Ecovyst Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2023

Key Takeaways

  • Strong 4Q and full-year 2022 results: Q4 sales rose 8% to $223 M with adjusted EBITDA up 9% to $69 M, while full-year adjusted EBITDA jumped 22% to $277 M, exceeding prior guidance.
  • Robust cash generation and shareholder returns: EcoVist generated $146 M of adjusted free cash flow in 2022, repurchased $137 M of shares, reduced net leverage to 2.8x, and ended the year with $171 M of liquidity.
  • Winter Storm Elliott headwind: Weather-related downtime in Q4 constrained production and is forecast to slash Q1 2023 adjusted EBITDA by $7–8 M, driving a ~30% decline versus last year’s first quarter.
  • 2023 outlook: Management projects sales of $760–790 M (≈7% growth ex-sulfur pass-through), adjusted EBITDA of $295–325 M, and free cash flow of $115–130 M, despite Q1 disruptions.
  • Commitment to sustainability and growth: EcoVist earned a gold EcoVadis rating (97th percentile), is targeting organic expansion in low-carbon catalysts and sulfuric acid for mining and chemical markets, and is focused on R&D aligned with green infrastructure trends.
AI Generated. May Contain Errors.
Earnings Conference Call
Ecovyst Q4 2022
00:00 / 00:00

There are 8 speakers on the call.

Operator

Good morning. My name is Shelby, and I will be your conference operator today. Welcome to Ecovist's 4th Quarter 2022 Earnings Call and Webcast. Please note today's call is being recorded and should run Approximately 1 Hour. Currently, all participants have been placed in a listen only mode to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. To Gene Shields, Director of Investor Relations. Please go ahead.

Speaker 1

Thank you, Shelby. Good morning and welcome to Ecovist's 4th quarter and Full Year 2022 Earnings Call. With me on the call this morning are Kurt Bidding, Ecovist's Chief Executive Officer and Mike Pien, Ecovist's 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 is forward looking information, including information about the company's financial and operating performance strategies, our anticipated end use demand trends and our 2023 financial outlook.

Speaker 1

This information is subject to risks and uncertainties that could cause actual results in 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 in presentation materials posted in the Investors section of our website atecovist.com. Now I'd like to turn the call over to Curt Bidding.

Speaker 1

Curt?

Speaker 2

Thank you, Gene, and good morning. First, I want to take the opportunity to thank all of my colleagues at EcoVist 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 Q4, the favorable demand fundamentals we experienced throughout the 1st 9 months of 2022 continued, providing for a strong finish to the year despite the disruption associated with Winter Storm Elliot late in the 4th quarter. During the Q4, high refinery utilization in the U.

Speaker 2

S. Continued to translate into strong demand for our regeneration services. In addition, underlying demand for virgin sulfuric acid also remained firm, although 4th quarter sales were below the extremely high level of sales we experienced in the quarter of 2021. This was due in part to the impact of customer downtime as well as our downtime and related production constraints rising from winter storm Elliott, which limited our ability to fully satisfy the attractive spot demand in the quarter. In our Catalyst Technologies business, during the Q4, we saw increased demand for renewable fuel and hydrocracking catalysts.

Speaker 2

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 Q4 of 2022 were up 8% compared to Q4 2021 and consolidated adjusted EBITDA of $69,000,000 was up 9% versus the year ago quarter. In light of the strong 4th quarter results, We delivered full year 2022 adjusted EBITDA of $277,000,000 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 $63,000,000 repurchase of stock in conjunction with another successful secondary offering. Through the offering, we repurchased 8,000,000 of the shares offered by a private equity sponsor, helping to reduce their ownership of EcoVist to less than 10%.

Speaker 2

On a full year basis, strong cash generation facilitated the reduction of our net debt leverage ratio to 2.8 times, While at the same time, we increased shareholder value with $137,000,000 worth of share repurchases. We ended the year with a strong balance sheet and with $171,000,000 of liquidity positioning us well to Growth Opportunities in 2023. In terms of non financial achievements, in 2022, we continue to position EcoVist for future growth as a key process improvement is of 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 Ecovadis, Which places EcoVist in the 97th 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.

Speaker 2

We expect 2023 to be another year of growth for EcoVist as we build upon our successes in 2022. As noted, we believe the demand fundamentals that contributed to our 2022 results will continue this 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 as a leading supplier of virgin sulfuric acid to a broad range of industrial applications, Eco Services is positioned for growth in 2023. Our regeneration services are essential to our customers' production of alkaline, a high value gasoline blending component.

Speaker 2

We expect a favorable domestic demand for refined products in 2023 In concert with increasing needs for higher octane, cleaner burning premium fuels and strong export demand, we'll continue to to increase in 2023 with positive demand fundamentals for many industrial end uses 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 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 bores 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 In terms of other end uses driving demand for sulfuric acid, Eco Services is the largest producer of oleum, a supersaturated sulfuric acid used in the production of nylon and engineered plastics for construction materials in coatings and packaging applications and in automotive applications for vehicle light weighting.

Speaker 2

We also provide electrolyte grades used in petrochemical and chemical Semiconductor production, lead acid batteries and water treatment applications, all of which are expected to drive incremental demand for virgin sulfuric acid 2023. For our catalyst activation business, we expect another strong year for CHEM32, a provider of off-site catalyst activation services. As a reminder, 1032 is a global provider of ex situ activation services, which is preferred over on-site activation because it reduces the customer's resource requirements and downtime. We expect CHEM32 to benefit this year from growth in renewable fuel production capacity and change outs as well as from sales and change outs of hydroprocessing 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 sulfuric acid producer with the permits in place to treat hazardous waste streams regulated by RCRA, the Resource Conservation and Recovery Act, We are uniquely positioned for additional opportunities to serve the refining and petrochemical industries in the Gulf Coast.

Speaker 2

Our treatment services are a compelling alternative long haul trucking and deep well disposal for our customers and Eco Services 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.

Speaker 2

Over the past few years, our custom polyethylene catalyst solutions, which We have had strong 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 2023, we expect continued demand growth in food and applications with stronger overall demand in the back half of the year as export demand into China and Europe improves. For hydrocracking catalysts, we expect strong sales growth in 2023. The hydrocracking catalysts produced by our joint venture Zeolyst Give refiners the ability to hit desired yield targets to maximize unit profitability. As we have discussed previously, we believe sales of hydrocracking catalysts 2022 were impacted by turnaround delays as our refining customers sought to maintain lofty operating rates in the face of extremely high refining margins.

Speaker 2

As a result of these turnaround deferrals, we believe some catalyst sales were pushed into this year. In addition, we expect refinery utilization in the U. S. Will remain elevated in '23, supported by low product inventories and robust export demand to Latin America and Europe, where refined product production has been adversely impacted by the Russian Ukraine Conflict. In 2022, our sales of emission control catalysts were limited by a significant This year, we expect that the improvement in chip supply and increasing production and delivery against the significant backlog be a positive contributor to Catalyst Technologies this year.

Speaker 2

We believe the ongoing expansion in renewable fuel capacity and production that I referred to as being positive for our Chem32 business this year will also translate into stronger sales in the ZI joint venture. Renewable fuel production, Specifically, renewable diesel production and the nascent production of sustainable aviation fuel is being driven by the need to Carbonized 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 Directive in Europe and the Inflation Reduction Act in the U. S.

Speaker 2

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 SAF 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 uses expected to grow in 2023, you may have noticed common threat. All are associated with the need for more sustainable technologies. We believe EcoVist remains uniquely positioned to Help meet the world's increasing need for green infrastructure and sustainable technologies.

Speaker 2

As a key supplier of products and services that are essential to the advancement of low carbon Technologies. A majority of our sales address customer and consumer needs for more sustainable products and services. Broad sustainability objectives such as cleaner air, reduced vehicle emissions, increased electrification and the circular plastics economy, all provide opportunities for EcoVist to leverage its technical expertise and product portfolio. 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 and D investment is in product innovation linked to sustainability.

Speaker 2

However, our commitment to sustainability extends beyond our product and service offering. In terms of the environment, we have 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 EcoVist, we reinforced a culture of safety continuous improvement through our HS and E Perfect Days initiative and through the principles of the American Chemistry Council's 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 that we received from EcoVadis in 2023, which places EcoVist in the 97th percentile of all companies rated in our peer group.

Speaker 2

At this time, I'll turn the call over to Mike Fean for a more detailed discussion of our 4th quarter and full year financial results. Thank you, Kurt. Continued favorability of market fundamentals during the 4th quarter provided the backdrop for another solid Total sales for the 4th quarter, including our 50% interest in the Zillow joint venture were $223,000,000 up $16,000,000 or 8% compared to the Q4 of 2021. The increase in sales was driven by continued pricing benefits in our Eco Services business associated with the contractual price increases arising from higher labor, energy and freight costs. In contrast to prior quarters, the pass through of sulfur costs had a minimal impact on sales in the 4th quarter.

Speaker 2

4th quarter adjusted EBITDA was $69,000,000 Up 9% compared to the Q4 of 2021, with the pricing benefit partially offset by higher variable costs, largely associated with inflation, lower sales volume in Silica Catalyst and higher turnaround cost in Eco Services. Total sales for the full year, including the Zeolyst Joint Venture, were $953,000,000 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 and Catalyst Technologies. Of the increase in sales, dollars 85,000,000 is associated directly with the pass through of higher sulfur costs within the Eco Services business, which negatively impacted margins by 280 basis points. The strong pricing and volume growth resulted in adjusted EBITDA growth of nearly $50,000,000 or 22%. In addition, we generated $146,000,000 of adjusted free cash flow during the year, leading to a cash conversion ratio of just under 80%.

Speaker 2

And after deploying $137,000,000 of total for share repurchases, we reduced our net leverage ratio by half a turn to 2.8 times. Moving to the next slide, we'll take a deeper look into the drivers of our 4th quarter adjusted EBITDA growth. The increase in 4th quarter adjusted EBITDA was primarily driven by $30,000,000 of pricing benefits. These price increases were largely associated with index pass through of higher labor, energy and freight costs in Eco Services, as well as price increases through the year in Catalyst Technologies. These price increases more than offset the higher variable costs driving another quarter of positive price to cost ratio.

Speaker 2

In addition, the quarterly results were impacted by lower virgin sulfuric acid sales, driven by lower spot sales, planned customer turnarounds and the impact of winter storm Elliott as well as an unfavorable mix impact in silica catalysts. Turning to Slide 12. 4th quarter 2022 sales for Eco Services was $160,000,000 up 12.5% compared to the Q4 of 2021. Sales increase was principally driven by higher pricing in regeneration services and virgin sulfuric acid, including the contractual pass through of higher labor, energy and freight Demand for regeneration services continued with higher sales volume compared to the Q4 of 2021. While market demand for virgin sulfuric acid remained strong in the 4th quarter, sales volume was down compared to the exceptionally strong sales volume In the Q4 of 2021, due in part to the adverse impact of planned customer turnarounds, disruption associated with Winter Storm Elliot and lower spot sales.

Speaker 2

4th quarter Adjusted EBITDA for Eco Services was $54,000,000 up 4% compared to the Q4 of 2021, with the sales benefit being partially offset by higher turnaround costs of approximately $3,000,000 compared to the Q4 of 2021 and the impact of winter storm Elliott. While the storm had a modest impact on 4th quarter results, it will have a more material impact on 1st quarter results due to the timing of repair costs and lost customer sales. We estimate the storm will have an impact on the 1st quarter adjusted EBITDA of approximately $7,000,000 to $8,000,000 The 4th quarter 2022 adjusted EBITDA margin for Eco Services was 34%, Down compared to the Q4 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 Zeolyst Joint Venture of $63,000,000 was down approximately 2% renewable fuel application and modestly higher sales of hydrocracking catalyst.

Speaker 2

Silica catalyst sales for the 4th We're $23,000,000 down approximately $5,000,000 compared to the year ago quarter, primarily due to unfavorable mix and some order timing of polyethylene catalyst. 4th quarter adjusted EBITDA for Catalyst Technologies was $20,000,000 down $3,000,000 compared to the Q4 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.

Speaker 2

In addition, over the course of 2022, we incurred elevated ocean and freight costs associated with the logistical delays, which we believe are largely non recurring. Turning to the next slide, a few comments on leverage and liquidity. Throughout 2022, our strong cash generation We continued to provide for significant capital allocation flexibility. With free cash flow of $146,000,000 and a cash conversion ratio of nearly 80%, we were able to comfortably fund our capital expenditure programs and use $137,000,000 of cash to increase shareholder value through our share repurchases, while reducing our net leverage ratio from 3.3x at the end of last year to 2.8x at the end of this year. At year end, we had total liquidity of 100 dollars.

Speaker 2

We believe our strong liquidity position and strong cash generation allow us continued flexibility in our capital allocation strategy. Turning to Slide 15. In conjunction with the secondary offering in November, we repurchased 8,000,000 shares of our common stock sold for $63,000,000 including repurchase activity in the 2nd and third quarters of last year through open market repurchases and a secondary offering in August. For the full year, we repurchased 16,500,000 shares for $137,000,000 Our balance sheet remains strong with only one tranche of debt maturing in 2028. 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.

Speaker 2

Turning to our full year 2023 outlook on the next slide. 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 $760,000,000 $790,000,000 This reflects estimated pass through impact of lower sulfur costs of approximately $95,000,000 Adjusting for the sulfur pass through impact, sales growth, including the Zillow's joint venture sales would be 7% assuming the midpoint of the guidance. In Eco Services, adjusting for the estimated $95,000,000 of pass through software cost impact, We expect mid single digit growth in sales despite the lower volume resulted from winter storm Elliott. For Catalyst Technologies, We expect sales including our proportionate share of the Zeolyst Joint Venture sales to reflect low double digit growth in 2023.

Speaker 2

For silica catalysts, we expect sales of polyethylene catalysts 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 Zeolyst Joint Venture, we expect sales to be up 10% to 15%, driven by strong growth in hydrocracking and emission control catalysts, up on a high teens percentage basis and higher sales of renewable fuel catalysts up on a mid teens percentage basis. By a growth of approximately 6% at the midpoint compared to 2022. However, this guidance incorporates our expectation That Winter Storm Elliot will have an adverse impact on 1st quarter adjusted EBITDA of approximately $7,000,000 to $8,000,000 Excluding the impact of winter storm Elliott, we would therefore have expected 2023 adjusted EBITDA 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.

Speaker 2

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% 15%. Given our 2023 expectations for adjusted EBITDA, we expect adjusted free cash flow to be in the range of $115,000,000 to $130,000,000 While the increase in EBITDA 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 $60,000,000 to $70,000,000 in 2023 compared to 2022 reflects higher growth capital primarily in our catalyst business. And for interest expense, we are projecting a range of $40,000,000 to $50,000,000 reflecting higher rates in 2023.

Speaker 2

Having provided an outlook for the full year of 2023, which reflect our positive growth expectations for both Eco Services and Catalyst Technologies, I want to provide some specific guidance for the Q1. We expect Q1 2023 adjusted EBITDA will be down approximately 30% compared to the Q1 of 2022. In Eco Services, as previously noted, we expect that Winter Storm Elliot will have a negative impact on 1st quarter adjusted EBITDA of approximately $7,000,000 to $8,000,000 In addition, we expect a further impact related to an extended turnaround at one of our sites during the Q1. 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 Q1 As our continued growth is expected to be reduced by higher planned turnaround cost at one of our larger units and the impact associated with planned customer turnarounds during the Q1. Therefore, we anticipate Eco Services adjusted EBITDA will be approximately 20% lower compared to the Q1 of 2022.

Speaker 2

For Catalyst Technologies, While we are expecting full year earnings growth of 10% to 15%, including stronger sales of hydrocracking catalyst, We expect order timing to be a factor in the Q1. For hydrocracking catalysts, we searched some of the largest refineries Individual orders are significant in dollar terms. Some orders can be larger than $10,000,000 For the Q1, we expect lower sales of hydrocracking and specialty catalyst, driven by some large orders that are being shipped in the Q1, but will likely be recognized in the Q2. The order timing will not impact full year growth expectations. As a result, We expect adjusted EBITDA in Catalyst Technologies to be off approximately 50% compared to the Q1 of 2022.

Speaker 2

This will result in EcoVist's adjusted EBITDA to be off approximately 30% compared to the prior year Q1. While our Q1 earnings are anticipated to be light, driven by sales timing in 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 Kirk for some closing remarks. Thank you, Mike. We are extremely proud of the results we delivered in 2022.

Speaker 2

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 Elliot late in Q4, 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 EcoVist their contributions that made the successes of 2022 possible. We entered 2023 with solid underlying business momentum. Despite a degree of economic uncertainty, we maintain solid growth expectations for the year.

Speaker 2

We expect Eco Services to continue on its long term growth trajectory this year. While our first quarter results will reflect Active winter storm Elliott and a significant planned turnaround, 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.

Speaker 2

And this will continue to enable our flexible capital allocation strategy, 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.

Operator

We'll take our first question from John McNulty with BMO.

Speaker 3

Yes. Thanks for taking my question. Maybe the first one On the winter storm impact that you're calling out for the Q1, the $7,000,000 to $8,000,000 or so, can you help us to understand how much of that Hi, the repair and maintenance costs versus the volume loss. And then on the volume loss portion, is that something you can make back As we kind of progress through the year or is it, hey, look, you either have it and you can produce it and deliver it or you can't and they go somewhere else. I guess, how should we be thinking about that?

Speaker 2

Hey, John. Thanks for your question. This is Mike. I would estimate that roughly half of the impact is lost Sales compared to half being more repair maintenance. We have built in any catch up into our guidance for the year.

Speaker 2

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

Speaker 4

year. Got it. Got it.

Speaker 3

And then maybe just a follow-up. So Early on in your prepared remarks, you kind of walked through all the positives and admittedly, I mean, it sounds like everything kind of A bunch of positives going forward from end market demand apparently being kind of the big driver of it. I guess the 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 for say some of the catalyst business that you're only guiding to 6 percent EBITDA growth is kind of the midpoint of the range. So are there other 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 muted EBITDA growth.

Speaker 3

So maybe can you help us to think about maybe what other bad guys might be out there that we should be considering?

Speaker 2

Yes. I mean, John, this is Kurt. Thanks for the question. No, I mean, we're really confident in the growth, as you said, for the major segments. When you look at When you look at Catalyst Technologies, polyethylene, renewables, hydrocracking, all showing low double digit type growth.

Speaker 2

And then when you go over to Eco Services, it's really that it's that storm impact in the Q1. So regeneration services continue to have strong demand with strong refining economics, strong refining utilization in the quarter and really projected through the year and then really and good underlying demand growth really for virgin sulfuric acid. It's really That virgin acid kind of setback in Q1 that's really related to that storm and the lost volume and the maintenance costs

Operator

and we'll take our next question from Aleksey Yefremov with KeyBanc Capital Markets.

Speaker 5

Thanks and good morning everyone. I wanted to ask you about Catalyst Technologies. The high watermark for EBITDA was $108,000,000 in 2019 and every subsequent year was below that level in 'twenty two you did 78,000,000 How do you view that 108 level? Was this unsustainable or was this something that could be target that you could achieve and exceed in the long run and when could that be

Speaker 6

if that's the case?

Speaker 2

Yes. Hi, Alevsky. Thanks for the question. So just referring back to that year 2019 And Catalyst Technologies was really a high watermark really for hydrocracking catalyst. It was a kind of a peak Change out year and then our niche custom catalysts as well had a very strong year.

Speaker 2

When we look at catalyst technologies 2023. The growth there is really being driven by the major segments in the business. Again, polyethylene, Renewables, hydrocracking and emission controls are all had really solid growth in those in their secular trends. 2022, I will say, was impacted by a couple of things, right? We said there was a high refinery margins and really high utilization in those refineries delayed turnaround.

Speaker 2

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 You're coming into an era where there's very high utilization rates. So we definitely know 2022 was impacted by those high utilization rates

Speaker 3

in hydrocracking.

Speaker 2

And then we had the spike in energy costs mid year and then really as Mike talked about some one time freight interplant logistics that will review non recurring. So we view that most of Those headwinds that we saw in 2022 are behind us and we really feel that the segment is going to be very healthy in

Speaker 5

And thanks, Avison. Maybe as a follow-up to how would you look at 2023 EBITDA in this segment, is this somewhat below normalized level above or at normalized kind of could you Frame it relative to the cycle of margin normalization and maybe the catalyst reload cycle at your various customers.

Speaker 2

Yes. I mean, I'll start just on really maybe on the catalyst cycle reload. I mean, I think Again, I think we see strong growth. I mean, we see a low double digit growth at least in all The major segments there. I 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.

Speaker 2

So as we Saw some catalysts hydrocracking sales push from 2022 into 2023. That could very well happen as well into 2023 and 2024. And so that cycle is a little bit more of 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. I didn't I left out renewable fuels as well, renewable fuels production growing at roughly 20%

Operator

We'll take our next question from P. J. Juvekar with Citi.

Speaker 5

Hi, good morning. This is Patrick Cunningham on for P. J. You referenced your geographic footprint in Virgin relative The heavy mining industry and I know lithium is a relatively small part of your business and just a small part of lithium supply in the U. S.

Speaker 5

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, what might be the differences, let's say, relative to copper or borax?

Speaker 2

Yes. So thanks for the question, Patrick. That's a really good one. So as The outline we do have we like to say we have our plants kind of triangulate the mining sector in the U. S.

Speaker 2

Right between The Northern California, Southern California and the Gulf Coast location. 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, bores, copper uses traditional copper leaching uses around 3 to 5 tons of sulfuric acid Per ton of copper produced. Lithium is much higher in the realm of 20 tons. So as you look at the lithium production that's projected or really needed to kind of power The electrification and green infrastructure going forward, it's going to require immense amounts of sulfuric acid, much more than copper or borates, It just uses a much higher magnitude of sulfuric acid. So we expect that will continue to drive demand for sulfuric acid going forward.

Speaker 5

Great. Thanks. And then just on the higher CapEx number, which Parts of the Catalyst business is that being directed? And would I be correct in assuming that you might have a bias towards The catalyst business in terms of potential bolt ons? Thanks.

Speaker 2

Yes. That's 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 well as in our Zeolyst Joint Venture that we're continuing to look at, There is something that we're continuing to believe that there's strong growth where we will continue to invest organically In the catalyst business.

Speaker 2

Yes, I think we if it looks in terms of inorganic growth, we look at EcoVist, we like all the segments that we serve, right. I mean, we deliver unique and customized products and services related to blue chip, Refining, petchem, mining and catalysts and major industrial consumers. And we really like these segments. So any opportunity To expand our offerings in these areas or adjacent to 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, how our customer relationships In either of the businesses, not just Catalyst Technologies.

Speaker 5

Great. Thank you.

Operator

We'll take our next question from David Begleiter with Deutsche Bank.

Speaker 4

Thank you. Kurt, you touched on cap Allocation this year, but thinking about the use of the free cash for debt pay down, what can you talk about how much we should expect or are there priorities Besides that reduction this year?

Speaker 2

Yes. So thank you for the question. So We'll go step back really. 2022, we've repurchased about $137,000,000 worth of stock, increasing the value to the shareholders. So we're really we're proud of that fact we're able to execute that and maintain our net leverage ratio at At 2.8x, it really reduces to the and then maintain it at that 2.8x.

Speaker 2

So as 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 And grow them both organically and inorganically as we think there's great opportunities there. And then secondly, we also have that Board share repurchase authorization that I just mentioned that we continue that we can continue to use to deliver value to shareholders.

Speaker 4

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?

Speaker 2

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 logistics assets. We have the ability to debottleneck and remove restrictions on our existing plants and push more, I guess more sulfur capacity through the plants to generate more sulfuric acid. And we love the sulfuric acid industry.

Speaker 2

We've been in it for 120 years, so we're always looking to grow our production capacity where we can.

Speaker 5

Thank you.

Operator

And we'll take our next question from Hamed Khorsand with BWS.

Speaker 4

Hey, good morning. Could you just elaborate on given the reduced production in Q1, Are you looking to ramp up production beyond nameplate capacity to catch up with sales? How are you going about Landing new customers when you have this kind of headwind in Q1 as far as production is concerned?

Speaker 2

Yes, Hamid, thanks for the question. So the production we service our customers really through a network of of facilities. So when we have turnarounds and we have outages that are caused by weather related events, we continue to supply with our existing network Capacity. The utilization across our network as well as the sulfuric acid market in general is very high. So contracts in that business tend to be longer term.

Speaker 2

So when we look at our customer base. We're generally in positions on Virgin Asset with customers anywhere from 1 to 7 years. So We look at those as those customers sign up with us for a long period of time. We make commitments to them over a 1 to 7 Over a 1 to 7 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.

Speaker 4

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 still a short term event?

Speaker 2

Well, I mean, I think if you look at the refining utilization rates that are projected by the EIA, They are projected really to continue to maintain high rates in the medium term. So again, We do long term agreements with our customers, refining customers, and those continue and they have 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 are going to be high utilization rates. I would also like to highlight as well is that it's not just utilization, it's the Alkali, the value of alkali continues to be very high, right, which is what we're linked to. So refineries, despite whatever utilization rates are, They're always trying to push their alkali units because it's one of the highest margin products that the refinery produces.

Speaker 2

It's needed in gasoline 4th and to produce premium gasoline. Okay. Thank you.

Operator

And we'll take our next question from Laurence Alexander with Jefferies.

Speaker 7

Hi. This is Dan Rizzo on 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?

Speaker 2

That's a hard question to answer for expansion. We look at a brownfield expansion as we debottleneck equipment in our plants all the time. So if you look at a sulfuric acid plant, it's Made up of numerous pieces, I would say, of modular type equipment that as those pieces of equipment age and we replace and 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 product and upsizes, I guess, the production capacity of those plants. So it's hard to put a cost on a brownfield because that's kind of what we look at is We debottleneck certain units of the sulfuric plant. Greenfield plants Obviously very expensive and if we were going to go in a multiyear project to permit and construct.

Speaker 2

So If we were going to go down that path, obviously, as we've done in the past with our other capacity expansions or other major investments, we would Tying it to specific customer or specific segment demand.

Speaker 7

All right. That's very helpful. And then just one other question. Just broadly speaking, if we were to hit a recession in the U. S.

Speaker 7

By the second half of this year into 2024, could you still hit your The low end of your outlook, your EBITDA outlook?

Speaker 2

Yes, I think Mike and I have been with this Have been with the legacy businesses here, I think since 2006. So we've had the opportunity, been through a couple of the economic down cycles and you look at all the you look at the segment trends driving most of our businesses Really in refinery, the regeneration business is being driven by again utilization that demand for alkali which we see will continue to be strong. Virgin acid, another large product line of ours, that's been really driven by things like Green Technologies and 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.

Speaker 2

We talk Mining and the green technology is really transitional. And so even if there would be a downturn, we believe those will continue to be strong because there's heavy investment, both private and government going into those areas. And for Catalyst Technologies, a lot of the same thing. Our high density polyethylene catalyst sales are continuing to support light weighting of vehicles and packaging and film as well as the other things like Renewable fuels and hydrocracking which 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 2020 downturns

Operator

question. We'll take our next question from David Silver with CLK.

Speaker 6

Yes. Hi. Thanks very much. I had a couple of questions. I just wanted Start clarification, I think, on the tax rates.

Speaker 6

So just as perspective, but I think in 2022, We started out thinking the tax accrual rate was going to be closer to 30%, and 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 4th quarter. Could you maybe comment on that? And then in particular, what kind of range is reasonable For using for our 2023 forecasts. Thank you.

Speaker 2

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 20s. 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.

Speaker 2

S, which She now 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-20s on a run rate basis. I think our adjusted tax rate was around 23% or 24% this past quarter. So we probably expect it to be somewhere in the mid-20s on a go forward basis.

Speaker 6

Okay. Thank you for that. My next question would be about the catalyst for renewable Fuels and I'm looking at the very bottom slice of Slide 7. But you talked about the opportunities in sustainable aviation fuel and I think you used the word nascent. But the part of your Renewable Fuels business that goes into, I don't know, the spent cooking oil or the mixed feedstocks.

Speaker 6

As I recall, I mean, that's a very nice profit making opportunity for you just due to the demands on the catalyst and 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 you're talking about the demand for your product Rising like 50% in the next year. And what does Ecovist have To be fully prepared to kind of exploit that unusual growth opportunity. Thank you.

Speaker 2

Yes. Thanks for the question. So when you look at renewable fuels and the new production units Coming online are really being built to service. The 2 kind of segments when we talk about renewable diesel, which Again is a drop in 1 for 1 replacement of regular road, call it regular ultra sulfur, ultra low sulfur road diesel. The next kind of next step of those processes and what a lot of the new units are being designed are also to make sustainable aviation fuel.

Speaker 2

So as we look forward into kind of the 2025 to 2026 time period, we see more sustainable aviation fuel being Opted where airlines are going to start to blend up to 50% of that sustainable aviation fuel into their fuel blends to start to Try to achieve their low carbon technology. So that's really as you look down the road, you see Renewable diesel taking share of the diesel market, but then more I think the larger share will come really from aviation where it can be blended up into a 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 and Our zeolites that we sell into that industry are coveted for their purity and their performance. And we partner with really the leaders, the technology in those areas that are capturing A lot of those new units. So we're positioning ourselves with our really zeolite expertise to benefit from the growth in that segment going forward.

Speaker 6

Okay. Thank you very much.

Operator

We have no further questions in the queue at this time. This does conclude the Ecovest 4th quarter and full year 2020 2 Earnings Call and Webcast. Thank you for your participation. You may disconnect at any time.

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