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.

Thank you. At this time, if you would like to ask a question, please press star 1 on your touchtone phone now. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question. As a reminder, we ask that you please pick up your handset to allow for optimal sound quality. We will now pause for a moment to allow questions to queue. Thank you. Our first question will come from Oleski Evermoff with KeyBank. Your line is now open.

Hello, everyone. This is Ryan on for Alexi. Thanks for taking my questions this morning. So I guess my first question is just around share repurchases for the balance of the year and then into 2023. I guess how should we kind of just think about the potential timing of when we might be able to see those?

Yeah. Hi, Ryan. This is Mike. I think what we've explained before is that we entered into this or announced this share repurchase program that we're going to use for a couple different purposes. We don't really have timing on exactly when we'll use it, but what we do want to articulate is that we're going to use it to help drive investor returns. We saw an opportunity certainly with you know, where the share price was trading in the second quarter and took an opportunity to buy back around $9 million worth of shares and then, again, some additional shares going forward. So we don't have any direct plans, but we'll keep an eye out for when we think it makes the most sense given our capital allocation strategy. Yeah, I'll just add. Thanks, Ryan, for the question. I think we have really strong conviction that our stock is undervalued, right? So this is why you saw management purchase shares in the second quarter. But we also believe we have a strong balance sheet, which gives us the flexibility to deploy our capital to boost shareholder value, which is exactly what we did.

Great. Great. Thanks for the answer there. And then I guess just sticking with capital allocation, I know we've spoken about both on M&A before. I guess just my questions are, you know, are you still seeing some attractive targets out there? And, you know, how are valuations faring at this time? Obviously, it's crazy. Thank you.

Yeah, there remains a really good pipeline of bulk on opportunity, you know, pipeline opportunities that we continue to watch. I mean, as we've talked before, you know, the eco-services side has a large list of opportunities, really, because it's spanning more on the industrial and sulfur product side. And then, obviously, the catalyst business is much more technology-driven, which gives us the ability to look in, you know, a diverse group of catalyst technology. So we continue to explore in that area, and really our capital allocation strategy, as we talked before, gives us that ability to kind of do all the above in terms of our stock repurchase, fund our really rich organic growth opportunities, and continue to look at M&A.

Thank you. Our next question will come from John McNulty with BLO Capital Markets. Your line is now open.

Well, maybe not BLO, but BMO, but either way. Well, thanks for taking my question. I had a question on the catalyst tech business and the delays you were speaking to. I know 2023 was already kind of poised to be a pretty strong or enjoy a pretty strong uptick. I guess I'm wondering if the push out from 22, does that make 2023 even bigger or is it a function of, okay, it kind of pushes everything out and some of the stuff in 23 then actually gets pushed out to 24 and it just kind of lengthens this up cycle. I guess, how should we be thinking about that?

Yeah, thanks for the question. You know, I think the way we look at it is there's currently very high refinery utilization, which is being driven by obviously strong demand and high refinery crack spreads. So as refineries look to conduct their change-outs, you know, they've chosen just to kind of temporarily delay them. So we've seen some potential slippage to moving from this year to 2023. But I don't see you'll see that cycle will change all that much because it They really don't have that kind of flexibility. And in theory, as they run the refineries harder, the catalyst will deplete itself faster. So we're just seeing what we believe is really being driven, honestly, just on high refinery utilization and crack spreads and the refining customers wanting to opportunistically run harder and delay the change-outs for short periods of time.

Got it. Okay. So it really just kind of compounds 23, if I'm understanding you right on that.

Yeah, that's fair. I mean, we see that, yeah, 23 is having more change-outs for sure.

Got it. Okay. Okay, and then I guess, you know, there's a lot of questions, you know, around the macro and things potentially slowing, I guess. Can you help us to understand how you guys are thinking about, you know, your playbook for, you know, any potential recessionary environment as it may, you know, pop up as we kind of get into the latter half of this year and early next year? I know in general you're pretty resilient, but are there certain levers that you would pull? Are there certain, you know, things that you would enact if things do get a little bit dicey?

Sure. Well, so, you know, Mike and I have had the advantage of being with the eco-business businesses for 15-plus years, and we've actually experienced the prior downturn. So we really believe that, as you said, the businesses would remain fairly resilient in a recessionary scenario. So, you know, if you look at the regeneration business, we feel that would remain strong due to the high refinery utilization and minimal impact to gasoline demand. Similarly, on the virgin acid side, we don't think that would be significantly impacted because it services such a diverse group of end uses, particularly those that are supporting low-carbon and sustainable technologies. So we don't see those slowing down. On the catalyst side, for polyethylene catalysts, demand is projected to continue to grow, and we believe our Our unique catalyst solutions will continue to enable us to have a higher win rate with the new units that are planned to come on. And there's really a heavy backlog of heavy-duty diesel vehicles that was created by the supply chain issues over the past couple years. So we feel that that's going to maintain real firmness demand for our zeolite pressure products. So You know, we feel we're going to be pretty resilient on the demand side. And to answer your question on other things that we can do, I mean, we obviously, again, we had that experience coming through a couple of these downturns, and there are certain levers that we can pull where we can, you know, temporarily reduce costs or, you know, adjust our capital strategy.

Great. Thanks very much for the call, Eric.

Thank you. Our next question will come from Angel Castillo with Morgan Stanley. Your line is open.

Hello, guys. This is Stefan Diaz sitting in for Angel. Thanks for taking my question. First off, what's driving the free cash flow guide? Is that just a function of higher working capital due to higher price inventory, or is there any other specific trends?

Yeah, I think for our free cash flow guidance, we didn't change it from the previous guidance. So we still feel very strong that our cash flow generation this year will fall in that range. We certainly see some strength in the businesses that are going to drive EBITDA. growth. But we're being a little cautious on any dividends coming out of the ZI joint venture for some of those delays that we talked about with the change-outs and lowering the ZI guidance. So we're very excited for our cash flow. I mean, we've demonstrated such strong free cash flow generation over the last several quarters. We talked earlier about how we've delevered a full-turn and leverage from 3.8 times at the end of September last year to 2.8. And that's a lot of function of our, you know, strong cash flow generation and EBITDA growth. So we're very confident with our range that we have out there.

Perfect. Very helpful. And what do you see in terms of your order books thus far in the quarter, I guess, across both segments?

Yeah, I think... Thanks for the question. I think, as Mike had alluded to in his comments, we continue to see strength in the regeneration business for eco-services being driven by very high refinery utilization rates. For instance, the EIA just reported Q2 refinery utilization was 92% versus the prior year at 89%, which is really being driven, obviously, on very high refinery crack spreads The virgin acid business remains very resilient and with lots of demand coming from areas for the materials for obviously the sustainable and low-carbon technologies. Polyethylene catalyst, the momentum there continues with strong demand. And, you know, as we see, there's four additional units, polyethylene units, just coming online here in the U.S. this year. And then finally, we talked a little bit about on the zealous side, for hydrocracking orders, there's been a little bit of delay on that just because of the strong refinery utilization, which is obviously positively impacting the eco-services business. But the other segments from our zealous materials remain strong with pressure products for emission controls as we try to catch the backlog on the heavy-duty diesel vehicles, and renewables demands remain strong as well.

Thank you. Thank you. Our next question will come from Lawrence Alexander with Jefferies. Your line is now open.

Hi, guys. It's Dan Rizwan from Lawrence. Thanks for taking my question. I just want to know how we should think about in Catalyst how pricing works in kind of a deflationary environment. If things were to soften and some costs were to ease, I was wondering if there are price concessions and how rapid they are.

No, generally, I mean, so the catalyst, as opposed to, you know, the eco-services business, which kind of has mechanical, you know, pricing adjustments, you know, our pricing in the catalyst businesses, you know, as we stated in the comments, we really had Ford looking, you know, we were very forward-looking on that and put in place price increases at the end of 2021 and then further instituted energy surcharges. So, you know, we don't really – In a deflationary environment, we don't really see the quick drop in any kind of pricing or anything like that as we've been very judicious in how we've implemented the price increases.

But the energy surcharges would roll off. And would that happen, I mean, relatively quickly?

We would depend on the momentum of the energy. I mean, currently, you know, we don't really see the energy surcharges rolling off at this point because there remains, you know, obviously natural gas and the other inputs remain at elevated rates. Yeah, and just to add, I mean, those energy surcharges are really to cover the higher costs, right? So, you know, if those, you know, start going down and the pricing goes down, it wouldn't impact our earnings, you know, profile.

Okay. And then you mentioned just not the whole, but you mentioned M&A, the bolt-on opportunities. I was wondering if that's like looking into adjacencies within the Gecko services, like something a little different, or was it just about really increasing density or footprint or just market share?

I mean, it really, it's, Really all the above. I mean, as you saw last year when we acquired the Chem32 business, that was obviously more of an adjacent business that fit very well with eco-services really based on the sulfur chemistry that they used to apply to the catalyst for the catalyst activation. But It also has a strong overlap with the refinery service component of eco-services. So to answer your question, it could be either or, really. I mean, there's lots of adjacencies in that eco-services segment where, you know, things with sulfur are obviously the service component for refineries. Thank you very much.

Thank you. Our next question will come from PJ Juvicar with Citi. Your line is now open.

Hi, this is Patrick Cunningham on for PJ. Good morning, everyone. Good morning. So there seems to be some major tailwinds supporting the build-out of lithium and EV battery supply chain here in the U.S. So I'm curious to think of, you know, how are you thinking about this in your sort of medium to long-term growth strategy for virgin sulfuric acid? You know, are you looking to participate more in lithium, or will this be more of a copper play? Thank you.

Yeah, well, we participate pretty heavily in the mining segment right now, which is we obviously have the two locations out on the West Coast as well as our Gulf Coast assets, which kind of form a triangle, really, as you'd say, around the heavy mining sector, which is obviously doing not only copper but borates and then a little bit of lithium as well. So, As time goes on, we agree there's going to be a strong demand for mining, not only for lithium, but copper and other minerals that are obviously going to be in extremely high demand to fuel those low-carbon technologies. So as that demand rolls out, we're always looking at debottlenecking opportunities, not only just on production debottlenecking opportunities, but logistic debottlenecking opportunities, which we recently executed at the Houston plant where we doubled our rail capacity, which gives us more of an ability to ship into that sector. So As that grows out, we're going to continue to look for opportunities to expand our production and services to meet it. Great. Thank you.

Thank you. Our next question will come from David Silver with CL King. Your line is now open.

Okay. Sorry. Thank you very much. I had a question maybe about, you know, the guidance that you provided on slide 15. And in particular, you know, you increased the revenue guidance $20 million on each end. for GAAP, but you did reduce it somewhat on the zealous JV. So, a couple of questions, but on the GAAP side, last quarter when you raised your GAAP sales guidance, you attributed it all to sulfur. This time, I'm just wondering how that incremental $20 million breaks down. Is Is that just merely more pass-through, or is that representing, you know, an increase in demand? And then secondly, maybe just a comment on the reduced revenue guidance for zealous joint venture. Thank you.

Yeah, sure. Sure, David. Thanks for the question. So, you know, on the sales side, we have seen some strong overall pricing, not just with the pass-through of sulfur, but we've benefited, you know, from some of the other inflationary aspects. We also see some volume strength as well. So a lot of that's built in. We do, you know, anticipate perhaps that, you know, sulfur might be easing a little bit from a price standpoint, but, you know, it'll really depend and And as we've talked about before, whether sulfur goes up or down, it really doesn't impact our results. It just impacts the margins. So we're very, very comfortable that we're continuing to see strong demand resulting in higher volumes as well as strong pricing factors driving some of that. On the zealous side, that lowering really has to do with what we talked about earlier with some deferrals and delays in some of our, you know, products that we see just going into 2023. But, again, nothing that impacts our overall demand and strength in those markets. It's just more of the timing aspects that Kurt had articulated earlier.

Okay. Thanks for clarifying that. And I apologize. I didn't jump in between two multiple calls here. Sorry about that. Last question would be maybe for Mike, and it's kind of a question, I guess, clarification about wording or definitional aspects a little bit. First off, I'd say congratulations on the net debt trailing 12-month EBITDA getting below three times. I think that's probably a first for your company, so kind of a milestone in my view. But looking at that going forward, I mean, you talked about balanced capital deployment, and I'd like to just hone in on that phrase just a little bit. So, you know, there's the net debt to EBITDA formula, which is, you know, a ratio, and then there's, you know, maybe just net debt or gross debt or however you look at it. And I was just wondering how you're viewing, you know, the idea of balanced capital deployment in terms of your overall debt. In other words, are you going to be looking to reduce the net debt along with your share repurchase activity? Or is this the case where, you know, for your purposes, the ratio of the net debt trailing 12 months EBITDA is the, you know, is the priority kind of ratio that you're tracking? Thank you.

Yeah, sure, David. And thank you, yes. You know, we are very excited for the fact that we've gotten below three times. You know, I think that's definitely a milestone for us. And, you know, again, as EcoVist is different than PQ, it's becoming very evident in what we've shown over the last year. We're getting to the one-year milestone since we sold the chemicals business in a few days. And so the profile of Ecovist is really strong, right? We talked about the cash generation and the reduced leverage. To answer your question, the – you know, the net leverage calculation includes cash, right? So we have about $150 million of cash on hand, and instead of using it to pay down debt, we want to keep it available as we start to deploy some of our capital allocation strategies, right? So, you know, one of the things we talked about is potential M&A, you know, from a bolt-on acquisition standpoint, as well as participating in the buyback program you know, for which we started the process, but, you know, we may end up using it for some other aspects in the buyback, including, you know, private transactions and such with our sponsors, as we've talked about in the past. So we want to maintain that cash on hand and use it effectively over you know, the coming months, quarters. So, you know, we do look at net leverage as the right metric as opposed to paying down debt and then losing that availability to do some of our capital allocation strategies. Very helpful. Thank you. Thank you.

Thank you. Our next question will come from Hamed Korsant with BWS Financials. Your line is now open.

Hi. First off, I just wanted to ask about your commentary on the catalyst business of product mix being unfavorable and what that means. Is that just a one-time event, or how do you manage that?

Yeah, sure. Yeah, we do look at that as more of a one-time. I mean, the unfavorable mix is customer product-driven. We did see some margin, a little lower margin that we expect for the quarter. However, we're very excited about how we expect the rest of the year to turn out. We do see a lot of strength in the demand for our products. We see easing of some of the challenges around supply chain, which, you know, again, some of those costs were built into the quarter, which were more one-time costs. So for the remainder of the year, we're very confident that, you know, that business will continue to grow. And as I got into earlier, you know, we talk about the business being a stronger second half than the first half for the catalyst businesses. It continues to grow into the second half, and margins we expect to be a lot stronger. So to answer your question, yes, it's a little more of a one-time for the quarter.

And could you just talk about the – the sales opportunity as far as being able to add customers? Is that still a capability that you have right now in the marketplace from a competitive standpoint? And how, you know, do those renewals come up as far as being able to capture new customers?

Sure. I mean, we, you know... I spent basically my first 90 days as CEO traveling around to the various ECOVIS sites, and I could tell you really meeting with the colleagues and the customers and our partners, we have an even greater conviction in the company's ability to really innovate and execute our strategy and add new customers and grow over the long term. So I mentioned, you know, we've got ability in eco-services to continue to de-bottleneck, just not on the production side as well as on logistics as well. The catalyst business continues to grow, as we mentioned, our really unique and customized solutions, particularly in the polyethylene segment, allows us to continue to really beat the trendline growth in that area as we have a higher adoption rate. And really to strengthen our market segments as contracts with existing customers come up for renewal really gives us the ability to negotiate those on more favorable terms.

Okay. Thank you.

Thank you. We have no further questions in the queue at this time. This does conclude the ECOVIS second quarter 2022 earnings call and webcast. Thank you for your participation. You may now disconnect.