Ecovyst Inc.

Good morning. My name is Brittany and I'll be your conference operator today. Welcome to the ECOVIST fourth quarter and full year 2021 earnings call and webcast. Please note today's call is being recorded and should run approximately one hour. Currently, all participants have been placed in a listen-only mode to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please press the star and 1 on your telephone keypad. If you want to remove yourself from the queue, please press the pound key. When poising your question, we ask that you please pick up your handset to allow optimal sound quality. Lastly, if you should need operator assistance, please press star 0. I would now like to turn the call over to Chris Evans, Director of Investor Relations and Financial Communications. Please go ahead.

Thank you. Welcome, everyone. And thank you for joining us for our fourth quarter 2021 earnings call. We will start today with formal remarks from Balgasim Chiriag, Chairman, President, and Chief Executive Officer, and Mike Thehan, Vice President and Chief Financial Officer. Then we will follow with a Q&A session. Please note that some of the information shared today is forward-looking, including information about the company's financial and operating performance, strategies, our anticipated end-use demand trends, our 2022 financial outlook, and our 2025 goals. This information is subject to risks and uncertainties that could cause the actual results and the implementation of the company's plans to vary materially. Any forward-looking information shared today speaks only as of this date. These risks are discussed in the company's filings with the SEC. Reconciliations of non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures can be found in our earnings release and presentation materials posted on the Investors section of our website at www.ecovist.com. And with that, I'm pleased to turn the call over to Belgassim.

Thank you, Chris, and thank you to everyone joining us today. I'm very proud of what we accomplished in 2021. It was a highly successful and transformational year as the Ecovist team achieved remarkable financial performance and delivered on our strategic vision to create a simpler and stronger portfolio. Most importantly, we successfully completed our transformational journey with the launch of Ecovist, a pure play catalyst and services company. We are now aligned around two strong, complementary, and growing businesses, each with high margins, high growth rates, and robust gas generation. We are uniquely positioned to support the green energy transition. Today, our products help our customers to achieve their sustainability goals. Our innovation pipeline is increasingly focused on sustainable solutions in areas such as biomass, renewable fuels, and plastic circularity. We are very confident in our strategy and the industry trends. and we remain on pace to achieve the 2025 financial goals we laid out at our investor day last April. Meanwhile, we are committed to and acting on our own key ESG goals. Our sustainability ambitions are center to our mission and complimentary to our financial growth. In 2021, we implemented a comprehensive set of sustainability goals for 2025 and 2030. which define our path towards decarbonization and waste reduction. 2021 was a challenging operational year from the pandemic and supply chain complications. Throughout it all, we maintained a high level of customer support and operational performance. Our successful execution was critical to delivering a solid year and fourth quarter performance. We will go through these financials in more detail later. But I'll comment on a few points worth noting. 2021 earnings exceeded our upgraded financial guidance as we delivered a solid fourth quarter. Volumes rebounded across the entire portfolio, driving sales and boosting profitability. We are succeeding in offsetting inflationary factors. This has been achieved in part from contractual pass-throughs of sulfur, energy, and labor in our eco-services business, but also from cost management and targeted pricing efforts. You can see the net benefit of our actions in our fourth quarter and full-year adjusted EBITDA margins, which are up considerably after adjusting out of the impact of pass-throughs. And we have delivered strong free cash flow. In total, 2021 was a great year for EcoVest, but our work is not done. We see growth momentum continuing into 2022, and we expect another solid year of growth and cash generation. Moving to slide four. I would like to highlight several key metrics that make me proud of this team and excited about our long-term potential. I view these as undeniable proof points of the quality of our business and the success of our strategic execution. We are number one or number two industry leader by supply share for those products categories that make up more than 90% of our sales. This speaks to the value we deliver for our customers and our differentiation from competitors. We expect to maintain our product leadership position through our innovation, advantage regional exposure, and deep customer connectivity. We create tailored solutions for our customers, which provide unmatched value and makes for enduring relationships. These factors enable us to grow at above industry rates. This is demonstrated in our 2021 results, with 19% sales growth and 18% adjusted EBITDA growth. We're now exceeding pre-pandemic sales and profitability in the majority of our business lines, despite a restrained recovery in select areas like emission control and hydrocracking catalysts. In these areas, we expect to see tailwinds in 2022 and 2023 as ordering patterns and supply chains normalize. EcoVest is a highly profitable business. We reported 31% adjusted EBITDA margins in 2021. This was an improvement of more than 200 basis points year over year when excluding the sulfur cost pass-through impact. This was a notable achievement given the degree of cost inflation in the economy and is indicative of the stability and strength of our earnings profile. But none of these matter without an unwavering commitment to safety. Our safety metrics are some of the most important KPIs that the management team monitors very closely. We have made great strides over the past several years and reached a top-tier performance level.

Let's move to slide five.

Our financial and operational performance in 2021 clearly demonstrates the quality of our simpler and stronger portfolio. Having successfully completed our strategic transformation, we are now pivoting to growing and greening. Growing and greening means that we see our business as primed to grow with multiple secular greening trends, including the shift to clean and efficient fuels, electrification, and sustainable industrial solutions. Turning to slide six. Let me clarify here that growth is not new for these businesses, but we expect it to be even stronger, more predictable, and more readily apparent in our slimmed-down portfolio. Take silica catalysts, for example, our industry-leading catalyst and support business. Sales have grown at a 10% CAGR between 2017 and 2021, far outpacing global polyethylene demand. We are winning share with our differentiated products and tailored approach. We work every day to make sure this trend continues through active customer collaboration and a pipeline of investments into attractive secular growth areas. Moving to slide seven, there is no better example of growing and greening for us than the opportunity available in renewable fuels. We view this as one of our most exciting and substantial growth opportunities where we can best contribute sustainable solutions for our customers and the planet. The transition to renewable fuels is happening today, and it is fast becoming a meaningful part of our portfolio. So let me provide a little background and then frame the opportunity for us. Renewable fuels are bio-derived, typically from waste products such as used cooking oils. Renewable fuels have a much lower carbon intensity than fossil fuels and can be used as a drop-in replacement, most specifically today in heavy-duty diesel. Standards and regulations are driving this transition, such as California's low-carbon fuel standards which gives refiners incentives such as tax credit to produce low-carbon fuels. Other states like Oregon, Washington, and New York are also proposing similar standards, and Canada announced the introduction of a clean fuel standard within the next year. These incentives and the increased societal focus on decarbonization are making renewable fuels an exciting and profitable area of growth for refiners. As you can see on the left side of this slide, capacities are rapidly scaling up in the U.S., and refiners are quickly revamping or expanding their facilities to incorporate renewable fuel production. This is where EcoVis products play an important role. Our technology is the key enabler. Our customized zeolite-based catalysts can be used to increase yield and to improve specific fuel properties, such as cold flow, so it's suitable for use in cold climates. They can also be incorporated into a wide range of catalysts for operating flexibility at renewable fuel refineries. Our U.S.-based manufacturing is uniquely positioned to regionally support demand. Since commercializing a renewable diesel product line in 2019, we have seen unprecedented growth. Sales nearly tripled from 2020 to 2021, and given the rapid acceleration of renewable diesel production, we expect growth to remain robust in 2022 and beyond. We forecast a mid-20% sale CAGR through at least the middle part of this decade. We are excited about this opportunity, as well as the progression of sustainable aviation fuels, which is just beginning to take shape in the industry, and is likely to create additional opportunities as the decade progresses. Turning to slide eight, growing and greening continues our emphasis on serving high-growth, high-margin segments, like the renewable fuel example we just discussed. Even under very different macroeconomic environments, EcoVest has maintained very attractive low 30% adjusted EBITDA margins. Our unique value proposition results in strong earnings, high visibility and predictability driven by long-term contracts, customer collaborations, and a portfolio of specified-in products. We are targeting adjusted EBITDA margins of 35% to 40% by 2025 with cash conversion around 80% through customer-centric innovation and disciplined cost and capital management. On to slide nine, where I want to speak to our bigger mission, sustainable solutions. Global sustainability trends toward clean air, plastic circularity, and renewable fuels accelerate the need for our proprietary solutions. These solutions remove sulfur in diesel, enable chemical recycling and reuse of plastics, and help transform biomass into fuels, to cite just a few examples. As we support our customers in achieving their own sustainability goals, we anticipate improving our environmental performance and have implemented a comprehensive set of sustainability goals for 2025 and 2030. There is more to come on these topics as the year progresses.

Moving to slide 10, we're actually off to a good start as Ecovest.

Our strategy is playing out, and we're delivering on our goals. We are confident that we are on pace to deliver on our 2025 targets, as evident in the strong finish of 2021 and strong 2022 financial outlook Mike will walk us through shortly. Let's now turn to slide 11 for a brief overview of current trends impacting our businesses, starting with eco-services. We are continuing to see strong recovery for gasoline demand, with utilization rates reaching close to 90%. and potentially surpassing it by year-end as we come out of the pandemic. More people are resuming their morning commute, families are traveling more than ever, and fleet logistics demand has been at an all-time high thanks to robust consumer demand for goods. Recently, TIA has announced that oil production will set new records in 2022 and 2023 as demand remains robust and inventory remains low. As you may know, sulfuric acid plays a critical role in green mining such as copper, borates, and lithium for batteries in automotive and electronics. We continue to see positive trends around industry supply chain, which puts us in strong position to continue supplying our high-grade acid as we continue to contribute towards the greener economy. With the enactment of the U.S. infrastructure bill, We expect even further positive momentum for our catalysts for the welfare of the economy. Renewable fuels demand continues to grow more than 20% year-on-year, supported by government legislation and consumer preferences. We estimate that renewable diesel will account for about 5% of global diesel consumption by the end of 2022. On the polyethylene front, global demand remains robust in the mid to high single digits as consumer preferences for packaged goods accelerated behind fast-growing e-commerce trends. On the industrial front, manufacturers continue to build products lighter and stronger as polymers continue to replace metals in key applications. Policy changes and corporate pledges are pushing the market towards chemically recycled plastics, which is driving demand for pyrolysis catalysts in addition to the polymerization catalysts. We continue to see strong demand on the emission controls front as new regulations are being introduced to counter high NOx and SOx levels. More and more industry players are seeking custom novel solutions to address key challenges, and our silicon zeolite-based technologies remain critical to their solutions, both in the conventional and the renewable fuel space. And now I will turn the call over to Mike to discuss our fourth quarter and full-year financial results and outlook.

Thank you, Bill Gasson, and good morning, everyone. I'm glad that you joined us today as I'm excited to share our fourth quarter and full year results as well as our 2022 financial outlook with you. As mentioned during our third quarter earnings call in early November, we expected to see continued strong sales and adjusted EBITDA growth in the fourth quarter. This morning, I'm excited to report that we delivered ahead of our performance expectations. During the quarter, total sales, including our 50% share of the Z-List JV and adjusted EBITDA, grew 35% and 38%, respectively, year over year. Demand for polyethylene catalysts and hydrocracking catalysts led the way, along with a broad-based rebound in demand across most other product categories. Higher variable costs, partially driven by inflation such as sulfur, natural gas, and logistical costs, were more than offset by contractual price adjustments, allowing strong earnings growth. Adjusted EBITDA margins increased to 30.6%, despite a 280 basis point negative impact from the dollar-for-dollar pass-through of higher solver costs. Our fourth quarter was the final leg in the delivery of a remarkable financial performance for the year. While 2021, particularly the second half, was partially a story of recovery from the impact of the global pandemic, we also saw strong demand in certain areas like renewable fuels and polyethylene catalysts driving our full-year results. Higher demand, increased pricing, and favorable mix resulted in a year-over-year 19% growth in sales and an 18% growth in adjusted EBITDA and a 30.7% adjusted EBITDA margin included a 220 basis point negative impact from the pass-through of higher SALPR costs. In addition, we generated $93 million of adjusted free cash flow during the year. And as promised, we reduced our leverage ratio by more than a half a turn to end the year at 3.3 times. Moving to the next slide, we'll take a deeper look into our fourth quarter profitability. adjusted EBITDA increased $17 million on higher volumes from stronger demand, but also on the positive price to cost dynamic. As previously discussed, software costs are passed through in price on a dollar for dollar basis. In addition, we have other contractual provisions that index our pricing to labor, natural gas, and other input costs, further protecting against inflation. As such, increasing pricing exceeded higher variable costs driving profitability. While margins expanded to 60 basis points, if you exclude the sulfur pass-through impact, margins would have expanded 340 basis points during the quarter. With input cost increases neutralized, we're able to leverage the full benefit of the strong demand for our products and favorable mix, further demonstrating the strength of our businesses. Let me dive a little deeper into the businesses as we turn to our eco-services segment on the next slide. Sales increased $39 million, or 38%, driven by higher volume, favorable virgin sulfuric acid pricing, including the pass-through of $17 million of higher sulfur costs, as well as the pass-through of higher labor and energy index costs and regeneration services. Adjusted EBITDA increased $12 million, or 29%, on the favorable pricing and volume, inclusive of the impact from the Chem 32 acquisition. While adjusted EBITDA grew, margins in this segment were pressured by nearly 570 basis points related to the pass-through of higher sulfur costs. Turning to the results of our Catalyst Technologies segment, this segment includes the results of our Silica Catalyst business and the ZList joint venture. Silica Catalyst sales improved 35% while sales in the Zealous JV were up 26%. The sales increase in silica catalysts was driven by the continued strong demand for polyethylene, with volume up more than 16%, driven by demand and share gains. Within the Zealous JV, sales of both hydrocracking catalysts and pressure product catalysts grew on increasing refinery utilization and emission control. Adjusted EBITDA of $23 million increased 58%, with margins increasing 660 basis points, benefiting from higher volumes and a mix of higher margin products. Moving to the financial outlook for 2022, we remain extremely positive on both sales and adjusted EBITDA as we build on the success of our 2021 results and the continued momentum of growth of our demand drivers. We believe the demand for regeneration services for the production of alkylate the increased use of virgin sulfuric acid in mining, nylon, and other industrial uses, and the continued expansion of our catalyst activation business will drive growth in eco-services in 2022. In catalyst technologies, our historic outpacing of industry growth in polyethylene catalyst is expected to continue, along with our expectation for growth in renewable fuels and niche custom catalysts. For 2022, We expect total sales, including our 50% share of zealous JV sales, to be between $880 million and $910 million, or up 20% at the midpoint. With the recent spike in sulfur costs, we expect sales to be higher by approximately $60 million due to the contractual pass-through of higher sulfur costs, which would have a negative impact on adjusted EBITDA margins of over 200 basis points. but would not negatively impact adjusted EBITDA. We anticipate that adjusted EBITDA will be between $260 and $270 million or up 16% at the midpoint. Cash generation is expected to further improve next year as we are forecasting adjusted free cash flow of between $115 and $125 million. At the midpoint, this is a 30% improvement over the prior year which, as a reminder, included cash generated from the performance chemicals business through August 1st. Capital expenditures is projected to remain consistent with 2021 with a range of between $55 and $65 million. With respect to the first quarter of 2022, we anticipate robust sales and adjusted EBITDA growth compared to the first quarter of 2021. To provide context, let me comment on the first quarter of 2022 in comparison to the fourth quarter of 2021 for each business. First, in Catalyst Technologies, we expect the first quarter of 2022 to be slightly down in sales and adjusted EBITDA to the fourth quarter of 2021. In Eco Services, we expect sales in the first quarter of 2022 to be slightly higher than the fourth quarter of 2021, driven by higher estimated sulfur costs and other input costs. However, adjusted EBITDA is expected to be between 10% and 15% lower than the fourth quarter due to lower expected virgin sulfuric acid spot sales and the timing of certain planned manufacturing costs. In summary, our businesses delivered remarkable financial performance in 2021. Our portfolio has great fundamentals with ties to growing industry demand drivers. We have the structure in place to help protect against inflation and manage through supply chain disruptions. We finish the year strong and expect to carry the positive momentum into 2022 as we look forward to further growth.

With that, I'll turn the call back to Belgasson. Thanks, Mike.

You heard our story for the strong fourth quarter and full year 2021 performance. our positive outlook for 2022, as well as our confident strategic progress. Now I'd like to summarize a few key takeaways. First, we have the right strategy at the right time. Our businesses are aligned around strong secular trends, which are driving the clean energy transition and accelerating our growth. Second, we enter 2022 with momentum in our core markets, reflected in our strong 2022 financial outlook. Third, our teams are doing a great job of mitigating supply chain issues, and we are well prepared to drive growth while offsetting inflationary items. And finally, I'm very proud and grateful for the dedication and resiliency of the entire Ecoviz team for delivering a great year and setting us up for a remarkable 2022. This concludes our formal remarks. We're now ready to take your questions.

At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and 1 if you would like to ask a question. And we will take our first question from Angel Castillo with Morgan Stanley.

Hi, good morning, and congrats on the strong quarter. Just wanted to circle back a little bit more on the pass-through. I was just wondering if you could give us a little bit more detail. You had a very strong performance in terms of the price-cost. So, you know, as we think about maybe how much of that is just directly through contracts versus is there any incremental that you're maybe going out to get, you know, to make sure to cover something that may not be contractually, you know, already set up and And as we think about, you know, the following quarter and into the 2022, how should we think about both that $60 million and other incremental price that you might be out to get to cover costs?

Yeah, thanks, Angel. It's a great question. So from a pass-through perspective, about 90% of our costs in eco-services are pass-through costs. on that basis, right? And we're still able to capture the other 10%. Even though they're not contractually obligated, we still have the ability, just given our relationships, to pass those through. So we really feel comfortable that we're protected against costs like that. In addition, and that's really on the eco-services side, but on the catalyst side, there aren't contractual pass-throughs, but we've been very successful at working with our customers and being able to pass through any higher raw material costs. We were able to do that in the fourth quarter and a lot of that is starting to come to fruition in the first quarter this year as well. So we do have the ability, you know, outside of contracts from an incremental standpoint to your question to take any additional costs and pass those through. That really gives us a lot of comfort in this period of high inflation that we can really benefit from that and we're very well protected. For 2022, I think we commented a little bit on, you know, that, you know, some of those software pass-through costs, you know, is coming through. We do expect it to be higher in 2022 versus 2021. And, again, it's dollar for dollar. It does impact our margin, but it has no impact on our overall earnings.

Let me add one comment on the catalyst component as well, Angel. Yes, I mean, it's more specific. forward in the eco-services, but on the catalyst side, the team has managed to pull a very aggressive campaign on value pricing and price increases that will be extremely beneficial for us in 22 and even beyond. They've done a focus on not only raw material adjustments and indexing, but also pricing on technology. And we're very happy with the momentum they picked up this year. All that contributed to the numbers, and I think it's going to be here for a long time.

Understood. And, you know, interesting on the catalyst front that, you know, you have this aggressive campaign to recover costs, but also you noted market share gains on, I think it was the polyethylene side. We'd love to hear a little bit more color as to what you're seeing, what is driving some of this, and how should we expect it to proceed going forward?

We've been working on share gain on catalysts, silica catalysts, for a while with customers. The process takes years sometimes to get processed, accepted, modified. We're seeing the beginning of the penetration of some of our new technology. And so that market share gain is something we expect to continue. And obviously, entering with new technology is well-priced, and we believe the quality of earnings from the new technology catalyst is also going to continue to improve. And that explains a lot the reason why we are outgrowing the market from a growth perspective, not necessarily volume only, but new technology coming in and better pricing.

Very helpful. Thank you. You're welcome, Angel.

We will take our next question from David Beckletter with Deutsche Bank. Your line is open.

Thank you. Good morning. Can you discuss your capital allocation priorities for this year in terms of debt reduction and other aspects? Thank you.

Yeah, sure, David. Our capital allocation process is still pretty similar from what we've shown before. I mean, we've demonstrated that we can generate some significant cash flow, both in what we've shown in 2021, as well as what our guidance is for next year. We were able to reduce our leverage ratio down to 3.3 times. So as we continue to generate that strong cash flow, we are going to continue to look to either pay down debt, reduce our leverage, continue to reduce our leverage, or look at opportunistic bolt-on acquisitions similar to the Chem 32 acquisition that we did last year. Those can come up, and we just need to be prepared as we look for something that's going to be accretive to the business or strategically linked in with our businesses. So we continue to go down that process.

Very good. And, Bill Goss, can you just discuss the improvement you're looking for in Q2 and beyond versus Q1 and beyond? kind of cadence of earnings to get to the full year guidance? Thank you.

Yeah, I'll give a high-level comment, and then Mike can probably give you a little bit more color. Last year, 2021, we saw a unique performance in terms of a low first half and a strong second half. We went into the H2 and delivered 40% improvement over H1 in terms of adjusted EBITDA, and we delivered exactly to our guidance and there is a tailwind going forward moving towards the recovery of hydrocracking, recovery, continuous growth of polyethylene market, recovery of some of the emission control. Everything we set forward is happening from a recovery perspective. This quarter, Q1 was strong. Q4, sorry, was strong, which indicates that we're going forward into a strong Q1. And Mike gave you a little bit of a guidance on how we feel about the Q1 2022 versus last year. Granted, last year we had some events, you know, freeze and all that, but it's going to be a stronger quarter comparable to Q4. We see the cadence to be smoother this year. We're going to see a slow improvement all the way to the end of the year. The typical cadence is a low Q1, a strong Q2 and Q3, and a slightly lower Q4 based on all the trends the maintenance work and some of the seasonal stuff. So we're going back this year to the typical cadence of quarters. So we do expect a great Q2 and Q3 for the year.

Very good. Thank you. Mike?

Yeah, I mean, the only thing I would add just as we look at that is if you look back at 2020, obviously that was a year with COVID and that you kind of throw that out somewhat. And then last year, of course, with the early part, of the year not being as strong as the second half. But to Belgasm's point, if you do look at the eco services, that has a little more of the seasonality where the catalyst business is going to be a little smoother.

Great. Thank you.

Sure.

We will take our next question from John McNulty with BMO Capital Markets.

Hi, this is Caleb on for John. Hope that's all right. Hey, Caleb.

Thanks for taking my question. I was just wondering if you could kind of give us an update on, I believe it was on the last quarter earnings call, you made a comment on like eight new commercial projects. And I was just wondering if you could kind of walk us through how those are progressing and then when you see those projects coming online.

Yes, we have quite a bit of new technology introduction this year, which means commercial. Everything is going exactly as we want. As you know, we've shifted focus from projects to others, focusing on a bunch of emission control-related projects that will answer the questions to the regulation changes, and some of the areas around polyethylene and zeoless catalysts for renewables. Everything is coming along exactly as we planned. We should see more of that coming in towards the second half of the year, rather, but we will have the plan executed, and we're excited about what's coming the following year.

Kayla? Oh, I apologize. Now I'm going to make sure that Caleb got the answer.

And we will take our next question from PJ Juvicar with Citi. Your line is now open.

Hi, this is Patrick Cunningham on for PJ. Good morning, everyone. Good morning, Patrick. I just had a question. I had a question about plastic circularity and kind of your potential product offering there. I guess what I'm trying to understand is where are the areas that you play, which markets are you potentially exposed to, and sort of how differentiated is this technology and potential upside from it going forward?

Yeah, thank you for the question. We did say before that our technology in the plastic circularity is going to play in the pyrolysis process. And we believe that we have unique technology that has been proven and approved by some of the first comers or the customers that are really more advanced than others. We do anticipate as we go into the pilot testing beyond the lab testing with the pilot plans for our customers that we're gonna start seeing some volumes coming in from a pilot testing confirmation. And we anticipate into, as we said before, into 24 and 25 to start having a fully commercial line with volumes that we're excited about. So it's pure pyrolysis, which seems to become more and more the most favorable, the more favorable process going forward. And we're aligned with at least two customers that are in the lead right now.

That's all I can say. Yeah, thanks. That's helpful. High-level overview.

And then maybe just a quick one. You know, as you have almost a full year of sales from the Chem 32, and I just want to get an update on, you know, how is the integration going? You know, how are you making the progress that you had hoped on Synergy Capture? Just any sort of detail there would be helpful. Thanks.

To be honest, I've done a lot of integrations and acquisitions, smaller ones, technology ones in the past, but this is one of the best ones. Personally, I believe the technology delivered beyond our own expectation, and the integration process have gone really well. The team's done really well. It was well accepted by everybody, including our customers. We've increased our sales. We've increased our capability to de-button-neck the process. It's going so well that we're now looking at expanding, maybe end of 22 to early 23, to see if we can increase capacity because we've been on high demand. And the target is that we increase at least 50% capacity in a year and a half or two years before we go overseas beyond that. So that's how excited we are about it.

That's great. Thank you. You're welcome.

We will take our next question from Oleski Efremov with KeyBank. Your line is open.

Thank you. Good morning, everyone. Bogatsam, you just gave us some update on payroll. It says, do you have any updated view on how large this business could be for Ecovist, maybe let's say by 2025 or whatever year you feel is relevant?

Alexey, how are you doing? It's tough to give a size, but we're in a leading position right now. We think by route analysis is one of the preferred processes. We are working with fast runners or first comers, and we think we're going to be out in the market sooner than later. But, you know, the recycling or circularity has got several other processes. The mechanical component of recycling is not going to go away immediately, so that's going to be a slow build. But we're very excited that we're – We're ahead of the curve, and I think we're going to see an increase in volumes accelerated beyond 24, 25 in the second half of the decade, and we're excited about it. I can't quantify it, but it's going to be a pretty good, important business for us.

Thank you, Bill Gosselin. On merchant sulfuric acid, I think you saw – Higher margins this year, I think you see higher margins per ton or dollars per ton next year as well. Is this sustainable level or do you, I guess, sustain margins at this elevated level beyond 22? And is there any new capacity here on the horizon from competitors perhaps over the next two, three years?

First of all, let me just set it up. In Diversion Asset, we serve primarily three pockets of end uses. We serve the industrial component of the market, which probably takes up like half of our sales. into chloride batteries, chemicals, steel, tires recently at a decent good margin. We serve the nylon part of the market in automotive packaging and construction. Maybe that's 20% to 25% of our sales at also really good margin. And we are serving the fastest growing component of the market, which is the mining. Bore rates, as you know, bore rates, we use two tons of acid per ton of bore rate at a decent margin as well. Copper, the ratio is 4 to 1, and lithium is 20 to 1. Today, we're growing fast in bore rate and copper. Lithium is the next area because you really need to be nearby the assets to be able to serve them efficiently, and we're working some plans forward to participate further in lithium. But, you know, the sulfur pricing, which probably is going to increase a little bit more after the Ukraine thing, since Russia is an ad exporter of sulfur, we could see some tightness in the market in Europe and here, which could raise the sulfur pricing. But we're protected from that in the first place. But as you look at how we measure our performance, we measure our performance into price per tonne. And what we managed to do, at least in 2021, is grow that between 3% and 5%. Actually, it was about 5%. And going forward for 2022, we'll project to maintain that performance at 3% to 5% for the foreseeable future. So we believe that is doable, and we think we're playing in the right components of the market. So we're very excited about the version asset part of the business.

Thanks, Will Dawson. Thank you.

We'll take our next question from Lawrence Alexander with Jeff Rees. Your line is now open.

Good morning. You mentioned sort of the regulatory shifts on the clean fuel standards, and you've laid out in the past your longer-term growth. aspirations for the clean fuels business. As you look at those regulatory shifts, whether in Canada or elsewhere, is that going to be incremental to the growth path you previously sketched out, or does it just give you more confidence that that path is achievable?

Well, I can't say if it's more incremental depending on the rigor implementation and the speed of implementation. But the more those regulations get implemented, the faster, the more we have incremental growth. So when you look at some of those in the U.S., and even if you go overseas, With what's going on in China right now, what's going on in India, in Japan, in Korea, there's a lot of activity towards some of those regulatory requirements for clean air that we are very excited about being able to bring to the market technologies that I talked about earlier, especially in the next year or two. that will be unique into being able to handle those expectations from a temperature standpoint and performance overall of the market. So it's not direct incremental, but it's supportive plus incremental if we get those regulations implemented sooner and with rigor. You know, China 6 has been top two for years, and it's only recently that it's got implemented. So building our plans based on those is not necessarily the right thing to do, but we do hope that they get implemented. When they do, the portion that gets implemented will be incremental. So we're very excited about those regulations, and we're excited that the pipeline of innovation that we have is working towards that. As we get Europeans to be more rigorous in implementing, as we get China and the other countries I mentioned to initiate those regulations and get started, I think we're going to be in really good shape for emission control.

Okay, great. Thank you very much.

Thank you, Alexander.

And we will take our next question from David Silver with CL King. Your line is now open.

Okay, thank you very much. So I had maybe a couple of questions. The first one would just be the quarterly trend within your eco-services business. You laid out a number of metrics. You called out the strength and the virgin acid portion of that business. And I think there was a comment about overall volumes had returned to pre-pandemic levels. I was just wondering if you could maybe elaborate on how the traditional or the non-virgin side of the eco-services business did this quarter. In other words, was the growth still strong, but maybe just a little less so than the virgin side? Or You know, was there a difference in the performance on, you know, the recycling, the regeneration aspects of that business? Thank you.

Yeah, sure, David. So if you look at the regeneration services side of the business, we still see very strong demand in that market. I mean, that's you know, the service business that's used to help produce alkylate at the refineries. And, you know, as we like to say, that's one of the more profitable sides of the refinery where they look at that as liquid gold, right? So the demand for that is very strong. It continues to be strong. That is the one that probably has a little more of the seasonality, where Q1 and Q4 are a little lighter than Q2 and Q3. A lot of that is based on, you know, partially miles driven, but also you know, when refineries go down for their turnarounds, and then we, you know, have our turnarounds around the same time as them in the first and fourth quarter. So, you know, the demand for Regen is still strong, and the cadence is really a stronger second and third quarter. For Virgin, we did see a very strong fourth quarter. It was up compared to last year. Fourth quarter is also up compared to the third quarter. So a lot of that is the continued strong demand for virgin sulfuric acid used in mining and everything else that Bill Gasson was talking about, nylon and industrial use. And we continue to see that being strong going forward.

Yeah. Okay. Thank you for that. And I forgot to mention, but I did want an update on the new contract, the new customer that you had acquired that was discussed in the last quarter or two. But I believe that new services contract, $10 million more revenue opportunity was – set to kick off, I think, January 1st. Could I just get a quick update on that?

It's up and running. It's kicked off in December, actually, David.

December. Thank you. I did want to ask about the liquidity. I usually look for that in your release, but could we just get a quick update on where your total liquidity is relative to a few months ago, three months ago? And then do you anticipate any need to, you know, make moves to give yourself greater liquidity in 2022? I mean, you've talked about a number of, you know, growth opportunities, Chem 32 and some other areas, plus the desire to remain opportunistic. So is your current, you know, liquidity or easy access to, you know,

incremental funding you know sufficient for for the next year or so thanks yeah sure so our liquidity has improved um we were 165 million dollars at the end of the the third quarter a little little over 200 million um in in december uh we don't see any need for additional liquidity down down the road i think with our strong cash generation and our access to our ABL revolver, that way we won't have any issues with it. So we're very comfortable with the position we're at, and if those Chem 32 type acquisitions come about, we have adequate liquidity to make a move at the right time.

Okay, and then finally, I just have maybe a more of a general question about the operating environment, and in particular, you know, the price of crude oil and how that flows through to the costs of the products that your customers sell. But I'll stipulate up front I'm the world's worst, you know, price predictor for something like crude oil. But, I mean, the trend throughout the last year or so has been, you know, steadily in one direction up. And whether it's continued economic recovery or, you geopolitics. I mean, a lot of people are thinking the price might continue on in an upward direction. So, you know, I'm not talking about a steep recession or some other hugely disruptive event, but assuming there's trendline economic growth, but we're in a much higher crude price environment, 2022 versus 2021. Can you reflect back on, you know, how that tends to impact your business? In other words, how customer, refining customers view the, you know, the cadence of catalyst replacement or, you know, how fuel makers kind of view the value of the, you know, the higher value or value-added catalysts you provide. So, you know, assuming we're in a structurally higher crude oil environment for an extended period of time, how do you How do you think that would impact your overall business and your ability to meet your 2022 targets? Thanks.

That's a very deep question, David, and I will rank myself just behind you in predicting the oil price. But we do look at energy costs overall. What matters, both matters, the crude oil and the gas, both matter, and I'll explain a little bit. The crude oil price matters for our refining customers, the speed of acceleration that they do, the activity level. which probably indirectly impacts our volumes in terms of sales, the frequency of change-outs, how we run refineries. So we provided that this is not a very short period of time, that is not a three-month deal or a six-month deal. This could be pretty positive to an extent in certain areas. Maybe it's going to impact some of our regeneration business a little bit. Maybe it will impact the driven miles a little bit from a cost perspective, but overall it's a positive environment when refiners are making money. On the gas pricing side, energy, raw materials, the highest level of raw materials that impacts our business is sulfur. And then the second is the energy and including gas for our manufacturing assets. We have the ability to pass through these energy cost changes or pricing changes to our customers across the board, not only in the eco-services but also in the catalyst businesses. in European plants and here as well. So we're not concerned about gas price, raw material increase. We're not concerned about the sulfur price increase, which could also be, or drop, because it could also be the outcome of increased activity in the refineries. So we're covered out there. From a business perspective, we could see an upside, but who knows how long this is going to be. Maybe people are going to operate with more prudent perspective in not getting too excited about an event and then pacing themselves a little bit better than we did in the past. And in any case, we're good. We like when there is energy around, and we like when there is expectations to be the world is more positive. which will impact a few other things from a GDP growth perspective and everything, which could help the rest of the business, which is not directly linked to energy. I don't know if this helps, David, but it's pricing going up. As long as it doesn't go to $250 a barrel, which some people are speculating, but as long as it stays within the most reasonable expectation, 100, 120, 130, decent, believable, credible, if that's the case, we're always in good shape.

All right, thank you for that. I know that was kind of a PhD thesis question, but thank you for that. I appreciate your thoughts.

You're very welcome.

We have no further questions on the line at this time. This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful day.