Good morning. My name is Travis, and I will be your conference operator today. Welcome to the Ecovyst Second Quarter 2023 Earnings Call and Webcast. Please note today’s call is being recorded and should run approximately one hour. [Operator Instructions] I would now like to hand the conference over to Gene Shiels, Director of Investor Relations. Please go ahead, sir.

Thank you, Operator. Good morning, and welcome to the Ecovyst Second Quarter 2023 Earnings Call. With me on the call this morning are Kurt Bitting, Ecovyst Chief Executive Officer; and Mike Feehan, Ecovyst Chief Financial Officer. As is our usual practice, following our prepared remarks, 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 2023 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 in today’s call with their corresponding GAAP measures can be found in our earnings release and in the 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. We are pleased with our financial results for the second quarter of 2023 with adjusted EBITDA up 9% when compared to the second quarter of 2022. There were a number of positive factors contributing to our second quarter results. High refinery utilization continued to drive activity for our regeneration services business, and we benefited from higher net pricing for regeneration services in the quarter. As we expect refinery utilization to remain at high levels for the balance of the year, we continue to have a positive outlook for our regeneration services business. During the second quarter, we also benefited from higher pricing in our Catalyst Technologies business. While sales of silica catalysts were lower compared to the year ago quarter, due to the lack of event-driven niche custom catalyst sales in the quarter and lower sales of polyethylene catalysts associated with softer global polyethylene demand, The pricing momentum in the Silica Catalyst business in conjunction with higher sales of renewable fuels, hydrocracking and emission control catalysts from the Zeolyst Joint Venture translated into favorable year-over-year growth in sales and 19% growth in adjusted EBITDA for our Catalyst Technologies segment. However, the quarter was not without its challenges. In the closing weeks of the second quarter, our Dominguez, California site suffered an unexpected and premature equipment failure, which resulted in an outage and production restriction limiting our sales volume in the quarter. The plant then required another outage at the end of July to replace the equipment and make the lasting repair. This production constraint also resulted in higher costs in the quarter as we work to minimize the overall impact of the production limitation. Second quarter sales, including our proportionate share of sales in the ZI joint venture were $229 million, while this was…

Thank you, Kurt. Starting on Slide 9. I’ll provide a review of our second quarter 2023 financial performance. Total sales, including our proportionate 50% share of sales from the Zeolyst Joint Venture were $229 million compared to $261 million in the second quarter of last year. Of the period-over-period change, approximately $32 million is directly associated with a pass-through of lower sulfur costs compared to the second quarter of 2022. In addition, volume was lower during the quarter compared to the prior year. Sales volume for virgin sulfuric acid was lower, largely due to the production limitations during the quarter that Kurt referenced. Silica Catalyst sales decreased due to weaker global demand for polyethylene as well as timing for event-driven niche custom catalyst used for the production of methyl methacrylate. The lower volume was offset by higher pricing and regeneration services and in silica catalysts. Within our Zeolyst Joint Venture, sales were up 25%, on higher sales of catalyst used in the production of renewable fuels, emission control and hydrocracking catalyst compared to the second quarter of the prior year. Adjusted EBITDA for the second quarter was $79 million, up 9% compared to the second quarter of 2022, driven by higher pricing and regeneration services as well as favorable sales mix and higher pricing in Catalyst Technologies. This more than offset lower sales volume and higher unplanned repair and maintenance costs in Ecoservices during the quarter. The adjusted EBITDA margin for the second quarter of 2023 was nearly 35%, up close to 700 basis points compared to 28% in the second quarter of last year, illustrating the impact that changes in sulfur costs and the associated pass-through has on the margin calculation. Approximately 440 basis points of the increase is related to the pass-through of lower sulfur cost. The balance…

Thank you, Mike. We believe our second quarter results demonstrate the underlying strength and profitable growth potential of Ecovyst’s portfolio. Although we were challenged by an unexpected production restriction in our Ecoservices business during the quarter, Higher pricing in regeneration services, along with higher pricing and higher sales volume in Catalyst Technology drove a 9% year-over-year increase in adjusted EBITDA. While our outlook for the second half of the year has been tempered by a weaker demand outlook in two specific end uses, which we believe represent temporary down cycle conditions, for the balance of our businesses, we believe demand fundamentals will remain positive. We expect refinery utilization will remain at high levels for the balance of the year, providing continued support for our regeneration business. In addition, with the production challenges at our Dominguez site now resolved, a resumption of more normal production volumes for virgin sulfuric acid should support demand in other end uses for virgin acid over the balance of the year. For Catalyst Technologies, we still anticipate a stronger second half of the year for hydrocracking sales, and we also expect continued growth in renewable fuel catalyst sales. Overall, we expect Catalysts Technologies will continue to benefit from higher pricing in 2023 with solid year-over-year growth in adjusted EBITDA. Despite a revised look for the second half of the year associated with production challenges that are now resolved and lower expected sales into two select end uses, we expect pricing and margins to remain favorable. On a full year basis, we expect cash generation to remain favorable with cash conversion above 75% for the year. Given our expectation for strong cash generation over the balance of the year, we expect to end the year with a net debt leverage ratio below 3 times. From a capital…

[Operator Instructions] Our first question comes from Aleksey Yefremov, KeyBanc Capital Markets.

Hey guys, good morning. Thank you for taking my question here. This is Ryan [Ph] on for Aleksey. So the first thing I wanted to do is just kind of dig into the new EBITDA guidance for the year, right? You called out a number of different factors. You have the unplanned outage and then you also have lower sales volumes for virgin sulfuric and PE catalysts. Can you just help us try and break out what the impact of each of those are to kind of better understand the new guide? Thanks.

Sure. Thanks for the question, Ryan. So there were the primary factors that were resulting in our moderated adjusted EBITDA outlook are really as follows. The unplanned equipment outage at our Dominguez, California site that really happened in late June that carried on into July, and that resulted in lower operating rates, lost sales, higher repair and maintenance costs, some unfavorable fixed cost absorption and higher networking and networking costs across that period. Additionally in the second quarter, our nylon and polyethylene customer end markets increased headwinds due to the really stalled recovery in China and global consumer pressure. And that revised outlook really resulted in us seeing lower customer nominations for products as well as some destocking. So in terms of magnitude of the adjustment, we like to think it’s about probably one thirds of it is attributable to the Dominguez and operating issues and higher maintenance costs associated with that. And then the balance of the two thirds is really split evenly between the downturn in the nylon and polyethylene segment.

Great. That’s incredibly helpful there. And then my next question, I just want to try and understand a little bit of the timing of what you guys are on PE catalysts. You’re flagging destocking and lower operating rates, which I feel like that’s kind of been a phenomenon that’s been going on -- kind of since the beginning of the year, where a lot of large producers are probably running at their lowest. So can you just maybe try and sift through that for us? Thanks a lot guys.

Yes. No problem, Ryan. I mean, I think at the beginning of the year, we had also stated that we had a cautious view on polyethylene, and we are realizing that -- at that time, there was uncertainty surrounding the recovery in China and there were some other consumer headwinds. Again, as we approach the end of the quarter, we started seeing more customer activity pulling back, citing macroeconomic headwinds, which led them to destock and lower operating rates, beyond what we had thought would happen at the beginning of the year. And as you said, I’m sure you’ve read those comments from those polyethylene producers themselves. So I do want to point out that we are happy that we’ve been successful in increasing pricing in that segment. And we believe that really long-term, these global leaders that we’re partnered with that are in this space will benefit from their scale and geographic locations and their cost advantage. So we’re confident in that market long term after it moves through this down cycle patch.

Our next question comes from John McNulty, BMO Capital Markets.

Yes, good morning. Thanks for taking my question. Just one on the Virgin acid side. So it sounds like it’s kind of a mixed bag where you’ve got some weakness around the nylon markets, but you’ve got strength in some of the other markets around the metal and mining opportunities. I guess can you help us to think about what that might mean for virgin acid pricing as we push forward through the rest of this year and into early next year?

Yes. Well, I think we’ll -- we’re not really -- as you know, John, and thanks for the question. We’re not going to guide for anything in 2024 at this point. But in terms of -- maybe I’ll start with nylon, as I mentioned in the script that we typically experience really strong virgin acid demand for this segment in Q3. Typically, what happens is those producers are building inventory in Q3 in anticipation of Q4 planned maintenance as well as any potential weather events that could impact the Gulf Coast. So this year really with the lack of recovery that they’re seeing in China and the weaker kind of consumer dynamics that influence that market, the segment is really reducing rates and destocking. Long-term, we believe that segment will still continue to grow because it’s highly linked to things like light weighting and packaging and our Gulf Coast presence and those customers are well positioned with their scale and cost advantages in the long run. To your point, we’ve flagged nylon and polyethylene as being segments that are being impacted by the consumer demand and kind of the global macroeconomic outlook right now. Other sections of our business are largely performing very well, right? With strong regeneration pricing, strong pricing across the Catalyst Technologies segment in total. Good deal less volumes that are outperforming. So really, if you balance these two down segments versus the up segments that we have and those would have really washed each other out. So -- our guide really is based -- we view it as we’re almost down about $25 million due to these operational issues. Going back to the winter storm that hit us in January and then dovetail with our Houston outage that we had also in the first quarter and now these Dominguez issues. So outside of those operational issues, the two down markets would have largely been balanced out by the positivity we’re seeing elsewhere.

Got it. Thanks very much for the color.

Our next question comes from David Begleiter, Deutsche Bank.

Hi, this is David Begleiter here. I guess you talked about nylon and polyethylene being at the bottom of the cycle. Do you expect any sequential improvement? And are you baking in a sequential improvement to your guidance?

Yes. So we’re -- again, we’re not -- we’re really kind of -- as we gave our guidance, we’re looking at our customer orders as we see their outlook and their nominations really through the end of the year. We see -- again, we feel this is a really down cycle period that were going on right now. As mentioned earlier in the call, that it started earlier, we started the year thinking that it was going to be a soft this year for polyethylene, and it’s kind of gotten a little softer than we expected. So that’s leading us to adjust or partially adjust our guidance -- partial of our guidance adjustment. So the other side of our adjustment, obviously, is on the nylon side, which is probably the other half of really the market segment where we’re seeing a downturn, again, related to consumer and like slower recovery in China. So looking forward, again, we feel that both nylon and the polyethylene markets will recover nicely. We have very good customer partnerships where we’re linked to the largest global scale producers that will benefit long-term, both from where they’re located geographically and their scale. And those markets will grow over time because they’re linked to, obviously, things like, again, light weighting and packaging and so forth.

Okay, thanks. And then second, I guess, on capital allocation. Are you comfortable with your leverage levels right now? And if you think about capital allocation in the second half in 2024, do you expect any share buybacks in the near future?

Yes David, I think for -- in our current capital allocation strategy, we’ve talked before of having a balanced approach. We certainly have share repurchases as a component of our capital allocation strategy and you’ve seen us participate in share repurchases during some of the recent secondary offerings, and we’ll continue to do so as we see that the price makes sense from a low value standpoint, we still believe that our stock price is undervalued. However, we also recognize that leveraging and deleveraging is a very important component, and we are very focused on that. We do and have said that we are targeting to have a leverage ratio in the low 2s, somewhere between 2 times and 2.5 times. So our focus is certainly going to be on that as we finish this year and go into next year.

Okay, thank you.

Our next question comes from Hamed Khorsand, BWS Financial.

Hi, good morning. So the first question I had was -- in regards to your Catalyst business, how do you describe your outlook as far as your order book is concerned, given that your customers usually order 6 to 12 months ahead of time?

Thanks Hamed. So when you look across all the Catalyst Technologies segment, there’s -- we’re having a good year in that segment overall, right? So if you look at the ZI Joint Venture, hydrocracking is expected to be up over 20% renewable fuels is up mid-teens. So we’re seeing really good volume in sales in the ZI Joint Venture. And then strong pricing, as I mentioned, across the whole Catalyst Technologies segment. So we do see -- as you mentioned, there is an outlook of orders where customers give us a little bit of a longer time -- lead time to that. So we still see that order book as strong. I mean, again, we’re not guiding here for 2024, but we feel confident about that business going forward. We’ve got great products; particularly on the hydrocracking side where we’ve got our next-generation hydrocracking catalyst is having a lot of success in the marketplace being adopted by refineries. We want to take advantage of the flexibility that that catalyst offers. And then renewable fuels continues to be -- continues to expand for us, right, as demand for renewable fuels and soon sustainable aviation fuels continues to grow.

And my other question was regarding Dominguez equipment failure, do you think the business overall is running too hot and you need to take some maintenance downtime for other facilities? Or was this a one-off equipment failure issue?

We really view this as a one-off equipment failure. I mean we’ve had more downtime than what we’ve liked this year. A good portion of that downtime again was attributed to the winter storm that really hit us at the beginning of the year, and that dovetailed into that extended outage that we had in Houston when we opened up the boiler and how to perform more extensive maintenance. The Dominguez outage and the prolonged restriction that resulted in July, was really one component in our main gas blower, which is a key piece of rotating equipment that kind of runs the plant. That equipment was actually installed about 12 months ago. So the failure was really premature and unexpected that we typically don’t see. So the good news is that’s now complete. And we feel that’s behind us. And again, we attribute about $25 million of our kind of shortfall really being attributed to the downtime between the winter storm and the Houston and now the Dominguez event.

Okay, thank you.

Our next question comes from Laurence Alexander, Jefferies.

Hello, so just can you help us think through the operating leverage for how Ecovyst should benefit from normalization in the plastics market. I guess, first, in terms of volumes, is there any kind of refill that you would get in terms of order patterns above and beyond just the production rate at the customers and then how should we think about the incremental margin leverage that you would get on those orders?

Yes. Thanks for the question. So I mean, right now, the polyethylene market for us, which is generally what we’ve been talking as being in the down cycle is being driven by kind of that lack of recovery in China and lower customer demand. We still view that market long-term. It’s going to grow 3% to 4%. We particularly tend to partner with and supply the largest and most scalable polyethylene units across the globe. And we’ve had a proportionately higher win rate with those new units, and that’s due to our tailored and specified catalysts that are preferred by these large polyethylene producers. So as that market grows long-term, we feel will grow even more than the market due to our ability to win a disproportionate amount of that new business. From a margin standpoint, we’ve been successful this year in raising prices really all across the Catalyst Technology segment including our silica catalyst. So our customers value that tailored catalyst that allows them to make the products that they want to for the market.

I guess could you help us understand -- or could you help me just a little bit with the kind of the near-term dynamics of -- if the order pattern, let’s say, next year reverts back to 4% production rates, 4% growth. Is that -- would you see any incremental benefit above and beyond that? And also, do you -- would you see your shipments at the same time as -- you’ll pick up at the same time as the production rates pick up? Or do you ship in advance? Or is it more the refill than you maybe lagged by a quarter, how should we think about kind of the degree of cyclical lift next year in response to what you’re forecasting for the back half of this year?

Yes. I think really for -- that’s hard to -- that’s really hard to determine because some of that’s based on supply chain and logistics dynamics, which we had the downside of that last year. We had to ship a lot of product around with airfreight and so forth, which cost us additional money. So we’re not -- I really can’t project what that will look like in 2024. We do expect that long-term, again, this market should recover. It’s a 3% to 4% long-term growth rate. The folks that we service with our catalysts tend to be the larger, more cost competitive. So they would largely benefit obviously from any upcycle in the market.

Okay, thank you.

Our next question comes from David Silver, CL King.

Yes hi, good morning. I was going to ask you a question, I guess, about the shortfalls, I guess, on the catalyst side, in particular. So I know you’ve kind of come at this a couple of different ways. Maybe I just would benefit from one more time through. But as far as nylon goes, I mean, I’m pretty comfortable with the idea that the softness in China is definitely leading to some export -- opportunistic exporting out of there. And given the size of the global market, that makes sense to me. But I always think of the polyethylene market, in particular, as a much bigger market and much less cyclical, more tied to consumer nondurables and very global. So could you just talk about like the magnitude, I guess, of the disruption here that would lead to the size or the magnitude of the impact on your results? In other words, is it just the garden variety recession is doing this? Or is it something that’s much more targeted and, I don’t know, multistep or whatever where people are not just reducing current operating rates, but destocking at the same time. Just trying to get comfortable with in such a large, relatively noncyclical end market, such as polyethylene, why the severity of the drop off seemingly over a relatively compressed period of time. Thank you.

Yes. Thanks for the question, David. So I think I’ll put it in -- maybe I’ll try to break it down a little bit further. I mean we’re really seeing in polyethylene, particularly the regions that are slower are in Asia and Europe, right, where Asia obviously linked to the slower recovery in China or lack thereof maybe is a better way to put it. And then Europe, rates of -- operating rates have been turned down. Obviously, in conjunction with the slowness of the macroeconomic activity, but also their cost competitive -- cost competitiveness as well. Fortunately for us that tends to be -- that’s I mean, minority share of where we ship our products. But I would say that some of that distortion particularly maybe in Asia, as you spoke with nylon as the lack of Chinese recovery creates opportunistic exports elsewhere in the world. Some of that may be going on in polyethylene as well. So that’s leading to maybe some lower operating rates elsewhere in the world as well as some destocking.

Okay. Thank you for that. I appreciate it. I’d like to switch over to maybe the renewable fuels catalyst area and SAF. And in particular, I was wondering if you could talk through a little bit of how the selling process kind of works in practice. So in other words, a lot of catalysts -- I don’t want to say they’re off the shelf, but they are well understood and the feedstock that they work with is mature and well developed. And I’m contrasting that with renewable fuels, at least from a global perspective where there could be a very wide range of feedstocks. And different people have much different capacity needs from time to time. So could you just talk about how you make -- how you plan to make your inroads in that market? Is it really customer to customer? Is there some uniformity or uniform standards for the products that are emerging? And then regarding SAF in particular, I mean, obviously, that’s a very nice opportunity let’s say, over the medium term. But what final milestones really, in your opinion, need to be met or across for that product to really start to be used in volume. In other words, are all the regulatory approvals in place? Are there certain other issues that you would cite that or maybe the final stumbling block to unlocking a fair amount of demand in that end-market? Thank you.

Sure. Well, maybe I’ll work backwards from that, David. So I think really from a milestone point for SAF, I mean, what we sort of look forward to is again, that regulatory approvals for the fuels and that an eventual commitments by the airlines of blending in certain percentages, right, of the sustainable aviation fuel. Most of the airlines have come forth with goals, various goals in terms of what they want to blend in their fuel pools going forward. I think that obviously, again, will depend on the regulatory approvals and then followed by the availability of the fuels themselves. So we think long-term, we’re excited about that market. In terms of selling into renewable fuels and sustainable aviation fuel, there’s -- the good news is with our business, we’ve got a lot of experience working with customers, our ability to really tailor catalysts and work with them on their various different feedstocks. So of course, you know renewable fuels is largely linked to fats and oils and such. There’s some of that for sustainable aviation, but we’re also -- we also work with others that are looking at taking shorter carbon chains, right, and putting them together to make aviation fuels. So things like ethanol to aviation fuel. And the good news is our DLI technology really can act as a catalyst for both ways, right? So we work with our customers based on what their individual technology is, and we’ve got a really good, obviously set up here in our Conshohocken site that allows us to quickly pilot those catalysts and work with those customers so they can obviously test their units out and try to produce fuels to get tested with the airlines.

Okay, thank you very much. Appreciate it.

We have no further questions in the queue at this time. This does conclude the Ecovyst Second Quarter 2023 Earnings Call and Webcast. Thank you for your participation and you may disconnect at any time.