Ecovyst Inc (ECVT) 2021 Q1 法說會逐字稿

Good morning. My name is Catherine, and I will be your conference operator today. Welcome to the PQ Group Holdings First Quarter 2021 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 turn the conference over to Nahla Azmy, Vice President of Investor Relations and Financial Communications. Please go ahead.

Thank you. Welcome, everyone, and thank you for joining us for our first quarter 2021 earnings call. We will start today with formal remarks from Belgacem Chariag, Chairman, President and Chief Executive Officer; and Mike Crews, Executive Vice President and Chief Financial Officer. Then we will follow with a Q&A session.

Please note that some of the information shared today is forward-looking information about the company's results and plans, including with respect to the anticipated sale of our Performance Chemicals business, our anticipated end-use demand trends, including the impact of COVID-19 and our 2021 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. These risks are discussed in the company's filings with the SEC, including in the company's annual report on Form 10-K for the year ended December 31, 2020. Reconciliations of non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures can be found in our earnings release and presentation materials posted on the Investors section of our website at www.pqcorp.com.

With that, I'm pleased to turn the call to Belgacem.

Thanks, Nahla, and good morning, everyone. This is a very exciting time for PQ. Since our previous earnings call in early March, we've had the opportunity to communicate with many of our investors on 2 very important occasions and milestones for the company. First, we held an investor conference in early April, at which we detailed our strategy, sustainability goals and growth outlook through 2025.

We unveiled ecovyst, the future brand for our pure-play catalyst and services company. More recently, we took the opportunity through a secondary offering to improve the trading liquidity for PQ shares by approximately 35%, addressing an important challenge that dates back to the company's IPO.

During the first quarter, we remained highly focused on our execution and achieved several accomplishments that I would like to briefly summarize.

Beginning on Slide 3, with safety. We continue to make positive strides. Our year-on-year key metrics improved 28% for recordable incidents and 16% for perfect tariffs, continuing a trend of significant improvement in the last 2 years, from top management to front line and support functions, a leading safety and environmental performance is embedded in our culture. We expect 2021 to be an even better year on this front.

On the operational side, I'm happy to report that our production facilities in Texas have returned to full capacity safely. And in time to meet the demand ramp by our customers, who, in some cases, were even more severely impacted by winter storm Uri.

Commercially, we have mounting momentum as we expand our positions into new and growing end markets. We continue to grow our catalyst portfolio offering, and we are now increasing sales into the renewable fuel space.

For refining services, with its permits and location advantages, we are seeing higher demand for waste treatment services, largely driven by the construction recovery. And in only 2 months since acquisition closed, we are already seeing some initial commercial synergies within the Chem32 catalyst activation business.

On strategy, we're nearing the completion of our portfolio transformation and are on plan to close the sale of Performance Chemicals in the second half of this year. We now expect net proceeds to be approximately $995 million, up from our original estimate of $950 million.

Finally, our financial performance was solid despite a significant impact on our refining services business from winter storm Uri. Excluding this impact, sales, adjusted EBITDA and margins would have been higher than the first quarter of last year before demand levels were impacted by the pandemic. This outcome demonstrates the recovery trends we're experiencing and reinforces our confidence in our 2021 outlook.

Turning now to Slide 4. I'll discuss the drivers of these recovery trends in more details. First is the economy recovery, which is being led by the larger economies in China, the U.S. and Europe. GDP growth rates in these regions are projected to be in the range of mid- to high single digits in 2021. Second is increasing consumer confidence, which is estimated to be approximately 15% higher in second quarter, both year-on-year and sequentially, with optimism that this continues for the balance of the year. Third is growing energy consumption, which is expected to be up 4% year-on-year. The largest beneficiary of this recovery are the transportation and commercial sectors.

Lastly, sustainability regulations are on the rise, particularly mandates for cleaner and more efficient fuels. For example, Tier 3 standards implemented in the U.S. in 2020 require a 2/3 reduction in sulfur content for gasoline. In addition, fuel economy standards continue to increase, offering demand for high-octane fuels.

Let's go over what we're seeing in terms of the impact of these trends on demand for our key products and services. I'll address them in order of magnitude. Starting with fuels and emissions control, which crosses both our businesses. With the reopening of cities around the U.S., vehicles mile travel have been increasing year-to-date. Last month, this metric was tracking at 95% of 2019's level. At the end of last month, mobility data in the U.S. shows more than 150% improvements year-on-year. Recall that this time last year in April, our refinery customers and our regeneration services experienced significant demand reduction on the implementation of stay-at-home mandates. To support this rebounding activity, refinery utilization has been on the rise, with the exception of the temporary storm impact in the Gulf Coast.

Higher refinery utilization of greater than 90% expected in the second quarter of this year will benefit regeneration or sulfuric acid recycling services. Additionally, hydrocracking catalyst products will also see improved demand on more refinery turnarounds in the second half of the year. And finally, as production of heavy-duty diesel vehicles continues to exhibit double-digit growth in 2021, demand for zeolite-based emission control catalyst is recovering steadily.

Further, government incentives are creating additional growth opportunities as refineries increased production of renewable fuels, leading to higher sales of our catalyst materials in this space. And as refineries and renewable fuels producers seek to reduce the downtime and safety risks associated with traditional on-site catalyst activation, this is benefiting our newest business, Chem32.

Next, for the specialty grade high-purity virgin sulfuric acid market. As we mentioned last quarter, we had already seen volumes recover to 2019 level with improving demand for industrial and automotive applications.

Mining is another key industry for us. And here, high single-digit demand growth for copper and borate is being driven by the rebound in construction, coating and demand for electronics. Green infrastructure initiatives are also expected to propel further copper and borate demand for use in electrification and renewable energy.

Finally, demand for polyethylene grew steadily throughout the pandemic, and we expect the overall polyethylene market to grow by mid-single-digit again in 2021. In the first quarter, we saw more than 10% year-on-year increase in catalyst demand for high density polyethylene. Polyethylene film demand is expected to increase about 7% year-on-year on increased packaging demand for food and hygiene applications.

To summarize, and over the course of the year, we see demand improvement for nearly all our products and services. This will be driven by the economic recovery as well as the secular trends favoring more environmentally friendly, sustainable products and solutions. Both of our businesses are well positioned to capitalize on these growth trends, working closely with our customers.

And now I will turn the call over to Mike to discuss our first quarter financial results and outlook.

Thank you, Belgacem, and good morning. We are pleased to report first quarter results at the high end of the initial ranges we provided last week, which also compared favorably to the prior year quarter when excluding the impact of winter storm Uri.

Before we begin, I would like to remind everyone our results are based on continuing operations with both Performance Materials and Performance Chemicals now reported as discontinued operations.

Starting with Slide 5. Demand in the first quarter continued to improve as the overall economy recovers. Sales were in line with the prior year, while adjusted EBITDA was lower due to the impact of the storm. This lowered sales by 5% and adjusted EBITDA by 18% and reduced margin by 460 basis points.

Shifting to the segment discussion that begins on Slide 6. Refining Services sales for the quarter of $100 million were in line with the prior year as storm effects were mitigated by the pass-through of higher sulfur costs and recoveries under our take-or-pay contracts.

Adjusted EBITDA of $33 million was reduced by $9 million due to the storm on lower sales volume and additional onetime expenses related to outages and facility repairs.

Turning to Slide 7. Sales for silica catalysts improved by 6% to $26 million with polyethylene catalyst volumes leading the way. Zeolyst Joint Venture sales of $29 million were down $3 million as hydrocracking and specialty catalyst customers continued to defer changeouts as anticipated. Offsetting the decline was a rapid increase in demand for low sulfur renewable fuel catalysts.

Adjusted EBITDA of $19 million and margin of 33%, both declined from prior year on lower sales volumes in the joint venture as well as unfavorable fixed cost absorption on lower inventories versus an inventory build in the prior year quarter. These trends are expected to reverse in the second half of the year.

Moving to the outlook on Slide 8. We are reaffirming the guidance shared on our last earnings call, which reflected the effect of winter storm Uri. Sales are projected to be in the range of $555 million to $565 million, with Zeolyst Joint Venture sales in the range of $140 million to $150 million. Adjusted EBITDA is expected to be between $215 million and $225 million, with adjusted free cash flow between $75 million and $85 million.

We are making good progress with regulatory approvals and expect the sale of Performance Chemicals to occur sometime in the third quarter. We are planning to use the net proceeds at closing to pay a special dividend of $2.50 to $3.25 per share and reduce debt by $450 million to $550 million. This is expected to result in pro forma leverage at the end of this year in the mid- to high 3s.

I would note that our adjusted free cash flow guidance for the year assumes a sale date of September 30. We have also assumed approximately $3 million of corporate cost savings this year and project to achieve our run rate savings of $10 million to $15 million by the second quarter of next year.

With respect to the second quarter, we expect GAAP sales to be up approximately 15% from the first quarter as refiners are back online and working to make up for lost production. Sales for the Zeolyst Joint Venture should increase from the first quarter by approximately 10% as we see hydrocracking catalyst change-outs rebound.

We are projecting second quarter adjusted EBITDA to be largely in line with the prior year as hydrocracking catalyst orders are second half weighted, and we incurred $5 million of higher costs from increased turnaround activities. You may recall the second quarter last year was very strong for catalyst as customers accelerated orders ahead of the pandemic shutdown.

For the year, we expect second half adjusted EBITDA to be approximately 40% higher than the first half with higher Zeolyst Joint Venture sales and a continued rebound in sales volumes for refining services.

To summarize, first quarter results showed solid improvement absent the effects of the storm. We see demand building through the year that should drive significant second half improvement and double-digit sales and adjusted EBITDA increases for the year, and we are on track with the sale of Performance Chemicals and are in position to drive outstanding growth and margins as ecovyst going forward.

With that overview of the financials, I will now turn the call back to Belgacem.

Thanks, Mike. Now I'd like to summarize our financial growth targets, both for the near and long term, as shown on Slide 9.

Turning first to the near term. Earlier, I discussed the positive underlying end-use market dynamics, enabled by the healthy economic recovery and the continuing favorable secular trends. And Mike just reviewed the 2021 financial outlook for double-digit year-on-year growth in sales and adjusted EBITDA, with margins in the low 30% level. As a reminder, this is inclusive of the corporate transition cost drag of nearly 200 basis points as we transition the Performance Chemicals business to the new owner post deal closed.

As we move into 2022, there are a number of fundamental drivers that we expect will further enhance our growth over 2021 and in the following years. To cite a few of these. In the area of fuels and emissions control, regeneration services volumes are anticipated to rise by high single-digit on continuing alkylation demand growth, additional volumes from a new long-term customer contract and growing gasoline exports.

Growth for our catalyst is also projected to accelerate on the recovery of hydrocracking refinery change-outs and heavy-duty diesel production. Increasing renewable fuel production will drive higher demand for our catalyst materials as well as Chem32's upside catalyst activation services.

Virgin sulfuric acid will continue its robust growth into the mining sector, driven by the proliferation of green infrastructure and increased needs for automotive and electronics, resulting in strong demand growth for copper. And polyethylene catalyst growth will continue to outpace the market as our silica-based catalysts are preferentially specified in the production of materials with above market demand growth, such as high-density polyethylene or HDPE, with a high-strength to weight ratio.

With a meaningful and expandable size of total addressable markets for our businesses, we have clear focus and a commercial mission to capture further market share. Our growth journey is also setting up well to build on clear momentum and future tailwinds for energy transition and more durable lighter weight plastics.

So as we continue our collaboration with leading global industry players, we anticipate a growing pipeline of new opportunities for ecovyst growing and greening strategy through 2025 and beyond.

We view our 2025 targets as very achievable. Just to reiterate, this is simply pivoting off the current strength of our competitive customer positions, having long served them with critical proprietary and sustainability focused custom products and services. This competitive position affords us opportunities for commercially favorable multiyear contracts that provide stability and visibility. As a result, we expect to continue our industry-leading track record of high-growth and margins with strong cash conversion rates.

In closing, the entire team remains focused on execution on multiple fronts. We expect to complete our portfolio transformation this year on or ahead of plan. We have laid out our near and long-term strategy and pathways for accelerating growth. And at the forefront of our strategies, we are committed to expanding on our current base of sustainability focused products and services.

We look forward to continuing to update you on our progress and hope to see many of you this year, preferably in person.

With that, I hope that you and your families remain safe and well.

This concludes our formal remarks, and we're now ready to take your questions.

(Operator Instructions) We'll take our first question today from David Begleiter with Deutsche Bank.

Belgacem, just looking at second half guidance, obviously, is quite strong. Can you discuss amongst the 2 segments, the various drivers of that strong year-over-year second half performance?

David, the second half is going to be marked by the strong recovery of the alkylation business, particularly in the summertime. That's the season where driving becomes much more interesting. Also, as we -- refineries capacity are building up and increasing, we're going to see an additional level of change-outs happening, which will drive hydrocracking recovery to be sooner than later.

We started seeing the order books in the second half or the second half for our hydrocracking and other catalyst products. And we feel pretty strong that the recovery is going to be much stronger than what we're seeing in Q1 and Q2. That drives the shift. And as we increase volume, David, the margins are going to be highly accretive with volume because the cost is at a certain level today where we can get good margins and good adjusted EBITDA. Therefore, the growth quarter half to half.

Great. And just on the Performance Chemical sale, what drove the increase in the net proceeds? And what's the expected aftertax portion of those new proceeds?

David, it's Mike. The number that we've given of $995 million is aftertax. And the increase is really just due to -- we had a very preliminary estimate of what we thought our taxes were going to be when we gave the initial guidance. This -- there are a lot of comingled assets and entities between chemicals and catalysts. So as we've gotten deeper into it and formulated our plan to separate the entities, we've come up with a more refined estimate.

We'll take our next question from Angel Castillo with Morgan Stanley.

(technical difficulty)

I am sorry. I think we hardly hear the question at all because there is a background sound and there is a -- that is completely cut off. I hope I'm not the only one. Sorry, Angel.

Yes. (technical difficulty)

Yes, Angel, you're breaking up. There's a phone ringing in the background. I don't know if that's on your line or somewhere else.

And it does look like we have lost Angel's line. In that case, we will continue on to Aleksey Yefremov with KeyBanc.

Refining Services price in first quarter was up 5.8%. Was this entirely due to higher sulfur pass-through? Or was there underlying price increase in addition to cost pass-through?

It's a combination, but most of it is -- Mike, you can complement it. Most of it is a high pass-through.

Yes. Belgacem, that's correct. Yes, there's about $3 million of pass-through. The rest of the price is related to the take-or-pays that kicked in as a result of the storm. So that help mitigate part of the volume impact.

Understood. So underlying contract levels are about flat year-over-year. And is that expected to remain so for this full year?

You mean volumes...

Yes, I mean, mix is there as well. Yes, sorry go ahead. I mean...

The volumes or pricing, we talk about 2 different things, probably. Volumes or price changes or contract kicking in.

Pricing. Yes. I think it's the underlying pricing before any cost pass-throughs. Is that factor sort of a flat, a small positive or maybe low single-digit positive percent?

Go ahead, Mike.

Yes. Thank you. I would say there's -- the pricing itself has been strong. There's a lot of noise in this quarter between mix and the storm impact and everything else. But generally speaking, I would say, there's low single-digit pricing improvement areas, just masked by some of the other movements due to the volume changes and what actually got sold in the quarter, which was truncated by the storm.

Understood. And maybe another question on catalysts. You mentioned some destocking. Could you talk about that and sort of destocking, restocking dynamics that you see in this segment overall in the first half and the second half?

Well, the -- I wouldn't refer to them more of a destocking. But in the first half, there was an improved activity and particularly on an element of renewable diesel catalyst, which showed up much stronger in the first quarter.

We are going to see the real improvements in the second half for catalyst as the refineries are going to continue to increase our operation. And there's going to be more rhythm in terms of operating of refineries, which will drive more change-outs than anticipated or than previous -- than the first half, which will drive an increased demand on our catalyst products. That's on the catalyst.

But the other element that is reflected on the catalyst activation on the refining services, which is similar, is driven by refineries, is the activation -- demand for activation is going to be probably much stronger since there is going to be demand for renewable catalyst, which we have in our Chem32 business the ability to deliver some specific technology. And this is going to be also an element of growth from a catalyst perspective. So I wouldn't call that restocking. I think it's more catching up with the potential growth that is going to hit in the second quarter, into the third and fourth quarter.

(Operator Instructions) We'll go to Angel Castillo with Morgan Stanley.

Can you hear me?

Perfect. Thank you.

Yes, we can. Welcome back.

Sorry about that. Yes, I don't know what happened there. So just a quick question on leverage. You talked about where you will see -- you'll be kind of at the end of the year pro forma. As we think about the new portfolio longer term, what is kind of the right level of leverage that you see as kind of the right normal that it can sustain?

Belgacem, I could take that one. So what we've communicated is mid- to high 3s and the leverage by the end of this year. From a capital allocation perspective, we're going to be focused on debt reduction through the end of 2022. You've seen our cash flow guidance. And when you look at the EBITDA growth and the cash flow generation that we believe we can drive from ecovyst that we should be able to continue to delever at 0.5 turn a year. We have not set a longer-term target. But if you look to the end of 2022, we should be able to get to the low 3s at that point, and we'll continue to evaluate. From an M&A perspective, we've discussed bolt-on acquisitions, which are a little more bite size. You saw Chem32, we paid for that out of cash, did not meaningfully move our leverage. So we do believe we have the ability to bring the leverage down over time.

So Angel, just to put more color, the equation has got the M&A piece, which we know that it's not a list that you go and tap in when you have cash, it's opportunity. So it's opportunistic. And then you have the drive to reduce to drop the leverage. We have those 2 and the pay back debt. So the priority to pay debt is going to be always there. And as opportunities show up, we would be reinvesting in the business. Now you could have a period where all we do is pay debt. Now you could have a period where, especially what we see in the near-term is that we're going to go to the low 3s. And we are -- we have the ability to bring the leverage down by 0.5 turn a year, depending on the opportunities. But we're going to be chasing opportunities. And you also could have opportunities that show up halfway through, and we will just take them and then go back to bringing levers down.

So where we are probably going to be the sweet spot by 2022, it will be low 3s, which we think is comfortable enough for us to be able to juggle the 2 because we need to grow in based on small tuck-in M&A as well. So that's the balance. It's very difficult to predict.

What we know is our ability of 0.5 turn reduction. And we also know that in the near term, we're going to focus on bringing the leverage down to the low 3s. If that makes sense.

Yes, absolutely. That's very helpful. And then, I apologize if somebody already asked -- go ahead.

And Angel -- I'm sorry. Yes, one other point that I would make is, you may have seen that we expanded our peer set when we did the Investor Day presentation. And when you look at these other companies beyond -- because we really -- we don't have great direct comps in the specialty chemicals space, right, particularly considering that Grace is no longer be a public reporting entity.

So when you look at some of these other electronic chemical companies or the environmental recycling businesses, we're in the middle of the pack on leverage. That doesn't mean we need to stay there, and we communicated what our plans are for deleveraging. But I mean certainly, when you've got a high-growth, high-margin, high-cash conversion entity like ours compared to these others, we don't feel that we're an outlier, but we will continue to focus on bringing that leverage down.

Understood. That's very helpful. And then just -- I apologize if somebody already asked this while I drop-off for a second. But to your point on growth, one of the things that I noticed, I guess, was Chem32, it sounds like you're getting some of the benefits of that acquisition already flowing through. And you talked about renewable fuels and what you're seeing there. I was wondering if you could just expand a little bit more on the one, the Chem32 synergy opportunity, and 2, what you're seeing kind of from a renewable fuel end market perspective, if you didn't already discuss it, sir.

Sure. Look, the reason we have Chem32 in our portfolio is because we saw and we still see the opportunities, one, 2 growth vectors. One growth vector is the drive of the refining industry to outsource some of the units sulfating exercise and the activation.

Today, the activity -- there's probably 80% of the refiners still do that activity onsite. 20% are moving away from that and using their smaller units to be sulfide or a pre-sulfide at off-site, which presents a huge value for them on several fronts. One is obviously the time saving, especially if you go to a more frequent change-outs, time saving. And most of all is hazard and safety.

Remember, it grew in 2020 simply because of also COVID and health reasons where people wanted to minimize the presence of individuals onsite. So that is going to probably turn to be even more economic for some of the refiners. So we think that many refiners will go that way.

There will probably be even a trend to go to bigger units as opposed to only small units to increase the chance of refiners getting more -- saving more time and staying really in control of the cost and safety. That's one vector of growth, we think it's going to be in the favor of Chem32 market direction.

The second vector is on renewables. As I said, renewable requires a special catalyst special activation. And we do have a process in our intellectual property, reactor technology that favors us, and we have experience in that.

We think as we see renewable activation, catalyst activation grow or renewable growth, we can have a nice advantage over that. So you put those 2 together. And then you add the synergy that we're creating with the customer network. Remember, we operate in the Gulf Coast. This location is here in Texas, we -- they talk to refiners. We talk to every day.

We have deeper relationships with some of the refiners. It just expands the commercial and customer network with the reliability of our Eco Services business that brings more confidence. And with the strength of the technology that Chem32 has, we believe the growth vector could be very interesting in the coming years.

(Operator Instructions) We'll go now to David Silver with CL King.

I guess I had kind of maybe more of a clarification question for Mike. But for the allocation of the proceeds from the sale of Performance Chemicals, you've given a range for a special dividend and a range for debt paydown. And I think the gap in both cases is pretty close to $100 million. Can you just remind me what the criteria would be for deciding whether you're going to maximize that pay down, maximize the special dividend or something in between?

David, it's still under review. I mean, we gave a range for a reason because we hadn't finalized our tax position, which is still under review. We haven't finalized the closing date so all of those factors are still in play. So we will be happy to communicate where we come out a little closer to the closing or upon closing, but at this point, we're still working inside that range and deciding how best to optimize the mix between debt and special dividend.

Okay. And then I had a question for Belgacem maybe about his view on the evolving regulatory environment that you'll be operating in for the next few years.

So the current administration has started with a flurry of executive orders, and then there's a lot of discussion about some additional regulations or environmental legislation they might institute. And refining, of course, has been driven by continuous regulatory changes for a long time. But can you maybe just help us -- help me call out maybe 1 or 2 changes that have occurred since the new administration took place? And then maybe, are there 1 or 2 critical developments you're anticipating that may drive demand for your emissions catalysts or the alkylation business? In other words, where would be the key regulatory drivers from your perspective?

David, look, there is -- let me do that from a U.S. perspective, but also from a global perspective because it impacts also some of the refinery activities with respect to catalyst and emission control. So first of all, here, we believe that there is going to be some further stringent kind of tightening on the regulations. I can't cite any specific regulation changes. All I know is the CAFE standard particularly is not going to be eased as it was during the previous administration. And we might revert back to further tightening the CAFE standards, which means further tightening the sulfur -- desulfurizing and the emissions and -- which would be a great opportunity for our alkylation business.

Just a note on the Tier 3 sulfur regulations that are implemented in 2020 towards the end, that really brings in additional requirements for octane increase to a level where it probably triples the amount of alkylates that is needed to do that. And that's in practice right now. So we see that continuing and maybe growing further.

And of course, we're going to probably see some more than executive orders, probably we're going to see more rules and regulations put in place. And tighter application on further -- it's going to be further and further sulfur reduction. And every time you remove sulfur, you destroy octane, and you're going to have to rebuild it, which will probably be a positive factor.

On a global basis, of course, you'll recall people stopped talking about IMO 2020, which is a process by which also desulfurizing marine fuel that was starting to be implemented around China, particularly with the highest volume of application, that is recovering and moving forward.

You also have the emission control rules, the Europe 6 and the China 6 and all those regulations that are going to be pushed forward, continue to be pushed forward post-pandemic to recreate that momentum of tighter regulations.

So if you look at it as a whole, I think we're going to see a nice ramp-up of tighter regulation. That is the only answer that is there today to create that transition movement into cleaner air and cleaner fuel. It's just going to keep tightening.

And for us as a business, if I connect the 2, the more that tightening is the more activity for us and more business for us. And I think there is still a lot of room. It's not only the next couple of years where we're going to see cleaner fuels and cleaner air and cleaner water and all those demands and requirements, that's going to be a good tailwind for our business.

We have no further questions in queue at this time. This does conclude the PQ Group Holdings First Quarter 2021 Earnings Call and Webcast. Thank you for your participation, and you may disconnect at any time.