Good morning. My name is Shelby, and I will be your conference operator today. Welcome to Ecovyst' Fourth 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 hand the conference over to Gene Shiels, Director of Investor Relations. Please go ahead.

Thank you, Shelby. Good morning, and welcome to Ecovyst's Fourth Quarter and Full-Year 2022 Earnings Call. With me on the call this morning are Kurt Bitting, Chief Executive Officer; and Mike Feehan, Ecovyst'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 or anticipated end-use demand trends and our 2023 financial outlook. This information is subject to risks and uncertainties that could cause actual results and the implementation of the company's plans to vary materially. Any forward-looking information we share today speaks only as of this date. These risks are discussed in the company's filings with the SEC. Reconciliations of non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures can be found in our earnings release and 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 Bitting. Kurt?

Thank you, Gene, and good morning. First, I want to take the opportunity to thank all of my colleagues at Ecovyst for their dedication and hard work. Their efforts to provide great products and services to our valued customers, enabled the strong financial results that we delivered in Q4 and for full-year 2022. During the fourth quarter, the favorable demand fundamentals we experienced throughout the first nine months of 2022 continued, providing for a strong finish to the year despite the disruption associated with Winter Storm Elliott late in the fourth quarter. During the fourth quarter, high refinery utilization in the U.S. continued to translate into strong demand for our regeneration services. In addition, underlying demand for virgin sulfuric acid also remained firm. Although fourth quarter sales were below the extremely high level of sales we experienced in the fourth quarter of 2021. This was due in part to the impact of customer downtime as well as our downtime and related production constraints arising from Winter storm Elliot, which limited our ability to fully satisfy the attractive spot demand in the quarter. In our Catalyst Technologies business, during the fourth quarter, we saw increased demand for renewable fuel and hydrocracking catalysts, while sales of polyethylene catalysts were lower than the year-ago quarter, in part due to the timing of shipments at year-end. As a result, total sales for the fourth quarter of 2022 were up 8% compared to Q4 2021 and consolidated adjusted EBITDA of $69 million was up 9% versus the year-ago quarter. In light of these strong fourth quarter results, we delivered full-year 2022 adjusted EBITDA of $277 million. That was up 22% compared to 2021 and above our previously raised guidance range. Our favorable financial results provided for meaningful cash generation in the quarter, enabling increased shareholder…

Thank you, Kurt. Continued favorability of market fundamentals during the fourth quarter provided the backdrop for another solid quarterly performance for Ecovyst. Total sales for the fourth quarter, including our 50% interest in the Zeolyst joint venture were $223 million, up $16 million or 8% compared to the fourth quarter of 2021. The increase in sales was driven by continued pricing benefits in our Ecoservices business associated with the contractual price increases arising from higher labor, energy and freight costs. In contrast, prior quarters, the pass-through of sulfur cost had a minimal impact on sales in the fourth quarter. Fourth quarter adjusted EBITDA was $69 million, up 9% compared to the fourth quarter of 2021, with the pricing benefit, partially offset by higher variable costs, largely associated with inflation, lower sales volume in silicon catalyst and higher turnaround costs in Ecoservices. Total sales for the full-year, including the Zeolyst joint venture were $953 million, up 28% compared to 2021, with the increase reflecting higher pricing, including the pass-through of higher sulfur costs and higher sales volume in both Ecoservices and Catalyst Technologies. Of the increase in sales, $85 million is associated directly with the pass-through of higher sulfur costs within the Ecoservices business, which negatively impacted margins by 280 basis points. The strong pricing and volume growth resulted in adjusted EBITDA growth of nearly $50 million or 22%. In addition, we generated $146 million of adjusted free cash flow during the year, leading to a cash conversion ratio of just under 80%. And after deploying $137 million of capital for share repurchases, we reduced our net leverage ratio by 0.5 turn to 2.8x. Moving to the next slide, we'll take a deeper look into the drivers of our fourth quarter adjusted EBITDA growth. The increase in fourth quarter adjusted EBITDA…

Thank you, Mike. We are extremely proud of the results we delivered in 2022. Given the economic uncertainty and inflationary pressures that prevailed throughout the year, our businesses demonstrated outstanding resilience. We finished the year with strong financial results despite the adverse impact of Winter Storm Elliott late in the fourth quarter. Our financial performance paved the way for cash generation and net leverage reduction allowing us to enhance shareholder value through significant share repurchase activity. We also achieved a number of nonfinancial milestones as we continue to position Ecovyst for growth in 2023 and beyond. I want to, again, personally thank all of our employees for their dedication and their contributions that made the successes of 2022 possible. We entered 2023 with solid, underlying business momentum. Despite a degree of economic uncertainty, we maintained solid growth expectations for the year. We expect Ecoservices to continue on its long-term growth trajectory this year. While our first quarter results will reflect the impact of Winter Storm Elliott and a significant planned turnaround, we project growth in sales and adjusted EBITDA for Ecoservices this year. For Catalyst Technologies, we expect higher sales for hydrocracking, renewable fuel, emission control and polyethylene catalysts this year. We believe these higher sales coupled with lower inflationary pressures and incremental pricing actions will translate into solid year-over-year growth. As Mike referenced, we expect 2023 to be another strong year for cash generation, and this will continue to enable our flexible capital allocation strategy, which is intended to drive growth and increase shareholder returns. In closing, we are highly confident in our ability to deliver growth again in 2023, and we look forward to updating you on our progress throughout the year. With that, we will ask the operator to open the line for questions.

[Operator Instructions]. We'll take our first question from John McNulty with BMO.

Maybe the first one just on the winter storm impact that you're calling out for the first quarter, the $7 million to $8 million or so. Can you help us to understand how much of that's tied to the repair and maintenance cost 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. Like I guess, how should we be thinking about that?

Hey, John, thanks for your question. This is Mike. I would estimate that roughly half of the impact is lost sales compared to half being more repair maintenance. We do -- we have built in any catch-up into our guidance for the year. So we still believe that we're going to be strong for our overall results for Ecoservices in the mid-single digits, excluding that impact, but it is built into our guidance for the year.

Got it. Got it. And then maybe just a follow-up. So early on in your prepared remarks, you kind of walked through all the positives [indiscernible], I mean it sounds like everything kind of has a bunch of positives going forward from end market demand, apparently being kind of the big driver of it. I get 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% EBITDA growth at 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 kind of EBITDA growth. So maybe can you help us to think about maybe what other bad guys might be out there that we should be considering?

Yes. 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 Catalyst Technologies, polyethylene, renewables, hydrocracking, all showing low double-digit type growth. And then when you go over to Ecoservices, it's really that it's that storm impact in the first quarter. So regeneration services continue to have strong demand with strong refining economics, strong refining utilization in the first quarter and really projected through the year. And then really -- and good underlying demand growth really for virgin sulfuric acid. It's really just that virgin acid kind of setback in Q1 that's really related to that storm and the lost volume and the maintenance costs associated with that.

Got it. Okay. Thanks for the color. Appreciate it.

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

I want to wanted to ask you about Catalyst Technologies. The high watermark for EBITDA was $108 million in 2019, and every subsequent year was below that level in '22, you did $78 million. How do you view that 108 level? Was this unsustainable? Or was it something that could be target that you could achieve and exceed in the long run? And when could that be, if that's the case.

Yes, hi Aleksey. Thanks for the question. So just referring back to that year 2019 in Catalyst Technologies was really a high watermark, really, for hydrocracking catalyst. It was kind of a peak change-out year and then our niche custom catalyst as well had a very strong year. When we look at Catalyst Technologies for 2023, the growth there is really being driven by the major segments in the business. Again, polyethylene, renewables, hydrocracking and emission controls are all had really solid growth in those -- in their secular trends. 2022, I would say, was impacted by a couple of things, right? We said there isn't high refinery margins and really high utilization in those refineries delayed turnaround. So as we look at hydrocracking going forward, I mean it may not -- it may be smoother than it was maybe in the past because you had the pandemic, which had low utilization rates, now 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 in hydrocracking. And then we had the spike in energy costs at midyear and then really, as Mike talked about, some one-time freight interplant logistics that will really leave you nonrecurring. 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 2023.

And maybe as a follow-up, how would you look at 2023 EBITDA in this segment? Is this somewhat below normalized level, above or at normalized kind of can you frame it relative to the cycle of margin normalization and maybe the catalyst reload cycle at your various customers?

Yes. I mean I'll start just really maybe on the catalyst cycle reload. I mean, I think -- again, I think we see strong growth. I mean, we see 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. So as we saw some catalyst hydrocracking sales push from '22 into '23, that could very well happen as well in the '23 and '24. 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 roughly 20% per year, which is going to translate into some nice sales growth for us as well.

Great. Thanks a lot.

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

Hi, good morning. This is Patrick Cunningham on for PJ. You referenced your geographic footprint in virgin relative to the heavy mining industry. And I know lithium is a relatively small part of your business and just a small part of lithium supplies in the U.S. in general. Is there enough potential demand to justify adding new capacity or expanding existing capacity, maybe Southeastern U.S. I think I'm just trying to understand the volume potential, what might be the differences, say, relative to copper [indiscernible]?

Yes. So thanks for the question, Patrick. That's a really good one. So as you outlined, we do have -- we like to say we have our plants kind of triangulate the mining sector in the U.S., right, between 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 borates. Copper use is -- traditional copper leaching uses around 3 to 5 tons of sulfuric acid per ton of copper produced. A 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, right? It just uses a much higher magnitude of sulfuric acid. So we expect that will continue to drive demand for sulfuric acid going forward.

Great. Thanks. And then just on the higher CapEx number, which parts of the 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.

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. Yes. I think it looks in terms of inorganic growth, we look at Ecovyst, we like all the segments that we serve, right? I mean we deliver unique and customized products and services, really the 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 the 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 know-how or customer relationships in either of the businesses, not just Catalyst Technologies.

Great. Thank you.

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

Thank you. Kurt, you touched on capital allocation this year. But thinking about the use of the free cash for debt pay down, what -- can you talk about how much we should expect? Or what are the priorities besides that reduction this year?

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

Understood. And just on sulfuric acid, apologies if I missed this. Is there potential to add capacity organically or even potentially buy some more capacity given the robust end market growth you've talked about?

Yes. We're always -- we have multiple projects at any given time looking to debottleneck our existing assets, right? So we've talked about before we debottleneck 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. We've been in it for 120 years. So we're always looking to grow our production capacity where we can.

Thank you.

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

Hi, 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? And how are you going about landing new customers when you have this kind of headwind in Q1 as far as production is concerned?

Yes, Hamed, thanks for the question. So the production we service our customers really through a network 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. So when we look at our customer base, we're generally in a position in virgin asset with customers anywhere from one to seven years. So we look at those as -- those customers sign up with us for a long period of time. We made commitments to them over a one to seven-year period and supply them from whatever plant that we need to -- if we have a certain unit down, we can just obviously supply either from the other unit at that site or additional plants in our network.

And my other question was on refinery utilization rates have been elevated for quite some time. Does this structurally change your business on a long-term basis? Or you feel like this is still a short-term event?

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 higher 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 alkylate, the value of alkylate 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 alkylate units because it's one of the highest margin products that the refinery produces. It's needed in gasoline exports and to produce premium gasoline.

Okay. Thank you.

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

This is Dan Rizzo for Laurence. I just have a follow-up on, I think, it was David's question. You mentioned doing debottlenecking into sulfuric acid. I was just wondering if it's possible or how much it would cost for brownfield or greenfield expansion?

That's a hard question to answer for expansions. 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 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 sulfur plant greenfield plants are obviously very expensive and if we were going to go in a multiyear project to permit and construct. 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 be tying it to specific customer or specific segment demand.

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. by the second half of this year into 2024, could you still hit your -- the low end of your outlook, your EBITDA outlook?

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 we've 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 refinery, the regeneration business is being driven by, again, utilization that demand for alkylate, which we see will continue to be strong. Virgin acid, another large product line of ours that's being really driven by things like green technologies and low-carbon technologies and you talk about mining. So we look at those types of things with the underlying commodities continue to be strong in those areas. And those are really transitional. We talk about mining and the green technology is really transitional. 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 hydro cracking, which we're benefiting from strong distillate demand and strong demand for those renewable fuels. So we feel confident this business would be resilient in an economic downturn, and it's shown that to be the case during the 2008 and 2020 downturns as well.

All right. Thank you very much.

[Operator Instructions]. We'll take our next question from David Silver with CLK.

Hi. Thanks very much. I had a couple of questions. I just wanted to start clarification, I think, on the tax rates. So just as a 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 fourth quarter. Could you maybe comment on that? And then in particular, what kind of range is reasonable for using for our 2023 forecast? Thank you.

Yes, David, it's Mike. Thank you for the question. I think in the past, we talked about the tax rate being in the mid to high 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.S., which 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.

Okay. Thank you for that. My next question would be about the catalyst for renewable fuels. And I'm looking at the very the 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 spend cooking oil or the mixed feedstocks. 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 a 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 Ecovyst have to do to be fully prepared to kind of exploit that unusual growth opportunity? Thank you.

Yes. Thanks for the question. So when you look at renewable fuels and the new production units coming online are really being built to service the two kind of segments when we talk about renewable diesel, which again is a drop in one-for-one replacement of regular road -- called regular sulfur -- ultra-low sulfur road diesel. The next -- kind of the next step of those processes and what a lot of the new units are being designed also to make sustainable aviation fuel. So as we look forward into kind of the 2025 to 2026 time period, we see more sustainable aviation fuel being adopted, where airlines are going to start to blend up to 50% of that sustainable aviation fuel into their 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. But we expect growth, and I think as Mike had said, renewables in the low double digits this year. And the way we track and our Zeolyst that we sell into that industry are coveted for their purity and their performance. And we partner with really the leaders of the technology in those areas that are capturing a lot of those new units. So we're positioning ourselves with our really Zeolyst expertise to benefit from the growth in that segment going forward.

Okay. Thank you very much.

We have no further questions in the queue at this time. This does conclude the Ecovyst fourth quarter and full year 2022 earnings call and webcast. Thank you for your participation. You may disconnect at any time.