Ecovyst Inc.

Good morning. My name is Madison and I will be your conference operator today. Welcome to Ecovist's first quarter 2024 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. I would now like to hand the conference over to Jean Shields, Director of Investor Relations. Please go ahead.

Thank you, Operator. Good morning, and welcome to the ECOVIST first quarter 2024 earnings call. With me on the call this morning are Kurt Bidding, ECOVIST's Chief Executive Officer, and Mike Vian, ECOVIST's 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 2024 financial outlook. This information is subject to risks and uncertainties that could cause the actual results and 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 our corresponding GAAP measures can be found in our earnings release and in presentation materials posted on the investor section of our website at ecoviz.com. I'll now turn the call over to Kurt Bidding. Kurt?

Thank you, Gene. Good morning. Ecoviz delivered solid results for the first quarter of 2024. Continued strong demand for regeneration services and higher sales of virgin sulfuric acid drove the favorable results in eco-services. Sales within the zealous joint venture were up on higher sales of catalysts used in sustainable fuel production and sales growth in customized catalyst applications. However, sales in advanced silicas were lower due to lower sales of polyethylene catalyst supports, which more than offset stronger sales in finished polyethylene catalysts. As a result, we delivered first quarter adjusted EBITDA of $45.5 million, up 6% compared to the first quarter of 2023. Cash generation in the first quarter was particularly strong, reflecting the timing of dividends received from the ZList joint venture that were deferred in the fourth quarter due to the timing of working capital needs within the joint venture. This favorable cash generation, along with higher adjusted EBITDA, provided for further reduction in our net debt leverage ratio to 2.9 times at the end of the first quarter, down from three times at the end of the last year. Overall, I'm pleased with our achievements in the first quarter. Our first quarter financial performance provides a good start to the year. We successfully completed two turnarounds in our eco-services segment during the quarter while maintaining a very favorable safety performance. In addition, we continue to execute on our long-term strategic plan, positioning Ecovist for continued growth in the future. As we turn to slide six, I'll provide an update on our near-term demand outlook. Starting with eco-services, for our regeneration services business, the outlook remains positive. We believe that the North American refining climate remains favorable with rising vehicle miles traveled, refining utilization rates expected to remain in the 90% range, and increasing margins for affluent. And for our Gulf Coast refining customers, the lack of availability of Russian refined products in the global market is creating additional demand for U.S. refined product exports. For virgin sulfuric acid, we see balanced conditions and expect sales volume to be up in 2024. Mining demand remains strong, with continued demand strength expected to be driven by global copper demand and ongoing expansion of projects in North America. We continue to expect improvement this year for virgin sulfuric acid sales into the nylon end use. Industrial demand remains a mixed bag with relative stability in many end uses, including lead-acid batteries, chlorophyll-I, and water treatment. While we continue to see some price weakness for spot and short-dated contracts as compared to 2023, we did not see significant deterioration in overall demand conditions for industrial markets in the first quarter. For our Chem 32 business, we continue to see high utilization and strong customer interest, with continued growth in sustainable fuel production capacity being a contributing factor. Turning to advanced materials and catalysts, For advanced silicas, global demand growth for polyethylene is expected to be up 2% to 3% this year, led by North America, where producers continue to benefit from favorable feedstock costs. Sales for the advanced silica segment fell short of our expectations in the first quarter, where higher sales of finished polyethylene catalysts were offset by lower sales of polyethylene catalyst supports associated with customer order timing and limited destocking. Overall, we expect improved global demand conditions to benefit our sales of advanced silicas used to produce polyethylene, particularly in the second half of the year. We remain very optimistic about the long-term outlook for sales of catalysts used in the production of sustainable fuels. In 2024, North American capacity for renewable diesel and sustainable aviation fuel is expected to grow by over 70%. supported by attractive production incentives for US-based producers. And with the EU mandating blending targets, EU renewable diesel and SAF capacity is expected to grow by 26% in 2024. Customer and prospective customer engagement in sustainable fuels remains high. We already have trial sales of catalysts for alcohol-to-jet SAF production technologies and we expect activity to increase with a number of startups slated for next year. For hydrocracking catalysts, the growth in global diesel demand is a positive factor. Market conditions in the U.S. remain favorable, with diesel inventories below historic averages. The hydrocracking catalyst market remains competitive, but we believe we have a differentiated offering with our mock technology. Order timing for hydrocracking catalyst sales remains a function of change-out activity, which makes the timing of sales difficult to predict with absolute certainty. While we expect a positive year for hydrocracking sales in 2024, we will not repeat the peak level of sales in 2023. And based upon our current expectations for sales timing, we anticipate a stronger second half for 2024. Sales of emission control catalysts, we are seeing a softer demand outlook for 2024. Increased borrowing costs are impacting purchase activity for new vehicles. And while not commercial on a large scale yet, we continue to work with key players in the advanced recycling industry, where our catalyst technologies can provide a meaningful reduction in energy intensity for thermal paralysis. We expect growth in recycling activity to increase in the next two years, with 12 advanced recycling plans for plastic waste expected to be commissioned in 2024. I'll now turn the call over to Mike for a more detailed discussion of our financial results for the first quarter.

Thank you, Kurt. Ecovist sales for the first quarter of 2024, including our proportionate 50% share of sales from the Zealous Joint Venture, were $184 million, slightly higher than the first quarter of 2023. Eco-services sales were up 3%, reflecting higher sales volume in virgin sulfuric acid and regeneration services. However, advanced materials and catalyst sales were down as lower sales of advanced silicates used for the production of polyethylene were only partially offset by higher sales from the Zealous joint venture. Adjusted EBITDA for the first quarter was $45.5 million, up 6%, driven primarily by the contribution from higher sales volume. The adjusted EBITDA margin for the first quarter was 24.7%, up 130 basis points over the prior year. Turning to the next slide, I will discuss the primary components of the change in adjusted EBITDA compared to the first quarter of last year. In looking at the major drivers of the change in adjusted EBITDA, the higher sales volume provided a pull-through benefit of approximately $10 million. However, while aggregate pricing, including the $5 million sulfur pass-through effect, was down $16 million period over period, the lower pricing resulted from the pass-through of $17 million in lower variable costs, which included lower sulfur, natural gas, electricity, and other variable costs. Overall, the net impact resulted in a positive price-to-cost ratio for the quarter. The balance of the change in adjusted EBITDA is comprised of a number of factors, including approximately $3 million of higher planned turnaround costs, higher fixed manufacturing costs associated with our reliability initiative, costs attributed to Winter Storm Heather, and inflation and our labor costs. As we transition to our segment results, I'll start with the highlights for eco-services. Sales for the first quarter of 2024 were $142 million, up 3% on higher sales volume for virgin sulfuric acid and regeneration services, primarily reflecting recovery from the prior year lower sales volume that was adversely impacted by winter storm Elliott and the extended turnaround. the sales increase was partially offset by the pass-through effect of lower sulfur prices of $5 million, as well as the pass-through effect of other variable costs such as natural gas and electricity. First quarter 2024 adjusted EBITDA for eco-services of $41.5 million was up 13%, with the benefit of higher sales volume partially offset by the higher turnaround costs higher fixed manufacturing costs, and costs associated with the winter storm. Overall, it was a positive quarter for eco-services and a solid start to the year, with adjusted EBITDA up 13% and the associated margins of 29%, up 260 basis points from the first quarter of 2023. For advanced materials and catalysts, first quarter sales, including our 50% proportionate share of zealous joint venture sales, were $42 million, down $3 million. Sales for the zealous joint venture were up 6%, driven by higher sales of catalysts used in sustainable fuel production and sales growth in customized catalyst applications. However, sales for advanced silicas decreased year over year, due to lower sales volume of advanced silicas used for the production of polyethylene. While sales of finished catalysts used to produce polyethylene were up, sales of polyethylene catalyst supports were lower due to customer order timing and limited destocking. For the full year, we continue to expect higher sales of advanced silicas used for the production of polyethylene compared to 2023, with an expected stronger second half of the year compared to the first half. Adjusted EBITDA for advanced materials and catalyst was $11 million, compared to $13 million in the year-ago quarter, with higher sales volume and favorable mix in the Zealous Joint Venture, offset by the lower sales in advanced silicas. Turning to cash and leverage on the next slide. Cash generation in the first quarter of 2020 forward is particularly strong, benefiting from the dividends received from the ZLIS joint venture that were deferred from the fourth quarter of 2023 due to the timing of working capital. As such, we ended the first quarter with cash of $103 million, including the $70 million of availability under our ABL facility. We ended the first quarter with total liquidity of $173 million. In light of the strong cash generation and higher adjusted EBITDA, we ended the first quarter with a net debt leverage ratio of 2.9 times, down from 3.0 times at the end of the year. At this time, we remain on target to generate free cash flow for this year of $85 million to $105 million. In terms of capital allocation, we expect to continue to maintain a balanced strategy. From an overall balance sheet perspective, we have one tranche of debt maturing in 2028. We have capped our interest exposure on approximately 75% of our outstanding debt out to the third quarter of 2026, and our weighted average cost of debt is expected to be approximately 5.5% during 2024. As it relates to our guidance, the full year outlook that we provided and our fourth quarter earnings call in late February remains unchanged, with gap sales of $715 to $755 million, sales for the ZLIS joint venture of $145 to $165 million, and consolidated adjusted EBITDA of $255 to $275 million. As is our usual practice, the guidance ranges for specific modeling line items are included in today's earnings press release and in the earnings presentation. In terms of directional guidance for the second quarter, on a consolidated basis, we expect second quarter 2024 adjusted EBITDA to be between $50 and $55 million. For eco services, we expect adjusted EBITDA for the second quarter to be down compared to the prior year in a range of between $48 million and $52 million. While we expect sales volume to be higher in the second quarter compared to the prior year, higher fixed costs, including an increase in the number of turnarounds and the related costs, along with an unfavorable net pricing impact, is expected to drive lower earnings for the quarter. The unfavorable net pricing is expected to reflect the timing and the contractual pass-through of certain costs, including energy and other index costs. For advanced materials and catalysts, we expect second quarter 2024 adjusted EBITDA to be sequentially flat to the first quarter of 2024 with a range of between $10 and $12 million. The results are expected to be lower than the prior year's second quarter driven by lower sales of advanced silicas used for polyethylene production, unfavorable product and customer mix, and the unfavorable impact of fixed cost absorption on inventory period over period. And we continue to expect corporate costs to be between $7 and $8 million per quarter. I will now hand the call back to Kurt for some closing remarks.

Thank you, Mike. As we move into the second quarter, we will continue to build upon the positive financial results we delivered in the first quarter. With the expectation of improved global polyethylene demand and higher sales of virgin sulfuric acid into the nylon end-used, the demand outlook across our portfolio remains positive for 2024. EcoServices will have conducted four of its five major turnarounds in the first half of 2024, which will position the business to deliver virgin sulfuric acid and regeneration volumes in the second half of the year. We expect stronger demand fundamentals in the second half of the year, particularly for sales of polyethylene catalysts and for the timing of hydrocracking catalyst sales. As such, our previous guidance for 2024 remains unchanged. However, we will seek to leverage opportunities for incremental growth as they arise. Moreover, we believe favorable cash generation in 2024 will continue to support a balanced capital allocation strategy. Before we move to the Q&A session, I do want to comment on a recent development regarding our Houston site. The United Steelworkers Union represents a number of maintenance and operation employees at our Houston site. Unfortunately, despite our good faith efforts to reach a labor agreement with the union, the union workers went on strike on April 10th. I am happy to report that we reached a tentative agreement with the union on a new three-year contract. The Houston Plants Union ratified the new contract earlier this week, and our valued colleagues fully returned to work on May 1st. During the course of the strike, operations at the Houston site continued, allowing us to service our customers. Thank you for your interest in ECOVIS, and at this time, I 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 the star and 1 on your telephone keypad. 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 will pause for a moment to allow questions to queue. And we will take our first question from John McNulty with BMO Capital Markets. Please go ahead. Your line is open.

Sorry about that. That was muted. So when I look at the outlook that you have for the various segments for 2024, it looks like, you know, a few things have maybe gotten a little bit more positive, you know, the PBC outlook, mining recovery, utilization rates in refining, yet you've largely maintained the guide. I guess are there some negative offsets to that that we should be thinking about, or is it just, look, it's early in the year and you don't want to get too far ahead of yourselves? I guess how should I be thinking about that?

Thanks for the question, John. I would say we're still early in the year. As we mentioned on the call, really in the first five months of the year, we're going to conduct four of our five maintenance outages, which I think really puts us in a nice position to meet what we see as good demand from the regeneration segment. We're happy with virgin acid. We do expect to have increased virgin acid volumes year over year with some recovery in the nylon segment, mining remaining strong. Polyethylene, as expected, we believe that will be stronger in the second half of the year, which is what we had thought it was on our last call. So, Essentially, we feel good about where we're at, and we're happy with our results so far in the first quarter, but there's still time left in the year, but we feel good about where we're at.

Got it. Okay. And then can you spoke through the through the prepared remarks around a push out in terms of timing around around the polyethylene catalyst side? I guess, can you can you help us to quantify that and think about the timing of when you expect that to roll in? It sounds like it may not necessarily all be too cute, maybe pushed out into the back half of the year.

Yeah, sure. So for Q1, just to recap on for Q1, our finished polyethylene catalyst sales were up year over year. What fell short was the polyethylene catalyst supports, which are really intermediates that either co-producers in the catalyst industries or actually polyethylene producers themselves buy from us, these advanced intermediates, and they impregnate them with their own metals and That's around a quarter to a third of what we call our polyethylene catalyst sales. So that, there was some timing issues. Some of it was base shipping and just when the orders actually landed at the customers. There was some limited destocking in that space. But overall, when we look at polyethylene, both for the finished catalyst side and support side, We do expect that to be picking up in the second half of the year and for both of them to be year over year.

Got it. Thanks very much for the call.

Thank you. And we will take our next question from Alexi Yefremov with KeyBank Capital Markets.

Thanks. Good morning. And just to stay with PE catalyst, can you just step back and tell us where you think you are in this PE catalyst cycle for yourselves? In the back half of this year, would you be at a normal run rate or is there still more recovery as you go into next year, maybe not looking for precise growth next year, but some idea of where you are in that cycle?

Sure. Thanks for the question, Lesky. I think, you know, we generally look at the polyethylene market and what's expected this year is a 2% to 3% growth across the globe. Now, that's segmented by, you know, that there's different regions behaving differently. You know, here in North America and the Middle East where feedstock costs are low, those advantaged producers are, you know, are above, you know, that growth rate. Other regions, such as China, continues to have sluggish growth, as well as Europe. But we do see overall growth growing 2% to 3% this year. As we've talked about before, historically, through capturing market share and getting a disproportionate amount of the new builds and new business, we've been roughly able to double that market growth rate. So, We feel good about where polyethylene is going. It clearly is recovering from where it was last year, but we expect, I guess, the momentum of that recovery to pick up more in the second half of the year.

Thanks. And shifting to merchant asset market, when you talk about some net pricing headwinds in the second quarter, what is the net price headwind that you expect for the entire year, either in dollars or percentage of price or any other metric?

Yeah, Leslie, thanks for the question. This is Mike. So, you know, I think what, you know, for the second quarter, you know, we really don't have any concerns around our overall base pricing. I mean, we did see some headwinds in the Virgin. sulfuric acid pricing model from some of the spot sales that we talked about before and some of the shorter-dated contractual pricing. The net pricing impact that we were referring to in the second quarter is really generated on the pass-through nature of some of the contracts and the timing of when those costs are incurred. versus when they're passed through, right? There's a quarterly lag. And when you have significant variances, that can be intensified by the variable cost, the volatility in the variable cost. So, you know, we see that, you know, hitting us really in the second quarter, but then really moderating out for the rest of the year, right? It's not, it's really, you know, partly due to the pass-through contract timing. So we don't expect that to be something that you'll see continuing in Q3 and Q4, you know, for the full year.

Okay. Thank you.

Thank you. And we will take our next question from Patrick Cunningham with Citi.

Hi, good morning. Um, maybe just on the Kansas City expansion that you referenced in the release, I guess, you know, how, how big is that in terms of the percentage basis off your capacity and all the long-term commitments you referenced linked to the latest wave of PE capacity additions. And is there any sort of, is there anything baked in for the larger capacity additions we see in 2026 and 2027? Are you stuck in there or is the timeline a bit closer to first production?

Thanks for the question, Patrick. So in terms of the sizing of the Kansas City expansion, I think we've said it's a 50% expansion of our polyethylene capacity at the Kansas City site. We do have other production locations around the globe, but the Kansas City, it's about a 50% production increase. And, of course, as we talked about, it is linked to contractual obligations with customers. that are part of this wave of new builds across the globe. Obviously not at liberty to state the customers that are involved with that, but those volumes are essentially spoken for already from those customers that are expanding their polyethylene production and need those catalysts. So in terms of timing of that, we do expect – the expansion to be complete, you know, fourth quarter or the end of 2025. And that's really there to start meeting some of that demand that you see and call late 26, 27, 28, that time period.

Got it. And can you help size the growth that you've seen in renewable fuels catalysts, you know, in the first quarter and into 2024? How big is that business today and what sort of growth rates are you forecasting into 2025 and beyond?

Yeah, so thanks for the question. The, you know, the growth rates that we see there are linked to the market, right? There's definitely a strong market push that are talking about, you know, significant growth rates. That business, you know, represents, you know, a little more than probably 10 plus percent of our overall sales from our AM&C group. We've talked about this during our investor day where, you know, the growth of that will be, you know, call it 20-plus, you know, percent over time. Obviously that shifts, you know, quarter on quarter, year on year, but we definitely see some extremely good strength in that business as we continue to ramp it up and win new businesses.

Yeah, and I think the dynamic with that, Patrick, is, you know, played a lot in, you know, we call it sustainable fuels. That's mainly been limited to renewable diesel at this point. You know, when you talk about 2025 and 2026, SAF technology will start to take hold in terms of airlines consuming the fuel or getting approved. So that is going to provide further wins at the back for the sustainable fuels business. Great. Thank you.

Thank you. And we will take our next question from Lawrence Alexander with Jefferies.

Good morning. Just to follow up on that, do you have any rough metrics for kind of dollars per ton revenue opportunity for you if there's expansions in copper mining capacity? if refineries move from gasoline and diesel production to chemical production, which I understand would probably increase the catalyst demand, and then also kind of your sensitivity to sort of SAF. Is there any way to help us understand just how they kind of, you know, what the terms of the market might be on a dollar per ton basis? Are we talking $5 or hundreds of dollars or thousands?

Yeah, I could probably, I can help you a little bit on me, on some of the questions that put, you know, the usage, I guess, of sulfuric acid. So, you know, when you look at copper, you know, solvent extraction, electrowinning, right, which is essentially copper leaching, that consumes anywhere from three to five tons of sulfuric acid per ton of copper produced. So that's a good, you know, that's a good kind of flag for, you know, what the potential growth is in terms of sulfuric acid and copper mining. And there's various, when you look at lithium, that uses more, anywhere up to 20 tons of sulfuric acid. Some other metals use different ratios. In terms of regeneration business, our customer base, which is roughly two-thirds located in the Gulf Coast, you know, have tremendous scale. And, you know, we believe they'll be in the refined products and their business models will drive them towards exporting refined products as time goes along. And then for our West Coast refineries, obviously the outlet that they're producing is highly valuable in the California market in order to meet those California gasoline specifications. So that's probably the best you know, markers I can give you in terms of, you know, acid usage and some of those dynamics that you mentioned.

And then just the opportunity for catalyst.

Yeah, so for catalysts, we do see the polyethylene catalyst or polyethylene demand, as we talked about, continuing to grow, you know, in that 3% range. You know, we sell a lot of catalysts both into the Middle East and North American markets where we see continued expansions, and there's planned expansions that have been announced, obviously, to take advantage of the low feedstock cost, low natural gas, and so forth. So we've always, you know, one of the reasons we made the expansion decision for Kansas City was to, you know, and those customer commitments that we have for backing that investment up are to meet some of that growing demand long term. That's benefiting from lower feedstock costs here in the U.S. and Middle East.

Thank you.

Thank you. Once again, if you would like to ask a question, please press star and one on your telephone keypad now. And we will take our next question from Hamed Khorsand with BWS Financial.

Hey, good morning. So I just wanted to understand the level of conversation you're having with customers, you know, looking out for the rest of the year that gives you confidence that the rest of the year is not at risk given where Q1 and potentially Q2 are.

Sure. Thanks for the question, Ahmed. So, if we look at, you know, if we just go across the spectrum of the major end-use customers, We obviously, the products that we supply to those customers is very important. We're generally sole sourced with a lot of our customers, so we do get a very good window into their forecast because some of the products obviously take longer to make if it's in terms of catalyst. And then the sulfuric acid and sulfuric acid regeneration has very high utilization across the country, so customers are generally... very transparent with us in terms of their forecast. So when you look at regeneration, the things we mentioned on the call, there's very good margins for octane and alkylate right now. So we see that demand carrying through the year. Exports are up due to the global dynamics going on right now, and U.S. refining capacity having a nice advantage there. Virgin sulfuric acid, which we were uncertain with on the last call, what I would say is pricing there has stabilized from the last call, as well as we expect the nylon end-use sales to rise year over year. Mining remains very firm. As you can see, the metals prices have firmed here in the last three to six months. And there's still some pockets in virgin acid, certain industrial applications that I would say, are less certain. But, you know, in general, things have stabilized nicely there. And then moving over to polyethylene catalysts, as we just talked about, there's growth year over year. We do expect that to pick up more momentum in the second half of the year. And then hydrocracking, which, you know, another large chunk. Those orders we do have good visibility to now or better visibility to now later on in the year. And, again, those are longer lead time catalyst items that have to be produced. So we generally have a good visibility on those.

Okay. And then could you just quantify what kind of impact you're expecting Q2 as far as the downtime is concerned?

Well, we have two planned turnarounds for the quarter, which was one more than we had Q2 of last year. But the downtime itself will be very similar to Q1, right? So we executed two maintenance turnarounds in this Q1 of 2024 this year. So it will be similar to Q1, slightly more than it was Q2 last year. of last year, but we're happy with where we're set up, really, because those turnarounds will all be complete, really, by the end of May, which leaves us with 80% of our turnaround activity completed for the year and with a decent volume outlook for the remainder of the year. Okay. Thank you.

Thank you. It appears that we have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.

Thank you, Madison. Thank you to all of our participants this morning for your interest in ECOVIST and your thoughtful questions. With that, we'll conclude our call.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.