Q3 2019 Earnings Call
Okay and welcome to the Kikuyu Group Holdings third quarter 2019 earnings Conference call.
All participants will be any listen only mode.
Do you need assistance. Please take note conference specialist by pressing the star key file buys here on your telephone keypad. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
Ill.
Hey, we ask that you please limit yourself to one question and one follow up.
Please note. This event is being recorded I would now like turn the conference over to Nahla Azmy Vice President of Investor Relations. Please go ahead.
Thank you Melissa welcome to everyone joining us for third quarter 2019 earnings results call. We will start today with formal remarks from both gas and Terry <unk>, President and Chief Executive Officer, and my crews Executive Vice President and Chief Financial Officer, then we will follow with acuity session.
Please note that some of the forward looking statements that we make today about the company's results and plans are subject to risks and uncertainties that could cause actual results.
And the implementation of the company plans to vary materially. These risks are discussed in the company's filings with the FCC.
Reconciliations of non-GAAP financial measures and I've mentioned on today's call without a corresponding GAAP measures can be found in our earnings release and presentation materials posted on the Investor section of our website at Www Dot PQ Cork Dotcom and that was done please to turn the call to Bell gossip.
Thank you and all that good morning, everyone and thank you for joining us this morning.
When I last earnings call, we discussed our expectations for another consecutive quarter of strong results largely driven by our catalyst business.
We're extremely pleased to have delivered significant growth in adjusted EBITDA margins on adjusted free cash flow.
Which positions us well to deliver on our free cash flow and leverage targets for the year.
This performance demonstrates the benefit of our diversified portfolio and the operating leverage within our specialty businesses, which underpins the resilience to changing macroeconomics environments.
This is evident from a positive pricing across all our businesses and the year to date financial performance in three you bought for businesses that said and as you know there has been younger supporting of global economic slowdown.
We're not completely immune and are experiencing softer demand in some pockets of our businesses mainly in performance chemicals.
With that as a backdrop I'd like to briefly cover what we're seeing in the markets underlying our businesses.
Starting with refining services.
By the numerous unplanned refinery customer outages in North America overall alkali utilization rates are high.
This favored our regeneration services line.
That's where our version sulphuric acid product lines, the diversity of and usage is this trend.
When there is demand weakness from one end markets, we work to shift focus to another end markets such as mining batteries and the other general industrial applications.
Turning to our catalyst business.
Demand drivers are largely insulated from global macroeconomic fundamentals for example demand for our catalyst products that serve the polyethylene industry is driven by increased capacity expansions and or hydrocracking and specialty catalyst benefits from timing of refining customer change outs coupled with.
Capacity expansions.
You know performance materials business, we had a soft start to the strapping season in the first half due to exceptional levels of rainfall.
However, the transportation safety maintenance cycle has accelerated in the second half a year.
In the rest of this business, we are seeing slight softness in industrial product demand largely from Europe and China.
Finally on performance chemicals.
This is largely diverse in its global reach and uses and customer base. However, it is also partially susceptible to exchange rate and general industrial slowdown as it is recently the case in certain market segments like paint and coatings chemical intermediates construction industrial cleaning and pulp and paper.
Sure.
This has direct impact on our sodium silicate product line as large global customers destock or reduce inventory.
As you may recall from a previous earnings call. We indicated that we are focusing on pursuing some portfolio capacity and efficiency optimization actions into performance chemicals business. We expect these will drive capital and operational efficiencies and enhance mid to long term financial performance.
This is underway and we will update you on our progress.
Let's now turn to slide three to review the strategic and financial highlights of the third quarter.
First on safety.
We continue to drive improvements in our health safety and environmental performance in 2019, we rolled out the H. Destiny perfect day program on a daily basis. It tracks that each workplace and collective business unit is completely injury and in <unk> environmentally incident free.
This generated a tremendous excitement about the positive transformation about work environment.
Year to date three of our core businesses are tracking above 90% on this metric and over 50% of our global work locations have perfect safety HST performance every single day.
Second.
On commercial.
The catalyst performance materials and refining services teams delivered higher adjusted EBITDA margins. This was the result of our continued focus on execution on improved value pricing about differentiated products and services as well as improved operating efficiencies.
You know performance chemicals business, we successfully completed a multiyear contract extension with one of our key European customers on favorable terms.
And our zealots joint venture received final product qualification from a key customer for the following up on emission control catalysts in China. This is exciting news for PQ as we position to participate in a growing China market within minimal investment.
Third on portfolio optimization, we continue to advance our strategic pathways to make our portfolio simpler and stronger.
In another meaningful step, we recently announced a multiyear agreement with any house, a key polyethylene global industry leader.
Agreement enhances our current portfolio of technologies and customer relationships.
Well already providing supports into the segments of this market.
The most significant commercial benefit of this agreement is that it enables us to supply finished ziegler natta catalyst for specific processes worldwide.
This expands our product offering to our existing silica catalyst customers. In addition, it better positions us to provide broader catalysts offerings to meet the requirements of selected new plants and processing.
Moving to the financial highlights.
In the third quarter adjusted EBITDA increased nearly 18% and we achieved an adjusted EBITDA margin of nearly 29%. This is an expansion of more than 300 basis points versus the same period of last year further we generated free cash flow of $100 million.
Our anticipated free cash flow generation for the full year, coupled with our opportunistic asset sale cross currency swap restructuring and capital efficiency allow us to raise our total debt repayment target for 2090.
We now expect to repay between 170 to 190 million.
This is up from a previous expectation of at least 150 million and 135 million of last year.
With that I will turn the call to Mike for detailed review other financial results in 2019 guidance Mike.
Thank you Bill got some and good morning.
We're pleased to review another quarter of strong financial performance, we delivered significant growth in adjusted EBITDA margins and free cash flow and increased our debt repayment target for the year.
Beginning on slide four what the discussion of our consolidated results.
Sales of $424 million were in line with the prior year as higher pricing across the businesses and higher demand and silica catalyst offset lower revenues from the past sort of lower sulfur costs and softening demand within performance chemicals.
Adjusted EBITDA rose, 17% to $138 million.
This is largely attributable to the increased demand and the catalyst business across the product portfolio, along with favorable pricing and sales mix and refining services and performance materials.
Adjusted EBITDA margin increased 310 basis points to 29% driven by margin expansion in three of our four business segments.
This was the second consecutive quarter that we achieved a margin above 28%.
Moving to a more detailed discussion by business segment and for refining services on slide five.
Sales declined 4% to 118 million.
In addition to lower sulfur cost pass through slowing orders from certain version acid customers reduced sales, which was partially offset by higher demand and regeneration services.
Adjusted EBITDA increased 3% to $51 million largely on favorable customer product sales mix, which increased adjusted EBITDA margin by more than 300 basis points to 43%.
Next on slide six for review of catalyst.
Silica catalyst sales increased 57% to $26 million.
We continue to deliver double digit growth as new polyethylene production capacity favor silica based technologies.
Additionally, we benefited from higher metal miseq relate orders related to customer refills and top off.
Zealots JV sales were up 68% to 54 million.
This quarter marks the strongest quarter of the year in terms of hydrocracking catalyst orders.
We also benefited from the acceleration of specialty catalyst orders of 5 million from the fourth quarter.
This more than offset slowing European customer orders for our mission control catalyst, which we believe will extend into the fourth quarter.
Adjusted EBITDA of $32 million more than doubled resulting in margin expansion of more than 700 basis points to 40% on higher sales and favorable product mix in both silica catalyst analysts delist JV.
Moving to performance materials on slide seven.
Sales of $115 million were in line with the prior period, but up slightly on a constant currency basis.
Price increases and improve sales mix and highway safety more than offset lower demand for industrial applications in Europe and Asia.
Adjusted EBITDA of 26 million increased 21% or 23% on a constant currency basis.
Adjusted EBITDA margin was 22% a 390 basis point expansion.
Usually due to price increases and the benefit of efficiency improvements that lowered operating costs versus the prior year quarter.
And for performance chemicals on slide eight.
Sales were down 4% or 2% on a constant currency basis, largely from lower demand for sodium silicate that I would characterize as broad, but not the due to a weaker economic outlook, which caused customers to scale back orders for the second half of the year.
Adjusted EBITDA of 37 million income decreased 12% for 10% on a constant currency basis with margins of 22%.
This reduction was largely the result of lower sales volume.
Also impacting results were higher maintenance costs and logistics costs as we expedited shipments to meet customer commitments during both planned and unplanned operating outages in North America.
Turning to adjusted free cash flow on slide nine.
Given the seasonality of our portfolio, we generate our strongest free cash flow and the third quarter.
This quarter, we delivered $100 million, an adjusted free cash flow up 9 million from prior year, primarily from higher adjusted EBITDA.
Year to date capital expenditures were 92 million.
And we're now targeting lower capital expenditures for the year in the range of $130 million to $135 million.
As we noted on our last call we use of free cash flow to repay $100 million a term loan in August .
As a result, our net debt to EBITDA was 4.1 times at the end of the quarter.
And in October we restructured our cross currency swap portfolio, which resulted in net cash proceeds of $38 million that will be used for additional debt repayment.
Moving to slide 10 for a discussion on our 2019 outlook.
We're updating our 2019 guidance largely to reflect our expectations for weaker demand in performance chemicals that is only partially offset by improved results from the rest of the portfolio.
We're now targeting 2019 sales to be in the range of $1.56 billion to $1.58 billion.
With respect to adjusted EBITDA, we anticipate being at or slightly below the bottom end of our $470 million to $485 million range, given the lower results and outlook for performance chemicals, and an unplanned customer outage that recently took place in refining services.
With margins slightly favorable versus 2018 based on our year to date results.
Other revisions include adjusting our DNA for PQ to $180 million to $185 million accounting for lower capital expenditures.
And interest expense at a range of 112 to 116 million, reflecting year to date and expected lower interest rates for the balance of the here.
We are therefore, revising our 2019 adjusted diluted EPS guidance to be in the range of 84 cents to 87 cents per share.
And we continue project adjusted free cash flow in the range of 125 million to $145 million.
This cash flow along with asset sale and swap restructuring proceeds of raised our expected debt repayment for the year to $170 million to $190 million.
The should keep us on track for our half a turn per year leverage reduction in 2019.
So to summarize we had a strong quarter despite some demand softness.
Our year to date financial performance puts us in a solid position to achieve our adjusted free cash flow objectives.
And we continue to creatively execute additional financial and business levers to generate excess cash flow to meet our leverage reduction goals.
I will now turn the call back to bogus.
Thank you Mike.
Over the course of the last few quarterly calls we have been providing a series of Indebt reviews of each of our business unit.
We have addressed their competitive advantages and growth drivers and on todays call I will focus on our fourth specialty business unit performance materials.
Turning to slide 11 for an overview.
Performance materials also known as potters.
As a global leader in glass Microsphere technology products. The business has elevated for more than 100 years, providing customer solutions for transportation safety and industrial and consumer applications.
Demand growth in the business benefits from global trends toward increased transportation safety standards and material substitution.
We have a highly efficient and innovative global production network.
We have built a strong reputation for a broad array of differentiated high performance products that meet quality specification and ensure reliability of supply for more than 2000 customers around the world.
In the area of transportation safety, our retro reflectivity microspheres enhanced brightness and visibility performance on marketing for both highway lanes and airport runways guardrails barrier and sign markings.
We are the number one road marketing solid beat supplier in North America, Europe , and Latin America.
Logistics and supply chain position support quality and specification requirements by country state and reach.
It also offers the ability to meet customer demand on short order timeframe, given the variability of weather conditions and lack of storage and inventory capacity.
In industrial applications, we utilize our engineering expertise and production know how to efficiently coproduce with our highway product lines. We are the number one or two provider of microspheres for a number of highly specialized industrial applications and uses.
These include strengthening our light weighting in plastics cement and surface coding conducted for mobile electronics and environmentally friendly substitutes for cleaning metals.
In slide 12.
Discuss the key growth drivers for these product lines.
Starting with transportation safety.
80% of our product demand is replacement of restructuring of existing roads and markings in developed countries. This is largely funded by gasoline taxes and is not subject to the vagaries off legislative budgets or funding for new infrastructure.
The balance of demand is driven by.
Higher performance value added products that are easier and safer to install new construction in both developed and developing countries.
And the rising regulatory safety standards, requiring greater visibility in all climates, either with more reflective glass speeds and or white align markings.
These standards are consistent with the needs of an aging population and the trend towards auto assist autonomous vehicle navigation.
On our engineered glass materials or MGM, our products are used in a variety of industrial and consumer applications. This product line evolved through close collaboration with global industrial customers.
Strong position and glass microspheres, and the ability to customize to a wide range of specifications allow us to meet stringent performance size and application requirements. Further our innovation has enabled our industrial customers to achieve lower input costs in there and products.
Our ATM business is favored by several global trends some of which are demand for lightweighting without compromising surface strengths and mold flexibility in plastics and other materials.
Preference for environmentally driven solutions for cleaning metal surfaces, and an ability to cost effectively displace other materials for conductivity and electromagnetic interference protection.
In summary performance materials, leading position and favorable demand drivers continue to support our expectation for sustainable near to long term growth in earnings and cash flows.
In closing for this call I would like to leave you with the following points.
Our team continued to execute well and has delivered solid financial and commercial performance year to date and is on track with our de leverage plants.
We are taking steps to optimize capacity and enhance efficiency for our performance chemicals business.
We continue to make strides to make our portfolio simpler and stronger through optimizing assets driving capital efficiency and developing new channels for growth.
And finally, we remain focused on delivering enhanced shareholder value in the near to long term through improved capital efficiency strong free cash flow and progress so our leverage target.
This concludes our prepared remarks, we're now ready to take your questions.
Thank you we will now begin the question and answer session.
Ask your question you May Press Star then one on your telephone keypad.
You are using a speakerphone please pick up your handset before pressing monkeys. If at any time. Your question has been addressed or you would like to withdraw. Your question. Please press Star then too.
As a reminder, we ask that you limit yourself to one question and one follow up to allow equal access to all participants.
This time, we will pause momentarily to assemble our roster.
The first question today comes from John Mcnulty of BMO capital markets. Please go ahead.
Hi, good morning, Thanks for thanks for taking my question.
So I guess the first one on with regard to the zeolite catalyst business. You, obviously had a lot of strength there in the hydro cracking and and the specialty catalyst side I guess, how much of that was lumpiness or a pull forward from Fourq U verse, just the overall strengthen total demand.
Hi, John This is Mike the.
The third quarter, we said was going to be the strongest quarter of the year. So for hydro qubec cracking catalyst it was pretty much in line with what we expected the pull forward would have been more on the silica catalyst side, where we had some specialty catalyst orders that came through and our method. The fact relate orders were strong in the quarter as well.
Got it thanks, and then with regard to the Capex reduction I guess question on that with regard to with regard to the cut is it more a function of the lack of need for investment just given kind of the what's the squishy macro environment or is it.
Greater efficiency and actually what you're spending on like what would actually drove the cut capex.
Theres a couple of components. There. Some is we had one large project of about $5 million that we've decided to defer and do a little more work on.
Some as is a bit of a deferral given the macro environment of some maintenance capex that we we have a pool every year, where there's a certain amount that we generally can figure out what what needs to get done that's critical this year and if something is a lower priority. We can push it out a bit to improve free cash flow in any given year. So it's a combination of though.
Great. Thanks, very much of the color.
The next question today comes from David Begleiter of Deutsche Bank.
Thank you a good morning.
No not someone else out early for 2020, but given now Ah you have Q4.
Guidance out there any early thoughts on how 2020 might look for you on EBITDA basis.
Well, we will we'll planning to give you explicit guidance.
In our February call, but let me let me run through if you if you.
Going to guidance as a business by business and how we see the market right now.
First let me start with the performance chemicals environment as you know there was.
An accelerated weaknesses that we are seeing we have revised guidance for Q4, and we've taken actions. We believe that this weakness will continue through at least the first half of the year and the recovery in that environment will probably depends on when the destocking activity will reverse.
On the performance materials the highway business given his replacement value is expected to continue.
Probably offsetting some minor softness in the industrial application, particularly in Europe and in Asia.
The catalyst part we see the.
Catalyst continuing to be strong on new capacity 2019 was a very strong year for HCC due to the timing of a number of turnarounds, while we still expect mid year on hydrocracking. It is likely to be slightly down from this year next year.
On the refining side 2019 was a solid year, but we were impacted by customer and our own turnarounds for regeneration, we actually expect.
Nice rebound in volumes next year.
Overall and on margins and expectation I think we've we're working very well to get on margin up to speed and efficiency and everything we we don't expect to see any change in the way we run on margin performance in 2020.
And David that's that's as much as I can tell you have distinct.
Very very helpful and just lastly on some of these noncore asset sales as you did announce one last quarter any further progress you've made on somebody's noncore asset disposals.
We we did one last quarter as you as you rightly mentioned, we as I said, we are working on several opportunities and there's nothing obviously this quarter, but we continue laser focused on making sure that our portfolio scrutinized and opportunities would not be missed.
Yes, we're very active.
But.
We shall see what happens in the future.
Thank you very much.
The next question comes from Vincent Andrews of Morgan Stanley .
Hi, This is Andrew I feel on for Vincent. Thank you for taking my question. So just to follow up.
The portfolio review, just curious as to what the environment looks like so as you mentioned you haven't announced anything.
So focus, but what do you see in in terms of.
What's holding up perhaps any.
Any further divestitures.
In terms of valuation is it the environment getting a little bit tougher and how is that impacting timing.
That's great question.
No that.
You do you apart and then the rest is absolutely Adam you control typically in these cases I think we have been and we continue to do our part of understanding what opportunities. We are interested in how we want it and what is the value of that opportunity I mentioned, a couple of times that.
The value of the.
Smaller components of the assets or the assets is important.
And then we will do.
We will make transactions when it makes sense.
We are ready we know what we want but the opportunity has to match a few other conditions and the market. The market is still okay. We're just not pairing up with the right opportunities that right.
And that's very helpful. Thank you and then in terms of debt repayment.
If you do another half a turn next year that should put you kind of for the Iran or at least the up slightly below your targeted range curious if it starts again that cater to 3.5 times.
How should we think about capital allocation is perhaps a little bit to an advanced 2021 question, but.
You know if in the event that you do asset sales and are able to do more next year.
So what that means for capital allocation.
Yeah, I think that that's a good 0.1 once we get into that that range I think that gives us a lot more financial flexibility whether it be more bolt on M&A to assist with organic growth with further inorganic growth would be looking at dividends potentially so I think everything would be on the table at that point in terms of capital allocation.
Because clearly you have to take a balanced approach and our first priority right now is getting down into the appropriate leverage level, but once we do that we'll have a lot more flexibility.
Thank you.
The next question comes from Christopher Parkinson of Credit Suisse.
Thank you most my questions have been answered, but just real quick on the margin front can you just kind of walk us through the key external internal variables had been driving some of the expansion over time and just how we should be thinking about the intermediate to long term factors.
That we should be closely monitoring as we enter 2020 and even on to 21. Thank you.
Hi, Chris It's Mike on the margin front, we did say, we expect some slight improvement in this year versus the prior year part of that is because of the strong contribution that we see from the catalyst group, which is at higher average margins relative to the portfolio at the same time, we've seen some really nice margin expansion other.
Forms materials business. So why we may be down on volume there. We've had two things strong pricing and also very favorable mix. So we've had good margin expansion, there and and while we've seen a bit of a drag on the performance chemicals side I think it's been outweighed by those factors. So as we get into next year and this is what we've talked about previously is.
We do expect our margins to blend up overtime as the refining services and the catalyst group become a larger portion of the overall EBITDA contribution.
Got it.
Just regarding that portfolio composition question just out of curiosity. When you go out to your shareholders and kind of have the dialogue is their perception of the portfolio in intermediate to long term does that.
More or less accurately reflect a there was a managements are there kind of key differentials and now you perceive your portfolio versus the investment community any color and that would be appreciated. Thank you.
I think when we go out and talk about the portfolio one of the hallmarks of PQ is really our diversification, whether it's by product or by geography, and I think that resonates with investors and you see that even in times, where we may see some economic slowdown in certain pockets of end markets or geography.
Is that three of our four businesses were up this quarter and I think it's a testament to the resilience of the business. The lack of cyclicality that we see in our portfolio and and I think people appreciate that.
Thank you.
Thank you.
The next question comes from Bob Court of Goldman Sachs.
Hi, everyone. This is Tom let's see on for Bob.
So quick question on the implied Fourq you guide.
So the guidance for EBITDA is at or slightly below the bottom end of the range, which implies a touch under 100 million of EBITDA. So what is incrementally getting worse from Threeq to Fourq you to bring growth down from around 15% to a decline of 10.
Thank you.
Yes. This is this is Mike. So if you look at where we came out in the third quarter or some of that was a pull forward. We had some orders of accelerated in the catalyst group. So while we had some outperformance in the third quarter that impacts the fourth quarter and the other is that some of the volume weakness and demand weakness that we've seen in performance chemicals in Threeq you as expected.
The carry into Fourq you.
Awesome, Thanks, and then real quickly on refining services and the deal this JV.
Is there going to be any impact from IMO 2020, there or is it mostly other factors.
The.
Let's let's talk about refining services and IMO, because that's the connection disease. This JV.
As a different story so on the refining we there isn't any impact on the IMO right now there is always a shift between diesel and gasoline.
And that is not we're not seeing that alkylation demand is higher.
At least at least that's what we're seeing right now.
City is limited at the moment in terms of.
Refiners and we see next year as an increase in volumes with all these.
Plan issues that were taken place this year out of the way on the.
Zealand's JV on the hydrocracking side capacity has been increasing and therefore production has increased and you see that reflected in some of the results that we've had this year, we've had a pretty pretty strong year. This year, the only change and that will continue but the only difference and couldn't continuity and sustained.
Ability of this level of production in hydrocracking is the timing and how that fits this schedule of the of the refiners. That's why we're saying I've said it earlier that next year, we anticipate that with the movements.
Between between quarters that we might be slightly lower but it's not a weakness is just a timing and scheduling.
Challenge for their fighters.
Awesome. Thank you.
Yeah.
Justin comes from Laurence Alexander with Jefferies.
Hi, good morning, two questions one on the efficiency programs.
How should we think about the nets tailwind versus cost inflation in 2020.
And then on catalyst could we pin down a little bit what you think the sustainable run rate EBITDA is for the business and I guess you in terms of is Q4 going to be below the first half run rates.
And is 2020 expected to be above or below 2019.
Yes, Hi, this is Mike I'll take the second part for so that the catalyst runway, we had a very strong core third quarter as we expected. So clearly we expect to be down in the fourth quarter, just due to timing because we had such a high concentration hydrocracker catalyst sales in the third quarter.
Quarter over quarter in Fourq, you, we would expect to be down as you look into 2020, I think what they've got some had noted is on the polyolefin catalyst front, we still expect that demand, which has been strong this year to continue to be strong as those capacity additions come in that being said on the zeal aside because it's been such a strong.
Year for Hydrocracking catalysts that we would expect that to be down year on year as we get into 2020.
I guess, maybe just to clarify that then do you think the second half catalysts in 2019 is better than the first half catalysts in 2019.
In total.
Well, we had a pretty strong second quarter. So they are fairly close I think second half were probably going to be down a bit.
Thank you.
Again, if you have a question. Please press Star then one the next question today comes from P.J. Juvekar of Citigroup.
Yes, hi, good morning.
Good morning, well get on your portfolio much materials for Microsphere. Some traffic. Thank you mentioned that most of their funding is.
Gasoline taxes, but I believe local and state spending is also important so can you talk about trends data in daughter when spending.
And also a surprise you didn't mention much about thermal drop can you give us an update on that.
Okay. The first of all the stock about the funding.
Tax funded it's always been like that the local spending is happening state to state.
County to Conkey based on their plans on.
Activity volumes and new infrastructure, so that spending is happening and then quality and specifications. That's why I said the specifications as a product vary from the region to region from state to state depending on what the local.
Before these would prefer to do how fast they do it and.
Quality of what they want to spend therefore extensive or made value products like thermal drop.
For instance is not in every state is only in states, where applied in states, where they value the quality and value of the product efficiency and they value the the placement efficiency.
And they are willing to pay.
A value price value price over some of the states that they want to volume and on the regular.
Regular placements so that transitions me to the thermal drop thermal drop has been picking up in terms of pricing lately, we decided as I told you before we decided that we were going to make sure that we focus on creating value with the products, we limited our expansions to the current capacity so.
That we can sell the product at the right value before we expand the uptake in the market has grown with time.
Price increase efforts. This year has been have been very aggressive because we wanted the product to be to be better and very well valued some customer accepted it and that really running with it in coming back and reordering and some.
Limited that base that based on pricing, so soma drop growth remained strong.
Versus the past and pricing is tremendously better than what it was a year ago.
And while we have controlling that we're preparing value than than than volume at this stage.
Would you say that are more drop is behind your expectations in terms of sales.
During the drop is behind my expectation personally on on total value not in volumes because bought volume.
Volume of sales can go really high the reason, we choked the volume of sales as we want to make sure that it generates the return that we anticipated to.
And at the beginning it Didnt and Thats why we will try to manage that now. So my expectation is that this will pick up with time.
Thank you and then secondly performance chemicals sales dropped with weaker read weak economies.
And your margins are down as well.
A lot of this product go into consumer sort of products and some in industrial industrial economy.
What are you seeing the weakness is that more of the consumer side or is it on the industrial side. Thank you.
It's primarily industrial.
More so than the consumer and I mentioned, a few industries, where where there was kind of a slowdown.
Which slowed down trends translates into a destocking activity.
Or inventory please.
Depleting activity, which results into.
An impact for us the main product that has been impacted for our portfolio has been sodium silicate, which goes into like four or five different applications and you know the way we sit in the value chain PJ, we're kind of lower on the value chain because some of our customers start.
Destock in a bit light and we see that effect. So we are bound to see later effect.
And it's on a couple of products primarily sodium silicate.
And then when even when this is going to rebound, we going as we going to be probably later to rebound because of the value take position as well and it's one product our capacity is capable of ramping up fast.
Were taken advantage of.
Optimizing the portfolio through maintenance and making sure that we we optimize our efficiency and we are ready to.
Flex up again, when the time comes.
Thank you.
You're welcome.
The next question today is a follow up from John Mcnulty of BMO capital markets.
Yes, Thanks, just was hoping to get a little bit better color on the any us agreement and when you think you might see demand getting pulled from this I know, it's kind of early stages at this point, but I guess, how should we be thinking about that.
Hey, John .
Let me, let me give you a backdrop on the any US agreement and why is so critical important for us even though the value is probably going to be later that I will explain that we opt we operate in in the chroma silica catalyst market, which is up a smaller component of the total catalyst market.
The agreement is to get involved in operating in the Ziegler Natta market, which is the largest.
Out of the three ziglar not of a single side and the Chromecast.
And the agreement is going to allow us to not only continue to sell support to that market, but now we're going to be able to sell.
The final products.
To to customers that we didnt sell those products too. So it's a it's a it's an organic growth opportunity to expand our portfolio to expand our customers. It will also allow us to as we start talking about Ziegler Natta, we will be able to increase our.
Exposure to to self further.
Products to the new customers on the crop side.
To me this is a great opportunity to participate in a different bigger market.
The way it works John as you take these products and then you start qualifying because these are new customers you qualify the products and that process takes six to nine months at least once they qualify and they like the product you start producing for that for that application. That's why I think.
By the end of the year 2020, we're going to start seeing.
Revenue stream, and then 2021 should mature up and we start see a ramp up of a nice chunk of growth that didnt cost PQ.
Any capital.
Got it that's that's hugely helpful and I guess, maybe too that you spoke I guess in the release to not only multiple opportunities to optimize but you spoke to broadening out your product portfolio I assume this is an example of that but do you have other ones out there that you're that you're close to and I guess at the same time. This one Rick.
There's no capital would you consider one is the do require capital even given the leverage on your balance sheet. If the if the opportunity was right or is it really just leverage is is the number one priority right now.
Well to be honest leverage today is the number one priority has a larger scale, but opportunity to broaden our growth for growth channels I call them, where we can increase the number of channels, where we could sell because that's that's important for growth. If those opportunities are there any they make sense, we will find a way to two too.
Deal with them I mean, we increased our capacity.
Tolling and Korea with with catalyst, we just created a new opportunity in China too tall for.
For the emission control product we introduced this phenomenon this concept of.
Collaboration with any us to increase our portfolio of sales and we're looking at a few other opportunities. So just to let you know that we're looking at the portfolio improvement from a costing and reduction in selling but also we're looking at a portfolio enhancing through a stronger ability to occur to grow.
Through various channels that require the lease possible capital.
Great. Thanks, very much for the added color.
The next question today comes from sub Q of JP Morgan.
Good morning, how are you.
Good morning wanting.
Instead, a nice job controlling yeah.
Cost CNS sales piping was flattish this year if it turns out that the first half of the year also sees more flattish gross do you have other levers to.
Well, yes cost next year, and what might Dusty and second I was wondering.
Which capital expenditure project.
It's gotten postponed and what you expect capex requirements to be next year.
Yes on the question a front, we have taken a pretty tight approach to controlling our SJ cost be it open positions that may be deferred or we take a hard look at what discretionary projects. We may have so as we get into the budgeting process for 2020, we would have similar levers to pull should the market not be where we want it.
To be.
On the other what what was your second question I'm sure.
On the capital side, Yeah. We had mentioned earlier, we had we had one lar about a $5 million project that.
It was just not ready for primetime at this point, we're going to do some more economic analysis.
In May look to add that back in 2020 in the rest is really been tight control on maintenance some of that would probably get deferred into 2020, I would say at a normal run rate you can assume in any given year is $140 million to $150 million and then as we get closer to providing guidance, we can update that.
Thank you.
As there are no more questions. This concludes our question and answer session. The conference has now also concluded. Thank you for attending today's presentation. You may now disconnect your line.