Arq - Q4 2025

Transcript

Operator (participant)

Greetings, and welcome to the Arq Q4 2025 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.

Anthony Nathan (Head of Investor Relations)

Thank you, operator. Good morning, everyone, and thank you for joining us today for our Q4 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 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 [email protected]. 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-K for the period ended 31 December 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.

Robert Rasmus (President, CEO and Director)

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. 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. 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.

I'll turn to PAC, which continues to perform extremely well and provides a growing profitable foundation for the company. 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 timeline 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 ft of duct runs that allow gases 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 wet cake feedstock's 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 inefficiency. 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 ft. When gases cooled in this ductwork, 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 the proper analysis to identify the tire composition and excess amount of off-gas. This excess volume of resultant off-gas could not be handled by the existing plant afterburner 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 drier 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. 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 purchased coal conversion, we took what I'd 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 standalone 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. 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 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 ten 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 modifications? 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 remains very strong. Pricing continues at attractive levels. Supply constraints persist. 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 non-cash 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 wet cake, particularly asphalt emulsion blending, where we've progressed to the next testing phase with encouraging results. 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 pitfalls. 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 eight-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 PAC 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. 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. That $13 million figure significantly understates the true performance of our PAC operations, and I want to be explicit about this. GAC startup 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 startup associated with plugging issues and constant maintenance shutdowns. We produced non-sellable GAC product that consumed furnace hours without generating revenue, 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 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 three-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.

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 to 125 million and adjusted EBITDA of $17 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 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 PAC products. We sell engineered products into specialty applications that command premium pricing. The volume growth demonstrates both market demand and our operational capabilities. 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 one 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.

Stacia Hansen (Chief Accounting Officer)

Thanks, Bob. We delivered strong financial results during the Q4 and full year of 2025, albeit offset by the frustrating impact of GAC's startup 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 pack 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 Q4. 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 Q4 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 Q4 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, 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 foundation on which we can continue to build.

Turning to the balance sheet, we ended the year with 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 31 December 2025 totaled $28.5 million compared to $24.8 million in 2024, with the increase driven by higher utilization of our MidCap 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 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% to 15% of revenue as they have in previous years. Alongside this revenue guidance, we are also providing adjusted EBITDA guidance of between $17 to 20 million, which would represent a 30% improvement on 2025 at the bottom end of the range.

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 to 10 million. This is inclusive of around $3 million relating to our routine biannual two-week maintenance, which is scheduled at our Red River plant. With that, I will turn things back to Bob.

Robert Rasmus (President, CEO and Director)

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 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. 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 PAC 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 (participant)

Thank you. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Gerard Sweeney with Roth Capital Partners. Please proceed with your question.

Gerard Sweeney (Managing Director and Senior Research Analyst)

Good morning, Ras, Stacia, and Anthony. Thanks for taking the call.

Robert Rasmus (President, CEO and Director)

Good morning, Gerry.

Gerard Sweeney (Managing Director and Senior Research Analyst)

Yep. Thanks for all the detail. I appreciate it. I'm just gonna 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, you know, 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.

You know, I think even some of the larger competitors have had issues expanding some of their facilities, and they've taken a year, if not 18 months longer than anticipated. Just curious if there's anything that would stop you from pursuing GAC.

Robert Rasmus (President, CEO and Director)

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 undersupplied 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. 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've used this pause to further refine what modifications are necessary to be able to attack the market.

Gerard Sweeney (Managing Director and Senior Research Analyst)

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. I think in your press release, you did highlight or mention that, you know, there are some regulatory undercurrents that I think have been ebbing and flowing, we'll say. Any commentary on that in terms of any potential changes on that front that you're seeing?

Robert Rasmus (President, CEO and Director)

Two 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. 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.

Gerard Sweeney (Managing Director and Senior Research Analyst)

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

Robert Rasmus (President, CEO and Director)

I think your math is good in terms of, you know, 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 gonna be about $3 million that's included in that CapEx guidance as it relates to that. Next year, we would expect that maintenance CapEx for the PAC business to be even less and to generate even more free cash flow.

Gerard Sweeney (Managing Director and Senior Research Analyst)

All right. I lied. 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, 125. If hot summer, lots of power generation, I mean, AI is driving that to some degree, but there's potential upside. Do you have capacity to supply the market if there's more upside demand? Is that correct?

Robert Rasmus (President, CEO and Director)

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 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. Again, PGI, while it's an important component of the PAC business, is just a component of the PAC business.

Gerard Sweeney (Managing Director and Senior Research Analyst)

Got it. That's fair too. All right. Thanks.

Robert Rasmus (President, CEO and Director)

Thank you, Gerry.

Operator (participant)

Thank you. Our next question comes from the line of Aaron Spychalla with Craig-Hallum Capital Group. Please proceed with your question.

Aaron Spychalla (Senior Research Analyst)

Yeah. Hi, Bob. Thanks for-

Robert Rasmus (President, CEO and Director)

Hey, Aaron.

Aaron Spychalla (Senior Research Analyst)

Taking the questions. You know, maybe first for me, you know, appreciate all the color, just kinda wanna square it with what we heard in April back in November just wanna confirm, you know, on the thermal oxidizer side of things, it sounded like you were looking to purchase a new one of those and thought that could take care of some of the issues now-

-you know, it sounds like it's more on the off-gas side of things and making sure you have the proper, you know, kinda capacity and equipment there. You know, at this point, just wanna confirm, you know, you think that those issues are solvable it's just still trying to take a step back and, you know, determine the right path forward from a cost and capital standpoint.

Robert Rasmus (President, CEO and Director)

Yeah, absolutely, Aaron. I think what you're referring to is in our remarks last November. You know, I mentioned that we expected to spend about $8 to 10 million for a thermal oxidizer, and that was the case. What we did is we decided to take a proactive approach to ensure that if we spent that $8 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. 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.

The reason that was determined, again, was we decided to do that proactive approach, but we had conducted kiln off-gas testing by a third-party lab right ahead of Christmas. The results of that found that the kiln off-gas contained heavier tar fractions than anticipated from the original flawed engineering design. In essence, this heavier tar would require additional heat and air inputs to the thermal oxidizer at the higher $25 million pound throughput rates. 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.

You know, 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 a water quencher, heat exchanger, wet scrubber, ID fan, a new stack. 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.

Aaron Spychalla (Senior Research Analyst)

No, I appreciate that thanks, Bob. Maybe second, you know, on the third party feedstock switching there, you kinda in your commentary talked about often exceeding industry benchmarks. Just wanna kinda confirm, you know, you feel comfortable with, you know, the switch in the feedstock and kind of the resulting product. It's just about, you know, again, solving the equipment and kinda the production line dynamics.

Robert Rasmus (President, CEO and Director)

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 seven, and we further narrowed it down to five that were essentially interchangeable as it relates to that. You know, we've done testing of the material. It's a proven process in the industry, and we know this is going to work.

Aaron Spychalla (Senior Research Analyst)

All right. Thank you for taking the questions. I will turn it over.

Robert Rasmus (President, CEO and Director)

Thanks, Aaron.

Operator (participant)

Thank you. Our next question comes from the line of Jason Tilchen with Canaccord Genuity. Please proceed with your question.

Jason Tilchen (Director and Senior Equity Research Analyst)

Good morning, and thanks for taking my question. The guidance implies the 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?

Robert Rasmus (President, CEO and Director)

You know, we've seen excellent pricing growth on our ASP over the last nine, 10, 12 quarters. As we have said in previous calls 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 our ASP, our more commodity-like sales.

Jason Tilchen (Director and Senior Equity Research Analyst)

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

Robert Rasmus (President, CEO and Director)

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 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, 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.

Jason Tilchen (Director and Senior Equity Research Analyst)

Very helpful. Thank you very much.

Robert Rasmus (President, CEO and Director)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Peter Gastreich with Water Tower Research. Please proceed with your question.

Peter Gastreich (Managing Director, Senior Energy Transition and Sustainability Analyst)

Thank you. Good morning, everybody, and thanks for taking my questions. I do appreciate the-

Robert Rasmus (President, CEO and Director)

Sure, Peter.

Peter Gastreich (Managing Director, Senior Energy Transition and Sustainability Analyst)

Detail and clear action plan. Hello. Sorry, can you hear me?

Robert Rasmus (President, CEO and Director)

Yep, absolutely.

Peter Gastreich (Managing Director, Senior Energy Transition and Sustainability Analyst)

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

Robert Rasmus (President, CEO and Director)

The guidance we've 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.

Peter Gastreich (Managing Director, Senior Energy Transition and Sustainability Analyst)

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

Robert Rasmus (President, CEO and Director)

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 multi-year, some are one year, some are two years. Hence the visibility profile. We would expect that when we get to this same time next year, that we would have similar numbers going out the next three years.

Peter Gastreich (Managing Director, Senior Energy Transition and Sustainability Analyst)

Okay, thank you. 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, you know, startup costs, you know, or lost revenues in terms of damages, or are we still in kind of a wait-and-see mode right now?

Robert Rasmus (President, CEO and Director)

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

Peter Gastreich (Managing Director, Senior Energy Transition and Sustainability Analyst)

Okay, great. Thank you very much. I'll get back in the queue.

Operator (participant)

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

Robert Rasmus (President, CEO and Director)

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 one, 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.

Operator (participant)

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