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Q4 2023 Ecovyst Inc Earnings Call

Participants

Gene Shiels; Director of IR; Ecovyst Inc.

Kurt Bitting; CEO & Director; Ecovyst Inc.

Mike Feehan; CFO; Ecovyst Inc.

Aleksey Yefremov; Analyst; KeyBanc Capital Markets Inc.

John McNulty; Analyst; BMO Capital Markets Equity Research

David Begleiter; Analyst; Deutsche Bank AG

Hamed Khorsand; Analyst; BWS Financial Inc.

David Silver; Analyst; CL King & Associates, Inc.

Presentation

Operator

Good morning, My name is PoE, and I'll be your conference operator today. Welcome to equal this fourth quarter 2023 Earnings Conference Call and Webcast. Please note, today's call is being recorded and should run approximately one one hour. (Operator Instructions)
At this time, I'll turn things over to Mr. Gene Shiels, Director of Investor Relations. Please go ahead.

Gene Shiels

Thank you, operator. Good morning and welcome to the Aecon. This fourth quarter and full year 2023 earnings call. With me on the call this morning are bidding. You could this Chief Executive Officer and Mike Feehan because as Chief Financial Officer. Following our prepared remarks this morning, we'll take your questions.
Please note that some of the information shared today is forward-looking information, including information about the company's financial and operating performance strategies, our anticipated end-use demand trends and our 2024 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 from any forward-looking information provided 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 the presentation materials posted on the Investors section of our website that e-commerce.com. I'll now turn the call over to Kurt bidding. Curt?

Kurt Bitting

Thank you, Jean, and good morning. First, I want to thank my EcoBoost colleagues for delivering a strong finish to 2023. Despite the economic uncertainty and operational challenges that we faced last year, our EcoBoost colleagues remain dedicated to their core purpose of delivering high quality products and reliable services to our valued customers despite the macroeconomic uncertainty relative stability and demand fundamentals across the majority of our end uses for both Veeco services and advanced materials and catalyst helped Veeco this deliver solid financial results for the fourth quarter of 2023.
High refinery utilization, favorable gasoline demand and the trend toward higher octane and cleaner burning fuels continued to drive output production in 2023, providing support for our regeneration services business where volume was up compared to the fourth quarter of 2023.
Sales volume for virgin sulfuric acid was also up compared to the fourth quarter of 2023, albeit with weaker pricing dynamics associated with softer macroeconomic conditions, particularly in industrial applications in Advanced Materials and catalysts.
Fourth quarter sales were up considerably compared to the fourth quarter of 2022, while polyethylene sales volume was lower compared to the prior year fourth quarter. Higher pricing and strong demand for hydrocracking catalyst and customized catalysts applications contributed to the sales growth.
Given these volume and pricing dynamics, our fourth quarter 2023 adjusted EBITDA was $70 million. During the fourth quarter, we maintained our focus on the strategic initiatives and operational priorities that we believe are positioning EcoSys to deliver strong growth in the future in our core and industrial applications as well as in the emerging applications we discussed in our November Investor Day for the Zeolyst Joint Venture.
These emerging applications include the ongoing expansion of sustainable fuel production, both for renewable diesel and sustainable aviation, fuel and catalyst, specifically designed for advanced recycling of plastic waste. We are benefiting from the growth in renewable diesel today, and we expect our zeolite technologies for alcohol alcohol to jet SAF production to gain additional momentum this year.
For our advanced silicas portfolio, we highlighted a number of nascent platforms, including our AlphaCat advanced filters and our Alpha Select functionalized filters for use in applications such as immobilized enzymes, carbon capture and clean water.
I'm pleased to announce that during the fourth quarter, we achieved our first sale of advanced silicas for enzyme applications, and we anticipate additional sales this year as we look to expand our support for all these emerging applications.
In light of our favorable financial results for the quarter, cash generation remained positive, providing for reduction in our net debt leverage ratio. We ended the year with a net debt leverage ratio of three times, down from 3.2 times at the end of the third quarter.
In terms of capital allocation priorities, continued reduction in our leverage ratio remains a key focus as we look to make substantial progress this year toward our target leverage ratio of below 2.5 times.
And lastly, over the past three years, we have made significant progress in supporting our customers with more sustainable products and technologies in addition, we have worked to drive more sustainable business practices across our organization, consistent with the spirit of continuous improvement.
Two years ago, we were recognized by EcoVadis with a silver medal sustainability rating last year. In recognition of our continued progress, we achieved gold medal status with EcoVadis. I'm fleet now pleased to report that each of this recently achieved platinum medal status with EcoVadis in recognition of our incremental efforts to integrate the principles of sustainability and corporate social responsibility into our overall business practices. This recognition places Ecovation in the top 1% of all companies rated in our peer group.
As we turn to slide 6, I'll provide an update on our near term demand outlook. We believe the long-term demand trends for the end users we serve remain very compelling. And I want to emphasize that the longer term and use outlook, growth expectations and financial targets we shared in our November Investor Day, remain intact.
However, for 2024, we believe there's significant near-term economic uncertainty arising from a number of factors, including persistent inflation, rising interest rates, de-stocking, geopolitical tensions and weak demand in Europe and China. Given the current uncertain macro economic environment, we are cautious about the trajectory of near-term demand trends.
As a result, while we anticipate stronger demand fundamentals in the second half of 2024, we have tempered our expectations for the first half of the year. For our regeneration services business, we expect high refinery utilization to stable gasoline demand and increased exports in 2024 as Alcoa demand continues to be driven by tightening fuel standards such as Tier 3.
We expect these fundamentals will continue to provide a favorable backdrop for our regeneration services business this year for virgin sulfuric acid, in light of the significant impact that winter storm Eliot and the production headwinds we faced in 2023 had on sulfuric acid sales.
We expect volume recovery for virgin sulfuric acid in 2024, specifically for our sales into the production of nylon intermediates, while destocking was a factor in the demand softness we experienced in 2023.
We believe the destocking phase is behind us. However, the global demand outlook for Engineered Plastics remains uncertain in part due to surplus capacity and continued demand weakness in Asia.
We expect sulfuric acid demand for the mining applications that we service to remain stable in 2024, with ongoing copper expansion projects in the US and the longer-term projected global supply deficit for copper underpinning demand.
We believe the economics of these expansion projects remain favorable with current copper prices for the wide range of industrial applications we serve. We expect the portfolio effect will provide a level of stability for virgin sulfuric acid sales in 2024 with stable to positive demand in many end use applications serving to counter softer demand in others.
We expect relative stability and end uses such as lead acid batteries, water treatment and chlor alkali to balance the potential for eroding demand in end uses, such as paper and packaging, where demand weakness is being driven by capacity rationalization in certain geographies.
Overall, for the first half of 2024, we see softer industrial demand for virgin sulfuric acid. And while significant amount of our virgin sulfuric acid sales are under long-term contract, we currently see weaker market sentiment resulting in pricing pressure for short dated contracts and spot sales for our 1032 catalyst activation business.
We see demand remaining strong in 2024, supported by continued growth in sustainable fuel production and expanded customer interest. Likewise, we see stable demand for our Treatment Services business with demand and activity levels highly correlated to factors such as consumer spending.
Turning to Advanced Materials and catalysts for advanced silicas. We believe that the inventory destocking that adversely impacted demand for polyethylene catalyst over the second half of 2023 has run its course, while market forecasts are projecting global polyethylene demand to be up 2% to 3% in 2024.
We believe that excess global capacity will continue to weigh on operating rates. As such, we are not projecting a significant near term change in the demand for polyethylene catalysts, but the prospect of a stronger second half of this year exists.
We believe we are well positioned for a recovery in demand, particularly given our representation in North American and Middle Eastern markets where raw material and energy costs provide more favorable production economics following positive sales momentum in the fourth quarter.
In North America, we expect modestly lower operating rates in the mid 80% range with weaker first quarter sales as customers work through end-of-year inventory in the Middle East, we expect operating rates to remain robust, supported by a cost-advantaged feedstock position and strong export activity for Europe. We expect polyethylene demand to decline in 2024 due to the poor economic climate.
And in Asia Pacific, we expect the Lunar New Year and sluggish restocking activity to be a factor in the first quarter. Within our Zeolyst Joint Venture, our core applications include hydrocracking catalysts to petroleum-based fuels and zeolites used in emission control applications.
Hydrocracking catalysts, our high value add fixed bed catalyst. That refineries change out every three to four years, even though we expect refinery margins to remain healthy for 2020 for many large customers completed catalyst change-outs last year.
So we believe 2023 was likely a near-term peak year for sales of hydrocracking catalyst. And we currently expect that 2024 will be a lower cycle year for hydrocracking catalyst sales.
In terms of sales cadence, we have lowered our sales projections for the first quarter due to revised order timing for our sales into emission control applications. We expect the current economic environment will translate into lower production and delivery of heavy duty diesel vehicles.
Turning to the production of sustainable fuels, which include both renewable diesel and sustainable aviation fuel or SAF, our zeolites are used in the waxing phase of those sustainable fuels production processes. We expect robust sales in 2024 with sales likely stronger in the second half of the year.
North American renewable diesel and sustainable aviation fuel capacity is projected to grow by approximately 33% this year, supported by attractive financial incentives with eight production facilities expected to start up in 2024 for the European Union, renewable diesel and SAF capacity is projected to grow by 43% this year, with nine facilities expected to start up in 2024.
Looking forward, we see good progress in licensor activity, supporting pilot production of SAF using alternate technology referred to as alcohol to jet. Our zeolite had a key role to play in the liberalization phase of this emerging technology where our catalysts are used to build the carbon carbon chains in the production of SAF.
We believe the focus on advanced recycling technologies for plastic waste provides significant growth opportunities for EcoBoost. We continue to work with industry leaders on the application of zeolites in these recycling processes in which our Opal Infinity family of catalysts provides a step change reduction in thermal intensity for catalytic paralysis and where ZI.
Catalyst can be used to enhance the quality of paralysis oil, providing higher value end products and expanding potential for use as feedstocks and chemical production. As we discussed in our recent Investor Day, we have already had pilot sales of our catalysts for advanced recycling this year.
There are 12 advanced recycling plants for plastic waste recycling expected to be commissioned. And with the momentum we see in this area, we continue to expect commercial sales in early 2025.
I'll now turn the call over to Mike for a more detailed discussion of our fourth quarter and full year financial results.

Mike Feehan

Thank you, Curt. I will begin with a review of our fourth quarter and full year 2023 financial results. Fourth quarter sales, including our proportionate 50% share of sales from the Zeolyst Joint Venture were $226 million compared to $223 million in the fourth quarter of 2022.
Higher sales volume across both businesses and the benefit of continued favorable pricing within Advanced Materials and catalyst was largely offset by the $9 million impact from the pass-through of lower sulfur costs.
As well as the pass-through of lower natural gas and freight costs within ITO Services adjusted EBITDA for the fourth quarter was $70 million, up 1% over the prior year fourth quarter. Favorable pricing and higher sales volume were partially offset by lower net pricing and equal services on lower raw material pass-through pricing.
The consolidated adjusted EBITDA margin for the fourth quarter was 31%, in line with the fourth quarter of 2022 on a full year basis, total sales for 2023, including our proportionate 50% share of sales from the Zeolyst Joint Venture were $848 million compared to $953 million in 2022.
Of the change in sales, $86 million was associated with the pass-through effect on pricing of lower sulfur costs. The balance of the decrease reflects lower sales volume from virgin sulfuric acid, lower demand for polyethylene catalyst and the relative timing of niche custom catalyst sales.
This was partially offset by higher average selling prices across both segments. Full year 2023 adjusted EBITDA was $260 million, down 6% compared to $277 million for 2022, driven by the lower sales volume along with higher unplanned repair and maintenance costs. But full year 2023 adjusted EBITDA margin was 31% up compared to 29% in 2022.
As we move to the next slide, I'll highlight the primary components of the change in adjusted EBITDA compared to the fourth quarter of the prior year. Similar to the last several quarters, average sulphur costs for the fourth quarter of 2023 were lower than in the prior year.
Pass-through of these lower sulfur costs had an impact of $9 million in variable cost with a corresponding reduction in average selling prices. As such, the lower sulfur cost pass-through on sales during the quarter had no impact on adjusted EBITDA.
Our price to variable cost ratio continues to be favorable while variable costs were lower for the quarter. The pass-through pricing on some of these costs, including natural gas and freight were also lower. However, implemented and base price increases continued to be favorable, generating a positive price to cost ratio.
Turning to the segment results, we will begin with E-Co services. Eco Services sales for the fourth quarter were $141 million compared to $160 million in the fourth quarter of 2022. The change in sales primarily reflects the pass-through of lower sulfur costs of $9 million and lower pricing in regeneration services associated with the pass-through of lower natural gas and freight costs.
These factors were partially offset by higher regeneration services volume and higher demand for virgin sulfuric acid for mining and opportunistic spot sales because Services adjusted EBITDA was $48 million in the fourth quarter compared to $54 million in the prior year, while demand remained strong in both regeneration services and virgin sulfuric acid.
The decrease in adjusted EBITDA was driven by lower net pricing associated with lower raw material pass-through pricing. E-co Services' adjusted EBITDA margin for the fourth quarter was 34%, in line with the fourth quarter of 2022.
Turning to Advanced Materials and catalysts. Total fourth quarter sales for Advanced Materials and catalysts, including our 50% proportionate share of Zeolyst Joint Venture sales, were $84 million, up $21 million or nearly 34% compared to the fourth quarter of 2022 or advanced silica's fourth-quarter sales of $31 million were up 37% compared to the year-ago quarter, reflecting higher sales across all product lines.
While sales volume for polyethylene catalysts was lower compared to the fourth quarter of 2022, favorable pricing and the higher sales of niche custom catalysts drove the increase year over year. For the Zeolyst Joint Venture, sales were $53 million, up $13 million or 32% compared to the fourth quarter of 2022.
Primarily driven by higher sales of hydrocracking catalysts. Fourth quarter 2023 adjusted EBITDA for Advanced Materials and catalysts was $27 million up $7 million or 34% compared to the year ago quarter, with the increase driven by higher pricing and sales volume. Adjusted EBITDA margin for Advanced Materials and catalyst was 32% in line with the fourth quarter of 2022.
Turning to cash and leverage on the next slide. During the fourth quarter, cash generation was very strong, providing for a reduction in our net debt leverage ratio of three times as we continue to make progress towards our net target of less than 2.5 times on a full year basis, free cash flow generation was $72 million.
This was in line with our recent expectations, but below the prior year, driven by the lower adjusted EBITDA, lower dividends from our Zeolyst Joint Venture, higher cash taxes and cash interest as well as an unfavorable change in working capital year over year.
As discussed in our Investor Day in November, we continue to target a cash conversion ratio of approximately 75%. For 2023, our cash conversion ratio was 75%. We continued to maintain a balanced approach for capital allocation with net leverage reduction remaining a key priority.
During 2023, we used cash to repurchase shares largely in connection with secondary offerings of our equity sponsors in 2023, we repurchased 7.5 million shares for $79 million. Our balance sheet remains in strong shape. At year end, we had total available liquidity of $152 million, comprised of $88 million of cash and availability under our ABL facility of $64 million.
We have one tranche of debt outstanding, which matures in 2028, excluding outstanding letters of credit, there were no outstanding borrowings under our ABL facility. At year end, 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, it was approximately 5% during 2023.
Now let's turn to guidance and expectations for 2024. For 2024, we expect sales on a GAAP basis to be between $715 million and $755 million. And we expect our proportionate 50% share of sales for the Zeolyst joint venture to be between $145 million and $165 million as such, we anticipate total sales, including our proportionate share of the Zeolyst Joint Venture sales to be between $860 million and $920 million, or up approximately 5% at the midpoint compared to 2023.
In terms of the pass through effective sulfur pricing, we are currently expecting a very modest decrease in average sulfur pricing for the first half of 2024 with the impact on sales, largely immaterial. As Kurt discussed in his comments about our end use demand outlook.
The value of octane and Alcoa, it remains favorable, and we expect continued high refinery utilization to support regeneration services activity. We expect a modest cautious recovery of virgin sulfuric acid sales relative to 2023, primarily related to demand for virgin sulfuric acid going into the production of nylon intermediates and the expectation for higher year-over-year production volume.
As such, we expect sales in Eco Services to be up mid single digits and advanced materials and catalyst. We expect improvement in demand conditions for polyethylene catalysts and growth in our customized catalyst applications could drive high single digit to low double digit sales growth in advanced silicas and for the Zeolyst Joint Venture.
While we expect continued growth and sustainable fuel catalysts, sales in 2020 for sales of hydrocracking catalyst are expected to be significantly lower, which is typical when coming off of peak year like we experienced in 2023 for 2024, we are expecting adjusted EBITDA to land in the range of $255 million to $275 million.
In terms of segment expectations for the full year 2024, we expect adjusted EBITDA for E-Co services to reflect a mid to high single digit percentage increase compared to 2023 based on the anticipated recovery of virgin acid sales into nylon intermediates, strong virgin acid sales into mining and higher contracted pricing in regeneration services.
This is somewhat offset by downward pressure on Virgin asset pricing, driven by the uncertain macroeconomic environment and $10 million to $15 million of higher maintenance and turnaround costs associated with enhancing our operational reliability to help ensure long term volume increases.
As we discussed during our November 2023 Investor Day for Advanced Materials and catalyst. We expect 2024 overall adjusted EBITDA to be in line with 2023. Advanced silicas is expected to be up on a high single digit basis, driven by more normalized demand growth for polyethylene catalyst and sales into emerging areas.
Adjusted EBITDA for the Zeolyst Joint Venture, however, is expected to be down on a high single digit percentage basis, driven by lower sales of hydrocracking catalysts off a peak year and 2023, anticipated unfavorable fixed cost absorption associated with production and sales timing and increased costs to accelerate the growth in our emerging applications. In addition, we expect our corporate costs to be around $30 million on an annual basis.
For the full year 2024, we are expecting adjusted free cash flow of $85 million to $105 million, including CapEx of $70 million to $80 million in 2020 for the higher CapEx reflects costs associated with the previously announced expansion of advanced silicas capacity at our Kansas City site, an investment in our 1032 catalyst activation business.
Given this expectation for cash generation and assuming no uses of cash for other capital allocation priorities, we expect to delever nearly a half of turn, resulting in significant progress towards our target net debt leverage ratio of below 2.5 times for interest expense.
Taking into account the interest caps that we have in place, which cover approximately 75% of our exposure, we are projecting a range of $45 million to $55 million with a weighted average cost of debt of approximately 5.5%.
Having covered our expectations for the full year 2024, I want to provide some directional guidance for the first quarter of 2024. On a consolidated basis, we expect first quarter 2024 adjusted EBITDA to be approximately $40 million for Eco Services in light of the impact of winter storm Elliot and impact of the extended turnarounds in the first quarter of last year. We expect first quarter 2024 adjusted EBITDA to be up approximately 10% compared to the first quarter of 2023.
For Advanced Materials and catalysts, we expect first quarter 2024 adjusted EBITDA to be between $7 million to $8 million. The lower adjusted EBITDA compared to the prior year is primarily driven by a cautious view around the recovery of the polyethylene market and anticipated unfavorable fixed cost absorption associated with production and sales timing.
I'll now hand the call back to Kurt for some closing remarks.

Kurt Bitting

Thank you, Mike. Despite near-term economic uncertainty, we remain positive on the long-term growth opportunities for EcoBoost. We believe our core and industrial businesses will continue to experience solid growth.
We have well established customer relationships, leadership positions in the end users we serve and we have articulated our plans to drive efficiency gains and to support sales growth through automation, de-bottlenecking opportunities, capacity expansions and through reliability initiatives.
In our Eco Services segment that will also translate into incremental volume and sales opportunity for our regeneration services business. We believe the role of alkylate in the production of cleaner burning fuels is well appreciated in the long term demand outlook for refined products in North America and the export markets our customers serve will continue to provide opportunities for growth.
Although we see some near-term demand softness in some industrial applications for virgin sulfuric acid mining demand remains strong, and we expect further improvement in demand for virgin sulfuric acid sales into production of nylon intermediates as the global economy improves.
We also believe the portfolio effect for the balance of our industrial applications will continue to provide a level of overall stability in terms of our sales of polyethylene catalysts we believe global polyethylene demand will return to historic growth rates of approximately 3%.
Specifically for E. CoVest, we expect our sales of polyethylene catalysts will continue to grow differentially to the overall market, benefiting from our customized catalyst design approach and our leading supply share positions in North America and the Middle East, which benefit from advantaged feedstock and energy costs.
Lastly, we have announced a significant expansion of polyethylene catalyst production capacity at our Kansas City site that is supported by firm customer commitments, providing further support for our future growth expectations for over, we are energized by the opportunities for growth provided by emerging technologies, which are not just aspirational.
We continue to see robust growth in Catalysts supporting the production of sustainable fuels we have a technology leadership position for zeolites for advanced recycling technologies. And we have developed advanced silicas and functionalized silicas that position us to capture growth in enzyme immobilization in food chemical and biomass based processes as well as carbon capture and water treatment applications.
In summary, we have a portfolio of products and technologies that we believe provide for a compelling organic EBITDA growth. As we discussed in our Investor Day, the long-term growth trends supporting each of these products and services is reflected in the anticipated 2024 volume growth across the majority of our product lines.
Our current guidance reflects our caution around near term demand conditions and the expected off-cycle year for event-driven hydrocracking sales. As I indicated earlier, we believe the second half of the year could provide for improved demand conditions, including stronger sales of virgin sulfuric acid and polyethylene catalysts. And we will capture opportunities for incremental growth as they arise.
At this time, I will ask the operator to open the line for questions.

Question and Answer Session

Operator

Thank you, Mr. fitting.(Operator Instructions)
Patrick Cunningham at Citi.

Hi, good morning. This is Eric Zeng on for Patrick. My first question is what is driving the higher pricing for key catalysts and do you expect that trend to continue?

Kurt Bitting

Hi, Eric, this is Curt. Well for the poly for polyethylene. Do you believe that destocking that we saw really in the latter half of 2023 is largely behind us and we do expect double digit sales growth during the year, albeit weighted towards the second half of the year. And we've implemented. We've implemented price increases as time goes along and has allowed us on our on our contracted prices.
Just to further comment, really on polyethylene, our expectations there, it's geographic centric as well, where most of our sales are centered in North America as well as the Middle East, where those regions have a high advantage in terms of raw materials and lower energy costs, Europe that we're less less exposed and less exposed in Asia Pacific in those two regions generally have more of the more of a muted recovery or less of the less of an uptick this year.

Got it. Thank you. And my last question is with Indigo services. Can you elaborate on any trends that you're seeing with existing customers re-contracting Have there been any difficulties in getting customers to re-sign? Thank you.
Yes.

Kurt Bitting

Thanks for the question. So when you look at the regeneration business every year, those contracts are generally longer in length, so anywhere from five to 10 years. So any given year, there's a reconstitution of certain basket of contracts that are up for renegotiation and recontracting.
So I would say, as time has gone. We've gone along. We've re-upped those customers and we've been successful and implementing price increases as time has gone along in virgin acid, about 90% of our customers are under a long-term contract basis, the 10% that we call on a spot sales or short dated contracts.
That's where we've seen a little bit of pricing pressure as I've mentioned on the call. And that's really related, I would say, mainly to the industrial space where we see some caution from some of those industrial consumers around 2024.

Great. Thank you.

Operator

Thank you. Aleksey Yefremov, KeyBanc Capital Markets.

Aleksey Yefremov

Thanks and good morning, everyone. Just to follow up on the industrial piece of Virgin asset sales could you quantify the magnitude of this price pressure, either KEYNOTE as a total percent of your virgin acid business or as a percent of that bucket of short term contracts?

Kurt Bitting

Sure. Good morning Lasky. So virgin acid, again, it's when you look at our portfolio on virgin acid, 90% of it is really under long-term agreements, which were are adjusting on longer-term contracts, right? So it's just that 10% that's on that short-dated or call spot spot spot sales goes towards those sorts of things.
So what we see in this area is again, that some cautiousness of customers on the and on the industrial side, and there's also been some rationalization in the pulp and paper industry.
We don't move a lot of volume into that industry. But it has created, I guess, some pockets of oversupply in different geographies where we don't where we don't operate, but that that's created some, I say, temporary imbalances in a couple of the geographies that really has to settle itself out.
So if I don't know if we had to quantify it really less deal, you're talking about 10% of our virgin acid portfolios, probably $5 million to $10 million in terms of pricing. That's subject to some of this pressure that we're seeing in the industrial space.

Aleksey Yefremov

And thanks, Curt very helpful. Tom, you mentioned accelerated increased cost driven by investments in those emerging applications. Kind of hard from outside to judge is because that was just costs more to do looking envision? Or is it really that there's a bigger opportunity and those opportunities are coming faster? And you could you elaborate on this?

Mike Feehan

Yes. So it is, as we stated during our in our Investor Day of growing our emerging technologies is a really a key priority for us when we look at the some of the things like advanced plastics recycling, sustainable fuels the advancements now that we're making on the immobilized enzymes.
So really on the front end of that, where we're building out our our capabilities in those areas, building out our sales and marketing capabilities and there's areas. So we're making those front end investments as expected to deliver long term long term sales, as I've outlined in our Investor Day.

Aleksey Yefremov

Thanks a lot.

Operator

Thank you.
John McNulty of BMO.

John McNulty

Yes, good morning. Thanks for thanks for taking my question. So a question on the EBITDA on Advanced Materials and catalyst So it looks like the first half is going to be there or excuse me, the first quarter is going to be basically almost half of what it was the prior year which kind of implies the back half or the remaining three quarters, excuse me, is basically flattish on.
So I guess can you help us to think about where the improvement comes from is the bulk of it just the lumpiness in the HPC catalyst side? Or is it the polyethylene ramp that you're talking about? I guess what's the what's the bigger contributor to kind of the weakness in 1Q and the snapback as we look at kind of the remaining three quarters?

Mike Feehan

Yes. John, this is Mike. Thanks for the question on. Yes, it's a combination of all those factors, right? So on we mentioned earlier that we're seeing a little bit of a cautious feel in Q1 around polyethylene starting out, but we do expect the polyethylene demand to continue on and actually improve over the prior year, call it in a double digit basis.
And we also see that hydrocracking, while we came off of peak year from last year. It is a little lighter in Q1 than originally anticipated, but we do see it growing in Q2, Q3 and then into Q4. So it's a little bit of the nature of the business, primarily around the hydrocracking and the timing, along with some of the niche custom catalysts.
Polyethylene is more constant. However, just given also what we saw in 2023. It's a little lighter starting out, but it's ramping up certainly in the in the later half of the year.

John McNulty

Got it. Okay. Now that makes that makes sense. And then in one of the slides, you highlighted some weakness in the heavy duty truck markets, which I assume is tied to some of the regulated, the new regulations where there was maybe a little bit of pull forward. I guess how long does that normally last is that a year does tend to last a little bit longer than that. I guess how should we be thinking about that?
Yes.

Kurt Bitting

Thanks, John. There's a couple of headwinds there really in the trucking where there's just a general, I'd say, slowdown in that transportation segment right now, which is, I think, linked to the general economic uncertainty going on.
So and then also coming off working off a pretty big backlog that had developed since '21, '22 and '23 where a lot of trucks were there was big back orders and they work those off. So you see some slowness there. Additionally, the Euro seven regulation that was due to go in effect in 2027.
Europeans have delayed that for two years, which has pushed off some of the, I'd say, next-generation catalyst technologies that we're going to go into those trucks that we're going to reduce emissions by 80%. So the combination of those things has kind of created a little bit of a headwind for that for that segment this year.

John McNulty

Got it. Thanks very much for the call.

Operator

Thank you.
David Begleiter, Deutsche Bank.

David Begleiter

Thank you. Good morning. I'm Curt, any coal services, you had a number of headwinds in 2023, the winter storm outages, turnarounds and some weak demand and destocking still given that, why is the EBITDA growth a little faster than, say, mid 5% plus in '24 it?
Sure.

Kurt Bitting

Thanks for the thanks for the question, David. So as we stated on the call, a few times, we've taken a cautious look for 2020 for many of our customers, particular in that exit at industrial segments have have adopted cautious approaches for 2024, and that's played into our overall opinion on the demand trends as it especially as it relates to virgin sulfuric acid.
But when you look at the what we expect from 2024 and E-Co services refining margins. The refining business remains healthy. We expect a strong year for regeneration, the treatment services business and 1032 both work to have very full schedules this year.
It's the virgin acid business where we do plan on moving more volume into the market this year, particularly into nylon where there was headwinds last year, we see a recovery there. I wouldn't say it's necessarily an up-cycle year.
However, we do expect to move more product into into that nylon segment where we see that some of the headwinds on equal services that earlier on one of the questions I talked about that industrial space and the pricing pressure is creating in that short term and spot pricing segment of the virgin acid acid space as well as we're spending about $10 million to $15 million more on maintenance and reliability this year.
During the Investor Day, we talked about we have a long term reliability enhancement program that we're instituting, which is a combination of really additional resources at the plants as well as some automation, which is there really to deliver higher reliability as well as de-bottlenecking at the plants over time.
So that's some of the some of the change you see there is really pushing in that extra cost to kick off that reliability enhancement program.

David Begleiter

And Kurt, on that program, though, one-time that fiduciary, i.e., 25, should that come back down by $10 million to $15 million, should that be sustained at this higher level and some of that will be.

Kurt Bitting

And I mentioned, too, we do have additional turnaround costs. So that will some of that will be sustained because it's going to be the resources we're putting in place will be on a sustained basis.
We do have accelerated turnaround costs this year, which those mostly are actually going to take place in the first half of the year and then the automation piece that we're putting in place, obviously, we'll go on to the plan. So I would think of a portion of that will be sustained over the or the horizon.

David Begleiter

Thank you.
Yes.

Operator

Thank you.
Hamed Khorsand, BWS Financial.

Hamed Khorsand

Yes.
Hey, good morning. So first question I had was given what has happened in '23, 42 your business, how have you adjusted in '24? I mean, are you through all the inventory you might have had in '23 because of disruptions and so forth. So what kind of yield lingering effects are there from '24 from those effects in '23?

Kurt Bitting

Yes, good morning, Hamed. I think really what into in terms of 2023. We obviously had [$20 million-ish] of headwinds that were operational related in the Eco Services business. When you go back to the winter storm that started out at the beginning of 2023.
And then we had on the extended maintenance downtime at the Houston plant. So we don't expect those those events this year. Obviously, just talked about the enhanced reliability program, which we hope will yield higher volumes.
And we do expect to produce and sell more virgin sulfuric acid volumes this year, even though I've talked about some of the industrial headwinds in some of the pockets in the virgin acid market. I think the other areas that we talked about last year that were headwinds for us was polyethylene catalyst.
Which in the second half of the year there destocking that went on. We see that abating and recovering is and as Mike said, particularly in the second half. So we do expect polyethylene catalysts to be up double digits this year.
And then secondly, the nylon segment, which impacted the virgin acid of business last year in the second half, we saw destocking in that area. We do expect nylon volume to be up for us this year, albeit not certainly a high cycle year, but certainly a recovery there.

Hamed Khorsand

Okay. And my last question is on the slides provided today. You're highlighting and the slow conditions for heavy duty vehicles, and that's a new item for you on the slide. Why is that such a big deal now versus prior quarters where that was not even an issue even from a positive side or negative side. I mean, how bad of a drag is this year highlighting it now?

Kurt Bitting

Yes, I think it's not. I think in the past over the past year or two, the business was largely is moving along in terms of the backlog of the heavy duty diesel vehicles. It's not a an overly huge segment for us. And essentially, we view that market as we see headwinds there in terms of just demand for overall heavy-duty diesel vehicles as well as the regulation thing that I mentioned earlier on on Euro seven.
But when we look at it from a sales standpoint, it's flattish for us. So I wouldn't call it necessarily a huge drag for us. It's just it's an area that we see in the in the segment. There definitely are headwinds in that in that segment.

Hamed Khorsand

Okay. Thank you.

Operator

Thank you. (Operator Instructions)
David Silver, CL King & Associates.

David Silver

So you kind of go up? Yes, hi. Thank you very much. I had a question maybe about the some of your spending initiatives over the next year, but some For starters, there is a something of an increase on your CapEx spend.
And I'm guessing some part of that is Kansas City and along those lines, just with the time line there, I was just wondering or I was wondering if the spend might even the CapEx spend might have even been a little bigger to prepare for the anticipated demand growth.
And then beyond that, I'm just wondering if you could articulate or highlight any increase in either R&D spend or pre commercialization type of spending by them beyond the beyond.
I guess the operational things I mean what other kind of spending initiatives should we be thinking about to support your growth, which you highlighted in the release and in some of your comments here, but is there is there a way to kind of get a bigger, a clearer view of that, please? Thank you.

Mike Feehan

Yes, David, good morning. This is Mike. So on the first part of the question around capital spending, you are correct. We do see about given our guidance range at the midpoint, roughly roughly $10 million increase in CapEx spending on the predominance of that is associated with the Kansas City expansion.
I think we mentioned this during our investor day that that dumb would take a period of time over certainly over at least two year period of going in 2025. So our spend on that facility is not a and bottoms up approach. We already have structures and available there.
We're just expanding upon that so the CapEx cost is not done perhaps as significant as you might think we're building in a brand new plant, but we are adding about 50% capacity for making our polyethylene catalyst there.
We also have some additional costs on, you know, in the U.S. capital spending around Eco Services to continue to start to look and expand our 1032 catalyst activation business. So there's some spending in there as well.
And when you look at the R&D and precommercial on Kurt mentioned earlier that we are seeing some additional spending in the on just as we start to ramp up some of our emerging products. So we are seeing a little bit of additional costs there. But again, as we mentioned, we're very excited on where our and sales have been taking us.
We've already had some sales in 2023 related to the biocatalysis, and a lot of it is exactly how we articulated during our November Investor Day.
And hopefully, we also talked a little bit more about the spending on Eco Services related to the reliability and turnaround costs that we talked about. Earlier. So hopefully that covers some of your cost, your questions on the end, it costs and spending.

David Silver

Yes, thank you for that. And then maybe just from another angle on the I was wondering about the operational plans, the downtime overall planned by your portfolio of refining customers. So I guess refining margins largely have been very healthy for the last few years. And done?
Yes. Anecdotally, I guess a lot of refineries has deferred or delayed downtime as much as they could to take advantage of what they viewed as favorable profit profit opportunities as you kind of look at the planned downtime and planned operating strategies that your refiner customers have shared with you? I mean, should we expect another year of?
Yes, very high or close to full utilization there? Or are there some major outages or downtime planned, you know, relative to maybe 2023 or 2022, excluding the weather events?

Mike Feehan

Sure. Thanks, David. So in terms of when we look at our own refinery downtime effects, two parts of the business differently. When you look at Eco Services on the acid regeneration, we don't really see a particularly high amount of customer turnarounds this year in that in their alkylation units.
So we're expecting, I would say, more of an more of an average year we look at hydrocracking catalyst, obviously, we're coming off a peak cycle year in 2023 selling hydrocracking catalyst that some of those turnarounds took place in Q4 of 2023. Some of them are taking place in Q1 2024.
They were buying the catalyst on the had on site and for their turnaround. So we expect and again, hydrocracking to be more of a low cycle of this year. So we do expect less turnarounds in that space as well.
But those are for our customers. So they're there certainly are other refiners, other regions that could have different issues.
But in general, I think would be the average in the Eco Services side and less turnarounds in hydrocracking because it's an off-cycle year?

David Silver

Yes, yes, you did highlight that there. Okay, that's great. Thank you very much.

Operator

And we'll take a follow-up question now from John McNulty of BMO.

John McNulty

Yes, thanks for taking my follow-up. So on on the polyethylene catalyst demand, which which is a pretty strong forecast for the year, up double digits, I guess, can you help us to think about how much of that just core industry growth verse account wins. I think you have had a bunch of wins and some some assets are still in the process of ramping up. So that maybe some of the benefit, but can you help us think about the high level?

Kurt Bitting

Sure. I mean, I think it's a mix really, John, of both wins and just increased utilization rates. So you see a recovery, particularly, I would say Middle East and North America are right now at very low natural gas prices are enjoying a huge arbitrage window in polyethylene production.
So we obviously have a little heavier weighting to those to those areas. So we're receiving we're seeing some recovery in that area. And again, I think Mike mentioned, we're it's more second half, more second half weighted.
So a lot of its recovery, but yet some evidence of its recovery of new account wins that we've had as well. So it's a little bit of a mixed bag. But if I had to give it the weighting, I'd say it's more just on the general recovery side.

John McNulty

Got it. Thanks for the color.

Operator

And Ladies and Gentlemen, it appears we have no further questions today. So that will bring us to the conclusion of equal this fourth quarter 2023 earnings conference call.
We'd like to thank you all so much for joining us today and wish you all a great remainder of your day. We'll take a bit of a buffer to be able to fulfill to fully deliver wonderful.

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