Ecovyst Inc. (ECVT) Earnings Call Transcript & Summary

Good morning. My name is Ashley, and I'll be your conference operator today. Welcome to the PQ Accelerates Transformation Call. Please note today's call is being recorded and should run approximately 45 minutes. [Operator Instructions] I will now turn the conference over to Nahla Azmy, Head of Investor Relations. Please go ahead.

Thank you, Ashley. Welcome to everyone joining us today to discuss the sale of our Performance Chemicals business and the acquisition of Chem32. With me here is Belgacem Chariag, Chairman, President and Chief Executive Officer; and Mike Crews, Executive Vice President and Chief Financial Officer. Following Belgacem's formal remarks, we will hold a Q&A session. At this time, we will not be providing additional financial information beyond what is contained in today's presentation material. Please note that some of the information shared today is forward-looking information about the company, including statements regarding today's announced transaction, the anticipated time line for the sales completion and the intended use of proceeds there from. 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. 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 presentation materials posted on the Investors section of our website at www.pqcorp.com. With that, I'm pleased to turn the call to Belgacem.

Thanks, Nahla, and good morning, everyone. We're very excited to connect with you this morning, and hope you're all safe and well. Beginning on Slide 3. As you know, last fall, we announced the sale of Performance Materials. At that time, we also began a strategic review of our Performance Chemicals business to explore options to unlock the most value for our shareholders. Today, we are very pleased to announce a definitive agreement for the sale of our Performance Chemicals business to a partnership established between Cerberus Capital Management and Koch Minerals & Trading. The sale milestone was the next critical step in our transformation to extract value from our portfolio, while focusing resources to accelerate growth in our core catalyst and related services businesses. We were very impressed by the level of interest we received in response to the review. Now less than 5 months later, we are pleased to announce the sale for $1.1 billion, and at a favorable valuation of 9.4x last 12 months ended September 30, 2020, adjusted EBITDA. I would remind you that over the past 2 years, we have also monetized nearly $90 million of noncore assets and product lines related to this business, which is an even better representation of the total value. The completion of the sale is contingent on regulatory approvals and traditional closing conditions, which we look to complete within 2021. Turning to Slide 4. Management and the Board are carefully considering our use of cash proceeds from the sale and cash on hand. While we are still evaluating the optimal mix, we currently expect to pay a special dividend in the range of $2.50 to $3.25 per share. This will lead to an anticipated debt reduction in the range of $450 million to $550 million and a pro forma leverage range in the mid- to high 3s by the end of 2021. Prior to closing, we expect to refinance our capital structure in order to meet the needs for the remaining Target PQ businesses. I'm also happy to announce that we have entered into an agreement to acquire a niche technology catalyst services company called Chem32 for $44 million which represents 6.7x the estimated 2021 adjusted EBITDA and including acquisition tax benefits. Chem32 is a leading business provider of off-site catalyst preactivation used in the production of traditional and renewable fuels. The patented technology and process converts manufactured catalysts in their oxidic form to fully activated catalysts, enabling safer and faster start-ups of refinery or petrochemical processing units. Importantly, this business complements our regeneration services product line within refining services, enhancing both top line growth and our already strong margins. This is in line with our strategy to invest in inorganic growth through strategic and niche technology and services back-ends. So to recap, since our IPO, we have applied our cash generation primarily for debt reduction according -- accounting for half of our capital allocation, with the remainder split between investment and 2 special dividends. You're seeing an acceleration of our portfolio activities in recent months that is simply a result of our multiyear strategy efforts coming nicely together. As laid out on Slide 5, our journey toward what we call simple and stronger began in 2019. We took a number of steps to streamline our businesses for increased transparency and accountability to drive improved safety, commercial and operational performance. We also began sculpting each of the 4 businesses in our portfolio selling nonstrategic assets and product lines and using the proceeds, along with our strong cash flows to pay down debt. With this foundation in place, we accelerated the transformation with the sale of Performance Materials and now the announced sale of Performance Chemicals, along with the purchase of Chem32. Simply put, we are aggressively executing on our strategic plan for value creation. While our actions are many, the objectives for what we call the Target PQ are straightforward. A pure play, high-growth catalyst focused portfolio with a higher top line growth rate, even better and leading adjusted EBITDA margins, robust cash flows and improved valuation multiples. Our businesses will be directly enabling key sustainability efforts, supporting our customers as they strive for clean energy transition and circular economy for plastics. We're very excited about what Target PQ means for our employees, our customers, our vendors, but particularly for our investors. So to conclude on Slide 6, we would like to note 2 upcoming webcast events. To add more information and context to the future of Target PQ. First, on March 9, we will review the fourth quarter and year-end 2020 results. Also at this time, we expect to provide an update on 2021 business trends and financial guidance for continuing operations, which will exclude the Performance Chemicals business. Second, on April 8, we would like to invite you to participate in a Virtual Investor Conference. We intend to provide the investment community a view into our multiyear strategy for the Target PQ portfolio going forward. You will also have the chance to meet several key members of the PQ leadership and take a deeper dive into our businesses, end-use demand drivers, approach to technology and financial outlook. Before I close, I would like to take this opportunity to thank the whole team who worked relentlessly to make this important milestone happen, particularly I would like to congratulate the Performance Chemicals team for their resilience and hard work as we are transitioning the business into a new chapter that I'm confident will be nothing but success. We look forward to keeping you appraised of our progress, and thank you for always -- as always, for your interest. And with this, I would like to take the opportunity to take questions together with Mike.

[Operator Instructions] We can take our first question from John McNulty with BMO Capital.

Congratulations on what looks like a really strong transaction. So I guess I had a question. You've really gone a lot faster in terms of getting the portfolio to where you want to be. And I know you mentioned your target of building this Target PQ that's focused really on catalyst and service company. It seems like you're kind of there, like what other measures do you want to take? Or do you feel like you have to take to get PQ to where you want it to be at this point?

Thank you, John, I think we're pretty much there, John. We have done all the steps. The reason -- it seems like it was fast, it's because there's a lot of work going on in the background, and we got to where we need it to be. We're very successful with the 2 divestitures. I think we -- what went faster is actually the acquisition that was part of the plans that we were thinking about already in place. So things are fitting in perfectly in the puzzle. We do continue to consider that our portfolio is never done. It will be perfected, optimized, but in the same direction of focus, pure play, high growth, high-margin, so we anticipate in the coming years to see a few more of these Chem32 opportunities.

Got it. Makes sense. And then can you give us an update just on the stranded cost, where you are in terms of pulling out what you need to for kind of the next level of PQ?

I'll let Mike go through that.

Sure. John, this is Mike. When you think about our corporate costs, normal run rate would be $10 million to $11 million per quarter with the 2 divestitures, we're currently thinking that we can take out about $10 million to $15 million worth of those costs. We continue to refine that number, that's our current estimate.

And we can take our next question from David Begleiter with Deutsche Bank.

Belgacem, just on the small acquisition of Chem trade. What was the pre synergy multiple of this purchase?

You mean before the tax benefits?

I'm sorry, yes, before the tax befits, exactly.

Yes, it was about a little over 8.5%, I believe.

And do you expect some synergies from this transaction?

The biggest synergy is associated -- go ahead, Belgacem.

I think this is going to be very critical because it is going to bring in not only some synergies, some commercial synergies, but also the connection between our sulfuric acid capabilities and expertise on refining services and the need for this feedstock product for the sulfiding process. There is going to be a lot of synergy there. We have an impressive outlook on synergies on logistics as well because this is a very big logistics process. The proximity and location of the Chem32 facility is nearby in the same area where we operate for the Gulf Coast will allow this to happen. And then there might be more maybe on the technology and development, there might be things where we can kind of co-look at together, which will bring some synergies. So we're all excited about how we are going to bring this to the customers, how we are going to almost double up on our commercial capabilities and share customers and access to the refineries. So we're very excited about that.

Very good. Just lastly, how is the remaining M&A pipeline Belgacem?

Well, I told you before that we've been -- since we were restricted in terms of -- we didn't have much flexibility on cash in the past. We were only doing the homework. So we had a bunch of opportunities. Every business at the time had to be ready for a couple at least, if not more. We then -- when we decided we're going towards the refining and catalysts, we refined our searches, and we made sure that we have a certain list that I think is pretty strong. It's a question of the timing and the actual fit. So you've got to make sure that you bring in something that will bring value to either a technology or a service capability. We do have a plan that we would probably share a little bit more on the themes of this plan as we talk to you guys on the Investor Day where we're going to lay out the strategy. We're going to give you guidance on what kind of thinking do we have and what themes and why. But we do -- we're confident we have plenty. We just need to get to do them.

And we can take our next question from Aleksey Yefremov with KeyBanc.

Can you just clarify the transaction multiple that you calculate in the presentation? I think you're taking out stand-alone costs of $17.5 million from the run rate EBITDA. What does it represent?

The stand-alone cost are the cost that will -- that the buyer is required to put in for that business to run on its own. So it's going to have -- there are additional staff that they're going to have to add beyond what gets transferred from PQ, their IT costs going forward, that's a large component. So it's things like that.

Makes sense. And a question for Belgacem. So now you have some capital at your disposal that you could put into organic growth. Could you talk about organic growth opportunities in refining services, maybe specifically but also elsewhere?

Well, we do believe that our organic growth business is going to be the main driver going forward. We do believe that the reason we went into this direction is because we have high-growth businesses naturally organically, and they both show a high single -- mid- to high single-digit growth. And in certain areas like the silica catalyst, it's a double-digit growth opportunity just organically. What we wanted to paint the picture going forward for is that we are going to be doing more than that. We're just going to be focusing -- since we're focused, we're going to be doing more in terms of tuck-ins and everything and which is going to take our overall organic growth to be -- our overall growth to be at least a double-digit growth, and we're going to go through that in the future conversations about Target PQ. Most of all is -- that's a top line growth that is well equated to the also strong EBITDA -- adjusted EBITDA growth. We believe in the market drivers, we believe in what we have, and we think we can do it. And the more we find opportunities on inorganic, the stronger it's going to be. But the fundamentals even just organically, it's going to be an amazing growth trajectory going forward.

We'll take our next question from Roger Spitz with Bank of America.

First, what were the Performance Chemicals expected cash taxes and/or net proceeds to be?

The net proceeds from the sale, Roger, is that what you're asking?

Right. Right. So we know -- yes, the $1.1 billion headline price.

Sure.

What is the net proceeds post tax?

Net proceeds post tax, we think, are in the range of $940 million.

$940 million. And [Technical Difficulty] to provide the 2020 sales and EBITDA, please?

I'm sorry, you broke up there.

Sorry. The Chem32 -- the 2020 sales and EBITDA actuals for Chem32.

Yes. Well, I think on the EBITDA estimate, I don't have the sales in front of me. Their margins are similar to better than what we have for refining services. The EBITDA contribution for this year, which would only be a partial year would be somewhere in the range of $5 million.

[Operator Instructions] We'll go next to Vincent Andrews with Morgan Stanley.

This is Angel Castillo on for Vincent. Just a quick one on free cash flow, I guess, how do you think about it going forward? And maybe could you just give us what Performance Chemicals CapEx is? And how should we think about kind of the free cash flow level in the future? Pro forma?

Yes. So we've provided guidance for 2020 for CapEx total of $80 million to $90 million. The chemicals portion of that is approximately $40 million. 2020 was obviously a low year as we tightened our belts of response to COVID. But that gives you an idea of what the chemicals capital expenditures would have been. As it relates to free cash flow going forward, that's information that we'll provide on our earnings call next week.

Understood. And then just in terms of leverage, you talked about being in the 3.5 or mid- to high 3s leverage, I guess, by the end of the year. How should we think about target level? I think in the past, you talked about 3 to 3.5 being kind of the target for the company that's kind of sustainable. Is that still the right range to think about? And how should we kind of bridge to when will you get into your target range? And maybe within that, maybe what the interest expense savings would be from the debt repayments that you plan right now?

Yes. Again, I think that's probably not a topic for this call. I will say we looked at Target PQ's cash generation and profitability going forward, which makes us comfortable with this range. It also incorporates the cash that we are outlaying for the Chem32 acquisition as part of our starting point leverage. But as we get into our earnings guidance for the future, we can -- we'll also talk about where we think we're comfortable on our leverage. We also have our investor conference where we will be providing additional information. So we haven't set a hard target at this point. We're just -- we're comfortable with where we are. We're looking at the forecast for Target PQ on cash flow generation. And you've seen us be very prudent in terms of how we generate cash, what we do with that cash with the right mix of deleveraging and investing for growth.

We can take a follow-up from Roger Spitz with Bank of America.

First, what is the expected timing of the closing for Performance Chemicals within 2021, should we model in, say, Q2 or Q3?

No, Roger, I think I would do -- no, we have a few jurisdictions, approvals to go through because of the nature of the business and buyers in international and most of our chemicals business being more international and present in a few continent. We're very confident that there should be no issues. But I think that could take a certain amount of time. So I would model towards the end of the year for now, from what we know.

Perfect. And then will you be entering a purchase agreement with the Performance Chemicals to buy products from them? And if so, will those purchase be done at market price levels?

Yes. So we have several co-mingled sites, including some administrative sites in the U.S. and operating sites in the U.K., Brazil and Indonesia. So we've established term sheets and operating agreements that we've completed negotiating them for all the shared operating sites, and we don't expect to have any issue with that. They were negotiated at the reasonable market price whereby there will be no loss of supply and then no financial losses. So those are very, very critical because we do have a few sites that provide services and products to the catalyst business. So that was successfully agreed upon, and we don't see any issue at all.

If I could fit one more in. What is the Cerberus co-percent shareholding expected to be, 50-50 or something else?

I honestly don't know. What we know is that partnership is going to be a joint venture that is operated cooperated, but the rest is probably a detail to answer.

And there does appear to be no further questions.

Well, in that case, can you allow me just to say a few words to make sure that it looks like things are clear. Our strategy was -- we took a lot of work to prepare it. We laid it out. We're executing on our strategy. Things are coming on really well. That's exciting. But the most excitement I have personally is the future. The excitement I have is the look -- outlook of future as we put together what we really want to run as a business with the growth potentials in the market, the transition in the market, we think we're going to be a major player. Our ability to see into the next 5, 6 years and have a plan and tuck-ins and everything. We don't have to worry anymore about wrong businesses or anything, which is an amazing transformation. Our portfolio will be a high growth, high-margin business. We will continue to deploy the strong cash flow that we will generate into debt reduction until we get to the level that we will become more comfortable with. We will always think of splitting the working -- the capital into 3 ways, into the dividend, into paying debt, and also into inorganic investments. So I'm very excited about what is laying ahead, and I look forward to spending time with you guys in the near future to take you through that. But this is a pivot moment for PQ and its employees, and hopefully you guys, and I'm very excited about that. And thank you for your interest.

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