Arq, Inc. Common Stock Water Tower Research Virtual Insights Conference

Good afternoon, everyone, and thank you for joining us today. Welcome to this Water Tower Research Insights conference session with Arq, Inc. I am Peter Gastreich, Managing Director of Energy Transition and Sustainable Investing at Water Tower Research. Joining me today is Bob Rasmus, who is the Chief Executive Officer of Arq. Bob, welcome today, and thanks so much for spending some time with us today.

Thank you, Peter. We are delighted to be here and delighted to participate.

Okay, fantastic. Just a couple of quick housekeeping items before we begin. Arq's safe harbor statements can be found on the investor tab of the company's website, and I would encourage investors to take a look at those. Investor questions are, of course, welcome. Please put them in the chat box and we will make sure that those are delivered to Bob and his team to address during the chat or later. If you would like to request a meeting with Arq management's team, you can also register that interest through the conference portal. With that formality out of the way, let us get into it here. Bob, maybe we will just start from the top. As always with these kind of calls, there could be some investors listening who are new to the story.

With that in mind, could you walk us through from a high level, what does the company do, what markets does Arq serve, and how would you characterize the strategy that you are executing right now?

Sure. We're an environmental technology company whose products, principally activated carbon, reduce and even reverse harmful environmental liabilities and pollutants such as PFAS or forever chemicals, scrubbing mercury emissions from coal-fired power plants, remediating groundwater or soil in terms of pollutants, as well as improving the taste and odor of municipal water supply on that. Our markets, as I mentioned, are utilities, water utilities, coal-fired power plants, and other industrial generators, as well as a wide variety of pollution remediation activities.

Why don't we start with PFAS here. The compliance clock for U.S. water utilities is now running. Where are the utilities in their planning today, and how exactly will your activated carbon help them to achieve that objective, in terms of their water systems?

Sure. Where utilities are as it relates to PFAS varies by municipality, by state, by region, and by utility. I think all of them are keenly aware of the need to stay on top of and be proactive as it relates to the upcoming compliance as mandated by the EPA. I'd say people are focused on characterizing the problem in terms of expanding or confirming their existing PFAS sampling, mapping concentrations by well or by source, evaluating seasonal variabilities, and if they're not in compliance, starting to focus on how are we going to get in compliance. If they are in compliance, focusing on contingency, what happens if they go out of compliance?

I think all are keenly aware of the cost of compliance, especially as it relates to if the decision is made to install a granular activated as a solution, that the timing and the considerable expense that would be associated with that. Where we are is that we've looked to take advantage of our core competency in terms of our best-in-class research and technology, and developed our PAC4PFAS product. It's not a one size fits all. It's designed for those who are close to being in compliance or those. The quick definition is what's close to being in compliance is a logical question to ask. We know that you have to be 4 parts per trillion or less to comply with the new EPA regulations. We know that 20 or 30 parts per trillion, that our PAC4PFAS product will allow people to get into compliance.

Now, we could go much higher, but at some point, the volume of PAC that would be required would offset the cost of capital in terms of GAC. It is a selective portion of the market, but it is a very large portion of the market, and it allows our customers to be in compliance proactively with the upcoming EPA regulations, and also avoid the capital expense required in terms of installing GAC systems to be able to combat PFAS.

You have said before that the PAC4PFAS trials are ongoing and looking very encouraging, with a meaningful contribution starting from next year. What has to go right in a trial to turn that into a contract, and how much of that demand do you think you can serve from your existing asset base, whether that means displacing lower margin volume or by raising your utilization?

Sure. We know PAC4PFAS works. We know it from our trials, we know it from third party trials, we know it from independent third party trials. Where we are now is with a beta group of water utilities who we have our PAC4PFAS product out who are currently testing and confirming the results that we have, and again, that the third party testing. Based on that, we expect those utilities to enter into contracts for us for PAC4PFAS. In terms of the overall market, it is quite significant. As I say, it is not the entire market in terms of PFAS remediation, but it is a significant portion, and we think it will provide very meaningful opportunity to expand our EBITDA and our cash flow. As it relates to cannibalizing potentially existing business.

One of the initiatives we have is increasing our efficiency, increasing our capacity, lowering costs, and that goes hand in hand, is interrelated with our PAC4PFAS initiative. That will allow us to not only serve our existing customers, but also to expand volumes and sales capabilities to be able to handle PAC4PFAS. If it ever becomes a constraint, it would be a very advantageous problem to have, because what we would do is then we would cut off the lower margin and lowest margin product, and continue to expand PAC4PFAS.

Okay. Thanks for that. Let's turn over to the granular activated carbon strategy. This recent quarter, you put a CapEx range on phase one for the first time, and you're equally clear at the same time that just publishing that number is not necessarily a decision either way. Could you walk investors inside that framework and what are you looking for on cost, on design, and on returns before you would sanction that opportunity?

Sure. Matt, we constructed and did a debrief and lesson learned on our initiative into GAC, and one of the lessons learned was that the business is not GAC, the business is PFAS remediation. That led to a dual pronged strategy in terms of emphasizing PAC4PFAS, creating that as a product which takes advantage of our core capabilities, our strong R&D team, our strong technical relationships without the need for additional CapEx. When we look at the granular activated carbon, it is still a very viable alternative and solution, but it's all about what's the best vehicle for creating maximum shareholder value as it relates to that. Can we achieve maximum returns with PAC4PFAS without getting into the GAC business? Or as time evolves, do we look into getting into the GAC business and getting rid of some of the lower margin existing PAC business?