Q2 2024 Ecovyst Inc Earnings Call
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Madison: Good morning. My name is Madison, and I will be your conference operator today. Welcome to the Ecovyst second quarter 2024 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 speaker's remarks, there will be a question and answer period. If you would like to ask a question at that time, please press star one on your telephone keypad.
Madison: Good morning. My name is Madison and I will be your conference operator today. Welcome to the Ecovyst's second quarter 2024 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 speaker's remarks, there will be a question and answer period. If you would like to ask a question at that time, please press star 1 on your telephone keypad.
Madison: If you want to remove yourself from the queue, please press star 2. When asking your question, we ask that you please pick up your handset to allow for optimal sound quality. Lastly, if you should need operator assistance, please press star 0. I would now like to hand the conference over to Gene Shields, Director of Investor Relations. Please go ahead.
Madison: If you want to remove yourself from the queue, please press star 2. When posing your question, we ask that you please pick up your handset to allow for optimal sound quality. Lastly, if you should need operator assistance, please press star 0. I would now like to hand to the conference over to Jean Shields, Director of Investor Relations.
Gene Shields: Thank you, operator. Good morning, and welcome to Ecovyst's second quarter 2024 earnings call. With me on the call this morning are Kurt Bitting, Ecovyst's Chief Executive Officer, and Mike Feehan, Ecovyst's Chief Financial Officer. Following our prepared remarks this morning, we'll take your questions. Please note that some of the information shared today is forward-looking information, including information about the company's financial and operating performance, strategies, our anticipated in-use demand trends, and our 2024 financial outlook.
Speaker Change: Please go ahead.
Jean Shields: Thank you, operator. Good morning and welcome to Ecovyst's second quarter 2024 earnings call.
Speaker Change: With me on the call this morning are Kurt Bitting, Ecovyst's Chief Executive Officer, and Mike Feehan, Ecovyst's Chief Financial Officer.
Speaker Change: Following our prepared remarks this morning, we'll take your questions.
Speaker Change: Please note that some of the information shared today is forward-looking information, including information about the company's financial and operating performance, strategies, our anticipated in-use demand trends, and our 2024 financial outlook.
Speaker Change: 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.
Speaker Change: These risks are discussed in the company's filings with the SEC.
Speaker Change: Reconciliations of non-GAAP financial measures mentioned in today's call with their corresponding GAAP measures can be found in our earnings release and in the presentation materials posted on the investor section of our website at ecovyst.com.
Gene Shields: 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. Therefore, any forward-looking information shared today speaks only as of this date. These risks are discussed in the company's filings with the SEC. Reconciliations of non-GAAP financial measures mentioned in today's call with their corresponding GAAP measures can be found in our earnings release and in the presentation materials posted on the investor section of our website at ecovyst.com. I'll now turn the call over to Kurt Bitting. Thank you, Gene.
Speaker Change: I'll now turn the call over to Kurt Bitting.
Kurt Bitting: Overall, we are pleased with our results for the second quarter of 2024. We delivered financial results above our forecast, and we made solid progress on a number of strategic initiatives. During the quarter, we continued to see strong demand for regeneration services supported by high refiner utilization and favorable economics for alkylate, with regeneration volume up compared to the second quarter of 2023. Sales volume was also up for virgin sulfuric acid and treatment services compared to the year-ago quarter.
Curt Bitting: Thank you, Gene, and good morning.
Curt Bitting: Overall, we are pleased with our results for the second quarter of 2024. We delivered financial results above our forecast and we made solid progress on a number of strategic initiatives.
Curt Bitting: During the quarter, we continue to see strong demand for regeneration services supported by high refiner utilization and favorable economics for outlet with regeneration volume up compared to the second quarter of 2023.
Sales volume was also up for virgin sulfuric acid and treatment services compared to the year-ago quarter. And in our advanced materials and catalyst segment, sales of advanced silicas increased compared to the second quarter of 2023 on higher sales of chemical catalysts.
Kurt Bitting: And in our advanced materials and catalyst segment, sales of advanced silicas increased compared to the second quarter of 2023 on higher sales of chemical catalysts. However, during the quarter, we saw lower sales of catalyst materials used in the production of sustainable fuels and emission control applications. All in, for the second quarter, we delivered an adjusted EBITDA of $57 million.
Curt Bitting: However, during the quarter, we saw lower sales of catalyst materials used in the production of sustainable fuels and emission control applications.
Curt Bitting: All in, for the second quarter, we delivered a adjusted EBITDA of $57 million.
Kurt Bitting: In terms of the continued strategic positioning of Ecovyst, it was a very successful project. By the end of May, we had completed the four turnarounds planned for eco-services in the first half of the year. Work also progressed on our polyethylene catalyst production capacity expansion at our Kansas City site. Reflecting our balanced approach to capital allocation, during the quarter, we also repurchased 552,000 shares of Ecovyst Common stock for a total cost of $5 million.
Speaker Change: In terms of the continued strategic positioning of Ecovyst, it was a very successful quarter.
Speaker Change: By the end of May, we had completed the four turnarounds planned for Ecoservices in the first half of the year. Work also progressed for our polyethylene catalyst production capacity expansion at our Kansas City site.
Speaker Change: Reflecting our balanced approach to capital allocation, during the quarter we also repurchased 552,000 shares of Ecovyst common stock for a total cost of $5 million.
Kurt Bitting: In addition, as we announced last week, our work during the quarter culminated in an equity investment in Pajarito Powders, a company with expertise and support materials and catalysts for green hydrogen and fuel cells. This transaction is consistent with our stated strategy of leveraging our material science capabilities as we continue to position Ecovyst for growth in emerging markets. Through this investment, we gain access to, and support for, scaling technologies that we believe will position us to support and participate in future growth of the hydrogen economy, as we believe hydrogen, produced through electrolysis, can be widely used as a low-carbon fuel for heavy-duty transportation and industrial applications. Lastly, during the quarter, we strengthened our balance sheet through an amendment and extension of our term loan facility, which reduced the interest rate spread and extended the maturity of the facility until
Speaker Change: In addition, as we announced last week, our work during the quarter culminated in an equity investment in Pajarito Powders, a company with expertise in supports and catalysts for green hydrogen and fuel cells.
Speaker Change: This transaction is consistent with our stated strategy of leveraging our material science capabilities as we continue to position Ecovyst for growth in emerging markets.
Speaker Change: Through this investment, we gain access to, and support for, scaling technologies that we believe will position us to support and participate in future growth of hydrogen economy, as we believe hydrogen
Speaker Change: produced through electrolysis can be widely used as a low-carbon fuel for heavy-duty transportation and industrial applications.
Speaker Change: Lastly, during the quarter, we strengthened our balance sheet through an amendment and extension of our term loan facility, which reduced the interest rate spread and extended the maturity of the facility until June of 2031.
Kurt Bitting: As we turn to slide 6, I'll discuss our near-term demand outlook. In Ecoservices, we anticipate a favorable demand forecast for regeneration, treatment services, and catalyst activation throughout the remainder of the year. We anticipate that regeneration will continue to experience strong demand driven by persistently high refinery utilization rates and healthy appellate margins. Additionally, our treatment services segment is expected to continue to experience high volumes as it serves as a sustainable waste management solution for numerous chemical producers along the Gulf Coast.
Speaker Change: As we turn to slide 6, I'll discuss our near-term demand outlook.
Speaker Change: In Ecoservices, we anticipate a favorable demand forecast for regeneration, treatment services, and catalyst activation throughout the remainder of the year. We anticipate that regeneration will continue to experience strong demand driven by persistent high refinery utilization rates and healthy outlet margins.
Speaker Change: Our treatment services segment is expected to continue to experience high volumes as it serves as a sustainable waste management solution for numerous chemical producers along the Gulf Coast.
Kurt Bitting: And despite anticipating a dip in utilization rates among renewable diesel manufacturers, we are observing a rising need for ex-situ catalyst activation, which is expected to contribute to a buoyant outlook for CHEM 32 in the latter half of the year. For virgin sulfuric acid, we expect continued positive demand for mining, with copper demand sustained by continued expansion of copper mining projects in North America and borates demonstrating a normalization of inventories and stable demand.
Speaker Change: And despite anticipating a dip in utilization rates among renewable diesel manufacturers, we are observing a rising need for ex-situ catalyst activation, which is expected to contribute to a buoyant outlook for CHEM 32 in the latter half of the year.
Kurt Bitting: And even though the nylon industry's rebound remains subdued, we anticipate a year-over-year increase in virgin sulfuric acid sales for the nylon end use in 2024. For the remainder of our virgin sulfuric acid sales, which support a wide range of industrial end uses, including chloralkali and chemicals, water treatment, paper, and packaging, and spot sales into various end uses, we have adopted a more conservative view of demand and pricing for the second half of 2024. Turning to Advanced Materials and Catalysts
Speaker Change: And even though the nylon industry's rebound remains subdued, we anticipate a year-over-year increase in virgin sulfuric acid sales for the nylon end-use in 2024.
Speaker Change: which supports a wide range of industrial end uses, including chloralkali and chemicals.
Speaker Change: Paper and Packaging, and Spot Sales into various end uses, we have adopted a more conservative view of demand and pricing for the second half of 2024.
Kurt Bitting: In advanced silicose, global polyethylene demand is expected to be up 2-3% in 2024. However, the demand outlook continues to vary by geography. In North America, demand is positive, with operating rates expected to approach 90% supported by exports. Producers in North America and in the Middle East, where we have sales concentration, continue to have a cost advantage with lower energy and feedstock costs, and we expect these geographies to benefit disproportionately as global polyethylene demand recovers. However, projections for Europe reflect flat demand with lower operating rates of approximately 80%, and in Asia, operating rates also continue in the low 80% range with subdued demand and new capacity continuing to come online.
Speaker Change: Turning to Advanced Materials and Catalysts.
Speaker Change: Producers in North America and in the Middle East where we have sales concentration continue to have a cost advantage with lower energy and feedstock cost and we expect these geographies to benefit disproportionately as global polyethylene demand recovers.
Speaker Change: However, projections for Europe reflect flat demand, with lower operating rates of approximately 80%, and in Asia, operating rates also continue in the low 80% range, with subdued demand and new capacity continuing to come online.
Kurt Bitting: Overall, we continue to expect our sales of polyethylene catalysts and supports to be up in 2024 relative to 2023, but the magnitude of the increase remains dependent upon global demand conditions as well as customer sourcing and inventory decisions. For the ZLS joint venture, we now see weaker demand for catalyst materials used in sustainable fuel production in a mission control application, and this has led us to revise our sales expectations for these end uses in the second half of this year.
Kurt Bitting: As a reminder, we provide catalyst materials that are used in the de-waxing phase of renewable diesel production, and these catalyst material sales are primarily made to the licensors of sustainable fuels production technology. Market conditions and customer sentiment evolved rapidly over the course of the second quarter, and this is leading to our revised outlook for sales into renewable diesel production. Specifically, the pricing and value for Renewable Identification Numbers, or RINs, which are a key incentive for renewable diesel producers, declined significantly.
Speaker Change: Market conditions and customer sentiment evolved rapidly over the course of the second quarter and this is leading to our revised outlook for sales into renewable diesel production.
Kurt Bitting: RIN credits traded above $1.50 for several years, contributing positively to the overall economics of renewable diesel production, particularly for smaller producers. However, with the development of an imbalance between renewable diesel production and demand, the value of RIN credits has decreased significantly, recently falling below 50 cents. With the lower pricing for RINs credits, and with increased feedstock costs and higher overall costs due to inflation, many producers are re-evaluating production economics. As a result, there has been a slowdown in new capacity additions, and with lower near-term operating rates, we expect catalyst life to be extended, pushing out sales associated with periodic catalyst changes.
Speaker Change: As a result, there has been a slowdown in new capacity additions, and with lower near-term operating rates, we expect catalyst life to be extended, pushing out sales associated with periodic catalyst changeouts.
Kurt Bitting: Longer term, we continue to believe the leading technologies offered by our ZLS joint venture position us well to participate in future growth opportunities for sustainable fuel production. While near-term economics for renewable diesel are challenged, we believe that demand for our catalyst materials will improve as producers retrofit their renewable diesel processes and add new units to produce sustainable aviation fuels, where demand is expected to triple by 2030 due to both governmental mandates and carbon reduction targets set by the airlines.
Speaker Change: Longer term, we continue to believe the leading technologies offered by our zealous joint venture position us well to participate in the future growth opportunities for sustainable fuel production.
Speaker Change: where demand is expected to triple by 2030 due to both governmental mandates and carbon reduction targets set by the airlines.
Kurt Bitting: We have also revised our expectations for sales of our catalysts used in emission control applications for the balance of the year. Economic conditions in the EU, the UK, and in the US, including the effects of inflation and higher interest rates, have adversely impacted purchasing activity for heavy-duty diesel vehicles. For the month of May, sales of Class 8 trucks in the U.S. were down 18% compared to May of 2023, with May 2024 representing the 10th consecutive month of sales declines for Class 8 vehicles. However, we expect sales to grow over the next few years. We are aligned with key players in the industry and expect a dozen advanced recycling plants to be built and commissioned in the next few years.
Speaker Change: In addition, although Euro 7 legislation was previously expected to go into effect in 2025,
Speaker Change: The EU has softened NOx reduction requirements and has delayed the implementation of Euro 7 for heavy duty vehicles for four years, significantly impacting vehicle sales in 2024.
Speaker Change: Given the delay in both the implementation of Euro 7 and the need for compliance with more stringent emission requirements, there is little incentive to upgrade truck fleets now, and this is having an adverse impact on our catalyst material sales for emission control applications for the balance of 2024.
Speaker Change: For sales of hydropacking catalysts, we continue to see good demand, which led to a strong first half and expect a similarly strong second half for 2024.
Speaker Change: However, as we discussed in our first quarter earnings call, with 2023 representing a peak year in the replacement cycle for hydrocracking catalysts, we expect overall sales of hydrocracking catalysts in 2024 to be below peak levels in 2023.
Speaker Change: We expect sales to grow over the next few years. We are aligned with key players in the industry and expect a dozen advanced recycling plants to be built and commissioned in the next few years.
Speaker Change: I'll now turn the call over to Mike for a more detailed discussion of our financial results for the second quarter.
Mike Feehan: Thank you, Kurt. Ecovyst's sales for the second quarter of 2024, including our proportionate 50% share of sales from the Zealous joint venture, were $212 million, down $17 million compared to the second quarter in 2023.
Speaker Change: Ecoservices benefited from strong demand for regeneration services and virgin sulfuric acid.
Speaker Change: and sales in advanced silicas increased on higher chemical catalysts.
Speaker Change: However, lower net pricing in eco-services.
Speaker Change: associated with the timing and contractual pass-through effect of lower variable costs as well as lower sales for catalyst materials used in the production of sustainable fuels and emission control applications drove the overall lower sales year-over-year.
Speaker Change: Second quarter 2024 adjusted EBITDA was 57 million dollars.
Speaker Change: down compared to $79 million in the second quarter of 2023, reflecting the lower sales within the Zealous joint venture.
Speaker Change: unfavorable net pricing, mostly attributable to the timing of the contractual cost pass-through effect, and higher planned turnaround and maintenance costs in ecoservices.
Speaker Change: This was partially offset by the higher sales volume in both eco-services and advanced silicas.
Speaker Change: Moving to the next slide, the unfavorable net pricing impact is reflected in the price and variable cost drivers, netting to a $13 million negative impact on our adjusted EBIT in the second quarter.
Kurt Bitting: The lower net pricing was driven primarily by the timing and the mechanical contractual pass-through of certain costs, including energy and other index costs. However, the sales contribution from higher volume and eco services. The revisions to our full year 2024 expectations are reflected on slide 13, with the revised outlook as follows.
Speaker Change: Our pricing continues to exceed our variable cost. The unfavorable variance is a result of the period-over-period comparison and the quarterly timing lag.
Speaker Change: Overall volume and mix were lower in the quarter as the lower sales in the Zealous joint venture more than offset the increase in regeneration services and virgin sulfuric acid.
Speaker Change: The balance of the decrease is largely associated with higher costs, including the costs associated with the planned turnaround and maintenance activity, higher networking costs, and costs associated with our reliability initiatives, which we had previously discussed.
Speaker Change: Turning to the segment results, I'll start with the highlights for Ecoservices.
Speaker Change: Ecoservices sales for the second quarter of 2024 were $154 million, down 3%.
Speaker Change: Sales volume was up for regeneration services.
Speaker Change: Virgin Sulfuric Acid, and Treatment Services.
Speaker Change: However, the sales contribution from higher volume and eco-services
Speaker Change: was offset by the unfavorable net pricing in the quarter.
Speaker Change: Looking to the second half of the year, we believe headwinds associated with the unfavorable timing and contractual pass-through effect of certain costs are largely behind us.
Speaker Change: Second quarter 2024 adjusted EBITDA for Ecoservices was just under $50 million.
Speaker Change: The decrease in adjusted EBITDA and adjusted EBITDA margin was primarily driven by the net pricing impact, the higher planned turnaround and maintenance costs, and networking costs to support the turnarounds.
Speaker Change: These items were only partially offset by the benefit of higher volume in the quarter.
Speaker Change: Sales for advanced silicas of $29 million were up nearly $3 million on higher sales of chemical catalysts.
Speaker Change: However, sales for the Zealous joint venture decreased $16 million on lower sales of catalyst materials used in the production of sustainable fuels and emission control applications.
Speaker Change: As Kurt noted, we now expect software demand for catalyst materials used for sustainable fuel and emission control in the second half of the year.
Speaker Change: adjusted EBITDA for Advanced Materials and Catalysts was just under 15 million dollars. The decrease compared to the second quarter of 2023 was primarily driven by the lower volume in the Zealous Joint Venture.
Speaker Change: Turning to cash and leverage on the next slide, Ecovist continues to have strong cash generation capability, which we believe will continue to support a balanced approach to capital allocation.
Speaker Change: For the first six months of the year, adjusted free cash flow was just over $14 million, compared to $2 million for the first half of 2023, reflecting higher dividends received from the Zealous joint venture in the first quarter, offsetting the lower earnings, higher interest and taxes.
Speaker Change: During the quarter, we refinanced our term loan, extending the maturity to 2031 and reducing the interest rate spread by 35 basis points, saving over $3 million in annual interest costs.
Speaker Change: In light of this transaction, our balance sheet is in exceptionally strong shape.
Speaker Change: We continue to have interest rate caps in place that limit our interest rate exposure and our average cost of debt is expected to be approximately 5.5% during 2024.
Speaker Change: During the second quarter, we repurchased 552,000 shares of our stock at an average price of $9.05 per share for a total of $5 million.
Speaker Change: We ended the second quarter with 83 million dollars of cash and have available liquidity of 156 million dollars.
Speaker Change: Considering the use of cash for refinancing our term loan and share repurchases, and with the reduction in the trailing 12-month adjusted EBITDA.
Speaker Change: Our net debt leverage ratio at quarter end was 3.3 times.
Speaker Change: with the expected cash generation over the balance of the year and excluding any impact of share repurchases or M&A activity.
Speaker Change: We expect to end the year with a leverage ratio of approximately three times.
Speaker Change: As noted in this morning's earnings release, we have revised our outlook for the balance of the year, considering the expected softer demand for sales of catalyst materials used for the production of sustainable fuels and emission control applications.
Speaker Change: and to reflect the moderate impacts of Hurricane Beryl and a more cautious view with regard to industrial demand, particularly for sales of virgin sulfuric acid.
Speaker Change: The revisions to our full year 2024 expectations are reflected on slide 13 with the revised outlook as follows.
Speaker Change: We now expect that GAP sales will be in the range of 700 to 740 million dollars.
Speaker Change: $15 million lower at the midpoint compared to our prior guidance range.
Speaker Change: with the revised outlook for catalyst sales used in the production of sustainable fuel and emission control applications.
Speaker Change: We now expect sales for the Zealous Joint Venture to be between $115 to $135 million, down $30 million at the midpoint.
Speaker Change: Adjusted EBITDA is expected to be in the range of 230 to 245 million dollars.
Speaker Change: For Advanced Materials and Catalysts, we expect third quarter adjusted EBITDA to be between $13 to $15 million.
Kurt Bitting: Reflecting upon our results for the first half of 2024, I believe the Ecovyst team has done well in executing relative to our operational and strategic plan as we continue to manage through an uncertain economic environment. For our regeneration business in particular, despite indications that refining margins are under pressure, I'll reiterate that demand for our regeneration services is more associated with the profitability of the Appalachian, which is expected to remain positive for the balance of 2024.
Speaker Change: Reflecting upon our results for the first half of 2024, I believe the ECOVIS team has done well in executing relative to our operational and strategic plan as we continue to manage through an uncertain economic environment.
Speaker Change: We also expect that second half of 2024 volumes for all Ecoservices products, as well as Ecoservices EBITDA, will demonstrate year-over-year gains.
Speaker Change: And while Ecoservices results for the second quarter reflected net pricing pressure associated with the timing effect of contractual pass-through of variable costs, we believe the headwinds of this timing effect are largely behind us as we go into the third quarter.
Speaker Change: We're equally eager to support our new partner, Pajarito Powders, as they develop and scale their solutions for fuel cells and green hydrogen generation.
Speaker Change: In closing, even with our revised financial outlook, we expect free cash flow generation for 2024 to be up year over year, providing for continued flexibility for capital allocation as we position EcoVist for the future.
Kurt Bitting: While we see near-term softness in two specific end uses for the ZLS joint venture, we expect modest volume growth in EcoServices and Advanced Silicas, and we will continue to execute on the strategic plan that we have established to deliver long-term growth across the entirety of the EcoVist portfolio.
Speaker Change: While we see near-term softness and two specific end uses for the ZLS joint venture, we expect modest volume growth in eco-services and advanced silicas.
Operator: Thank you. And at this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star and two, and we will pause for a moment to allow questions to queue.
Speaker Change: And we will take our first question from John McNulty with BMO Capital Markets.
John Mcnulty: Yeah, hi Cale, good morning. Thanks for the question. The feral impact is a few million dollars. You know, the guidance outlook, you know, we provided some ranges for the two businesses.
Speaker Change: ultimately about half of it is coming from the Ecoservices side and the other half is coming from the AM&C side.
Speaker Change: However, we do see positivity coming in the future as...
Patrick: pre-downturn levels. I don't know, is it down 20%, 100%? And is there more pressure here, or has it stabilized? We will sort of go sideways for the next 12, 18.
Speaker Change: pre-downturn levels. I don't know, is it down 20%, 100% and is there more pressure here or has it stabilized and will sort of go sideways for the next 12-18 miles?
Speaker Change: And as Kurt just alluded to, what we're seeing that is on a short-term basis, but in the longer term, we do see there's the ability for that to grow, particularly around changes in the dynamics and the supply and demand, as well as the SAF business.
Speaker Change: Okay, and then on the net pricing in eco-services...
Speaker Change: So you have these lag effects in the first half. Do you expect them to go away in the second half? Or if not, when do you think that would happen? And what do you think pricing would look like when we no longer see the...
Speaker Change: [inaudible]
Speaker Change: Yeah, sure. So, you know, first I just want to comment that, you know, we don't have any concerns around our base pricing, right, you know, our overall pricing is exceeding our variable cost and, you know, we're, you know, obviously have a profitable business.
Speaker Change: A lot of what this is is really the mechanical pass-through nature and the timing of when those costs are incurred.
Speaker Change: So, when you're looking at a period over period comparison, you know, we had a big benefit in the second quarter of last year, and this year it's, it's, you just don't have the same compares same benefits. So, it looks as a big negative. So, we do not expect that trend to continue. So, you'll see a much more muted impact going forward for the rest of the year, but the overall impact from the first half.
Speaker Change: does impact your overall year-over-year comparison, but for the second half, you're not gonna see that same dynamic.
Speaker Change: Okay, thanks a lot.
Speaker Change: Thank you. And our next question comes from Patrick Cunningham with Citi.
Patrick Cunningham: Hi, good morning. I think I just want to, you know, continue on the thread with, you know, the weaker outlook and renewable fuels and...
Speaker Change: renewable fuels as well as emission control catalysts.
Patrick Cunningham: First, can you maybe talk about the regulatory uncertainty, whether it's the Chevron decision, election results, and what customers are saying in terms of their buying patterns?
Speaker Change: And then just in terms of the, you know, cooling demand for renewable fuels, are you, is any of that cost optimization and how you're positioning your business, you know, taking place? Are you taking actions as a result of this, you know, weaker forecasted demand the next 12 to 18 months?
Kurt Bitting: Sure, thanks for the question, Patrick. I think, you know, in terms of just the macro environment for renewable or sustainable fuels right now, being driven by the supply-demand imbalance, which is, you know, creating pressure on those rent credits, which, you know, leads to lower utilization, and leads to deferral of investments that we've mentioned before. In terms of regulatory, I mean, there are still – there still are some issues to be resolved.
Speaker Change: Sure, thanks for the question, Patrick. I think, you know, in terms of just the macro environment for renewable or sustainable fuels right now,
Speaker Change: being driven is the supply-demand imbalance, which is you know
Speaker Change: creates pressure on those rent credits, which leads to lower utilization, leads to deferral of investments that we've mentioned before.
Speaker Change: In terms of regulatory, I mean, there still are...
Kurt Bitting: The RFS, you know, and I guess the renewable volume obligation will be set post-election, so I think that, you know, that could have a future impact on that. And that's, you know, the EPA has already announced that they're not going to make that call until after the election. So I think we're in a little bit of a holding pattern here with that, but long-term, as we mentioned, we do see momentum behind sustainable aviation fuel because, you know, airlines have made large commitments to the volumes that they intend to purchase for sustainable aviation fuels, as well as, you know, actual regulations.
Speaker Change: There still are some issues to be resolved. The RFS, you know, and I guess the renewable volume obligation will be set post to the election. So I think that, you know, that could have a.
Operator: Great! Thank you so much.
Unnamed Participant: The RIN being an excuse just sounds a little off.
Speaker Change: a future impact on that and that's, you know, the EPA has already announced that they're not going to make that call until post the election. So I think
Speaker Change: We're in a little bit of a holding pattern here with that, but long-term, as we mentioned, we do see
Speaker Change: momentum behind sustainable aviation fuel because they're, you know, airlines have made large commitments to the volumes that they intend to purchase for sustainable aviation fuels, as well as, you know, actual regulations.
Speaker Change: that have been put in place in the EU and ones that are being contemplated elsewhere.
Speaker Change: In terms of the
Speaker Change: in terms of cost controls.
Speaker Change: We've already taken steps in July to remove costs from those impacted, I would say, underutilized units that are really concentrated in the ZList joint venture.
Speaker Change: in terms of emission controls and renewable fuels. And put in perspective, it's probably the equivalent of removing a shift out of the production schedule. We've also deferred some spendings.
Speaker Change: Got it. And then just a question for Mike, you know, you've indicated wanting to get below three times leverage eventually in the low twos. You know, what do you expect to be the balance of debt paid out? I know you said probably limited focus on M&A and repurchases for the balance of the year. Are there any sort of discrete headwinds or tailwinds, you know, that'll make cash conversion come in better or worse on a four-year basis?
Mike Feehan: Yeah, thanks for the question. So from a leverage standpoint we expect to end the year based on our guidance of roughly three times levered.
Mike Feehan: We do expect our free cash flow to still remain strong. You'll notice that our free cash flow guidance is down, but not as much as what our EBITDA is. We still believe that we have strong cash generation and expect it to be higher than it was last year.
Speaker Change: So, we continue to generate cash, you know, our core businesses are intact and, you know, as Kurt mentioned, we've been doing some other things, you know, to defer spending and take the appropriate actions to help support that generation going forward.
Speaker Change: Great, thank you so much.
Speaker Change: Thank you. And our next question comes from Lawrence Alexander with Jeffries.
Lawrence Alexander: Good morning. So first can we maybe look at the sort of adjustments that you've made and separate out like the transitory versus the structural and as you think about what the baseline is for building the bridge for 2025 EBITDA.
Speaker Change: what you think we, you know, we should be using and sort of, you know, the puts and takes there.
Speaker Change: And then secondly, given the discussions you've had with the customers at this point, can you talk a little bit about what the...
Speaker Change: kind of revenue opportunity is over four or five years now on both the SAF front and the recycling front. If current plans go through and the industry builds out as expected,
Speaker Change: what's the kind of revenue opportunity for you if you get your fair share of the supply chain?
Speaker Change: Yeah, thanks for the question. So I'll just start and just note that we're not going to provide any updated guidance on 2025, but I, you know, I would tell you that from a directional standpoint, you know, we're certainly happy with what we've seen this year from a volume standpoint, particularly around the regeneration services.
Speaker Change: We do see growth in virgin sulfuric acid we talked about however a little more cautious than earlier in the year But it's still a good growth component over the over the previous year we do have that strong base pricing that we expect to continue going forward into future years and You know with our cost structure, you know in eco services now Managed at an appropriate level with the higher cost that we talked about related to the reliability program and higher turnaround costs
Speaker Change: you know, that'll moderate going forward. So we expect, you know, 2025 to continue to go in the right direction. As it relates to AM&C, of course, you know, as we talked about, we don't have a full view of where we think sustainable fuels are, but we definitely see that there's an impact in the next 12 to 18 months.
Speaker Change: So that will, you know, impact us going into next year. Our hydrocracking catalyst actually is doing well this year. It's not quite at the peak that it was in 2023, last year. However, it is having a strong year and we continue to see that being a positive.
Speaker Change: into next year as well. So with some of the newer areas, whether it's advanced recycling or in the functionalized silica business
Speaker Change: with Enzyme Development. Those are all positives that are going to take us into a positive nature around those for 2025 as well. Yeah, I would just add, Lawrence, I mean, I think we look at, Mike mentioned a little bit, sustainable aviation fuel.
Speaker Change: We see that growth, as we've said before, to be anticipated to really come in in 2025 and 2026 as those units get built out and the regulations and so forth go into effect. Advanced Recycling, there's 12 units under construction. We expect...
Speaker Change: and I'll just circle back really on the eco-services side, I mean, all the products are going to have volume uptick year over year.
Speaker Change: Thank you.
Speaker Change: And our next question will come from Hamed Khorsan with BWS Financial.
Unnamed Participant: Hi, so I just wanted to ask about what's going on ZList. These RIN comments you've been making, RIN's been coming down for more than a year. So what's different now? Is it that ZList lost a customer? It just sounds, you know, all of a sudden that RIN being an excuse just sounds a little off. Please stand by.
Hamed Khorsan: Hi, so I just wanted to ask about what's going on with ZList. This RIN comments you've been making, RIN's been coming down for more than a year. So what's different now? Is it that ZList lost a customer? It just sounds, you know, all of a sudden that...
Speaker Change: The Rin being an excuse just sounds a little off
Speaker Change: Please stand by.
Speaker Change: Please stand by while we resolve technical difficulties.
Speaker Change: Hello? Yes, hi, are we back?
Speaker Change: Hello, you are coming in clear. And we do have our next question from Hamed Korsund with BWS Financial.
Hamed Korsund: Hi, what I wanted to ask about was on the sustainable fuel side and the ZLS. Is this a customer loss perspective? Because RIN prices have been coming down for a year now, so I'm just surprised it took a year before you're seeing any kind of impact from it.
Speaker Change: Yes, sure. Thanks, Tom. And I just want to apologize. There was a loss of audio here on the call, so we apologize to the participants for the disruption.
Speaker Change: But good question, Hamid. I think what we have not lost customers in this space, I mean, we are, you know, a leading provider in de-waxing catalyst materials.
Speaker Change: But that being said, our end customer.
Speaker Change: as we've stated, tends to be the catalyst technology provider, right, or the technology provider for the renewable producers. So we're, in most cases, once removed, in terms of the actual producers themselves, which in some cases are on-purpose renewable producers or, you know, integrated refining companies that produce renewable fuels. So...
Speaker Change: Our view on this was RINs credits came down, the sustained nature of that has led to these long-term decisions where people are going to defer investments, as well as the catalyst life at the low utilization rates impacting
Hamed Khorsan: the catalyst consumption or the use of the catalyst
Hamed Khorsan: the slower sales, right, from that long-term low utilization from the RINs credits. So I hope that answers your question. It's, you know, we're once removed there, but I think it's more the long-term nature of, you know, and the length that the RINs credits have been below that has started culminating in some of this activity.
Speaker Change: Got it. And then, as far as your cost management is concerned, how manageable is that? Are you reducing costs when sales come back? Do those costs come back as well, or are you able to keep those permanent?
Speaker Change: Obviously, we'll look at that when those come back. I mean, we do have the ability to scale up. I mean, essentially, what I mentioned before was the removal of the equivalent of the shift at the production sites that are
Hamed Khorsan: for the production lines that are affected. So we would have the ability to scale that back, and it would just be a matter of, you know, at what pace that comes back. I mean, do we, you know, can we handle it with our existing capacity, or, you know, do we have to go back and add those costs back? So it would really be a function of.
Hamed Khorsan: the pace of the return of the sales.
Hamed Khorsan: Okay, I appreciate it. Thank you.
Speaker Change: Thank you and once again if you would like to ask a question please press star and 1 on your telephone keypad now and we will take our next question from David Silver with CL King
Hamed Khorsan: Bye-bye.
David Silver: I guess the first question I'd like to ask would be maybe to get your view on the back half of the year in terms of the opportunities for your virgin acid product.
Unnamed Participant: [inaudible] I think the demand on that side has been
Speaker Change: weaker or hasn't really been exceptionally strong for a few quarters now.
Speaker Change: And I'm just thinking about, you know, kind of the step down or the implied step down in your guidance, but.
Speaker Change: Is there a dynamic in that market, maybe, Kurt, where...
Kurt: When industrial activity weakens, there are some new players that enter. In other words, they can't use all their captive product internally, and then they tend to look for outlets into your preferred markets.
Speaker Change: In other words, is this just a demand that you see falling away or...
Hamed Khorsan: Is there kind of maybe something a little more complex where, you know, weaker industrial demand turns into some increased competition in, you know, some of your traditional markets?
Hamed Khorsan: Good question, David. I think so for the back half of the year overall for virgin sulfuric acid again.
Hamed Khorsan: We do expect volumes to be up year over year and, you know, and actually the EBIDTA of ecoservices in the second half of the year to be up year over year. That
Hamed Khorsan: That being said,
Hamed Khorsan: when we gave our initial guidance coming into this year.
Hamed Khorsan: You know, we had planned to do four turnarounds in the first half of the year. We viewed the second half of the year would be a recovering marketplace. Most of our turnaround activity was done. We had the volume to meet. What generally is a spot, and I'd say short-dated contract.
Hamed Khorsan: market, right, where if industrial activity is healthy and other producers are taking turnarounds or such themselves, there's generally a healthy spot market to sell additional materials which are, you know, generally higher, right, in price because due to their short term and opportunistic nature. Right. So.
Hamed Khorsan: What we're seeing now is just generally the cautiousness with the overall industrial climate.
Hamed Khorsan: Not really impacting our existing demand, but it just makes those.
Hamed Khorsan: you know, kind of those marginal and fringe spot sales that we typically have the ability to capitalize due to our scale. It just, you know, we're just cautious around our ability to capture those because they just might not be there because the market, you know, the existing market may be able to meet that demand.
Unnamed Participant: Okay, thank you for that. And I should have stipulated and, you know, upfront, I think I've missed a few answers due to expire or mature until I think 2028 or so and
Speaker Change: Okay, thank you for that. I should have stipulated in, you know, upfront, I think I've missed, you know, a few answers.
Speaker Change: whatnot. So I apologize for making you repeat yourself there.
Speaker Change: The second thing I'd like to ask you about is maybe the decision to, you know, redo and extend your term loan.
Speaker Change: So, you know, when I read the announcement originally, I noted that that term loan wasn't really...
Speaker Change: due to expire or mature until I think 2028 or so and you know in effect you've extended it out three years.
Speaker Change: My thinking or my assumption is the impetus to redo the term loan would have been on your side. Banks are always anxious to earn a few more fees.
Speaker Change: You know, it's a lot of time and effort internally to a lot of paperwork.
Speaker Change: But maybe Mike if you wouldn't mind, you know, just sharing your thoughts about you know, why now or why June? Middle of June was was the right time to extend that and and you know beyond the
Speaker Change: $3 million or so of annual interest savings. What other key features did you come away with from there that you think were part of your calculation in moving forward with that decision at that time?
Mike Feehan: Yeah, certainly, David. So, I mean, we, you know, there's certainly a bit of it.
Mike Feehan: a question in the market around companies and their balance sheet. And we saw this as an opportunity to go out into the market.
Mike Feehan: You know, our bankers that we've used have done a nice job helping us guide through when the right opportunities might arise.
Speaker Change: We certainly were able to do this at a relatively low cost.
Speaker Change: for what we were able to do, extending the term out for three years, as well as reducing the overall interest expense, as you mentioned, around $3 million a year. The NPV and the value of doing it was quite high. And we also felt very, very comfortable that it would help support our story of having a strong balance sheet from a capital allocation standpoint, generating cash and having the ability to use that cash for what we needed to do going forward. So we believe that it was the right time to go out in the market, gives the investors comfort that our balance sheet is strong and also allows us to continue with our strategy.
Speaker Change: Michael Feehan, CFO Alphabet and Google
Speaker Change: Okay, thanks. And then last question, if I could, I mean, but
Speaker Change: you know I guess with this latest update you know you'll be I don't know under earning maybe or below trend for a little bit of a period of time
Speaker Change: Any thoughts from your side on kind of your major?
Speaker Change: capital outlays, and I'm thinking of Kansas City in particular, but does the original timeline still make sense here or, you know, if we do enter a softer patch, you know, industrial activity-wise?
Speaker Change: You know, that's something that could probably be timed a little differently.
Speaker Change: Thanks for the question, David. So just with polyethylene, obviously the growth in the polyethylene is.
Speaker Change: a little lower than what it's been in the trend past 3% to 4%. You know, as we said on the call, that is currently running around 2% to 3%. We do expect our polyethylene catalyst sales to be up.
Speaker Change: year over year.
Speaker Change: The Kansas City investments are really linked to, you know, customer commitments.
Speaker Change: who are simultaneously, you know...
Speaker Change: and such that will need those catalysts, which, you know, to our knowledge, they're
Hamed Khorsan: Rolling along so we we don't have any intention to slow those Kansas City Expansion at this time just we have commitments to meet for downstream customers
Speaker Change: Okay, thank you very much.
Operator: We have no further questions in queue at this time. This does conclude the Ecovyst second quarter 2024 earnings call and webcast. Thank you for your participation, and you may disconnect at any time.
Speaker Change: Thank you.
Speaker Change: We have no further questions in queue at this time. This does conclude the EcoVist second quarter 2024 earnings call and webcast. Thank you for your participation and you may disconnect at any time.
Speaker Change: [inaudible]