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Arq, Inc. (ADES)·Q3 2023 Earnings Summary

Executive Summary

  • Q3 2023 showed sequential improvement with revenue of $29.83M (+45.9% vs Q2) and positive Consolidated Adjusted EBITDA of $0.89M, driven by portfolio optimization, higher average selling prices, and improved product mix; consumables gross margin expanded to 30.6% from 24.1% a year ago .
  • Management emphasized progress on transitioning to granular activated carbon (GAC): air permit approved post-quarter, phase one construction commenced at Red River; evaluating accelerating elements of the expansion plan given encouraging pre-qualification discussions .
  • Balance sheet and capex: Cash and restricted cash were $61.3M; total debt $21.2M. 2023 capex outlook trimmed to $35–$40M primarily due to timing (some spend pushed to early 2024) and lower equipment down payments .
  • Estimates context: S&P Global consensus mapping for ADES was unavailable; therefore, we cannot provide SPGI-based consensus comparisons for Q3. Note that results were framed by management as improved vs. internal expectations via margin/EBITDA traction, but formal Street comparisons are not available via SPGI for this period (see Estimates Context) .

What Went Well and What Went Wrong

What Went Well

  • Portfolio optimization: “Throughout the third quarter we intensely focused on measures designed to improve unit economics by optimizing our PAC portfolio… eliminating customer contracts at unfavorable margins, increasing our overall selling price and improving our product mix,” which supported positive EBITDA and 5% YoY consumables revenue growth .
  • Margin expansion: Consumables gross margin rose to 30.6% (from 24.1% YoY) on pricing/mix and improved input cost management; gross margin per pound improved despite lower volumes year-to-date .
  • Strategic repositioning to GAC: Air permit approval post-quarter and start of phase one construction at Red River; customer pre-qualification indicates “high levels of demand,” with a path to pre-production contracts at expected capacity .

What Went Wrong

  • Volume headwinds: Year-to-date revenue declined to $71.1M (vs $79.6M prior-year) due to lower consumables volumes tied to lower natural gas prices and power generation demand, partly offset by price/mix; YTD operating loss widened to $16.4M (vs $8.7M) .
  • Higher operating expense base: Q3 other opex increased to $11.6M (vs $9.5M) on higher payroll/benefits and G&A associated with the Arq acquisition; Q3 interest expense also rose to $0.8M (vs $0.1M) on the $10M term loan and assumed debt .
  • Continued net loss: Q3 net loss was $2.18M (vs $2.39M prior-year), with year-to-date net loss at $15.54M (vs $5.75M) reflecting lower operating earnings and integration/transaction-related costs, despite signs of quarterly improvement .

Financial Results

Consolidated P&L and Profitability (comparisons vs prior quarter and prior year)

MetricQ3 2022Q2 2023Q3 2023
Revenue ($M)$28.44 $20.40 $29.83
Consumables Gross Margin %24.1% —30.6%
Operating Income (Loss) ($M)$(2.62) $(6.10) $(2.53)
Net Income (Loss) ($M)$(2.39) $(5.90) $(2.18)
Diluted EPS ($)$(0.13) —$(0.07)
Consolidated Adjusted EBITDA ($M)$(0.55) $(3.00) $0.89

Notes:

  • Q2 2023 metrics are from the company’s Q2 press release; EPS not disclosed in that release excerpt .
  • Q3 2023 EPS and Adjusted EBITDA are from the company’s Q3 results 8‑K press release .

Segment/Category Revenue

SegmentQ3 2022Q3 2023
Consumables Revenue ($M)$28.44 $29.83

Balance Sheet & Cash Flow Highlights

MetricFY 2022Q3 2023
Cash & Restricted Cash ($M)$76.43 $61.32
Total Debt incl. financing leases ($M)$4.55 $21.17
YTD Capital Expenditures ($M)—$17.01

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Capital Expenditures ($M)FY 2023Prior plan (implied higher timing of spend in 2023)$35–$40; some costs shift into early 2024; lower equipment down payments Maintained range with timing shift/lower upfront spend

No explicit quantitative guidance for revenue, margins, OpEx, OI&E, tax, or dividends was provided in the Q3 materials.

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1–Q2 2023)Current Period (Q3 2023)Trend
Portfolio optimization (pricing/mix; eliminating low-margin contracts)Management identified cost/margin focus and integration of Arq; working capital/cost controls to stabilize margins CEO highlighted elimination of unfavorable contracts, higher selling prices, improved mix; EBITDA positive in Q3 Improving execution
Red River GAC expansionInitiated growth capex; submitted last permit; long-lead purchases begun Air permit approved post-quarter; phase one construction started; evaluating accelerating aspects given demand signals Advancing; accelerating
Demand signals (pre-qual and pre-production contracts)Building pipeline and customer engagement post-Arq integration “High levels of demand” in pre-qualification; path to fill expected capacity via pre-production contracts Strengthening
Power generation end-market and natural gas price effectsLower natural gas prices pressured volumes and revenue in 1H23 YTD decline in revenue tied to lower volumes from power generation customers reiterated Persistent headwind YTD
SeasonalityDiscussed as a factor: Q3 and Q1 tend to be strongest due to weather Reinforced in Q3 call commentary (Q3 strength consistent with pattern) Stable pattern

Management Commentary

  • “Throughout the third quarter we intensely focused on measures designed to improve unit economics by optimizing our PAC portfolio… These initiatives improved our financial performance and led to positive EBITDA in the third quarter while also delivering 5% revenue growth for our consumables products.” — Robert Rasmus, CEO .
  • “We are pleased with the pace and progression of the first stage of our strategic plan to repurpose our assets to produce granular activated carbon products… we see a path toward meeting our expected capacity with pre-production contracts.” — Robert Rasmus, CEO .

Additional relevant press releases during Q3 timeframe:

  • Red River expansion plan update, including working with State of Louisiana on a five-phase plan (Oct 23, 2023) .
  • Heads of Terms with LSR Materials for Unicarb activated carbons marketing partnership (Nov 3, 2023) .

Q&A Highlights

  • Seasonality and margin cadence: Management reiterated that Q3 and Q1 tend to be strongest quarters due to weather, providing context for profitability cadence as portfolio optimization takes hold .
  • Capex and project timing: Finance leadership reiterated FY23 capex of $35–$40M with some spend moving into early 2024, consistent with Q3 press release .
  • Strategic focus: Priorities post-integration include expanding PAC into non-traditional markets, emphasizing customer profitability, and executing GAC ramp at Red River (pre-qualification and pre-production contracts) .

Estimates Context

  • S&P Global consensus mapping for ADES was unavailable at the time of analysis (tool returned “Missing CIQ mapping”), so we cannot provide SPGI-based consensus comparisons for Q3 2023. Accordingly, any Street comparison is omitted to avoid mixing sources. The company did not provide formal quantitative guidance for revenue/margins in Q3 materials .

Key Takeaways for Investors

  • Execution turn underway: Clear sequential step-up from Q2 to Q3 in revenue and EBITDA as pricing/mix actions and contract pruning flow through; watch for sustainability of 30%+ consumables gross margin as pricing resets annualize .
  • Transition catalyst: Air permit approval and phase one construction at Red River de-risk early stages of the GAC strategy; encouraging customer pre-qualification supports potential pre-production contracting and faster ramp .
  • Capex timing mitigates cash draw: FY23 capex kept at $35–$40M with some timing pushed into early 2024; liquidity ($61.3M cash/restricted) and manageable debt ($21.2M) support execution, but monitor spend cadence and working capital .
  • End-market sensitivity persists: Lower natural gas prices weighed on power gen volumes YTD; diversification into water/remediation and GAC can reduce power gen cyclicality over time .
  • Modeling implications: Without SPGI estimates, anchor to demonstrated Q3 run-rate while incorporating seasonality (Q1/Q3 strongest) and expected incremental margin from ongoing portfolio optimization .
  • Near-term stock catalysts: Additional GAC milestones (customer contracts, construction progress), evidence of sustained margin expansion, and any commercial wins from the LSR Materials arrangement could be stock-moving .