Q3 2022 Ecovyst Inc Earnings Call
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[music].
Good morning, My name is Katie and I will be your conference operator today welcome to the Eco best third quarter 2022 earnings call and webcast. Please note today's call is being recorded and should run approximately one hour.
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I would now like to turn the call over to gene Shiels director of Investor Relations. Please go ahead.
Thank you Katie good morning, and welcome to the <unk> third quarter 2022 earnings call.
With me on the call. This morning are Kurt bidding <unk>, Chief Executive Officer, and Mike <unk>, Chief Financial Officer.
Following our prepared remarks, we will take your questions.
Please note that some of the information shared today is forward looking information.
<unk> information about the company's financial and operating performance strategies are anticipated end use demand trends and our 2022 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 shared today speaks only as of this date. These risks are discussed in the Companys filings with the SEC.
Reconciliations of non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures can be found in our earnings release.
And then presentation materials posted in the investors section of our website at <unk> Dot com.
Now I'd like to turn the call over to Kurt Kurt.
Thank you gene and good morning.
<unk> delivered strong financial results for the third quarter of 2022, reflecting continued growth in sales and building upon the favorable results. We delivered in the first half of this year.
As a key supplier of products and services to industries that provide energy and materials to essential segments of the economy equal. This has continued to benefit this year from favorable demand trends across the breadth of our portfolio.
In addition, we believe <unk> remains well positioned to leverage key sustainability trends and the big benefit from projected growth in demand for low carbon technologies in the years to come.
For our eco services business high utilization rates in the U S refining industry more stringent fuel standards and increasing demand for premium gasoline continue to drive volume growth for our regeneration services.
Regeneration services are vital to our refining customers production of alcohol at the critical component in the formulation of higher octane and cleaner fuels Eagle.
<unk> has a leading share position for regeneration services in the U S with long standing relationships with Blue chip customers, who rely upon <unk> as their sole provider of regeneration services.
Our assets are well situated to service both the Gulf Coast market, where two thirds of U S. Refining capacity is located in West coast markets, where alkylate plays an important role in the production of car Bob the regulated blend for California gasoline with four facilities in the Gulf Coast and two in California, our customers value our production.
<unk> as it ensures operational integrity for their highly profitable alkylation units.
Strong regeneration volume growth was a significant contributor to the robust year over year results for our eco services business in the third quarter. We also continued to see strong demand for Virgin sulfuric acid across a variety of applications, including mining production of engineered plastics lead acid batteries and semiconductors.
And in the third quarter, our catalyst technologies business benefited from higher sales of polyethylene catalyst driven by positive global polyethylene demand.
We also saw increased sales of niche custom catalysts for petrochemical applications.
With continued favorability in demand trends eco vis third quarter sales, including our 50% share in the <unk> joint venture were up 30% and adjusted EBITDA was up 9% compared to the third quarter of 2021.
I'll note here that on a year to date basis <unk> sales are up nearly 45% and adjusted EBITDA is up 26% compared to the first nine months of 2021 with the increase primarily representing organic growth.
While inflation is a reality in today's environment. We have continued to benefit from structural margin support in our ecosystem business by contractual pass through mechanisms for variable costs for sulfur. The pass through is dollar for dollar while costs for other variable inputs, such as natural gas transportation labor and certain plant costs.
Our pass through on an index basis.
While we do not have these contractual pass throughs in our catalyst technologies business, we have undertaken targeted price actions as a means to offset increases to variable costs. As a result, we were able to significantly mitigate the adverse impact of inflation in the quarter. In fact during the third quarter. We continued to see unit margin expansion in our eco.
Services business.
The third quarter of 2022 was also another quarter of strong cash generation for eco boost with open market share repurchases and in conjunction with the secondary offering in early August we repurchased an aggregate of $65 million worth of stock during the quarter, yet we were able to maintain our net debt leverage ratio.
<unk> of two eight turns underscoring our conviction that <unk> cash generation capability continues to provide for significant capital allocation flexibility.
In our second quarter earnings call in late July we shared with you our belief that we remain on track to deliver solid year over year growth and financial results given our conviction in the strength and stability of our business at that time, we increased our full year guidance range for adjusted EBITDA to 265 to 275.
Yeah.
As we move into the fourth quarter I am pleased to say that the positive momentum in our business has continued based upon our current outlook for the balance of the year, we expect that our full year 2022, adjusted EBITDA will land at the high end of our $265 million to $275 million guidance range.
Now, let's turn to slide five for more detail on our expectations for near term demand trends.
Within our ecosystem business, we believe the outlook for our regeneration services and for Virgin sulfuric acid demand remains favorable while electric vehicle penetration will no doubt increase over the next few years, we believe conventional fuel demand will remain strong supported by the sheer number of conventional cars and trucks in use today.
High refinery utilization growth in premium gasoline, which requires a higher proportion of outlet as well as increasing fuel economy standards are expected to continue to drive outlet demand.
Additionally, export demand for refined products remains strong and with access to crude supplies and the lowest cost of energy U S refineries remain in a favorite position to serve the growing export demand.
We also believe future expectations for greener infrastructure in electrification as well as continued growth in other industrial applications will drive further demand for Virgin sulfuric acid.
Growth in low carbon technologies, including electric vehicles batteries and solar panels will require increased production of metals and minerals with sulfuric acid utilized in the leaching process to extract materials, such as copper and <unk> from the mined rock.
And if expectations for expansion of these low carbon technologies are to be met demand for sulphuric acid will undoubtedly increase.
Turning to the balance of our eco services business, while collectively less than 10% of consolidated revenue. We believe our catalyst activation segment. The <unk> 32 business that we acquired last year and our waste treatment businesses are positioned for attractive growth.
<unk> 32 provides exit you activation for catalysts, including catalyst used in renewable fuels applications exit you activation provides for faster startup from turnarounds averting lengthy onsite activation processes. The business is extremely scalable and we expect to benefit from continued expansion of renewable fuel production.
We also expect further growth in our waste treatment business with our favorable Gulf coast locations, our incineration of specific chemical waste streams provides our customers with the preferred alternative to long distance trucking of liquid waste and disposable via deep well injection.
With a more environmentally friendly process than other alternatives. The waste streams are incinerated in our furnaces in eagle vis benefits from the inherent energy in the waste streams, reducing external natural gas requirements.
For our catalyst technologies business sales of our silica catalysts have continued to grow along with global polyethylene production.
While polyethylene demand is expected to slow modestly as we have noted our sales in the polyethylene production has been higher than the industry growth rate as the sales of our customized catalyst solutions had benefit from a differential win rate on new capacity expansions.
Likewise, the near term demand outlook for sales of zeolite catalysts through our <unk> joint venture also remains positive.
We expect high refinery utilization and global fuel demand will continue to support sales of hydrocracking catalyst.
While there is still a significant backlog of heavy duty diesel vehicle orders due to production constraints and the global chip shortage sales of zeolite catalyst for emission control applications are expected to benefit.
Lastly, we expect growth in renewable fuel capacity, including the future adoption of sustainable aviation fuel will continue to drive growth for our zeolite catalysts.
With that I will turn the call over to Mike <unk> for a review of third quarter financial results.
Thanks, Kurt during the third quarter <unk> continued to benefit from favorable demand trends.
Total sales, including our 50% interest in the Zelus joint venture for $260 million up $60 million were 30% compared to the third quarter of 2021.
The increase was primarily driven by higher average selling prices, including the pass through of higher sulfur costs as well as the higher demand for regeneration services, and our eco services business and higher catalyst sales into polyethylene and niche custom applications within catalyst technologies.
Higher pricing in the third quarter includes the pass through of $28 million of higher sulfur costs as well as the contractual index pass through of other variable costs, including natural gas and freight principally in our eco services business.
Adjusted EBITDA for the third quarter of 2022.
With $75 million up 9% compared to the third quarter of 2021 with an associated margin of 29%.
On the next slide.
Highlight the components of our adjusted EBIT expansion compared to the third quarter of 2021.
The increase in adjusted EBITDA.
Was driven by nearly $7 million of contribution from higher sales volume.
As well as higher average selling prices, including the $28 million pass through of higher sulfur costs, which more than offset the increase in variable costs.
The $28 million average selling price increase associated with the sulfur pass through does not impact adjusted EBITDA.
Does inflate the denominator and the adjusted EBIT margin calculation.
If you exclude the impact associated with the pass through of higher sulfur costs.
The adjusted EBIT margin would have been 32, 5% in the third quarter of 2022.
Turning to the next slide Eco services posted another favorable quarter with third quarter sales of $196 million up $58 million or 42% compared to the third quarter of 2021.
Third quarter results were driven principally by higher contract pricing along with the increased demand for regeneration services.
Supporting alkylation production.
In addition sales of Virgin sulfuric acid were up modestly compared to the third quarter of 2021.
Reflecting ongoing demand in industrial applications, including mining.
Third quarter adjusted EBITDA for Eco services was $64 million up $12 million or nearly 24% compared to the third quarter of 2021 on.
The higher sales volume and pricing covering increased operating cost, including sulfur natural gas and freight.
The adjusted EBITDA margin for Eco services was 32, 8% down 490 basis points compared to the third quarter of last year. However.
However, adjusting for the 690 basis point impact.
Of the sulfur pass through <unk>.
Adjusted EBITDA margin for eco services would've been 40% for the quarter.
Turning to results for catalyst technologies on the next slide.
Third quarter results for catalyst technologies reflects higher sales of polyethylene.
Niche custom catalyst.
Partially offset by lower sales of hydrocracking catalyst.
Largely a function of timing due to the deferral of planned turnarounds as refiners seek to maximize profitability.
We expect to see higher sales of hydrocracking catalyst in the fourth quarter.
Total sales for catalyst technologies was $64 $6 million up $2 million or 3% compared to the third quarter of 2021.
Third quarter, adjusted EBITDA was $19 million down $6 million compared to the third quarter of 2021.
With higher overall sales volume offset by less favorable product sales mix and higher production costs within the quarter.
Moving to the highlights on leverage and liquidity.
We have previously discussed our strong cash generation provides significant financial flexibility.
Supporting net leverage reduction.
Ending of growth initiatives as well as share repurchases.
Our net leverage ratio was two eight times at September 30, which was unchanged from the end of the second quarter, even with deploying nearly $65 million in cash for share repurchases in the third quarter.
Given our expectation for further cash generation in the fourth quarter.
And excluding any potential M&A or additional share repurchases.
We continue to anticipate our leverage ratio to be in the mid two times by the end of the year.
At the end of the third quarter, we had total liquidity of nearly $200 million.
While down compared to the $236 million at the end of the second quarter.
This reflects the previously mentioned $65 million of cash used for share repurchases during the quarter.
We continue to believe our free cash flow generation capability, and our liquidity position provides us with a significant amount of financial flexibility, allowing us to maintain a very balanced approach to capital allocation.
Given our strong balance sheet with only one tranche of debt maturing in 2028, we.
We can continue to invest in operational improvements and organic growth initiatives, while remaining positioned to evaluate accretive bolt on acquisitions that have a clear strategic fit.
With our existing businesses.
As we demonstrated in the third quarter. We can also participate in targeted share repurchases, while continuing to prioritize net leverage reduction and growth initiatives.
During the quarter, we repurchased one 1 million shares through open market purchases at an average price of $9 77 per share.
In addition.
We repurchased an additional $6 5 million shares in early August .
According the secondary sale of stock by our private equity sponsor.
As of quarter end, we still had $376 million remaining under the original $450 million share repurchase authorization.
Turning to our full year 2022 outlook as mentioned.
We expect demand trends to remain relatively stable for the balance of the year.
We believe high refinery utilization will continue to drive demand for alkylate and therefore, our regeneration services and we expect demand for Virgin sulfuric acid to also remains strong.
In catalyst technologies.
Our outlook for long term demand trends as positive driven by polyethylene demand.
Future growth in renewable fuel and emission control applications.
Overall, our outlook for the fourth quarter has not changed materially.
We are lowering our full year sales guidance down modestly to a range of $810 million to $830 million solely a reflection of the pass through impact of lower anticipated sulfur costs.
Based upon our favorable results for the first nine months and our expectations for the fourth quarter.
We anticipate our full year 2022 adjusted EBITDA.
Fall toward the high end of our $265 million to $275 million range.
And we continue to expect adjusted free cash flow generation of $115 million to $125 million for the year.
As a reminder.
The fourth quarter tends to be seasonally lower for eco services due to customer and internal turnaround activity following the summer driving season.
And we expect fourth quarter adjusted EBITDA for Eco services to be similar to the first quarter earlier this year.
In contrast, and as noted in our second quarter call. We expect expect strong fourth quarter results for catalyst technologies with.
With fourth quarter, adjusted EBITDA higher than in the third quarter.
I'll now hand, the call back to Kurt for some closing remarks.
Thank you Mike.
In summary, we are energized by the financial results, we have delivered thus far in 2022 and I want to extend my gratitude to all the <unk> employees for their dedication and their contributions to the success. We have had this year. We firmly believe our year to date results demonstrate the true resilience and organic growth potential of the <unk> business model.
Furthermore, our favorable results thus far in 2020 to validate the decision to divest the performance chemicals and performance materials businesses.
Which enabled <unk> to focus on growing the high quality uniquely positioned businesses that we have today.
We have entered the fourth quarter with good business momentum in both our ecosystem and our catalyst technologies businesses. As a result for full year 2022, we expect to deliver on the high end of our guidance range for adjusted EBITDA.
Looking forward into 2023, while the uncertain economic environment could result in some softening of demand, we still expect demand fundamentals across our end use exposures to remain positive. We believe our leadership positions in growth markets. The nature of our long standing customer relationships and in some cases order backlog.
We'll all continue to provide for good near term visibility.
With a net debt to leverage ratio of two eight times and in light of the cash generation capability. We have our balance sheet is in very strong shape, we expect to generate additional cash over the course of the fourth quarter, which will continue to provide us with the flexibility as we balance our capital allocation alternatives and continue.
To position <unk> to deliver exceptional value for our shareholders.
With that we will ask the operator to open the line for questions.
Thank you at this time, if you would like to ask a question. Please press star one on your Touchtone phone you may remove yourself from the queue at any time by pressing star to once again that is star one to ask a question.
Our first question will come from John Mcnulty with BMO capital markets. Your line is open. Please go ahead.
Thanks, a lot. Thanks for taking my questions. So I guess the first one would just be on the on the.
Refining catalyst business in terms of some of the business that kind of got delayed or pushed out as the refiners.
Postponing some of their turnarounds just does that all get pushed into the fourth quarter do you see that drag into 2023 as well because I know I know 2023 was looking like we're going to see a pretty good step up already but I guess curious if if that maybe even even picks up higher.
Thanks, John .
Yes, really nothing has fundamentally changed with the hydrocracking.
With the hydrocracking business, we've seen delays as you mentioned and this is really due to the historically high distillate cracks in the marketplace right now and as you've probably seen the historically low inventories of distillate. So this is obviously.
Encourage refineries to put off turnarounds and the and the catalyst change out to basically make more product for the marketplace, but the other side of this is that.
With these high margins and the high demand for the product is when these refineries do take those outages that theyre going to look to install really high yielding and high performance catalysts like Zelus offers so we did as we did mentioned fourth quarter will be stronger on hydrocracking and we look at these types of things.
They are really delays they're not.
That won't go on very long time, and it's really due to just the demand for the product in the market right now.
Got it fair enough and then when you think about the eco services business as we start looking out to 2023. It seems like there is kind of a lot of puts and takes it seems like you may see more demand from the regeneration side as you as you know the economy is opening up and you see more and more driving at the same time like there is obviously.
Concerns about the economy slowing down and so maybe there is a negative impact on mining industrial so maybe can you walk us through how you guys are thinking about the puts and takes and maybe give us a little bit of an early peek at how do we think about 2023.
Yes.
We won't obviously, we're not going to providing guidance towards 2023, but if you look at just the underlying trends for specifically for the eco services business.
High refinery utilization.
Above above historic average refinery crack spreads.
The continued strong demand for alkylate in the octane and between gasoline component that it provides to the U S motor pool strong exports of motor gasoline, leaving the United States, which are our customers, particularly in the Gulf coast participate strongly in that so that is all going to continue to benefit the <unk>.
Generation business as.
You look over to Virgin sulfuric acid I mean, the way I like to think of it is really very yourself uric acid is where the rubber meets the road on creating these green technologies in low carbon technologies in them and the minerals and metals required for that clearly demands a lot of Virgin sulfuric acid. The other sections of our Virgin sulfuric acid.
Business.
I would say more in the industrial and the materials side a lot of that is concentrated towards in the Gulf coast, where those customers again have enormous energy advantage and should continue to prosper in this environment.
Got it helpful helpful color, Thanks very much.
Thank you.
Now as a reminder, this star one if you had a question. We will go next to David Begleiter with Deutsche Bank. Your line is open. Please go ahead.
Thank you Kurt just sticking on the Virgin sulfuric acid business in a recession how has it performed historically in.
In prior downturns.
Yes.
In prior in prior downturns, it's been it's been stable we have a.
Fortunately I've been with the business really since 2006.
I've gone through the 2008 downturn and obviously the 2020 downturn and the business is very diverse. So obviously sulphuric acid is the most widely used.
Chemical in the World, our particular portfolio of business is diverse in terms of its exposure to industrials again mining is weak.
What may be different as we enter <unk>.
2023 different from maybe past is really the the mining segment continuing to remain strong we don't really see any.
Any anything thats going to deter fuse.
Future mining activity and the need for the Green technology and low carbon technologies that require those copious amounts of metals and minerals and again on the industrial side very diverse in terms of materials to petrochemicals to water treatment chemicals, a lot of our business again is concentrated in.
In the Gulf Coast, which has a enormous energy advantage versus their competition worldwide.
Very good and just a catalyst technologies you mentioned higher production costs in Q3 could you talk to those in a is that one of the reasons why Q4 is a it looks like quite a bit stronger than Q3.
Yes, well really for on the on the catalyst side. When you look at the Q3 is first of all I guess.
On the Q2 call. We did say that Q3 was going to look a lot like Q2. So when you look at overall the catalyst performance you had a few things going on there right.
The hydrocracking sales, which we talked about earlier that were delayed due to really the strength in the distillate production going on don't going on right now there was a.
From a comparative standpoint versus third quarter of 2021. The mix was the mix was slightly different and then really on the production cost side that we referred to is really intercompany shipment costs, where we had some kind of onetime logistics bottlenecks that required us to do some freight expediting of raw materials and between plants.
And can you quantify that impact in Q3, and a tailwind for Q4.
Yes, we don't think the for Q4 as we said we expect we expect Q4 to be to be stronger in Q3 in the catalyst business in terms of the.
Production cost impact of those intercompany transfers, we see that moderating as the logistics supply chains are improving.
Thank you very much.
Our next question comes from Alexia <unk> with Keybanc capital markets. Your line is open. Please go ahead.
Thanks, Good morning, everyone.
Stay on.
On the catalyst side.
I realize you will not be providing guidance for next year, but what's your service can catalysts business grow next year.
Grow EBITDA.
Yes sure. So we expect there is again there is strong underlying growth trends in that catalyst business.
Clearly diesel crack spreads and diesel inventories are expected to remain favorable going into next year benefiting the hydrocracking segment.
When you look over to some of the other sections of our catalyst technologies on emission controls clearly as we've talked about before there's a backlog of heavy duty diesel vehicles that has built up that will require emission control catalysts moving moving into 2023, and we really see in our other segments of the catalyst business firmness when you talk about.
Things like polyethylene turns of its demand for things like film and sheeting continue continue to remain strong so really as we look as we look going forward.
We see really continued strength and obviously as we've highlighted before on previous calls renewable fuels continues to be a tailwind for us as.
Obviously higher distillate cracks encourage us even more renewable fuels production and the construction of new renewable fuels plants.
Thanks Kurt.
On eco services.
You reported volume growth this quarter was this primarily or generation or hurt.
Both markets.
Yes, I can answer that one that was primarily in the regeneration services side.
That was the predominance of the volume growth. However, I would comment that Virgin sulfuric acid was up modestly.
It was it was up continuing with.
The strong growth in the various end markets. So both sides were up but more on the regional side.
Thanks, and last one if I may just on on Virgin Mark is do you see any signs of weaker demand trends. Obviously, there is some seasonality.
Beyond that is there any red flags in that market.
Yes, I think the.
Urgent sulfuric businesses and so isn't so seasonal the regeneration is I think.
As we said before as you enter the fourth and the first quarters on regeneration refineries.
Refineries and ourselves <unk>.
Services will typically take our maintenance.
During those times.
Off peak season times on Virgin sulfuric, it's it's less so it's more really kind of steady demand. So.
When you look at the end market drivers there again the petrochemical.
Materials business remained strong and I think that's for us being completely north American based our customers are enjoying a very large energy advantage versus their global competition, which allows them to keep very high utilization rates and again on the mining on the mining segment.
Clearly.
All the tailwind behind that sector are really going to be hard to kind of disrupt drive when you think about all the investment the.
The government subsidies that or even the recent inflation reduction act, which put a large amount of subsidies and tax credits into things like green infrastructure as well as electric vehicles, which all are going to require really a lot of U S. Mining activities. So that's very beneficial for the Virgin acid segment.
Very helpful. Thanks, a lot.
We'll go next to Angel Castillo with Morgan Stanley . Your line is open. Please go ahead.
Alright, Thanks for taking my question.
I'm just wondering if you could give us a little bit more color on the methyl methacrylate or MMA catalyst.
Business and what Youre seeing there in terms of orders as well as just overall demand both fourth quarter and quite frankly.
Yes.
Methyl methacrylate or we tend to refer those as more in the niche custom catalysts space in general.
I think we mentioned the third quarter as compared to third quarter of 2021.
The mix of that was different so that was lighter this year than last year, and that's primarily a timing those those methyl methacrylate orders generally.
Our.
Theres not sales in every quarter, they generally can be a.
Timing issue as those customers refill those refill those units, but we believe the demand in that in that space remains strong we have a really good and unique technology offering there.
With long term relationships with those customers and it really specified into those units. So we feel that is healthy going forward.
That's helpful. Thank you and then just in terms of capital allocation to you noted you did another $11 million of buybacks. This quarter and you talked about opportunities in terms of bolt ons or further kind of investments can you just tell us I guess, if you think about both near term and into next year, how youre kind of thinking about.
Both the buyback opportunity given you have.
Katherine station still outstanding as well as bolt on opportunities in the pipeline that you see there both from a timeline perspective and in areas of potential interest or opportunity.
Sure. Good question. So we look at we look at the businesses cash generation as well as its strong balance sheet really gives us as I have to say, a very flexible and robust capital allocation strategy. So.
As we look at that as we look at that strategy clearly.
Growth is very important so we have a rich pipeline of both organic and inorganic.
Opportunities and as we as we go forward, we're going to use that cash generation and our balance sheet to fund that growth, where we can and we've looked at as we look at M&A opportunities, where clearly our existing business is clearly in the energy environment things linked to green infrastructure trends renewable fuels and <unk>.
The production onshoring of a lot of materials that were seeing on right now so as we evaluate opportunities going forward, we're going to continue to look in those in those spaces in terms of.
The stock repurchases listen we view.
This management team is very strongly views that our share prices undervalued. So we participated in both open Mark open market.
Purchases as well as alongside the secondary offering that happened in catalysts. So we feel very strongly that.
Where the stock is undervalued.
The company has participated in those repurchases as well as the management team I'll highlight again this quarter was another strong quarter for management personally buying shares as well.
Very helpful. Thank you.
We will go next.
Next to P. J <unk> with Citi. Your line is open. Please go ahead.
Hi, This is Patrick Cunningham on for P. J good morning.
We started to see some inventory destocking in polyethylene and producers are cutting utilization rates.
Do you what are your expectations.
For polyethylene film and packaging demand and do you expect this sort of recent destocking to mute near term volume growth.
Sure so.
Our polyethylene sales were up were up in the third quarter.
You have seen and I think we've read the same thing where you have seen some I would say more inventory distortions.
On separate sides of the supply chain is there has been.
Ongoing shipment and logistics issues in the industry, but we view things like film and sheet as is remaining stable.
As we mentioned are really highly customized catalysts that we were specified into really the world class producers of polyethylene.
Companies that are on the very low end of the cost curve due to their scale and their location and their and their cost of energy so our customer base.
Generally.
<unk> maintains a very high utilization. So we feel that we feel pretty good about polyethylene going forward.
Okay.
Great.
And how are you thinking about the potential benefits of the inflation reduction act are there any sort of.
Growth investments that become more incrementally attractive whether it be catalysts for renewable fuels or something in plastics recycling. How are you positioning yourself given that the bill.
Yes.
Reviewing the inflation reduction act it really supports several aspects of the business first there is there is tax credits and loans for green infrastructure. So as I mentioned before that's really where the Virgin acid segment plays a vital role in the production of those metals and minerals that are going to be required to produce things like wind turbines solar panels.
Et cetera.
It also extends the credits for renewable fuels and introduces a new credit for sustainable aviation fuel, which is kind of a next generation of renewable fuels and that we expect really sustainable aviation fuel to really start being adopted heavily around mid decade, and then finally, the cleanup vehicles element of.
<unk>.
Of the act.
<unk> encourages those vehicles to be made with metals and minerals that are produced here in the U S, which will be a tailwind for the mining sector and Virgin acid, but in general the inflation reduction Act is very.
Very positive for numerous segments of our of our business you did mentioned the plastics recycling. So we again, we've talked about that before were working with major plastics producers on catalyst technology that really enables the catalytic paralysis or catalytic recycling.
Plastics, and we expect that to really kind of be commercialized in mid decade.
Great. Thank you.
Our next question comes from Laurence Alexander with Jefferies. Your line is open. Please go ahead.
So good morning, I just had two questions on cadence so wanted to follow up on the last question when new renewable diesel capacity ramps up.
Is there an initial fill order for your product towards your sales to that facility is going to be tied more to just their actual production run rates.
Yes so.
Yes, and yes.
So we have.
When you look at the our renewable fuels exposure is really on two sides of the business. So starting on the eco services side, the <unk> 30 to.
Catalyst activation business that we acquired last year they are.
Sulfide in the hydro processing side of that of that process. So those hydro processing catalyst when the units built requires it to be sulfide and then those those catalysts end up being changed out every year to 18 months, so theres kind of.
Ah repeat natural repeat business that goes through that on the catalyst technology side, we're making <unk>.
<unk> catalysts that are used in the <unk> side of that process. Those are more for the initial fills and then the change out.
Rate on those is a little bit longer multiyear change out rates. So we kind of play on both sides, where one we on the initial fill both businesses do benefit but then there is the intermittent change outs that occur anywhere from 10% to 18 months on the eco services side and Neil a couple of years on the catalyst.
Technology side.
Okay. No. That's very helpful. And then when you look at the scale of the investments that have been proposed already and the renewable diesel area.
Do you have enough capacity to serve that by flexing and shifting capacity over from other end markets.
Or do you need to undertake a investment cycle and if you do when do you need to do that to be ready for the customers.
Yeah, Yeah. So.
On the catalyst activation side for renewables when we purchased the <unk> business one of the things that was attractive.
About that business was a scalability. So we are actively scoping.
At ways to scale that up to meet that growing demand, especially as new renewable units are built we will require not only new fills but then the recharge of those skills.
Meeting that demand and on the on the.
Renewable side for the catalyst technologies business for the zeolite catalysts.
Clearly we have.
We have capacity in that in that sector that we can flex between our emission controls our mission controls production. So some of those assets are fungible between bolt so as as demand grows or we need to create capacity for one or the other we can flex between the products.
Okay, Great and then separately on the heavy duty diesel side.
Sure.
Will you see a downturn in volumes at the same time as production.
Of the vehicles or do you once the backlogs are worked off or will you see a slowdown before the backlogs are finished I mean I'm just.
What's your place in the inventory cycle.
Okay.
Yes, I mean, we've seen.
That business is obviously has gone through supply chain the supply chain disruptions, particularly on on the chip side, but we have seen customers that are starting to we're starting to stock up in order in anticipation of working that backlog down I think the.
The backlog is.
Pretty much was created over two year period. So we think that Scott kind of along a longer tail to it and then once we come to the end of that and more of a normalization there are new.
Europe , both Europe and the U S are considering new regulations, which will require even more stringent emission controls, which will eventually require more CLI catalysts for those emission controls. So we kind of view. It is we're looking more long term Asia working off of that backlog over.
Over the next couple of years, because it will take a while to do that and then after that.
Additional demand really coming from new regulations.
Okay got it okay, great. Thank you.
And again I want to start one if you had a question. We will go next to David Silver with CL King. Your line is open. Please go ahead.
Yeah.
Okay. Thank you.
I have a couple of questions I will apologize in advance I did have to step away one or two points here.
I have a couple of questions to start on the sulfur side. So first I just was hoping you could refresh my memory on the mechanism for sulfur cost pass throughs in other words we.
We've seen a steep run up earlier this year and now a pretty steep decline in the price of sulfur is the pass through mechanism kind of seamless or are their leads and lags that that may.
Impact to your reported quarterly results, how seamless would that pass through mechanism be.
Yeah. Thanks, Thanks for the question.
David I think the.
It's not perfectly seamless there are small.
<unk> bolt.
We purchased from our suppliers may lag with the current market prices and then obviously are the contractual mechanism point of that may lag a little bit, but it's nothing nothing very material. We always are have been pretty good with <unk>.
Closely overlapping the sulfur costs with what are.
What our actual pricing.
To our customers so it's really not.
Big deal when we call sour spot, our sweet spot out there where youre on one side or the other.
Okay. Thanks, and then.
<unk> about your Virgin sulfuric acid production capability.
I mean, you've cited that as a source of stronger growth for a number of quarters now.
Where are you on your own capacity utilization for the Virgin product.
And in particular can you just remind me, but is it possible or practical to debottleneck.
Youre sulfuric acid unit or is it the case, where you would really have to go greenfield, which I recall at world scale can be can be pretty expensive.
Yes, I would say the.
Nation on on the asset both on regeneration and Virgin asset not just with us, but really in the whole industry is high.
And you've probably seen that if you read about the demand for Virgin acid has obviously been very strong to support some of the fundamentals. We spoke we spoke about earlier, but we we're constantly innovating in the ecosystem business and working on Debottlenecking projects.
We had mentioned some in the past quarters, where we've installed new logistics capabilities, particularly at the Houston site, where we installed pretty much doubled our rail shipment capability, we've gone back and we're actually adding to that right now we've added rail capacity to the Martinez plant. This year, we've got several other projects that are.
Really targeted towards Virgin acid and the <unk>.
Southern California, and Midwest plant, where we.
We can actually increase the amount of sulfur throughput that we can have in the furnaces. So theres things out there that we're constantly working on to incrementally debottleneck the units.
A lot of it is.
We're replacing pieces of equipment.
With larger pieces of equipment or larger pumping capability that just allows us to <unk>.
Produce more more Virgin sulfuric acid, which has allowed us to really keep pace with the growing market demand.
Okay.
Okay, Great and then one last one on the pure cash, but I have read an article recently.
Linking.
Very strong demand for sulphuric acid with lithium production in particular and <unk>.
From the trajectory of global lithium production.
Is there anything, especially unique about the processing.
Or the extraction of lithium.
Going on that that would lead to an unusually high intensity of sulphuric acid consumption in that end market.
So apart from the <unk>.
Production growth level, but it's the process itself, especially.
Intensively and intensive user.
Sulphuric acid. Thank you.
Yes, I think it really gets back to.
It really gets back to just the ore.
<unk> content right. So you have.
Projects that Youre trying to drive smaller amounts of enrolled out of a larger amount of rock I think for the for the lithium so you're just requiring more more sulphuric acid.
We've seen everything from upwards of 20 tons of sulphuric acid per ton of lithium carbonate produced on the copper side that's lower.
It's three to five tons of <unk>.
<unk> per ton of copper produced but one of the things that is now going on and I would say the.
The metals industry is metal prices have become so favorable metals demand high for these green infrastructure projects work.
We're seeing buying to go back and go after I would say.
They called Leach piles.
Or is that have already been processed that have residual metals and minerals on them and they'll go and re lease them with even more amounts of sulphuric acid to try to drive out as much metal as they possibly can so thats led to even even higher demand of sulphuric acid.
Okay.
Okay, and then last question would be about your share buyback activity and this would be along the lines of how you.
Decide where to where to direct kind of incremental buyback activity. So.
I did look at the the final prospectus from August on the.
The secondary offering by your major stockholder, and then you indicated above and beyond that.
You chose to purchase I think $1 1 million shares in the open market here.
And when I think about kind of the optimal way might be optimal way to conduct that I'm just scratching my head but.
You are able to get a discount I guess off of the market. When you go in one direction and you're purchasing at full market.
Give or take in the other direction.
I'm just wondering from the point of view of stability of the share price and return on your buyback dollars.
How do you think about the.
The negotiating directly with our major shareholder versus going out in the open market to conduct those those buybacks. Thank you.
Yeah, Hey, David It's Mike So the open market purchases were done.
Prior to the.
Purchased with the secondary right. So that was really an extension of what we had done at the end of the second quarter that bled into the beginning of the third quarter.
When we look at that really academically when your stock prices trading a lot lower than our expectations are and as Curt mentioned, we believe that the stock is undervalued. So it made sense to execute those open market purchases.
And then when we.
Executed on the stock buyback as part of the August secondary those were.
Not necessarily negotiated.
But they were just in conjunction with the price that was executed under the secondary.
So again it was as you could see at a lower price, but it was part of the part of the structure and the ones that were done in the open market where under the <unk> one that was in place at the time.
But hopefully.
That helps clarify, but we're always looking for a a prudent execution to increase shareholder value for those share repurchases.
That's very clear thank you very much.
We have no further questions in the queue. At this time. This does conclude the <unk> third quarter 2022 earnings call and webcast.
Thank you for your participation and you may disconnect at any time.
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