Arq 2026 Q3 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Arq Q3 2026 earnings conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star 0 for the operator. This is being recorded on Thursday, November 5, 2026. I would now like to turn the conference over to Anthony Nathan, Head of Investor Relations. Thank you. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us today for our third quarter 2026 earnings results call. With me on the call today are Bob Rasmus, Arq's Chief Executive Officer, Shimon Steinmetz, Arq's Chief Financial Officer. This conference call is being webcasted live within the investor 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 two of today's slide presentation in our Form 10-Q for the quarter ended September 30, 2026, 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 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. During my remarks, I will cover the entire business, but there are three points I want to emphasize. First, our foundational PAC business is performing very well. Volumes and margins are growing organically, and we achieved record quarterly revenue. Importantly, this has been a strong year, not just a great quarter. As a result, we are raising the bottom end of our 2026 adjusted EBITDA guidance, with the range converging toward the top end of original guidance. Second, the PFAS remediation market is robust. Customers are proactively seeking remediation solutions, and market prices are rising. That is the ideal backdrop for our PAC for PFAS products. Customer testing is advancing. Third, we believe there is a clear path to meaningfully grow profits in 2027.

This is driven by the organic growth just mentioned, the addition of our PAC for PFAS products, our cost and efficiency initiatives, and a simpler balance sheet. Turning to our third quarter results, this was a strong quarter driven by our foundational PAC business. We had record revenues of $38.2 million, up approximately 9% from the prior year. Gross margin for the third quarter was 39.7%, compared to 28.8% in the prior year period, and adjusted EBITDA was $8.8 million versus $5.2 million in the prior year period. That is our 10th consecutive quarter of positive adjusted EBITDA. We generated net income of approximately $2.5 million in the quarter, compared to a net loss of approximately $900,000 in the prior year period. I want to highlight two important points. First, we delivered on what we told you we would do.

Rebuilding credibility with investors is my priority, and the way we rebuild credibility is simple: communicate our target to investors and then meet or beat them. Second, these results come before any expected contribution from PAC for PFAS. To put our progress in context, through the first three quarters of 2026, our adjusted EBITDA of $17.4 million has already exceeded the $13 million of adjusted EBITDA we reported for the whole of 2025, as well as the low end of our full-year 2026 guidance. We have had a strong year to date, not just a great quarter. That brings me to guidance. We are tightening our full-year 2026 adjusted EBITDA guidance to $19 million-$20 million from $17 million-$20 million previously. At the same time, we are reiterating our revenue guidance of $120 million-$125 million.

Turning now to one of the biggest drivers of our future growth, PFAS remediation. With the April 2027 monitoring and reporting deadline approaching, PFAS is front of mind for most of our water customers. Many municipalities tell us they want to get into compliance as soon as possible, irrespective of the regulatory timetable. This is entirely rational, particularly given the reputational risk of being seen to accept PFAS contamination above mandated levels. That demand, together with anecdotal price increases reported across the activated carbon industry, confirms that PFAS remediation remains an attractive market, a market that will likely continue to grow in both size and pricing as we approach both the EPA's PFAS contaminant threshold reporting and compliance effective dates. With this in mind, we believe our targeted portfolio approach to being able to provide multiple PFAS solutions offers the best range of strategies for our customers.

While PAC for PFAS will likely be the first off the line for next year, we have the option to start advancing additional product lines such as granular activated carbon and other solutions as the 2029 to 2031 compliance deadline gets closer. Our focus remains on capturing near-term opportunities, maintaining optionality, and maximizing shareholder returns. Turning to the more immediate opportunity, we are continuing to make progress with PAC for PFAS, a key component of our PFAS remediation strategy. Testing is ongoing with major customers, and I would note that these test volumes have been sold, not given away. Initial customer testing results have been successful in demonstrating that these products remove lower-level PFAS contamination while simultaneously addressing taste and odor requirements. Importantly, I would note that PAC for PFAS is an outgrowth of our long history of researching, developing, and producing powdered activated carbons.

We have been adapting and customizing our PAC products going all the way back to 2010. PAC for PFAS is a product line extension similar to our previous developments, created by our technology team and driven by customer feedback. This is known and proven technology development, adding new functionalities to one of our existing product family. PAC for PFAS utilizes existing operational equipment and systems, entirely avoiding the specific challenges we encountered with granular activated carbon production. We now have the opportunity to pull the PAC for PFAS product forward commercially and are quickly moving to do so. All of this is being accomplished with little to no CapEx. On the point of customer feedback and benefits, there is also a clear economic case beyond just early compliance.

Placing PAC for PFAS at the front of a water system, including ahead of an existing GAC system, can reduce how often that granular activated carbon needs to be changed out. This is a potential material cost savings and operational improvement for the customer. Importantly, it also demonstrates that the potential for these PAC for PFAS products is significant, as they can work both as alternatives to granular activated carbon in certain situations or in combination with GAC and others. Some of our advanced PAC for PFAS water carbons have outperformed standard market products, and the test volumes we have sold to date of this premium product were priced materially above our traditional PAC average selling price. In light of this improved performance, we have pending patent protection for this line of products.

To give you a sense of the opportunity, we believe the addressable market for PAC for PFAS could be substantial, conservatively estimated around 160 million pounds per year by 2029. We will further refine these numbers as customer testing continues. It is early, so I want to be measured about volumes. What I can say is that we believe meaningful orders are feasible in 2027. I expect PAC for PFAS to be a contributor to our growth next year. As we build our sales record and better define the customer base over the next few months, we expect to share more detail on market size, volumes, and pricing as part of the formal 2027 guidance we plan to provide early in the new year.

We expect our foundational PAC business to continue growing through organic volume and pricing gains. We also expect PFAS remediation to be an additional driver of Arq's near-term growth. PAC for PFAS is our first step into that market. GAC remains a potential longer-term addition, but it is no longer essential to meaningful near-term growth in revenue, margin, and profitability. The strategic optimization review relating to the company's granular activated carbon facility is now effectively complete. We now know the preferred design as well as estimated cost and construction duration, which remain unchanged from the amounts disclosed during our earnings call in August. As I also said in August, PFAS remediation is our strategy, and GAC remains an option, and one which we expect to exercise, but in the future.

For now, we are focused on PAC for PFAS as one component to maximize the profitability of our core activated carbon business. PAC for PFAS is currently our PFAS remediation priority for one simple reason: we believe it can currently deliver similar or better cash margins than granular activated carbon with little or no CapEx. It doesn't need to be more complicated than that. Now let me turn to 2027. Budgeting is still underway, and we expect to provide formal 2027 guidance early in the new year. I don't want to get ahead of that, but we do want to share how we're thinking about the building blocks. First, PAC for PFAS. As I just described, this is an attractive near and long-term opportunity. I expect it to be a meaningful contributor to growth next year. Second, cost efficiencies. Shimon's arrival as Chief Financial Officer, coupled with our new Chief Accounting Officer, Peter Owino, is already improving our financial efficiency.

This will include freeing up excess cash and working capital, better matching of receivables and payables, shortening our monthly close, and renegotiating longstanding contracts that have not been aggressively renewed in years. I expect sustainable reductions in our SG&A expense and efficiency savings in 2027 from these ongoing actions. Third, credit refinancing. We are exploring a refinancing of our MidCap Financial credit facility. When we signed that facility, we were generating around $7 million of adjusted EBITDA annually. Today, the top end of our guidance is $20 million. A lower cost of capital may be possible, but more importantly, believe we can secure a much simpler facility that removes the reporting burden of the current structure, effectively lowering cost and providing increased liquidity against our assets.