Ecovyst Inc.

Good morning. My name is Jim, and I will be your conference operator today. Welcome to the EcoVist third quarter 2024 earnings call and webcast. Please note today's conference 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 and one on your telephone keypad. If you wish to remove yourself from the queue, please press star and two. 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 today, please press star and zero. I would now like to turn the conference over to Gene Shields, Director of Investor Relations. Please go ahead, sir.

Thank you, Jim. Good morning and welcome to ECOWAS third quarter 2024 earnings call. With me on the call this morning are Kirk Vitting, 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 in-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 this morning's call with their corresponding GAAP measures can be found in our earnings release and then the presentation materials posted in the investor section of our website at Ecovist.com. I'll now turn the call over to Curt Fitting.

Curt Fitting Thank you, Gene, and good morning. Against the backdrop of a challenging macroeconomic environment, Ecovist's third quarter financial results were in line with our overall expectations. Our eco-services segment continued to exhibit resilience with positive demand fundamentals contributing to another quarter of solid performance. During the quarter, high refinery utilization and attractive alkylate economics continued to support demand in our regeneration services business, where contractual pricing increases contributed positively to the segment profitability in the quarter. Although demand remained soft in certain industrial end uses, third quarter sales volume for virgin sulfuric acid increased compared to the prior year. We also continued to see strong demand in our Chem 32 catalyst activation business, with volume also up year-over-year. In our advanced silicas business, sales of silicas used in the production of polyethylene increased in the third quarter, and we remain on track for polyethylene catalyst sales to be up in 2024 compared to 2023. Within the zealous joint venture, sales of hydrocracking catalysts were up in the third quarter. However, sales of specialty catalysts in the third quarter were lower than we had initially expected due to timing, as we saw some sales slip from the third quarter into the fourth quarter due to minor logistical delays. Cash generation remained positive in the quarter, providing for a modest reduction in our net debt leverage ratio. As we turn to slide six, I'll provide an update on our near-term demand outlook. For eco-services, we believe the outlook remains positive. Taking into account planned seasonal turnaround activity for our refining customers, for the balance of the year, we expect stable activity for our regeneration services business. Looking forward, we continue to expect that high refinery utilization and favorable output economics will continue to benefit demand for regeneration services, particularly from our customers who operate some of the largest scale refineries in the Western Hemisphere. EcoVis regeneration contracts offer substantial earning stability due to their long-term nature, cost pass-through mechanisms, and capacity reservation fees. Turning to virgin sulfuric acid, although we remain cautious about the potential for near-term weakness in the industrial demand to adversely impact sales, particularly for spot sales and sales under short-dated contracts, We continue to believe the long-term outlook for virgin sulfuric acid remains very positive. As one of the most widely used chemicals, sulfuric acid plays a critical role in a wide range of industrial and petrochemical applications and processes. Ecoservice's quality and robust network continues to make us a preferred supplier to leaders in a wide range of industrial applications, including mining and the production of nylon intermediates. Chem 32 and treatment services provide our customers with unique and high-value services, and we maintain a positive demand outlook for both segments. For Chem 32 catalyst activation, we expect demand to remain strong through 2024, and we are seeing high levels of interest in activation services well into 2025. As we have discussed previously, we are taking steps to significantly expand our capacity at the Orange, Texas site to serve the growing demand we see for ex-situ catalyst activation. Turning to advanced materials and catalysts, for sales of polyethylene catalyst and catalyst supports, the weak global economy continues to constrain growth in global polyethylene demand. However, we remained aligned with major producers, both in the cost-advantaged U.S. and Middle East. We remain positive on the long-term sales outlook for our polyethylene catalyst, given how our customized catalyst approach has enabled us to win at the key expansion projects in the U.S. and Middle East. We expect sales growth for the full year, as well as into 2025 and beyond, to be supported by the ongoing expansion of polyethylene catalyst production capacity at our Kansas City site, which is on track for completion by the end of next year. The expansion is backed by firm customer commitments for expansion projects that are expected to ramp in 2026 and 2027. In addition, we continue to leverage our research and development capabilities to expand our advanced silicas portfolio for high-growth biocatalysis applications. Customers continue to qualify our products for food processing applications with very positive feedback, and we expect these qualifications to translate into additional sales in 2025. For the zealous joint venture, we continue to expect that 2024 will be a strong year for the sales of hydrocracking catalysts, although we do not expect to repeat the peak sales levels we saw in 2023. In terms of longer-term growth expectations, we continue to believe our mock technology is gaining market share as it offers refineries valuable production flexibility. For our sales of catalyst materials into sustainable fuel production, there has not been a significant change in market dynamics from the view that we shared with you in early August. We see the current low value for RINs and the adverse impact of inflation on construction costs continuing to weigh on near-term project economics for incremental renewable diesel capacity. Absent improved producer economics in the short term, we continue to expect weak demand conditions for catalyst material sales into renewable diesel over the next 12 to 18 months. In the long term, we maintain that the introduction of sustainable aviation fuel is the only viable near-term solution for airlines to achieve decarbonization. We expect that sustainable aviation fuel will begin to ramp up at the end of 2025 and the beginning of 2026. We believe our zeolite technologies for both de-waxing materials and agglomeratization catalysts are well positioned as key enablers for the industry. For sales of emission control catalysts, our outlook has also not changed materially since August. Global sales for heavy-duty diesel vehicles remain depressed due to the weak macroeconomic environment and high interest rates. In addition, the deferral and implementation of more stringent emission requirements under Euro 7 has been delayed, and this is another contributing factor to the weak vehicle sales. Lastly, we remained aligned with key players developing advanced recycling technologies, working towards customer plant trials. With a solid technology offering, we believe we are well positioned for future growth. I'll now turn the call over to Mike for a more detailed discussion on our financial results for the third quarter. Thank you, Kurt. Sales for the third quarter, including our proportionate 50% share of sales from the Zealous joint venture, were $210 million, unchanged compared to the prior year. Eco-services sales were up approximately 4%. largely driven by higher volume of virgin sulfuric acid and favorable contractual pricing for regeneration services. Sales for advanced silicas decreased modestly as the benefit of higher sales volume for polyethylene catalyst and catalyst supports was offset by the comparative timing of event-driven niche custom catalyst sales. Sales for the Zealous Joint Venture were lower as higher sales of hydrocarbon catalysts were more than offset by a decrease in sales of catalyst materials used in the production of sustainable fuels and emission control applications. Third quarter adjusted EBITDA was $60 million compared to $68 million in the prior year, with the decrease primarily driven by the lower sales within the ZLIS joint venture, offsetting the higher earnings from eco-services and advanced silicas. Moving to the next slide, I'll highlight the major components of the change in adjusted EBITDA. As we anticipated and discussed in our second quarter earnings call, the unfavorable period-over-period net pricing impact in the second quarter associated with the contractual pass-through of energy and other index costs within ECO Services is behind us. The price-to-variable cost ratio in the third quarter was positive, with net pricing accounting for approximately $3 million. driven largely by strong contractual price increases for regeneration services. However, the lower sales volume of high-margin catalysts used in the production of sustainable fuels drove a less favorable sales mix within the zealous joint venture, impacting adjusted EBITDA in the year-over-year period comparison. The balance of the change in adjusted EBITDA relates to higher costs, including higher planned manufacturing and maintenance spending within eco-services costs associated with our reliability initiatives, as well as other costs, including certain employee-related costs. I'll now cover the highlights of our segment results, starting with eco-services. Third quarter sales for eco-services was $154 million, up 4 percent. Drivers of the increase include higher sales volume for virgin sulfuric acid and favorable contractual pricing for regeneration services. Higher comparative volume for our Chem 32 catalyst activation business was also a contributing factor. Third quarter adjusted EVA for eco-services was up modestly compared to the prior year, as the higher volume and increased pricing was largely offset by higher manufacturing costs associated with inflation, increased planned maintenance costs, and costs related to our reliability initiatives, which have resulted in a marked increase in operational efficiency. As we previously discussed, we expect the improved operational efficiency of our reliability program to translate into enhanced capacity and ability to serve growth in demand for our products and services. Moving to advanced materials and catalysts. Third quarter sales for advanced silicas was $25 million, a slight decrease compared to the prior year. The modest decrease reflects higher sales volume for catalysts used in polyethylene production offset by the timing associated with sales of niche custom catalysts. Our proportionate 50% share of sales from the ZLIS joint venture was $31 million, down compared to the prior year, as higher sales of hydrocracking catalysts were offset by the lower sales of catalyst materials used in the production of sustainable fuels and emission control applications. Third quarter adjusted EBITDA for the advanced materials and catalyst segment was $11 million, compared to $16 million in the prior year, driven by the lower sales volume within the Zealous Joint Venture. As we moved to cash and leverage, the third quarter was another quarter of favorable cash generation. For the first nine months of the year, adjusted free cash flow was nearly $60 million, compared to $20 million in the prior year, primarily driven by the timing of dividends from the Zealous Joint Venture and favorable changes in working capital. We ended the third quarter with approximately $123 million of cash, and our available liquidity was $188 million, including availability under our ABL facility. Our net debt leverage ratio at quarter end was 3.2 times, down from 3.3 times as of the end of the second quarter. Based upon our expectations for cash generation for the remainder of the year, and excluding any discretionary uses of cash, we expect to end the year with a net leverage ratio of approximately three times. As a reminder, our target net leverage ratio is between two to two and a half times. I'll now turn to our outlook for the fourth quarter and full year 2024. As Kurt noted, our third quarter financial results were in line with our expectations, and while adjusted EBITDA for the third quarter fell toward the lower end of our guidance range, This was largely due to the timing associated with specialty catalyst orders within the ZLIS joint venture, with some sales shifting from the third quarter into October. For the full year of 2024, we are maintaining our previous guidance ranges for gap sales of $700 to $740 million, sales for our proportionate 50% share of the ZLIS joint venture of $115 to $135 million, and for adjusted EBITDA of $230 to $245 million. As we have previously discussed, the sales of certain products within advanced materials and catalyst segment can be lumpy, as they are often large event-driven sales. Single orders of these catalyst sales can be large, and the timing of when the revenue is recognized can be relevant to specific quarterly results. The range takes into account the lumpiness of our sales in advanced materials and catalysts and acknowledges a range of outcomes in our virgin sulfuric acid and polyethylene business, given the current industrial demand outlook. In terms of the specific outlook for the fourth quarter, we see continued stability in our eco-services business. As such, our expectations for the full-year adjusted EBITDA for the eco-services segment remain in the range we provided in our second quarter earnings call, which was $195 to $205 million. and this would imply fourth quarter adjusted EBITDA of approximately $54 million at the midpoint of the guidance range. Last quarter, we also provided a full year range for our advanced materials and catalyst segment of $65 to $70 million. Prior guidance incorporated our expectations for timing of certain niche custom catalyst sales with heavy weighting in the fourth quarter, implying a fourth quarter adjusted EBITDA for the segment in the $30 million range. However, in light of continued uncertainty around the sales of catalysts used in the production of sustainable fuels and emission control applications and the timing of certain catalyst sales, full-year results for advanced materials and catalysts could be slightly below our target. However, this would be largely offset on a consolidated, adjusted EBITDA basis by favorability and corporate costs. I will now hand the call back to Curt for some closing remarks. Thank you, Mike. I want to make a few comments on our safety and sustainability efforts. The responsible stewardship of our facilities and products is a core value at EcoVist. During the past two years, EcoVist has made significant investments in time and resources across our safety and environmental programs. These investments, along with the superb efforts of all of our EcoVist colleagues, has resulted in top quartile safety performance and our platinum Ecovada sustainability rating for 2024. I am confident that Ecovist's hyper-focus on stewardship will continue to yield outstanding safety and environmental performance, which helps us retain a strong connection to our strategic plan and stakeholders. Finally, as we look to deliver on our financial commitments for 2024, our capital allocation focus remains on positioning Ecovist for differential growth in the future and delivering value for our shareholders. As such, we are continuing to implement the strategic plan we outlined last year in our investment day. We continue to see compelling opportunities across our businesses to strengthen our portfolio and improve the resiliency of our earnings. Consequently, we are investing to capture these organic and inorganic growth opportunities. We are currently investing in the expansion of our polyethylene catalyst production capacity at our Kansas City site and the expansion of our catalyst activation capacity within Chem 32. Both projects remain on budget and on target to support expected future growth and demand. In addition, the reliability initiatives within our eco-services segment that we outlined in our investor day last year have already resulted in significant increases in our operational efficiency. As we have discussed, we expect these initiatives will provide for overall improvement in plant operating rates and therefore expanded capacity to serve expected growth and demand for both virgin sulfuric acid and for regeneration services. We also remain interested in inorganic growth opportunities that would closely complement our existing businesses, provide attractive synergies, enhance our capacity and capabilities, and increase our earnings resiliency and growth profile. Ecovisibility to generate cash provides long-term investment potential in both organic and inorganic opportunities. As Mike mentioned earlier, a primary goal of our current capital allocation strategy is to reduce our net leverage ratio to a target range of two to two and a half times, thereby enhancing our balance sheet flexibility to capture future growth opportunities. In summary, we remain intently focused on growth and value creation for our shareholders. We see compelling opportunities across our portfolio, and we believe the strategic plan we have outlined will allow us to deliver on our growth expectations. Thank you. And at this time, I will ask the operator to open the line for questions.