Ecovyst Inc. Q3 FY2022 Earnings Call

Good morning. My name is Katie, and I will be your conference operator today. Welcome to the Ecovyst Third Quarter 2022 Earnings Call and Webcast. Please note today's call is being recorded and should run approximately one hour. After the speakers’ remarks, there will be a question-and-answer period. I would now like to turn the call over to Gene Shiels, Director of Investor Relations.

Thank you, Katie. Good morning, and welcome to the Ecovyst third quarter 2022 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, 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, anticipated end-use demand trends, and our 2022 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 on today's call with their corresponding GAAP measures can be found in our earnings release and in presentation materials posted in the Investors Section of our website. Now I'd like to turn the call over to Kurt.

Thank you, Gene, and good morning. Ecovyst delivered strong financial results for the third quarter of 2022, reflecting continued growth in sales and building upon the favorable results we delivered in the first half of this year. As a key supplier of products and services to industries that provide energy and materials to essential segments of the economy, Ecovyst has continued to benefit this year from favorable demand trends across the breadth of our portfolio. In addition, we believe Ecovyst remains well-positioned to leverage key sustainability trends and to benefit from projected growth and demand for low-carbon technologies in the years to come. For our Ecoservices business, high utilization rates in the U.S. refining industry, more stringent fuel standards, and increasing demand for premium gasoline continue to drive volume growth for our regeneration services. Those regeneration services are vital to our refining customers' production of alkylate, the critical component in the formulation of higher octane and cleaner fuels. Ecovyst has a leading share position for regeneration services in the U.S. with long-standing relationships with blue-chip customers, who rely upon Ecovyst as their sole provider of regeneration services. Our assets are well situated to service both the Gulf Coast market, where two-thirds of U.S. refining capacity is located, and West Coast markets where alkylate plays an important role in the production of CARBOB, the regulated blend for California gasoline. With four facilities in the Gulf Coast and two in California, our customers value our production redundancy as it ensures operational integrity for their highly profitable Appalachian units. Strong regeneration volume growth was a significant contributor to the robust year-over-year results for our Ecoservices business in the third quarter. We also continue to see strong demand for virgin sulfuric acid across a variety of applications, including mining, production of engineered plastics, lead acid batteries, and semiconductors. In the third quarter, our Catalyst Technologies business benefited from higher sales of polyethylene catalysts, driven by positive global polyethylene demand. We also saw increased sales of niche custom catalysts for petrochemical applications. With continued favorability in demand trends, Ecovyst's third quarter sales, including our 50% share in the ZI joint venture, were up 30%, and adjusted EBITDA was up 9%, compared to the third quarter of 2021. I'll note here that on a year-to-date basis, Ecovyst's sales are up nearly 45% and adjusted EBITDA is up 26%, compared to the first nine months of 2021, with the increase primarily representing organic growth. While inflation is a reality in today's environment, we have continued to benefit from structural margin support in our Ecoservices business by contractual pass-through mechanisms for variable costs. For sulfur, the pass-through is dollar-for-dollar, while costs for other variable inputs such as natural gas, transportation, labor, and certain plant costs are passed-through on an index basis. While we do not have these contractual pass-throughs in our Catalyst Technologies business, we have undertaken targeted price actions as a means to offset increases to variable costs. As a result, we were able to significantly mitigate the adverse impact of inflation in the quarter. In fact, during the third quarter, we continued to see unit margin expansion in our Ecoservices business. The third quarter of 2022 was also another quarter of strong cash generation for Ecovyst. With open market share repurchases and in conjunction with the secondary offering in early August, we repurchased an aggregate of $65 million worth of stock during the quarter, yet we were able to maintain our net debt leverage ratio of 2.8 times, underscoring our conviction that Ecovyst's cash generation capability continues to provide for significant capital allocation flexibility. In our second quarter earnings call in late July, we shared with you our belief that we remain on track to deliver solid year-over-year growth in financial results. Given our conviction in the strength and stability of our business, at that time we increased our full-year guidance range for adjusted EBITDA to $265 million to $275 million. As we move into the fourth quarter, I am pleased to say that the positive momentum in our business has continued. Based upon our current outlook for the balance of the year, we expect that our full-year 2022 adjusted EBITDA will land at the high end of our $265 million to $275 million guidance range. Now let's turn to slide five for more detail on our expectations for near-term demand trends. Within our Ecoservices business, we believe the outlook for our Regeneration Services and for virgin sulfuric acid demand remains favorable. While electric vehicle penetration will undoubtedly increase over the next few years, we believe conventional fuel demand will remain strong, supported by the sheer number of conventional cars and trucks in use today. High refinery utilization, growth in premium gasoline, which requires a higher proportion of alkylate, as well as increasing fuel economy standards are expected to continue to drive alkylate demand. Additionally, export demand for refined products remains strong, and with access to crude supplies and the lowest cost of energy, U.S. refineries remain well-positioned to serve the growing export demand. We also believe future expectations for greener infrastructure and electrification, as well as continued growth in other industrial applications will drive further demand for virgin sulfuric acid. Growth in low-carbon technologies, including electric vehicles, batteries, and solar panels will require increased production of metals and minerals with sulfuric acid utilized in the leaching process to extract materials such as copper and borates from the mined rock. And if expectations for expansion of these low-carbon technologies are to be met, demand for sulfuric acid will undoubtedly increase. Turning to the balance of our Ecoservices business, while collectively less than 10% of consolidated revenue, we believe our Catalyst Activation segment, the Chem32 business that we acquired last year, and our Waste Treatment businesses are positioned for attractive growth. Chem32 provides ex-situ activation for catalysts, including catalysts used in renewable fuels applications. Ex-situ activation provides for faster start-up from turnarounds, averting lengthy on-site activation processes. The business is extremely scalable, and we expect to benefit from continued expansion in renewable fuel production. We also expect further growth in our Waste Treatment business. With our favorable Gulf Coast locations, our incineration of specific chemical waste streams provides our customers with a preferred alternative to long-distance trucking of liquid waste and disposal via deep well injection. With a more environmentally friendly process than other alternatives, the waste streams are incinerated in our furnaces and Ecovyst benefits from the inherent energy in the waste streams, reducing external natural gas requirements. For our Catalyst Technologies business, sales of our silica catalysts have continued to grow along with global polyethylene production. While polyethylene demand is expected to slow modestly, our sales in the polyethylene production have been higher than the industry growth rate as the sales of our customized catalyst solutions have benefited from a differential win rate on new capacity expansions. Likewise, the near-term demand outlook for sales of zeolite catalysts through our ZI joint venture also remains positive. We expect high refinery utilization and global fuel demand will continue to support sales of hydrocracking catalysts. While there is still a significant backlog of heavy-duty diesel vehicle orders due to production constraints and the global chip shortage, sales of zeolite catalysts for emission control applications are expected to benefit. Lastly, we expect growth in renewable fuel capacity, including the future adoption of sustainable aviation fuel, will continue to drive growth for our zeolite catalyst. With that, I will turn the call over to Mike Feehan for a review of third quarter financial results.

Thanks, Kurt. During the third quarter, Ecovyst continued to benefit from favorable demand trends. Total sales, including our 50% interest in the Zeolyst joint venture, were $260 million, up $60 million or 30%, compared to the third quarter of 2021. The increase was primarily driven by higher average selling prices, including the pass-through of higher sulfur costs, as well as the higher demand for Regeneration Services in our Ecoservices business and higher catalyst sales into polyethylene and niche custom applications within Catalyst Technologies. Higher pricing in the third quarter includes the pass-through of $28 million of higher sulfur costs, as well as the contractual index pass-through of other variable costs, including natural gas and freight, principally in our Ecoservices business. Adjusted EBITDA for the third quarter of 2022 was $75 million, up 9%, compared to the third quarter of 2021 with an associated margin of 29%. The increase in adjusted EBITDA was driven by nearly $7 million of contribution from higher sales volume, as well as higher average selling prices, including the $28 million pass-through of higher sulfur costs, which more than offset the increase in variable costs. The $28 million average selling price increase associated with the sulfur pass-through does not impact adjusted EBITDA, but does inflate the denominator in the adjusted EBITDA margin calculation. If you exclude the impact associated with the pass-through of higher sulfur costs, the adjusted EBITDA margin would have been 32.5% in the third quarter of 2022. Ecoservices posted another favorable quarter, with third quarter sales of $196 million, up $58 million or 42%, compared to the third quarter of 2021. Third quarter results were driven principally by higher contract pricing along with the increased demand for Regeneration Services supporting alkylation production. In addition, sales of virgin sulfuric acid were up modestly compared to the third quarter of 2021, reflecting ongoing demand in industrial applications, including mining. Third quarter adjusted EBITDA for Ecoservices was $64 million, up $12 million or nearly 24%, compared to the third quarter of 2021 on the higher sales volume and pricing covering increased operating costs, including sulfur, natural gas, and freight. The adjusted EBITDA margin for Ecoservices was 32.8%, down 490 basis points, compared to the third quarter of last year. However, adjusting for the 690 basis point impact of the sulfur pass-through, the adjusted EBITDA margin for Ecoservices would have been 40% for the quarter. Turning to results for Catalyst Technologies. Third quarter results for Catalyst Technologies reflect higher sales of polyethylene and niche custom catalysts, partially offset by lower sales of hydrocracking catalysts, largely a function of timing due to deferral of planned turnarounds as refiners seek to maximize profitability. We expect to see higher sales of hydrocracking catalysts in the fourth quarter. Total sales for Catalyst Technologies were $64.6 million, up $2 million or 3%, compared to the third quarter of 2021. Third quarter adjusted EBITDA was $19 million, down $6 million, compared to the third quarter of 2021, with higher overall sales volume offset by less favorable product sales mix and higher production costs within the quarter. Moving to the highlights on leverage and liquidity. Our strong cash generation provides significant financial flexibility, supporting net leverage reduction, the funding of growth initiatives, as well as share repurchases. Our net leverage ratio was 2.8 times at September 30th, which was unchanged from the end of the second quarter, even with deploying nearly $65 million in cash for share repurchases in the third quarter. Given our expectations for further cash generation in the fourth quarter and excluding any potential M&A or additional share repurchases, we continue to anticipate our leverage ratio to be in the mid-2 times by the end of the year. At the end of the third quarter, we had total liquidity of nearly $200 million, while down compared to the $236 million at the end of the second quarter, this reflects the previously mentioned $65 million of cash used for share repurchases during the quarter. We continue to believe our free cash flow generation capability and our liquidity position provides us with a significant amount of financial flexibility, allowing us to maintain a very balanced approach to capital allocation. Given our strong balance sheet with only one tranche of debt maturing in 2028, we can continue to invest in operational improvements and organic growth initiatives while remaining positioned to evaluate accretive bolt-on acquisitions that have a clear strategic fit with our existing businesses. As we demonstrated in the third quarter, we can also participate in targeted share repurchases while continuing to prioritize net leverage reduction and growth initiatives. During the quarter, we repurchased 1.1 million shares through open market purchases at an average price of $9.77 per share. In addition, we repurchased an additional 6.5 million shares in early August, supporting the secondary sale of stock by our private equity sponsor. As of quarter end, we still had $376 million remaining under the original $450 million share repurchase authorization. Turning to our full-year 2022 outlook. We expect demand trends to remain relatively stable for the balance of the year. We believe high refinery utilization will continue to drive demand for alkylate and therefore, our Regeneration Services, and we expect demand for virgin sulfuric acid to also remain strong. In Catalyst Technologies, our outlook for long-term demand trend is positive, driven by polyethylene demand, future growth in renewable fuel, and emission control applications. Overall, our outlook for the fourth quarter has not changed materially. We are lowering our full-year sales guidance down modestly to a range of $810 million to $830 million, solely a reflection of the pass-through impact of lower anticipated sulfur costs. Based upon our favorable results for the first nine months and our expectations for the fourth quarter, we anticipate our full-year 2022 adjusted EBITDA may fall toward the high end of our $265 million to $275 million range, and we continue to expect adjusted free cash flow generation of $115 million to $125 million for the year. As a reminder, the fourth quarter tends to be seasonally lower for Ecoservices due to customer and internal turnaround activity following the summer driving season, and we expect fourth quarter adjusted EBITDA for Ecoservices to be similar to the first quarter earlier this year. In contrast, as noted in our second quarter call, we expect strong fourth quarter results for Catalyst Technologies, with fourth quarter adjusted EBITDA higher than in the third quarter. I'll now hand the call back to Kurt for some closing remarks.

Thank you, Mike. In summary, we are energized by the financial results we have delivered thus far in 2022, and I want to extend my gratitude to all Ecovyst employees for their dedication and their contributions to the success we have had this year. We firmly believe our year-to-date results demonstrate the true resilience and organic growth potential of Ecovyst’s business model. Furthermore, our favorable results thus far in 2022 validate the decision to divest the Performance Chemicals and Performance Materials businesses, which enabled Ecovyst to focus on growing the high-quality uniquely positioned businesses that we have today. We have entered the fourth quarter with good business momentum in both our Ecoservices and our Catalyst Technologies businesses. As a result for full-year 2022, we expect to deliver on the high end of our guidance range for adjusted EBITDA. Looking forward into 2023, while the uncertain economic environment could result in some softening of demand, we still expect demand fundamentals across our end-use exposures to remain positive. We believe our leadership positions in growth markets, the nature of our long-standing customer relationships, and in some cases, order backlog will all continue to provide for good near-term visibility. With a net debt-to-leverage ratio of 2.8 times and in light of the cash generation capability we have, our balance sheet is in very strong shape. We expect to generate additional cash over the course of the fourth quarter, which will continue to provide us with the flexibility as we balance our capital allocation alternatives and continue to position Ecovyst to deliver exceptional value for our shareholders. With that, we will ask the operator to open the line for questions.

Thank you. Our first question will come from John McNulty with BMO Capital Markets. Your line is open, please go ahead.

Yes, thanks a lot. Thanks for taking my questions. So I guess the first one would just be on the refining catalyst business in terms of some of the business that kind of got delayed or pushed out as the refiners postponed some of their turnarounds. Does that all get pushed into the fourth quarter? Or do you see that drag into 2023 as well? Because I know 2023 was looking like we were going to see a pretty good step up already. But I guess curious if that maybe even picks up higher.

Thank you, John. There hasn't been a significant change in the hydrocracking business. We have experienced some delays, primarily due to the historically high distillate cracks currently in the market and the very low distillate inventories. This situation is encouraging refineries to postpone turnarounds and catalyst replacements in order to produce more products. However, when these refineries do take outages, they are likely to invest in high-yielding and high-performance catalysts like those offered by Zeolyst. As we mentioned earlier, we anticipate a stronger fourth quarter for hydrocracking, viewing these delays as temporary. The current demand for the product in the market is driving this situation.

Got it. Fair enough. And then when you think about the Ecoservices business as we start looking out to 2023, it seems like there's, kind of, a lot of puts and takes. It seems like you may see more demand from the regeneration side as the economy is opening up and you see more and more driving. At the same time, like there are obviously concerns about the economy slowing down and so maybe there's a negative impact on mining and industrial. So maybe can you walk us through how you guys are thinking about the puts and takes and maybe give us a little bit of an early peek at how you're thinking about 2023?

Yes, we won't be providing any guidance for 2023. However, if we look at the trends in the Ecoservices business, there's high refinery utilization, refinery crack spreads are above historic averages, and there’s strong demand for alkylate and clean gasoline for the U.S. motor pool. Additionally, we're seeing significant exports of motor gasoline from the U.S., especially from the Gulf Coast, where our customers are very involved. All these factors will positively impact the Regeneration business. Regarding virgin sulfuric acid, it plays a crucial role in developing green and low-carbon technologies, which require significant amounts of it. The other areas of our virgin sulfuric acid business, particularly in industrial and materials, are mostly centered in the Gulf Coast, where customers have a considerable energy advantage and should continue to thrive in this environment.

Got it. Helpful, helpful color. Thanks very much.

We'll go next to David Begleiter with Deutsche Bank. Your line is open, please go ahead.

Thank you, Kurt. Just sticking on the virgin sulfuric acid business. In a recession, how has it performed historically in prior downturns?

In previous downturns, the business has shown stability. I've been with the company since 2006, so I've experienced the downturns in 2008 and 2020. Our business is quite diverse, especially in terms of our sulfuric acid portfolio, which is the most commonly used chemical globally. We have a broad exposure to the industrial sector, particularly in mining, which appears to remain strong as we enter 2023. We foresee no factors that would hinder future mining activity or the demand for green and low-carbon technologies that rely on substantial amounts of metals and minerals. Additionally, our industrial segment is diverse, covering materials from petrochemicals to water treatment chemicals. A significant portion of our operations is based in the Gulf Coast, which offers a considerable energy advantage over competitors worldwide.

Very good. And just in our Catalyst Technologies, you mentioned higher production costs in Q3. Could you talk to those? And is that one of the reasons why Q4 looks like quite a bit stronger than Q3?

Yes. Specifically regarding the Catalyst side, when considering Q3, we previously mentioned during the Q2 call that Q3 would be similar to Q2. In terms of overall Catalyst performance, there were a few factors at play. The hydrocracking sales we discussed earlier were delayed due to strong distillate production at this time. Comparatively, the mix was slightly different compared to the third quarter of 2021. Additionally, on the production cost front, we faced some one-time logistics bottlenecks that necessitated expedited shipping of raw materials between plants.

And can you quantify that impact in Q3? And is that for Q4?

Yes. We expect Q4 to be stronger than Q3 in the Catalyst business. We anticipate that the impact of production costs related to intercompany transfers will moderate as logistics supply chains improve.

Our next question comes from Aleksey Yefremov with KeyBanc Capital Markets. Your line is open, please go ahead.

Thanks. Good morning, everyone. Just to stay on the Catalyst side, I realize you will not be providing guidance for next year. But what's your sense can Catalyst business grow next year grow EBITDA?

Yes, we expect strong underlying growth trends in the Catalyst business. Diesel crack spreads and inventories are projected to remain favorable into next year, which will benefit the hydrocracking segment. Additionally, there is a backlog of heavy-duty diesel vehicles that will require emission-controlled catalysts in 2023. In other areas of the Catalyst business, such as polyethylene, demand for film and sheeting continues to be robust. Looking ahead, we anticipate continued strength overall. Renewable fuels remain a positive factor for us, as higher distillate cracks promote increased production of renewable fuels and the establishment of new plants.

Thanks, Kurt. And on Ecoservices, you reported volume growth this quarter, was this primarily regeneration or both markets?

Yes, I can answer that one. That was primarily in the Regeneration Services side. That was the predominance of the volume growth. However, I would comment that virgin sulfuric acid was up modestly. Again, it was up continuing with the strong growth in the various end markets. So both sides were up, but more on the Regen side.

Thanks. And last one, if I may, just on virgin markets. Do you see any signs of weaker demand trends? Obviously, there's some seasonality. But beyond that, is there any red flags in that market?

Yes, I believe the virgin sulfuric business isn't particularly seasonal. The Regeneration side is seasonal, and as we've mentioned, during the fourth and first quarters, we typically schedule maintenance during off-peak times. In contrast, the demand for virgin sulfuric is fairly steady. When we analyze the end market drivers, the petrochemical and materials sectors remain robust. Being entirely North American-based gives our customers a significant energy advantage over global competitors, enabling them to maintain high utilization rates. Regarding the mining sector, there are strong tailwinds that are unlikely to be disrupted. With substantial investments and government subsidies, including those from the recent Inflation Reduction Act, which offers considerable support for green infrastructure and electric vehicles, there will be a substantial increase in U.S. mining activities, benefiting the virgin asset segment.

We'll go to next to Angel Castillo with Morgan Stanley. Your line is open, please go ahead.

Alright, thanks for taking my questions. First, I was just wondering if you could give us a little bit more color on the methyl methacrylate or MMA catalyst business. And what you're seeing there in terms of orders as well as just overall demand, both fourth quarter and for 2023?

Yes, for methyl methacrylate, we generally consider this segment to be more niche or specialized in catalyst applications. As we discussed, the mix in the third quarter compared to the third quarter of 2021 was different, resulting in lighter sales this year than last. This is mainly due to timing, as sales of methyl methacrylate orders do not occur every quarter and can depend on when customers need to replenish their supplies. However, we believe that demand in this sector remains strong. We offer a distinct and effective technology in this area and have developed long-term relationships with our customers, who are well integrated into their processes. Therefore, we are optimistic about its health moving forward.

That's helpful. Thank you. And then just in terms of capital allocation, you noted you did another $11 million of buybacks this quarter. And you talked about opportunities in terms of bolt-ons or further kind of investments. Could you just tell us, I guess, as you think about both the near term and into next year? How you're kind of thinking about both the buyback opportunity, given you have authorization outstanding, as well as bolt-on opportunities in the pipeline that you see there, both from a timeline perspective and in areas of potential interest or opportunities?

Certainly. We assess the company's cash generation along with its strong balance sheet, which enables a flexible and robust capital allocation strategy. Growth is a key focus for us, supported by a substantial pipeline of both organic and inorganic opportunities. Moving forward, we plan to utilize our cash generation and balance sheet to fund this growth. In terms of mergers and acquisitions, our current business is aligned with the energy sector, particularly in areas related to green infrastructure trends, renewable fuels, and the domestic production of various materials. As we explore future opportunities, we will continue to target these sectors. Regarding stock buybacks, our management team believes strongly that our share price is undervalued. We have engaged in open market purchases and participated in the secondary offering associated with Catalyst. We are committed to repurchasing shares wherever we see value, and this quarter, our management team also made personal purchases of shares, further emphasizing our confidence in the company's valuation.

We'll go next to P.J. Juvekar with Citi. Your line is open, please go ahead.

Hi, this is Patrick Cunningham on for P.J. Good morning. We've started to see some inventory destocking in polyethylene and producers are cutting utilization rates. What are your expectations for polyethylene film and packaging demand? And do you expect this sort of recent destocking to near-term volume growth?

Sure. So our polyethylene sales were up in the third quarter. You have seen and we've read the same thing where you've seen some, I would say, more inventory distortions on separate side of the supply chain as there's been ongoing shipment and logistics issues in the industry. But we view things like film and sheet as remaining stable. As we mentioned, our really highly customized catalysts that we were specified into really the world-class producers of polyethylene companies that are on the very low end of the cost curve, due to their scale and their location and their cost of energy. So our customer base has generally maintained a very high utilization. So we feel pretty good about polyethylene going forward.

Great, and how are you thinking about the potential benefits of the Inflation Reduction Act? Are there any sort of growth investments that become more incrementally attractive, whether it would be catalyst for renewable fuels or something in plastics recycling? How are you positioning yourself given that the bill?

Yes. Reviewing the Inflation Reduction Act, it supports several aspects of our business. There are tax credits and loans for green infrastructure, which highlights the importance of the virgin acid segment and the production of metals and minerals needed for wind turbines, solar panels, and similar technologies. The Act also extends credits for renewable fuels and introduces a new credit for sustainable aviation fuel, expected to see significant adoption around the middle of this decade. Additionally, the clean vehicle development encourages the use of metals and minerals sourced in the U.S., benefiting the mining sector and virgin acid. Overall, the Inflation Reduction Act is very positive for many segments of our business. Regarding plastics recycling, we are collaborating with major plastics producers on catalyst technology to enable the catalytic recycling of plastics, which we anticipate will be commercialized in about a decade.

Great. Thank you.

Our next question comes from Laurence Alexander with Jefferies. Your line is open, please go ahead.

Good morning. Just two questions on cadence. One to follow up on the last question. When new renewable diesel capacity ramps up, is there an initial fill order for your product? Or is your sales to that facility going to be tied more to just their actual production run rates?

Yes, we have renewable fuels exposure on two sides of the business. Starting with the Ecoservices side, the Chem32 Catalyst Activation business we acquired last year is involved in sulfiding the hydroprocessing side of the process. These hydroprocessing catalysts are required to be sulfided when the units are built, and they are typically changed out every one to 18 months, creating a natural repeat business. On the Catalyst Technology side, we're producing zeolite catalysts for the dewaxing process, which are more relevant for the initial fills. The change-out rate for these catalysts is longer, typically over a span of a couple of years. Both businesses benefit on the initial fill, but there are also intermittent change-outs occurring from 10 months to 18 months on the Ecoservices side and every few years on the Catalyst Technology side.

Okay. No, that's very helpful. And then when you look at the scale of the investments that have been proposed already in the renewable diesel area, do you have enough capacity to serve that by flexing and shifting capacity over from other end markets? Or do you need to undertake an investment cycle? And if you do, when do you need to do that to be ready for the customers?

Yes. Regarding the Catalyst Activation for renewables, when we acquired the Chem32 business, one appealing aspect was its scalability. We are currently exploring ways to enhance that scalability to meet the increasing demand, particularly as new renewable units are constructed, which will necessitate not only new installations but also the recharging of those systems. In our Catalyst Technologies division for zeolite catalysts, we have the capacity to adjust our production to accommodate both this sector and our emission controls production. Some of our assets can be used interchangeably, allowing us to shift resources as demand increases or to create capacity for either product line.

Okay, great. And then separately on the heavy-duty diesel side, will there be a downturn in volumes at the same time as vehicle production? Or will you see a slowdown before the backlogs are cleared? I mean, what is your position in the inventory cycle?

Yes. We've observed that the business has faced supply chain disruptions, especially with chips. However, customers have started to place orders and stock up as they anticipate reducing their backlog. This backlog was created over a two-year span, and we believe it will have a prolonged impact. Additionally, there is increasing demand due to new regulations.

Great, got it. Okay, great. Thank you.

We have no further questions in the queue at this time. This does conclude the Ecovyst third quarter 2022 earnings call and webcast. Thank you for your participation, and you may disconnect at any time.