Arq, Inc. (ARQ) Q3 2026 Earnings Call Transcript

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, AHRQ's Chief Executive Officer, and Siobhan Steinmetz, AHRQ'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 AHRQ's Investor Relations team at investors at AHRQ.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 10Q for the quarter ended September 30th, 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 path for PFAS products. Customer testing is advancing. And 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 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 to $20 million from $17 to $20 million previously. At the same time, we are reiterating our revenue guidance of $120 to $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 PAT 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, and we also expect PFAS remediation to be an additional driver of ARC'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 turbine 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 an 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 cap X. 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. Jamon's arrival as Chief Financial Officer, coupled with our new Chief Accounting Officer, Peter Wallino, 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 mid-cap 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 costs and providing increased liquidity against our assets. Our target is to complete the refinancing within six months. Fourth, operational efficiencies. Our focus is on improving efficiency and margins across our existing operations, thereby increasing profitability with higher throughput as a secondary opportunity. And fifth, Corbin monetization. Corbin is a unique asset. In terms of sale, the universe of potential buyers is specialized. Asphalt remains the leading opportunity, and testing continues to progress well, but because a commercial solution will take time, we are maintaining optionality across all the opportunities previously discussed. These opportunities include rare earths, synthetic graphite, silicone wafers, and potentially as a feedstock source for energy storage applications. I won't speculate on what Corbin is worth or how quickly we can monetize it, but it is probably worth clarifying what it costs us today so you can better understand the thought process. The site carries around $8 million of debt through our loan with Community Trust Bank, which requires approximately $1.9 million of cash held in escrow. It also carries about $1.2 million a year in operating costs and around $1.4 million a year in SG&A. Relative to our size, monetizing Corbin would meaningfully benefit both our balance sheet and our operating results. We are working to expedite the process, and I hope it might happen within 12 months, but it would be premature to build it into our 2027 expectations. Taken together, these are largely independent levers that we believe can collectively deliver material value, and we will provide more precise guidance once we close out the year. Meanwhile, I remain comfortable with my previous statement of exiting 2027 at an adjusted EBITDA run rate of around $30 million without granular activated carbon or any of its associated CapEx, but crucially, while still retaining the granular activated carbon optionality with a substantially completed plan that offers a rapid route to production once we determine an acceptable funding solution. Finally, a word on how the markets see art. We continue to believe that our story is misunderstood and undervalued and that there are four elements that will rectify this. First, we are now delivering on guidance and beating expectations. Second, we have multiple avenues to increase profitability in 2027 and beyond. Third, PFAS remediation is a major growth opportunity via both PAC for PFAS and GAC optionality. Fourth, our balance sheet is robust, strengthened through increased profitability and a growing cash position. The potential refinancing process, which we are now exploring, could strengthen it further. Beyond that, the board and management remain significantly aligned with all shareholders, and our existing NOLs put us in a strong position to convert operating profit into net income. Importantly, I believe we can deliver material near-term growth without significant additional capex. We are well positioned to grow cash from here and potentially, in combination with a more straightforward credit facility, further strengthen our balance sheet. With that, I'll turn it over to Shimon for the financial review.

Thank you, Bob, and thank you, everyone, for joining today. As reported overnight, ARC delivered a very strong third quarter, with revenues of $38.2 million compared to $35.1 million in the prior year period. This was driven primarily by higher seasonal pack volume throughout the quarter. Growth margin was approximately 39.7% compared to 28.8% in the third quarter of 2025. This improvement reflects management's focus on our foundational pack business. Adjusted EBITDA was approximately $8.8 million compared with $5.2 million in the prior year period. This was primarily driven by continued strength and improving profitability in our core PAC business. Net income was $2.5 million compared with net loss of approximately $900,000 in the third quarter of 2025. SG&A expenses totaled $7.2 million, compared with $4.6 million in the prior year period. The increase was primarily driven by increased incentive compensation, as well as legal and other professional fees. R&D costs for the third quarter were approximately $800,000, compared to $2.6 million in the prior year period. The decrease reflects GAC's ramp-up expense in the prior year period that did not and will not reoccur in 2026. Overall, our third quarter was very strong and ahead of expectations. It points to a strong second half and gives us confidence that we can deliver full-year results at the top end of our original range. We remain focused on further improving the profitability and cash generation of our packed business. Turning to the balance sheet, we ended the third quarter with a total cash of $19.1 million, of which approximately $7.8 million was unrestricted. Our unrestricted position increased by nearly $7 million over the prior quarter. This was a result of strong quarterly revenue and disciplined cash management. Total debt at the end of the quarter was $28.2 million. A $2.5 million reduction from prior quarter and includes $19.2 million drawn under the mid-cap facility. Today, we are reiterating our 2026 CapEx guidance of $8 to $10 million. As Bob noted, we are tightening our full-year adjusted EBITDA guidance to $19 to $20 million, reflecting the high end of our previous range. We are also reiterating our full-year revenue Guidance of $120 to $125 million. Finally, an update on the cost and efficiency program we outlined in August. The work is ongoing, but we have already identified over 15 opportunities to improve efficiency, reduce costs, and unlock liquidity across eight departments. As we go through the 2027 budget process, we are interrogating each opportunity to validate or disprove its feasibility. As you would expect, we will remove some of the identified opportunities while also adding other levels of value creation during budget planning. With that, I'll turn it back to you, Bob.

Thanks, Shimon. As you can see, the roadmap we laid out in August is on track and in some areas ahead of our expectations. New products are progressing to market, cost reduction initiatives are advancing, and the balance sheet simplification is underway. We expect to provide detailed 2027 guidance early in the new year. Our focus is on steady, consistent execution. Our strong year-to-date results show that approach is working. Before we turn to questions, let me leave you with two key takeaways. First, our foundational PAC business is thriving. Volumes, revenue, and adjusted EBITDA are up. Margins are improving, and we still see significant room to grow into even higher value, higher margin products. Second, the PFAS remediation opportunity is as strong as it has ever been. Prices for remediation solutions are rising ahead of the April 2027 monitoring and reporting deadline. PAC for PFAS gives customers an immediate solution with minimal capex and the potential for operating cost savings. We expect this market to deliver material value to ARC in 2027, while GAC remains a potential part of our PFAS remediation portfolio further into the future. With that, I'll hand it back to our moderator to open for questions.

Thank you. We will now begin the question and answer session. Should you have a question, please press star followed by the one on your telephone keypad. You will hear a three-tone prompt acknowledging your request, and should you wish to cancel your request, please press star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Thank you. And your first question comes from the line of Jerry Sweeney from Roth Capital. Please go ahead.

Good morning. Thanks for taking my call. Happy to do so, Jerry. How are you doing, Raz? But just on the PAC for PFAS strategy, just wanted to understand maybe next steps in terms of testing, certification, and then sales. I'm not sure if you've already sort of gone through a couple of those steps, but just wanted to understand where we are today versus getting products into.

So on the customer trial and contracting, you know, between existing and scheduled testing, we have more than a dozen opportunities that we have identified. We expect that number to continue to grow. Testing typically takes one to three months to complete, and contract discussions are occurring simultaneously with the testing. We would expect the PAC for PFAS revenue to contribute in 2027 and to be back and loaded.

Got it. Obviously, you've been involved in the water industry in different capacities with PAC, and you do have relationships with water systems. How does this sort of help jumpstart maybe the PAC for PFAS strategy? Is that a fair assumption?

It is a fair assumption, Jerry. We have an outstanding relationship with a large number of municipal water authorities and private utilities, and you combine that with our outstanding technical and R&D capabilities, and that certainly gives us a leg up in terms of getting into the companies and discussing PAC for PFAS and getting momentum on that product.

Okay, one more question, then I'll turn back in line. I think the regulations are four parts per trillion. And obviously, I think we've discussed that PAC has remedial capacity up to a certain level. Actually, it can go to probably any level, just it becomes an economic question. But I was just curious if you've gotten any data back on sort of what the sweet spot for MCLs, for PAC, for PFAS remediation, where they may fall into place.

Sure. Our testing to date, Jerry, confirms that PAC for PFAS removes lower-level PFAS contamination and can also address taste and odor at the same time. That's an important component. Product can serve as an alternative to granular activated carbon in some situations, and in combination with GAC and others. And using PAC for PFAS in lieu of GAC really offers the utilities an immediate path to compliance, as well as saving the customer time and money in CapEx. Using PAC for PFAS in combination with GAC has the potential to reduce how often the GAC needs to be changed out as well, and we're still at work determining the technical sweet spot for the PAC for PFAS product, but it's up to a reasonably high level. Got it. I appreciate it. Thanks, Rav. Thanks, Jerry.

Thank you. And your next question comes from the line of Aaron Sparchella from Pig Hallam. Please go ahead.

Yeah, good morning, Bob and Jim. Thanks for taking the questions. Maybe first for us, can you just talk a little bit about the strength in the quarter and maybe some of the end market drivers of that? And then just on the guide and kind of implications for the fourth quarter, can you talk about maybe the mix of kind of conservatism there or if there was some pull forward strength in the third quarter? Just help unpack that a little bit for us.

Sure. So the revenue growth in the quarter was driven predominantly by volume. Excuse me. We expect our core business to continue to grow through volume and pricing gains, including as contracts renew. We did sell some small pack for PFAS volumes. Those that we've sold to date were priced materially above our traditional pack average selling price. So as that product grows, it should lift the overall average. As far as 2027 guidance, we'll give that early in the new year. In terms of guidance for the fourth quarter, as we say, we've upgraded our EBITDA to the higher end of the range. We, in terms of revenue, we've kept that flat, and as part of the optimization review, we assessed how we could optimize the returns from the core PAC business, and raising adjusted EBITDA, but not revenue, is really a direct result of us being able to capture some of those initial efficiencies identified in the review. It's also evidence of the underlying strength of the business. And, you know, in terms of why we haven't adjusted that, you know, EBITDA, you know, again, as I mentioned in my prepared remarks, our goal is to restore investor credibility. We've had a strong year to date, but our focus has been and remains meet or beat, and we want to maintain those trends.

Understood. Thanks. And then maybe second, just on gross margin, obviously sounds like you're still expecting good volume growth, some of these cost reductions and efficiency initiatives, and then back for PFAS can be additional. But it just seems like I know it was a seasonally really strong quarter for you in the third quarter, but still optimistic of margin expansion as we move forward.

Yeah, absolutely, and thanks for the question. Gross margin was 39.7, up 1,100 basis points from 28.8% a year ago, right? Revenue rose 9%, while cost really fell about 8%. It's important to note that, and I should say that that was largely driven by higher volume, but it is important to note that third quarter is typically our strongest quarter. We intend to continue to strengthen our margin through a combination of our cost mitigation strategies that Bob alluded to, as well as the growth in our core PAC business and the launch of our PAC for PFAS product.

Understood. And then maybe just one last one on, you know, you had some commentary in the release on the replacement versus book value of Red River and kind of the substantial undervaluation there. Can you just kind of unpack that a little bit to talk a little more about how you see that disconnect? And that's it for me.

I think it's a dual disconnect. One is the value in terms of replacement value of our assets are a significant multiple of the book value or carrying value on our balance sheet right now. I think that's one. The second is if you look at our performance and where we've been trading as a multiple of enterprise value, I think we're severely undervalued.

All right. Thanks. I'll turn it over. Thanks.

Thank you. And your next question comes from the line of Jason Belcheno from Canico Genuity. Please go ahead.

Morning, everyone. Thanks for taking my questions. I guess to start, I'm just curious, the comments you made around the strategic optimization review being completed, and obviously PAC for PFAS being the immediate priority for PFAS remediation, wondering how we should think about some of the gating factors to eventually proceeding there, given it takes some time to ramp PAC for PFAS, you know, you're not going to really see that operating momentum start to build through until the sort of back half of 2027. So just thinking if it's possible, we could have to wait until after you see some of that evidence about how that's working in the marketplace before making a formal decision. If Corbyn, a resolution there plays into that timeline as well, any commentary there would be very helpful. Thank you.

Sure. We're very confident in the PAC for PFAS product and its market attractiveness. That's based on conversations with customers and initial testing results. As it relates to granular activated carbon, the review is effectively complete, as we mentioned, but there's really no open date to commit to in terms of timing. It's not dependent upon PAC for PFAS adoption. As we mentioned, our business is PFAS remediation, and PAC for PFAS as well as granular activated carbon are two components of that product. What remains as it relates for granular activated carbon is a decision on timing and funding, and the decision depends on the return profile in the funding solution we find acceptable, not really on any calendar or dependent upon PAC for PFAS. As I say, you know, right now we're focused on PAC for PFAS as a component to maximize the profitability of our core business, and PAC for PFAS is the immediate priority in that respect, and one for the simple reasons that we could believe it can deliver similar or better cash margins than granular activated carbon with little to no CapEx on our part.

Okay, that's very helpful. Thank you. And then just one additional follow-up. In the deck, you talk about the 2027 growth drivers. You also mentioned those in your prepared remarks. And as it relates to the volume, I believe you mentioned 15% to 20% upside. The guide for this year was about in the mid-120s range for pounds. And so I'm just curious, you're bumping up against the capacity there, and then you talk about a potential market size in a few years for PAC for PFAS that even exceeds your current capacity. Wondering what some of the puts and takes are there. It implies a meaningful upside given the higher prices from a revenue and margin standpoint for the core PAC business over time, over the next few years. Just wondering how you're thinking about that and some of those moving parts. Thanks.

Sure. So, you know, as we stated, we expect our profitability improvement in 2027 to come from a variety of different factors, lower operating costs, higher pricing, cost efficiencies, increased revenue and volumes. And as such, we would expect to see the effects of those initiatives to occur gradually throughout the year. And as I mentioned before, the PAC for PFAS results to be more back-end weighted. As far as pricing and volume and capacity, if we were to be bumping up against our capacity constraints, that would be a very pleasant problem to have. We know that the PAC for PFAS is going to be priced significantly higher than our current average selling price. And so if we did start running up against capacity constraints, we would do what we would do is carve out or eliminate the lower end and lower margin segment of the volumes.

Thank you very much, and congrats on the strong results. Great.

Thanks.

Thank you. Once again, should you have a question, please press star 4801 on your telephone keypad. Thank you, and your next question comes on the line of Peter Gastrick from Water Tower Research. Please go ahead.

Thank you. Yes, good morning, and congratulations on the results and execution, and, you know, thanks for taking my questions. Just the first one about the PAC for PFAS addressable market. I appreciate the, you know, the data on the size of market by 2029. Are you able to, you know, talk about how that 160 million pounds was estimated, and also any comments on what share, you know, ARC could reasonably be able to capture, you know, by that year? Thank you.

The addressable target market has grown, and we expect it to continue to grow. The growth has really come from two areas, conversations with customers and prospective customers, as well as additional in-depth market research. As the compliance deadline nears, both in 29 to 31, as well as the monitoring and reporting deadlines in April of 27, we anticipate that the total addressable market will continue to get even larger. Excuse me, sorry. We would expect even modest amounts in the PFAS remediation market overall are going to mean very attractive returns to ARC.

Okay, thank you. My next question, you recently appointed a new senior vice president of operations. Could you talk about his hire, you know, what he brings to the table and what his first priorities look like?

Sure. You know, Thad Ratliff is the person, and he replaced Eric Robinson. Eric joined us about a year ago to stabilize operations and really to build the next layer of operating leadership, and he has achieved both well ahead of our original estimate and his original estimate and timeline of two to three years. We identified FAD Ratliff fairly early on as his successor. FAD has extensive experience in activated carbon, carbon black, and specialty chemical operations. And as we have focused near term on PAC for PFAS and our existing operations ahead of any granular activated carbon construction, the scope of the role, the operational role change, and the timing of the The transition was right. Eric remains a consultant for ARC and will advise us if we proceed with granular activated carbon. We didn't announce the appointment separately because it occurred during the quarter and the role is not part of the C-suite.

Okay, thank you. And just one more question. With your customers, you're moving from monitoring to compliance for utilities customers. How will that start to kind of change our relationship with them? For example, should we expect longer term contracts? Are we going to have more customized products or added services or other things that your team has been evaluating?

So, it's going to definitely be a relationship enhancement for us because we're solving a significant problem for the utilities as it relates to PFAS contamination, and we would expect it to lead to additional contract volumes, including, you know, single-year and multi-year contract volumes as well.

Okay, great. Thanks, Bob, and again, congratulations.

Thank you.

Thank you. If there are no further questions at this time, I will now hand a call back to Mr. Bob Rasmus for closing remarks.

Thanks, Operator. We're very pleased with the progress we have made executing in our strategic optimization review. It's not just the strong quarter and year-to-date results. How we are positioned to grow in 2027. We are also proud of our ability to achieve this growth with the level of capital efficiency we have now. I thank you for your interest in ARC and your ongoing interest, and we look forward to providing additional updates in the future.

And this concludes today's call. Thank you for participating. You may all disconnect.