ECVT - NYSE

Good morning. My name is Todd, and I will be your conference operator today. Welcome to the Ecovyst First Quarter 2023 Earnings Call and Webcast. Please note today's call is being recorded and should run approximately one hour. Currently, all participants have been placed in a listen-only mode to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. [Operator Instructions] I would now like to hand the conference over to Gene Shiels, Director of Investor Relations. Please go ahead.

Thank you, Operator. Good morning, and welcome to the Ecovyst First Quarter 2023 Earnings Call. With me on the call this morning are Kurt Bitting, Ecovyst's Chief Executive Officer; and Mike Feehan, Ecovyst Chief Financial Officer. Following our prepared remarks this morning, we'll take your questions. Please note that, some of the information shared today is forward-looking information, including information about the company's financial and operating performance, strategies, our anticipated end-use demand trends and our 2023 financial outlook. This information is subject to risks and uncertainties and 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 on today's call with their corresponding GAAP measures can be found in the earnings release and in the presentation materials posted in the Investors section of our website at ecovyst.com. I'll now turn the call over to Kurt Bitting. Kurt?

Thank you, Gene, and good morning. During the first quarter, we continued to execute on our long-term strategies, leveraging Ecovyst's leadership positions and technical strengths to benefit from the world's expanding need for more sustainable technologies. In this regard, it was a successful quarter. During the quarter, we continued to see positive demand in the fundamentals across the range of end uses we serve giving us continued confidence in long-term growth opportunities for Ecovyst. In terms of financial results for the quarter, as discussed in our fourth quarter earnings call in late February, we expected our first quarter results to be impacted by a number of factors. For our Eco Services business, we indicated that our first quarter results would be adversely impacted by Winter Storm Elliott as well as by an extended turnaround at one of our sites. And in our Catalyst Technologies business, we expected lower sales of hydrocracking catalysts due to customer order timing. The first quarter impact of these factors was in line with our expectations. The significant planned maintenance turnaround at one of the Eco Services sites was extended, which limited sales of virgin sulfuric acid in the quarter and resulted in some one-time higher maintenance costs. As a result, first quarter adjusted EBITDA for Eco Services was lower than we anticipated in February, however, our Catalyst Technology businesses results contributed favorably to our first quarter results, benefiting from positive pricing momentum and lower raw material and energy costs. Total sales for the first quarter, including our proportionate share of sales for the

Thanks, Kurt. As Kurt noted, our financial performance in the first quarter reflects several factors, including the effect of Winter Storm Elliott, the impact of extended maintenance turnaround activity at one of our sites in Eco Services and our order timing for hydrocracking and specialty catalyst sales in our Catalyst Technologies business. With the exception of some of the extended maintenance activity, the anticipated impact of these discrete events on first quarter results was discussed during our fourth quarter earnings call in late February. The operational disruption of Winter Storm Elliott along with the extended maintenance activity resulted in constrained availability to produce inventory and meet customer demand for virgin sulfuric acid in the first quarter. In addition and as discussed in our fourth quarter call, while we still expect percentage growth to be in the high teens for hydrocracking catalyst sales on a full-year basis, the timing of customer orders for hydrocracking catalysts was a factor in the first quarter with the majority of these sales expected to occur over the balance of the year. Total sales for the first quarter, including our proportionate 50% share of sales from the

Thank you, Mike. Overall, we expect the demand environment to remain positive in 2023. In our favor, we have diversified end-used exposure with strong representation in markets that we believe have favorable growth trends associated with the growing demand for low-carbon and more sustainable technologies. We believe we are uniquely positioned with an Eco Services business that should continue to benefit from the demand for cleaner burning higher octane fuels and the expanding need for virgin sulfuric acid to support a wide range of industrial processes, including demand growth associated with increased mining activity for metals and minerals that are essential for electric vehicle production, expansion of charging networks, and the tie-in of wind and solar generating capacity. At the same time, we are benefiting from mega trends that include growing production of renewable fuels, increasing regulation associated with more stringent emission requirements, and the continued demand growth for specialty engineered materials. Mike and I outlined the factors that played into our first quarter 2023 results. And as we move through the second quarter, the storm impact and costs associated with the extended turnaround activity are largely behind us. In addition, and based upon order activity in the first quarter, we continue to expect stronger results in our Catalyst Technologies business over the remainder of the year. We also expect to maintain the positive pricing momentum for Eco Services and Catalyst Technologies that we saw in the first quarter. Therefore, we are maintaining our guidance range for 2023 adjusted EBITDA and for adjusted free cash flow generation. We expect that strong cash generation over the balance of the year will continue to support a balanced capital allocation strategy. We will continue to evaluate opportunities to enhance shareholder value with priorities given to growth initiatives and leverage reduction. With that, we will ask the operator to open the line for questions.

Thank you. At this time, we will open the floor for questions. [Operator Instructions] Our first question comes from Aleksey -- I'm sorry Aleksey Yefremov with KeyBanc Capital Markets.

Hey guys. Good morning. This is Ryan on for Aleksey. I guess first question for you just kind of going based off what you guys guided for 2Q and then looking at what it implies to the back half it looks like a pretty sizable step up. Can you maybe just talk about at least to get to the midpoint can you maybe just talk about confidence there and like kind of what leads you to believe in that step-up? Thanks.

Sure Ryan. Thanks for the question. Well, we really see strong demand across all of our market segments moving into the latter part of the year. So, regeneration business is obviously going to benefit what's projected to be growing domestic gasoline demand growing exports of gasoline and that equating to strong refinery utilization. Our virgin sulfuric acid demand is very strong for things like low carbon technologies and sustainable technology. So, we view that business as really as much as we can produce. We'll be able to sell Chem32 and treatment services' demand remains robust. And then moving over to the Catalyst Technologies segment. Obviously, as we've said before, our hydrocracking catalysts we expect to be up on a year-over-year basis on sales in the high teens. We expect growth in line with market for our polyethylene catalyst and then strong demand coming from both renewables and emission controls. So, we have good confidence going into the later quarters of this year which is why we're maintaining our EBITDA guidance.

Great. Thanks for the color there. And then I guess just like can you talk about in Catalyst Technologies how you guys are tracking on price cost? I believe last quarter you guys talked a little bit about how you can be at the upper end of the guide if not potentially a little bit above it. If you continue you kind of see some relief on energy costs and stuff like that. So, I don't know if maybe you guys have anything to provide there?

Sure. Yes. So, we did see just so in our comments, we saw some good pricing momentum in particularly in Silica Catalyst, where we instituted some pricing actions in the latter part of 2022 as well as just the formula-based pricing, that some of that is attached to some of that business making adjustments in 2023. So, that provided stronger pricing, as well as we are experiencing a lower cost for raw materials and energy and so forth so, that's been able -- that's given us the ability to expand our margins. And then really, our products as we look over to the

Our next question comes from David Begleiter with Deutsche Bank.

Hi. This is David Huang. Maybe first, just going back to the guidance. Can you talk about at this point what's driving the low end and high end of your guidance range? And I guess, just given the demand issue you mentioned in Catalyst, do you think we're tracking towards the lower end of the guidance rather than the higher end?

Yes. Thanks for the questions, David. So when we look at the guidance range and as we gave that on last quarter's call we obviously, were looking at we were cautious looking at -- we've got a long part of the year left here, as we sit here right in May so that range is really there as we watch the general overall macro market conditions. However, I will say, we remain confident in the Catalyst Technologies segment for this year. We see strong order patterns, especially for hydrocracking, for the second half of the year and again expect that business to be up in high teens percentage year-over-year, on a sales basis. And we continue to maintain good sales at kind of the market rate for our polyethylene catalyst as well.

Okay. And second question, can you talk about your expectation for sulfuric acid pricing and then sulfur cost for the rest of the year?

Sure. Well for sulfuric acid, the demand remains really strong. And again, it's driven by the production of -- and the propagation of low-carbon technology, sustainable technologies which were obviously, requiring minerals and materials for all the -- for charging and electric vehicles and so forth. So, there's a tremendous pull for sulfuric acid and then for just general industrial uses as well. From a sulfur basis. Sulfur, is largely driven by -- pricing is largely driven by the agricultural market. They purchased about two-thirds of the world's sulfur, so we're expecting currently this year sulfur prices in 2023, to be below what they were in 2022. And that's being driven by one, the high refinery utilization. So as refineries run harder, they're producing more sulfur, which consequently benefits our regeneration business obviously, benefits from a higher utilization rate. But then on the other side of the equation, on the demand side agricultural demand for sulfur this year is a little bit lower. We don't participate in that market. It's driven by agricultural economics, but we see the overall supply-demand balance for sulfur being slightly tilting towards lower pricing in 2023, which obviously impacts our virgin acid pricing as sulfur's pass-through on a dollar-for-dollar basis.

Okay. Thank you

Thank you. Our next question comes from Hamed Khorsand with BWS Financial.

Yes. Hi. So first off here in sulfuric acid in the presentations you're talking now about construction coming back. Is that incremental demand to what you previously talked about as far as the consumers of sulfuric acid?

Yes. Hi, Hamed. Thanks for the question. So for virgin sulfuric acid, I think, what we're seeing in demand from there is largely mining and construction, right? So you look at things like wiring and copper and other minerals and materials being used for not only just in commercial construction, but then for infrastructure construction right? The support charging, green energy products and so forth. So we see that market continuing to be strong because quite frankly the global -- there's global initiatives to push towards low-carbon technologies and green energy and it's just going to require lots of those materials and minerals. So as we refer to construction it's somewhat into that space.

And are you completely done with the turnarounds that you've been talking about?

Yes. So we have the extended turnaround that we had in the first quarter is completed and that unit is running at capacity now. We do have other turnarounds that take place in the latter part of the year and that's quite normal for us. So they're planned. Generally when we plan turnarounds we have a scope of work that we know that will be executed and we can generally time when they're going to be up or down and we plan around those with building inventory and such. We have a pretty robust preventive and replacement cycle with our plants and it's obviously very important to us that we conduct our maintenance at our plants as thoroughly as possible because we view the market as very strong. We'll be able to sell everything we produce. So we want to make sure those plants are running correctly.

And my last question is what's the timeline for upselling the refineries and higher quality catalysts given that they're still running at 90% plus?

Yes. Thanks for the question. I think you're referring to hydrocracking catalyst so our hydrocracking catalyst is -- those change-outs generally happen on a on a three to four-year cycle basis. So a lot of the customers in that portfolio are incumbents right? So you've got some customers that will upgrade their catalysts as we develop new catalysts that have higher yields and allow them higher flexibility. And then at the same token our new products that offer that higher yield and higher flexibility we're trying to win new customers with those catalysts which we've seen would be very successful with our technology which really is kind of surrounded by the purity of our zeolites that we produce.

Okay. Thank you.