Q1 2024 Ecovyst Inc Earnings Call

Participants

Gene Shiels; Director - Investor Relations; Ecovyst Inc

Kurt Bitting; Chief Executive Officer, Director; Ecovyst Inc

Michael Feehan; Chief Financial Officer, Vice President; Ecovyst Inc

John McNulty; Analyst; BMO Capital Markets

Aleksey Yefremov; Analyst; KeyBanc Capital Markets Inc.

Patrick Cunningham; Analyst; Citi

Laurence Alexander; Analyst; Jefferies LLC

Hamed Khorsand; Analyst; BWS Financial Inc.

Presentation

Operator

Good morning. My name is Madison, and I will be your conference operator today. Welcome to Ecovyst's first quarter 2024 earnings call and webcast. Please note, today's call is being recorded and should run approximately one hour. (Operator Instructions) I would now like to hand the conference over to Gene Shiels, Director of Investor Relations. Please go ahead.

Gene Shiels

Thank you, operator. Good morning and welcome to the E. CoVest First Quarter 2024 earnings call. With me on the call this morning are Kurt Bitting, Ecovyst's Chief Executive Officer; and Mike Feehan, Ecovyst'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 their corresponding GAAP measures can be found in our earnings release and presentation materials posted on the Investors section of our website at Equifax.com.
I'll now turn the call over to Kurt Bitting. Kurt?

Kurt Bitting

Thank you, Gene, and good morning. Ecosys 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 Zeolyst Joint Venture were up on higher sales of catalysts used in sustainable fuel production and sales growth and 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 Zeolyst 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 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 Ecovation for continued growth in the future.
As we turn to slide 6, I'll provide an update on our near-term demand outlook, starting with E-Co 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 Asola and for our Gulf Coast refining customers. The lack of availability of Russian refined products in the global market is creating additional demand for US refined product exports for virgin sulfuric acid, we see balanced conditions and expect sales volume to be up in 2024.
Mining demand remained 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, chlor alkali 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 1032 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 silicon segment fell short of our expectations in the first quarter were 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 Catalyst 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 protection technologies, and we expect activity to increase with a number of start-ups slated for next year.
For hydrocracking catalyst, the growth in global diesel demand is a positive factor. Market conditions in the US remain favorable with diesel inventories below historic averages. The hydrocracking catalyst market remains competitive, but we believe we have a differentiated offering with our Market 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 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 advanced recycling industry where our catalyst technologies can provide a meaningful reduction in energy intensity for thermal pyrolysis, we expect growth in recycling activity to increase in the next two years with 12 advanced recycling plants 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.

Michael Feehan

Kurt equaled the sales for the first quarter of 2024, including our proportionate 50% share of sales from the Zeolyst Joint Venture were $184 million, slightly higher than the first quarter of 2023 because 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 silicas used for the production of polyethylene were only partially offset by higher sales from the Zeolyst 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. And 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 initiatives, 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 Elliot 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 a 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 E-Co 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 catalyst first quarter sales, including our 50% proportionate share of Zeolyst Joint Venture sales were $42 million, down $3 million. Sales for the Zeolyst Joint Venture were up 6%, driven by higher sales of Catalyst 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 silicon used for the production of polyethylene. While sales of finished catalyst 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 Zeolyst 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 2024 was particularly strong, benefiting from the dividends received from the Zeolyst 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 an $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 in our fourth quarter earnings call in late February remains unchanged with GAAP sales of $715 million to $755 million. Sales for the Zeolyst joint venture of $145 million to $165 million and consolidated adjusted EBITDA of $255 million 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 million 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 as 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 million and $12 million. The results are expected to be lower than the prior year 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 cost to be between $7 million and $8 million per quarter.
I will now hand the call back to Kurt for some closing remarks.

Kurt Bitting

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 nylon and used. The demand outlook across our portfolio remains positive. For 2024, equal services 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. And fortunately, 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 plant union ratified the new contract earlier this week and our valued colleagues fully returned to work on May first during the course of the strike operations at the Houston site continued allowing us to service our customers.
Thank you for your interest in Ecovyst. And at this time, I will ask the operator to open the line for questions in queue.

Question and Answer Session

Operator

(Operator Instructions) John McNulty, BMO Capital Markets.

John McNulty

So when I look at the outlook you have for the various segments for 2024, it looks like a few things have maybe gotten a little bit more positive PVC PVC outlook in mining recovery utilization rates in refining, you largely maintain the guide. I guess are there are some negative offsets to that that we should be thinking about or is it just look it's early in the year and you want to get too far ahead of yourselves. I guess how should I be thinking about that?

Kurt Bitting

Thanks for the question, John. Yes, we're it's still I would say we're still early in the year, as we mentioned on the call, were the first 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 is good demand from the regeneration segment. We're happy with the 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 would be stronger in the second half of the year, which is what we had thought it was on our 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 there's still time left in the year. And but we feel good about where we're at.

John McNulty

Got it. Okay. And then can you spoke you through the through the prepared remarks around a push-out in terms of timing around around the polyethylene catalyst side, I guess can you and can you help us to quantify that and think about the timing of when you expect that to roll? And it sounds like it may not necessarily all be 2Q, it may be pushed out into the back half of the year?

Kurt Bitting

Yes, sure. So for for Q. one, just to recap on For Q1, our finished polyethylene catalyst sales were up year over year. What was fell short was the polyethylene catalyst supports, which are really I'm intermediates that either coal producers and the catalyst industries are actually polyethylene producers themselves five from us, these advanced intermediates and then partner them with their own metals. That's around a quarter to a third of what we call in our polyethylene catalyst sales. So those that there was some timing issues. Some of it was base shipping. And just when the orders actually landed at the expense of customers, there was some limited destocking in that in that space. But overall, when we look at polyethylene, both for the finished catalysts side and supports, 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.

Operator

Aleksey Yefremov, KeyBanc Capital Markets.

Aleksey Yefremov

Thanks, good morning. Just to stay with key catalysts, can you just step back and tell us where you think you are in those E catalysts on a 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 it's some idea of where you are in that cycle.

Kurt Bitting

Sure. Thanks for the thanks for the question of the last year, I think we generally look at the polyethylene market and what's expected this year is 2% to 3% growth across the globe. Now that's segmented by that there's different regions behaving differently here in North America and the Middle East, where feedstock costs are low on those advantaged producers are at or above that growth rate. Other regions such as China continues to have sluggish growth as well as well as Europe. But we do see overall growth growing 2% to 3% this year, as we've talked about before, historically, we've through capturing market share and getting a disproportionate amount of the new builds and new business, we've been roughly able to been able to double that that market's a growth rate. So we feel good about where polyethylene is going. It's 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 base.

Aleksey Yefremov

And shifting to merchant acid market, I mean you talked about some 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?

Michael Feehan

Yes, unless we thanks for the question. This is Mike. So I think was for the second quarter, 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 on 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 costs. So we see that hitting us really in the second quarter, but then really moderating out for the rest of the year, right? That's not it's really 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 for the full year.

Operator

Patrick Cunningham, Citi.

Patrick Cunningham

Hi, good morning. Maybe just on the Kansas City expansion that you referenced in the release, I guess how how big is that in terms of a percentage basis off your capacity and no long-term commitments you referenced linked to the latest wave of PDH capacity additions? And is there any sort of is there anything baked in for the larger capacity additions we see in 2026 and 27? Are you expecting there or is a time when it gets closer to first production?

Kurt Bitting

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, so around around the globe, but the Kansas City, it's about a 50% production increase. And of course, as we've talked about, it is linked to contractual equip our contractual obligations with customers that are part of this wave of new builds a cross of across the globe, but obviously not at liberty to state the customer, the customers that are involved with that. But those volumes are essentially spoken for already from those customers that are expanding their polyethylene catalyst or their polyethylene production in need and need those catalysts. So in terms of timing of that is the we do expect the expansion to be complete in our fourth quarter or the end of 2025. And that's really there to start meeting some of that demand that you see in call 20. So late 26, 27, 28, that time period.

Patrick Cunningham

Got it. And can you help us size the growth that you've seen in renewable fuels catalysts 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?

Michael Feehan

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

Kurt Bitting

Yes, I think the the dynamic with that, Patrick, is, yes, played a lot in we call sustainable fuels. That's mainly been limited to renewable diesel at this point on when you talk about 2025 and 2026 SAF. technology will start to take enough to take hold in terms of airlines consuming the fuel is getting approved. So that all that all that is going to provide further winds at the back for the sustainable fuels.

Operator

Laurence Alexander, Jefferies.

Laurence Alexander

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

Kurt Bitting

Yes, I can probably I can help you a little bit on me on some of the questions, the PUDs and the usage, I guess of sulfuric acid. So when you look at copper on solvent extraction, electrowinning, right, which is essentially copper leaching that consumes anywhere from three to five tonnes of sulfuric acid per tonne of copper produced. So that's a good outcome. That's a good kind of flag for 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 of anywhere up to 20 tonnes of sulfuric acid, some other metals he's used a different different ratios in terms of regeneration of business are our customer base, which is roughly two thirds located in the Gulf Coast. Arm has tremendous scale, and 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 output that they're producing is highly valuable in the California market in order to meet those of those California gasoline specifications. So that's probably the best for markers I can give you in terms of asset usage and some of those dynamics that you mentioned.

Laurence Alexander

And then just the opportunity for catalyst?

Kurt Bitting

Yes. So for catalysts, we do see the polyethylene catalysts or polyethylene demand as we talked about, continuing to grow in that 3% range. 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 had been announced, obviously, to take advantage of the low end, the low feedstock costs, low natural gas and so forth. So we've always known that one of the reasons we made the expansion decision for Kansas City was due and those customer commitments that we have for that 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.

Operator

(Operator Instructions) Hamed Khorsand, BWS Financial.

Hamed Khorsand

Hey, good morning. So I just wanted to understand the level of conversation you're having with customers 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 and the following.

Kurt Bitting

Sure. Thanks for the question on it. So if we look at the if we just go across the spectrum of the major end use customers. We obviously the products that we supply. Those customers is very important. We're generally sole source to 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 terms of catalysts and then yields of the sulfuric acid and sulfuric acid regeneration is has very high utilization across the across the country. So they are our customers are generally very transparent with us in terms of their forecast. So when you look at regeneration of the things we mentioned on the call, there's Yes, very good margins for octane and output right now. So we see that demand carrying through the year of exports are up due to the global dynamics going on right now in US refining capacity, having having a nice advantage there.
Virgin sulfuric acid, which we were we were uncertain with on the on the last call, what I would say our pricing there has has stabilized from the last from the last call as well as we expect 90, the nylon and new sales to rise year over year mining remains very firm. As you can see, the metals prices has firmed here in the last three, three to six months, and there's still some pockets in virgin acid. Certain industrial applications I would say are less certain, but in general, things have stabilized nicely. There may move it 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 is another large chunk, those orders, we do have good visibility to now or better visibility to now on 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.

Hamed Khorsand

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

Kurt Bitting

Well, we have two planned turnarounds in the US in for the quarter, which was one more than one more than we had Q2 of last year. But the downtime itself will be very similar to Q1.
Right so we had to we executed two maintenance turnarounds in this Q1 of 2024 this year. So it will be similar to Q. one. Com slightly more than it was Q2 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.

Operator

In queue, 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.

Gene Shiels

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

Operator

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