Ecovyst Inc. Q3 FY2024 earnings call

• Against a challenging macroeconomic backdrop, third quarter financial results were in line with expectations. Ecoservices showed resilience with positive demand fundamentals, regeneration services benefited from contractual pricing increases. Virgin sulfuric acid sales volume increased, Chem32 Catalyst Activation business had year-over-year volume growth. Advanced Silicas sales for polyethylene production increased. Zeolyst joint venture hydrocracking catalysts sales up but specialty catalysts sales delayed. Cash generation positive, net debt leverage ratio reduced. - Safety and sustainability efforts: Ecovyst made significant investments in safety and environmental programs, achieving top quartile safety performance and Platinum EcoVadis sustainability rating for 2024. - Capital allocation: Focus on positioning for growth, investing in polyethylene catalyst production capacity expansion and catalyst activation capacity expansion. Reliability initiatives in Ecoservices increased operational efficiency.

For the Ecoservices segment, third quarter sales were $154 million, up 4%. Drivers included higher sales volume for virgin sulfuric acid and favorable contractual pricing for regeneration services. The Advanced Materials and Catalysts segment had third quarter sales of $25 million, a slight decrease due to higher sales volume for polyethylene production catalysts offset by timing of niche custom catalyst sales. The proportionate 50% share of sales from the Zeolyst joint venture was $31 million, down as higher hydrocracking catalyst sales were offset by lower sales of catalysts for sustainable fuels and emission control applications. Adjusted EBITDA for the quarter was $60 million, with Ecoservices and advanced silicas contributing higher earnings offset by lower sales in the Zeolyst joint venture.

• Full year 2024 guidance: GAAP sales $700 million to $740 million, proportionate 50% share of Zeolyst joint venture sales $115 million to $135 million, adjusted EBITDA $230 million to $245 million. - Fourth quarter outlook: Ecoservices business stable, adjusted EBITDA for Ecoservices segment expected in range $195 million to $205 million implying fourth quarter ~$54 million. Advanced Materials and Catalysts segment full year results could be slightly below target but offset by corporate cost favorability.

• Macro-economic environment challenges. - Soft demand in certain industrial end uses. - Timing risk of specialty catalyst orders in Zeolyst joint venture. - Near-term weak demand conditions for catalyst material sales into renewable diesel over next 12 to 18 months due to low RINs and inflation impact on construction costs. - Weak global sales for heavy-duty diesel vehicles due to macroeconomic environment and delayed emission requirements.

Q: Just curious on your early thoughts for 2025, both from an end market standpoint. And then you mentioned a lot of things in terms of items in your control, whether it's benefits from the reliability program, capacity additions and potentially some add-backs from maintenance costs you incurred in 2024. So maybe just both in terms of the market setup as well as items in your control.

A: Yes. Thanks, Patrick. I think we're not really guiding here for 2025. But as we look at the overall landscape Eco Services continues to operate in terms of our regeneration services at a high utilization rate. So we expect volumes to remain strong there, as well as we contracts roll off and we reprice them, we expect continued pricing power in that segment. Virgin sulfuric acid, while there has been some pockets of weakness in certain industrial segments. On balance, it's operating really as we expected. And globally, the reported virgin sulfuric acid prices have risen here in the last six months and we would hope and think that continues on into 2025. And then for Advanced Materials and Catalysts really, we continue to offer really high-value products to our customers that deliver really customized polyethylene solutions for some of the largest producers and we expect that will continue to be the case going forward.

Q: On the leverage, do you expect to be at your leverage target by the end of 2025?

A: Yes David, we are expecting as we said to have a good cash generation this year, right? So our free cash flow guidance has a midpoint of $80 million, which would be an increase compared to the prior year. And then we do expect to end the year around the three times leverage. We're not giving specific guidance into next year. But in the past I would say that we've talked about being able to delever about 0.5 turn a year. So our target range of two times to 2.5 times would be certainly within the range if we continue down that path and generate a good amount of free cash flow each year.

Q: What was the impact from Hurricane Beryl in the quarter?

A: Yes. The impact was a few million dollars. So it did impact the results but not quite as materially as some of the other hurricanes and weather events that we've seen in the past, particularly in early 2023.

Q: Just on the subject of the reliability program and clarify something. I think you mentioned that you're happy with how this reliability program is performing thus far and you see the benefits. Are these benefits more in the potential capacity when demand improves? Because if I just look at EBITDA, it's sort of hard to see it right now. Maybe you can explain.

A: Thanks for the question, Aleksey. I think the reliability efforts have really -- it's an enhancement year-over-year from last year of 2023 and it has enabled us this year. I mean we believe that we're going to be up year-over-year on our virgin sulfuric acid sales. So it's benefited us there. But there's still work to be done. I mean it's a multiyear initiative where we're using -- we have additional reliability team. We've improved our maintenance schedules. We've also are using automation to conduct reliability models. So the combination of those efforts across a multiyear period will -- we believe, will equate to incremental sulfuric acid capacity, which allows us to take advantage of those high operating leverage and produce additional EBITDA. So we believe, you'll see that -- as time goes on, you'll see that incremental capacity that comes from the reliability program will meet up with the higher virgin sulfuric acid demand that we see long-term.

Q: On the catalyst for sustainable fuels obviously things have taken a step back. Are there things you can do from a belt tightening perspective that you're considering at this point? Because it does sound like this is something that may not recover in the next year may not recover in the next couple of years based on at least some of your commentary. So I guess can you help us to think about maybe some of the levers you can pull to help with the profitability around that particular part of the platform?

A: Hi, John thanks for the question. And I think it just really -- as we said on the call our position on sustainable fuels hasn't changed. We still view that as a 12-month to 18-month type of timeline on recovery just because of the supply demand imbalance that currently exists in the marketplace there. I would point you to in Q2 and Q3 we did do cost reductions at our Advanced Materials and Catalyst facilities right where we address cost particularly at the North American level. But we're limited in what we can do there because a lot of the assets are fungible with other catalyst products that are non-renewable right that they're all making similar intermediates. So we've already taken a pretty strong approach to that in Q2 and Q3 which is starting to roll through.

Q: I guess I'm trying to get more sense of demand sensitivities to rate drops. I'm just kind of curious to see if I guess how you expect maybe demand to turn let's say if rates drop 100 basis points or so in 2025. And I guess I'm just curious to see if you're seeing any signs of green shoots yet.

A: Sure. I think in terms of rate cuts I mean that's most of our customers that we service I would say especially in terms of refining and petrochemical are already very advantaged on a global basis from an energy standpoint which is probably more impactful to them than the rate cuts themselves. And our other customers that are producing other chemicals or intermediates or materials are generally selling on a global basis and are also cost advantage. In terms of what we see in demand we do this year our virgin sulfuric acid sales will be up year-over-year. One of the segments that we talk about nylon, we believe, will be up year-over-year albeit not -- it’s certainly not a banner year in nylon. It's still on a historically lower end level, but yet up year-over-year, Mining remains strong as you've seen, metals and other materials components maintain high pricing and high demand. So from a demand standpoint, I think in general, refining remains very robust with high utilization rates. Output is always again considered liquid gold within the refining industry and always has a very strong demand push behind it. And in terms of virgin sulfuric acid we talked about some industrial segments weakness, but it's a very diverse product and there's lots of areas where there is a very good demand. In terms of catalyst our Advanced Materials and Catalysts we've already spoken with the renewable fuels segment. But polyethylene demand growth is still projected to be 2% to 3% per year. We're aligned with the major producing cost advantage areas in terms of the U.S. and Gulf Coast. And our hydrocracking sales which we're happy with this year albeit, it's not a peak cycle year that we had in 2023, we are gaining share in that space with our zeolite technology.

Q: What's the level of conversation you're having with the refinery customers given that they're publicly talking about crack spreads declining and their utilization rates just hugging the 90% line right now?

A: Sure. Good morning Hamed, I think we're very on the refining side for Ecoservices have very I'd say close relationships with the refining customers and in many cases data feeds to their actual consumption of the sulfuric acid in terms of their Alkylation units and how they're running. Alkylate remains very valuable in terms of its position in the gasoline pool. So even as you see things like overall utilization rates ticking down particularly some of it's related to maintenance or crack spreads dropping. Generally they will want to lean into their Alkylation units even harder, because it's an area of significant profitability for them. So our outlook on Alkylation and it has it's been for since I've been involved with this business remains strong because it's the favorability of output demand and the economics that surround it are unchanged.

Q: You've had some lots of really one-time issues in last year and this year. Exiting out the Zeolyst joint venture is 2022 a good baseline to compare for 2025?

A: Yeah. I mean every year has some different challenges in it right? And 2022 had some favorability in some cases timing items and others right? So we've talked before about the hydrocracking in peak years in 2023. It was lower in 2022, but then there was also a different dynamic with sustainable fuels. We also had some favorable pricing that was really driven by some of the indexation that we've talked about in the past in the Ecoservices that we wouldn't see going forward. So there's a combination of a few things, Hamed. It's a bit of a mixed bag.