Arq, Inc. (ARQ) Q4 2025 Earnings Report, Transcript and Summary

Greetings, and welcome to the Arq Fourth Quarter 2025 Earnings Call [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Anthony Nathan, Head of Investor Relations. Thank you, sir. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us today for our fourth quarter and full year 2025 earnings results call. With me on the call today are Bob Rasmus, Arq's Chief Executive Officer; and Stacia Hansen, Arq's Chief Accounting Officer. This conference call is being webcasted live within the Investors section of our website, and a downloadable version of today's presentation is available there as well. A webcast replay will also be available on our site, and you can contact Arq's Investor Relations team at investors@arq.com. Let me remind you that the presentation and remarks made today include forward-looking statements as defined in Section 21E of the Securities Exchange Act. These statements are based on information currently available to us and involve risks and uncertainties that could cause actual future results, performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements. These risks and uncertainties include, but are not limited to, those factors identified on Slide 2 of today's slide presentation, in our Form 10-K for the period ended December 31, 2025, and other filings with the Securities and Exchange Commission. 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. 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.

Thank you, Anthony, and thanks to everyone for joining us this morning. The decisions we're announcing this morning require significant detail, and we'll be providing you with that today. So let me address the most significant update directly. After extensive additional evaluation and testing, we have made the decision to pause our GAC production project to conduct a comprehensive engineering and production process optimization review of the best path forward. I am confident it is the right decision for maximizing shareholder value and the long-term success of this company. So I'm going to walk you through exactly why we've reached this conclusion. I'm going to spend time on this, more time than you might expect because I think it's critical that you understand not just where we are today, but how we got here, what problems we've solved, what challenges remain, why we have made this decision and what our path forward looks like. Then I'll turn to PAC, which continues to perform extremely well and provides a growing profitable foundation for the company. But first, let's start with granular activated carbon. We are pausing GAC production to conduct a comprehensive engineering and production process assessment of the optimal path forward. We do not have a firm time line for completion. Our goal is to complete it as quickly as possible, ideally by our next earnings call. Let me be clear about what this means practically. There will be no GAC production in 2026. Our assessment will help determine when we can expect material GAC production to resume. While disappointing, it's the reality of where we are. Let me walk you through the specific technical challenges we have faced thus far. First, the original design flaws. Our former engineering firm with whom we remain in active litigation created fundamental design flaws in the plant. These weren't minor issues. They include things like having structure and equipment elevations that are materially off, having around 320 feet of duct runs that allow gas to condense, material conveyance systems that are ill designed for the products being handled, inadequate control systems for utility supplies and so on. They were systemic problems that have manifested in different ways as we've attempted to commission and operate the facility, and they remain the root cause of initial cost overruns and timing delays versus the original budget. Second, moisture content. The Corbin Wetcake feedstock 40% moisture content created handling difficulties that were exacerbated by the ill-designed product handling systems at commercial scale. When received at Red River, this material becomes problematic as conveyance and handling can cause moisture to squeeze to the surface, making it sticky and inhibiting efficient production. Solving the challenges created by the variable moisture content was exacerbated by the design flaws. Third, design and efficiency. We identified inefficient design configurations, including numerous 90-degree angles in the material conveyance processes that exacerbated our operational challenges. Fourth, and most recently, the off-gas system design. The original design created an insufficiently heated off-gas duct of over 300 feet. When gas is pooled in this duct work, they condensed and solidified, requiring frequent shutdowns for cleaning and maintenance before we could restart production. This created a cycle of constant interruption. Fifth, we solved the off-gas system design via the installation of a thermal oxidizer. At the time, we had thought this was a complete solution, but with hindsight, it turned out to be just a partial solution. When we conducted testing in late December to determine the modifications necessary to the existing thermal oxidizer in order to reach our target of 25 million pounds production, it became apparent that the amount of gases, air and natural gas needed to process the off-gas and destroy the tire was grossly underestimated by the original engineering design. The original engineering did not appropriately consider or conduct a proper analysis to identify the tire composition and excess amount of off-gas. This excess volume of resulted off-gas could not be handled by the existing plant after burner system as originally designed by our former engineering firm. No amount of modification to the thermal oxidizer would overcome the initial off-gas system design efficiencies. Now I want to talk about the problems we have solved. We haven't been sitting idle. We've been methodically working to find solutions to these issues. Most recently, we addressed the moisture and design issues by making the strategic decision to transition to purchase domestic bituminous coal feedstock. This is proven technology used successfully throughout the industry. Using bituminous proven performance coal feedstock eliminates the moisture-related production constraint, reduces freight costs significantly. Remember, we were essentially shipping water with the carbon feedstock and improves yield through dryer input materials. We addressed the off-gas system by bringing in a thermal oxidizer to properly handle the off-gases when char granules are heated during carbonization. Meanwhile, our testing confirms that GAC product quality with purchased bituminous coal remains exceptionally high, often exceeding industry benchmarks as a direct result of our patent-pending technology and technical know-how. And it is worth adding that customers don't view the feedstock source as a material factor in their purchasing decisions, so we remain entirely confident that it will not impact customer uptake. These weren't minor fixes, each represented significant technical challenges that we methodically and systematically addressed. This brings me to why we're pausing now after addressing these other issues. As we prepare to execute the purchase coal conversion, we took what I call a proactive belt and suspenders approach. We brought in an independent outside testing firm to analyze our entire off-gas system and determine precisely what modifications would be necessary to scale from our current approximately 15 million pound capacity to our target production levels of 25 million pounds. The testing was conducted in December. We received results in late January, and those results revealed a constraint that hadn't previously been identified. The thermal oxidizer we brought in on short notice was only capable of handling the equivalent of 15 million pounds of annual production. The results of the December off-gas testing revealed that the existing plant off-gas system could not handle the excess volume of resultant gases from properly burning off all the tires and [ volatiles ] at the thermal oxidizer at production levels of 25 million pounds or higher. Now here's the economic reality that makes this a critical issue. Producing 15 million pounds of granular activated carbon does not provide sufficient returns on a stand-alone basis to make it economically attractive. The margins on the first pounds are significantly lower than the margins on subsequent pounds as we achieve production scale. The business case for GAC was always built around achieving 25 million pounds or more of production and the return profile was predicated on the average margin across that higher volume. So it follows that a materially lower volume would not have as attractive a margin. At present and due to the results of the off-gas testing previously described, we don't have sufficient clarity on what it would cost to get from 15 million to 25 million pounds or whether it even makes sense to stop at 25 million when 50 million pounds might be more economically attractive given the benefits of scaling fixed costs. We have variables dependent upon variables. We have just received the final test results 10 days ago. We need to refine what the scaling will cost, what modifications will be required and what the return profile looks like at different production levels. This is why we're pausing, not because we can't solve these problems. We remain committed to GAC, but we must first clarify our spending plans and operating strategy. We've reached a point where it would be imprudent to continue deploying capital without further refinement and a complete understanding of the path to overcome the current production challenges and reach economic production. We're not going to spend material capital on a front-end conversion to purchase bituminous coal until we have further refined the off-gas related variables, including cost, timing and spending cadence to ensure we have the risks sufficiently mitigated. Our job as stewards of your capital is to make disciplined decisions based on complete information, not to continue down a path just because we've already invested in it. That's the sunk cost fallacy and it's a trap we refuse to fall into. The engineering assessment we're conducting will answer several critical questions. What modifications are required to the thermal oxidizer and downstream off-gas treatment to achieve 25 million pounds of production? What would it cost to make those modifications? What is the timing required to make the necessary modification? Does it make more sense to target 25 million pounds or to jump directly to 50 million pounds? What are the return profiles at different production levels? With all that being said, I want to address the question of market fundamentals because I know some of you are wondering whether this pause reflects concerns about the GAC market opportunity itself. The answer is an emphatic no. GAC market fundamentals remain very strong. Pricing continues at attractive levels, supply constraints persist. And despite the delays, our customer relationships remain solid, a testament to how tight the market is. We're seeing persistent supply shortages against steady annual growth from existing demand drivers, not even accounting for PFAS-related requirements that could add significant additional demand. The opportunity is real. We remain confident in the tremendous opportunity associated with granular activated carbon development. We're also taking a $45 million write-down on our Corbin assets this quarter. This is an accounting measure that reflects our decision to idle Corbin operations given our decision to switch our GAC feedstock to purchase bituminous coal. The write-down is a noncash charge. It doesn't affect our near-term cash flow or our ability to fund operations and growth initiatives. What it does reflect is our commitment to being conservative in our accounting and transparent about the challenges we're facing. We're continuing to advance alternative applications for Corbin Wetcake, particularly asphalt emulsion blending, where we progressed to the next testing phase with encouraging results, but we don't expect that these applications will generate material cash flow in 2026. Given the repeated challenges we face, we have been making significant changes to upgrade our leadership team. We've appointed Eric Robinson as Senior Vice President of Operations. Eric is an industry veteran with direct experience optimizing activated carbon facilities, including our Red River plant. In 2012, when the Red River plant was struggling with post-construction production issues, Eric's work delivered 20% yield improvements, doubled production and materially improved plant availability. Eric's expertise specifically addresses the types of plant ramp-up challenges we've encountered. His track record at this exact facility gives us confidence that he understands both the opportunities and the potential pitfall. We've also hired an on-site process engineer with technical oversight to augment our Red River team reporting directly to Eric. The strengthened technical capability ensures we have the right expertise at the point of operation. With Eric's appointment and Corbin idling making us a single plant business, we no longer require a COO role. I want to thank Deke Williamson for his dedication since joining Arq. Deke played a pivotal role in enhancing our PAC operations to their current profitable state. On the financial leadership front, Jay Voncannon no longer serves as Arq's Chief Financial Officer. We have been interviewing CFO candidates with the intention to have an announcement shortly. Anthony Nathan will become VP Finance. In addition to his current Investor Relations role, Anthony will also be responsible for strategic planning, financial analysis and budgeting. Anthony's 8-year tenure with Arq, including oversight of all equity and credit financings in the Arq Limited ADS combination, now Arq Inc., positions him well for this expanded role. Stacia Hansen continues as Chief Accounting Officer, responsible for accounting, tax and financial reporting and will also serve as the company's Principal Financial Officer. Last November, we also hired Jeanette McQueeney as Senior Vice President and Head of Sales. Jeanette has had a long and successful sales career with significant chemical and activated carbon sales experience. Jeanette is both a proven producer and a leader. In addition to her leadership abilities, Jeanette has brought the strategic orientation skills we were seeking. All of the changes just mentioned stem from our goal to upgrade the talent and performance level of our executive leadership team and company. Now let me turn to our PAC business. I've spent significant time on GAC because that's what's changing, and that's what requires explanation. But it's important to recognize what hasn't changed, which is that we have a profitable growing PAC business that provides the foundation for this company. Our PAC business delivered exceptional performance in 2025. Full year revenues reached approximately $120 million, up 10% year-over-year, while reported adjusted EBITDA was $13 million, representing a 26% improvement over 2024. But that $13 million figure significantly understates the true performance of our PAC operations, and I want to be explicit about this. GAC start-up costs, unplanned downtime, inefficient furnace utilization and operational challenges cost us several million dollars in 2025. Let me break that down. Taking Corbin offline alone saves us several million dollars annually in operating costs. We incurred significant expenses from GAC start-up associated with plugging issues and constant maintenance shutdowns. We produced non-sellable GAC product that consumed furnace hours without generating revenue and which added costs. We had operational inefficiencies and distractions from trying to commission a troubled facility. Even with the impact of certain of these GAC headwinds, our 2025 adjusted EBITDA was $13.2 million, which we believe highlights the true earning power of our PAC business. This context is critical because it explains our business model. We effectively operate by selling furnace hours. We have a finite number of hours we can run our furnaces each year, and we must make optimal decisions about how to allocate those hours. For the past year, we've been allocating furnace hours to GAC production that generated losses instead of profit. By pausing GAC, we're redirecting those furnace hours back to our proven profitable PAC business. This isn't just about avoiding future GAC losses. It's about actively improving our near-term financial performance and optimizing our long-term potential. We have over 15 years of experience operating in this PAC business. This is not a novel operation or an experimental process. It is a proven profitable business that we execute consistently. With Eric's activated carbon and experience at Red River, we believe we can further enhance this business. This performance reflects our strategic transformation, sustained volume growth, enhanced product mix and continued pricing strength as we capture higher value, higher-margin applications beyond traditional power markets. Our shift towards specialty products and engineered materials commanding premium pricing has fundamentally improved our business profile. The PAC market shows robust performance with excellent visibility. We have 96% contract visibility on 2026 targeted volumes, 75% visibility through 2027 and 43% through 2028. Our 3-year customer retention rate of 86% demonstrates customer stability and loyalty. This is a stable, profitable business with long-term customer relationships and clear visibility into future demand. Now let me turn to guidance, which we're providing in detail for the first time. I recognize the irony of introducing guidance at the same time we're announcing a major project pause. I also recognize that some of you may be skeptical given our track record with GAC over the past year. But here's the critical distinction. We're providing guidance on a business we've operated successfully for over 15 years, not on a novel facility we're still trying to commission. This is a proven operation with clear visibility into volumes, pricing and costs. None of the factors contributing to our GAC challenges over the past year or so apply to our PAC business. With that in mind, we believe you, our investors, need a frame of reference to value this company. We're providing this detail so you can make an informed decision. With that said, for full year 2026, we anticipate revenue in the range of $120 million to $125 million and adjusted EBITDA of $17 million to $20 million. These projections assume no GAC contribution and are based entirely on our PAC business performance. We are also providing operational metrics that offer deeper insight into our business drivers. This includes PAC average selling price of $0.88 to $0.91 per pound compared to $0.89 in 2025 and $0.82 in 2024. Production volumes of 122 million to 125 million pounds compared to 117 million pounds in 2025 and 111 million pounds in 2024. The pricing guidance reflects continued success in market diversification and value capture. We're not just selling commodity pack products. We sell engineered products into specialty applications that command premium pricing. The volume growth demonstrates both market demand and our operational capabilities. And here's an important point, pausing GAC production creates additional PAC furnace capacity, enabling higher PAC production than we previously anticipated. Even with GAC Phase 1 online and at capacity, we believe it would likely not require any reduction in PAC production volumes, a significant operational advantage that preserves and extends the earnings power we're demonstrating in 2026. We expect additional revenues from other chemicals and products will contribute approximately 13% to 15% of total revenues, consistent with 2025 and previous years. Now let me turn it over to Stacia to walk through the detailed financial results and provide additional context on our Q4 performance.

Thanks, Bob. We delivered strong financial results during the fourth quarter and full year of 2025, albeit offset by the frustrating impact of GAC start-up costs in the second half of the year. Revenue grew 10% year-over-year for the second year running to approximately $120 million. This was driven primarily by solid improvements in our average selling price and volumes. Gross margin for the year was 27.9%, representing a negative impact of GAC ramp-up costs, offsetting the otherwise positive momentum in PAC pricing and cost efficiencies. We delivered $13.2 million in adjusted EBITDA in 2025, a very impressive 26% improvement compared to 2024. This underlines the ongoing and sustained improvements we have made to our PAC business, which built on the progress of 2024 and which we believe will continue again through 2026. Now turning to our discussion of the fourth quarter. Revenue totaled $29.4 million, up around 8% on the same period, driven in part by a 7% quarter-over-quarter growth in our average selling price and positive changes in our product mix. Our gross margin for the quarter was 13.6% compared to 36% reported in the prior year period. Again, a reflection of the painful impact of our GAC ramp-up costs. It is also worth noting that the lower level of take-or-pay contracts collected in Q4 2025 versus Q4 2024 underscores the improved demand for our products. Net loss was $50 million in the fourth quarter of 2025 compared to a net loss of $1.3 million in Q4 of 2024. We generated positive adjusted EBITDA of approximately $0.3 million in the fourth quarter of 2025 compared to the adjusted EBITDA of $3.8 million in the same period during 2024. Both these changes versus the prior year were primarily driven by the costs associated with the ramp-up of our GAC production at Red River, which totaled several million dollars in fiscal year 2025. Selling, general and administrative expenses totaled $6 million in Q4 of 2025, which is flat versus the prior year period. Overall, and on an annualized basis, our performance demonstrates our ability to operate our PAC business in a way that contributes positively to our economic position while further enabling us to pursue and execute on alternative growth opportunities within our business. We remain extremely confident that our PAC business will continue to be cash generative in fiscal year 2026 and beyond. The strong annual performance of our PAC business in 2025 demonstrates its potential to secure a foundation on which we can continue to build. Turning to the balance sheet. We ended the year with a total cash of $15 million, of which approximately $6.6 million is unrestricted. The change versus last year was driven by CapEx spend to complete the GAC line. Total debt, inclusive of our financing leases at December 31, 2025, totaled $28.5 million compared to $24.8 million in 2024, with the increase driven by higher utilization of our mid-cap revolving credit facility. Looking ahead, not only did the PAC business perform well in 2025, but we have sufficient visibility on the performance that we are today in a position to issue financial guidance for the first time. As Bob mentioned, for the fiscal year 2026, we expect revenue of $120 million to $125 million, driven in part by strong PAC volumes of between 122 million and 125 million pounds at an average selling price of between $0.88 and $0.91 per pound. which both pricing and volume expected to improve compared to 2025. I would note that the delta between the PAC total and our overall revenue is the contribution from our other chemicals and products, which we anticipate will contribute between 13% and 15% of revenue as they have in previous years. Alongside this revenue guidance, we are also providing adjusted EBITDA guidance of between $17 million and $20 million, which would represent a 30% improvement on 2025 at the bottom end of the range. And as noted by Bob, but to reiterate, these forecasts assume no contribution from our GAC. While this is a source of collective frustration, it also demonstrates how strong our PAC business is performing. Finally, I would add that pending completion of our optimization review, we currently anticipate CapEx for 2026 to be in the range of $8 million to $10 million. This is inclusive of around $3 million relating to our routine biannual 2-week maintenance, which is scheduled at our Red River plant. With that, I will turn things back to Bob.

Thanks, Stacia. Before we turn to questions, let me leave you with the key takeaways that should frame how you think about Arq going forward. First, we are pausing GAC to conduct a comprehensive engineering and production process optimization review of the development of the GAC business. This is a disciplined capital allocation decision, not a reflection of lost confidence in the market opportunity. Second, our PAC business is profitable, growing and provides a stable foundation. We have over a decade of operating experience, clear visibility into demand and strong customer relationship. The $17 million to $20 million adjusted EBITDA guidance we're providing for 2026 is based on this proven business, and we're confident in our ability to deliver it. Third, we're taking our pain upfront rather than spreading it across multiple quarters, and we're making the difficult decisions necessary to position this company for sustainable success. I'm confident that we're making the right decisions for the long-term value of this business. And as I am always keen to remind you, both I and many members of the Board and management team are significant shareholders. We must not overlook that we have a profitable core operation. We have experienced leadership in place to optimize it, and we have the discipline to make smart capital allocation decisions rather than continuing down a path that may not generate acceptable returns. We're committed to rebuilding your confidence through consistent execution. That starts with delivering on our 2026 path guidance, and it continues with providing you with a clear, well-supported plan for GAC when our assessment is complete. With that, I'll hand it back to our moderator to open for questions.

[Operator Instructions] Our first question comes from the line of Gerry Sweeney with ROTH Capital Partners.

Thanks for all the detail. I appreciate it. I'm just going to start off. Anything that you see today that would prevent you from not pursuing GAC. I understand there's costs associated with some of these changes and opportunities. But our channel checks continuously indicate there's an extreme amount of demand for GAC on a go-forward basis. The demand characteristics are very positive. And I think even some of the larger competitors have had issues expanding some of their facilities and have taken a year, if not 18 months longer than anticipated. But just curious if there's anything that would stop you from pursuing GAC.

Really, the answer is an emphatic no. The market fundamentals, as you just articulated, and I tried to express in the prepared remarks, the market is in an extreme undersupply versus excess demand imbalance. We expect that imbalance to persist for many years to come, and that's even before the PFAS regulations formally come into effect. Pricing continues to rise, and there are barriers to entry for both greenfield entrants as well as existing players. And so that we -- I don't see any reasonable alternative other than -- or I should say not reasonable alternative, but any alternative, but that we would go forward because the market fundamentals are so great, and we're so well positioned to capture that once we use this pause to further refine what modifications are necessary to be able to attack the market.

Got it. Switching gears to PAC. Obviously, lots of visibility into contracts, which is great, I mean, especially for this year and even into next year. But I think in your press release, you did highlight or mention that there are some regulatory undercurrents that I think that have been ebbing and flowing, let's say. Anything -- any commentary on that in terms of any potential changes on that front that you're seeing?

So 2 things. As you mentioned, we've got excellent visibility on the PAC business with 96% of our expected volumes or targeted volumes for 2026 already contracted and 75% for 2027. So we like the way that business is positioned for future growth. As it relates to potential regulatory uncertainty, there really isn't regulatory uncertainty. There was some discussion from the EPA about new regulations that have been pushed further back, but that was not a rollback of existing regulations. So therefore, no effect on our existing PAC business.

Understood. And then one last question. Guidance, $17 million to $20 million; CapEx, $8 million to $10 million. You back out some interest costs. I think that implies maybe some free cash flow of $4 million or $5 million to upwards to $8 million. Is that back of the envelope? It does appear that you're going to be free cash flow -- generating free cash flow for the year. And is there anything else that we should be thinking about on the balance sheet?

I think your math is good in terms of calculations. We expect the PAC business to be a free cash flow generator. We are doing the biennial plant turnaround scheduled for April. That's going to be about $3 million. That's included in that CapEx guidance as it relates to that. So next year, we would expect that maintenance CapEx for the PAC business to be even less and to generate even more free cash flow.

One more quick question. Obviously, there's a little bit of excess capacity still at Red River. I think it's 150-ish, you're running around $120 million, $125 million. If hot summer, lots of power generation, power -- I mean, AI is driving that to some degree, but there's potential upside. you have capacity to supply the market if there's more upside demand. Is that correct?

That's absolutely correct. As I mentioned in my prepared remarks, when we bring on the 25 million pounds of GAC, we don't expect that to cannibalize PAC production at all. So we definitely have room in this interim period to further expand the PAC volumes and take advantage of high nat gas prices, increased electricity demand as it relates to AI and data centers and/or any weather-related increase in power demand. But again, PG&I, while it's an important component of the PAC business, is just a component of the PAC business.

Our next question comes from the line of Aaron Spychalla with Craig-Hallum Capital Group.

Maybe first for me, I appreciate all the color. Just kind of want to square it with what we heard in April -- back in November. So just want to confirm on the thermal oxidizer side of things, it sounded like you were looking to purchase a new one of those and thought that, that could take care of some of the issues now. It sounds like it's more on the off-gas side of things and making sure you have the proper kind of capacity and equipment there. But at this point, I just want to confirm, you think that those issues are solvable. It's just still trying to take a step back and determine the right path forward from a cost and capital standpoint?

Yes, absolutely, Aaron. I think what you're referring to is in our remarks last November, I mentioned that we expected to spend about $8 million to $10 million for a thermal oxidizer, and that was the case. But what we did is we decided to take a proactive approach to ensure that if we spent that $8 million to $10 million, we would solve the problems associated with getting production from 15 million pounds to 25 million pounds. Part of that proactive approach was the addition of Eric Robinson to our team. While he formally was added as Senior VP, Operations at the beginning of March, he's been serving as a consultant to us since late 2025. But what really happens is we needed so much more than just a thermal oxidizer. We need a complete air quality control system, which means heat recovery, acid gas removal, particulate control, et cetera. And the reason that was determined again was we decided to do that proactive approach that we had conducted kiln off-gas testing by a third-party lab right ahead of Christmas. And the results of that found that the kiln off-gas contained heavier tire fractions than anticipated from the original flawed engineering design. In essence, this heavier tire would require additional heat and air inputs to the thermal oxidizer at the higher 25 million pound throughput rates. And the existing off-gas system, the afterburner sulfur scrubber downstream of the thermal oxidizer wouldn't be able to handle the extra heat and gas volume. The net result is we need to install an entirely new separate off-gas train comprising the new thermal oxidizer we discussed back in November, along with some additional items like water quencher, heat exchanger, wet scrubber, ID fan, a new stack. And as a result of all this is why we've hit the pause button so we can use this optimization period to refine the recommendations, and that will determine the final timing and cost. I apologize for being so long-winded, but I understand people's frustration, and I wanted to be able to provide detail for your answer.

No, I appreciate that. And then maybe second, on the third-party feedstock switching there, you kind of in your commentary, talked about often exceeding industry benchmarks. So I just want to kind of confirm, you feel comfortable with the switch in the feedstock and kind of the resulting product. It's just about, again, solving the equipment and kind of the production line dynamics.

Absolutely, we feel comfortable. We've done testing of the material. And in fact, we originally evaluated over 55 potential feedstocks. We narrowed that down to 13, did extensive and even more extensive testing on those feedstocks. We narrowed that down to 7. We further narrowed it down to 5 that were essentially interchangeable as it relates to that. So we've done testing of the material. It's a proven process in the industry, and we know this is going to work.

Our next question comes from the line of Jason Tilchen with Canaccord Genuity.

The guidance implies PAC ASP growth of sort of 1% at the midpoint. Obviously, you're lapping very strong growth from the past few years. But curious, what are some of the puts and takes to consider with that range of pricing expectations relative to recent trends?

Sure. We've seen excellent pricing growth on our ASP over the last 9, 10, 12 quarters. As we have said in previous calls that, that pace -- that double-digit pace of price increases had to moderate. We still expect to see price increases from the base business and also as we expand into more value-added markets, which are more highly engineered and sell at much higher prices than the -- than our ASP, our more commodity-like sales.

Okay. Great. That's very helpful. And one quick follow-up. In the release, you also talked about some of the alternative applications for the Corbin Wetcake and those continuing to advance. Perhaps you could just maybe expand a bit more about how those developments are trending.

Sure. Really, alternative uses for the carbon feedstock really come down to asphalt emulsion, synthetic graphite, graphene and potentially isolating rare earth minerals or critical elements as part of the washing process. The most advanced is the asphalt emulsion. We've completed with a third-party asphalt company that the initial round of testing, we've progressed to the next round recently. So we're making good progress there. However, I think it would be premature to expect significant revenues from asphalt emulsion in 2026 from Corbin. Synthetic graphite and graphene are more longer term. We're working with several firms and including the government doing and conducting research in that regard. And I would put those as potential, but I'd say more sizzle than steak or sirloin.

Our next question comes from the line of Peter Gastreich with Water Tower Research.

I do appreciate the detail and clear action plan. Can you hear me?

Yes, absolutely.

Okay. Great. So yes, I appreciate the detail and the clear action plan here, and it's great to see the formal forward guidance, including the operating metrics coming through as well. Just a couple of questions. In the past, you've mentioned that there are tariff benefits for domestic producers like Arq. Just kind of curious if you are realizing that now? And is any of your EBITDA guidance for this year taking into account effective tariff benefit just because it would seem there would be some good operational leverage there if that is the case.

The guidance we provided reflects steady-state business and doesn't give any benefit from tariffs and the imposition of tariffs on our competitors, most of whom import material from overseas.

Okay. Great. And just a little bit more on the contract volume visibility of 75% for 2027 and 43% for 2028. Just for some context, would you characterize that as a typical your visibility for you? Or is that stronger than usual? It would appear that you're in a very good place just looking at this year, given that your outlook is that is for PAC volumes to be rising.

I'd say it's the usual position that we are in. We have an extremely high renewal rate, thanks to the quality of Jeanette McQueeney and her sales team. We typically renew 86% or more on average of our contracts. Some of those contracts are multiyear, some are 1 year, some are 2 years. So hence, the visibility profile. But we would expect that when we get to this same time next year that we would have similar numbers going out the next 3 years.

Okay. And just one more question. I recognize you might not be able to answer this, but just regarding any potential litigation recovery in the future, would you be looking for start-up costs or lost revenues in terms of damages? Or are we still in kind of a wait-and-see mode right now?

As we mentioned, the lawsuit is ongoing, and it's our policy not to comment on the particulars of active litigation. But I will say that we feel very confident in our position.

Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Rasmus for any final comments.

Thanks, Melissa. In closing, I want to emphasize that our PAC business has been transformed from a cash consumer to a cash generator, one which after maintenance CapEx creates free cash flow to help fund our GAC expansion. Our PAC business had a good 2025 and 2026 will be very good as it relates to the PAC business. The company, even without GAC is profitable, is growing and has visibility to sustain the PAC growth. It isn't a hockey stick style growth, but it's steady growth. Demand for GAC is not an issue. There's definitely a demand-supply imbalance that has persisted, and we think will continue to persist for many years. In addition, there are regulatory benefits and barriers to entry, which will delay any new entrant or greenfield expansion for many, many years. For Arq and investors, the upside is about refining what is needed to complete Line 1, execute on the build and successfully produce GAC. Bringing on experienced activated carbon operating management in the form of Eric Robinson and others will help further improve the business and mitigate that execution risk. Thank you very much, and we look forward to providing updates on our next quarterly call.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.