Ecovyst Inc. (NYSE:ECVT) Q1 2024 Earnings Call Transcript May 4, 2024
Ecovyst Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Madison, and I will be your conference operator today. Welcome to Ecovyst’s First Quarter 2024 Earnings Call and Webcast. Please note today’s call is being recorded and should run approximately 1 hour [Operator Instructions]. I would now like to hand the conference over to Gene Shiels, Director of Investor Relations. Please go ahead.
Gene Shiels: Thank you, operator. Good morning, and welcome to the Ecovyst First Quarter 2024 Earnings Call. With me on the call this morning are Kurt Bitting, Ecovyst’s Chief Executive Officer; and Michael Feehan, Ecovyst’s Chief Financial Officer. 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 2024 financial outlook. This information is subject to risks and uncertainties that could cause the actual results and 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 presentation materials posted on the Investors section of our website at ecovyst.com. I’ll now turn the call over to Kurt Bitting. Kurt?
Kurt Bitting: Thank you, Gene, and good morning. Ecovyst delivered solid results for the first quarter of 2024. Continued strong demand for regeneration services and higher sales of virgin sulfuric acid drove the favorable results in Ecoservices. Sales within the Zeolyst joint venture were up on higher sales of catalysts used in sustainable fuel production and sales growth in customized catalyst applications. However, sales in advanced silicas were lower due to lower sales of polyethylene catalyst supports, which more than offset stronger sales in finished polyethylene catalysts. As a result, we delivered first-quarter adjusted EBITDA of $45.5 million, up 6% compared to the first quarter of 2023. Cash generation in the first quarter was particularly strong, reflecting the timing of dividends received from the Zeolyst joint venture that were deferred in the fourth quarter due to the timing of working capital needs within the joint venture.
This favorable cash generation, along with higher adjusted EBITDA provided for further reduction in our net debt leverage ratio to 2.9 times at the end of the first quarter, down from 3 times at the end of last year. Overall, I’m pleased with our achievements in the first quarter. Our first quarter financial performance provides a good start to the year. We successfully completed two turnarounds in our Ecoservices segment during the quarter while maintaining a very favorable safety performance. In addition, we continue to execute on our long term strategic plan, positioning Ecovyst for continued growth in the future. As we turn to Slide 6, I’ll provide an update on our near-term demand outlook. Starting with Ecoservices, for our Regeneration Services business, the outlook remains positive.
We believe that the North American refining climate remains favorable with rising vehicle miles traveled, refining utilization rates expected to remain in the 90% range and increasing margins for [alkali]. And for our Gulf Coast refining customers, the lack of availability of Russian refined products in the global market is creating additional demand for US refined product exports. For virgin sulfuric acid, we see balanced conditions and expect sales volume to be up in 2024. Mining demand remained strong with continued demand strength expected to be driven by global copper demand and ongoing expansion of projects in North America. We continue to expect improvement this year for virgin sulfuric acid sales into the nylon end-use. Industrial demand remains a mixed bag with relative stability in many end uses, including lead acid batteries, chlor-alkali, and water treatment.
While we continue to see some price weakness for spot and short-dated contracts as compared to 2023, we did not see a significant deterioration in overall demand conditions for industrial markets in the first quarter. For our Chem32 business, we continue to see high utilization and strong customer interest with continued growth in sustainable fuel production capacity being a contributing factor. Turning to Advanced Materials and Catalysts, for advanced silicas, global demand growth for polyethylene is expected to be up 2% to 3% this year, led by North America, where producers continue to benefit from favorable feedstock costs. Sales for the Advanced Silicas segment fell short of our expectations in the first quarter, where higher sales of finished polyethylene catalysts were offset by lower sales of polyethylene catalyst supports associated with customer order timing and limited destocking.
Overall, we expect improved global demand conditions to benefit our sales of advanced silicas used to produce polyethylene, particularly in the second half of the year. We remain very optimistic about the long-term outlook for sales of catalyst using the production of sustainable fuels. In 2024, North American capacity for renewable diesel and sustainable aviation fuel is expected to grow by over 70%, supported by attractive production incentives for US based producers. With the EU mandating blending targets, EU renewable diesel and SAF capacity is expected to grow by 26% in 2024. Customer and prospective customer engagement and sustainable fuels remains high. We already have trial sales of catalysts for alcohol to jet SAF production technologies, and we expect activity to increase with a number of start-ups slated for next year.
For hydrocracking catalysts, the growth in global diesel demand is a positive factor. Market conditions in the US remain favorable with diesel inventories below historic averages. The hydrocracking catalyst market remains competitive, but we believe we have a differentiated offering with our AMAC technology. Order timing for hydrocracking catalyst sales remains a function of change out activity, which makes the timing of sales difficult to predict with absolute certainty. While we expect a positive year for hydrocracking sales in 2024, we will not repeat the peak level of sales in 2023. Based upon our current expectations for sales timing, we anticipate a stronger second half for 2024. Sales of emission control catalysts, we are seeing a softer demand outlook for 2024.
Increased borrowing costs are impacting purchase activity for new vehicles. While not commercial on a large scale yet, we continue to work with key players in advanced recycling industry, where our catalyst technologies can provide a meaningful reduction in energy intensity for thermal pyrolysis. We expect growth in recycling activity to increase in the next two years with 12 advanced recycling plants for plastic waste expected to be commissioned in 2024. I’ll now turn the call over to Mike for a more detailed discussion of our financial results for the first quarter.
Michael Feehan: Thank you, Kurt. Ecovyst sales for the first quarter of 2024, including our proportionate 50% share of sales from the Zeolyst joint venture were $184 million, slightly higher than the first quarter of 2023. Ecoservices sales were up 3%, reflecting higher sales volume in virgin sulfuric acid and regeneration services. However, Advanced Materials and Catalyst sales were down as lower sales of advanced silicas used for the production of polyethylene were only partially offset by higher sales from the Zeolyst joint venture. Adjusted EBITDA for the first quarter was $45.5 million, up 6%, driven primarily by the contribution from higher sales volume. The adjusted EBITDA margin for the first quarter was 24.7%, up a 130 basis points over the prior year.
Turning to the next slide, I will discuss the primary components of the change in adjusted EBITDA compared to the first quarter of last year. Looking at the major drivers of the change in adjusted EBITDA, the higher sales volume provided a pull-through benefit of approximately $10 million. However, while aggregate pricing, including the $5 million sulfur pass-through effect was down $16 million period-over-period, the lower pricing resulted from the pass-through of $17 million in lower variable costs, which included lower sulfur, natural gas, electricity, and other variable costs. Overall, the net impact resulted in a positive price-to-cost ratio for the quarter. The balance of the change in adjusted EBITDA is comprised of a number of factors, including approximately $3 million of higher planned turnaround costs, higher fixed manufacturing costs associated with our reliability initiative, costs attributed to winter storm Heather, and inflation in our labor costs.
As we transition to our segment results, I’ll start with the highlights for Ecoservices. Sales for the first quarter of 2024 were $142 million, up 3% on higher sales volume for virgin sulfuric acid and regeneration services, primarily reflecting recovery from the prior year’s lower sales volume that was adversely impacted by winter storm Elliott and the extended turnaround. The sales increase was partially offset by the pass-through effect of lower sulfur prices of $5 million as well as the pass-through effect of other variable costs such as natural gas and electricity. First quarter 2024 adjusted EBITDA for Ecoservices of $41.5 million was up 13%, with the benefit of higher sales volume, partially offset by the higher turnaround costs, higher fixed manufacturing costs, and costs associated with the winter storm.
Overall, it was a positive quarter for Ecoservices and a solid start to the year with adjusted EBITDA up 13% and the associated margins of 29%, up 260 basis points from the first quarter of 2023. For Advanced Materials and Catalyst, first-quarter sales, including our 50% proportionate share of Zeolyst joint venture sales were $42 million, down $3 million. Sales for the Zeolyst joint venture were up 6%, driven by higher sales of catalysts used in sustainable fuel production and sales growth in customized catalyst applications. However, sales for advanced silicas decreased year-over-year due to lower sales volume of advanced silicas used for the production of polyethylene. While sales of finished catalysts used to produce polyethylene were up, sales of polyethylene catalyst supports were lower due to customer order timing and limited destocking.
For the full year, we continue to expect higher sales of advanced silicas used for the production of polyethylene compared to 2023 with an expected stronger second half of the year compared to the first half. Adjusted EBITDA for Advanced Materials and Catalyst was $11 million compared to $13 million in the year-ago quarter with higher sales volume and favorable mix in the Zeolyst joint venture offset by the lower sales in advanced silicas. Turning to cash and leverage on the next slide, cash generation in the first quarter of 2024 was particularly strong, benefiting from the dividends received from the Zeolyst joint venture that were deferred from the fourth quarter of 2023 due to the timing of working capital. As such, we ended the first quarter with cash of $103 million, including the $70 million of availability under our ABL facility.
We ended the first quarter with total liquidity of $173 million. In light of the strong cash generation and higher adjusted EBITDA, we ended the first quarter with a net debt leverage ratio of 2.9x, down from 3.0x at the end of the year. At this time, we remain on target to generate free cash flow for this year of $85 million to $105 million. In terms of capital allocation, we expect to continue to maintain a balanced strategy. From an overall balance sheet perspective, we have one tranche of debt maturing in 2028. We have capped our interest exposure on approximately 75% of our outstanding debt out to the third quarter of 2026, and our weighted average cost of debt is expected to be approximately 5.5% during 2024. As it relates to our guidance, the full-year outlook that we provided in our fourth quarter earnings call in late February remains unchanged with GAAP sales of $715 million to $755 million, sales for the Zeolyst joint venture of $145 million to $165 million and consolidated adjusted EBITDA of $255 million to $275 million.
As is our usual practice, the guidance ranges for specific modeling line items are included in today’s earnings press release and in the earnings presentation. In terms of directional guidance for the second quarter, on a consolidated basis, we expect second quarter 2024 adjusted EBITDA to be between $50 million and $55 million. For Ecoservices, we expect adjusted EBITDA for the second quarter to be down compared to the prior year in a range of between $48 million and $52 million. While we expect sales volume to be higher in the second quarter compared to the prior year, higher fixed costs, including an increase in the number of turnarounds and the related costs, along with an unfavorable net pricing impact is expected to drive lower earnings for the quarter.
The unfavorable net pricing is expected to reflect the timing and the contractual pass-through of certain costs, including energy and other index costs. For Advanced Materials and Catalysts, we expect the second quarter 2024 adjusted EBITDA to be sequentially flat to the first quarter of 2024, with a range of between $10 million and $12 million. The results are expected to be lower than the prior year’s second quarter, driven by lower sales of advanced silicas used for polyethylene production, unfavorable product and customer mix, and the unfavorable impact of fixed cost absorption on inventory period-over-period. And we continue to expect corporate costs to be between $7 million and $8 million per quarter. I will now hand the call back to Kurt for some closing remarks.
Kurt Bitting: Thank you, Mike. As we move into the second quarter, we will continue to build upon the positive financial results we delivered in the first quarter. With the expectation of improved global polyethylene demand and higher sales of virgin sulfuric acid into the nylon end-use, the demand outlook across our portfolio remains positive for 2024. Ecoservices will have conducted four of its five major turnarounds in the first half of 2024, which will position the business to deliver virgin sulfuric acid and regeneration volumes in the second half of the year. We expect stronger demand fundamentals in the second half of the year, particularly for sales of polyethylene catalysts and for the timing of hydrocracking catalyst sales.
As such, our previous guidance for 2024 remains unchanged. However, we will seek to leverage opportunities for incremental growth as they arise. Moreover, we believe favorable cash generation in 2024 will continue to support a balanced capital allocation strategy. Before we move to the Q&A session, I do want to comment on a recent development regarding our Houston site. The United Steelworkers Union represents a number of maintenance and operation employees at our Houston site. Unfortunately, despite our good faith efforts to reach a labor agreement with the union, the union workers went on strike on April 10. I am happy to report that we reached a tentative agreement with the union on a new 3-year contract. The Houston Plants Union ratified the new contract earlier this week, and our valued colleagues fully returned to work on May 1.
During the course of the strike, operations at the Houston site continued allowing us to service our customers. Thank you for your interest in Ecovyst. And at this time, I will ask the operator to open the line for questions.
Operator: [Operator Instructions] And we will take our first question from John McNulty with BMO Capital Markets.
See also 9 Largest Private Military Contractors in the World and 15 Best States to Retire for Women in the US.
To continue reading the Q&A session, please click here.