Greetings. Welcome to Arq's Fourth Quarter and Full Year 2023 Earnings Call. At this time all participants will be in listen only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. Please note this conference is being recorded. I'll now turn the call over to Ryan Coleman with Investor Relations. Thank you. You may now begin.

Thank you, operator. Good morning, everyone. And thank you for joining us today for our fourth quarter and full year 2023 earnings results call. With me on the call today are Bob Rasmus, Arq's Chief Executive Officer and President; as well as Kim Hansen, Arq's VP of Finance. This conference call is being webcasted live within the Investors section of our Web site 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 investor@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-K for the year ended December 31, 2023 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 in 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.

Thank you, Ryan. And thanks to everyone for joining us this morning. Let's begin on Slide 3 of our presentation. We finished 2023 with strong momentum and are very pleased with the steps we have taken and continue to take to further improve our business. Our fourth quarter results clearly indicate the improving profitability of our existing business. We delivered a very solid quarter marked by revenue growth of 20% over the prior year, nearly doubled our gross margin to approximately 50% versus last year, generated strong cash flow from our PAC business in the form of $7.2 million of adjusted EBITDA, and we are excited to have achieved positive net income for the first time in eight quarters. As I have emphasized since joining, our absolute focus is on execution and maximizing shareholder value. We remain dedicated to optimizing our PAC business, where in a short period of time, we have successfully enhanced the economics and overall profitability. While we pursue exciting and highly attractive opportunities in the granular activated carbon market, it's crucial that our PAC business stand on its own from an economic perspective. In my remarks on our last earnings call, I stated that we wanted to improve the performance of our foundational PAC business. This was to be achieved by reducing costs, improving operating efficiencies, eliminating unfavorable or loss making relationships and focusing our sales efforts on the best opportunities to improve product mix and increase our average sales price. Our goal was to improve economics and overall profitability. Our strong and encouraging fourth quarter performance reflect the results of those efforts. We increased our average selling price by [6%] versus last year and 18% sequentially. We eliminated negative margin contracts, of which we expect only one will be remaining by March 31st of this…

Thanks, Bob. And thanks, everyone, for joining us today. Please turn to Slide 4. As Bob mentioned earlier, we delivered strong financial results during the fourth quarter with revenue growing 20% year-over-year, driven largely by increases in average selling prices, positive changes in product mix and enforcement of take-or-pay contracts. Our gross margin in the quarter was 49.8%, nearly double the 25.4% reported in the prior year period. As a result, we achieved the second consecutive quarter of positive adjusted EBITDA in the fourth quarter and our first quarter of positive net income since Q4 of 2021. While our business does benefit from seasonal factors, our strong results clearly exhibit the improvements and momentum we're experiencing across the company. Our quarterly revenue of $28.1 million represented an increase of 20% year-over-year. On a full year basis, our revenue performance was impacted by lower natural gas prices, which negatively impacted demand from our power generation customers. Our fourth quarter saw significant growth in EBITDA and net income, proving the success we are achieving in prioritizing profitability over volume. Adjusted EBITDA improved to $7.2 million compared to a loss of $1.2 million in the prior year. Net income was $3.3 million compared to a net loss of $3.2 million in Q4 of 2022. 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 [execute] on high growth and high margin opportunities within our expanding GAC business. Turning to the balance sheet. We ended the year with cash of $54.2 million with the change versus last year driven by ongoing strategic investments and expansion at Corbin and Red River. As we flagged last quarter, 2023 included a number of nonrecurring items related…

Thanks, Kim. Before moving on, I'd like to take a moment to expand on Kim's remarks, including those related to our balance sheet, cash position and long term performance. While we are proud of our fourth quarter results and clear momentum across our business, I want to make sure that we are taking a holistic and long term approach to how our leadership team is incentivized. As such, the decision was made not to pay any short term incentive compensation to members of the executive leadership team, including myself and reduce other payments. With that action, we have saved approximately $2 million in cash, which would have been paid out in the first quarter of this year. We will continue to make the decisions necessary to ensure alignment and enable our team to drive long term stakeholder value. Switching gears and moving to Slide 7. I'd like to spend a moment to highlight our corporate rebrand, which we completed in February. This important milestone was achieved just one year after our transformational Arq acquisition and reflects the company's evolution from a manufacturing business, primarily serving declining industries to an environmental technology company producing activated carbon primarily from bituminous coal waste with products which reduce or even reverse environmental liabilities like PFAS or forever chemicals. We are focused on providing differentiated solutions for faster growing markets. The strategic investments we're making in our GAC expansion is just the first step in our ongoing transformation. With the new brand in place, we are now much better positioned to execute on our ambitions and have a brand and corporate identity that aligns with our corporate vision. Turning to Slide 8. We were very active during the fourth quarter with our strategic GAC expansion and these efforts have continued full steam ahead into the…

[Operator Instructions] At this time, I'll turn the call over to Ryan Coleman for additional questions.

Thank you, Rob. We have some investor questions that we'd like to get to as well. Our first question we received, how do you know that cost for the first phase of Red River will not continue to rise between now and completion?

We've completed an extensive process to get to a place of comfort around where we are today. We've looked at all aspects of the project, both internally and externally managed. And while we're comfortable that we've identified all the key pieces that have contributed to the increase we've announced today, there's always uncertainty in managing and executing large projects such as this. We feel we've got a pretty good handle. In fact, we feel we've got a very good hand on the factors that are in our control. But quite frankly, some aren't in our control. We've baked in some level of conservatism to account for this. But again, we don't expect further increases as we believe we've been diligent as described in today's update and we'll continue to do all we need to do to manage and mitigate the potential impacts of any negative outside factors.

Our second question. Could you please elaborate on the planned refinancing of the existing term loan, are you going to do this whether you need money or not? And what do you mean by potential expansion of the term loan?

Refinancing of our term loan has always been on our to-do list and we will absolutely proceed with refinancing. What I mean by expansion is increasing the size of our current borrowing amount. We currently have very low debt levels. We have attractive future cash flows and a valuable asset base as replacement cost we estimate is well over $500 million. As such, I think it's prudent that we put some additional cash on the balance sheet to fund any needs as it relates to completing Phase 1 of the Red River expansion or it can be used to bring forward Phase 2 if needed.

Our next question. Could you please provide any additional information on GAC margins versus those that you realized in your PAC business?

Pricing for PAC and granular activated carbon varies widely based on the type of product and its uses. What I can tell you is that average GAC pricing is a multiple of average pack pricing. Does it cost more to produce granular activated carbon than powdered activated carbon? Yes. Does it cost a multiple? Absolutely not, nowhere near. That is what makes the GAC market so attractive. I'd like to provide further specifics but for competitive reasons, I'm going to refrain.

Our fourth question. You mentioned the PAC business will be a net cash provider in 2024. Should we expect similar results throughout 2024 as what you realized in Q4?

The fourth quarter was a great quarter, which included some onetime items like the make whole revenues relating to our take or pay contracts. Don't forget, if the volumes have been taken throughout the year, it would have spread out the results [Technical Difficulty] facing some headwinds as it relates to natural gas pricing and our PGI segment. However, that should be offset by our continued work on pricing enhancements for the water segment and further penetration of the PAC water market. We're pleased at what we see as our volume growth in the PAC water market. And most importantly, I think for investors and for the company is that this segment carries a higher price point and higher margins than the PGI business. In addition, we're going to continue to focus on manufacturing efficiencies to reduce our cost and increase margin. And all of these factors combined for me to be confident in the PAC business being a net cash contributor in 2024.

Thank you. We do have a question from the phone coming from the line of Gerry Sweeney with Roth Capital.

A lot to unpack, lots of details, so I really appreciate it. And also congratulations on obviously a great quarter. I was wondering if we could maybe take a step back, level set, and I'm not sure how much of this information you want to provide, but I'm just curious as to what your total PAC production today is? And I believe GAC will be 25 million pounds. But I just wanted to level set in terms of production and where we are today, if you're up for that?

Historically, we haven't given volumes for competitive reasons. Every time I bring that subject up, Garrett Chandler, our Head of Sales, has a heart attack, and I think he's only 32 years old, on that respect. And so it's something that we'll continue to discuss on the volumes on that. But I think the key thing for the PAC business is that while volumes declined slightly, the fruits of our efforts in terms of pricing enhancements and using and going to different markets than the PGI -- specifically, the water market helped enhance pricing increased average sales price and margin. As it relates to what we expect for granular activated turbine going forward, we've said and we maintain 25 million pounds of capacity coming online when we complete the Red River expansion at the end of this year. As I mentioned in my remarks, I believe that some of the things we've done will lead to greater efficiencies that will allow us to produce greater than 25 million pounds of granular activated carbon. However, when I talk about payback in three years or less and the returns associated with the granular business, we're assuming only the 25 million pounds of granular activated carbon. We've given no credit for potential increases in GAC volumes. We assume pricing is in line with the current customer discussions and we assume that the foundational PAC business is a net cash contributor.

And I figured PAC was a little bit of a trade secret per se, but you did answer my next question on GAC with originally 25 million, but there's potential upside to that. Sticking with PAC just for a moment, and I think you mentioned -- again, I was writing a lot of the stuff down here. It sounded like there was 24% of volumes and these are my words not yours, so I apologize if it's incorrect. 24% of volumes were negative contracts and 14% going to 2% in, I think, March or April. So does this imply that there's potentially a little bit more upside to the PAC business in the first quarter then it sort of hits a steady state going forward? Am I reading that correctly?

So at the end of the first quarter, we'll have one remaining negative margin contract and that will be gone by the end of this year for that one. Two, there's always work to be done. While we're pleased with the progress we've made we’re far from satisfied or at least I’m far from satisfied, and I hope everybody else is far from satisfied and where we're going. And so while, as I mentioned earlier, that there are some headwinds we're facing as it relates to natural gas pricing and demand in the PGI, we're making excellent progress in the water market that we think will offset that and potentially more than offset the headwinds we're facing in the natural gas pricing.

Switching gears to GAC. Corbin commercialization in 2Q, Red River complete commercialization in 4Q. I think Corbin was actually complete, commercialization in 2Q. But really, Red River is -- I mean, my focus here, if you're completing commercialization in 4Q, that means maybe end of 3Q, the plant, you start running some production runs running through the processes. What is sort of the next major hurdle with Red River to get you to that…

Really, the hurdle is I'm going to under-promise and hopefully over-deliver as it relates to Red River. But really start commissioning Red River in the fourth quarter and late in the fourth quarter actually start production with first deliveries very late in the fourth quarter or the beginning of the first quarter of next year.

And I've done a bunch of channel checks pricing in the water market is great. I know a huge amount of opportunity coming down the pipe as to with potential EPA regulations, let’s say potential, but there will be something. And I know different water groups are taking different approaches. Some are wait and see what those regulations are and some are actually buying -- putting up contracts now. I'm just curious as to maybe the momentum you're seeing on potential contracts inbounds and how does that sort of fill out with that 25 million of production?

So I mean I'm going to -- so what you're basically saying is what's my confidence level in contracting for GAC and the terms. And so I want to -- really, my confidence is based on several factors, Gerry. The first is fundamentals, the market’s undersupplied, demand is growing. And this is, as you mentioned before, any PFAS regulations are enacted. The second is the results we're seeing in regards to our prequalification testing done with prospective customers. The feedback has been extremely positive. And as I mentioned during the call, all the completed testing is either moved on to the next phase of testing or to actual contract discussions and third is the conversations with those customers. Users are interested in not only finding supply to meet their demands, but new supply. They like the quality of our product, the fact that it's domestically produced, the performance characteristics they've seen in testing. And since our footprint is our feedstock is derived from bituminous coal waste, they really like the environmental benefits in terms of reduced carbon footprint. They find all of those things quite attractive. And all of these factors combined are really what relates to my confidence level and not only being able to contract our production prior to actually beginning to produce granular activated carbon from Red River but also to the potential for prepayments. Surety of supply, as you probably found out from your channel checks for GAC is extremely important. And so the second part is what types of terms are we looking for? I mean, every negotiation is a trade off. And what we're really looking for is to find what maximizes long term shareholder value. The reality is we could contract 100% of it right now but we don't want to. We want to find the right fit, the right mix, the right price, the right customers.

We have one final investor question that we'd like to get to. And that question was what do you mean by increased operating efficiencies and volumes as a reason why equipment costs rose at Red River?

As mentioned, we tweaked some of the equipment to maximize potential performance. One benefit, as I said in my prepared remarks, is that GAC production is now additive to PAC production. Previously, GAC production would have been on a pound per pound reduction in our PAC production capability. Now GAC is actually additive on a one for one basis. Also, I expect some of the operational efficiencies would also increase the amount of GAC from the first phase and future stages of the expansion similar to what I mentioned in Ryan's question that we've used and continue to use 25 million pounds as the output, but we hope and expect that it will be greater than that. And as I mentioned, we have not assumed either the additive increase or anything above 25 million pounds in our return calculations.

Thanks, Bob. And thanks again to those of you who provided questions. I'd like to turn the clock over to Bob for any closing remarks.

Thanks, Ryan, and thank you all for listening today and your interest in Arq. With our fourth quarter results, you're beginning to see the fruits of our labors and the effects of the company's transformation. There's still a lot of work to be done. As always, our focus is on execution and maximizing shareholder value. I am optimistic about Arq's continued transformation and the future, and I look forward to talking with you on our next call.

Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.