ARC (ARQ) Q2 2025: GAC Line Commissioned, Unlocking 25M Pound Capacity for High-Margin Expansion

August 12, 2025 | By EarningsIQ Research

ARC’s Q2 marks an inflection point as its first granular activated carbon (GAC) line is commissioned, positioning the company for structural margin and growth gains. The foundational powdered activated carbon (PAC) business continues to generate cash and margin expansion, while GAC capacity ramps into a supply-constrained market. Management is targeting a second GAC line decision by year end, signaling a multi-year growth runway as regulatory and industrial tailwinds converge.

Summary

• GAC Capacity Online: First 25M pound GAC line successfully commissioned, with ramp-up underway.
• PAC Profitability Locked In: All PAC contracts now profitable, with further cost and margin optimization targeted.
• Phase Two Acceleration: Decision on second GAC line targeted before year end, leveraging lessons learned and market demand.

Performance Analysis

ARC delivered a pivotal quarter, with revenue growth driven by higher volumes and strong average selling price (ASP) gains in the PAC business, even as Q2 is typically a seasonally weaker period. Gross margin improved, reflecting both operational discipline and pricing power. The PAC business, which supplies powdered activated carbon for environmental and industrial use, is now fully cash generative and has completed a multi-year turnaround—every PAC contract is now net profitable, compared to nearly a quarter of volumes being loss-making at the end of 2022.

The newly commissioned GAC line at Red River introduces a high-growth, high-margin business lever. Initial sales have validated both product quality and market demand, and management expects to reach full 25M pound nameplate capacity within six months. The company incurred $1.9M in pre-production feedstock costs related to the GAC ramp, impacting net loss, but adjusted EBITDA more than tripled year-over-year, marking the fifth consecutive positive quarter.

• Margin Expansion: PAC gross margin exceeded 33%, with management projecting further improvement as commissioning costs subside.
• Cost Control: SG&A fell 16% YoY, reflecting payroll and administrative discipline.
• R&D Investment: R&D spend increased, primarily from GAC commissioning, signaling commitment to future growth levers.

Cash on hand and credit access provide sufficient runway for continued investment, with CapEx needs covered by internal cash flow and amended borrowing lines. Management emphasized no need for equity dilution to fund upcoming GAC expansion.

Executive Commentary

Strategic Positioning

1. GAC Market Entry and Ramp

The GAC business, granular activated carbon for water and industrial filtration, is ARC’s structural growth engine. Commissioning of the first 25M pound line at Red River is complete, with ramp-up to full capacity expected in six months. The company is already making initial sales, including to renewable natural gas (RNG) customers. Management is holding back some capacity to target higher-margin, higher-growth RNG applications, rather than saturating water treatment alone. With the market undersupplied and demand expected to multiply as PFAS (per- and polyfluoroalkyl substances) regulations phase in, pricing power is strong.

2. PAC Business Optimization and Diversification

PAC, powdered activated carbon, is now a stable cash generator, with all contracts profitable and further cost optimization underway. ARC has intentionally diversified away from mercury emissions applications, which now represent under 40% of PAC volumes, reducing regulatory and pricing risk. New end markets are being targeted to sustain ASP momentum and margin expansion.

3. Capital Allocation and Expansion Discipline

ARC is prioritizing debt and internal cash flow for expansion, with no plans to issue equity for the next GAC line. The second 25M pound GAC line at Red River is already permitted and will leverage lessons from phase one to reduce cost and lead time. Management expects to finalize investment decisions by year end, contingent on ramp execution, customer demand, and financing clarity.

4. Regulatory and Policy Tailwinds

The regulatory environment is supportive, with EPA PFAS rules likely to drive a step-change in GAC demand, even if implementation is delayed to 2031. ARC’s position as the only fully integrated domestic producer shields it from tariff risk and positions it as a critical supplier as U.S. water and industrial standards tighten.

5. Emerging Growth Levers

ARC is also exploring new markets, including asphalt emulsion, where its proprietary feedstock has shown unique performance advantages. Early-stage testing with a leading U.S. asphalt company could unlock another large revenue stream, with the addressable market potentially exceeding current feedstock capacity.

Key Considerations

Q2 2025 was a strategic inflection quarter, with ARC crossing from turnaround to expansion mode. The company’s twin-engine model—PAC for stable cash flow, GAC for high-margin growth—now has operational proof points and validated market demand. Investors should weigh:

Key Considerations:

• Commissioning Execution: GAC line ramp must stay on track to capture outsized pricing and demand.
• Market Supply Constraints: Limited new GAC capacity industry-wide supports sustained pricing power.
• Customer Mix Optimization: Balancing water and RNG end markets can maximize margin and reduce cyclical risk.
• Capital Efficiency: Internal funding and debt discipline reduce dilution risk and strengthen return profile.
• Regulatory Visibility: PFAS implementation timing is a variable, but underlying demand trend is up and to the right.

Risks

Commissioning and ramp-up execution risk remains, as full GAC capacity utilization is not yet proven. Regulatory delays (such as EPA’s possible PFAS deadline extension) could push back the demand spike, while customer adoption cycles in new markets like RNG add timeline uncertainty. Industry supply response is muted for now, but any acceleration by competitors could pressure future pricing. Management’s no-equity stance relies on continued cash flow and credit market stability.

Forward Outlook

For Q3 2025, ARC expects:

• Continued GAC ramp-up with incremental volume and margin gains as commissioning costs fade
• PAC margin and ASP expansion as customer and end-market mix shifts further from mercury applications

For full-year 2025, management reiterated CapEx guidance of $8-12M, with all funding sourced from cash, internal generation, and amended credit lines. The company is targeting a final investment decision on a second GAC line before year end, conditional on operational and commercial milestones.

• Phase one GAC ramp to nameplate capacity in six months
• Phase two investment decision by year end

Takeaways

ARC is at a structural inflection, with foundational PAC profitability now funding a high-growth, high-margin GAC expansion. The company’s multi-market strategy, capital discipline, and regulatory tailwinds position it for multi-year upside, but execution on GAC ramp and end-market diversification will determine the pace and scale of value creation.

• Structural Growth Lever: GAC market entry and ramp is the key upside driver, with capacity and margin expansion validated by early sales and tight market conditions.
• Operational Foundation: PAC business turnaround is complete, providing stable cash flow and margin buffer for growth investments.
• Execution Watchpoint: Investors should monitor commissioning progress, customer contract conversion, and the timing of phase two GAC investment as key catalysts for future re-rating.

Conclusion

ARC’s Q2 results confirm the company’s successful transition from turnaround to expansion, with GAC now a proven commercial lever and PAC delivering sustainable profitability. The next six months will be critical as GAC capacity ramps and phase two plans crystalize, setting the stage for a structurally higher growth and margin profile.

Industry Read-Through

ARC’s experience underscores the acute supply-demand imbalance in North American activated carbon markets, particularly as regulatory and industrial applications converge. PFAS-related demand and RNG growth are creating multi-year tailwinds for all GAC suppliers, with pricing power persisting due to multi-year capacity lags. Operators with domestic, integrated supply chains are best positioned to capture incremental value as environmental regulation tightens. Sector peers should note the rising importance of end-market diversification, capital discipline, and regulatory engagement in shaping long-term competitive positioning.

ARQ Materials Specialty Chemicals Environmental Activated Carbon Regulation Capacity Expansion RNG