Ecovyst Inc.

Good morning. My name is Travis, and I will be your conference operator today. Welcome to the ECHOVIS third quarter 2023 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 the star 1 on your telephone keypad. If you want to remove yourself from the queue, please press star 2. Composing your question, we ask that you please pick up your handset to allow for optimal sound quality. Lastly, if you should need operator assistance, please press star 0. I would now like to turn the call over to Gene Shields, Director of Investor Relations. Please go ahead, sir.

Thank you. Good morning and welcome to the ECOWIS third quarter 2023 earnings call. With me on the call this morning are Kurt Bidding, ECOVIS Chief Executive Officer, and Mike Feehan, ECOVIS Chief Financial Officer. Following our prepared remarks this morning, we'll take your questions. Please note that some of the information shared today is forward-looking information, including information about the company's financial and operating performance strategies, our anticipated end-use demand trends, and our 2023 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 in today's call with their corresponding GAAP measures can be found in the earnings release and the presentation materials posted in the investor section of our website at Ecovist.com. I'll now turn the call over to Curt Bidding.

Thank you, Gene, and good morning. I am pleased with Ecovist's performance in the third quarter. Against the backdrop of an evolving and an uncertain macro environment, Ecovist delivered solid results for the third quarter of 2023. Ecoviz also made good progress on several key strategic initiatives, including launching our operational and reliability enhancement program, announcing a major expansion for our Kansas City silica catalyst plant, and rebranding our zeolite products to highlight our differentiated technology in emerging areas such as renewables and plastic circularity. During the third quarter, demand across the majority of our end-use exposures remained stable. In our eco-services business, High utilization rates for our refining customers continue to drive demand for our regeneration services, while in our virgin sulfuric acid business, our broad exposure to a variety of industrial applications provided a level of stability in the quarter. However, as anticipated on our second quarter earnings call in early August, our third quarter sales of virgin sulfuric acid reflected weaker demand for oleum and high purity grades of sulfuric acid utilized in the production of caprolactam and other nylon intermediates. For catalyst technologies, as anticipated, sales of polyethylene catalysts were lower in the third quarter due to weaker global polyethylene demand and the ongoing impact of destocking. However, in the ZI joint venture, sales were up over 30% on higher sales of hydrocracking catalysts and catalysts used in the production of renewable fuels. Of note, and in contrast to many industrial sectors facing weak demand and volume declines, pricing in both eco-services and catalyst technologies remained positive in the third quarter. Third quarter adjusted EBITDA was $68 million, down 10% compared to the third quarter of 2022, with the decrease largely driven by lower sales volume in the nylon and polyethylene end-uses and higher maintenance, repair, and networking costs arising from the previously discussed outage at our Dominguez site to correct a production restriction. Looking to the fourth quarter and the balance of the year, we expect our diverse end-use exposures will continue to provide for a level of stability. Although we do not anticipate any material change in polyethylene market conditions for the balance of the year, For virgin sulfuric acid sales into the nylon end use, we now expect incremental weakness associated with the UAW strike and its impact on auto production and therefore demand for nylon used in light weighting of automotive parts. In light of our expectations for softer virgin sulfuric acid demand in the fourth quarter, we have elected to accelerate into 2023 a turnaround at one of our eco-services sites that was previously planned for 2024. While the revised timing for the turnaround will have a modest impact on our production capacity for virgin sulfuric acid in the fourth quarter, we believe this step will better align fourth quarter production capacity with expected demand, but more importantly will eliminate downtime in 2024 that could impact our ability to address demand recovery. As a result of this decision, which we feel will result in net production reliability for 2024, we expect to incur incremental costs associated with the turnaround this year. Given our expectations for lower virgin sulfuric acid sales, incremental costs with the turnaround, and recognizing the potential for continued destocking and further demand weakness, we now anticipate that full year 2023 adjusted EBITDA will fall at the low end of our guidance range of $260 to $275 million. However, our longer-term outlook remains very positive. We believe our unique portfolio diversification of stable end-use exposures and leverage the key megatrends driving future demand in emerging sustainable technologies, such as renewable fuels and plastics recycling, provide for attractive growth opportunities. We look forward to discussing our strategies to leverage these growth opportunities in our November 28th Investor Day. As we turn to slide six, I'll provide more perspective on our near-term demand outlook. Throughout 2023, strong demand for refined products and historically low gasoline inventories continue to drive high rates of utilization for our refining customers. These high rates of refinery utilization in conjunction with attractive refining margins have continued to support demand strength for our regeneration services. Given third-party projections for refined products and based upon input from our refining customers, we expect refinery utilization rates will remain at high levels. While we have planned for our refining customers to take their customary seasonal turnarounds in the fourth quarter, our outlook for regeneration services business for the remainder of 2023 and into 2024 remains positive. For virgin sulfuric acid, we expect softer near-term conditions for the nylon end use. We continue to believe that we are at or near trough of the cycle conditions for the nylon end use, and we anticipate demand improvement with the recovery in automotive production and other end uses for nylon production, and ASD stocking for nylon and its precursors runs its course. For the balance of eco-services, we continue to see extremely high utilization levels and a full-order pipeline in our Chem 32 business, driven by activation of hydrocracking and hydro-processing catalysts used in the production of conventional fuels and by capacity expansion for the production of renewable fuels. Due to market demand and with increasing regulatory support, we expect that production capacity for renewable fuels, including renewable diesel and sustainable aviation fuel, will continue to expand, and this, in conjunction with more frequent catalyst change-outs, is expected to provide attractive growth opportunities for our catalyst activation business. Lastly, we continue to see strong demand for our waste treatment services for our Gulf Coast petrochemical and refining customers as a preferred disposal alternative. Looking to catalyst technologies, we expect near-term sales of polyethylene catalysts to reflect the current sluggish demand environment and the significant impact of destocking, particularly in China and in Europe. However, our longer-term outlook for our polyethylene catalyst business remains positive. Relative to historical rates of global demand growth for polyethylene, our customized approach to catalyst design has provided for differential growth in overall sales. We believe we are well represented in newer, lower-cost capacity additions, particularly in North America and in the Middle East, where more favorable economics should support demand recovery as destocking abates. As evidence of our customers' expectations and growth needs, we recently announced an expansion project at our Kansas City site that is expected to increase the site's silica catalyst production capacity by 50 percent. This expansion project is supported by long-term customer commitments for the increased capacity, providing further confidence in the longer-term outlook for polyethylene catalyst demand. For our zeoless joint venture, as noted, we saw strong sales of hydrocracking catalysts in the third quarter, and we continue to expect positive sales in the fourth quarter and into the first quarter of 2024. As noted in my discussion of our Chem32 business, we expect continued growth in the production of renewable fuels where our zeolite catalyst materials are used in the de-waxing process for the production of renewable diesel and sustainable aviation fuel. We look forward to sharing more detail on our expectations for longer-term demand trends and associated growth drivers for our business in our investor day in November. At this time, I'll turn the call over to Mike for a more detailed discussion of our third quarter results. Thank you, Kurt. Turning to slide eight, I'll provide additional detail on our third quarter financial results. Total sales for the quarter, including our proportionate 50% share of sales from the ZLIS joint venture, were $210 million, compared to $260 million for the third quarter of 2022. Of the $50 million change in sales, $39 million was driven by the pass-through of the lower sulfur costs. With the balance of the sales decrease, largely the result lower sales volume for virgin sulfuric acid used in the production of nylon intermediates and lower sales of silica-based catalysts used for polyethylene production. This was partially offset by continued strong pricing in both businesses and higher sales of hydrocracking catalysts and catalysts used in renewable fuel applications. Third quarter adjusted EBITDA was $68 million compared to $75 million in the prior year. The decrease was a function of lower sales volume, as noted, and higher operational costs associated with increased manufacturing and networking costs arising from the previously discussed Dominguez production outage in July. The adjusted EBITDA margin for the third quarter was 32%, up 330 basis points, with the margin uplift primarily driven by the impact of the pass-through of lower sulfur costs, along with favorable pricing partially offset by higher manufacturing and networking costs. As we move to the next slide, I'll highlight the primary components of the change in adjusted EBITDA compared to the prior year third quarter. As was the case in the second quarter, average sulfur prices in the third quarter of 2023 were significantly lower than in the prior year. Pass-through of these lower sulfur costs had an aggregate impact of $39 million in variable costs with a corresponding reduction in average selling prices. As such, the lower sulfur cost pass-through on sales during the quarter had no impact on adjusted EBITDA. The largest contributors to the reduction in adjusted EBITDA were lower sales volume along with the higher variable costs in the quarter. The higher variable costs were primarily a result of the additional networking costs and higher energy costs associated with planned maintenance. These factors were partially offset by higher pricing in the quarter. Let's now turn to our segment results, starting with Eco Services. Third quarter sales for Eco Services was $148 million, compared to $196 million in the third quarter of 2022. Of the change in sales, $39 million relates to the pass-through of lower average sulfur costs. The balance of the sales decrease was driven by lower demand for virgin sulfuric acid used in the production of nylon intermediates, and to a lesser extent, lower spot virgin sulfuric acid sales. Adjusted EBITDA for eco-services was $55 million in the third quarter, compared to $64 million in the prior year, with the decrease primarily driven by the lower sales volume, as well as the anticipated higher manufacturing and networking costs arising from the Dominguez production outage that occurred earlier in the quarter. For the third quarter, the Ecoservices adjusted even margin was 37% of 430 basis points. The margin increase was largely driven by the pass-through of lower sulfur costs, partially offset by higher costs in the quarter. Total sales for catalyst technologies in the third quarter, including our proportionate share of zealous joint venture sales, were $63 million, compared to $65 million in the third quarter of 2022. Silica catalyst sales for the third quarter were $26 million, down $11 million on lower demand for polyethylene catalysts and the absence of niche custom catalyst sales. As a reminder, certain sales of niche custom catalysts are event-driven and may be replaced every two to three years. Third quarter sales for the Zealous joint venture were $37 million, up $9 million, or 33%, with higher sales of hydrocracking catalysts and catalysts used in renewable fuel applications. Adjusted EBITDA for catalyst technologies was $16 million in the third quarter, down $3 million compared to the prior year. As pricing remained positive in the quarter, the decrease reflects the lower silica catalyst sales volume, partially offset by the continued strong pricing, as well as higher sales of hydrocracking and renewable fuel catalysts. The adjusted EBITDA margin for catalyst technologies was lower, driven by unfavorable mix and higher costs, partially offset by increased pricing. Turning to the next slide, I'll provide a few comments on our cash and leverage positions. We continue to maintain a balanced approach to capital allocation, and reducing leverage to our target of two to two and a half times remains a key priority. That said, we will continue to be opportunistic but prudent as we evaluate our capital deployment options. During the third quarter, we repurchased 541,000 shares of stock through the open market for an aggregate amount of just over $5 million. At the end of the quarter, we held a strong liquidity position of $109 million. We ended the third quarter with a net debt leverage ratio of 3.2 times, unchanged from the end of the second quarter. From a balance sheet perspective, we remain in excellent shape. We have one term loan with a maturity date of June of 2028. In addition, we continue to effectively manage our interest rate exposure. We have 75% of our interest exposure capped through the third quarter of 2026 with an all-in cost of debt of approximately 5%. And we continue to evaluate opportunities to extend our interest rate protection. I will now go over our guidance and expectations for the balance of 2023. We now expect sales for the full year 2023 to be in the range of $675 to $705 million. with the modest reduction from our most recent guidance range reflecting an expectation for incremental demand weakness for virgin sulfuric acid sales into the nylon end use, the soft environment for the demand of polyethylene catalyst, and the potential for a timing shift of some zealous joint venture sales from Q4 into the first quarter of 2024. Accordingly, we expect sales for the ZLIS joint venture to be between $150 and $160 million for the full year. In light of the sales volume expectations and taking into consideration the incremental cost and sales impact associated with the pull forward of turnaround activity into 2023 that Kirk mentioned, we now expect full year 2023 adjusted EBITDA to be at the low end of our previous annual guidance range at approximately $260 million, which is 6% lower than the prior year. At the segment level, for the fourth quarter, we expect Ecoservices adjusted EBITDA to be down mid to high single digits compared to the fourth quarter of 2022. Catalyst Technologies, however, is expected to be up significantly compared to the fourth quarter of 2022, at a level similar to their second quarter results. Overall, Ecovist is expected to be in line with prior year fourth quarter or at approximately $70 million. In terms of our cash flow, as we have highlighted previously, the nature of our business historically has provided for strong cash generation, and we certainly expect this to continue going forward. However, we are revising our 2023 free cash flow mainly due to revised expectations for the timing of dividends from our zealous joint venture prior to the end of the year, and to a lesser extent, modestly lower expectations for adjusted EBITDA. As previously discussed, within the zealous joint venture, we anticipate strong sales of hydrocracking catalysts in the fourth quarter, up close to 50% over the prior year fourth quarter. And for the full year, we expect to be up close to 40% year over year. As we have gained better visibility into the projected timing of these sales, we now expect that some sales may occur very late in the quarter. Considering normal receivable timing, collection of sales occurring late in the fourth quarter may extend into early 2024. In addition, With further insight into order timing that suggests stronger hydrocracking sales in the first quarter of 2024, we are now planning for a larger inventory build in the fourth quarter in advance of the anticipated strong first quarter hydrocracking sales. The revised expectations for receivable timing and the working capital needs associated with the fourth quarter inventory build are now expected to alter the timing of dividends received from the joint venture. As a result, We now expect free cash flow to be between $70 and $80 million. As the reduction in cash generation associated with the dividends from the Zealous joint venture is entirely timing related, we anticipate a comparative cash flow benefit in 2024. In light of the revised assumptions impacting cash generation, we expect to end the year with a net debt leverage ratio of approximately three times. I will now hand the call back to Kurt for some closing remarks. Thank you, Mike. Overall, we are pleased with our results for the third quarter. Our end-use exposures and diversification provided a level of stability in an uncertain macro environment. Moreover, pricing remained positive for both eco-services and catalyst technologies. While we saw lower demand in the third quarter specifically for virgin sulfuric acid into the nylon end-use, and for polyethylene catalysts as expected, we believe much of the near-term weakness is associated with the effects of destocking, which is transitory. For the balance of the year, we expect predictable performance from our regeneration services business and following strong third-quarter hydrocracking sales and consistent with the expectations we have had throughout this year for a stronger second half of the year, we continue to expect robust sales of hydrocracking catalysts in the fourth quarter and into the first quarter of 2024. Despite the near-term uncertainty in the macro environment, we believe the longer-term demand fundamentals for our business remains extremely positive. We see continued growth in our regeneration services business, which is supporting alkali production that is essential in the production of cleaner-burning, more efficient fuels. We see ongoing demand growth for virgin sulfuric acid given the critical role it plays in so many industrial processes. And for our catalyst technologies business, we see continued growth driven by expanding production capacity for polyethylene, as well as catalysts used for emerging technologies such as plastics recycling, renewable fuels, and enzymatic processes. The near-term demand softness, primarily concentrated in two specific end uses, has not altered our longer-term growth expectations for those end uses. or for our business as a whole. We look forward to discussing our demand outlook and our strategies to deliver value for the benefit of our shareholders in more detail at our Investor Day in November. At this time, I will ask the operator to open the line for questions.