification that that's very helpful. Because I know you were holding back some of the volume.
Speaker Change: The R&D side, but it's nice to hear the border removal is on track.
Jay Voncannon: Next one for Jay.
Jay Voncannon: I know you've only been in the CFO role for five weeks and you know you just mentioned leveraging the cost basis, but you know can you maybe share some color on things that you might want to add or enhance or maybe your past bes.
Jay Voncannon: Best practices and you know it might be too early to answer. This next part but are you seeing more SG&A cost saving levers potential because it's been quite good since last summer I'm just wondering if there's more to come on the SG&A.
Jay Voncannon: Cost leverage side.
Jay Voncannon: Sure. Thanks, Yeah, Yeah, I would say that you know.
Jay Voncannon: Montana meeting people understanding the business and the process getting up to speed on the delay that we've had.
Jay Voncannon: But I would say I do think there are more and more opportunity around the cost I'm, just beginning to dig into that area of it and I do think that there is an opportunity. If you just look at the size of the company and where we are definitely don't think that we'll see any increase in cost associated with the growth in revenue and I do think there are opportunities to actually trim some cough.
Jay Voncannon: Our and so that's something we'll be working on over the next quarter and I would say elsewhere. You know just based on my own experience that are you know I think there's probably even more opportunities around some of the even probably the you know the overhead that exist at the plants and looking at that regard and so I think what you mean.
Jay Voncannon: Everything is fair game, there's nothing that's taboo or off limits and so we'll be we'd be making prudent decisions and trying to understand what's in the best interest of the company and the shareholders.
Speaker Change: It's great because this is the operating leverage has been quite good in the last three quarters and it's nice to see if there is some runway left for that and my last question is back to Bob.
Jay Voncannon: Just regarding your compelling asphalt production product potential you know into the R&D piece is underway.
Jay Voncannon: Do you think it would be too presumptuous to assume maybe this year you can sign up with a strategic partner to start some commercial revenues by the end of next year on that front.
Jay Voncannon: I don't think it's presumptuous to have a partner in fact in a way we have partners in the testing that we're currently conducting and we have that scheduled to start later in the year. So I don't view it as that presumptuous at all I would say, though that the revenues the first revenue wouldn't be realized until.
Jay Voncannon: 2026 at the earliest as it relates to that.
Jay Voncannon: Essentially what we're looking at asphalt emulsion is another way of monetizing or creating value for shareholders as it relates to our unique carbon feedstock and that's why I also mentioned in my remarks as synthetic graphite railroad minerals, we know we produce railroad minerals from the washing process with.
Jay Voncannon: The Colo as we begin that for the manufacturing of the Oracle, let Jake I mentioned previously I was in D. C. Last week I also met with officials from the department of energy, who were the ones who brought up the rare Earth minerals and also potentially using our products for synthetic graphite and they were the ones who brought up or that potentially.
Jay Voncannon: Funding for us to realize that because obviously with the current administration. That's a critical focus on an ongoing basis, the railroad minerals and synthetic graphite.
Jay Voncannon: Great that's nice and thanks for.
Jay Voncannon: Permian consistent yeah on the revenues for asphalt not till last year I know you mentioned that that's not the next year you mentioned that last time. So that's it for my questions. Thanks.
Jay Voncannon: Thank you.
Speaker Change: The next question, we have is from pizza desultory shelf with the salary research. Please go ahead.
Speaker Change: Thank you very much hi, Bob and team congratulations on your results and thanks for the presentation. This morning also appreciate the detailed technical presentation from Joe.
Speaker Change: Just a couple of questions here. The first one is more of a macro question. The industry question. So what is your experience with this first GAC expansion tells you about the prospects for industry supply. So you've got a you know a talented and experienced technical team. So it's probably not as stretched to the broader industry could run into similar teething issues in terms of the.
Speaker Change: A ramp up with GIC.
Speaker Change: And maybe we could have an even tighter than expected market. As a result, you know do you have any thoughts about this.
Speaker Change: Yeah Yeah.
Speaker Change: Yes, absolutely. So a couple of things one is I've mentioned, it's at least two or three year process for someone to bring on a new.
Speaker Change: New GAC capability, and probably being longer but again I'd rather have a.
Speaker Change: Look at it on the in the riskiest standpoint from the risk to our business that's one.
Speaker Change: Two I appreciate the comments about the technical capabilities and our operating team I as well things that they are first class and in the in some respects misery loves company I know one of our competitors had brought some GAC capacity online a while back and they had significant delay.
Speaker Change: As versus when they originally were going to bring on that online now I don't want to be in that company and that and I'm not happy about it and it is extremely frustrating but.
Speaker Change: Again, I think but we and they are kind of best in class and we've had issues and continue to work through those issues as it relates to that so I think one that gives me a additional confidence and the long term visibility and runway as it relates to the economics of the investment and the other is the supply demand in.
Speaker Change: Balance that was the original investment thesis and rationale for getting into the GIC business not only is still in place but continues to work in our favor I E demand continues to increase demand for our products customer inquiries for our product with as we all know that supply has now.
Speaker Change: It expanded so you know long term the again, both near term and long term the initial investment thesis and rationale for getting into the GAC business not only remains intact, but there.
Speaker Change: As such it was very very strong.
Speaker Change: Okay.
Speaker Change: Okay, great. Thank you my second question and I understand that first things first.
Speaker Change: You're going to want to get to commercial production.
Speaker Change: But for a G. G. C phase one are you still viewing that possibility of the 10% to 33% enhanced production.
Speaker Change: Absolutely, but as you say, we've got to get to a full commercial production and full run rate as we said once we're at full run rate will be able to tell what the the land your app will be in terms of additional production capability.
Speaker Change: Okay. Thanks, and just a final question and I'll get back in the queue, but for phase one what percentage of production is currently contracted.
Speaker Change: Ah phase one currently assuming the 25 million pounds, we're about 60% contracted again, we could fully contract that right now and be fully contracted but again, we're holding it back for the R. N G market because the LNG market is a higher price point higher margin for us.
Speaker Change: And again that the production ramp up profile matches, they testing requirements of the <unk> segment.
Speaker Change: Okay, great. Thanks, Bob I'll get back in the queue.
Hum.
Speaker Change: Yeah.
Speaker Change: Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the floor back over to Bob Rasmus for any closing remarks.
Bob Rasmus: Thanks, Irene from a financial standpoint, we delivered an attractive first quarter results building on the strong performance we achieved in 2024.
Speaker Change: Mentioned earlier April was also a good month for pack volumes. The overall economic fundamentals supporting our business remained strong while the Pac turnaround has been a major achievement, there's still meaningful room for further improvement further enhancing the value of this foundational asset as we grow into the granular activated carbon market.
Speaker Change: As mentioned our original investment thesis for expanding excuse me end of GAC is not only intact, it's more compelling than ever and let me be very clear the delay in reaching commercial scale production at Red River is frustrating. However, it doesn't change the fact the market remains.
Speaker Change: Significantly under supplied the long term DRAM demand drivers are firmly in place and we continue to believe deeply in G. <unk> role as a long term growth engine for arc and.
Speaker Change: And given the strength of the market and our expected near term production I can say, both as CEO and a major shareholder that I am as confident and exit excited about the arc opportunity today as they've been since joining.
Speaker Change: Thank you all for your time today.
Speaker Change: Ladies and gentlemen that concludes today's conference. Thank you for joining US you may now disconnect your lines.
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