Ecovyst Inc.

Good morning. My name is Katie, and I will be your conference operator today. Welcome to the EcoVEST third 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 period. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If you want to remove yourself from the queue, please press star two. When posing your question, we ask that you please pick up your handset to allow for optimal sound quality. And lastly, if you should need operator assistance, please press star zero. I would now like to hand the call over to Gene Shields, Director of Investor Relations. Please go ahead.

Gene Shields Thank you, Katie. Good morning and welcome to the ECOVIS third quarter 2022 earnings call. With me on the call this morning are Kurt Bidding, ECOWIS Chief Executive Officer, and Mike Feehan, ECOWIS Chief Financial Officer. Following our prepared remarks, 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 investor section of our website at ecovist.com. Now I'd like to turn the call over to Kurt.

Kurt? Thank you, Gene, and good morning. Ecovist delivered strong financial results for the third quarter of 2022, reflecting continued growth in sales and building upon the favorable results we delivered in the first half of this year. As a key supplier of products and services to industries that provide energy and materials to essential segments of the economy, Ecovist has continued to benefit this year from favorable demand trends across the breadth of our portfolio. In addition, we believe Ecovist remains well-positioned to leverage key sustainability trends and to benefit from projected growth and demand for low-carbon technologies in the years to come. For our eco-services business, high utilization rates in the U.S. refining industry, more stringent fuel standards, and increasing demand for premium gasoline continue to drive volume growth for our regeneration services. Those regeneration services are vital to our refining customers' production of alkali, the critical component in the formulation of higher octane and cleaner fuels. Ecovist has a leading share position for regeneration services in the U.S. with long-standing relationships with blue-chip customers who rely upon Ecovist as their sole provider of regeneration services. Our assets are well-situated to service both the Gulf Coast market, where two-thirds of U.S. refining capacity is located, and West Coast markets, where alkali plays an important role in the production of Carbob, the regulated blend for California gasoline. With four facilities in the Gulf Coast and two in California, our customers value our production redundancy as it ensures operational integrity for their highly profitable ablation units. Strong regeneration volume growth was a significant contributor to the robust year-over-year results for our eco-services business in the third quarter. We also continue to see strong demand for virgin sulfuric acid across a variety of applications including mining, production of engineered plastics, lead acid batteries, and semiconductors. In the third quarter, our catalyst technologies business benefited from higher sales of polyethylene catalysts, driven by positive global polyethylene demand. We also saw increased sales of niche custom catalysts for petrochemical applications. With continued favorability and demand trends, Ecovist's third quarter sales, including our 50% share in the ZI joint venture, were up 30%, and adjusted EBITDA was up 9% compared to the third quarter of 2021. I'll note here that on a year-to-date basis, Ecovist sales are up nearly 45%, and adjusted EBITDA is up 26% compared to the first nine months of 2021, with the increase primarily representing organic growth. While inflation is a reality in today's environment, we have continued to benefit from structural margin support in our eco-services business by contractual pass-through mechanisms for variable costs. For sulfur, the pass-through is dollar for dollar, while costs for other variable inputs such as natural gas, transportation, labor, and certain plant costs are passed through on an index basis. While we do not have these contractual pass-throughs in our catalyst technologies business, we have undertaken targeted price actions as a means to offset increases to variable costs. As a result, we were able to significantly mitigate the adverse impact of inflation in the quarter. In fact, during the third quarter, we continued to see unit margin expansion in our eco-services business. The third quarter of 2022 was also another quarter of strong cash generation for EcoVest. With open market share repurchases and in conjunction with the secondary offering in early August, we repurchased an aggregate of $65 million worth of stock during the quarter. Yet, we were able to maintain our net debt leverage ratio of 2.8 turns, underscoring our conviction that Ecovish cash generation capability continues to provide for significant capital allocation flexibility. In our second quarter earnings call in late July, we shared with you our belief that we remained on track to deliver solid year-over-year growth in financial results. Given our conviction in the strength and stability of our business, at that time we increased our full-year guidance range for adjusted EBITDA to $265 to $275 million. As we move into the fourth quarter, I am pleased to say that the positive momentum in our business has continued. Based upon our current outlook for the balance of the year, we expect that our full year 2022 adjusted EBITDA will land at the high end of our $265 to $275 million guidance range. Now let's turn to slide five for more detail on our expectations for near-term demand trends. Within our eco-services business, we believe the outlook for our regeneration services and for virgin sulfuric acid demand remains favorable. While electric vehicle penetration will no doubt increase over the next few years, we believe conventional fuel demand will remain strong, supported by the sheer number of conventional cars and trucks in use today. High refinery utilization, growth in premium gasoline, which requires a higher proportion of alkali, as well as increasing fuel economy standards are expected to continue to drive alkali demand. Additionally, export demand for refined products remains strong, and with access to crude supplies and the lowest cost of energy, U.S. refineries remain in favored positions to serve the growing export demand. We also believe future expectations for greener infrastructure and electrification, as well as continued growth in other industrial applications, will drive further demand for virgin sulfuric acid. Growth in low carbon technologies, including electric vehicles, batteries, and solar panels, will require increased production of metals and minerals, with sulfuric acid utilized in the leaching process to extract materials such as copper and borates from the mined rock. And if expectations for expansion of these low-carbon technologies are to be met, demand for sulfuric acid will undoubtedly increase. Turning to the balance of our eco-services business, while collectively less than 10% of consolidated revenue, we believe our catalyst activation segment, the Chem32 business that we acquired last year, and our waste treatment businesses are positioned for attractive growth. Chem 32 provides ex situ activation for catalysts, including catalysts used in renewable fuels applications. Ex situ activation provides for faster startup from turnarounds, averting lengthy onsite activation processes. The business is extremely scalable and we expect to benefit from continued expansion in renewable fuel production. We also expect further growth in our waste treatment business. With our favorable Gulf Coast locations, our incineration of specific chemical waste streams provides our customers with the preferred alternative to long-distance trucking of liquid waste and disposable via deep well injection. With a more environmentally friendly process than other alternatives, the waste streams are incinerated in our furnaces and Ecovist benefits from the inherent energy in the waste streams, reducing external natural gas requirements. For our catalyst technologies business, sales of our silica catalysts have continued to grow along with global polyethylene production. While polyethylene demand is expected to slow modestly, as we have noted, our sales in the polyethylene production have been higher than the industry growth rate, as the sales of our customized catalyst solutions have benefited from a differential win rate on new capacity expansions. Likewise, the near-term demand outlook for sales of zeolite catalysts through our ZI joint venture also remains positive. We expect high refinery utilization and global fuel demand will continue to support sales of hydrocracking catalysts. While there is still a significant backlog of heavy-duty diesel vehicle orders due to production constraints and the global chip shortage, sales of zeolite catalysts for emission control applications are expected to benefit. Lastly, we expect growth in renewable fuel capacity, including the future adoption of sustainable aviation fuel, will continue to drive growth for our zeolite catalysts. With that, I will turn the call over to Mike Feehan for a review of third quarter financial results.

Thanks, Kurt. During the third quarter, Ecovist continued to benefit from favorable demand trends. Total sales, including our 50% interest in the zeolite joint venture, were $260 million, up $60 million or 30% compared to the third quarter of 2021. The increase was primarily driven by higher average selling prices, including the pass-through of higher sulfur costs, as well as the higher demand for regeneration services in our eco-services business, and higher catalyst sales into polyethylene and niche custom applications within catalyst technologies. Higher pricing in the third quarter includes the pass-through of $28 million of higher sulfur costs, as well as the contractual index pass-through of other variable costs, including natural gas and freight, principally in our eco-services business. Adjusted EBITDA for the third quarter of 2022 was $75 million, up 9% compared to the third quarter of 2021, with an associated margin of 29%. On the next slide, I'll highlight the components of our adjusted EBITDA expansion compared to the third quarter of 2021. The increase in adjusted EBITDA was driven by nearly $7 million of contribution from higher sales volume, as well as higher average selling prices, including the $28 million pass-through of higher sulfur costs, which more than offset the increase in variable costs. The $28 million average selling price increase associated with the sulfur pass-through does not impact adjusted EBITDA, but does inflate the denominator in the adjusted EBITDA margin calculation. If you exclude the impact associated with the pass-through of higher sulfur cost, the adjusted EBITDA margin would have been 32.5% in the third quarter of 2022. Turning to the next slide, Ecoservices posted another favorable quarter with third quarter sales of $196 million up $58 million or 42% compared to the third quarter of 2021. Third quarter results were driven principally by a higher contract pricing along with the increased demand for regeneration services supporting alkylation production. In addition, sales of virgin sulfuric acid were up modestly compared to the third quarter of 2021 reflecting ongoing demand in industrial applications, including mining. Third quarter adjusted EBITDA for eco-services was $64 million, up $12 million, or nearly 24%, compared to the third quarter of 2021, on the higher sales volume and pricing, covering increased operating costs, including sulfur, natural gas, and freight. The adjusted EBITDA margin for eco-services was 32.8%, down 490 basis points compared to the third quarter of last year. However, adjusting for the 690 basis point impact of the sulfur pass-through, adjusted EBITDA margin for eco-services would have been 40% for the quarter. Turning to results for Catalyst Technologies on the next slide. Third quarter results for Catalyst Technologies reflects higher sales of polyethylene and niche custom catalysts, partially offset by lower sales of hydrocracking catalysts, largely a function of timing due to the deferral of planned turnarounds as refiners seek to maximize profitability. We expect to see higher sales of hydrocracking catalysts in the fourth quarter. Total sales for catalyst technologies was $64.6 million, up $2 million, or 3%, compared to the third quarter of 2021. Third quarter adjusted EBITDA was $19 million, down $6 million compared to the third quarter of 2021, with higher overall sales volume offset by less favorable product sales mix and higher production costs within the quarter. Moving to the highlights on leverage and liquidity. As we have previously discussed, our strong cash generation provides significant financial flexibility, supporting net leverage reduction, the funding of growth initiatives, as well as share repurchases. Our net leverage ratio was 2.8 times at September 30th, which was unchanged from the end of the second quarter, even with deploying nearly $65 million in cash for share repurchases in the third quarter. Given our expectation for further cash generation in the fourth quarter and excluding any potential M&A or additional share repurchases, We continue to anticipate our leverage ratio to be in the mid two times by the end of the year. At the end of the third quarter, we had total liquidity of nearly $200 million. While down compared to the $236 million at the end of the second quarter, this reflects the previously mentioned $65 million of cash used for share repurchases during the quarter. We continue to believe our free cashflow generation capability and our liquidity position provides us with a significant amount of financial flexibility, allowing us to maintain a very balanced approach to capital allocation. Given our strong balance sheet with only one tranche of debt maturing in 2028, we can continue to invest in operational improvements and organic growth initiatives while remaining positioned to evaluate accretive bolt-on acquisitions that have a clear strategic fit with our existing businesses. as we demonstrated in the third quarter, we can also participate in targeted share repurchases while continuing to prioritize net leverage reduction and growth initiatives. During the quarter, we repurchased 1.1 million shares through open market purchases at an average price of $9.77 per share. In addition, we repurchased an additional 6.5 million shares in early August supporting the secondary sale of stock by our private equity sponsor. As of quarter end, we still had $376 million remaining under the original $450 million share repurchase authorization. Turning to our full year 2022 outlook, as mentioned, we expect demand trends to remain relatively stable for the balance of the year. We believe high refinery utilization will continue to drive demand for alkaloid and therefore our regeneration services, and we expect demand for virgin sulfuric acid to also remain strong. In catalyst technologies, our outlook for long-term demand trends is positive, driven by polyethylene demand, future growth in renewable fuel and emission control applications. Overall, our outlook for the fourth quarter has not changed materially. We are lowering our full-year sales guidance down modestly to a range of $810 to $830 million, solely a reflection of the pass-through impact of lower anticipated sulfur costs. Based upon our favorable results for the first nine months and our expectations for the fourth quarter, we anticipate our full-year 2022 adjusted EBITDA may fall toward the high end of our $265 to $275 million range, and we continue to expect adjusted free cash flow generation of $115 to $125 million for the year. As a reminder, the fourth quarter tends to be seasonally lower for eco-services due to customer and internal turnaround activity following the summer driving season, and we expect fourth quarter adjusted EBITDA for eco-services to be similar to the first quarter earlier this year. In contrast, and as noted in our second quarter call, we expect strong fourth quarter results for Catalyst Technologies, with fourth quarter adjusted EBITDA higher than in the third quarter. I'll now hand the call back to Kurt for some closing remarks.

Thank you, Mike. In summary, we are energized by the financial results we have delivered thus far in 2022, and I want to extend my gratitude to all Ecovist employees for their dedication and their contributions to the success we have had this year. We firmly believe our year-to-date results demonstrate the true resilience and organic growth potential of Ecovist's business model. Furthermore, our favorable results thus far in 2022 validate the decision to divest the performance chemicals and performance materials businesses, which enabled Ecoviz to focus on growing the high-quality, uniquely positioned businesses that we have today. We have entered the fourth quarter with good business momentum in both our eco-services and our catalyst technologies businesses. As a result, for full year 2022, we expect to deliver on the high end of our guidance range for adjusted EBITDA. Looking forward into 2023, while the uncertain economic environment could result in some softening of demand, we still expect demand fundamentals across our end-use exposures to remain positive. We believe our leadership positions in growth markets, the nature of our longstanding customer relationships, and in some cases, order backlog, will all continue to provide for good near-term visibility. With a net debt-to-leverage ratio of 2.8 times, and in light of the cash generation capability we have, our balance sheet is in very strong shape. We expect to generate additional cash over the course of the fourth quarter, which will continue to provide us with the flexibility as we balance our capital allocation alternatives and continue to position Ecovist to deliver exceptional value for our shareholders. 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 touch-tone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question. Our first question will come from John McNulty with BMO Capital Market. Your line is open. Please go ahead.

Yeah, thanks a lot. Thanks for taking my question. So I guess the first one would just be on the – refining catalyst business in terms of some of the business that kind of got delayed or pushed out as the refiners, you know, postponed some of their turnarounds. Does that all get pushed into the fourth quarter, or do you see that drag into 2023 as well? Because I know 2023 was looking like we were going to see a pretty good step up already, but I guess curious if that maybe even picks up higher.

Thanks, John. Yeah, really nothing's fundamentally changed with the hydrocracking process. with the hydrocracking business, you know, we've seen delays, as you mentioned, and this is really due to the historically high distillate cracks in the marketplace right now, and as you've probably seen, the historically low inventories of distillate. So this has obviously encouraged refineries to put off turnarounds and the catalyst change-outs to basically make more product for the marketplace. But, you know, the other side of this is that, you know, when with these high margins and the high demand for the product is when these refineries do take those outages they're going to look to install really high yielding and high performance catalysts like zealous offers so we did as we did mention fourth quarter will be stronger on hydrocracking and you know we look at these types of things as they're really delays they're not you know that won't go on a very long time and it's really due to just the demand for the product in the market right now

Got it. Fair enough. And then when you think about the eco-services businesses, we start looking out to 2023. It seems like there's kind of a lot of puts and takes. It seems like you may see more demand from the regeneration side as the economy is opening up and you see more and more driving. At the same time, there is obviously concerns about the economy slowing down. And so maybe there's a negative impact on mining industrial. So maybe can you walk us through how you guys are thinking about the puts and takes and maybe give us a little bit of an early peek at how you think about 2023?

Yeah, I mean, obviously we're not going to provide guidance towards 2023, but if you look at just the underlying trends specifically for the eco-services business, high refinery utilization, above historic average refinery crack spread, The continued strong demand for alkali and the octane and the clean gasoline component that it provides to the U.S. motor pool, strong exports of motor gasoline leaving the United States, which our customers, particularly in the Gulf Coast, participate strongly in that. So that is all going to continue to benefit the regeneration business. As you look over to virgin sulfuric acid, the way I like to think of it is really, virgin sulfuric acid is where the rubber meets the road on creating these green technologies and low-carbon technologies and the minerals and metals required for that. Clearly demands a lot of virgin sulfuric acid. The other sections of our virgin sulfuric acid business, you know, I would say more in the industrial and the material side, a lot of that is concentrated towards in the Gulf Coast where those customers, again, have an enormous energy advantage and, you know, should continue to prosper in this environment.

Got it. Helpful call. Thanks very much. Thank you.

As a reminder, it is star one. If you had a question, we'll go next to David Begleiter with Deutsche Bank. Your line is open. Please go ahead.

Thank you, Kurt. Just sticking on the virgin sulfuric acid business, in a recession, how has it performed historically in prior downturns?

Yeah, in prior downturns, it's been stable. We have a, you know, Fortunately, I've been with the business really since 2006, so I've gone through the 2008 downturn and obviously the 2020 downturn. And the business is very diverse, so obviously sulfuric acid is the most widely used chemical in the world. Our particular portfolio business is diverse in terms of its exposure to industrials, again, mining. I think what may be different as we enter the 2023, different from maybe past, is really the mining segment continuing to remain strong. We don't really see anything that's going to deter future mining activity and the need for the green technology and low-carbon technologies that require those copious amounts of metals and minerals. Again, on the industrial side, very diverse in terms of materials to petrochemicals to water treatment chemicals. A lot of our business, again, is concentrated in the Gulf Coast, which has an enormous energy advantage versus their competition worldwide.

Very good. And just in catalyst technologies, you mentioned higher production costs in Q3. Could you talk to those, and is that one of the reasons why Q4 looks like quite a bit stronger than Q3?

Yeah, well, really on the catalyst side, when you look at the Q3, first of all, I guess on the Q2 call, we did say that Q3 was going to look a lot like Q2. So when you look at overall the catalyst performance, you had a few things going on there, right? The hydrocracking sales, which we talked about earlier, that were delayed due to really the strength in the distillate production going on right now. There was a, you know, from a comparative standpoint versus third quarter of 2021, the mix was slightly different. And then really on the production cost side that we refer to as really intercompany shipment costs where we had some kind of one-time logistics bottlenecks that required us to do some freight expediting of raw materials in between plants.

And can you quantify that impact in Q3? And is that teller for Q4?

Yeah, we don't think the – for Q4, as we said, we expect Q4 to be stronger than Q3 in the catalyst business. In terms of the production cost impact of those intercompany transfers, we see that moderating as the logistics supply chains are improving. Thank you very much.

Our next question comes from Alex, a year from off, with KeyBank Capital Markets. Your line is open. Please go ahead.

Thanks. Good morning, everyone. Just to stay on the Catalyst side, I realize you will not be providing guidance for next year, but what's your sense? Can Catalyst business grow next year? Grow EBITDA?

Yes. Yes, sure. So we expect, again, there's strong underlying growth trends in that catalyst business. Clearly, diesel crack spreads and diesel inventories are expected to remain favorable going into next year, benefiting the hydrocracking segment. When you look over to some of the other sections of catalyst technologies on emission controls, Clearly, as we've talked about before, there's a backlog of heavy-duty diesel vehicles that has built up that will require emission-controlled catalysts moving into 2023. And we really see in our other segments of the catalyst business firmness. You know, when we talk about things like polyethylene, in terms of its demand for things like film and sheeting continue to remain strong. So, really, as we look going forward, We see really continued strength. Obviously, as we've highlighted before on previous calls, renewable fuels continues to be a tailwind for us. Obviously, higher distillate cracks encourages even more renewable fuels production and the construction of new renewable fuels plants.

Thanks, Kurt. And on eco-services, you reported volume growth this quarter. Was this primarily regeneration or virgin?

Yeah, I can answer that one. That was primarily in the regeneration services side. That was the predominance of the volume growth. However, I would comment that virgin sulfuric acid was up modestly. Again, it was up, you know, continuing with, you know, the strong growth in the various end markets. So, you know, both sides were up, but more on the regen side.

Thanks. And last one, if I may, just on virgin markets, do you see any signs of weaker demand trends? Obviously, there's some seasonality, but beyond that, is there any red flags in that market?

Yeah, I think, you know, the virgin sulfuric business isn't so seasonal. The regeneration is, and I think, you know, as we said before, you know, as you enter the fourth and the first quarters on regeneration, refineries and ourselves, you know, eco-services will typically take our maintenance during those times, those, you know, off-peak season times. On virgin sulfuric, it's less so. It's more, you know, really kind of steady demand. So, You know, when you look at the end market drivers there, again, the petrochemical, the materials business remains strong. And, you know, I think that's, for us, being completely North American-based, our customers are enjoying a very large energy advantage versus their global competition, which allows them to, you know, keep very high utilization rates. And, again, on the mining segment, I mean, it's, you know, Clearly, all the tailwinds behind that sector are really going to be hard to kind of disrupt, right, when you think about all the investment, the government subsidies that are, you know, even the recent Inflation Reduction Act, which put a large amount of subsidies and tax credits into things like green infrastructure, as well as electric vehicles, which all are going to require really a lot of U.S. mining activities. So that's very beneficial for the virgin asset segment.

Very helpful.

Thanks a lot.

We'll go next to Angel Castillo with Morgan Stanley. Your line is open. Please go ahead.

Hi. Thanks for taking my question. First, I was just wondering if you could give us a little bit more color on the MEP on the faculty or MMA catalyst business and what you're seeing there in terms of orders as well as just overall demand, both fourth quarter and for 2023. Okay.

Yeah, well, for methyl methacrylate, you know, we tend to refer those as more in the niche or custom catalyst space in general. I think we mentioned that third quarter, as compared to third quarter of 2021, the mix of that was different. So that was lighter this year than last year. And that's primarily a timing. Those methyl methacrylate orders generally are, you know, There's not sales in every quarter. They generally can be a timing issue as those customers refill those units. But we believe the demand in that space remains strong. We have a really good and unique technology offering there with long-term relationships with those customers and are really specified into those units. So we feel that's healthy going forward.

That's helpful. Thank you. And then just in terms of capital allocations, you noted you did another $11 million of buybacks this quarter, and you talked about opportunities in terms of bull dones or further kind of investments. Can you just tell us, I guess, as you think about both the near term and into next year, how you're kind of thinking about both the buyback opportunity, given you have large authorizations still outstanding, as well as, you know, both on opportunities in the pipeline that you see there, both from a timeline perspective and in areas of potential interest or opportunities.

Sure. Good question. So, you know, we look at We look at the business's cash generation as well as its strong balance sheet really gives us, as I like to say, a very flexible and robust capital allocation strategy. So as we look at that strategy, clearly growth is very important. So we have a rich pipeline of both organic and inorganic opportunities. And as we go forward, we're going to use that cash generation and the balance sheet to fund that growth where we can. And we've looked at, as we look at M&A opportunities, we're clearly, our existing business is clearly in the energy environment. things linked to green infrastructure trends, renewable fuels, and really the production onshoring of a lot of materials that we see going on right now. So as we evaluate opportunities going forward, we're going to continue to look in those spaces. In terms of the stock repurchases, listen, we view, the management team very strongly views that our share price is undervalued. So we've participated in both open market pre-purchases as well as alongside the secondary offering that happened in Catalyst. So we feel very strongly that the stock is undervalued. The company has participated in those repurchases as well as the management team. I'll highlight, you know, again, this quarter was another strong quarter for management personally buying shares as well. Very helpful. Thank you.

We'll go next to PJ Juvicar with Citi. Your line is open. Please go ahead. Thank you.

Hi, this is Patrick Cunningham on for PJ. Good morning. You know, we've started to see some inventory destocking in polyethylene and producers are cutting utilization rates. How do you, what are your expectations, you know, for polyethylene film and packaging demand? And do you expect, you know, this sort of recent destocking to mute near-term volume growth?

Sure, so our polyethylene sales were up in the third quarter. You have seen, and we've read the same thing, where you've seen some, I would say, more inventory distortions on separate sides of the supply chain as there's been ongoing shipment and logistics issues in the industry. But we view things like film and sheet as remaining stable. As we mentioned, our really highly customized catalysts, that we're specified into really the world-class producers of polyethylene. Companies that are on the very low end of the cost curve due to their scale and their location and their cost of energy. So our customer base generally maintains a very high utilization, so we feel pretty good about polyethylene going forward.

Great. And how are you thinking about the potential benefits of the Inflation Reduction Act? Are there any sort of growth investments that become more incrementally attractive, whether it be catalysts for renewable fuels or something in plastics recycling? How are you positioning yourself given that bill?

Yeah, I mean, reviewing the Inflation Reduction Act, it really supports several aspects of the business. First, there's tax credits and loans for green infrastructure. So as I mentioned before, that's really where the virgin acid segment plays a vital role in the production of those metals. and minerals that are going to be required to produce things like wind turbines, solar panels, et cetera. The Act also extends the credits for renewable fuels and introduces a new credit for sustainable aviation fuel, which is kind of the next generation of renewable fuels. And we expect really sustainable aviation fuel to really start being adopted heavily around mid-decade. And then finally, the clean vehicles element of the Act you know, again, encourages those vehicles to be made with metals and minerals that are produced here in the U.S., which will be a tailwind for the mining sector and virgin acid. But in general, the Inflation Reduction Act is very – you know, very positive for, you know, numerous segments of our business. You did mention the plastics recycling. So we, again, as we've talked about that before, we're working with, you know, major plastics producers on, you know, catalyst technology that really enables the catalytic pyrolysis or catalytic recycling of plastics, and we expect that to really kind of be commercialized in mid-decade.

Great. Thank you.

Our next question comes from Lawrence Alexander with Jefferies. Your line is open. Please go ahead.

Good morning. Just two questions on cadence. One to follow up on the last question. When new renewable diesel capacity ramps up, is there an initial fill order for your product, or is your sales to that facility going to be tied more to just their actual production run rates?

Yes and yes. When you look at our renewable fuels exposure, it's really on two sides of the business. Starting on the eco-services side, the Chem32 catalyst activation business that we acquired last year, they are sulfiding the hydro processing side of that of that process so those hydro processing catalysts when the unit's built uh requires it to be sulfided and then those those catalysts end up being changed out every year to 18 months so there's kind of a a repeat natural repeat business that goes through that on the catalyst technology side We're making zeolite catalysts that are used in the de-waxing side of that process. Those are more for the initial fills, and then the change-out rate on those is a little bit longer, multi-year change-out rate. So we kind of play on both sides where, one, on the initial fill, both businesses do benefit, but then there's the intermittent change-outs that occur anywhere from, you know, 10 to 18 months on the eco-services side and, you know, a couple years on the catalyst technology side.

Okay, no, that's very helpful. And then when you look at the scale of the investments that have been proposed already in the renewable diesel area, do you have enough capacity to serve that by flexing and shifting capacity over from other end markets? Or do you need to undertake an investment cycle? And if you do, when do you need to do that to be ready for the customers? Yeah.

Yeah, so on the catalyst activation side for renewables, when we purchased the Chem 32 business, one of the things that was attractive about that business was its scalability. So, you know, we are actively scoping and looking at ways to scale that up to meet that growing demand, you know, especially as new renewable units are built will require, you know, not only new fills but then the recharge of those fills and meeting that demand. And on the renewable side for the catalyst technologies business for the zeolite catalysts, clearly we have capacity in that sector that we can flex between our emission controls production. So some of those assets are fungible between both. So as demand grows or we need to create capacity for one or the other, we can flex between the products.

Okay, great. And then separately on the heavy duty diesel side, what's your, you know, will you see a downturn in volumes at the same time as production of the vehicles? Or do you, you know, once the backlogs are worked off, or will you see a slowdown before the backlogs are kind of finished? I mean, just what's your place in the inventory cycle?

Yeah, I mean, we've seen, you know, that business obviously has gone through, you know, supply chain disruptions, particularly on the chip side. But we have seen customers that are starting to, you know, they're starting to stock up in order in anticipation of working that backlog down. I think, you know, the backlog is – you know, pretty much was created over a two-year period, so we think that's got, you know, kind of a longer tail to it. And then once we come to, you know, kind of the end of that and more of a normalization, there are new, you know, both Europe and the U.S. are considering new regulations which will require even more stringent emission controls, which will eventually require more zeolite catalysts for those emission controls. So we We kind of view it as, you know, if we're looking, you know, more long-term-ish, working off of that backlog over the next, you know, couple years, because it'll take a while to do that, and then after that, additional demand really coming from new regulations.

Okay, got it. Okay, great. Thank you.

And again, it was Star 1 if you had a question. We'll go next to David Silver with CL King. Your line is open. Please go ahead.

Okay, thank you. I have a couple of questions. I'll apologize in advance. I did have to step away at one or two points here. I have a couple of questions to start on the sulfur side. So first, I just was hoping you could refresh my memory on the mechanism for sulfur cost pass-throughs. In other words, We've seen a steep run-up earlier this year and now a pretty steep decline in the price of sulfur. Is the pass-through mechanism kind of seamless, or are there leads and lags that may impact your reported quarterly results? How seamless would that pass-through mechanism be?

Thanks for the question, David. I think it's not perfectly seamless. There are small lags, both from where we purchase from our suppliers may lag with the current market prices, and then obviously the contractual mechanism point of that may lag a little bit, but it's nothing very material. We always have been pretty good with closely overlapping the sulfur costs with what our

what our actual pricing is you know to our to our customers so it's really not a a big you know you know what we call sour spot or sweet spot out there where you're on one side or the other okay thanks and then um a question about your virgin sulfuric acid production capability so i mean you've cited that as a source of stronger growth for a number of quarters now um Where are you on your own capacity utilization for the Virgin product? And in particular, can you just remind me, but is it possible or practical to de-bottleneck, you know, your sulfuric acid unit, or is it the case where you'd really have to go greenfield, which I recall at world scale can be pretty expensive? Thanks.

Yeah, I would say the utilization on the assets, both on regeneration and virgin acid, not just with us, but really in the whole industry, is high. And you've probably seen that if you've read about the demand for virgin acid has obviously been very strong to support some of the fundamentals we spoke about earlier. But we're constantly innovating in the eco-services business and working on de-bottlenecking projects We had mentioned some in the past quarters where we've installed new logistics capabilities, particularly at the Houston site where we installed, you know, pretty much doubled our rail shipment capability. We've gone back and are actually adding to that right now. We've added rail capacity to the Martinez plant this year. We've got several other projects that are really targeted towards virgin acid in the Southern California and Midwest plant where we can actually increase the amount of sulfur throughput that we can have in the furnaces. So there's things out there that we're constantly working on to incrementally de-bottleneck the units. A lot of it is we're replacing pieces of equipment with larger pieces of equipment or larger pumping capability that just allows us to produce more virgin sulfuric acid, which has allowed us to really keep pace with the growing market demand.

Okay, great. And then one last one on the sulfuric acid. But I have read an article recently linking very strong demand for sulfuric acid with lithium production in particular. And apart from the trajectory of global lithium production, Is there anything especially unique about the processing or the extraction of lithium going on that would lead to an unusually high intensity of sulfuric acid consumption in that end market? So apart from the production growth level, but is the process itself especially unique you know, an intensive user of sulfuric acid. Thank you.

Yeah, I think it really gets back to just the ore content, right? So you have projects that you're trying to drive smaller amounts of minerals out of a larger amount of rock, I think, for the lithium. So you're just requiring more sulfuric acid. We've seen everything from upwards of 20 tons of sulfuric acid per ton of lithium carbonate produced. You know, on the copper side, that's lower, um, where, you know, it's three to five tons, uh, of sulfuric per, per ton of copper produced. But, you know, one of the things that, uh, is now going on, and I would say the, um, The metals industry is, you know, metal prices have become so favorable and metals demand high for these green infrastructure projects where we're seeing mines go back and go after, I'd say, you know, they call, you know, leach piles, you know, things, you know, ores that have already been processed that have residual metals and minerals on them, and they'll go and re-leach them with even more amounts of sulfuric acid to try to drive out as... much metal as they possibly can. So that's led to even higher demand of sulfuric acid.

Okay. And then last question would be about your share buyback activity. And this would be along the lines of how you decide where to direct kind of incremental buyback activity. So, you know, I did look at the final prospectus from August on the secondary offering by your major stockholder. And then you indicated above and beyond that, you know, you chose to purchase, I think, 1.1 million shares in the open market here. And when I think about kind of the optimal way, might be optimal way to conduct that, I'm just scratching my head, but you are able to get a discount, I guess, off of the market when you go in one direction and you're purchasing at full market, give or take, in the other direction. And, you know, I'm just wondering from the point of view of stability of the share price and return on your buyback dollars, you know, how do you think about, you know, negotiating directly with a major shareholder versus going out in the open market to conduct those buybacks? Thank you.

Yeah. Hey, David, it's Mike. So the open market purchases were done prior to the purchase with the secondary, right? So that was really an extension of what we had done at the end of the second quarter that bled into the beginning of the third quarter. And again, we look at that really, you know, academically, you know, when your stock price is trading a lot lower than our expectations are. And as Kurt mentioned, you know, we believe that the stock is undervalued, so it made sense to execute those open market purchases. And then when we executed on the stock buyback as part of the August secondary, you know, those were, you know, not necessarily negotiated, but they were just in conjunction with the price that was executed under the secondary. So again, it was, as you could see, at a lower price but it was part of the structure. And the ones that were done in the open market were under the 10B51 that was in place at the time, but hopefully that helps clarify. But we're always looking for a prudent execution to increase shareholder value for those share repurchases.

That's very clear. Thank you very much.

We have no further questions in the queue at this time. This does conclude the EcoVest third quarter 2022 earnings call and webcast. Thank you for your participation, and you may disconnect at any time.