Ecovyst Inc.

To all sites on hold, we appreciate your patience. Please continue to stand by. Thank you. Good morning. My name is Katie and I will be your conference operator today. Welcome to the ECOVIST second quarter 2022 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 any time, please press star 1 on your telephone keypad. If you want to remove yourself from the queue, please press star 2. When posing your questions, we ask that you please pick up your handset to allow for optimal sound quality. Lastly, if you should need any operator assistance, please press star 0. I would now like to turn the call over to Jean Shills, Director of Investor Relations, please go ahead.

Thank you, operator. Good morning and welcome to the ECOWIS second quarter 2022 earnings call. With me on the call this morning are Kurt Bidding, ECOWIS Chief Executive Officer, and Mike Vian, ECOWIS Chief Financial Officer. Following our prepared remarks this morning, we'll take your questions. Please note that some of the information shared today is forward-looking information, including information about the company's financial and operating performance, strategies, our anticipated end-use demand trends, and our 2022 financial outlook. 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 in presentation materials posted in the Investors section of our website at ecovis.com. Now I'd like to turn the call over to Kirk.

Thank you, Gene, and good morning. We are extremely pleased with our standout results for the second quarter of 2022 as they reflect strong financial performance as well as solid operational execution and continued progress in implementing our long-term strategies to deliver growth and enhance profitability. EcoVis is a leading supplier of materials and services that are critical components in the delivery of the sustainable technologies. Our regeneration services enable the refining industry's production of cleaner, more efficient fuels, and we are a leading supplier of virgin sulfuric acid, which is used in a wide range of industrial applications, including mining, advanced materials, and lead-acid batteries. We provide catalyst technologies used in the desulfurization of traditional fuels, the expanding production of renewable fuels, the production of specialty polymers, and in clean air technologies reducing air emissions from heavy-duty diesel vehicles. The relevance of these end markets today is translating into favorable demand trends, and looking to the future, we believe these demand trends will remain positive, as the expanding need for low-carbon and clean air technologies provides significant opportunities for EcoVist. During the second quarter, we continued to benefit from these favorable demand trends. Building upon the positive momentum we established in the first quarter, we delivered outstanding financial results. Second quarter sales, including our 50% share in our ZI joint venture, were up 45% year-over-year, while adjusted EBITDA of $73 million was up 38% compared to the year-ago quarter. Inflation, impacts from geopolitical uncertainty, and currency fluctuations have posed a challenge to many businesses. Through our strong customer contracts and alignment to critical segments, Ecovist is well positioned to mitigate and even benefit from these challenges. Of significance, while the adverse impact of inflation remains a primary concern for management teams and investors alike, Ecovist's ability to mitigate the impact of inflationary pressures on our business has been a contributing factor to our strong financial results in the first half of 2022. The contractual price adjustment mechanisms in our eco-services business continues to provide for pass-through of higher variable costs, including sulfur, natural gas, and transportation, as well as adjustments to account for inflation in labor and plant cost indices. In fact, in the current environment, we have continued to expand unit margins in our eco-services business despite significant increases in variable costs. While we do not have the same contractual pass-through provisions in our catalyst technologies business, prudent and forward-looking pricing actions continue to contribute to unit margin stability. Given our favorable financial results, the second quarter was another quarter of strong cash generation. Our ability to generate cash provides us with substantial financial flexibility as we continue to maintain a balanced approach to capital allocations. During the quarter, we made further progress in reducing outstanding debt and leverage, and we ended the second quarter with a leverage ratio of 2.8 times. In addition, our balanced and flexible capital allocation strategy and conviction in our results enabled Ecovist to support shareholder value by repurchasing nearly $9 million worth of Ecovist common stocks. Looking more closely at key trends driving our business on slide five, we continue to have confidence in the near-term outlook for our business, and we believe the longer-term trends also remain positive. For eco-services, we see continued strength in demand for regeneration services, which is critical in our refining customers' production of outlets. High refinery utilization and alkaloid production is supported by recovered domestic gasoline demand and robust demand for gasoline exports. In the U.S., premium gasoline continues to grow as a percentage of the overall gasoline pool, and this is a function of higher octane requirements for the expanding number of higher compression turbocharged engines in newer vehicles. While approximately 15% of a gallon of regular gasoline is alkaloid, Due to the higher octane specifications, alkaloid concentration is as high as 45% in a gallon of premium gasoline. In addition, more stringent emission requirements, such as the EPA's 2020 Tier 3 emission standards, are also contributing to higher alkaloid demand, as many options to reduce sulfur content in gasoline result in an octane reduction that is typically rectified with the addition of alkaloid. In the long term, we believe that the North American refining industry, which maintains a strong global competitive position, will continue to maximize affluent production, therefore benefiting our regeneration services segment. EcoServices is also the largest U.S. supplier of virgin sulfuric acid, and we focus on high-growth industrial applications such as nylon and mining. We produce a wide range of specialty-grade acids, enabling us to sell into applications such as lead-acid batteries, water treatment, and semiconductors. With growing electrification needs, particularly in the U.S., we see the mining industry continuing to be an important and large consumer of sulfuric acid in leaching operations for copper, borates, and lithium. Included under the Ecoservices umbrella is our waste treatment business and the Chem32 catalyst activation business that we acquired in 2021, both of which we believe are positioned for attractive growth. Specific to waste treatment, we are a growing provider of liquid waste disposal services in the Gulf Coast region, where waste incineration in our furnaces provides our customers with a preferred disposal alternative to deep well disposal or landfill. which generally requires transport of waste over long distances by truck. The outsourcing of disposal to our sites, which are located in close proximity to our customers, also minimizes the risk and cost associated with hazardous material disposal for our customers. Of note, we gain from the beneficial use of the inherent energy content in the waste streams, ultimately reducing our external energy needs at the plant sites and enabling some customers to gain valuable waste exemptions. Our Chem32 business is an ex-situ provider of catalyst activation services. Ex-situ activation avoids time-consuming on-site activation, reducing turnaround time. Consistent with the long-term trend of outsourcing by the refining industry, the Chem32 business is scalable and positioned for further growth, particularly as the production of renewable fuels expands. In our catalyst technologies business, our silica catalysts continue to play an important role in production of polyethylene and plastic films and packaging. Polyethylene demand continues to grow. EcoVist's model of creating highly collaborative relationships with our customers to develop unique and customized catalyst solutions continues to be rewarded with a great win rate on new polyethylene capacity additions. This high adoption rate has allowed Ecovist to outpace the general growth in polyethylene demand. In addition, as the world transitions away from single-use plastics, we are partnering with industry leaders to develop and expand energy-efficient recycling processes for the production of durable and lightweight plastics. Our zeoless joint venture provides zeolite technologies that are essential for cleaner air and the production of lower carbon fuels. In order to meet increasing regulations focused on clean air, our pressure product catalysts are used in the emission systems of heavy-duty diesel vehicles to reduce nitrous oxide pollution. Additionally, we have partnered with industry leaders to provide deal-like solutions for the growth and demand for renewable fuels catalysts. We believe that the proliferation of renewable fuels, including sustainable aviation fuels, will provide significant opportunities for Ecovist over the next several years, not only for our catalyst technology business, but also for the Ecoservices Chem 32 business. Ecoservices products and services will be critical for the growing adoption of sustainable technologies. Our regeneration services enable our refining customers to produce higher octane fuels required by today's more efficient automobile engines, while our sales of virgin acids support the production of metals and minerals that are essential in electrification, including the high copper content in electric vehicles and associated charging networks. Our catalyst technologies support and enable many green technologies, including the production of renewable fuels and catalysts used in emissions reduction systems on heavy-duty diesel vehicles. Our silica catalysts also facilitate the production of more durable and lightweight plastics, enabling greater energy efficiencies. As a result, approximately two-thirds to three-quarters of our sales today are associated with sustainable products and services. Moreover, our research and development programs are intently focused on meeting society's needs for greener technologies, as over 80% of our R&D spend is allocated to projects that tie directly to more sustainable technologies. We expect that percentage to increase to approximately 90% over the next three years. With that, I'll turn the call over to Mike Feehan for a review of second quarter financial results. Thank you, Kurt. As Kurt noted, favorable demand trends in the first quarter carried over into the second quarter, setting the stage for our strong second quarter financial results. Total sales, including our 50% share in the Zealous Joint Venture, were $261 million, up $81 million, or 45%, compared to the prior year. Buying growth from product and service demand continued, primarily driven by higher virgin sulfuric acid and regeneration services in our eco-services business, and higher polyethylene, hydrocracking, and niche custom catalysts in our catalyst technology business. We continue to benefit from higher pricing, which is more than offset higher variable costs, including sulfur, natural gas, and freight. Second quarter adjusted EBITDA was $73 million, up 38% year over year, with an associated margin of 28%. Turning to slide nine, I'll highlight the components of the adjusted EBITDA expansion compared to the second quarter of 2021. The increase in adjusted EBITDA was a function of higher sales volume as the demand trends continue in both of our businesses. In addition, while costs have increased, we have largely been able to pass through these increased costs to our customers. As a reminder, the increase in average selling prices associated with the sulfur cost pass-through does not impact adjusted EBITDA, but adversely impacts adjusted EBITDA margins. While the adjusted EBITDA margin decreased 140 basis points, This reflects a 450 basis point impact related to the pass-through of higher sulfur costs. Thus, excluding the $37 million sales impact associated with pass-through of higher sulfur costs, the adjusted EBITDA margin would have been 32.4%, or a 310 basis point improvement compared to the second quarter of 2021. Turning to slide 10, Against the backdrop of robust demand for virgin sulfuric acid into a broad range of industrial applications and in light of high refinery utilization that is driving demand for alkalis and therefore our regeneration services, it was an exceptionally strong quarter for eco-services. Bales of $193 million were up $72 million or 60% compared to the prior year. Adjusted EBITDA for eco-services increased 48 percent year-over-year to $60 million, driven by the benefit of higher sales volume and favorable pricing that more than offset the higher operating costs. The adjusted EBITDA margin for eco-services was 31.1 percent, down 240 basis points compared to the second quarter of last year. However, the pass-through of higher sulfur costs accounted for 840 basis points of the period-over-period decrease. Adjusting for the impact of higher sulfur pass-through, the adjusted EBITDA margin for eco-services would have been 39.5% for the quarter. Moving to the results for catalyst technologies on slide 11. During the second quarter, we saw positive demand trends with continued growth in silica catalyst sales driven by polyethylene catalyst demand and higher sales in our zealous joint venture associated with the increase hydrocracking, and niche custom catalyst sales. Second quarter adjusted EBITDA for catalyst technologies was $21 million, up 3.5% compared to the prior year, with the contribution of the higher sales volume partially offset by unfavorable product mix and higher production costs. Moving to slide 12, a few comments on leverage and liquidity. Positive business fundamentals in the first half of 2022 and our strong cash generation have provided for leverage reduction of one full turn over the past three quarters. We are now at a leverage ratio of 2.8 times. We expect to be in the mid two times by the end of the year, excluding any potential M&A or significant share repurchase activity. In addition, with total liquidity of $236 million a quarter end, comprised of cash on hand of $151 million and $85 million in availability under our revolving ABL facility, we have continued to have ample liquidity to support organic and inorganic growth initiatives and to fund share repurchase activity. Our strong liquidity position and our free cash flow generation capability provide a significant amount of financial flexibility. And this allows us to maintain a very balanced approach to capital allocation. With no scheduled debt maturities until 2028, we have the latitude to maintain investment and operational improvements and organic growth initiatives, as well as to consider accretive bolt-on acquisitions that have a clear strategic fit with our existing businesses. Specifically, opportunities that expand our technology portfolio or broaden access to the end markets we currently serve, similar to the Chem32 acquisition made last year. In addition, the $450 million share repurchase program, announced in late April, provides for opportunistic share repurchases, including negotiated transactions with our sponsors. We continue to believe that EcoVis shares are significantly undervalued, and as previously communicated, we will continue to look for opportunities to return capital to shareholders. As a result, during the second quarter, we repurchased 893,000 shares at a cost of $8.8 million. We believe this is a prudent use of cash and is in the best interest of our shareholders. Even with the repurchase activity, we ended the second quarter with a stronger balance sheet and an increased liquidity position. Turning to our full year 2022 outlook on slide 14. In terms of overall demand drivers, as we saw in the second quarter, we expect industrial activity to continue to drive demand for virgin sulfuric acid over the balance of the year. In addition, given high refinery utilization and associated alkylate requirements, we expect solid growth in regeneration services for the balance of the year. In catalyst technologies, overall demand trends remain positive. We expect continued growth in polyethylene demand to drive silica catalyst sales, and high refinery utilization remains a positive driver for hydrocracking catalyst sales. However, given high utilization and profitability for the U.S., for the U.S. refiners, we now expect some catalyst changeouts to be pushed to 2023. Despite these timing-related impacts, our outlook for catalyst technologies remains positive. Given the higher realized pricing trend, including the pass-through of higher sulfur costs, we have raised our full year guidance for sales of $20 million to a range of $830 to $850 million. In addition, we're lowering our ZLS joint venture sales based on timing of certain sales that we expect to be realized in 2023. Given strong first half results and with the view of demand trends remaining stable into the third quarter, we are raising our previous guidance for the full year 2022 adjusted EBITDA to fall in a range of $265 to $275 million, with no change to our adjusted free cash flow generation of $115 to $125 million for the year. For the third quarter, we expect earnings from both businesses to be relatively in line with what we saw in the second quarter. Then, for the fourth quarter, We anticipate that Ecoservices' earnings will be lower and more in line with the first quarter of 2022, while Catalyst Technologies will be up over the third quarter. I'll now hand the call back to Kurt for some closing remarks. Thank you, Mike. Summing it up, Ecoviz delivered very strong financial results in the second quarter. We expect the favorable demand trends we have seen in the first half of the year to continue into the second half of the year. Our long-standing relationships with blue-chip customers and sales contracts that include take-or-pay provisions and inflationary protection, as well as an order backlog, provides us with good visibility for near-term activity levels. As a result, despite geopolitical uncertainty and inflationary pressures, our full-year outlook remains positive, and we remain on track to deliver solid year-over-year growth in sales and profitability. I believe our results for the first half of 2022 and our full year expectations underscore the conviction that we shared in our investor day a little over a year ago. Specifically, that Ecoviz is uniquely positioned to deliver growth and compelling value to our shareholders. We have leading market positions, and we are a critical supplier to end markets where demand is increasingly driven by the need for sustainable technologies to provide cleaner air, renewable fuels, expand electrification, or facilitate the circular economy with more efficient process for recycling plastics. We are successfully mitigating inflationary pressures through our contractual cost pass-through mechanisms and our pricing leverage. and we are generating strong cash flow, providing for incremental debt reduction and an even stronger balance sheet, positioning us to capitalize on future growth opportunities. We look forward to providing you with updates as the balance of the year progresses. With that, we will ask the operator to open the line for questions.