Good morning. My name is Katie, and I will be your conference operator today. Welcome to the Ecovyst Second 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. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Gene Shiels, Director of Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to the Ecovyst Second Quarter 2022 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 end-use demand trends and our 2022 financial outlook. This information is subject to risks and uncertainties that could cause the actual results and the implementation of the company's plans to vary materially. Any forward-looking information shared today speaks only as of this date. These risks are discussed in the 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 at ecovyst.com. Now I'd like to turn the call over to Kurt.

Thank you, Gene, and good morning. We are extremely pleased with our standout results for the second quarter of 2022 as they reflect strong financial performance, as well as solid operational execution and continued progress in implementing our long-term strategies to deliver growth and enhance profitability. Ecovyst is a leading supplier of materials and services that are critical components in the delivery of the sustainable technologies. Our regeneration services enable the refining industry's production of cleaner, more efficient fuels, and we are a leading supplier of virgin sulfuric acid, which is used in a wide range of industrial applications, including mining, advanced materials and lead acid batteries. We provide Catalyst Technologies used in the desulfurization of traditional fuels, the expanding production of renewable fuels, the production of specialty polymers and in clean air technologies, reducing air emissions from heavy-duty diesel vehicles. The relevance of these end markets today is translating into favorable demand trends. And looking to the future, we believe these demand trends will remain positive as the expanding need for low carbon and clean air technologies provide significant opportunities for Ecovyst. During the second quarter, we continued to benefit from these favorable demand trends. Building upon the positive momentum we established in the first quarter, we delivered outstanding financial results. Second quarter sales, including our 50% share in our ZI joint venture, were up 45% year-over-year, while adjusted EBITDA of $73 million was up 38% compared to the year-ago quarter. Inflation impacts from geopolitical uncertainty and currency fluctuations have posed a challenge to many businesses. Through our strong customer contracts and alignment to critical segments, Ecovyst is well positioned to mitigate and even benefit from these challenges. Of significance, while the adverse impact of inflation remains a primary concern for management teams and investors alike, Ecovyst's ability to…

Thank you, Kurt. As Kurt noted, favorable demand trends in the first quarter carried over into the second quarter, setting the stage for our strong second quarter financial results. Total sales, including our 50% share in the Zeolyst joint venture were $261 million, up $81 million or 45% compared to the prior year. Volume growth from product and service demand continued, primarily driven by higher virgin sulfuric acid and Regeneration Services and our Ecoservices business and higher polyethylene, hydrocracking and niche custom catalyst in our Catalyst Technologies business. We continue to benefit from higher pricing, which has more than offset higher variable costs, including sulfur, natural gas and freight. Second quarter adjusted EBITDA was $73 million, up 38% year-over-year, with an associated margin of 28%. Turning to slide nine. I'll highlight the components of the adjusted EBITDA expansion compared to the second quarter of 2021. The increase in adjusted EBITDA was a function of higher sales volume as the demand trends continue in both of our businesses. In addition, while costs have increased, we have largely been able to pass through these increased costs to our customers. As a reminder, the increase in average selling prices associated with the sulfur cost pass-through does not impact adjusted EBITDA, but adversely impacts adjusted EBITDA margins. While the adjusted EBITDA margin decreased 140 basis points, this reflects a 450 basis point impact related to the pass-through of higher sulfur costs. Thus, excluding the $37 million sales impact associated with pass-through of higher sulfur costs, the adjusted EBITDA margin would have been 32.4% or a 310 basis point improvement compared to the second quarter of 2021. Turning to slide 10. Against the backdrop of robust demand for virgin sulfuric acid into a broad range of industrial applications and in light of high refinery utilization…

Thank you, Mike. Summing it up, Ecovyst delivered very strong financial results in the second quarter. We expect the favorable demand trends we have seen in the first half of the year to continue into the second half of the year. Our long-standing relationships with blue-chip customers and sales contracts that include take-or-pay provisions and inflationary protection as well as an order backlog provides us with good visibility for near-term activity levels. As a result, despite geopolitical uncertainties and inflationary pressures, our full-year outlook remains positive, and we remain on track to deliver solid year-over-year growth in sales and profitability. I believe our results for the first half of 2022 and our full-year expectations underscore the conviction that we shared in our Investor Day a little over a year ago. Specifically, that Ecovyst is uniquely positioned to deliver growth and compelling value to our shareholders. We have leading market positions, and we are a critical supplier to end markets where demand is increasingly driven by the need for sustainable technologies to provide cleaner air, renewable fuels, expand electrification or facilitate the circular economy with more efficient process for recycling plastics. We are successfully mitigating inflationary pressures through our contractual cost pass-through mechanisms and our pricing leverage, and we are generating strong cash flow providing for incremental debt reduction and an even stronger balance sheet, positioning us to capitalize on future growth opportunities. We look forward to providing you with updates as the balance of the year progresses. With that, we will ask the operator to open the line for questions.

[Operator Instructions] Our first question will come from Aleksey Yefremov with KeyBanc. Your line is now open.

Hello, everyone. This is Ryan on for Aleksey. Thanks for taking my question this morning. So I guess my first question is just around share repurchases for the balance of the year and then into 2023. I guess how should we kind of just think about the potential timing when we might be able to see those?

Yeah. Hi, Ryan, this is Mike. I think what we've explained before is that, we entered into this or announced this share repurchase program that we're going to use for a couple of different purposes. We don't really have timing on exactly when we'll use it, but what we do want to articulate is that we're going to use it to help drive investor returns. We saw an opportunity, certainly with where the share price was trading in the second quarter and took an opportunity to buy back around $9 million worth of shares and then again, some additional shares going forward. So we don't have any direct plans, but we'll keep an eye out for when we think it makes the most sense, given our capital allocation strategy.

Yes. I'll just add. Thanks, Ryan, for the question. I think we have really strong conviction that our stock is undervalued, right? So this is why you saw management purchase shares in the second quarter. So -- but we also believe we have a strong balance sheet, which gives us the flexibility to deploy our capital to boost shareholder value, which is exactly what we did.

Great. Great. Thanks for the answer there. And then I guess just sticking with capital allocation. I know you've spoken about bolt-on M&A before. I guess, just my questions are, are you still seeing some attractive targets out there? And how are valuations faring at this time? Obviously, it's kind of bit crazy. Thank you.

Yes. There remains a really good pipeline of bolt-on opportunity -- pipeline opportunities that we continue to watch. I mean, as we've talked before the Ecoservices side has a large list of opportunities really because it's spanning more in the industrial and sulfur product side. And then obviously, the Catalyst business is much more technology-driven, which gives us the ability to look in a diverse group of Catalyst Technology. So we continue to explore in that area. And really our capital allocation strategies as we talked before, gives us that ability to kind of do all of the above in terms of our stock repurchase fund, our really rich organic growth opportunities and continue to look at M&A.

Thank you. Our next question will come from John McNulty with [BLO] (ph) Capital Markets. Your line is now open.

Well, maybe not BLO, but BMO. Thanks for taking my question. I had a question on the Catalyst Tech business and the delays you were speaking to. I know 2023 was already kind of poised to be a pretty strong -- or enjoy a pretty strong uptick. I guess I'm wondering if the push out from '22, does that make 2023 even bigger? Or is it a function of, okay, it kind of pushes everything out and some of the stuff in '23, then actually gets pushed out to '24, and it just kind of lengthens this up cycle? I guess, how should we be thinking about that?

Yes. Thanks for the question. I think the way we look at it is, there's currently very high refinery utilization which is being driven by, obviously, strong demand and high refinery crack spreads. So as refineries look to conduct their changeouts, they've chosen this to kind of temporarily delay them. So we've seen some potential slippage to moving from this year to 2023. But I don't see -- you'll see that cycle will change all that much because they real data really don't have that kind of flexibility. And in theory, as they run the refineries harder, the catalyst will deplete itself faster. So we're just seeing is really -- what we believe is really being driven, honestly, just on high refinery utilization and crack spreads and the refining customers want to -- wanting to opportunistically run harder and delay the changeouts for short periods of time.

Got it. Okay. So it really just kind of compounds '23, if I'm understanding you right on that?

Yes, that's fair. I mean, we see that, yes, '23 as having more changeouts, for sure.

Got it. Okay. And then I guess there's a lot of questions around the macro and things potentially slowing. I guess, can you help us to understand how you guys are thinking about your playbook for any potential recessionary environment as it may pop up as we kind of get into the latter half of this year and early next year? I know, in general, you're pretty resilient, but are there certain levers that you would pull? Are there certain things that you would enact if things do get a little bit dicey?

Sure. Well, so Mike and I have had the advantage of being with the Eco businesses for 15-plus years, and we've actually experienced the prior downturn. So we really believe that, as you said, the businesses would remain fairly resilient in a recessionary scenario. So if you look at the Regeneration business, we feel that would remain strong due to the higher refinery utilization and minimal impact to gasoline demand. Similarly, on the virgin asset side, we don't think that would be significantly impacted because it services such a diverse group of end users, particularly those that are supporting low-carbon and sustainable technologies. So we don't see those slowing down. On the Catalyst side, for polyethylene catalysts, demand is projected to continue to grow, and we believe our unique catalyst solutions will continue to enable us to have a higher win rate with the new units that are planned to come on. And there's really a heavy backlog of heavy-duty diesel vehicles that was created by the supply chain issues over the past couple of years. So we feel that that's going to maintain real firmness demand for our zeolite pressure products. So we feel we're going to be pretty resilient on the demand side. And to answer your question on other things that we can do. I mean, we obviously -- again, we have that experience coming through a couple of these downturns. And there are certain levers that we can pull, where we can temporarily reduce costs or adjust our capital strategy.

Great. Thanks very much for the color.

Thank you. Our next question will come from Angel Castillo with Morgan Stanley. Your line is open.

Hello, guys. This is Stefan Diaz sitting in for Angel. Thanks for taking my question. First off, what's driving the free cash flow guide? Is that just a function of higher working capital due to higher-priced inventory? Or is there any other specific trend?

Yes. I think for our free cash flow guidance, we didn't change it from the previous guidance. So we still feel very strong that our cash flow generation this year will fall in that range. We certainly see some strength in the businesses that are going to drive EBITDA growth. But we're being a little cautious on any dividends coming out of the ZI joint venture for some of those delays that we talked about with the changeouts and lowering the ZI guidance. So we're very excited for our cash flow. I mean, we've demonstrated such strong free cash flow generation over the last several quarters. We talked earlier about how we delevered a full turn in leverage from 3.8 times at the end of September last year to 2.8 times. That's a lot of function of our strong cash flow generation and EBITDA growth. So we're very confident with our range that we have out there.

Perfect. Very helpful. And what do you see in terms of your order book thus far in the quarter, I guess, across both segments?

Yes. I think -- thanks for the question. I think the -- as Mike had alluded to in his comments, we continue to see strength in the Regeneration business for Ecoservices being driven by very high refinery utilization rates. I mean, for instance, the EIA just reported, Q2 refinery utilization was 92% versus the prior year at 89%, which is really being driven, obviously, on very high refinery crack spreads. The virgin acid business remains very resilient and with lots of demand coming from areas for the materials for, obviously, the sustainable and low-carbon technologies. Polyethylene catalyst momentum there continues with strong demand. And as we see, there is four additional units -- polyethylene units just coming online here in the US this year. And then finally, we talked a little bit about on the Zeolyst side. For hydrocracking orders, there's been a little bit of a delay on that just because of the strong refinery utilization, which is, obviously, positively impacting the Ecoservices business. But the other segments from our Zeolyst materials remains strong with pressure products for emission controls as we try to catch the backlog on the heavy-duty diesel vehicles. And renewables demands remain strong as well.

Thank you.

Thank you. Our next question will come from Laurence Alexander with Jefferies. Your line is now open.

It's Daniel Rizzo on for Laurence. I just want to know how we should think about in Catalyst how pricing works in kind of a deflationary environment? If things were to soften and some costs were to ease, I was wondering if you -- if there are price concessions and how rapid they are?

No. Generally, I mean -- so the Catalyst as opposed to the Ecoservices business, which kind of has mechanical pricing adjustments, our pricing in the Catalyst business is, as we stated in the comments, we really had forward looking -- we were very forward-looking on that and then put in place price increases at the end of 2021 and then further instituted energy surcharges. So we don't really -- in a deflationary environment, we don't really see the -- a quick drop in any kind of pricing or anything like that as we've been very judicious in how we've implemented the price increases.

But the energy surcharges would roll off? And would that happen, I mean, relatively quickly?

We would have to -- it would depend on the momentum of the energy. I mean currently, we don't really see the energy surcharges rolling off at this point because there remains, obviously, natural gas. And the other inputs remain at elevated rates.

Yes. And just to add, I mean, those energy surcharges are really to cover the higher costs, right? So if those start going down and the pricing goes down, it wouldn't impact our earnings profile.

Okay. And then you mentioned -- just not to whole bit, you mentioned M&A bolt-on opportunities. I was wondering if that's -- like looking into adjacencies within the Ecoservices like something a little different? Or it was just about really increasing density or footprint or just market share?

I mean, it really -- it's really all of the above. I mean, as you saw last year, when we acquired the Chem32 business, that was obviously more of an adjacent business that fit very well with Ecoservice really, based on the sulfur chemistry that they use to apply to the catalyst for the catalyst activation. But it also has a strong overlap with the refinery service component of Ecoservices. So to answer your question, it could be either or really. I mean there's lots of adjacencies in that Ecoservices segment, where things with sulfur are obviously the service component for refineries.

Thank you very much.

Thank you. Our next question will come from P.J. Juvekar with Citi. Your line is now open.

This is Patrick Cunningham on for P.J. Good morning, everyone. So there seems to be some major tailwinds supporting the build-out of lithium and EV battery supply chain here in the US. So I'm curious to think of how are you thinking about this in your sort of medium to long-term growth strategy for virgin sulfuric acid? Are you looking to participate more in lithium? Or will this be more of a copper play? Thank you.

Yes. Well, we participate pretty heavily in the mining segment right now, which is -- we obviously have the two locations out on the West Coast as well as our Gulf Coast assets, which kind of form a triangle really, as you'd say around the heavy mining sector, which is, obviously, doing not only copper but borates and then a little bit of lithium as well. So as time goes on, I mean, we agree there's going to be a strong demand for mining, not only for lithium but copper and other minerals that are, obviously, going to be in extremely high demand to fuel those low-carbon technologies. So as the -- as that demand rolls out, we're looking at doing -- at always looking at debottlenecking opportunities, not only just on production debottlenecking opportunities but logistic debottlenecking opportunities, which we've recently executed at the Houston plant, where we doubled our rail capacity, which gives us more of an ability to ship into that sector. So as that grows out, we're going to continue to look for opportunities to expand our production and services to meet it.

Great. Thank you.

Thank you. Our next question will come from David Silver with CL King. Your line is now open.

Okay. Thank you very much. I had a question maybe about the guidance that you provided on slide 15. And in particular, you increased the revenue guidance $20 million on each end for GAAP, but you did reduce it somewhat on the Zeolyst JV. So a couple of questions, but on the GAAP side, last quarter when you raised your GAAP sales guidance, you attributed it all to sulfur. This time, I'm just wondering how that incremental $20 million breaks down? Is that just merely more pass-through? Or is that representing an increase in demand? And then secondly, maybe just a comment on the reduced revenue guidance for Zeolyst joint venture. Thank you.

Yes. Sure, David. Thanks for the question. So on the sales side, we have seen some strong overall pricing, not just with the pass-through of sulfur, but we've benefited from some of the other inflationary aspects. We also see some volume strength as well. So a lot of that's built-in. We do anticipate perhaps that sulfur might be easing a little bit from a price standpoint, but it will really depend. And as we've talked about before, whether sulfur goes up or down, it really doesn't impact our results, it just impacts the margin. So we're very, very comfortable that we're continuing to see strong demand resulting in higher volumes as well as strong pricing factors driving some of that. On the Zeolyst side, that lowering really has to do with what we talked about earlier with some deferrals and delays in some of our products that we see just going into 2023. But again, nothing that impacts our overall demand and strength in those markets. It's just more of the timing aspects that Kurt had articulated earlier.

Okay. Thanks for clarifying that. And I apologize, I’ve been jumping between two multiple calls here. Sorry about that. Last question would be, maybe for Mike, and it's kind of a question, I guess, clarification about wording or definitional aspects a little bit. But -- so first off, I'd say, congratulations on the net debt to trailing 12-month EBITDA getting below 3 times. I think that's probably a first for your company, so kind of a milestone in my view. But looking at that, going forward, I mean, you talked about balanced capital deployment. And I'd like to just hone in on that phrase just a little bit. So there's the net debt EBITDA formula, which is a ratio. And then there's maybe just net debt or gross debt or however you look at it. And I was just wondering, how you're viewing the idea of balanced capital deployment in terms of your overall debt? In other words, are you going to be looking to reduce the net debt along with the share repurchase activity? Or is this the case where for your purposes, the ratio the net debt trailing 12 months EBITDA is the priority kind of ratio that you're tracking? Thank you.

Yes. Sure, David, and thank you. Yes, we are very excited for the fact that we've gotten below 3 times. I think that's definitely a milestone for us. And again, as Ecovyst is different than PQ, it's becoming very evident in what we've shown over the last year. We're getting to the one-year milestone since we sold the chemicals business in a few days. And so the profile of Ecovyst is really strong, right? We talked about the cash generation and the reduced leverage. To answer your question, the net leverage calculation includes cash, right? So we have about $150 million of cash on hand. And instead of using it to pay down debt, we want to keep it available as we start to deploy some of our capital allocation strategies, right? So one of the things we talked about is potential M&A from a bolt-on acquisition standpoint, as well as participating in the buyback program, for which we started the process, but we may end up using it for some other aspects in the buyback, including private transactions and such with our sponsors, as we've talked about in the past. So we want to maintain that cash on hand and use it effectively over the coming months, quarters. So we do look at net leverage as the right metric as opposed to paying down debt and then losing that availability to do some of our capital allocation strategies.

Very helpful. Thank you.

Thank you.

Thank you. Our next question will come from Hamed Khorsand with BWS Financial. Your line is now open.

Hi. So first off, I just wanted to ask about your commentary on the catalyst business of product mix being unfavorable, and what that means? And is that just a one-time event? Or how do you manage that?

Yes, sure. Yes, we do look at that as more of a one-time. I mean the unfavorable mix is customer product driven. We did see some margin -- a little lower margin than we expected for the quarter. However, we're very excited about how we expect the rest of the year to turn out. We do see a lot of strength in the demand for our products. We see easing of some of the challenges around supply chain, which again, some of those costs were built into the quarter which were more one-time costs. So for the remainder of the year, we're very confident that, that business will continue to grow. And as I guided to earlier, we talk about the business being a stronger second half than the first half for the Catalyst business as it continues to grow into the second half. And margins, we expect to be a lot stronger. So to answer your question, yes, it's a little more of a one-time for the quarter.

And could you just talk about the sales opportunity as far as being able to add customers? Is that still capability that you have right now in the marketplace from a competitive standpoint? And how do those renewals come up as far as being able to capture new customers?

Sure. I mean we -- I spent basically my first 90 days as CEO traveling around to the various Ecovyst sites. And I could tell you really meeting with the colleagues and the customers and our partners, we have an even greater conviction in the company's ability to really innovate and execute our strategy and add new customers and grow over the long term. So I mentioned, we've got ability in Ecoservices to continue to debottleneck, just not on the production side as well as on logistics as well. The Catalyst business continues to grow as we mentioned. Our really unique customized solutions, particularly in the polyethylene segment allows us to continue to really beat the trend line growth in that area as we have a higher adoption rate. And really, the strength in our market segments as contracts with existing customers come up for renewal, really gives us the ability to negotiate those on more favorable terms.

Okay. Thank you.

Thank you. We have no further questions in the queue at this time. This does conclude the Ecovyst Second Quarter 2022 Earnings Call and Webcast. Thank you for your participation. You may now disconnect.