Ecovyst Inc.

Good morning. My name is Shelby and I will be your conference operator today. Welcome to EcoVist fourth 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. You may register to ask a question at any time by pressing the star and one on your touchtone phone. You may withdraw yourself from the queue by pressing star and two. I would now like to hand the conference over to Gene Shields, Director of Investor Relations. Please go ahead.

Thank you, Shelby. Good morning and welcome to EcoVist's fourth quarter and full year 2022 earnings call. With me on the call this morning are Kurt Bidding, EcoVest Chief Executive Officer, and Mike Feehan, EcoVest Chief Financial Officer. Following our prepared remarks this morning, we look forward to taking 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 2023 financial outlook. This information is subject to risks and uncertainties that could cause actual results in the implementation of the company's plans to vary materially. Any forward-looking information we share 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 Bidding. Kurt?

Thank you, Gene, and good morning. First, I want to take the opportunity to thank all of my colleagues at Ecovist for their dedication and hard work. Their efforts to provide great products and services to our valued customers enabled the strong financial results that we delivered in Q4 and for full year 2022. During the fourth quarter, the favorable demand fundamentals we experienced throughout the first nine months of 2022 continued, providing for a strong finish to the year despite the disruption associated with winter storm Elliott late in the fourth quarter. During the fourth quarter, high refinery utilization in the U.S. continued to translate into strong demand for our regeneration services. In addition, underlying demand for virgin sulfuric acid also remained firm, although fourth quarter sales were below the extremely high level of sales we experienced in the fourth quarter of 2021. This was due in part to the impact of customer downtime as well as our downtime and related production constraints arising from Winter Storm Elliott. which limited our ability to fully satisfy the attractive spot demand in the quarter. In our catalyst technologies business, during the fourth quarter, we saw increased demand for renewable fuel and hydrocracking catalysts, while sales of polyethylene catalysts were lower than the year-ago quarter, in part due to the timing of shipments at year-end. As a result, Total sales for the fourth quarter of 2022 were up 8% compared to Q4 2021, and consolidated adjusted EBITDA of $69 million was up 9% versus the year-ago quarter. In light of these strong fourth quarter results, we delivered full-year 2022 adjusted EBITDA of $277 million. That was up 22% compared to 2021 and above our previously raised guidance range. Our favorable financial results provided for meaningful cash generation in the quarter, enabling increased shareholder value associated with the $63 million repurchase of stock in conjunction with another successful secondary offering. Through the offering, we repurchased $8 million of the shares offered by a private equity sponsor, helping to reduce their ownership of Ecoviz to less than 10%. On a full year basis, strong cash generation facilitated the reduction of our net debt leverage ratio to 2.8 times, while at the same time, we increased shareholder value with $137 million worth of share repurchases. We ended the year with a strong balance sheet and with $171 million of liquidity, positioning us well to capture growth opportunities in 2023. In terms of non-financial achievements, In 2022, we continue to position Ecoviz for future growth as a key supplier, enabling greener and more sustainable technologies. While our focus on sustainability applies to products, services, and technology development, process improvement is of equal importance as we focus on our near-term and longer-term sustainability objectives. As evidence of our ongoing commitment to sustainability and in the spirit of continual improvement, We recently achieved a gold sustainability rating from Ecovattis, which places Ecovist in the 97th percentile of all companies rated in our peer group. We are pleased to receive this distinction, which we believe validates our ongoing efforts to promote more sustainable practices. We expect 2023 to be another year of growth for Ecovist as we build upon our successes in 2022. As noted, we believe the demand fundamentals that contributed to our 2022 results will continue this year, providing for incremental growth opportunities. In particular, with our leading supply share positions, we believe we have attractive organic growth opportunities associated with increasing demand for low-carbon and more sustainable technologies. As a leading provider of sulfuric acid regeneration services for the refining industry, and as a leading supplier of virgin sulfuric acid to a broad range of industrial applications, EcoServices is positioned for growth in 2023. Our regeneration services are essential to our customers' production of alkali, a high-value gasoline blending component. We expect a favorable domestic demand for refined products in 2023 in concert with increasing needs for higher-octane, cleaner-burning premium fuels and strong export demand will continue to support output production and drive demand for our regeneration services this year. In addition, we expect market demand for virgin sulfuric acid to increase in 2023, with positive demand fundamentals for many industrial end uses utilizing virgin sulfuric acid as a primary raw material. This year, we expect sulfuric acid demand in the mining sector to be strong. In light of the global supply shortage for copper and with increasing need for copper to support electrification and green infrastructure objectives, including electric vehicle production, charging network expansion, and the tie-in of wind and solar technologies, mining activity for copper is expected to increase, driving incremental demand for sulfuric acid required for leaching operations. In addition, mining activity for borates is expected to be stable. supported by demand in a highly diversified range of end use applications. Given our supply sources in the Gulf Coast and West Coast, we are well suited to serve our mining customers in the Southwest. In terms of other end uses driving demand for sulfuric acid, EcoServices is the largest producer of oleum, a supersaturated sulfuric acid used in the production of nylon and engineered plastics for construction materials, in coatings and packaging applications, and in automotive applications for vehicle light weighting. We also provide electrolyte grades used in petrochemical and chemical processes, semiconductor production, lead acid batteries, and water treatment applications, all of which are expected to drive incremental demand for virgin sulfuric acid in 2023. For our catalyst activation business, we expect another strong year for Chem32, a provider of offsite catalyst activation services. As a reminder, Chem32 is a global provider of ex-situ activation services, which is preferred over on-site activation because it reduces the customer's resource requirements and downtime. We expect Chem32 to benefit this year from growth in renewable fuel production capacity and change-outs, as well as from sales and change-outs of hydro-processing catalysts. And following a very good year in 2022 for our treatment services business, we anticipate another strong year in 2023, As the only North American sulfuric acid producer with the permits in place to treat hazardous waste streams regulated by RCRA, the Resource Conservation and Recovery Act, we are uniquely positioned for additional opportunities to serve the refining and petrochemical industries in the Gulf Coast. Our treatment services are a compelling alternative to long-haul trucking and deep well disposal for our customers, and Ecoservices gains from the beneficial use of the energy value in the waste streams. Turning to catalyst technologies, we expect 2023 to be an inflection point for our catalyst business. We expect broad-based growth across many of our catalyst technologies. For polyethylene and niche custom catalysts, we continue to expect demand growth in 2023. Over the past few years, our custom polyethylene catalyst solutions, which are designed to meet specific customer criteria, have enjoyed growth rates roughly twice that of underlying polyethylene demand. we have had strong share participation in newer, more cost-efficient capacity additions over the past few years, which we believe will maintain higher utilization rates relative to older capacity that is higher on the cost curve. For 2023, we expect continued demand growth in food and packaging applications with stronger overall demand in the back half of the year as export demand into China and Europe improves. For hydrocracking catalysts, we expect strong sales growth in 2023. The hydrocracking catalysts produced by our joint venture Zealis give refiners the ability to hit desired yield targets to maximize unit profitability. As we have discussed previously, we believe sales of hydrocracking catalysts in 2022 were impacted by turnaround delays, as our refining customers sought to maintain lofty operating rates in the face of extremely high refining margins. As a result of these turnaround deferrals, we believe some catalyst sales were pushed into this year. In addition, we expect refinery utilization in the U.S. will remain elevated in 2023, supported by low product inventories and robust export demand to Latin America and Europe, where refined product production has been adversely impacted by the Russian-Ukraine conflict. In 2022, our sales of emission control catalysts were limited by a significant backlog in heavy-duty diesel vehicle deliveries related to the chip shortage, as well as supply chain and logistics limitations. This year, we expect that the improvement in chip supply and increasing production and delivery against the significant backlog will contribute to higher sales of emission control catalysts. And lastly, we believe sales into renewable fuels will be a positive contributor to catalyst technologies this year. We believe the ongoing expansion in renewable fuel capacity and production that are referred to as being positive for our Chem 32 business this year will also translate into stronger sales in the ZI joint venture. Renewable fuel production, specifically renewable diesel production and the nascent production of sustainable aviation fuel, is being driven by the need to decarbonize heavy-duty transportation and aviation. As today, there are very limited electrification alternatives in those areas. In addition, regulatory mandates such as the Renewable Energy Directive in Europe and the Inflation Reduction Act in the U.S. will continue to contribute to capacity and production growth for renewable fuels. As an example, the Inflation Reduction Act has increased incentives for production of SAF, or sustainable aviation fuel, which we believe will become a meaningful component of renewable fuel production in the 2025 to 2026 timeframe as airlines pursue their carbon reduction goals. Having just walked through a number of end uses expected to grow in 2023, you may have noticed a common thread. All are associated with the need for more sustainable technologies. We believe Ecovist remains uniquely positioned to help meet the world's increasing need for green infrastructure and sustainable technologies. As a key supplier of products and services that are essential to the advancement of low-carbon technologies, a majority of our sales address customer and consumer needs for more sustainable products and services. Broad sustainability objectives such as cleaner air, reduced vehicle emissions, increased electrification, and the circular plastics economy all provide opportunities for EcoVis to leverage its technical expertise and product portfolio. In addition, they provide opportunities for more meaningful organic growth this year and in the future. With this in mind, our primary focus for R&D investment is in product innovation linked to sustainability. However, our commitment to sustainability extends beyond our product and service offering. In terms of the environment, we have committed to meaningful reductions in greenhouse gas emissions and reductions in hazardous waste, with clear targets set for 2025 and 2030. We are also committed to the safety of our employees and being responsible stewards in the communities in which we operate. At EcoVis, we reinforce a culture of safety and continuous improvement through our HS&E Perfect Days Initiative and through the principles of the American Chemistry Council's Responsible Care Program. Lastly, we are extremely proud that our dedication to driving more sustainable business practices throughout our company was validated by the gold status rating that we received from Ecovados in 2023, which places Ecovist in the 97th percentile of all companies rated in our peer group. At this time, I'll turn the call over to Mike Feehan for a more detailed discussion of our fourth quarter and full year financial results. Thank you, Kurt. Continued favorability of market fundamentals during the fourth quarter provided the backdrop for another solid quarterly performance for Ecovist. Total sales for the fourth quarter, including our 50% interest in the Zealous joint venture, were $223 million, up $16 million, or 8%, compared to the fourth quarter of 2021. The increase in sales was driven by continued pricing benefits in our eco-services business, associated with the contractual price increases arising from higher labor, energy, and freight costs. In contrast, prior quarters, the pass-through of sulfur costs had a minimal impact on sales in the fourth quarter. Fourth quarter adjusted EBITDA was $69 million, up 9% compared to the fourth quarter of 2021, with the pricing benefit partially offset by higher variable costs, largely associated with inflation, lower sales volume in silica catalyst and higher turnaround cost in eco-services. Total sales for the full year, including the Zealous joint venture, were $953 million, up 28% compared to 2021, with the increase reflecting higher pricing, including the pass-through of higher sulfur costs, and higher sales volume in both eco-services and catalyst technologies. Of the increase in sales, $85 million is associated directly with the pass-through of higher sulfur costs within the eco-services business, which negatively impacted margins by 280 basis points. The strong pricing and volume growth resulted in adjusted EBITDA growth of nearly $50 million or 22%. In addition, we generated $146 million of adjusted free cash flow during the year, leading to a cash conversion ratio of just under 80%. And after deploying $137 million of capital for share repurchases, we reduced our net leverage ratio by half a turn to 2.8 times. Moving to the next slide, we'll take a deeper look into the drivers of our fourth quarter adjusted EBITDA growth. The increase in fourth quarter adjusted EBITDA was primarily driven by $30 million of pricing benefits. These price increases were largely associated with index pass-through of higher labor, energy, and freight costs in eco-services, as well as price increases enacted through the year in catalyst technologies. These price increases more than offset the higher variable costs, driving another quarter of positive price-to-cost ratio. In addition, the quarterly results were impacted by lower virgin sulfuric acid sales, driven by lower spot sales, planned customer turnarounds, and the impact of winter storm Elliott, as well as an unfavorable mix impact in silica catalyst. Turning to slide 12. Fourth quarter 2022 sales for eco-services was $160 million, up 12.5% compared to the fourth quarter of 2021. Sales increase was principally driven by higher pricing in both regeneration services, and virgin sulfuric acid, including the contractual pass-through of higher labor, energy, and freight costs. Demand for regeneration services continued with higher sales volume compared to the fourth quarter of 2021. While market demand for virgin sulfuric acid remained strong in the fourth quarter, sales volume was down compared to the exceptionally strong sales volume in the fourth quarter of 2021, due in part to the adverse impact of planned customer turnarounds disruption associated with Winter Storm Elliott, and lower spot sales. Fourth quarter adjusted EBITDA for eco-services was $54 million, up 4% compared to the fourth quarter of 2021, with the sales benefit being partially offset by higher turnaround costs of approximately $3 million compared to the fourth quarter of 2021 and the impact of Winter Storm Elliott. While the storm had a modest impact on fourth quarter results, it will have a more material impact on first quarter results due to the timing of repair costs and lost customer sales. We estimate the storm will have an impact on the first quarter adjusted EBITDA of approximately $7 to $8 million. The fourth quarter 2022 adjusted EBITDA margin for eco-services was 34%. down compared to the fourth quarter last year, driven by the higher turnaround costs, lower virgin sulfuric acid volume, and the storm impact, resulting in higher maintenance costs. Turning to the results for Catalyst Technologies on the next slide, total sales, including the DeLis joint venture of $63 million, was down approximately 2% compared to the fourth quarter of 2021. Sales for the Zealous joint venture were up 10% in the fourth quarter, primarily driven by higher sales into renewable fuel application and modestly higher sales of hydrocracking catalyst. Silica catalyst sales for the fourth quarter were $23 million, down approximately $5 million compared to the year-ago quarter, primarily due to unfavorable mix and some order timing of polyethylene catalysts. Fourth quarter adjusted EBITDA for Catalyst Technologies was $20 million, down $3 million compared to the fourth quarter of 2021. The decline was primarily driven by the lower polyethylene sales and higher costs from continued inflationary pressures, including higher energy and transportation costs. With regard to inflationary pressures, over the course of 2022, we saw notable inflation around materials, as well as in energy and transportation costs. While we proactively implemented price increases, the extreme spikes in energy and raw material costs were not fully reflected in our short-term pricing actions. In addition, over the course of 2022, we incurred elevated ocean and freight costs associated with logistical delays, which we believe are largely non-recurring. Turning to the next slide, a few comments on leverage and liquidity. Throughout 2022, our strong cash generation capability continued to provide for significant capital allocation flexibility. With free cash flow of $146 million and a cash conversion ratio of nearly 80%, we were able to comfortably fund our capital expenditure programs and use $137 million of cash to increase shareholder value through our share repurchases. while reducing our net leverage ratio from 3.3 times at the end of last year to 2.8 times at the end of this year. At year end, we had total liquidity of $171 million, comprised of cash of $111 million and availability under our ABL facility of $60 million. We believe our strong liquidity position and strong cash generation allow us continued flexibility in our capital allocation strategy. Turning to slide 15. In conjunction with the secondary offering in November, we repurchased 8 million shares of our common stock sold for $63 million, including repurchase activity in the second and third quarters of last year through open market repurchases and a secondary offering in August. For the full year, we repurchased 16.5 million shares for $137 million. Our balance sheet remains strong with only one tranche of debt maturing in 2028. As such, We believe we can continue to invest in operational improvements and organic growth initiatives while retaining the flexibility to pursue attractive and accretive acquisition opportunities that can complement our existing business and our organic growth objectives. Turning to our full year 2023 outlook on the next slide. Overall, we expect demand trends to remain positive in 2023. And we expect this to translate into top-line growth for both eco-services and catalyst technologies. We expect 2023 sales to be between $760 and $790 million. This reflects the estimated pass-through impact of lower sulfur costs of approximately $95 million. Adjusting for the sulfur pass-through impact, sales growth, including the ZLIS joint venture sales, would be 7%, assuming the midpoint of the guidance. In eco-services, adjusting for the estimated $95 million of pass-through sulfur cost impact, we expect mid-single-digit growth in sales, despite the lower volume resulted from Winter Storm Elliott. For Catalyst Technologies, we expect sales, including our proportionate share of the Zealous Joint Venture sales, to reflect low double-digit growth in 2023. For silica catalysts, we expect sales of polyethylene catalysts to be up on a mid to high teens percentage basis in 2023, offset by lower sales of niche custom catalysts compared to a very strong 2022. For the zealous joint venture, we expect sales to be up 10% to 15%, driven by strong growth in hydrocracking and emission control catalysts up on a high teens percentage basis and higher sales of renewable fuel catalysts up on a mid-teens percentage basis. For 2023, we are guiding adjusted EBITDA of $285 to $300 million, which would imply a growth of approximately 6% at the midpoint compared to 2022. However, this guidance incorporates our expectation that Winter Storm Elliott will have an adverse impact on first quarter adjusted EBITDA of approximately $7 to $8 million. Excluding the impact of winter storm Elliott, we would therefore have expected 2023 adjusted EBITDA growth at the midpoint of the guidance range to be higher by over 200 basis points. Given the impact of winter storm Elliott, eco-services adjusted EBITDA growth is expected to be in the low single digits. If you exclude the storm impact, we would have expected mid-single digit growth. And then with the strong sales growth, we expect Catalyst Technologies adjusted EBITDA to grow between 10 and 15%. Given our 2023 expectations for adjusted EBITDA, we expect adjusted free cash flow to be in the range of $115 to $130 million. While the increase in EBITDA will result in the generation of additional cash flow, we expect higher working capital usage compared to 2022, along with slightly higher capital spending, interest, and taxes. Our higher capital expenditures range of $60 to $70 million in 2023 compared to 2022 reflects higher growth capital primarily in our Catalyst business. And for interest expense, we are projecting a range of $40 to $50 million, reflecting higher rates in 2023. Having provided an outlook for the full year of 2023, which reflect our positive growth expectations for both Ecoservices and Catalyst Technologies, I want to provide some specific guidance for the first quarter. We expect first quarter 2023 adjusted EBITDA will be down approximately 30% compared to the first quarter of 2022. In Ecoservices, as previously noted, we expect that Winter Storm Elliott will have a negative impact on first quarter adjusted EBITDA of approximately $7 to $8 million. In addition, we expect a further impact related to an extended turnaround at one of our sites during the first quarter. Prior to the impact of the storm and the extended turnaround, we anticipated Ecoservices adjusted EBITDA to be relatively in line with prior year first quarter, as our continued growth is expected to be reduced by higher planned turnaround costs at one of our larger units and the impact associated with planned customer turnarounds during the first quarter. Therefore, we anticipate eco-services adjusted EBITDA will be approximately 20% lower compared to the first quarter of 2022. For catalyst technologies, while we are expecting full-year earnings growth of 10% to 15%, including stronger sales of hydrocracking catalysts, we expect order timing to be a factor in the first quarter. For hydrocracking catalysts, we serve some of the largest refineries, and individual orders are significant in dollar terms. Some orders can be larger than $10 million. For the first quarter, we expect lower sales of hydrocracking and specialty catalysts, driven by some large orders that are being shipped in the first quarter but will likely be recognized in the second quarter. The order timing will not impact full-year growth expectations. As a result, we expect adjusted EBITDA and catalyst technologies to be off approximately 50% compared to the first quarter of 2022. This will result in Ecovist's adjusted EBITDA to be off approximately 30% compared to the prior year first quarter. While our first quarter earnings are anticipated to be light, driven by sales, timing, and catalyst, and the impact from winter storm Elliott, we expect solid overall growth for the full year in 2023. I'll now hand the call back to Kirk for some closing remarks. Thank you, Mike. We are extremely proud of the results we delivered in 2022. Given the economic uncertainty and inflationary pressures that prevailed throughout the year, our businesses demonstrated outstanding resilience. We finished the year with strong financial results despite the adverse impact of Winter Storm Elliott late in the fourth quarter. Our financial performance paved the way for cash generation and net leverage reduction, allowing us to enhance shareholder value through significant share repurchase activity. We also achieved a number of non-financial milestones as we continue to position Ecoviz for growth in 2023 and beyond. I want to again personally thank all of our employees for their dedication and their contributions that made the successes of 2022 possible. We entered 2023 with solid underlying business momentum. Despite a degree of economic uncertainty, we maintained solid growth expectations for the year. we expect Ecoservices to continue on its long-term growth trajectory this year. While our first quarter results will reflect the impact of Winter Storm Elliott and a significant planned turnaround, we project growth in sales and adjusted EBITDA for Ecoservices this year. For catalyst technologies, we expect higher sales for hydrocracking, renewable fuel, emission control, and polyethylene catalysts this year. We believe these higher sales coupled with lower inflationary pressures and incremental pricing actions, will translate into solid year-over-year growth. As Mike referenced, we expect 2023 to be another strong year for cash generation, and this will continue to enable our flexible capital allocation strategy, which is intended to drive growth and increase shareholder returns. In closing, we are highly confident in our ability to deliver growth again in 2023, and we look forward to updating you on our progress throughout the year. With that, we will ask the operator to open the line for questions.

At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star and 1. to ask a question. We'll take our first question from John McNulty with BMO.

Yeah, thanks for taking my question. Maybe the first one just on the winter storm impact that you're calling out for the first quarter, the $7 to $8 million or so. Can you help us to understand how much of that's tied to the repair and maintenance costs versus the volume lost? And then on the volume lost portion, is that something you can make back as we kind of progress through the year? Or is it, hey, look, you either have it and you can produce it and deliver it, or you can't and they go somewhere else? Like, I guess, how should we be thinking about that?

Hey, John, thanks for your question. This is Mike. I would estimate that, you know, roughly half of the impact is lost sales compared to half, you know, being more repair maintenance. We have built in any catch-up into our guidance for the year, so we're still, you know, believe that we're going to be strong for our overall results for eco-services in the mid-single digits. excluding that impact, but it is built into our guidance for the year.

got it got it and then maybe just a follow-up so you know early on in in your prepared remarks you kind of walk through all the all the positives and admittedly i mean it sounds like everything kind of has a bunch of positives going forward from you know end market demand you know apparently being kind of the big driver of it you know i guess the the winter storm impact you know obviously is a little bit of a setback but i guess i'm I'm a little bit surprised with all the growth drivers, you know, even some of the, you know, pent-up demand for, say, some of the catalyst business that you're only guiding to, you know, 6% EBITDA growth as kind of the midpoint of the range. So are there other, you know, quote-unquote bad guys that we should be thinking about in terms of either costs or what have you? I mean, it sounds like some are actually coming down. So I guess I just can't quite reconcile that. the kind of muted EBITDA growth. So maybe can you help us to think about maybe what other bad guys might be out there that we should be considering?

Yeah, I mean, John, this is Curt. Thanks for the question. Now, I mean, you know, we're really confident in the growth, as you said, for the major segments. When you look at catalyst technologies, you know, polyethylene, renewables, hydrocracking, you know, all showing, you know, low double-digit type growth. And then when you go over to eco-services, it's really that storm impact in the first quarter. So regeneration services, continue to have strong demand with strong refining economics, strong refining utilization in the first quarter and really projected through the year, and then really good underlying demand growth really for virgin sulfuric acid. It's really just that virgin acid kind of setback in Q1 that's really related to that storm and the lost volume and the maintenance costs associated with that.

Got it. Okay. Thanks for the call. I appreciate it.

And we'll take our next question from Alexey Yefimov with KeyBank Capital Markets.

Thanks, and good morning, everyone. I wanted to ask you about catalyst technologies. The high watermark for EBITDA was $108 million in 2019, and every subsequent year was below that level. In 2022, you did $78 million. How do you view that 108 level? Was this, you know, unsustainable, or was this something that could be a target that you could achieve and exceed in the long run? And when could that be, if that's the case?

Yeah, hi, Oleski. Thanks for the question. So, you know, Just referring back to that year of 2019 in catalyst technologies was really a high watermark really for hydrocracking catalysts. It was kind of a peak change out year. And then our niche custom catalysts as well had a very strong year. And when we look at catalyst technologies for 2023, The growth there is really being driven by the major segments in the business. Again, polyethylene, renewables, hydrocracking, and emission controls all have really solid growth in their secular trends. 2022, I will say, was impacted by a couple things, right? We said there was high refinery margins and really high utilization in those refineries, delayed turnaround. So as we look at hydrocracking going forward, I mean, it may be smoother than it was maybe in the past because you had the pandemic, which had low utilization rates. Now you're coming into an era where there's very high utilization rates. So we definitely know 2022 was impacted by those high utilization rates in in hydrocracking. And then we have the spike in energy costs at mid-year. And then really, you know, as Mike talked about, some one-time freight interplant logistics that, you know, that we view non-recurring. So we view that, you know, most of those headwinds that we saw in 2022 are behind us. And, you know, we really feel that the segment is going to be very healthy in 2023.

And thanks for this. And maybe as a follow-up to How would you look at 2023 in this segment? Is this, you know, somewhat below normalized level, above or abnormalized? Can you frame it relative to the cycle of, you know, margin normalization and maybe the catalyst reload cycle at your various customers?

Yeah, I mean, I'll start just on really maybe on the catalyst cycle reload. I mean, I think, you know, again, I think we see strong growth. I mean, we see... low double-digit growth at least in all the major segments there. I wouldn't necessarily say we can call it a peak year in hydrocracking because, again, it's another year of high refining utilization projections and high refining margins. So as we saw some catalyst hydrocracking sales increase, you know, push from 22 into 23, you know, that could very well happen as well into 23 and 24. And so that cycle is a little bit more of unknown than it has been in the past just because of the pandemic and the high utilization rates that have happened. But, you know, we continue to see, again, very strong growth in many of the regions. You know, I didn't, you know, I left out renewable fuels as well, you know, renewable fuels production growing at, you know, roughly 20% per year, which is going to translate into some nice sales growth for us as well.

Great. Thanks a lot.

We'll take our next question from PJ Juvicar with Citi.

Hi. Good morning. This is Patrick Cunningham. I'm on for PJ. You referenced your geographic footprint in Virgin relative to the heavy mining industry, and I know lithium is a relatively small part of your business and just a small part of lithium supply in the U.S. in general. Is there enough potential demand to justify adding new capacity or expanding existing capacity, maybe southeastern U.S.? ? I think I'm just trying to understand the volume potential, you know, what might be the differences, say, relative to copper or borates.

Yeah, so thanks for the question, Patrick. That's a really good one. So as you outlined, we do have, you know, we like to say we have our plants kind of triangulate the mining sector in the U.S., right, between the the Northern California, Southern California, and the Gulf Coast location. So when you look at mining, obviously mining is really kind of the backbone materials required for all the electrification and green infrastructure, you know, as you referred to, copper, lithium, borate. You know, copper uses, you know, traditional copper leaching uses around three to five tons of sulfuric acid per ton of copper produced, you know, Lithium is much higher in the realm of 20 tons. As you look at the lithium production that's projected or really needed to power the electrification and green infrastructure going forward, it's going to require immense amounts of sulfuric acid, much more than copper or borates, right? It just uses a much higher magnitude of sulfuric acid. So, you know, we expect that will continue to drive demand for, you know, sulfuric acid going forward.

Great. Thanks. And then just on the, you know, higher CapEx number, you know, which parts of this catalyst business is that being directed? And would I be correct in assuming that you might have a bias towards, you know, the catalyst business in terms of potential bullpens?

Yeah, that's another good question. I'll take the first part there. You know, our growth capital, you know, is geared towards the catalyst business. You know, there's some good opportunities, you know, in the polyethylene catalyst market as well as in our zealous joint venture that we're continuing to look at. There is, you know, something that we're continuing to believe that there's strong growth where we will continue to invest organically in in the catalyst business? Yeah, you know, I think, you know, it looks in terms of inorganic growth. You know, we look at, you know, Ecovist. We like all the segments that we serve, right? I mean, we deliver unique and customized products and services, really the blue chip, refining, pet chem, mining, and catalysts, and major industrial consumers. And, you know, we really like these segments. So any opportunity... to expand our offerings in these areas or adjacent to the areas is going to be interesting to us. So we're really confident that, you know, we can drive value in an acquisition either by leveraging our operational expertise, technical know-how, or customer relationships in either of the businesses, not just, you know, catalyst technologies. Great. Thank you.

We'll take our next question from David Begleiter with Deutsche Bank.

Thank you. Kurt, you touched on capital allocation this year, but thinking about the use of the free cash for debt pay down, can you talk about how much we should expect or what are the priorities besides debt reduction this year?

Yeah, so thank you for the question. We'll go a step back, really. You know, 2022, we repurchased about $137 million worth of stock, increasing the value to the shareholders. You know, so we're really proud of that fact. We were able to execute that and maintain our net leverage ratio at that 2.8 times or really reduce it and then maintain it at that 2.8. So as I just said, we really strongly believe in the secular growth trends in our businesses. So moving forward with our cash generation, we're going to continue to invest in our businesses and grow them both organically and inorganically because we think there's great opportunities there. And then secondly, we also have that board share repurchase authorization that I just mentioned that we can continue to use to deliver value to shareholders. Okay.

Understood. And just on sulfuric acid, apologies if I missed this, is there potential to add capacity organically or even potentially buy some more capacity given the robust air market growth you've talked about?

Yeah, we're always, we have multiple projects at any given time looking to de-bottleneck our existing assets, right? So we've talked about before, we de-bottleneck logistics assets. We have the ability to de-bottleneck and remove restrictions on our existing plants and push more, I guess, more sulfur capacity through the plants to generate more sulfuric acid. And We love the sulfuric acid industry. We've been in it for 120 years, so we're always looking to grow our production capacity where we can. Thank you.

And we'll take our next question from Hamed Korsant with BWS.

Good morning. Could you just elaborate on, given the reduced production in Q1, Are you looking to ramp up production beyond nameplate capacity to catch up with sales? How are you going about landing new customers when you have this kind of headwind in Q1 as far as production is concerned?

Yeah, Hamid, thanks for the question. So the production, we service our customers really through a network of facilities. So when we have turnarounds and we have and we have outages that are caused by weather-related events, we continue to supply with our existing network capacity. The utilization across our network as well as the sulfuric acid market in general is very high. Contracts in that business tend to be longer term. When we look at our customer base, we're generally in positions in virgin acid with customers anywhere from one to seven years. So we look at those as, you know, those customers sign up with us for a long period of time. We make commitments to them over a one to seven year period and supply them from whatever plant that we need to, you know, if we have a certain unit down, we can just obviously supply it either from the other unit at that site or additional plants in our network.

And my other question was on refining utilization rates have been elevated for quite some time. Does this structurally change your business on a long-term basis, or do you feel like this is still a short-term event?

Well, I mean, I think if you look at the refining utilization rates that are projected by the EIA, they are projected really to continue to maintain high rates in the medium term. So, again, we do long-term agreements with our customers, refining customers, and those continue. And they're very bullish on their refining, so I don't think that our customers mindset in terms of utilization, I guess, is we agree with our customers and what the EIA projects, which are going to be high utilization rates. And I've I would also like to highlight as well is that it's not just utilization. It's the value of alkali continues to be very high, right, which is what we're linked to. So refineries, despite whatever utilization rates are, they're always trying to push their alkali units because it's one of the highest margin products that the refinery produces. It's needed in gasoline exports and to produce premium gasoline. Okay. Thank you.

And we'll take our next question from Lawrence Alexander with Jefferies.

Hi, this is . I just have a follow-up on I think it was David's question. You mentioned doing deep bottlenecking into sulfuric acid. I was just wondering if it's possible or how much it would cost for a brownfield or a greenfield expansion?

That's a hard question to answer for expansions. We look at a brownfield expansion as we bottleneck equipment in our plants all the time. So if you look at a sulfuric acid plant, it's made up of, you know, numerous pieces, I would say, of modular type equipment that as those pieces of equipment age and we replace, you know, and come to end of life and we replace, a lot of times we're replacing things. with a piece of equipment that allows that plant to produce more product and upsizes, I guess, the production capacity of those plants. So it's hard to put a cost on a brownfield because that's kind of what we look at is we bottleneck certain units of the sulfuric plant. Greenfield plants are obviously very expensive, and, you know, if we were going to go in, you know, a multiyear project to permit and construct. So if we were going to go down that path, obviously, you know, as we've done in the past with our other, you know, capacity expansions or other major investments, we would be tying it to, you know, specific customer or specific segment demands.

All right. That's very helpful. And then just one other question. Just broadly speaking, if we were to hit a recession in the U.S. by the second half of this year into 2024, could you still hit the low end of your outlook, your EBITDA outlook?

Yeah, I think Mike and I have been with the legacy businesses here, I think, since 2006. So we've had the opportunity. We've been through a couple of the economic down cycles. And you look at all the – you look at the segment trends driving most of our businesses here. Really, in refinery, the regeneration business is being driven by, again, utilization, that demand for alkali, which we see will continue to be strong. Virgin Acid, another large product line of ours, that's being really driven by things like green technologies and low-carbon technologies, and you talk about mining. So we look at those types of things, the underlying commodities that continue to be strong in those areas. And those are really transitional. You know, we talk about mining and the green technology is really transitional. And so even if there would be a downturn, we believe those will continue to be strong because there's heavy investment, both private and government, going into those areas. And for catalyst technologies, a lot of the same thing. Our high-density polyethylene catalyst sales continue to support lightweighting of vehicles and packaging and film, as well as the other things like renewable fuels and hydrocracking, which we're benefiting from strong distillate demand and strong demand for those renewable fuels. So we feel confident in this business. would be resilient in an economic downturn, and it's shown that to be the case during the 2008 and 2020 downturns as well.

All right. Thank you very much.

And once again, if you would like to ask a question, please press star 1. We'll take our next question from David Silver with CLK.

Yeah, hi. Thanks very much. I had a couple of questions. I just wanted to start clarification, I think, on the tax rates. So just as perspective, but I think in 2022, we started out thinking the tax accrual rate was going to be closer to 30 percent. And it never really reached that level on an adjusted basis, by my records, that whole year. And then it was much, much lower. in the fourth quarter. Could you maybe comment on that? And then in particular, what kind of range is reasonable for using for our 2023 forecasts? Thank you.

Yeah, David, it's Mike. Thank you for the question. I think in the past, we talked about the tax rate being in the mid to high 20s. So, you know, probably not quite approaching the 30. I mean, we are a domestic business where, you know, a significant amount of our production does come out of the U.S., which, you know, has a statutory rate of 25%, you know, plus state taxes and such. However, we do have opportunities to lower our taxes, you know, through some of our structures that we have and how we're selling our products, which puts us probably in the mid- 20s on a run rate basis. I think our adjusted tax rate was around 23% or 24% this past quarter, so we probably expect it to be somewhere in the mid-20s on a go-forward basis.

Okay, thank you for that. My next question would be about the catalysts for renewable fuels, and I'm looking at the very bottom slide. slice of slide seven. But you talked about the opportunities in sustainable aviation fuel, and I think you used the word nascent. But the part of your renewable fuels business that goes into, I don't know, the spent cooking oil or the mixed feedstocks, as I recall, I mean, that's a very nice profit-making opportunity for you just due to the demands on the catalyst and maybe the more frequent replacement cycle or a shorter replacement cycle. I'm just curious, this is not a new business, but why is production capacity, I guess you're talking about the demand for your product rising like 50% in the next year, And, you know, what does Ecovist have to do to be, you know, fully prepared to kind of exploit that, you know, unusual growth opportunity? Thank you.

Yeah, thanks for the question. So when you look at renewable fuels and, you know, The new production units coming online are really being built to service the two kind of segments when you talk about renewable diesel, which, again, is a drop-in, one-for-one replacement of regular road, called regular ultra-low sulfur road diesel. The next, you know, kind of next step of those processes and what a lot of the new units are being designed are also to make sustainable aviation fuel. So as we look forward into kind of the 2025 to 2026 time period, we see more sustainable aviation fuel being adopted where airlines are going to start to blend, you know, up to 50% of that sustainable aviation fuel into their fuel blends to start to try to achieve their low-carbon technology. So that's Really, as you look, you know, down the road, you see renewable diesel, you know, taking share of the diesel, you know, of the diesel market, but then more, you know, I think the larger share will come really from aviation where it can, you know, can be blended up into, you know, a 50% range. But we expect growth, and I think, you know, as Mike had said, you know, renewables in the low double digits this year and The way we track and, you know, our zeolites that we sell into that industry are coveted for their purity and their performance. And, you know, we partner with really the leaders of the technology in those areas that are capturing a lot of those new units. So we're positioning ourselves with our really zeolite expertise to, you know, benefit from the growth in that segment going forward.

Okay. Thank you very much.

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