Ecovyst Inc.

Good morning. My name is Madison and I will be your conference operator today. Welcome to the ECOVIST second 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 period. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If you want to remove yourself from the queue, please press star 2. When posing 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 zero. I would now like to hand to the conference over to Gene Shields, Director of Investor Relations. Please go ahead.

Gene Shields Thank you, operator. Good morning and welcome to ECOVIST second quarter 2024 earnings call. With me on the call this morning are Kurt Bidding, ECOVIST 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 2024 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 our earnings release and in the presentation materials posted on the investor section of our website I'll now turn the call over to Curt Fitting.

Thank you, Gene, and good morning. Overall, we are pleased with our results for the second quarter of 2024. We delivered financial results above our forecast, and we made solid progress on a number of strategic initiatives. During the quarter, we continued to see strong demand for regeneration services supported by high refinery utilization and favorable economics for alkaloids. with regeneration volume up compared to the second quarter of 2023. Sales volume was also up for virgin sulfuric acid and treatment services compared to the year-ago quarter. And in our advanced materials and catalyst segment, sales of advanced silicates increased compared to the second quarter of 2023 on higher sales of chemical catalysts. However, during the quarter, we saw lower sales of catalyst materials used in the production of sustainable fuels and emission control applications. All in, for the second quarter, we delivered adjusted EBITDA of $57 million. In terms of the continued strategic positioning of EcoVist, it was a very successful quarter. By the end of May, we had completed the four turnarounds planned for eco-services in the first half of the year. The work also progressed for our polyethylene catalyst production capacity expansion at our Kansas City site. Reflecting our balanced approach to capital allocation, during the quarter we also repurchased 552,000 shares of Ecoviz common stock for a total cost of $5 million. In addition, as we announced last week, our work during the quarter culminated in an equity investment in Pajarito Powders, a company with expertise in supports and catalysts for green hydrogen and fuel cells. This transaction is consistent with our stated strategy of leveraging our material science capabilities as we continue to position Ecoviz for growth in emerging markets. Through this investment, we gain access to and support for scaling technologies that we believe will position us to support and participate in future growth of hydrogen economy, as we believe hydrogen produced through electrolysis can be widely used as a low-carbon fuel for heavy-duty transportation and industrial applications. Lastly, during the quarter, we strengthened our balance sheet through an amendment and extension of our term loan facility, which reduced the interest rate spread and extended the maturity of the facility until June of 2031. As we turn to slide six, I'll discuss our near-term demand outlook. In Ecoservices, we anticipate a favorable demand forecast for regeneration, treatment services, and catalyst activation throughout the remainder of the year. We anticipate that regeneration will continue to experience strong demand driven by persistent high refinery utilization rates and healthy alkaline margins. Our treatment services segment is expected to continue to experience high volumes as it serves as a sustainable waste management solution for numerous chemical producers along the Gulf Coast. And despite anticipating a dip in utilization rates among renewable diesel manufacturers, we are observing a rising need for ex-situ catalyst activation, which is expected to contribute to a buoyant outlook for Chem 32 in the latter half of the year. For virgin sulfuric acid, we expect continued positive demand for mining with copper demand sustained by continued expansion of copper mining projects in North America and borates demonstrating a normalization of inventories and stable demand. And even though the nylon industry's rebound remains subdued, we anticipate a year-over-year increase in virgin sulfuric acid sales for the nylon end use in 2024. For the remainder of our virgin sulfuric acid sales, which supports a wide range of industrial end uses, including chloralkali and chemicals, water treatment, paper and packaging, and spot sales into various end uses, we have adopted a more conservative view of demand and pricing for the second half of 2024. Turning to advanced materials and catalysts. In advanced silicose, Global polyethylene demand is expected to be up 2% to 3% in 2024. However, the demand outlook continues to vary by geography. In North America, demand is positive, with operating rates expected to approach 90% supported by exports. Producers in North America and in the Middle East, where we have sales concentration, continue to have a cost advantage with lower energy and feedstock costs. and we expect these geographies to benefit disproportionately as global polyethylene demand recovers. However, projections for Europe reflect flat demand with lower operating rates of approximately 80%, and in Asia, operating rates also continue in the low 80% range with subdued demand and new capacity continuing to come online. Overall, we continue to expect our sales of polyethylene catalysts and supports to be up in 2024 relative to 2023, but the magnitude of the increase remains dependent upon global demand conditions as well as customer sourcing and inventory decisions. For the Zeolus joint venture, we now see weaker demand for catalyst materials used in sustainable fuel production and emission control application, and this has led us to revise our sales expectations for these end uses in the second half of this year. As a reminder, we provide catalyst materials that are used in the de-waxing phase of renewable diesel production, and these catalyst material sales are primarily made to the licensors of sustainable fuels production technology. Market conditions and customer sentiment evolved rapidly over the course of the second quarter, and this is leading to our revised outlook for sales into renewable diesel production. Specifically, the pricing and value for renewable identification numbers, or RINs, which are a key incentive for renewable diesel producers, declined significantly. RIN credits traded above $1.50 for several years, contributing positively to the overall economics for renewable diesel production, particularly for smaller producers. However, with the development of an imbalance between renewable diesel production and demand, value of RINs credits has decreased significantly, recently falling below 50 cents. With the lower pricing for RINs credits and with increased feedstock costs and higher overall costs due to inflation, many producers are reevaluating production economics. As a result, there has been a slowdown in new capacity additions, and with lower near-term operating rates, we expect catalyst light to be extended, pushing out sales associated with periodic catalyst change-outs. Longer term, we continue to believe the leading technologies offered by our zealous joint venture position us well to participate in the future growth opportunities for sustainable fuel production. While near-term economics for renewable diesel are challenged, we believe that demand for our catalyst materials will improve as producers retrofit the renewable diesel processes and add new units to produce sustainable aviation fuels, where demand is expected to triple by 2030 due to both governmental mandates and carbon reduction targets set by the airlines. We have also revised our expectations for sales of our catalyst used in emission control applications for the balance of the year. Economic conditions in the EU, the UK, and in the US, including the effects of inflation and higher interest rates, have adversely impacted purchasing activity for heavy duty diesel vehicles. For the month of May, sales of Class 8 trucks in the U.S. were down 18% compared to May of 2023, with May 2024 representing the 10th consecutive month of sales declines for Class 8 vehicles. Year to date, sales of these heavy-duty vehicles in the U.S. are down 15%. In addition, although Euro 7 legislation was previously expected to go into effect in 2025, the EU has softened NOx reduction requirements and has delayed the implementation of Euro 7 for heavy-duty vehicles for four years, significantly impacting vehicle sales in 2024. Given the delay in both the implementation of Euro 7 and the need for compliance with more stringent emission requirements, there is little incentive to upgrade truck fleets now, and this is having an adverse impact on our catalyst material sales for emission control applications for the balance of 2024. For sales of hydrocracking catalysts, we continue to see good demand, which led to a strong first half and expect a similarly strong second half for 2024. However, as we discussed in our first quarter earnings call, with 2023 representing a peak year in the replacement cycle for hydrocracking catalysts, we expect overall sales of hydrocracking catalysts in 2024 to be below peak levels in 2023. And as we look into the future, we still have a positive outlook for catalyst sales in advanced recycling technologies. We expect sales to grow over the next few years. We are aligned with key players in the industry and expect a dozen advanced recycling plants to be built and commissioned in the next few years. I'll now turn the call over to Mike for a more detailed discussion of our financial results for the second quarter.

Thank you, Kurt. EcoVis sales for the second quarter of 2024, including our proportionate 50% share of sales from the Zealous joint venture, were $212 million, down $17 million compared to the second quarter of 2023. EcoServices benefited from strong demand for regeneration services and virgin sulfuric acid, and sales in advanced silicas increased on higher chemical catalysts. However, Lower net pricing in eco-services associated with the timing and contractual pass-through effect of lower variable costs as well as lower sales for catalyst materials used in the production of sustainable fuels and emission control applications drove the overall lower sales year-over-year. Second quarter 2024 adjusted EBITDA was $57 million. down compared to $79 million in the second quarter of 2023, reflecting the lower sales within the ZLIS joint venture, unfavorable net pricing, mostly attributable to the timing of the contractual cost pass-through effect, and higher planned turnaround and maintenance costs in eco-services. This was partially offset by the higher sales volume in both eco-services and advanced silicas. Moving to the next slide, The unfavorable net pricing impact is reflected in the price and variable cost drivers, netting to a $13 million negative impact on our adjusted EBIT in the second quarter. The lower net pricing was driven primarily by the timing and the mechanical contractual pass-through of certain costs, including energy and other index costs. Our pricing continues to exceed our variable costs. The unfavorable variance is a result of the period-over-period comparison and the quarterly timing lag. Overall volume and mix were lower in the quarter as the lower sales and the zealous joint venture more than offset the increase in regeneration services and virgin sulfuric acid. The balance of the decrease is largely associated with higher costs, including the costs associated with the planned turnaround and maintenance activity, higher networking costs, and costs associated with our reliability initiatives, which we had previously discussed. Turning to the segment results, I'll start with the highlights for EcoServices. EcoServices sales for the second quarter of 2024 were $154 million, down 3%. Sales volume was up for regeneration services, virgin sulfuric acid, and treatment services. the sales contribution from higher volume in eco-services was offset by the unfavorable net pricing in the quarter. Looking to the second half of the year, we believe headwinds associated with the unfavorable timing and contractual pass-through effect of certain costs are largely behind us. Second quarter 2024 adjusted EBITDA for eco-services was just under $50 million. The decrease in adjusted EBITDA and adjusted EBITDA margin was primarily driven by the net pricing impact, the higher planned turnaround and maintenance costs, and networking costs to support the turnarounds. These items were only partially offset by the benefit of higher volume in the quarter. Sales for advanced silicas of $29 million were up nearly $3 million on higher sales of chemical catalysts. However, Sales for the Zealous joint venture decreased $16 million on lower sales of catalyst materials used in the production of sustainable fuels and emission control applications. As Kurt noted, we now expect software demand for catalyst materials used for sustainable fuel and emission control in the second half of the year. Adjusted EBITDA for advanced materials and catalysts was just under $15 million. The decrease compared to the second quarter of 2023 was primarily driven by the lower volume in the ZLIS joint venture. Turning to cash and leverage on the next slide, Ecovist continues to have strong cash generation capability, which we believe will continue to support a balanced approach to capital allocation. For this first six months of the year, adjusted free cash flow was just over $14 million. compared to $2 million for the first half of 2023, reflecting higher dividends received from the ZLIS joint venture in the first quarter, offsetting the lower earnings, higher interest and taxes. During the quarter, we refinanced our term loan, extending the maturity to 2031 and reducing the interest rate spread by 35 basis points, saving over $3 million in annual interest costs. In light of this transaction, Our balance sheet is in exceptionally strong shape. We continue to have interest rate caps in place that limit our interest rate exposure, and our average cost of debt is expected to be approximately 5.5% during 2024. During the second quarter, we repurchased 552,000 shares of our stock at an average price of $9.05 per share for a total of $5 million. we ended the second quarter with $83 million of cash and have available liquidity of $156 million. Considering the use of cash for refinancing our term loan and share repurchases, and with the reduction in the trailing 12-month adjusted EBITDA, our net debt leverage ratio at quarter end was 3.3 times. With the expected cash generation over the balance of the year, and excluding any impact of share repurchases or M&A activity, we expect to end the year with a leverage ratio of approximately three times. As noted in this morning's earnings release, we have revised our outlook for the balance of the year, considering the expected softer demand for sales of catalyst materials used for the production of sustainable fuels and emission control applications, and to reflect the moderate impacts of Hurricane Beryl and a more cautious view with regard to industrial demand, particularly for sales of virgin sulfuric acid. The revisions to our full year 2024 expectations are reflected on slide 13 with the revised outlook as follows. We now expect that GAAP sales will be in the range of $700 to $740 million, $15 million lower at the midpoint compared to our prior guidance range. With the revised outlook for catalyst sales used in the production of sustainable fuel and emission control applications, we now expect sales for the Zealous Joint Venture to be between $115 to $135 million, down $30 million at the midpoint. The Just the Debit is expected to be in the range of $230 to $245 million. In terms of segment expectations, for the full year 2024, we expect adjusted EBITDA for eco-services will be in the range of $195 to $205 million. Advanced Materials and Catalysts is expected to be in the range of $65 to $70 million. And we continue to expect our corporate costs to be around $30 million on an annual basis. We have revised our guidance for free cash flow to a range of $75 to $85 million, down $15 million at the midpoint. But we are also providing full-year guidance for adjusted net income to be in the range of $53 to $74 million, and we expect adjusted diluted income per share to be in the range of $0.45 to $0.63. In terms of specific guidance for the third quarter, we expect third quarter adjusted EBITDA for eco-services to be between 53 and 57 million dollars. For advanced materials and catalysts, we expect third quarter adjusted EBITDA to be between 13 to 15 million dollars. Assuming unallocated corporate expenses of seven to eight million dollars, we expect consolidated adjusted EBITDA for the third quarter to be between 58 and 65 million dollars. We expect adjusted net income of $14 to $21 million with adjusted diluted income per share to be in the range of $0.12 to $0.18. I will now hand the call back to Kurt for some closing remarks.

Thank you, Mike. Reflecting upon our results for the first half of 2024, I believe the ECOVIS team has done well in executing relative to our operational and strategic plan as we continue to manage through an uncertain economic environment. In doing so, for the first half of the year, we exceeded our internal expectations for financial results. For Ecoservices, we believe demand fundamentals for regeneration services, catalyst activation, and treatment services will remain positive. We also expect that second half of 2024 volumes for all Ecoservices products, as well as Ecoservices EBITDA, will demonstrate year-over-year gains. For our regeneration business in particular, Despite indications that refining margins are under pressure, I'll reiterate that demand for our regeneration services is more associated with the profitability of the appellation units, which is expected to remain positive for the balance of 2024. For our sales of virgin sulfuric acid, we still expect sales volume to be up in 2024 compared to 2023, but we remain cautious about the economic environment leads to some uncertainty about overall industrial demand for virgin sulfuric acid and while eco services results for the second quarter reflected net pricing pressure associated with the timing effective contractual pass-through of variable costs we believe the headwinds of this timing effect are largely behind us as we go into the third quarter with our revised outlook for sales into sustainable fuel and emission control applications for the second half of the year We aim to mitigate the impact of these softer near-term market conditions through manufacturing cost reductions and deferring spending. We continue to be enthusiastic about the growth prospects for Ecovist in both our foundational businesses and in emerging technologies. We're equally eager to support our new partner, Pajarito Powders, as they develop and scale their solutions for fuel cells and green hydrogen generation. In closing, Even with our revised financial outlook, we expect free cash flow generation for 2024 to be up year over year, providing for continued flexibility for capital allocation as we position EcoVis for the future. While we see near-term softness in two specific end uses for the zealous joint venture, we expect modest volume growth in eco-services and advanced silicas and we will continue to execute on the strategic plan that we have established to deliver long-term growth across the entirety of the ECOVIS portfolio. At this time, I will ask the operator to open the line for questions.

Thank you. And 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 and 2. And 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.

Hey, good morning. This is Caleb on for John. I'm just curious how much of the lower guide is tied to the impact from Hurricane Beryl and then lower industrial demand and then also the impact from kind of the renewable fuels outlook?

Yeah, hi, Kayla. Good morning. Thanks for the question. The barrel impact is a few million dollars. You know, the guidance outlook, you know, we provided some ranges for the two businesses. Ultimately, about half of it is coming from the eco-services side, and the other half is coming from the AM&C side. Related to the, you know, the softness on the Virgin and the industrial side, that's, you know, primarily in the eco-services business, and then, of course, the change in our outlook related to both sustainable fuels primarily and then a little bit related to the emission control is driving the change in AMC.

Okay, thanks for that. And then just in terms of the headwinds on the renewable fuels, how long do you expect that to last for? Is that kind of a 25 thing or should we expect, is that just like a next couple quarters kind of dynamic?

Yeah, thanks for the question, Caleb. I think, you know, we're looking at our view as the renewable diesel market, which is really driving that, which is really the driver right now. It's going to face headwinds probably over the next 12 to 18 months. And there's been a kind of a sustained decline in the RINs credits, right, which has obviously led to deferred investment decisions for producers as well as slowed utilization rates in that space, which affects the consumption of the catalyst. So we expect, our view is that that will likely go for 12 to 18 months. However, we do see positivity coming in the future as sustainable aviation fuel units are built, right, where there's expected to be a tripling of demand between 2025 and 2030. So there'll be new units that will be built that will require de-waxing catalyst materials like we make, as well as the existing renewable diesel units. If the poor economics continue, producers and some have already made announcements where they'll convert their existing renewable diesel units into sustainable aviation units.

Okay. Thanks for the caller.

Thank you. And we will take our next question from Alexey Ressomov with KeyBank Capital Markets.

Thanks, Amanda. Good morning. Could you provide some maybe reference? How low is your renewable diesel business now relative to sort of pretty downturn levels? I don't know. Is it down 20%, 100%? And is there more pressure here or – as it's stabilized, we will sort of go sideways for the next 12, 18 months.

Yeah, Alexei, thanks for the question. Previously, we had said that the sustainable fuel business represented around 10% or a little more than 10% of our total sales for the AM&C segment. Now, what we see for the remainder of the year is below that 10%, right? call it, you know, a high, a mid to high single digit, you know, percent. And as Kurt just alluded to, you know, what we're seeing that is on a short term basis, but, you know, in the longer term, you know, we do see there's a, you know, the ability for that to grow, particularly around, you know, changes in the dynamics and the supply and demand, as well as the SAF business.

Okay. And then on the net pricing in eco-services, so you have these lag effects in the first half. Do you expect them to go away in the second half? Or if not, when do you think that would happen? And what do you think pricing would look like when we no longer see the lag effects?

Yes, so, you know, 1st, I just want to comment that, you know, we don't have any concerns around our base pricing. Right? You know, our, our overall pricing is exceeding our variable cost. And, you know, we're obviously have a profitable business. A lot of what this is, is really the mechanical pass through nature and the timing of when those costs are incurred. So, when you're looking at a period over period comparison. You know, we had a big benefit in the second quarter of last year, and this year, you just don't have the same benefit, so it looks as a big negative. So, we do not expect that trend to continue, so you'll see a much more muted impact going forward for the rest of the year, but the overall impact from the first half, you know, does impact your overall year-over-year comparison, but for the second half, you're not going to see that same dynamic.

Okay, thanks a lot.

Thank you. And our next question comes from Patrick Cunningham with Citi.

Hi, good morning. I think I just want to continue on the thread with the weaker outlook in renewable fuels and renewable fuels as well as emission control catalysts. First, can you maybe talk about the regulatory uncertainty, whether it's the Chevron decision, election results, and what customers are saying in terms of their buying patterns. And then just in terms of the cooling demand for renewable fuels, is any of that cost optimization and how you're positioning your business taking place? Are you taking actions as a result of this weaker forecasted demand in the next 12 to 18 months?

Sure. Thanks for the question, Patrick. I think in terms of just the macro environment, for renewable or sustainable fuels right now, being driven is the supply-demand imbalance, which is, you know, creates pressure on those RINs credits, which, you know, leads to lower utilization, leads to deferral of investments that we've mentioned before. In terms of regulatory, I mean, there still are There still are some issues to be resolved. The RFS, you know, and I guess the renewable volume obligation will be set post to the election. So I think that, you know, that could have a future impact on that. And that's, you know, the EPA has already announced that they're not going to make that call until post the election. So I think we're in a little bit of a holding pattern here with that. But long term, as we mentioned, we do see momentum behind sustainable aviation fuel because airlines have made large commitments to the volumes that they intend to purchase for sustainable aviation fuels, as well as actual regulations that have been put in place in the EU and ones that are being contemplated elsewhere. In terms of cost controls, We've already taken steps in July to remove costs from those impacted, I would say, underutilized units that are really concentrated in the ZList joint venture in terms of emission controls and renewable fuels. Put in perspective, it's probably the equivalent of removing a shift out of the production schedule. We've also deferred some spendings, but none of these costs, they're all going to be concentrated towards those areas. none of those cost controls are going to impact the other things that we have going on in our catalyst and advanced materials space where we're expanding the Kansas City site for polyethylene. All those things are still going to move forward, and these cost reductions won't impact that at all.

Got it. And then just a question for Mike. You've indicated wanting to get below three times leverage eventually in the low twos. You know, what do you expect to be the balance of debt paid out? I know you said probably limited focus on M&A and repurchases for the balance of the year. And are there any sort of discrete headwinds or tailwinds, you know, that'll make cash conversion come in better or worse on a four-year basis?

Yeah, thanks for the question. So, from a leverage standpoint, we expect to end the year based on our guidance of roughly three times leverage. We do expect our free cash flow to still remain strong. You'll notice that our free cash flow guidance is down, but not as much as what our EBIT is. We still believe that we have a strong cash generation and expect it to be higher than it was last year. So we continue to generate cash. Our core businesses are intact. And as Kurt mentioned, we've been doing some other things to defer spending and and take the appropriate actions to help support that generation going forward.

Great. Thank you so much.

Thank you. And our next question comes from Lawrence Alexander with Jefferies.

So, good morning. So, first, can we maybe look at the sort of adjustments that you've made and separate out like the transitory versus the structural? And as you think about what the baseline is for building the bridge for 2025 EBITDA, what you think we should be using in terms of the puts and takes there. And then secondly, given the discussions you've had with the customers at this point, can you talk a little bit about what the kind of revenue opportunity is over four or five years now on both the SAF front and the recycling front? If the current project, you know, plans go through and the industry builds out as expected, what's the kind of revenue opportunity for you if you get your fair share of the supply chain?

Yeah, thanks for the question. So I'll just start and just note that we're not going to provide any updated guidance on 2025, but I would tell you that from a directional standpoint, we're certainly happy with what we've seen this year from a volume standpoint, particularly around the regeneration services. We do see growth in virgin sulfuric acid we talked about, however, a little more cautious than earlier in the year, but it's still a good growth component over the previous year. We do have that strong base pricing that we expect to continue going forward into future years. And, you know, with our cost structure, you know, and eco-services now managed at an appropriate level with the higher cost that we talked about related to the reliability program and higher turnaround costs, You know, that will moderate going forward. So we expect, you know, 2025 to continue to go in the right direction. As it relates to AM and Z, of course, you know, as we talked about, we don't have a full view of where we think sustainable fuels are, but we definitely see that there's an impact in the next 12 to 18 months. So that will, you know, impact us going into next year. Our hydrocracking catalyst actually is doing well this year. It's not quite at the peak that it was in 2010. 23 last year. However, it is having a strong year, and we continue to see that being a positive into next year as well. So, with some of the newer areas, whether it's advanced recycling or in the functionalized silicas business, you know, with enzyme development, those are all positives that are going to take us into a positive nature around those for 2025 as well.

Yeah, I would just add, Lawrence, I mean, I think we look at, Mike mentioned a little bit, sustainable aviation fuel. We see that growth, as we've said before, to be anticipated to really come in in 25 and 26 as those units get built out and the regulations and so forth go into effect. Advanced recycling, there's 12 units under construction. We expect you know, an uptake in our products in that space to, you know, to begin 25 and 26 and going beyond. And I'll just circle back really on the eco-services side. I mean, all the products are going to have volume uptake year-over-year.

And we do have our next question from Hamed Khorasan with BWS Financial.

Hi. So what I wanted to ask about was on the sustainable energy FuelSod and Zealist, is this a customer loss perspective? Because RIN prices have been coming down for a year now, so I'm just surprised it took a year before you're seeing any kind of impact from it.

Yeah, sure. Thanks, Tom. And I just want to apologize. There was a loss of audio here on the call, so we apologize to the participants for the disruption. But good question, Hamid. I think we have not lost customers in this space. I mean, we are a leading provider in de-waxing catalyst materials. But that being said, our end customer, as we've stated, tends to be the catalyst technology provider, right, or the technology provider for the renewable producers. So we're, in most cases, once removed. in terms of the actual producers themselves, which in some cases are on-purpose renewable producers or integrated refining companies that produce renewable fuels. So our view on this was when these credits came down, the sustained nature of that has led to these long-term decisions where people are going to defer investments. as well as the catalyst life as the low utilization rates impacting the catalyst consumption or the use of the catalyst now is leading to the slower sales from that long-term low utilization from the RINs credits. I hope that answers your question. We're once removed there. I think it's more the long-term nature and the length that the RINs credits have been below that has started culminating in some of this activity.

Got it. And then as far as your cost management is concerned, how manageable is that? Are you reducing costs when sales come back? you know, do those sales, do those costs come back as well, or are you able to keep those permanent?

Yeah, we'll obviously, we'll look at that when those come back. I mean, we do have the ability to scale up. I mean, essentially, what I mentioned before was the removal of the equivalent of the shift that the, you know, the production sites that are, the production lines that are affected. So, we would have the ability to scale that back, and it would just be a manner of you know, at what pace that comes back. I mean, do we, you know, can we handle it with our existing capacity or, you know, do we have to go back and add those costs back? So it will really be a function of the pace of the return of the sales.

Okay. I appreciate it. Thank you.

Thank you. And once again, if you would like to ask a question, please press star and 1 on your telephone keypad now. And we will take our next question from David Silver with CL King.

Yeah, hi. Thank you. I guess the first question I'd like to ask would be maybe to get your view on the back half of the year in terms of the opportunities for your virgin acid product. So, you know, I think the demand on that side has been weaker or, you know, hasn't really been exceptionally strong for a few quarters now. And I'm just thinking about, you know, kind of the step down or the implied step down in your guidance. But is there a dynamic in that market, maybe, Kurt, where you know, when industrial activity weakens, that there are some new players that enter. In other words, they can't use all their captive product internally, and then they tend to look for outlets into, you know, your preferred markets. In other words, is this just demand that you see falling away, or – Is there kind of maybe something a little more complex where, you know, weaker industrial demand turns into some increased competition in, you know, some of your traditional markets?

Good question, David. I think so for the back half of the year overall for virgin sulfuric acid, again, we do expect volumes to be up. year over year, and actually the EBITDA of eco-services in the second half of the year to be up year over year. That being said, when we gave our initial guidance coming into this year, we had planned to do four turnarounds in the first half of the year. We viewed the second half of the year would be a recovering marketplace. Most of our turnaround activity was done. We had the volume to meet which generally is a spot, and I'd say short-dated contract market, right, where if industrial activity is healthy and other producers are taking turnarounds or such themselves, there's generally a healthy spot market to sell additional materials, which are generally higher in price due to their short-term and opportunistic nature. So what we're seeing now is just generally the cautiousness with the overall industrial climate not really impacting our existing demand but it just makes those kind of those marginal and fringe spot sales that we typically have the ability to capitalize due to our scale it just there you know we're just cautious around our ability to capture those because they just might not be there because the market you know the existing market may be able to meet that demand

Okay, thank you for that. And I should have stipulated in, you know, up front, I think I've missed, you know, a few answers and whatnot. So I apologize for making you repeat yourself there. The second thing I'd like to ask you about is maybe the decision to, you know, redo and extend your term loan. So, you know, when I read the announcement originally, I noted that that term loan wasn't really due to expire or mature until I think 2028 or so. And, you know, in effect, you've extended it out three years. My thinking or my assumption is the impetus to redo the term loan would have been on your side. Banks are always anxious to earn a few more fees, but it's a lot of time and effort internally and a lot of paperwork. But maybe, Mike, if you wouldn't mind just sharing your thoughts about why now or why June, middle of June, was the right time to extend that and beyond the $3 million or so of annual interest savings, what other key features did you come away with from there that you think were part of your calculation in moving forward with that decision at that time?

Yeah, certainly, David. So, I mean, there's certainly a bit of a question in the market around companies and their balance sheet. And we saw this as an opportunity to go out into the market. Our bankers that we've used have done a nice job helping us guide through when the right opportunities might arise. We certainly were able to do this at a relatively low cost for for what we were able to do, extending the term out for three years, as well as reducing the overall interest expense, as you mentioned, around $3 million a year. The NPV and the value of doing it was quite high, and we also felt very, very comfortable that it would help support our story of having a strong balance sheet from a capital allocation standpoint, generating cash, and having the ability to use that cash for what we needed to do going forward. So we believe that it was the right time to go out in the market. It gives the investors comfort that our balance sheet is strong and also allows us to continue with our strategy to add interest rate caps as needed. As we mentioned, we're about 75% hedged over the next several years. Our weighted average cost of capital is around 5.5% for the year. So, again, it just gives that comfort for investors to know that interest is not a big concern for a company like ours.

Okay, thanks. And then last question, if I could. I mean, but, you know, I guess with this latest update, you know, you'll be, I don't know, under-earnings. maybe are below trend for a little bit of a period of time. Any thoughts from your side on kind of your major capital outlays? And I'm thinking of Kansas City in particular, but does the original timeline still make sense here? Or, you know, if we do enter a softer patch, you know, industrial activity-wise, you know, that's something that could probably, you know, be timed a little differently.

Thanks for the question, David. So just with polyethylene, obviously the growth in the polyethylene is a little lower than what it's been in the trend past 3% to 4%. As we said on the call, that's currently running around 2% to 3%. We do expect our polyethylene catalyst sales to be up year over year. The Kansas City investments are really linked to customer commitments who are simultaneously constructing assets and such that will need those catalysts, which to our knowledge, they're rolling along. We don't have any intention to slow those Kansas City expansion at this time, just because we have commitments to meet for downstream customers.

Okay. Thank you very much.

Thank you. We have no further questions in queue at this time. This does conclude the EcoVis second quarter 2024 earnings call and webcast. Thank you for your participation, and you may disconnect at any time.