Ecovyst Inc. (NYSE:ECVT) Q4 2023 Earnings Call Transcript

Ecovyst Inc. (NYSE:ECVT) Q4 2023 Earnings Call Transcript February 28, 2024

Ecovyst Inc. misses on earnings expectations. Reported EPS is $0.22 EPS, expectations were $0.24. Ecovyst Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Bove [ph] and I will be your conference operator today. Welcome to Ecovyst Fourth Quarter 2023 Earnings Conference Call and Webcast. Please note today’s call is being recorded and should run approximately 1 hour. [Operator Instructions] Now, at this time, I will turn things over to Mr. Gene Shiels, Director of Investor Relations. Please go ahead, sir.

Gene Shiels: Thank you, operator. Good morning and welcome to the Ecovyst fourth quarter and full year 2023 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 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 provided 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 presentation materials posted on the Investors section of our website at ecovyst.com. I’ll now turn the call over to Kurt Bitting. Kurt?

Kurt Bitting: Thank you, Gene and good morning. First, I want to thank my Ecovyst colleagues for delivering a strong finish to 2023. Despite the economic uncertainty and operational challenges that we faced last year, our Ecovyst colleagues remain dedicated to their core purpose of delivering high-quality products and reliable services to our valued customers. Despite the macroeconomic uncertainty, relative stability and demand fundamentals across the majority of our end users for both Eco Services and Advanced Materials and Catalysts helped Ecovyst deliver solid financial results for the fourth quarter of 2023. High refinery utilization, favorable gasoline demand and the trend toward higher-octane and cleaner burning fuels continued to drive alkylate [ph] production in 2023, providing support for our regeneration services business where volume was up compared to the fourth quarter of 2023.

Sales volume for virgin sulfuric acid was also up compared to the fourth quarter of 2023, albeit, with weaker pricing dynamics associated with softer macroeconomic conditions, particular in advanced materials and catalyst. Fourth quarter sales were up considerably compared to the fourth quarter of 2022. While polyethylene sales volume was lower compared to the prior year fourth quarter, higher pricing and strong demand for hydrocracking catalysts and customized catalyst applications contributed to the sales growth. Given these volume and pricing dynamics, our fourth quarter 2023 adjusted EBITDA was $70 million. During the fourth quarter, we maintained our focus on the strategic initiatives and operational priorities that we believe are positioning Ecovyst to deliver strong growth in the future in our core and industrial applications as well as in the emerging allocations we discussed in our November Investor Day.

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Q&A Session

For the Zeolyst joint venture, these emerging applications include the ongoing expansion of sustainable fuel production, both for renewable diesel and sustainable aviation fuel and catalysts specifically designed for advanced recycling of plastic waste. We are benefiting from the growth in renewable diesel today, and we expect our Zeolyst technologies for alcohol-to-jet SAF production to gain additional momentum this year. For our advanced silicas portfolio, we highlighted a number of nascent platforms, including our AlphaCat advanced silicas and our AlphaSelect functionalized silicas for use in applications such as mobilized enzymes, carbon capture and clean water. I’m pleased to announce that during the fourth quarter, we achieved our first sale of advanced silicas for enzyme applications, and we anticipate additional sales this year as we look to expand our support for all these emerging applications.

In light of our favorable financial results for the quarter, cash generation remained positive, providing a reduction in our net debt leverage ratio. We ended the year with a net debt leverage ratio of 3x, down from 3.2x at the end of the third quarter. In terms of capital allocation priorities, continued reduction in our leverage ratio remains a key focus as we look to make substantial progress this year toward our target leverage ratio of below 2.5x. Lastly, over the past 3 years, we have made significant progress in supporting our customers with more sustainable products and technologies. In addition, we have worked to drive more sustainable business practices across our organization. Consistent with the spirit of continuous improvement, 2 years ago, we were recognized by EcoVadis with a silver metal sustainability rating.

Last year, in recognition of our continued progress, we achieved gold metal status with EcoVadis. I’m now pleased to report that Ecovyst recently achieved platinum metal status with EcoVadis in recognition of our incremental efforts to integrate the principles of sustainability and corporate social responsibility into our overall business practices. This recognition places Ecovyst in top 1% of all companies rated in our peer group. As we turn to Slide 6, I’ll provide an update on our near-term demand outlook. We believe the long-term demand trends for the end uses we serve remain very compelling, and I want to emphasize that the longer-term end-use outlook growth expectations and financial targets we shared in our November Investor Day remain intact.

However, for 2024, we believe there is significant near-term economic uncertainty, arising from a number of factors, including persistent inflation, rising interest rates, destocking, geopolitical tensions and weak demand in Europe and China. Given the current uncertain macroeconomic environment, we are cautious about the trajectory of near-term demand trends. As a result, while we anticipate stronger demand fundamentals in the second half of 2024, we have tempered our expectations for the first half of the year. For our Regeneration Services business, we expect high refinery utilization with stable gasoline demand and increased exports in 2024. As alkylate demand continues to be driven by tightening fuel standards such as Tier 3, we expect these fundamentals will continue to provide a favorable backdrop for our regeneration services business this year.

For virgin sulfuric acid, in light of the significant impact that Winter Storm Elliott and the production headwinds we faced in 2023 had on sulfuric acid sales, we expect volume recovery for virgin sulfuric acid in 2024. We specifically for our sales into the production of nylon intermediates, while destocking was a factor in the demand softness we experienced in 2023, we believe the destocking phase is behind us. However, the global demand outlook for engineered plastics remains uncertain, in part due to surplus capacity and continued demand weakness in Asia. We expect sulfuric acid demand for the mining applications that we service to remain stable in 2024 with ongoing copper expansion projects in the U.S. and the longer-term projected global supply deficit for copper underpinning demand.

We believe the economics of these expansion projects remain favorable with current copper prices. For the wide range of industrial applications we serve, we expect the portfolio effect will provide a level of stability for virgin sulfuric acid sales in 2024, with stable to positive demand in many end-use applications serving to counter softer demand than others. We expect relative stability in end uses such as lead acid batteries, water treatment and chlor-alkali to balance the potential for eroding demand in end uses such as paper and packaging where demand weakness is being driven by capacity rationalization in certain geographies. Overall, for the first half of 2024, we see softer industrial demand for virgin sulfuric acid. And while significant amount of our virgin sulfuric acid sales are under long-term contract, we currently see weaker market sentiment resulting in pricing pressure for short-dated contracts and spot sales.

For our Chem32 catalyst activation business, we see demand remaining strong in 2024, supported by continued growth in sustainable fuel production and expanded customer interest. Likewise, we see stable demand for our treatment services business with demand and activity levels highly correlated to factors such as consumer spending. Turning to Advanced Materials and Catalysts. For advanced silicas, we believe that the inventory destocking that adversely impacted demand for polyethylene catalyst over the second half of 2023 has run its course. While market forecasts are projecting global polyethylene demand to be up 2% to 3% in 2024, we believe that excess global capacity will continue to weigh on operating rates. As such, we are not projecting a significant near-term change in the demand for polyethylene catalysts, but the prospect of a stronger second half of this year exists.

We believe we are well-positioned for a recovery in demand, particularly given our representation in North American and Middle Eastern markets, where raw material and energy costs provide more favorable production economics. Following positive sales momentum in the fourth quarter in North America, we expect modestly lower operating rates in the mid-80% range with weaker first quarter sales as customers work through end-of-year inventories. In the Middle East, we expect operating rates to remain robust, supported by a cost advantaged feedstock position and strong export activity. For Europe, we expect polyethylene demand to decline in 2024 due to the poor economic climate. And in Asia Pacific, we expect the Lunar New Year and sluggish restocking activity to be a factor in the first quarter.

Within our Zeolyst joint venture, our core applications include hydrocracking catalyst petroleum-based fuels and Zeolyst used in emission control applications. Hydrocracking catalyst our high value add fixed bed catalyst that refineries change out every 3 to 4 years, even though we expect refinery margins to remain healthy for 2024, and many large customers completed catalyst change outs last year. So we believe 2023 was likely a near-term peak year for sales of hydrocracking catalysts, and we currently expect that 2024 will be a lower cycle year for hydrocrack catalyst sales. In terms of sales cadence, we have lowered our sales projections for the first quarter due to revised order timing. For our sales and emission control applications, we expect the current economic environment will translate into lower production and delivery of heavy-duty diesel vehicles.

Turning to the production of sustainable fuels, which include both renewable diesel and sustainable aviation fuel or SAF, our Zeolyst are used in the dewaxing phase of those sustainable fuels production processes. We expect robust sales in 2024, with sales slightly stronger in the second half of the year. North American renewable diesel and sustainable aviation fuel capacity is projected to grow by approximately 33% this year, supported by attractive financial incentives with 8 production facilities expected to start up in 2024. For the European Union, renewable diesel and SAF capacity is projected to grow by 43% this year with 9 facilities expected to start up in 2024. Looking forward, we see good progress in licensor activity supporting pilot production of SAF using alternate technology referred to as alcohol to Jet.

Our Zeolyst have a key role to play in the oligomerization [ph] phase of this emerging technology, where our catalysts are used to build the carbon chain in the production of SAF. We believe the focus on advanced recycling technologies for plastic waste provides significant growth opportunities for Ecovis. We continue to work with industry leaders on the application of Zeolyst in these recycling processes in which our Opel Infinity family of Catalyst provides a step change reduction in thermal intensity for catalytic pyrolysis and where ZI catalyst can be used to enhance the quality of pyrolysis oil, providing higher value end products and expanding potential for use as feedstocks and chemical production. As we discussed in our recent Investor Day, we have already had pilot sales of our catalysts for advanced recycling.

This year, there are 12 advanced recycling plants for plastic waste recycling is expected to be commissioned. And with the momentum we see in this area, we continue to expect commercial sales in early 2025. I’ll now turn the call over to Mike for a more detailed discussion of our fourth quarter and full year financial results.

Michael Feehan: Thank you, Kurt. I will begin with a review of our fourth quarter and full year 2023 financial results. Fourth quarter sales, including our proportionate 50% share of sales from the Zeolyst joint venture were $226 million compared to $223 million in the fourth quarter of 2022. The higher sales volume across both businesses and the benefit of continued favorable pricing within Advanced Materials and Catalyst was largely offset by the $9 million impact from the pass-through of lower sulfur costs as well as the pass-through of lower natural gas and freight costs within Eco Services. Adjusted EBITDA for the fourth quarter was $70 million, up 1% over the prior year fourth quarter. Favorable pricing and higher sales volume were partially offset by lower net pricing in eco services on lower raw material pass-through pricing.

The consolidated adjusted EBITDA margin for the fourth quarter was 31%, in line with the fourth quarter of 2022. On a full year basis, total sales for 2023, including our proportionate 50% share of sales from the Zeolyst joint venture were $848 million compared to $953 million in 2022. Of the change in sales, $86 million was associated with the pass-through effect on pricing of lower sulfur costs. The balance of the decrease reflects lower sales volume for virgin sulfuric acid, lower demand for polyethylene catalyst and the relative timing of niche custom catalyst sales. This was partially offset by higher average selling prices across both segments. Full year 2023 adjusted EBITDA was $260 million, down 6% compared to $277 million for 2022, driven by the lower sales volume along with higher unplanned repair and maintenance costs.

The full year 2023 adjusted EBITDA margin was 31%, up compared to 29% in 2022. As we move to the next slide, I’ll highlight the primary components of the change in adjusted EBITDA compared to the fourth quarter the prior year. Similar to the last several quarters, average sulfur costs for the fourth quarter of 2023 were lower than in the prior year. The pass-through of these lower sulfur costs had an impact of $9 million in variable cost with a corresponding reduction in average selling prices. As such, the lower sulfur cost pass-through on sales during the quarter had no impact on adjusted EBITDA. Our price to variable cost ratio continues to be favorable, while variable costs were lower for the quarter, the pass-through pricing on some of these costs, including natural gas and freight were also lower.

However, implemented and base price increases continue to be favorable, generating a positive price-to-cost ratio. Turning to the segment results, we will begin with Ecoservices. Ecoservices sales for the fourth quarter were $141 million compared to $160 million in the fourth quarter of 2022. The change in sales primarily reflects the pass-through of lower sulfur costs of $9 million and lower pricing in regeneration services associated with the pass-through of lower natural gas and freight costs. These factors were partially offset by higher regeneration services volume and higher demand for virgin sulfuric acid for mining and opportunistic spot sales. Ecoservices adjusted EBITDA was $48 million in the fourth quarter compared to $54 million in the prior year.

While demand remains strong in both regeneration services and version of sulfuric acid, the decrease in adjusted EBITDA was driven by lower net pricing associated with lower raw material pass-through pricing. Ecoservices adjusted EBITDA margin for the fourth quarter was 34%, in line with the fourth quarter of 2022. Turning to Advanced Materials and Catalyst. Total fourth quarter sales for Advanced Materials and Catalyst, including our 50% proportionate share of Zeolyst joint venture sales were $84 million, up $21 million or nearly 34% compared to the fourth quarter of 2022. For advanced Silicas, fourth quarter sales of $31 million were up 37% compared to the year ago quarter, reflecting higher sales across all product lines. While sales volume for polyethylene catalyst was lower compared to the fourth quarter of 2022, favorable pricing and the higher sales of niche custom catalysts drove the increase year-over-year.

For the Zeolyst joint venture, sales were $53 million, up $13 million or 32% compared to the fourth quarter of 2022, primarily driven by higher sales of hydrocracking catalyst. Fourth quarter 2023 adjusted EBITDA for Advanced Materials and Catalyst was $27 million, up $7 million or 34% compared to the year ago quarter. with the increase driven by higher pricing and sales volume. Adjusted EBITDA margin for Advanced Materials and Catalyst was 32%, in line with the fourth quarter of 2022. Turning to cash and leverage on the next slide. During the fourth quarter, cash generation was very strong, providing for a reduction in our net debt leverage ratio of 3x as we continue to make progress towards our net target of less than 2.5x. On a full year basis, free cash flow generation was $72 million.

This was in line with our recent expectations, but below the prior year driven by the lower adjusted EBITDA, lower dividends from Zeolyst joint venture, higher cash taxes and cash interest as well as an unfavorable change in working capital year-over-year. As discussed in our Investor Day in November, we continue to target a cash conversion ratio of approximately 75%. For 2023, our cash conversion ratio was 75%. We continue to maintain a balanced approach for capital allocation with net leverage reduction remaining a key priority. During 2023, we used cash to repurchase shares largely in connection with secondary offerings of our equity sponsors. In 2023, we repurchased 7.5 million shares for $79 million. Our balance sheet remains in strong shape.

At year-end, we had total available liquidity of $152 million comprised of $88 million of cash and availability under our ABL facility of $64 million. We have one tranche of debt outstanding, which matures in 2028. Excluding outstanding letters of credit, there were no outstanding borrowings under our ABL facility at year-end. 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 was approximately 5% during 2023. Now let’s turn to guidance and expectations for 2024. For 2024, we expect sales on a GAAP basis to be between $715 million and $755 million, and we expect our proportionate 50% share of sales for the Zeolyst joint venture to be between $145 million and $165 million.

As such, we anticipate total sales including our proportionate share of the Zeolyst joint venture sales to be between $860 million and $920 million or up approximately 5% at the midpoint compared to 2023. In terms of the pass-through effect of sulfur pricing, we are currently expecting a very modest decrease in average sulfur pricing for the first half of 2024, with the impact on sales largely immaterial. As Kurt discussed in his comments about our end-use demand outlook, the value of Octane and alkylate remains favorable, and we expect continued high refinery utilization to support regeneration services activity. We expect a modest, but cautious recovery of virgin sulfuric acid sales relative to 2023, primarily related to demand for virgin sulfuric acid going into the production of nylon intermediates, and the expectation for higher year-over-year production volume.

As such, we expect sales in Ecoservices to be up mid single digits. In Advanced Materials and Catalyst, we expect improvement in demand conditions for polyethylene catalyst and growth in our customized catalyst applications to drive high single-digit to low double-digit sales growth in advanced silicon. And for the Zeolyst joint venture. While we expect continued growth and sustainable fuel catalyst sales in 2024, sales of hydrocracking catalysts are expected to be significantly lower which is typical when coming off a peak year like we experienced in 2023. For 2024, we are expecting adjusted EBITDA to land in the range of $255 million to $275 million. In terms of segment expectations, for the full year 2024, we expect adjusted EBITDA for Ecoservices to reflect a mid to high single-digit percentage increase compared to 2023 based on the anticipated recovery of virgin acid sales into nylon intermediates, strong virgin acid sales into mining and higher contracted pricing and regeneration services.

This is somewhat offset by downward pressure on virgin acid pricing driven by the uncertain macroeconomic environment and $10 million to $15 million of higher maintenance and turnaround costs associated with enhancing our operational reliability, to help ensure long-term volume increases as we discussed during our November 2023 Investor Day. For Advanced Materials and Catalyst, we expect 2024 overall adjusted EBITDA to be in line with 2023. Advanced Silica is expected to be up on a high single-digit basis driven by more normalized demand growth for polyethylene catalyst and sales into emerging areas. Adjusted EBITDA for the Zeolyst joint venture, however, is expected to be down on a high single-digit percentage basis, driven by lower sales of hydrocracking catalysts off a peak year in 2023 and anticipated unfavorable fixed cost absorption associated with production and sales timing and increased cost to accelerate the growth in our emerging applications.

In addition, we expect our corporate costs to be around $30 million on an annual basis. For the full year 2024, we are expecting adjusted free cash flow of $85 million to $105 million including CapEx of $70 million to $80 million in 2024. The higher CapEx reflects costs associated with the previously announced expansion of advanced silicas capacity and our Kansas City site and investment in our Chem32 catalyst activation business. Given this expectation for cash generation and assuming no uses of cash for other capital allocation priorities, we expect to delever nearly half a turn, resulting in significant progress towards our target net debt leverage ratio of below 2.5x. For interest expense, taking into account the interest caps that we have in place which cover approximately 75% of our exposure, we are projecting a range of $45 million to $55 million, with a weighted average cost of debt of approximately 5.5%.

Having covered our expectations for the full year of 2024, I want to provide some directional guidance for the first quarter of 2024. On a consolidated basis, we expect first quarter 2024 adjusted EBITDA to be approximately $40 million. For Ecoservices, in light of the impact of winter storm Elliott and impact of the extended turnarounds in the first quarter of last year, we expect first quarter 2024 adjusted EBITDA to be up approximately 10% compared to the first quarter of 2023. For Advanced Materials and Catalyst, we expect first quarter 2024 adjusted EBITDA to be between $7 million to $8 million. The lower adjusted EBITDA compared to the prior year is primarily driven by a cautious view around the recovery of the polyethylene market and anticipated unfavorable fixed cost absorption associated with production and sales timing.

I will now hand the call back to Kurt for some closing remarks.

Kurt Bitting: Thank you, Mike. Despite near-term economic uncertainty, we remain positive on the long-term growth opportunities for Ecovyst. We believe our core and industrial businesses will continue to experience solid growth. We have well-established customer relationships, leadership positions in the end uses we serve and we have articulated our plans to drive efficiency gains and to support sales growth through automation, debottlenecking opportunities, capacity expansions and through reliability initiatives in our Ecoservices segment that will also translate into incremental volume and sales opportunity. For our Regeneration Services business, we believe the role of alkylate in the production of cleaner burning fuels is well appreciated.

And the long-term demand outlook for refined product North America and the export markets our customers serve, will continue to provide opportunities for growth. Although we see some near-term demand softness in some industrial applications for virgin sulfuric acid, mining demand remains strong, and we expect further improvement in demand for virgin sulfuric acid sales in the production of nylon intermediates as the global economy improves. We also believe the portfolio effect for the balance of our industrial applications will continue to provide a level of overall stability. In terms of our sales of polyethylene catalysts, we believe global polyethylene demand will return to historic growth rates of approximately 3%. Specifically, for Ecovyst, we expect our sales of polyethylene catalyst will continue to grow differentially to the overall market, benefiting from our customized catalyst design approach and our leading supply share positions in North America and the Middle East, which benefit from advantaged feedstock and energy costs.

Lastly, we have announced a significant expansion of polyethylene catalyst production capacity at our Kansas City site that is supported by firm customer commitments, providing further support for our future growth expectations. Moreover, we are energized by the opportunities for growth provided by emerging technologies, which are not just aspirational. We continue to see robust growth in catalyst supporting the production of sustainable tools. We have the technology leadership position for Zeolyst for advanced recycling technologies, and we have developed advanced silicones and functionalized silicas that position us to capture growth in enzyme minimalization in food, chemical and biomass-based processes as well as carbon capture and water treatment applications.

In summary, we have a portfolio of products and technologies that we believe provide for compelling organic EBITDA growth, as we discussed in our Investor Day. The long-term growth trends supporting Ecovyst products and services is reflected in the anticipated 2024 volume growth across the majority of our product lines. Our current guidance reflects our caution around near-term demand conditions and the expected off-cycle year for event-driven hydrocrack sales. As I indicated earlier, we believe the second half of the year could provide for improved demand conditions, including stronger sales of virgin sulfuric acid and polyethylene catalysts, and we will capture opportunity for incremental growth as they arise. At this time, I will ask the operator to open the line for questions.

Operator: Thank you, Mr. Bitting [Operator Instructions] And we will go first to Patrick Cunningham at Citi.

Eric Zhang: Hi. Good morning. This is Eric Zhang on for Patrick. My first question is, what is driving the higher pricing through key catalysts? And do you expect that trend to continue?

Kurt Bitting: Hi, Eric. This is Kurt. Well, for polyethylene, we do believe that destocking that we saw really in the latter half of 2023 is largely behind us, and we do expect double-digit sales growth during the year, albeit weighted towards the second half of the year, and we’ve implemented price increases as time goes along and has allowed us on our contracted prices. Just a further comment really on polyethylene, our expectations there it’s geographic-centric as well where most of our sales are centered in North America as well as the Middle East, where those regions have a high advantage in terms of raw materials and lower energy costs. Europe, we’re less exposed and less exposed in Asia Pacific in those two regions generally have more of a muted recovery or less of an uptick this year.

Eric Zhang: Got it. Thank you. And my last question is within Eco Services, can you elaborate on any trends that you’re seeing with existing customers recontracting — have there been any difficulties in getting customers to reassign? Thank you.

Kurt Bitting: Yes, thanks for the question. So when you look at the regeneration business every year, those contracts are generally longer in length, so anywhere 5 to 10 years. So any given year, there’s a certain basket of contracts that are up for renegotiation and recontracting. So I would say as time has gone along, we’ve re-upped those customers, and we’ve been successful at implementing price increases as time has gone along. In Virgin asset about 90% of our customers are under a long-term contract basis. The 10% that we call kind of spot sales or short dated contracts. That’s where we’ve seen a little bit of pricing pressure, as I’ve mentioned on the call. And that’s really related, I would say, mainly to the industrial space where we see some caution from some of those industrial consumers around 2024.

Eric Zhang: Great. Thank you.

Operator: Thank you. We go next now to Aleksey Yefremov at KeyBanc Capital Markets.

Aleksey Yefremov: Thanks and good morning, everyone. Just a follow-up on the industrial piece of Virgin asset sales, could you quantify the magnitude of this price pressure, either as a total percent of your virgin asset business or as a percent of that bucket of short-term contracts?