Good morning. My name is Travis and I will be your conference operator today. Welcome to the Ecovyst Third 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 turn the call over to Gene Shiels, Director of Investor Relations. Please go ahead, sir.

Thank you. Good morning and welcome to the Ecovyst third quarter 2023 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 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 the earnings release and the presentation materials posted in the Investors section of our website at Ecovyst.com. I'll now turn the call over to Kurt Bitting.

Thank you, Gene and good morning. I am pleased with Ecovyst's performance in the third quarter. Against the backdrop of an evolving and an uncertain macro environment, Ecovyst delivered solid results for the third quarter of 2023. Ecovyst also made good progress on several key strategic initiatives, including launching our operational and reliability enhancement program, announcing a major expansion for our Kansas City Silica Catalyst plant and rebranding our zeolite products to highlight our differentiated technology in emerging areas such as renewables and plastic circularity. During the third quarter, demand across the majority of our end-use exposures remained stable. In our Ecoservices business, high utilization rates for our refining customers continued to drive demand for our regeneration services. While in our virgin sulfuric acid business, our broad exposure to a variety of industrial applications provided a level of stability in the quarter. However, as anticipated on our second quarter earnings call in early August, our third quarter sales of virgin sulfuric acid reflected weaker demand for oleum and high-purity grades of sulfuric acid utilized in the production of caprolactam and other nylon intermediates. For Catalyst Technologies, as anticipated, sales of polyethylene catalysts were lower in the third quarter due to weaker global polyethylene demand and the ongoing impact of destocking. However, in the ZI joint venture, sales were up over 30% on higher sales of hydrocracking catalysts and catalysts used in the production of renewable fuels. Of note and in contrast to many industrial sectors facing weak demand and volume declines, pricing in both Ecoservices and Catalyst Technologies remained positive in the third quarter. Third quarter adjusted EBITDA was $68 million, down 10% compared to the third quarter of 2022, with the decrease largely driven by lower sales volume in the nylon and polyethylene end uses and higher maintenance, repair…

Thank you, Kurt. Turning to Slide 8. I'll provide additional detail on our third quarter financial results. Total sales for the quarter, including our proportionate 50% share of sales from the Zeolyst Joint Venture were $210 million, compared to $260 million for the third quarter of 2022. Of the $50 million change in sales, $39 million was driven by the pass-through of lower sulfur costs, with the balance of the sales decrease largely the result of lower sales volume for virgin sulfuric acid used in the production of nylon intermediates and lower sales of silica-based catalyst used for polyethylene production. This was partially offset by continued strong pricing in both businesses and higher sales of hydrocracking catalysts and catalysts used in renewable fuel applications. Third quarter adjusted EBITDA was $68 million compared to $75 million in the prior year. The decrease was a function of lower sales volume, as noted and higher operational costs, associated with increased manufacturing and networking costs arising from the previously discussed Dominguez production outage in July. The adjusted EBITDA margin for the third quarter was 32%, up 330 basis points with the margin uplift primarily driven by the impact of the pass-through of lower sulfur costs, along with favorable pricing, partially offset by higher manufacturing and networking costs. As we move to the next slide, I'll highlight the primary components of the change in adjusted EBITDA compared to the prior year's third quarter. As was the case in the second quarter, average sulfur prices in the third quarter of 2023 were significantly lower than in the prior year. Pass-through of these lower sulfur costs had an aggregate impact of $39 million in variable costs, with a corresponding reduction in average selling prices. As such, the lower sulfur cost pass-through on sales during the quarter had…

Thank you, Mike. Overall, we are pleased with our results for the third quarter. Our end-use exposures and diversification provided a level of stability in an uncertain macro environment. Moreover, pricing remained positive for both Ecoservices and Catalyst Technologies. While we saw lower demand in the third quarter, specifically for virgin sulfuric acid into the nylon end use and for polyethylene catalyst as expected, we believe much of the near-term weakness is associated with the effects of destocking which is transitory. For the balance of the year, we expect predictable performance from our regeneration services business and following strong third quarter hydrocracking sales and consistent with the expectations we have had throughout this year for a stronger second half of the year, we continue to expect robust sales of hydrocracking catalysts in the fourth quarter and into the first quarter of 2024. Despite the near-term uncertainty in the macro environment, we believe the longer-term demand fundamentals for our business remains extremely positive. We see continued growth in our Regeneration Services business which is supporting alkylate production that is essential in the production of cleaner burning, more efficient fuels. We see ongoing demand growth for virgin sulfuric acid given the critical role it plays in so many industrial processes. And for our Catalyst Technologies business, we see continued growth, driven by expanding production capacity for polyethylene, as well as catalysts used for emerging technologies such as plastics recycling, renewable fuels and enzymatic processes. The near-term demand softness, primarily concentrated in 2 specific end uses has not altered our longer-term growth expectations for those end users or for our business as a whole. We look forward to discussing our demand outlook and our strategies to deliver value for the benefit of our shareholders in more detail at our Investor Day in November. At this time, I will ask the operator to open the line for questions.

[Operator Instructions] Our first question comes from John McNulty, BMO Capital Markets.

So I guess I had a couple of questions. One would be, as far as the turnaround pull forward, you said there were some incremental cost to it. Can you help us to quantify what that impact was in total to your 4Q outlook or your full year outlook; however, you want to put it?

Sure. I think it's about -- when we look at it versus the kind of the midpoint of our previous guidance and walking that back to our guide now, I would say about half of that adjustment downwards is due to kind of the additional slowness we saw in the nylon segment related to the UAW strike and then about half of it on that turn -- in the corresponding turnaround costs as well. So if I'm looking at that walk back about half of it, I would consider nylon and the pull forward of that turnaround to meet or kind of to align our production volumes with the slower nylon demand.

Got it. Okay. Fair enough. And then just a question on the free cash flow change and the Zeolyst Catalyst business. So I guess, can you help me to understand because I wasn't completely clear or maybe I missed it. But is that shift in the timing, where it sounds like things are maybe going to come in late in the quarter and so some of the receivables are pushed out. But I guess I was a little bit confused as to, did you push out some of the earnings to next year around that Zeolyst Catalyst business and maybe some -- a little bit later adoption there? Or is it something -- is it really just on the cash flow side?

Yes, John, it's Mike. Yes, no change on the earnings side, right? It's all within the cash. We really saw a high concentration of hydrocracking sales in the fourth quarter and into the first quarter of next year. So over a 6-month period, it's quite significant. So that really does 2 things. One, we have to have more of an inventory build to build for those higher sales in Q1 of next year. And it also impacts the timing of some of those receivables. Not that there's a collection challenge but more of just the timing nature of when those sales go out and when the collection comes through. So all of this timing is expected to have a comparative benefit to us in early next year. So just timing between 2 years on the cash flow dividends from ZI [ph].

Got it. Fair enough. And maybe just one last one on that. Would you expect -- because it sounds like you've got some really strong demand in 4Q. It sounds like anything that's coming in may be stronger than you thought in 1Q. Can you help us, just to level set, should we be thinking about 1Q at least as high as 4Q? Is it going to be notably higher? How would you characterize it, at least based on what you see right now?

Yes. I mean what -- well we're not guiding really to Q1 but I would say it's -- the 6-month period between Q4 and Q1 is a very high concentration period. So it's -- what I'd say, higher than a normal Q1 for hydrocracking. We don't have the exact number yet but I would -- the way we're looking at it, I think as Mike explained to you, John, is that across those 2 quarters, it's just a very high concentration during that period of time.

Our next question comes from Aleksey Yefremov, KeyBanc Capital.

I just had a follow-up on your Slide 6, you're showing an arrow for virgin sulfuric acid that getting a little bit greener. And does it mean to imply that this business is getting stronger sequentially in the fourth quarter compared to third quarter?

Yes. I think what that's saying is the -- we see stability across -- we have a diverse end set of -- diverse group of segments that we serve across virgin acid. So we see strength in mining. Where we had struggles is that nylon space, right? So we're seeing that kind of, I would say, hitting its trough, right? And we're aligning our production accordingly to that and pulling for that turnaround. So our view right now on the virgin market is very diverse. The one area that we've struggled is really concentrated into that nylon segment and the other segments remain pretty stable. But we do -- as you heard in our comments, we are cautious towards the end of the year in some of the industrial spaces, if there would be further macroeconomic headwinds that would cause customers to accelerate destocking or anything like that.

Okay. And then just a longer-term question. I mean, you used to talk about your wins in polyethylene catalyst and how -- you have some visibility extending over a few years, right? Could you talk about that? How has your kind of longer-term looking win rate in polyethylene, how has it been lately? And can you tell us anything about the next couple of years for that business?

I think the best thing we can really say about that and evidence of that is the Kansas City expansion that we announced this quarter. So that expansion will happen over the next 2 years. We expect it to come online towards the end of 2025 which is really meant to meet customer commitments that have been given to us, right, that are out past that time period. So we're really confident in that business and our long-term win rate and we're installing capacity backed by the customer commitments to meet that long-term future demand.

Next question comes from David Begleiter, Deutsche Bank.

This is Anthony Mercandetti [ph] on for David. What inning would you say that we're in this destock cycle in nylon?

That's a good question, Anthony. We do believe we're in the trough of that cycle. We can't really -- we're not giving guidance for beyond this year, obviously but we do see that a lot of the more regression that we had in that segment for the end of this year, it really was kind of aggravated by the UAW strike. So we would expect that the trough -- we're at the trough of this cycle and then the destocking will run its course during this quarter.

Okay. And then, given what you're seeing on demand in these certain end markets, how should we think about virgin sulfuric acid pricing trending through, let's say, the balance of the year and early on into '24?

Yes. Well, I think the first is the sulfur pricing is related to sulfur pricing. So we did see a step-up in sulfur pricing which we passed through to our customers at a 100% level, so that will -- pricing will rise on the basis of that raw material cost pass-through. But then we have a high amount of contracts. A high amount of our business is also contracted. So we don't have a tremendous amount of material that's changing office long-term price contract at any given point, most of it around 90%-ish is under a longer-term 1, 2, 3 or even 5-year contract.

Okay. And then -- and just last one for me. As we go into '24, there's a lot of uncertainty just in the global macro environment. Can you just remind us, how should we think about the underlying earnings power of this business in a lower growth economic environment or potential recessionary environment?

Yes. So we've -- a bunch of us, Mike and the management team and myself have been with the business for quite some time and seen the business go through a couple of cycles. And we feel the business as a whole, due to its diverse end market uses that it services is -- sets up well and is pretty resilient through economic down cycles. I'll point you to the regeneration business which is largely linked to refinery utilization, the value of octane. All those things look positive going into next year and generally not all that cyclical with other economic macroeconomic headwinds. Mining, another large segment for us. Obviously, with all the demand for metals and minerals going forward for electrification and green infrastructure should remain firm. Our treatment services and activation business are also largely in a very sold-out position and we would expect that to continue. And then finally, the renewables space continues to grow, right? As renewable fuels become a more -- gain a larger share of the overall distillate pool moving from eventually up to 5% by 2025. That production level is going to continue to grow and that should continue to happen in light of any macroeconomic headwinds.

Our next question comes from Patrick Cunningham, Citi.

This is Eric [ph] on for Patrick. With the anticipated stronger sales in hydrocracking catalyst in 1Q '24, what sort of uplift should we see there? And how should we think about the margin profile for Catalyst Technologies as a whole?

So I would say, Eric. It's clearly, what I'd say about hydrocracking is we're in that 6-month period of really high concentration of sales between what we expect to realize in Q4 and then what we see in the pipeline for Q1. We're really not in a position to guide, really, for the full year of 2024 for hydrocracking because we just don't have that full year visibility on the order pipeline yet. And the order timing for that can change, right, in terms of the cadence of orders, it has changed a little bit since we've come out of the pandemic. There used to be much more predictability but the pandemic kind of stretched some turnarounds, product mix has changed at refineries. So we don't quite have that visibility yet. That being said, I would not expect a peak or a high concentration cycle that we've had during this 6-month period that we think we're going to have to repeat itself sometime later in '24. I mean, it's clearly a high concentration cycle right now.

Okay. Got it. And my last question is what is driving the balance in backlog to build ratio for emission control catalysts?

I mean, the backlog in that segment is really a hangover of just tremendous shortage and that sort of thing that went on for heavy-duty vehicle, right? So there was a period during the pandemic. And coming out of the pandemic, there was a high demand for trucks. So they're still working through that order backlog, similar to what's going on in the auto industry. So it just really hang over the backlog of the whole chip and supply chain shortage that was experienced in '21 and '22.

Next question comes from Hamed Khorsand, BWS Financial.

So first off, just on the SG&A line. How sustainable is that as far as what you reported in Q3 and going forward? And was there any special savings there that occurred?

Yes. I think the SG&A was a little bit lower, really because of some employment compensation adjustment in there. So it's probably a little more beneficial than other quarters.

By -- can you provide some like magnitude? I mean, there was quite a bit of a drop from Q2 levels.

Yes. I mean there's a couple of million dollars were flowing through there that would probably not be recurring in future quarters.

And my other question was, your commentary around hydrocracking in Q1, how would that impact your nameplate capacity for all of '24 and your contracts that you usually enter into for '24?

Hamed, it doesn't impact our ability to service the customers going into 2024. I think the material impact that it's had, what Mike was mentioning on the call was, we have a big -- a large inventory build right now going on to meet those orders in Q1 which Q1 is a heavier quarter and across that span of that 6-month period, there's a high concentration of volume and sales going out. So -- but our production assets have the capability to meet that required production schedule. So there'll be no issue there.

Our next question comes from Laurence Alexander, Jefferies.

This is actually Dan Rizzo on for Laurence. Just thinking about pricing going forward. I think it's been fairly strong but I was just given thinking just given the volatility, some of the destocking going on, what your -- how you're thinking about it in Q4 and as we head into 2024?

Dan, so the business is -- obviously, again, the service is a very diverse set of end uses. So if you look at the portfolio, I'll point to regeneration, those are very long-term agreements that are indexed, that are renegotiated at long intervals. So we don't expect, given the refinery -- the state of the refinery utilization and the utilization in that industry, we feel good about the pricing going forward on that, just based on the long-term nature of the agreements. Virgin acid, similar story, right, where -- that can tend to be one of the more areas that can be susceptible to these short-term destocking. But again, more of a longer-term agreement situation because a lot of those customers require our specific sulfuric acid, whether it's due to the high purity nature of it or the strength or our geographic locations. And then moving over to the catalyst oriented areas. Hydrocracking, those orders are done with -- based on really performance, it's really -- is driving the value there, as well as, I'd say, the polyethylene, right? Both of those segments are very sticky with their customers and the product is being sold on a performance basis. And it only generally makes up a very small percentage of the refineries or the pet chem plants [ph] overall cost. So we generally don't see the pricing pressure associated with that. So I think pricing can't change, obviously, as one -- some of the things are indexed to raw materials while some of those things move around but you know, the adjustments are made accordingly.

Our next question comes from David Silver, CL King.

Yes. I'll apologize in advance, I did have to step out at 1 or 2 points here. So if I -- apologies if I make you repeat yourself. Regarding the Dominguez outage, was -- did you -- was there a discussion of the economic impact of that on the third quarter results? So in other words, there were some repairs and maintenance, I'm guessing, there was some lost volume. I don't know if any of that was insurable. But any way to kind of think about the economic impact of the Dominguez outage on your third quarter results?

Yes. I would put -- the Dominguez outage, we took the plant down again at the end of July to fix what was a production restriction and made that correction and it's been running since that. So if you had to look at that impact in July, it was probably in the $4 million range and that's between the cost to repair the plant and the downtime and associated networking costs as we had to move product around our production network to service those customers.

And then somewhat similarly but you are advancing the timing of a turnaround. And I'm sorry, I don't recall this but some companies accrue for turnaround costs throughout -- quarterly or throughout the year. Other companies concentrate the costs of the turnaround in the period when the work is done. Can you just remind me how I should think about that? In other words, is this pulling costs directly out of fiscal year '24 and putting them all in the fourth quarter? Or have some of the costs already been recognized? I mean, if you could just kind of discuss that, that would be helpful.

Yes, David. So the turnaround costs, really, when we do turnarounds, there's really two components to it. There's first, generally a capital component, right? And so as we start the turnaround costs, certain costs are capitalized as part of extending the useful life of it. But at the same time, when we bring units down for these turnarounds, we also incur additional expenses. So what we're referring to here are the additional expenses that we would put through into the fourth quarter by pulling that turnaround forward into Q4.

Okay. Yes, I should clarify also capitalizing costs versus expensing. Last question. You did repurchase some shares this quarter. And I mean, if I'm just looking back from a couple of year perspective, I mean, you hadn't really repurchased any shares outside of the secondary offerings by your large shareholders. And one of those large shareholders, I think, still holding, I think, 9 million shares or something. So was the share buyback activity this quarter maybe due to a desire to offset the options issuance? Or is it purely opportunistic? I mean, how should we think about that and in particular, kind of moving forward?

Yes. So I'll just start, really. Our long term -- Ecovyst's long-term goal, right, is to get our leverage into that 2 to 2.5 range, right? And so our capital allocation strategy is going to be highly focused on that goal. That being said, that the capital allocation strategy is balanced and flexible. So opportunistically, we will come in and repurchase shares when we feel that the share price has fallen to a low -- a very low level or it doesn't quite reflect the value of the company. And we did have repurchase in 2022 where we did kind of a similar thing. So this repurchase here, just to put it in perspective, it's obviously, it was around $5 million of cost which really is not going to materially move the needle in terms of our ability to reach that 2.5x to 2x leverage goal.

We have no further questions in the queue at this time. This does conclude the Ecovyst third quarter 2023 earnings call and webcast. Thank you for your participation and you may disconnect at any time.