Ecovyst Inc. (ECVT) Earnings Call Transcript & Summary

[Audio Gap] packaging sectors at Bank of America. I'm pleased to host a fireside chat with Ecovyst, Nate Connor, Treasurer; Mike Cervini, Director, FP&A; and Erin Krzeminski, Assistant Treasurer. Over the past few years, Ecovyst has made a substantial transformation from PQ Corp., including the $650 million sale of Performance Material, aka Potters to the Jordan Company in December 2020, the $1.1 billion sale of Performance Chemicals to servers, Cerberus and Koch Minerals in August 2021. Ecovyst now reports in 2 segments. So there's Ecoservices, that's sulfuric acid regeneration services business, which basically sells strong acid, which weakens in the customer's process and the customer turns to weak acid to Ecovyst to restrengthen it and resold the regen acid to the customer again. And Advanced Materials and Catalysts, which manufacture catalysts for the manufacture of polyethylene and methyl methacrylate, the monomer to make PMMA, which is better known as Plexiglass and the Zeolyst JV with the partner, Shell, which manufactures hydrocracking catalysts using refineries among other catalyst products. So Ecoservices represents roughly 75% of LTM EBITDA and Advanced Materials and Catalyst around 25% of EBITDA. And that's roughly split evenly between silica catalysts and the ZI, on the ZI JV. Now yesterday, you probably are all aware, Ecovyst announced that the Board has initiated a strategic review of its Advanced Materials and Catalysts segment in order to maximize shareholder value. And that review is expected to be complete in mid-2025 and that the company won't make any additional comments about the strategic review until its work is complete and/or further disclosure is warranted. On an LTM Q3 basis, if I've done my sums correctly, Advanced Silicas had sales of $105 million and EBITDA of $32 million. And the ZI JV on a 50% basis had sales of $136 million and EBITDA of $35 million. As a reminder, this session is being webcast. And so as we go through the fireside chat, if you'd like to ask a question, you're more than welcome. Just if you would just wait for microphone to come up so that the webcast can hear your questions. But with that, I'll start off.

Thank you for having us, Roger.

Absolutely. So your 2024 Ecoservices EBITDA guidance was $195 million to $205 million, essentially flat with 2023 EBITDA of $200 million. And it looks like your sales may will be flattish year-over-year as well. Is it fair to say that volumes are up nicely, but that there was spread compression or maybe higher maintenance costs that are essentially effectively equally offsetting the higher volumes?

Yes, that's absolutely correct. I think you know, Roger, in our Ecoservices business unit, the top line isn't a great indicator because sulfur price is passed through dollar for dollar. But we have seen nice volumes in both our region and virgin business units this year. We're happy with the growth there. From a profitability standpoint, that has been offset by the planned maintenance, both regular turnarounds as well as our reliability program, which we outlined in our investor conference last November.

Interesting. Okay. And driving the volumes at Ecoservices, is that mainly driven by higher refinery throughput?

On the region portion of our business, yes, that's higher volumes through the alkylate units in the refineries. I think you know that's where the sulfuric acid is used as a catalyst to produce that blending component of alkylate. So we are seeing nice volume increases there with regulatory issues as well as demand for higher-grade gasoline, so premium-grade gasolines. Yes.

And with gasoline prices and oil prices where they were, is there still the drive to push more alkylate to the refineries?

There is. The alkylation units and refineries are historically some of the most profitable units in the refineries. And the United States is really net short in alkylate-producing capabilities. So it's highly profitable for the refiners, and we see them run their alkylation units at very, very high operational levels.

Okay. And you talked about spread compression in Ecoservices being one of the factors. What has caused that?

Well, obviously, 2023 was not a great year for us. You'll remember last year when we were down here, we were talking about a lot of unplanned maintenance at our facilities. So we instituted a reliability program to ensure that those issues don't reoccur. And that is -- that's part of some of the depressed margins that you'll see on a year-over-year basis. Also, from a turnaround standpoint, we take turnarounds at our regeneration and our acid facilities usually in conjunction with the large refiners. And we did have one more turnaround this year than in previous years. So that will impact the margin as well.

Okay. So you're referring to margins. I was thinking it was spread compression. What I meant by that is price raw material. But you're making -- I think you're correcting me in saying that it's not really that. It's more the turnarounds and the maintenance outages, which to me is sort of like part of the conversion costs or operating costs and sort of as opposed to price raw material.

Right. I think as you know, we have good price protections to pass through inflationary pressures in our business, especially on the Ecoservices side of our operations. So in that regeneration, these are all governed by long-term contracts, anywhere from 5 to 10 years that have price escalators in there. So from a, I'll say, an EBITDA margin standpoint, what you're seeing there from a compression is our investments in that planned maintenance as well as an incremental turnaround on a year-over-year basis.

How do you turn your plants around? And it sounds like you're really -- you'll turn your plant maybe when the associated refineries turned their plants. But how often? Is this is a once a year, every other year, every 3 years? What's the typical turnaround of a particular plant that you have?

Typical cycles are usually 18 to 24 months depending on what unit inside of our operations needs maintenance. So -- but as I mentioned, a lot of the refiners really view us as a utility. We're taking a byproduct that they don't necessarily have storage for in their spent sulfuric acid. We regenerate it and provide fresh acid back to them. So we do sync those up very closely with the major refiners.

And I know that, I guess, some refineries can use HF and the alkylate. But is -- and sulfuric acid appears to be winning that battle. But is that even getting better from your standpoint with the PFAS or it's really yes, it's flooring, but it's not really there? That's not really contributing to any of PFAS in the local waterways or anything like that?

It's -- I wouldn't necessarily say it has anything to do with PFAS. I think it's more of the -- obviously, the issues that come along with HF. Sulfuric acid's just kind of a better process.

Got it. So your 2024 Advanced Materials and Catalyst EBITDA guidance of $65 million to $70 million, down 12% at the midpoint versus 2023. Is this mainly at ZI or silicas? You've talked about both in the recent calls but...

Sure, primarily in the Zeolyst joint venture. I think on a year-over-year basis, what you'll see is 2023 was a peak hydrocracking year for reset of those fixed bed catalysts. We also, this year, have seen some pressure in our emission controls catalyst sales with the delay of some new regulations, emissions regulations as well as a slowing in the sustainable fuels as regulations get pushed back there and some of the investment spending in sustainable fuels, we've seen slow over the last 6 months. That's really been the contributor in the Advanced Materials and Catalysts.

Right. And I sort of reading that MD&A and listened to your calls. And I was kind of surprised, because it seems like all the other chemical comps I talked to, sustainability and emission control seem like where the trend is going. So when I see that I'm going -- I was -- is kind of confusing because I said, well, what's going on here?

Sure. We still think there's a great growth story in sustainable fuels. If you look at some of the sustainable aviation fuels blending mandates in Europe, we see large aviation partners here in the United States, United and Delta pushing for sustainable aviation fuels. We think there's still a great story there. However, it's going to take a while for all of the logistics to work itself out.

Okay. So to get to that 2024 Advanced Materials and Catalyst EBITDA guidance at the midpoint, Q4 has to generate about $31 million of EBITDA, meaning it has to do a lot of heavy lifting. How do you bridge that, given the segment's first 3 quarters in 2024? What's -- what are the puts and takes to say, okay, Q4 -- because you just gave the guidance. So it's how does -- what's driving it?

Well, a lot of, I'll say, larger and we've talked about this in the past, event-driven orders. So I think if you look to the history of recent years, specifically last year, where EBITDA in Advanced Materials and Catalysts increased from $16 million in Q3 to $27 million in Q4. You see a lot of timing in some of these order cycles. So we remain confident in our guidance.

Got it. There does seem to be a seasonality, but it's not a typical season. For most chemical companies, Q4 is a weak period.

Right.

When I look back over the -- your past Q4s, that's definitely not the case in this segment. What's driving that?

A lot of it is just based on end user timing and the -- I would say the mix of our orders. Specifically with hydrocracking catalysts, we can see large $10 million, $20 million orders at any given time. So it's really the lumpiness and event-driven nature that we've talked about in our earnings releases and past conferences.

I'm sorry, are you saying that when hydrocracker, they change of catalyst, that's a $10 million to $20 million ticket?

In some cases, it can be. Yes.

That's a big ticket.

They're significant orders, yes.

Okay. And that explains also the lumpiness. Okay.

Yes, it does.

All right. Let me see if we just answer this. So maybe slightly different take. So ZI JV has been hard hit, but the catalyst for sustainable fuels and emission controls, as you just mentioned, are refineries deemphasizing these initiatives? You talked about just a minute ago, the regulations are sort of being delayed, and maybe that's the answer. Or is it refiners are saying, you know what, the property isn't there yet for this. So I'm not going to focus -- I'm not going to spend the money on the catalyst if I can't get the return yet? Or is it many of those things?

I think it's a combination of all those things really. The carbon credits, we've seen vastly reduced prices on the carbon credits as well as just some, I would say, slowing in new projects as well as existing projects. I think everyone believes in the growth story of sustainable fuels. We obviously have to decarbonize. So the growth is there. It's coming with new technologies. I think sometimes it just -- we see some timing issues.

Got it. So in your EBITDA bridges that you show, which is very helpful, sort of the other items with a capital O has been a big mover for price for 2024 year-to-date. Are there any large pieces in other? For instance, is that where the maintenance turnarounds are coming in?

Yes.

So that's -- all right. So that's what's going on with the...

That's the maintenance turnaround and the planned reliability initiatives that we've spoken about in the past.

Got it. All right. So we talked about the turnarounds in Ecoservices. Silicas and the ZI JV, do they have a big turnaround or is it...?

Typically not. The larger turnaround expense comes with in the Ecoservices industry. I mean you're basically making a product that eats the equipment that makes it, right? So that's the larger [indiscernible].

But it's not carbon steel, is it? I hope.

No, no.

Yes. Maybe need to pay for the tantalum. All right. Is it fair to say, though, that when you do a maintenance turnaround that the impact on sales and volume at least is relatively minor since you're able to produce and put an inventory product so that it doesn't have a direct impact or...

Yes. So what you'll see us do is you'll see us build inventories ahead of a turnaround. And then as I mentioned, we partner very closely with the large major refiners to ensure that when we bring their -- our facilities down, they're typically down for maintenance as well.

Great. So do you -- for maintenance and turnaround cost, do you expense as incurred? Or do you capitalize and amortize?

It really depends on the nature of the turnaround and what's going on at the facilities. I think you've seen us in our Ecoservices business unit expand our volumes capability or capacity internally when we do those turnarounds. So as we replace large pieces of equipment to increase our capacity and our throughput, obviously, that would be capitalized. But some of the other items are expense, and you see that roll through.

Got it. That goes into EBITDA?

Yes.

What would be a typical cost whether capitalized or expense for a typical Ecoservices plant turnaround? So hundreds of -- single-digit millions? Or is it double-digit millions, teens?

Typically, single-digit millions. I think we've talked about a range of approximately $2 million to $4 million in the past. Now that is a very, very loose guideline. It really depends on which plant is coming down as the mix of turnarounds will impact that on a year-over-year basis. We see higher cost turnarounds at places like our California facilities, Martinez and Dominguez than we would at a facility in the Midwest or the Gulf Coast.

Your stock price has been quite volatile on news like earnings this year. Do you have a -- or does the Board have a plan to try to moderate your -- the stock price volatility?

Well, I think obviously, with the announcement yesterday of the strategic review, we -- the Board and the management team, and I think we've been quite vocal about this over the past 3 years do not feel that the stock price is reflective of the quality of the 2 businesses, both Advanced Materials and Catalysts, and Ecoservices. So we're 100% focused on increasing the shareholder value there.

Got it. Do you think there's sort of a minimum size you need to be to stay a public -- I mean it's easy to say a public company but...

Sure. That -- any comment on that from my part would be pure speculation. I'll make that to the equity analyst.

Fair enough. Sort of how do you think about positioning the business for growth?

We think both of our business units, both Ecoservices as well as Advanced Materials and Catalysts are extremely well positioned for growth. And I would point you to the Investor Day of last year. The management team is 100% committed to executing on the growth strategy that we outlined last year in both of the business units. So in the marketplace, we haven't seen the stock price respond to that in the last year, which is obviously part of the announcement yesterday.

Okay. So any -- never say never, but any inorganic big transformational acquisition, well, anything can always come is not necessary for growth as you can grow with what you have.

Yes, we feel like there is a good organic growth path in both of the businesses. Now that's not to say that we aren't always looking at an M&A pipeline for both the businesses as well. So...

And what input have you had from the rating agencies? Sort of in their view, what needs to transpire to see a ratings upgrade, say, from Moody's?

The conversations with both the ratings agency has been very well. I think we're covered by S&P as well as Moody's. We were upgraded with S&P earlier in the year. Moody's is very comfortable, I think, in their rating in our last conversation with them. They really like what's happened from the deleveraging standpoint as well as the exit of the private equity overhang in the stock. Conversations, obviously, from a rating standpoint, I think they'd always like to see leverage lower. And we continue to work on that. We've thrown out 2.5x is really our leverage target and continue to work towards that. And then I think it's just back to your point on size. Obviously, under $1 billion in annual revenue, I think they'd like to see the top line grow there as well.

Do you have a -- I guess yesterday's announcement puts it all into flux, but do you have a ratings target that you would like to be?

Not necessarily a ratings target. I think what we've seen is that we always have felt that the -- I would say our credit trades a little bit higher than the ratings that have been placed on it. We get a lot of good feedback from the people that hold our debt. And I think you saw that earlier this year in our successful repricing of our just under $900 million term loan B. So had a great response to that in June of this year, and that continues to trade very well. The last few weeks, it's back over par again. So...

When was the last time you talked to either of the agencies? I mean let me put it this way, was in the last few weeks if you know trying to get at.

We typically have detailed conversations with both S&P and Moody's on a quarterly basis. So...

Okay. Well, I don't know if you want to talk about. Have you talked to them specifically about this latest...

We have not.

Okay. So don't know how they come out on that?

No.

Okay. Any questions from the audience? All right. Maybe we'll call it there. I've got through my list. So thank you very much.

Thank you, Roger.

Very much appreciate it, Nate.