Q4 2022 Ecovyst Inc Earnings Call
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Good morning, My name is Shelby and I will be your conference operator today.
Welcome to go against fourth quarter 2022 earnings call and webcast. Please note today's call is being recorded and should run approximately one hour.
Currently all participants have been placed in a listen only mode to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
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I would now like to hand, the conference over to gene Shiels director of Investor Relations. Please go ahead.
Thank you Shelby good morning, and welcome to <unk> fourth quarter and full year of 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. This morning, we look forward to taking your questions.
Please note that some of the information shared today. This forward looking information, including information about the company's financial and operating performance strategies are anticipated end use demand trends and our 2023 financial outlook.
This information is subject to risks and uncertainties that could cause actual results and the implementation of the company's plans to vary materially.
Any forward looking information we share 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 on today's call with their corresponding GAAP measures can be found in our earnings release and 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 bidding Kurt.
Thank you gene and good morning.
First I want to take the opportunity to thank all of my colleagues at <unk> for their dedication and hard work.
Their efforts to provide great products and services to our valued customers enabled the strong financial results that we delivered in Q4 and for full year 2022.
During the fourth quarter, the favorable demand fundamentals, we experienced throughout the first nine months of 2022 continued providing for a strong finish to the year. Despite the disruption associated with winter storm Elliot late in the fourth quarter.
During the fourth quarter high refinery utilization in the U S continued to translate into strong demand for our regeneration services. In addition underlying demand for Virgin sulfuric acid also remained firm although fourth quarter sales were below the extremely high level of sales we experienced in the fourth quarter of 2021. This was due.
Due in part to the impact of customer downtime as well as our downtime and related production constraints arising from winter storm, Elliot, which limited our ability to fully satisfy the attractive spot demand in the quarter.
In our catalyst technologies business during the fourth quarter, we saw increased demand for renewable fuel and hydrocracking catalyst, while sales of polyethylene catalysts were lower than the year ago quarter in part due to the timing of shipments at year end.
As a result total sales for the fourth quarter of 'twenty to 'twenty, two we're up 8% compared to Q4 2021, and consolidated adjusted EBITDA of $69 million was up 9% versus the year ago quarter.
In light of the strong fourth quarter results, we delivered full year 2022, adjusted EBITDA of $277 million that was up 22% compared to 2021 and above our previously raised guidance range.
Our favorable financial results provided for meaningful cash generation in the quarter, enabling increased shareholder value associated with the $63 million repurchase of stock in conjunction with another successful secondary offering through the offering we repurchased $8 million of the shares offered by a private equity sponsor helping to reduce.
Used their ownership of veeco base to less than 10%.
On a full year basis strong cash generation facilitated the reduction of our net debt leverage ratio to two eight times, while at the same time, we increase shareholder value with $137 million worth of share repurchases.
We ended the year with a strong balance sheet and with $171 million of liquidity positioning us well to capture growth opportunities in 2023.
In terms of non financial achievements in 2022, we continued to position <unk> for future growth as a key supplier, enabling greener and more sustainable technologies, while our focus on sustainability applies to products services and technology development process improvement is equal importance as we focus on our near term.
And longer term sustainability objectives.
As evidence of our ongoing commitment to sustainability and in the spirit of continual improvement. We recently achieved a gold sustainability rating from Eco Bottas, which places <unk> in the 97 percentile of all companies rated in our peer group. We are pleased to receive this distinction, which we believe validates our ongoing efforts to promote.
More sustainable practices.
We expect 2023 to be another year of growth for <unk> as we build upon our successes in 2022.
As noted we believe the demand fundamentals that contributed to our 2022 result will continue this year, providing for incremental growth opportunities in particular with our leading supply share positions. We believe we have attractive organic growth opportunities associated with increasing demand for low carbon and more sustainable technologies.
As a leading provider of sulfuric acid regeneration services for the refining industry and is a leading supplier of Virgin sulfuric acid to a broad range of industrial applications Eco services is positioned for growth in 2023 or.
Our regeneration services are essential to our customers production of Apple at a high value gasoline blending components, we expect that favorable domestic demand for refined products in 2023 in concert with increasing needs for higher octane cleaner burning premium fuels and strong export demand will continue to support <unk> production.
And drive demand for our regeneration services this year.
In addition, we expect market demand for Virgin sulfuric acid to increase in 2023 with positive demand fundamentals for many industrial end users utilizing virgin sulfuric acid as a primary raw material.
This year, we expect sulfuric acid demand in the mining sector to be strong.
In light of the global supply shortage for copper and with increasing need for copper to support electrification and green infrastructure objectives, including electrical vehicle electric vehicle production charging network expansion and the tie in of wind and solar technologies mining activity for copper is expected to increase driving.
Incremental demand for sulfuric acid required for leaching operations.
In addition mining activity for borate is expected to be stable supported by demand in a highly diversified range of end use applications given our supply sources in the Gulf Coast and West Coast, we are well suited to serve our mining customers in the southwest.
In terms of other end uses driving demand for sulfuric acid Eco services is the largest producer of oleum, a super saturated sulphuric acid used in the production of nylon in engineered plastics for construction materials and coatings in packaging applications and in automotive applications for vehicle light weighting.
We also provide electrolyte grades used in petrochemical and chemical processes semiconductor production lead acid batteries and water treatment applications, all of which are expected to drive incremental demand for Virgin sulfuric acid in 2023.
For our catalyst activation business, we expect another strong year for <unk> 32, a provider of Offsite catalyst activation services. As a reminder, <unk> is a global provider of exits you activation services, which is preferred over onsite activation because it reduces the customers' resource requirements and downtime.
We expect <unk> 32 to benefit this year from growth in renewable fuel production capacity and change outs as well as from sales and change outs of hydro processing catalyst.
And following a very good year in 2022 for our treatment services business. We anticipate another strong year in 2023, as the only north American sulphuric acid producer with the permits in place to treat hazardous waste streams regulated by Rick growth the resource Conservation and recovery Act, we are uniquely positioned for additional opportunities.
<unk> to serve the refining and petrochemical industries in the Gulf Coast.
Our treatment services are a compelling alternative to long haul trucking and deep well disposal for our customers and ecosystem gains from the beneficial use of the energy value in the waste streams.
Turning to catalyst technologies, we expect 2023 to be an inflection point for our catalyst business, we expect broad based growth across many of our catalyst technologies.
For polyethylene and niche custom catalysts, we continue to expect demand growth in 2023 over the past few years, our custom polyethylene catalyst solutions, which are designed to meet specific customer criteria have enjoyed growth rates roughly twice that of underlying polyethylene demand we have had.
<unk> share participation in newer more cost efficient capacity additions over the past few years, which we believe will maintain higher utilization rates relative to older capacity that is higher on the cost curve for.
For 2023, we expect continued demand growth in food and packaging applications with stronger overall demand in the back half of the year as export demand into China and Europe improves.
For Hydrocracking catalyst, we expect strong sales growth in 2023.
The hydrocracking catalyst produced by our joint venture Zelus give refiners the ability to hit desired yield targets to maximize profitability as.
As we have discussed previously we believe sales of hydrocracking catalyst in 2022 were impacted by turnaround delays as our refining customers sought to maintain what the operating rates in the face of extremely high refining margins.
As a result of these turnaround deferrals, we believe some catalyst sales were pushed into this year in.
In addition, we expect refinery utilization in the U S will remain elevated in 2023 supported by low product inventories and robust export demand to Latin America, and Europe were refined product production has been adversely impacted by the Russia, Ukraine conflict.
In 2022, our sales of emission control catalysts were limited by a significant backlog in heavy duty diesel vehicle deliveries related to the chip shortage as well as supply chain and logistics limitations.
This year, we expect that the improvement in chip supply and increasing production and delivery against the significant backlog will contribute to higher sales of emission control catalysts.
And lastly, we believe sales into renewable fuels will be a positive contributor to catalyst technologies. This year, we believe the ongoing expansion and renewable fuel capacity in production that are referred to as being positive for our 32 business. This year will also translate into stronger sales in the Gi joint venture.
Renewable fuel production, specifically renewable diesel production and the nascent production of sustainable aviation fuel is being driven by the need to decarbonize heavy duty transportation and aviation as today. There are very limited electrification alternatives in those areas. In addition, regulatory mandates such as the renewable energy.
<unk> in Europe , and the inflation reduction act in the U S will continue to contribute to capacity and production growth for renewable fuels. As an example, the inflation reduction act has increased incentives for production of SaaS or sustainable aviation fuel, which we believe will become a meaningful component of renewable fuel production.
In the 2025% to 2026 timeframe as airlines pursue their carbon reduction goals.
Having just walked through a number of end users is expected to grow in 2023, you may have noticed the common threat.
All are associated with the need for more sustainable technologies.
We believe <unk> remains uniquely positioned to help meet the world's increasing need for green infrastructure and sustainable technologies as a key supplier of products and services that are essential to the advancement of low carbon technologies and majority of our sales address customer and consumer needs for more sustainable products and services.
Broad sustainability objectives, such as cleaner air reduce vehicle emissions increased electrification and the circular plastics economy, all provide opportunities for <unk> to leverage its technical expertise and product portfolio in.
In addition, they provide opportunities for more meaningful organic growth this year and in the future with this in mind, our primary focus for R&D investment is in product innovation linked to sustainability.
However, our commitment to sustainability extends beyond our product and service offering in terms of the environment. We are committed to meaningful reductions in greenhouse gas emissions and reductions in hazardous waste with clear targets set for 2025 and 2030.
We are also committed to the safety of our employees and being responsible stewards in the communities in which we operate at.
At <unk>, we and reinforce a culture of safety and continuous improvement through our HSE perfect days initiatives and through the principles of the American Chemistry Council responsible care program.
Lastly, we are extremely proud that our dedication to driving more sustainable business practices throughout our company was validated by the gold status rating. We received from <unk> in 2023, which places <unk> in the 97 percentile of all companies rated in our peer group.
At this time I will turn the call over to Mike <unk> for a more detailed discussion of our fourth quarter and full year financial results.
Thank you Kurt.
Continued favorability of market fundamentals during the fourth quarter provided the backdrop for another solid quarterly performance for <unk>.
Total sales for the fourth quarter, including our 50% interest in the Zelus joint venture, where $223 million up $16 million or 8% compared to the fourth quarter of 2021 the.
The increase in sales was driven by continued pricing benefits and our eco services business associated with the contractual price increases arising from higher labor energy and freight cost.
In contrast to prior quarters the pass through of sulfur costs had a minimal impact on sales in the fourth quarter.
Fourth quarter, adjusted EBITDA was $69 million up 9% compared to the fourth quarter of 2021 with the pricing benefit partially offset by higher variable costs largely associated with inflation.
<unk> sales volume in silica catalysts and higher turnaround cost and eco services.
Total sales for the full year, including the Zelus joint venture were $953 million up 28% compared to 2021.
With the increase reflecting higher pricing, including the pass through of higher sulfur costs.
And higher sales volume in both eco services in catalyst technologies.
Of the increase in sales $85 million is associated directly with the pass through of higher sulfur costs within the ecosystem business, which negatively impacted margins by 280 basis points.
The strong pricing and volume growth resulted in adjusted EBITDA growth of nearly $50 million or 22%.
In addition, we generated $146 million of adjusted free cash flow during the year, leading to a cash conversion ratio of just under 80%.
And after deploying $137 million of capital for share repurchases, we reduced our net leverage ratio by half a turn to two eight times.
Moving to the next slide we will take a deeper look into the drivers of our fourth quarter adjusted EBITDA growth the.
The increase in fourth quarter, adjusted EBITDA was primarily driven by $30 million of pricing benefits.
These price increases were largely associated with index pass through of higher labor energy and freight costs and eco services as well as price increases enacted through the year and catalyst technologies.
These price increases more than offset the higher variable cost driving another quarter of positive price to cost ratio.
In addition, the quarterly results were impacted by lower vault Virgin sulfuric acid sales.
Driven by lower spot sales.
Land customer turnarounds and the impact of winter storm Elliot as well as an unfavorable mix impact in silica catalyst.
Turning to slide 12.
Fourth quarter 2022 sales for Eco services was $160 million up 12, 5% compared to the fourth quarter of 2021.
Sales increase was principally driven by higher pricing in both regeneration services and Virgin sulfuric acid include.
Including the contractual pass through of higher labor energy and freight costs.
Demand for regeneration services continued with higher sales volume compared to the fourth quarter of 2021.
While market demand for Virgin sulfuric acid remains strong in the fourth quarter sales volume was down compared to the exceptionally strong sales volume in the fourth quarter of 2021.
Due in part to the adverse impact of planned customer turnarounds.
Disruption associated with winter Storm Elliot.
And lower spot sales.
Fourth quarter adjusted EBITDA for Eco services was $54 million up 4% compared to the fourth quarter of 2021.
With a sales benefit being partially offset by higher turnaround costs of approximately $3 million compared to the fourth quarter of 2021, and the impact of winter Storm Elliot.
While the storm had a modest impact on fourth quarter results. It will have a more material impact on first quarter results due to the timing of repair costs and lost customer sales.
We estimate the storm will have an impact on the first quarter adjusted EBITDA of approximately $7 million to $8 million.
The fourth quarter 2022, adjusted EBITDA margin for Eco services was 34% down.
Down compared to the fourth quarter last year, driven by the higher turnaround costs, lower Virgin sulfuric acid volume and the storm impact, resulting in higher maintenance costs.
Turning to the results for catalyst technologies on the next slide.
Total sales, including the Zelus joint venture.
Of $63 million was down approximately 2% compared to the fourth quarter of 2021.
Sales for the Zelus joint venture were up 10% in the fourth quarter, primarily driven by higher sales into renewable fuel application.
And modestly higher sales of hydrocracking catalyst.
Silica catalyst sales for the fourth quarter were $23 million down approximately $5 million compared to the year ago quarter, primarily due to unfavorable mix and some order timing our polyethylene catalyst.
Fourth quarter adjusted EBIT for catalyst technologies was $20 million down $3 million compared to the fourth quarter of 2021.
The decline was primarily driven by the lower polyethylene sales and higher costs from continued inflationary pressures.
Including higher energy and transportation costs.
With regard to inflationary pressures over the course of 2022, we saw notable inflation in raw materials as well as in energy and transportation costs.
While we proactively implemented price increases the extreme spikes in energy and raw material costs were not fully reflected in our short term pricing actions.
In addition over the course of 2022, we incurred elevated ocean freight costs associated with the logistical delays, which we believe are largely nonrecurring.
Turning to the next slide a few comments on leverage and liquidity.
Throughout 2022, our strong cash generation capability continued to provide for significant capital allocation flexibility with free cash flow of $146 million and a cash conversion ratio of nearly 80% we were able to comfortably fund our capital expenditure programs and use of $137 million of cash to.
Increase shareholder value through our share repurchases, while reducing our net leverage ratio from three three times at the end of last year to two eight times at the end of this year.
At year end, we had total liquidity of $171 million comprised of cash of $111 million and availability under our ABL facility of $60 million.
We believe our strong liquidity position and strong cash generation.
Now us continued flexibility in our capital allocation strategy.
Turning to slide 15 in conjunction with the secondary offering in November we repurchased 8 million shares of our common stock sold for $63 million, including repurchase activity in the second and third quarters of last year through open market repurchases and a secondary offering in August for the full year.
We repurchased $16 5 million shares for $137 million.
Our balance sheet remained strong with only one tranche of debt maturing in 2028 and as such we believe we can continue to invest in operational improvements.
And organic growth initiatives, while retaining the flexibility to pursue attractive and accretive acquisition opportunities that can complement our existing business and our organic growth objectives.
Turning to our full year 2023 outlook on the next slide overall.
Overall, we expect demand trends to remain positive in 2023, and we expect this to translate into top line growth for both eco services and catalyst technologies.
We expect 2023 sales to be between 760 and $790 million.
This reflects the estimated pass through impact of lower sulfur costs of approximately $95 million.
Adjusting for the sulfur pass through impact sales growth, including the <unk> joint venture sales would be 7%.
Assuming the midpoint of the guidance.
And eco services adjusting for the estimated $95 million of pass throughs sulfur cost impact we expect mid single digit growth in sales. Despite the lower volume resulted from winter storm Elliot.
For catalyst technologies, we expect sales, including our proportionate share of the Zelus joint venture sales to reflect lower low sorry.
<unk> low double digit growth in 2023.
For silica catalyst, we expect sales of polyethylene catalyst to be up on a mid to high teens percentage basis in 2023, offset by lower sales of niche custom catalysts compared to a very strong 2022.
For the Zelus joint venture, we expect sales to be up 10% to 15%.
Driven by strong growth in hydrocracking and emission control catalyst.
On a high teens percentage basis.
And higher sales of renewable fuel catalyst up on a mid teen percentage basis.
For 2023, we are guiding adjusted EBITDA of $285 million to $300 million, which would imply a growth of approximately 6% at the midpoint compared to 2022.
However, this guidance incorporates our expectation that winter storm Elliott will have an adverse impact on first quarter adjusted EBITDA of approximately $7 million to $8 million.
Excluding the impact of winter storm Elliot, we would therefore have expected 2023, adjusted EBIT growth at the midpoint of the guidance range to be higher by over 200 basis points.
Given the impact of winter storm Elliot Eco services adjusted EBITDA growth is expected to be in the low single digits. If you exclude the storm impact we would have expected mid single digit growth.
And then with the strong sales growth, we expect catalyst technologies adjusted EBITDA to grow between 10 and 15%.
Given our 2023 expectations for adjusted EBITDA, We expect adjusted free cash flow to be in the range of $115 million to $130 million.
While the increase in EBIT will result in the generation of additional cash flow, we expect higher working capital usage compared to 2022.
Along with slightly higher capital spending interest and taxes.
Our higher capital expenditures range of $60 million to $70 million in 2023 compared to 2022 reflects higher growth capital primarily in our catalyst business and.
And for interest expense, we are projecting a range of $40 million to $50 million, reflecting higher rates in 2023.
Having provided an outlook for the full year of 2023, which reflect our positive growth expectations for both eco services in catalyst technologies I want to provide some specific guidance for the first quarter.
We expect first quarter 2023, adjusted EBITDA will be down approximately 30% compared to the first quarter of 2022.
And eco services as previously noted we expect that winter storm Elliott will have a negative impact on first quarter adjusted EBITDA of approximately $7 million to $8 million.
In addition, we expect a further impact related to an extended turnaround at one of our sites during the first quarter.
Prior to the impact of the storm and the extended turnaround we anticipated eco services adjusted EBITDA to be relatively in line with prior year first quarter as our continued growth is expected to be reduced by higher plant turnaround cost at one of our larger units and the impact associated with planned customer turnarounds turnarounds during.
The first quarter.
Therefore, we anticipate eco services adjusted EBITDA will be approximately 20% lower compared to the first quarter of 2022.
For catalyst technologies, while we are expecting full year earnings growth of 10% to 15% <unk>.
Including stronger sales of hydrocracking catalyst, we expect order timing to be a factor in the first quarter.
For hydrocracking catalyst, we serve some of the largest refineries in individual orders are significant in dollar terms, some orders can be larger than $10 million.
For the first quarter, we expect lower sales of hydrocracking and specialty catalyst driven by some large orders that are being shipped in the first quarter, but will likely be recognized in the second quarter. The order timing will not impact full year growth expectations. As a result, we expect adjusted EBITDA in catalyst technologies to.
Off approximately 50% compared to the first quarter of 2022.
This will result in <unk> adjusted EBITDA to be up approximately 30% compared to the prior year first quarter.
While our first quarter earnings are anticipated to be light driven by sales timing and catalyst and the impact from winter storm Elliot, we expect solid overall growth for the full year in 2023.
I'll now hand, the call back to Kurt for some closing remarks. Thank.
Thank you Mike we are extremely proud of the results we delivered in 2022.
Given the economic uncertainty and inflationary pressures that prevailed throughout the year our businesses demonstrated outstanding resilience. We finished the year with strong financial results. Despite the adverse impact of winter storm Elliott late in the fourth quarter, our financial performance paved the way for cash generation and net leverage reduction, allowing us to enhance.
Shareholder value through significant share repurchase activity.
We also achieved a number of non financial milestones as we continue to position <unk> for growth in 2023 and beyond.
I want to again personally thank all of our employees for their dedication and their contributions that made the successes of 2022 possible.
We entered 2023 with solid underlying business momentum.
Despite a degree of economic uncertainty, we maintained solid growth expectations for the year.
We expect eco services to continue on its long term growth trajectory this year while.
While our first quarter results will reflect the impact of winter storm Elliot and of significant planned turnarounds, we project growth in sales and adjusted EBITDA for Eco services this year.
For catalyst technologies, we expect higher sales for hydrocracking renewable fuel emission control and polyethylene catalysts. This year. We believe these higher sales coupled with lower inflationary pressures and incremental pricing actions will translate into solid year over year growth.
As Mike referenced we expect 2023 to be another strong year for cash generation and this will continue to enable our flexible capital allocation strategy, which is intended to drive growth and increase shareholder returns.
In closing we are highly confident in our ability to deliver growth again in 2023, and we look forward to updating you on our progress throughout the year.
With that we will ask the operator to open the line for questions.
At this time, if you would like to ask a question. Please press the star and one on your Touchtone phone.
Remove yourself from the queue at any time by pressing star to once again that is star one to ask a question.
We'll take our first question from John Mcnulty with BMO.
Yes. Thanks for taking my question, maybe the first one just on the on the winter storm impact that you're calling out for the first quarter, the $7 million to $8 million or so can you help us to understand how much of that is tied to the repair and maintenance cost versus the volume loss and then on the volume lost portion.
Is that something you can make back as we kind of progressed through the year or is it hey look ya.
Either habit and you can produce it and deliver it or you can't and they go somewhere else like I guess, how should we be thinking about that.
Hey, John Thanks for your question this is Mike.
I would estimate that roughly half.
The impact is lost sales compared to half being more repair maintenance we.
We do we have built in any catch up into our guidance for the year. So we're still believe that we're going to be strong for our overall results for eco services in the mid single digits.
Excluding that impact, but it is built into our guidance for the year.
Got it got it and then maybe just a follow up so.
Early on in your prepared remarks, you kind of walk through all the all the positives and admittedly I mean, it sounds like everything kind of has a bunch of positives going forward from.
End market demand.
Apparently being kind of the big driver of it I guess.
Winter storm impact, obviously is a little bit of a setback, but I guess I'm a little bit surprised with all the growth drivers even some of the pent up demand versus say some of the catalyst business that that you're only guiding to 6% EBITDA growth at kind of the midpoint of the range. So are there other.
Quote unquote bad guys that we should be thinking about in terms of either costs or what have you I mean, it sounds like some are actually coming down so I guess I just can't quite reconcile.
The kind of muted EBITDA growth. So maybe can you help us to think about maybe what other bad guys might be out there that we should be considering.
Yes.
John This is Kurt.
So the question now.
We're really confident in the growth as you said for the major segments.
Catalysts technologies polyethylene renewables hydrocracking.
All showing.
Low double digit type growth and then when you when you go over to Eco services, it's really that it's that storm impact in the first quarter. So regeneration services continue to have strong demand with strong refining economics strong refining utilization in the first quarter and really projected through the.
A year, and then really and good underlying demand growth really for Virgin sulfuric acid, it's really just that that virgin acid.
Kind of setback in Q1, that's really related to that storm.
And the loss volume in the maintenance costs associated with that.
Got it okay. Thanks, Thanks for the call I appreciate it.
And we'll take our next question from Alexey <unk> from Roth with.
With Keybanc capital markets.
Thanks, and good morning, everyone.
I wanted to ask you about catalysts technologies the high watermark for EBITDA was $198 million in 2019.
Every subsequent year was below that level in 'twenty $2 million to $78 million.
How do you view that 108 level was this.
Sustainable or was it something that it could be a target that you could achieve and exceed in the long run and when could that be if that's the case.
Yeah, Hi, Olesky. Thanks for the thanks for the question so.
Just referring back to that year of 2019 in catalyst technologies was really a high water mark really for hydrocracking catalyst.
Kind of a peak change out year, and then our niche custom catalysts as well had a very strong year.
When we look at catalyst technologies for 2023.
The growth there is really being driven by the major segments in the business again polyethylene renewables hydrocracking and emission controls are all are all had really solid growth in those in those secular trends 2022, I will say was impacted by a couple of things right. We said there isn't.
High refinery margins and really high utilization in those refineries delayed turnaround so as we look at hydrocracking.
Going forward I mean, it may not.
It may be smoother than it was maybe in the past because you had the pandemic, which had low utilization rates now youre coming into an era, where there is very high utilization rates. So we definitely know 2022 was impacted by those high utilization rates in.
In Hydrocracking and then we had the spike in energy costs at mid year, and then really as Mike talked about some one time freight and in our plant logistics debt that will really we view non nonrecurring. So we view that most of those those headwinds that we saw in 2022 are behind us.
We feel that the segment is going to be very healthy in 2023.
Thanks for this and maybe as a follow up so how would you look at 2023 EBITDA in this segment is this.
Below normalized level.
We're at normalized kind of could you frame.
Frame it relative to the cycle off.
Margin normalization and.
And maybe the catalyst reloads cycle at your various customers.
Yeah, I mean, I'll start just not really might be on the on the catalyst cycle reload I mean, I think again I think we see.
Strong growth I mean with <unk>.
C.
Low double digit growth at least in all the major segments there.
Wouldn't necessarily say, it's we can call it a peak year in hydrocracking, because again, it's another year of.
High refining utilization projections and high refining margins. So as we saw some catalyst hydrocracking sales push from 'twenty two into 'twenty, three that could very well happen as well in the 'twenty three 'twenty four and so that that cycle is a little bit more of a unknown than it has been in the.
Past, just because of the pandemic and the high utilization rates that have happened, but we continue to see again very strong growth in many of the regions.
Left out renewable fuels as well renewable fuels production growing at roughly 20% per year, which is going to translate into some nice sales growth for us as well.
Great. Thanks, a lot.
We'll take our next question from P J <unk> with Citi.
Hi, Good morning. This is Patrick Cunningham on for P. J.
You referenced your geographic footprint in Virgin relative to the heavy mining industry and I know it was a relatively small part of your business and just a small part of lithium supply in the U S. In general.
Is there enough potential demand to justify.
Adding new capacity or expanding existing capacity, maybe southeastern U S. I think I'm, just trying to understand the volume potential and what might be the differences.
I would say relative to comparable rates.
Yes. So thanks for the question Patrick Thats, a really good one.
So as you outlined we do have we like to say, we have our plants kind of triangulate the mining sector in the U S right between.
Northern California, Southern California, and the Gulf Coast locations. So when you look at mining obviously mining is really kind of the backbone materials required for all the electrification and green infrastructure.
As you referred to copper lithium boring.
<unk> copper uses traditional copper leaching used at around 3% to five tons of sulphuric acid per tonne of copper produced.
Our lithium.
Lithium is much higher in the realm of 20 tons. So as you look at the lithium production. That's projected are really needed to kind of power the electrification and green infrastructure going forward, it's going to require immense amounts of sulphuric acid much more than copper <unk>.
Just uses a much higher magnitude of sulphuric acid. So we expect that will continue to drive demand for sulfuric acid going forward.
Great. Thanks, and then just on the higher Capex number which parts of the catalysts business that'd be directed and would I be correct in assuming that you might have a bias towards the catalysts business in terms of potential bolt ons.
Yes.
Another good question I'll take the first part there.
Our growth capital is geared towards the catalyst business.
There are some good opportunities in the polyethylene catalyst market as.
As well as in our <unk> joint venture that we're continuing to look at.
There is something that we're continuing to to believe that there is strength strong growth.
We will continue to invest organically.
And the catalyst business, yes.
I think it looks at in terms of inorganic.
<unk> growth, we look at the <unk>.
<unk>, we like all the segments that we serve right I mean, we deliver unique and customized products and services really the blue chip refining pet Chem mining and catalysts in major industrial consumers.
And we really like these segments, so any opportunity to expand our offerings. In these areas are adjacent areas is going to be interesting to us. So we're really confident that we can drive value in an acquisition either by leveraging our operational expertise technical knowhow, our customer relationships and either of the businesses not just <unk>.
<unk> technologies.
Great. Thank you.
We will take our next question from David Begleiter with Deutsche Bank.
Thank you Kurt you touched on capital allocation this year, but thinking about the use of the free cash for debt pay down what you're talking about how much we should expect a worthy parties. Besides debt reduction this year.
Yes. So thank you. Thank you for the question so.
We'll go to step back really in 2022, we have repurchased about $137 million worth of stock increasing the value to the shareholders.
So we're really proud of that fact, we were able to execute that and maintain our net leverage ratio at that at two eight times at really reduce it to the end and then maintain it at that 288 times. So.
I just said, we really strongly believe in the secular growth trends in our businesses. So moving forward with our cash generation, we're going to continue to invest in our businesses and grow that both organically and inorganically as we think there's great opportunities. There and then secondly, we also have that board share repurchase authorization.
<unk> that I just mentioned that we continue that we can continue to use to deliver value.
Value to shareholders.
Understood and just on sulfuric acid apologies if I missed this is there potential to add capacity organically or even potentially buy some more capacity given the.
Robust end market growth you've talked about.
Yes, we're always we have multiple projects at any given time looking to debottleneck, our existing assets right. So we've talked about before we debottleneck logistic logistics assets, we have the ability to debottleneck and remove restrictions on our existing plants.
Push more I guess more sulfur capacity through the plant to generate more sulphuric acid and we'd love the sulphuric acid industry. We've been in it for 120 years. So why are we looking to grow our production capacity, where we can.
Thank you.
Yeah.
And we will take our next question from Aman <unk> with B W.
Hey, good morning.
Could you just elaborate on that.
Given the.
<unk> reduced production in Q1.
Are you looking to ramp up production.
Nameplate capacity to catch up with sales and how are you going about.
Landing new customers if.
Will you have this kind of headwind in Q1 as far as production is concerned.
Yes, Amit thanks for the question so the.
Yes.
The production, we service our customers really through our network of facilities. So when we have turnarounds than we have and we have outages that are caused by weather related events, we continue to supply with our with our existing network capacity the utilization across.
Our network as well as the soft uric acid.
Market in general is very high so con.
Contracts in that business tend to be longer term. So when we look at our customer base.
Generally in positions on Virgin acid with customers anywhere from one 1% to seven years. So we look at those as those customers sign up with us for a long period of time, we made commitments to them over a 1% to seven well over a 1% to seven year period and supply them from whatever plant that we need to.
If we have a certain unit down we can just obviously supply it either from the other unit at that site or additional plants in our network.
And my other question was on refinery utilization rates have been elevated for quite some time.
Does this structurally change your business on a long term basis or do you feel like this is stu.
It's still a short term.
Well I mean, I think if you look at the refining utilization rates that are projected by the EIA. They are they are projected really to continue to maintain high rates in the in the medium term so.
Again, we.
We do long term agreements with our customers refining customers.
And those continue and they had they're very bullish on their refining so I don't think that our mindset in terms of utilization I guess is we agree with our customers and what the EIA projects, which youre going to be high high utilization rates.
I would also like to highlight as well is that it's not just utilization. It's the alkylate is the value of alkylate continues to be very high rate, which is what were linked to so refineries. Despite whatever utilization rates are they're always trying to push their alkylate units because it's one of the highest margin products at the refinery produces.
It's needed in gasoline exports in produce and to produce premium gasoline.
Okay. Thank you.
And we will take our next question from Laurence Alexander with Jefferies.
Hi. This is Dan was one for Laurence I just have a follow up on I think it was David's question.
You mentioned doing debottlenecking into sulfuric acid I was just wondering if it's possible or how much it would cost for brownfield or greenfield expansion.
That's a hard question that's a hard question to answer for.
Expansions.
<unk>.
We look at our brownfield expansion as we debottleneck equipment in our plants all the time. So if you look at our sulfuric acid plant, it's made up of <unk>.
Numerous pieces I would say of modular type equipment that as those as those pieces of equipment and can we replace.
And come to end of life and we replace a lot of times, we're replacing with a piece of equipment that allows that plant to produce more more product and upsize as I guess, the the production capacity of those plants. So it's hard to put a it's hard to put a cost on a brownfield because thats kind of what we look at as we debottleneck certain units of the of this.
Sulphuric plat sulfuric plants Greenfield plants are obviously.
Are obviously very expensive and if we were going to go in a multi year project to permit and construct so if we were going to go down that down that path, obviously as we've done in the past with our other capacity expansion or other major investments, we would be tying it to <unk>.
Specific customer specific.
Customer or specific segment demand.
Alright, that's very helpful. And then just one other question just broadly speaking if we were to hit a recession in the west for the second half of this year in 2024 could you still hit your.
The low end of your of your outlook.
Outlook.
Yes, I think.
Mike and I are making.
Mike and I have been with this have been with the legacy businesses here I think since since 2006. So we've had the we've.
<unk> had the opportunity a bit you've been through a couple of the economic down cycles and you look at all of the you look at the segment trends driving most of our businesses really refinery.
The regeneration business is being driven by again utilization that demand for alkylate, which we which we see will continue to be strong virgin acid. Another large product line of ours, that's being really driven by things like.
Green technologies in low carbon technologies, and you talk about mining. So we look at those types of things the underlying commodities continue to be strong in those areas and those are really transitional we talk about mining in the green technologies really transitional and so even if there would be a downturn, we believe that as well.
Continue to be strong because there is heavy investment both private and government going up going into those areas and for catalyst technologies a lot of the same thing in our high density polyethylene catalyst sales are continue to support light weighting of vehicles and packaging in film as well as the other things like renewable fuels and hydro <unk>.
<unk>, which we are benefiting from strong distillate demand and strong demand for those renewable fuels. So we feel confident this business would be resilient in an economic downturn and it's shown that to be the case during the 2008 and 2020 downturns as well.
Yes.
Alright, Thank you very much.
And once again, if you would like to ask a question. Please press star one.
Our next question from David Silver with C. L K.
Yes, hi, thanks very much.
I had a couple of questions I just wanted to start clarification I think on the tax rates.
So just as perspective, but I think in 2022.
We started out thinking the tax accrual rate was going to be closer to 30%.
It never really reached that level on an adjusted basis by my records that whole year and then it was much much lower in the fourth quarter could you maybe comment on that and then in particular.
What kind of range is reasonable.
We're using for our 2023 forecast thank you.
Yes, David it's Mike. Thank you for the question I think in the past, we talked about the tax rate being in the mid to high <unk>. So.
Probably not quite approaching the 30 I mean, we are a domestic.
Business, where a significant amount of our production does come out of the U S.
<unk> has a statutory rate of 25% plus state taxes, and such however, we do have opportunities to lower our taxes.
Through some of our structures that we have and how we're selling our products, which puts us probably in the mid twenties on a run rate basis, I think our adjusted tax rate was around 23 or 24%. This past quarter. So we'd probably expect it to be somewhere in the mid.
<unk> on a go forward basis.
Okay. Thank you for that.
The next question would be about the catalysts for renewable fuels.
I'm looking at the very bottom.
Yes.
<unk>.
Slide seven.
You talked about the opportunities in sustainable aviation fuel and I think you used the word nation, but.
The part of your renewable fuels business that goes into I don't know the spend cooking oil or the mixed feedstocks.
As I recall, I mean, thats, a very nice profit, making opportunity for Ya just due to the demands on the catalyst in maybe the more frequent replacement cycle or shorter replacement cycle.
I'm just curious.
This is not a new business, but why is production capacity I guess youre talking about the demand for your product rising like 50% in the next year.
And what what.
What does <unk> have to do to be fully prepared to kind of exploit that.
Unusual growth opportunity. Thank you.
Yes. Thanks for the question. So when you look at renewable fuels.
The new <unk>, new production units coming online.
<unk> really being built to service the two the two kind of segments. When you talk about renewable diesel, which again is a drop in one for one replacement of <unk>.
Regular road call regular ultra sulfur sulfur ultra low sulfur road diesel the next kind of.
Next step of those of those processes and what a lot of the new units are being designed or also to make sustainable aviation fuel. So as we look forward into kind of the 2025 to 2026 time period, we see more sustainable aviation fuel being adopted where airlines are going to start to blend up to 50% of that sustainable aviation.
Fuel into their into their fuel blends to start to try to achieve their low carbon technologies. So that's really as you look down the road you see.
Renewable diesel taking share of the diesel.
Diesel market, but then more.
I think the larger share will come really from aviation, where it can be blended up into 50%.
The 50% range, we expect growth and I think as Mike had said renewables in the low double digits. This year and we the way we track in our zeolite.
<unk>.
That we sell into that industry or our coveted for.
Purity and their performance and we partner with really the leaders of the technology in those areas that are capturing a lot of those a lot of those new units. So we're positioning ourselves with our.
<unk> expertise to benefit from the growth in that segment going forward.
Okay. Thank you very much.
Yeah.
We have no further questions in the queue. At this time. This does conclude the <unk> fourth quarter and full year 2022 earnings call and webcast. Thank you for your participation you may disconnect at any time.
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