Ecovyst Inc. (ECVT) Earnings Call Transcript

Good morning, everyone. My name is Beau, and I will be your conference operator today. Welcome to Ecovyst's Second Quarter 2026 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 Mr. Gene Shiels, Senior Director of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to Ecovyst's second quarter 2026 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 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 2026 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 this morning'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. I'll now turn the call over to Kurt.

Thank you, Gene, and good morning. We are very pleased with our second quarter results, which reflect continued progress against our financial objectives and clear execution of our long-term growth strategy. As anticipated, high refinery utilization and favorable alkylate economics contributed to growth in sales volume for regenerated sulfuric acid. In addition, virgin sulfuric acid volume increased on a double-digit percentage basis compared to the year ago quarter on positive demand and the contribution from Waggaman acquired in May of last year. This volume growth, along with favorable net pricing, resulted in adjusted EBITDA of $53 million, solidly within our guidance range and up 27% compared to the second quarter of 2025. The quarter was also a milestone in strategic execution. On June 30, we closed the acquisition of the Calabrian sulfur dioxide and related derivatives business, the third bolt-on in a playbook we have now run 3 times, which is to identify essential sulfur chemistries adjacent to what we already do best, acquire them at capital-efficient valuations and integrate them into a network that is uniquely built to provide superior products and services to our customers. Calabrian broadens our portfolio, deepens our position in end uses we already serve and is accretive from day 1. Slide 5 lays out that playbook. The disposition of our Advanced Materials & Catalysts segment in December simplified the portfolio and strengthened the balance sheet, giving us both the focus and the financial flexibility to build a platform of leading sulfur solutions. Ecoservices has long been a leading provider of virgin and regenerated sulfuric acid, and it is that scale in sulfur chemistry that makes each step out possible. The first was Chem32 in 2021, a leading provider of ex-situ catalyst activation using sulfur-based sulfiding technology. The second was Waggaman in May of 2025, which added capital-efficient incremental capacity sited in our Gulf Coast network. Waggaman contributed to our double-digit virgin sulfuric acid volume growth this quarter, and we have delivered the network optimization we underwrote. Calabrian is the third step, and it follows the same logic. It brings significant end-use and customer overlap with our legacy business, while adding sulfur dioxide and derivative chemistries we did not previously offer. That is what makes this more than added capacity. It widens what we can sell to customers we already serve in applications where reliability of supply, not price alone, decides who wins the contract. Across our portfolio, we hold leadership positions in critical chemistries that are essential to our customers' operations, positions that are uniquely built to provide superior products and services to our customers and that we intend to keep extending. On Slide 6, our demand expectations have not changed materially from our first quarter call. For sales of regenerated sulfuric acid, we are in the midst of the summer driving season, and alkylate economics remain favorable. We expect refinery utilization to remain high and for the second half, higher regenerated sulfuric acid volume with lower unplanned customer downtime than we experienced in 2025. For sales of virgin sulfuric acid overall, we expect relative stability for the balance of the year. We see continued demand growth in the mining sector driven by copper expansion projects tied to structural electrification. Calabrian gives us a second way to participate in that same growth. With Canadian gold mines running at full capacity, we expect its sulfur dioxide sales into mining to remain favorable. For sales into industrial applications, we continue to expect virgin sulfuric acid sales into the nylon end-use to be relatively flat in 2026. Sulfur prices continue to increase. And while we did not see any material demand destruction in the second quarter associated with high sulfur prices, we remain cautious about the potential for weaker demand in some industrial applications. Based on experience, we expect today's elevated sulfur prices to eventually moderate. If customers begin to anticipate lower sulfur prices, we could see a temporary demand impact from destocking. Overall, long-term secular trends, mining expansion and the onshoring of U.S. industrial activity are positives for Ecovyst. And as a leading provider of products essential to our customers, we remain excited about the longer-term outlook across our businesses. I'll now turn the call over to Mike, who will review our financial results.

Thank you, Kurt, and good morning. Starting with our key highlights. Our second quarter sales of $250 million were up $74 million, reflecting the pass-through impact of higher sulfur costs, favorable net pricing and strong demand for both regenerated sulfuric acid and virgin sulfuric acid. Adjusted EBITDA of $53 million was up 27% and solidly within our guidance range. Cash generation was positive in the quarter. And for the first half of 2026, adjusted free cash flow was $13 million. Considering the closing of the Calabrian acquisition at the end of the second quarter, funded through debt and cash on hand, we ended the quarter with a net debt leverage ratio of 2x. On the following slide, excluding the $55 million sulfur pass-through, sales were up nearly 11%, reflecting higher regenerated and virgin sulfuric acid volume in part from the acquired Waggaman plant and favorable contractual pricing. Adjusted EBITDA was up $11 million, driven by higher sales volume and favorable net pricing, partially offset by higher manufacturing costs, general inflation and higher transportation costs. The adjusted EBITDA bridge on the following slide shows a continued positive price-to-cost ratio at the contribution margin level. As previously mentioned, the pass-through effect of higher sulfur costs on sales was approximately $55 million, with the pass-through generally having no material impact on adjusted EBITDA. Excluding that pass-through, the price and variable cost combination contributed $9 million, largely from favorable contractual pricing for regenerated sulfuric acid, including the net price impact of higher index costs. Higher sales volume, including Waggaman, accounted for nearly $7 million, partially offset by higher fixed manufacturing costs, including Waggaman's incremental costs. Turning to the cash and leverage on the next slide. As noted, cash generation was positive in the second quarter, resulting in adjusted free cash flow for the first 6 months of 2026 of $13 million. As we have previously discussed, free cash flow generation this year will reflect higher capital expenditures associated with the expansion of our Gulf Coast storage and logistics network and the working capital impact of higher sulfur costs. We ended the quarter with available liquidity of $176 million, $88 million of cash and $88 million of availability under our ABL. Because the funding of the Calabrian acquisition added $100 million of debt with no associated trailing 12-month EBITDA contribution, our net debt leverage ratio at quarter end was 2x, up from 1.2x at March 31. It is worth noting that the 2x leverage ratio carries the full acquisition debt against none of Calabrian's trailing 12-month EBITDA. We are currently at the low end of our 2 to 2.5x target range. Turning to the next slide. Our capital allocation over the past 15 months reflects the same discipline Kurt described, $83 million of stock repurchases, $472 million of debt reduction and 2 bolt-on acquisitions, aggregating $224 million. In addition, this year, we have the flexibility to implement plans to organically invest approximately $20 million in the expansion of our Gulf Coast storage and logistics network. We executed buybacks, delevered and made 2 acquisitions and still ended the quarter at the bottom of our target leverage range. Going forward, we expect to maintain that balance, weighing organic growth projects, additional bolt-on acquisitions, debt reduction and stock repurchases, creating the most value for our stockholders. I'll now turn to the 2026 outlook and revised guidance. Our revised 2026 guidance reflects both our expectations for our legacy business and the expected contribution of the Calabrian business in the third and fourth quarters. Sulfur prices rose further in the second quarter, and our second half outlook assumes they hold near current levels. On that basis, we now expect the full year pass-through effect of sulfur cost on sales to be approximately $220 million higher compared to the prior year, up from $155 million previously expected. Incorporating Calabrian, we now expect full year 2026 sales of $1.02 billion to $1.06 billion, up from our prior guidance, which excluded Calabrian of $890 million to $970 million. Given our favorable first half results and our confidence in continued demand stability, we are raising the low end of our full year adjusted EBITDA guidance range for the legacy business to $185 million, while maintaining the high end at $195 million. For Calabrian, we expect adjusted EBITDA in the second half of the year to be in the range of $10 million to $12 million. Accordingly, we now expect Ecovyst full year 2026 adjusted EBITDA to fall in the range of $195 million to $207 million. We expect adjusted free cash flow to be in the range of $45 million to $55 million, up from $40 million to $55 million, with the increase reflecting the contribution from Calabrian, partially offset by the impact of increased sulfur costs on working capital. While we funded a portion of the Calabrian acquisition through a $100 million add-on to our term loan, we have realized some additional interest savings. And as such, our expectations for the full year interest expense remains unchanged at $18 million to $22 million. Capital expenditures are now expected to be $85 million to $95 million, up from $80 million to $90 million, reflecting the Gulf Coast expansion and the addition of Calabrian. Depreciation and amortization is now estimated at $80 million to $84 million. And we expect our full year effective tax rate to remain in the mid-20% range. And finally, we expect adjusted net income to be in the range of $65 million to $85 million with adjusted diluted net income per share of $0.58 to $0.72 per share. As we move to the next slide, I'll provide directional guidance for the third and fourth quarters. For the third quarter, we expect sales of regenerated sulfuric acid to be up compared to the third quarter of 2025. And although we expect third quarter volume to be up sequentially, we anticipate virgin sulfuric acid will be slightly lower than the year ago quarter, reflecting fewer expected spot sales compared to the third quarter of 2025. With higher turnaround costs than the prior year, we expect third quarter 2026 adjusted EBITDA, including Calabrian, to be in the range of $54 million to $59 million. Fourth quarter expectations are similar, higher regenerated sulfuric acid volume and lower virgin sulfuric acid volume than in the fourth quarter of 2025. Second half virgin volumes are expected to be lower than the last year because 2025 had a high amount of spot opportunities, and we did not have the turnarounds limiting our production. We believe sulfur prices may have reached a plateau and could begin to decrease later this year. We still expect sulfuric acid pricing, excluding the pass-through effect, to be lower in the fourth quarter on projected customer mix and on the timing difference between when we purchase sulfur and when we pass those costs through to customers. Regarding turnaround costs, you will note a change in the turnaround schedule compared to our view in the first quarter's earnings call, as 1 of the 2 turnarounds planned for the fourth quarter has now shifted into early 2027. Despite this timing shift, we still expect turnaround costs in the fourth quarter to be up compared to the year ago quarter, as Q4 2025 did not have any turnarounds. For the fourth quarter of 2026, we expect adjusted EBITDA, including Calabrian to be between $48 million and $55 million. I will hand the call back to Kurt for some closing remarks.

Thank you, Mike. We are encouraged by our progress through the first half of the year with results that position us well for the second half. Building on the strong performance of our legacy business and the expected contribution from Calabrian in the third and fourth quarters, we have increased our full year 2026 adjusted EBITDA guidance to a range of $195 million to $207 million. We are pleased to welcome the Calabrian team to Ecovyst. One month in, integration is on plan, and we are focused on executing the synergy actions we underwrote at signing and identifying the growth projects that Calabrian's asset base supports. For the remainder of the year, our focus will remain on execution. In addition to the integration of Calabrian, the Gulf Coast storage and logistics expansion is underway, which we expect will enhance our ability to serve growing virgin sulfuric acid demand. After funding the Calabrian acquisition, we ended the second quarter with a net debt leverage ratio of 2x, within our long-term guidance range of 2 to 2.5x. As we continue to evaluate organic and inorganic growth opportunities, we believe our balance sheet and cash generation capability will continue to provide significant flexibility, and we will prioritize the options we believe create the best value for our stockholders. I will close on this. Our advantage is not any single asset or transaction. It is a network of essential sulfur chemistries embedded in our customers' operations, a position we have now extended 3x without stretching the balance sheet. We intend to keep compounding it. At this time, I will ask the operator to open the line for questions.

[Operator Instructions] We'll go first this morning to John McNulty with BMO Capital Markets.

This is Margarita Margulis on for John. Given the volatility in the sulfur and sulfuric acid markets, could you please speak to not only spot pricing, but since roughly 90% of your business is tied to longer-term contracts, how should we think about where contracts coming due later this year may reset?

Thanks for the question. So yes, spot sulfur and sulfuric prices are obviously up appreciably year-over-year. And as you pointed out, the lion's share of our business is really -- is under contract, right, anywhere from 1-year to 3-year contracts for virgin sulfuric acid. And a portion of those roll off at the end of every year. So it would be our belief and expectation is as those roll off, they should be negotiated as usual at more favorable pricing and terms if everything in terms of the market overall is in the same condition as it is today.

Great. And then I had another question on nylon markets. We have seen concerns about some weakness there. Could you speak to what you're seeing currently?

Yes. For our area in nylon, which is, again, really geographically focused on the Gulf Coast production, we went into this year believing it would be flattish for us. And that's -- as we sit here midway through the year, that's largely how it's playing out. So we maintain that outlook for the remainder of the year.

We'll go next now to Patrick Cunningham with Citi.

Now that the Calabrian transaction is closed, integration is underway, can you quantify or provide an update on targeted cost synergies, how we should be thinking about those in 2027? And sort of how soon you expect to leverage your existing sales force and customer base to accelerate some of the cross-selling you talked about in the past?