Q1 2020 Earnings Call
Good morning, welcome to the PQ core Holdings first quarter earnings Conference call. All participants will be in listen only mode showed you need it's just simply saying no conference specialist by pressing star.
Okay, followed by zero.
After todays presentation, they'll be an opportunity to ask questions.
So ask a question you made press Star then one on your Touchtone phone to withdraw your question plus Star then too. Please note. This event is being recorded I would now like to turn the conference over to.
Me Vice President of Investor Relations.
Go ahead.
Thank you welcome to everyone joining us for first quarter 2020 earnings results and Cobot 19 update call.
We will start today with formal remarks from Bogota, Some Cherry AG, Chairman, President and Chief Executive Officer, and light Crudes Executive Vice President and Chief Financial Officer.
We will follow with a <unk> session.
Please note that somebody information chair today its forward looking information about the company's results unplanned.
Moving with respect to the anticipated impact that covers 90.
Information is subject to risks.
And uncertainties that could cause the actual results and the implementation of the company's plans to vary materially.
These risks are discussed in the company's filings with the FCC.
Installations of the non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures can be found in our earnings release and presentation materials posted on the Investor section.
Our website at Www Dot PQ Corp.
With that I'm pleased to turn the call to build outs.
Thank you know good morning, Thank you all for joining us today.
I would first like to acknowledge this unprecedented and show just on it all depends managing through.
We hope that you and your families are safe and healthy.
Mark Gordon sympathy, although families who have experienced a lot other the bulk of the golden monkey been done it.
In the short time since a lot goal.
I've seen a tremendous disruption in our global economy, gunkel space and market demand across many thought spot.
This has been driven by opening for the done.
Throughout the global spread to school that 19.
Sharp drop in oil prices.
And the subject on September recession.
The bulk of these developments.
It's important leaders, that's how could take extreme measures to protect the people that community.
Starting on slide three.
For an overview about first quarter activity.
As always we'll begin with Turkey.
Oh last earnings call.
That all 29 team's performance was the best in the last decade.
They could have tried this quarter, resulting in more than 65% improvement.
Recordable injury right over the first world last year.
Other number about health safety and environmental doesn't 60 days increased nearly 27% over this time last year, reflecting a visible commitment and dedication organization.
What was the summary about first quarter results, which reflected minimal impact so good 19.
We delivered the year on year three cents adjusted EBITDA agreements on 2% higher sales would stay strong margin.
The solid result was driven by volume growth in three years, all four businesses, particularly college and performance materials.
Finding services also benefited from higher volumes from increased production gone and newport's worked with those input cost that into industrial applications.
Well that's chemical volumes.
Down year on year, but rebounded sequentially by more than 10% from the park water you to restocking by certain customers.
This quarter wall, so mark to the gold at 90, Ross, it's Brad and something that box.
I'm incredibly proud to help you can see husbands bonded.
They have been instrumental and navigating through these extremely challenging operating circumstances, focusing on health and safety and optimizing it doesn't separation.
Well, we minimize any disruptions in order to meet customer demand.
Given the critical would be and use diversity both business.
Given our proactive efforts to strengthen our balance sheet and liquidity position. We believe often told you will continue to demonstrated significant resilient youngest gossip.
We expect this will result in adjusted free cash flow.
3200, $50 million and adjusted EBITDA margins have been mid 20% level for the year.
Turning to slide four.
On an operational update your and because of not you've been done it.
Oh boy would be well this crisis has been to safety probably.
Our customers and suppliers.
In early March we established a lot of response team consisting of our executive leadership team.
And have functional leaders no doubt corporate and government plan.
I would like to reiterate how extremely buildup and grateful I am door leadership management team and all the employees, who don't always have to that's a good options to implement safety guidelines.
Commended by the various governments around the world and the global Health organization.
Don we suspended work travel.
Instituted can you talk this is enabling people to be working from home or basically operating at the Worksite.
We believe this helped contain because domination and spread to the virus RPQ employees.
Well, so 300 employees the total basins, where do you have tested positive.
All of which has proven.
Turning to work.
After safety or net most critical would've activity has been going green business continuity for our customers.
Oh this is somebody factoring facility meet the criteria for an essential business as it is the gates with most of our customers and suppliers.
We are proud that our product supports the funeral home catalysts are essential components for critical and products such as surgical not packaging materials, leading bought a.
Smoking from critical items, Respirators hospital bed and personal protective equipment.
The good news is that peak you did not experience even if you went back payments business operation today.
We're all manufacturing facilities.
I've experienced only minor disruptions going shutdowns.
Both.
That's very.
Oh no Julie.
I'll just watching side.
We had only minor delays due to logistics.
Welcome to ensure we will have that got more ultimate supply sources book you materials should there be significant disruption sportswear 'cause it sounds good suppliers.
Moving to slide five for discussion well then do you plan for the near and midterm.
It is clear that's called it might be related stay at home Monday.
You bet struggled to Opex collapse have resulted in significant demand disruption, which has brought on a sudden and speak recession globally.
Well the macroeconomic level, both developed and emerging economies are expected to contracting 2020.
The most acute impact.
Expected in Q2 with an uncertain as a couple the pattern in the second half of your that's about it wasn't as potentially can paint.
Well PQ <unk>.
We strongly believe in the long term fundamentals underlying each one of our business.
That's it.
No that's something that's to do in fact on consumer behaviors and the demand patterns about customers, which created uncertainty you know outlook for the rest of year.
Starting with our findings services business, which typically benefits Ping pong, low oil and gasoline prices.
I do.
You know anticipate that demand this business could be materially impacted beautifully unprecedented stay at home builders.
It has significantly reduced miles driven and consequently, lower demand forgotten your daughter from our refinery customer dice.
Friends even thought.
You want to refineries have curtailed production by 30%.
Yes, the lean inventory levels on your whole body.
You're asking like low gasoline demand declined by more than 45%.
Now I'll give them declined by more than 50%.
These factors.
I've been in material loss of demand for regeneration services.
Although some of the impact would be partially moderated by the contractual minimum volume commitments.
That's what the balance about Didnt see the segment, we expect those instant book out 52 week of benign.
And do some nylon and mining applications at least and to be too.
I spoke performance chemicals, which we expect will be negatively impacted for the balance of either.
The forecast declines in U.S. industrial demand for more than 8% in 2020.
Expect into fuel in fact enough sodium silicate business, which is 50% itself and so the broad and diverse set of industrial and use it.
Partially it's definitely that's in March we saw a boost in demand for consumer cleaning products.
Likely soaps and the surgeon that appeared to be staying strong through the spend on it.
Within specialty Silicas, which is approximately 25% of sales.
That's all care usage also serves the March Buda consumer stocking up for who'll walk them.
We believe this will continue.
However, this positive trend has been offset by reduced denied for beer Joel I feel misquoting on consumer home shopping.
Turning to catalysts.
We continue to forecast the strong first half performance on from customer orders.
Some uncertainty in the second half as refiners might slow the waste the catalyst change out.
Silica catalyst, which largely serves the polyethylene market.
Overall projection.
Let me be demand.
However, we will see healthy demand outperformance.
This is due to the shift well prefer silicon technology from both you'd be capacity coming on stream.
An incremental demand from existing global capacity, where our products are specified into production.
Additionally.
Domestic demand has benefited from Golden monkey related search fulfill.
Flexible packaging and blow molded bottle obligation for medical packaging consumer end uses.
Evidence of this football school U.S. flexible plastic packaging demand, which increased 44% you want 2020 versus 20 Lucky.
Well, the 50% yields JV.
Well the second quarter, we anticipate solid performance on some orders however, there could be something like failed to talk you're talking catalyst.
Customer change outs.
This is due to the impact of transportation disruption coupled with the turmoil in the oil industry, but good movie.
Utilization rates for the what's your finally got currently down to 70%.
Additionally, demand is expected to be lower foreign but you can tell catalyst is production of commercial vehicles are forecast to be down more than 40% do 2020 versus 29 team on manufacturing floaters.
Why do we.
Performance materials business.
It's really the most you believe that stability in performance during its been dynamic, but picking only four extra placement highway safety reflective b.
47 States are continuing road mark in activity in some states actually accelerated project.
Turning to smoke Tropic period.
Well go well most of our business. Your many study given the normal striking replacement cycle.
We are monitoring discussion at all branches of U.S. government.
Essential for infrastructure build this year.
Finally in the segment, while we expect reduced demand for all fight on engineered material be.
Both of lower industrial activity.
We believe this will be partially offset by increased demand for medical industry applications.
In summary, and while the second quarter appears to be hit very hard duration than intensity of economic impact, resulting from called the ninth you've been dynamic it's still unknown and may vary considerably by industry.
We anticipate the impact on our business over the balance to be here will be mixed which makes it difficult to provide before your financial forecast at this time.
We believe the diversity of our businesses coupled with the specialty nature of the end uses.
Can mitigate the severity of the non disruption PQ overall.
And we would be actively managing our business operation to align with customer demand.
Maintaining flexibility for recovery.
Now let me jump this older Tomorrow for his review financial results liquidity and outlook.
Thank you both gasoline and good morning.
We were pleased with our first quarter results, which reflected solid performance across the portfolio wanted to volumes.
During the quarter, we took the opportunity to lock in lower interest rates, I repricing and extending our term loan asset base level.
These tone reactions have provided us additional financial flexibility during the call that 19 pandemic.
I'll begin by discussing first quarter results.
Our financial position.
Starting on slide six whatever you up our consolidated results.
On a constant currency basis sales of $362 million increased 2% on higher volumes and we find it services, but then it's materials and catalyst.
Adjusted EBITDA of $103 million was up 3% on a constant currency basis, primarily on higher sales volumes and improved results in the zealots joint venture.
Margins were in line with the prior year at 26%.
I will now briefly review each business segment, beginning with reporting services on slide seven.
Sales of $101 million declined 5%.
Archie on the pass through of $9 million lower sulfur prices.
Which more than offset increased virgin massive volumes from higher production on must turnaround downtime in the current.
Adjusted EBITDA of $37 million declined 6% on higher raw material usage.
<unk> costs related to plant startups, following unplanned maintenance outages.
Turning to slide eight for catalyst.
So what the catalyst sales increased 58% to $25 million benefiting from higher polyolefin catalyst demand to serve the global customer, bringing new capacity online and incremental volume from existing producers.
In addition, and then they catalyst sales increased on a border accelerated from the second quarter as acrylic demand grows late in the quarter.
In the zealots joint venture sales were up 10% to $32 million as demand for mission control catalyst returned to normal levels.
Adjusted EBITDA of $23 million increased 26% on cars sales volume.
Margins were consistent with the prior year.
In addition, favorable product mix offset lower absorption of fixed cost as we sold through our inventory to meet planned shipments.
Turning to slide nine for performance materials.
Sales increased 10% to $66 million on higher highway safety demand in North America as favorable weather enabled and when we started the striking season.
Adjusted EBITDA of $40 million increased 30% with margins rising by over 300 basis points.
Benefiting from volume growth, coupled with lower raw material prices and favorable mix.
Moving to slide 10 for performance chemicals.
Sales of $174 million fell 1% on a constant currency basis.
Volumes declined across the product portfolio, but were most impacted by reduced demand for consumer cleaning and personal care in Latin America.
However, we saw double digit improvement versus the fourth quarter.
I think by sodium silicate demand customers restocking after they reduced inventories in the second half of 2019.
Adjusted EBITDA of $41 billion declined 3% on a constant currency basis.
With margin slightly lower that's reduced volumes more than offset favorable pricing.
I will now discuss their cash flow debt profile and liquidity position on slide 11.
Adjusted free cash flow was lower versus the prior year quarter, largely due to timing of receivable collections and dividends from Israel. This joint venture.
We had been proactive position PQ, that's sufficient liquidity and financial flexibility.
Early in the quarter, we extended the maturity and lowered the interest rates, although term loan and Ito credit.
Upsize, the ideal like $50 million.
Prior to the end of March.
We drew $60 million on Diego to enhance our cash position.
Yeah, no significant debt maturities until November 2022, and had no material covenants that required us to maintain a leverage ratio any particular level.
We ended the quarter with available liquidity of $236 million.
Which we believe is sufficient to manage through their sustained economic downturn.
Moving to slide 12 to discuss our outlook.
As both gas and discussed we are seeing lower demand as a result is the cobot 19 pandemic.
We expect the most significant impact would be and we find it services on fewer miles driven due to stay at home mandates.
Demand for sodium silicate for industrial applications and chemical manufacturing performance chemicals is expected to be the next most impacted given the weaker macro economic outlook.
In performance materials Highway safety demand has been stable in North America today.
However outside of North American demand for engineered glass materials and highway 60 products has been weaker.
Well increased demand for polyolefin catalyst is expected to continue within catalyst.
The seamless joint venture May experience timing related delays for hydrocracking, especially catalyst orders that's customers can extend life cycles with little.
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As a result, this uncertainty we're withdrawing all annual guidance, except for adjusted EBITDA margin and adjusted free cash flow until we gain more clarity.
We do however had better visibility on short term basis.
For the second quarter, you're forecasting sales excluding deal was joint ventures.
To be $360 million to $375 million.
Yeah, I think by volume breaking catalyst.
Offset by an estimated 25% volume decline in refining services.
And is estimated at 15% volume decline in performance chemicals.
We expect adjusted EBITDA to be in the range of $94 million to $1.5 million.
With margin slightly below the mid 20% range.
On lower volumes, coupled with unfavorable product mix again.
We are taking action to improve free cash flow in response to lower expected adjusted.
This includes reducing capital expenditures by $15 million just in the first half of 2020.
Working capital improvement or cash interest savings from the recent debt refinancings and lower interest rates.
We had two asset sales in the first quarter and we'll continue to pursue opportunities to monetize my core assets.
We anticipate these actions will result in adjusted free cash flow in the range of $130 million to $150 million sitting here.
In addition, the steps, we're taking to reduce operating as to make calls we're targeting adjusted EBITDA margins in the mid 20% range for 2012.
We plan to maintain a defensive posture in cash to maintain financial flexibility until visibility on second half results improves.
Deleveraging continues to be our top priority, but will occur later in the year, that's seasonal cash generation this week.
In summary.
We delivered a solid first quarter driven by higher demand.
We have sufficient liquidity to navigate through this crisis.
We are taking significant steps to further enhance cash flows and liquidity.
With that I will turn the call back I guess.
Thank you Mike turning to slide 13 for a brief update on our portfolio optimization strategy.
We remain committed to going on strengthening our leading specialty position.
We're also focused on maintaining strong margins to drive improved free cash flows in changing macro environment.
We are still targeting additional monetization of noncore assets with a few in advanced stages.
As a reminder today.
We have completed the performance due as asset swap, which expanded our bees business, but the long term supply arrangement.
He sold 49% interest in a joint venture in South Africa and entered into a long term toll manufacturing agreement with a form a JV company.
And we monetize noncore assets sale within refining service.
With regards to our transformation plan for performance chemicals.
We launched the work streams in February.
However, given some calls is 19 related constraints on implementation.
We anticipate a delay for completion by one or two quarters.
We continue to start at an annualized adjusted EBITDA benefit of $10 million to $15 million.
We also anticipate improved cash flows from lower working capital and capital expenditures.
In closing on slide 14.
Safety health and wellbeing of all employees will always be or single highest priority in any circumstance wouldn't on it.
Depend on it we have and will continue if you'd be even more vigilant in take an extensive to caution.
We are balancing our operational productivity.
From a demand needs, while ensuring we have flexibility to scale up or down had been on chip.
We have additional levers within each business to optimize cashed improve liquidity through reductions in capital and discretionary spend should be impacted depends on that extend beyond 2020.
And while we cannot provide clarity beyond the second quarter, given the uncertainty related to the timing and based economies reopening.
Piccadilly throughout the U.S. and Europe.
We continue to believe that peak useful tool you will demonstrate its resilience during this crisis.
This is on the basis of the diversity and uses the criticality about products and services to our customers for their success.
And the strength and service quality of each of all individual business.
We expect this resilience resolved in the delivery of stable margins going strong free cash flow this year, despite the ongoing disruption and uncertainty.
Well that we have completed a formal remarks.
I wish you and your families a safe and healthy time ahead, and we look forward to connecting with you over the course of this year.
Thank you and we're now ready for questions.
We will now begin the question answer session to ask a question you must have solid then one on your Touchtone phone if you're using that speakerphone. Please pick up people have said before pressing the key.
To withdraw your question Press Star then too.
Please limit yourself to one question and one follow up if you have no questions. You may we answered the question too.
This time, we will pause momentarily to assemble our roster.
Our first question is from Christopher Pocket Parkinson from Credit Suisse go ahead.
Hi, Good morning, this carried on for Chris.
Morning.
Hi, I'm just wondering if he can walk me through some of the key tailwinds and headwinds that you foresee impacting margins into Q and then kind of in the second half of 20, specifically how should I be thinking about cost absorption you know raw materials, and maybe any product mix impact. Thank you.
[noise] Karin this is Mike I think from a second quarter standpoint, the thing to look at is what I referenced in my remarks, which would be the volume declines that we expected refining services, a 25% and then chemicals that 15%.
Refining services is a function more of.
The decline in miles driven I get high gasoline inventories typically low oil prices would be good for us right now, but with the stay at home mandates that really negatively impacts miles driven so that.
With that reduction in volume, we're gonna see a resulting impact on sales and EBITDA fortifying services, and then chemicals, we see sodium silicate weakness just due to a weak macro environment.
On the raw material side for chemicals, we tend to pass through any changes.
In raw material pricing, so don't expect a huge impact there absorption there was a fairly large effect on absorption for the catalyst group in Q1 little over 5 million, we'll see that same phenomenon that club probably more of the high single digit into Q. So walk catalyst sales will.
Be up we expect sale or excuse me EBITDA will be down year on year. It was a very tough comp nearly 30 million in Q2, we do have the absorption phenomenon will you may recall that we said we were happy [laughter] workshops, we built inventory to meet 2020 sales commitments, we'll see that reverse itself in the first.
Half of this year.
Great. Thank you and then maybe just a quick follow up I know it might be a little preliminary but and it might be covered in your remarks, but are there you know any.
Areas that you would say, we're a little bit more challenging or any pockets of strength that you saw in April, but you might be able to reference as we think pool.
Kinda give give adults in the rest of your thank you.
Hi, Karen for four hour.
Forecasts or estimates that we gave you we fine tune it based on what we saw in April.
The other impact on finding services.
Oh look down.
<unk> has come back to get the most as we go back into reopening the economies in many places we're going to see that easing up.
And and the other industries, which are served by our performance chemicals business, well still be a little bit impacted at least through Q3 and.
As things go back to normal we should see slight improvement.
So it's really nothing different from what we guided you to.
Great. Thank you very much.
Our next question is from John but no they from B and low capital markets.
Yeah.
Yes. Thanks for taking my question with regard to their refining services business, obviously, it's under a decent amount of pressure right. Now I know there is expectations at least in the industry that refining utilization rates you know as we progress even through to Q and certainly toward Threeq you could bounce back you know somewhere in the 10 to 15 per se.
Signage points in terms of operating rates. So I guess, how should we think about how that starts to impact the refining services business and how quickly will you feel what is their inventory in the channel that we should be kind of thinking about is there you know our their take or pay threshold that you have to work through before you start to see the incremental benefits I guess, how should we be thinking about how that business come.
Back.
Hi, John Great question, obviously currently the refining services business says they are probably has the highest impactful to lock down.
Double effect, it's the Ah Hey, it's they locked down.
That's driven as well as the pricing.
And the inventory that is really high today, well deplete the economy's reopen and I'm sitting in Houston I'm looking off my office.
And I haven't seen the highway pull ups has many cars.
As I'm doing it right now for the last couple along so people are coming back to driving we're going to see some depletion of inventory what time.
As for as for the the take or pay you need to understand that it's a protection measure it only cover 60% to 70%.
It covers more than 85% of our regeneration business, but it covers components of the cost.
Just gotten there to not to replace reduced volume, but it's fair to to protect so I think it's very useful for our margins. That's why our margin shouldn't be seen a tremendous trough as we restart we will increase the volume rights because what we need is we reduced the rights of the manufacturing facilities without stock.
Doing anything we just increase right Oh production and we should see a nice incrementals as we.
We would bring that up.
So we're not concerned about the low side were rather.
Waiting for the right timing for that to start recovering and the fast so it recovers the faster we see the value of refining surface and back to the standard normal margins hopefully by your rent.
Great. Thanks, Thanks for the color on that but very helpful. And then I guess.
The only other question would just be it on page five where are you kind of showed up the red yellow and green kinda, depending on how the business are going is it fair to assume the Greens, you're going to see kind of a flat top you know yellows are down it looks like 10% give or take or zero to 10% minutes Reds or worse than that as I said kind of or we gauging.
Right or is there another way to maybe think about [noise].
You are not you're not far off the way we're looking at it is.
Relative to.
To what we normally you would expect for refining surfaces. Obviously, the impact is large threat I wouldn't put percentages there, but yeah, you're right anything below 10% is not considered that that serious.
Catalyst business is still very strong and anything that could happen to the catalyst business between now and year end would be just pushes and delays and the typical moves a performance materials is very strong in highway.
There is improvement to be made on each yet so we hopefully expect that easy I'm brings it back to green.
That's the description of yellow and chemicals is purely because it's dependent on a couple of industries that might be lower between now and your rent yet there are some components of chemicals business that are more positive than its represented here on a personal care and some of the detergent tend to other stuff that is still under demand at least what the next.
Oh a quarter kit.
Got a great. Thanks, very much of the color guys.
Thank you.
Our next question is some day, but then bleed out from Deutsche Bank go ahead.
Good morning, Dogani, Dan Good morning, good how about the cost actions, you're taking this year to offset the impact of the over 19 pandemic and also I believe you were expecting I have a comp that comp headwind this year.
Happy the case, given the lower earnings are seeing at least in the first half the year. Thank you.
Thank you David I'll start Oh, that's something that might give you a bar more maybe details on the second part of the questions.
The actions that we took a timely so.
As we as we started seeing the problem, we started really a balancing the productivity customer demand and cost of our operations. We looked at every single piece of the cost and the lost 60 to 90 days I would say.
We focused on maintaining cash and then we maintain.
We'll maintain stable margin at all our options.
Don So that we don't impair our flexibility for ramp up capability with the market as it recovers. So we looked at populist discretionary spend we delayed and pushed up some of the unnecessary capital investments we looked at a the day to day cost.
Product cost efficiency improvements and those had an impact on the Oh, well have an impact on the Q2 results, but we also have a second set not started set of actions that we're willing to do depending on the left subset. So this problem or has it goes forward. So as we project so.
Margin stability, we're fairly confident that our barge and components.
Our actions are doable in our margin component.
Well be good the only upside to that would be if so if we see higher recovery faster recovery foster reopening of the economy.
More demand more restocking that would be icing on the cake in terms of margins because the anchor boxes will be very high but what we're talking to you about today, they more reasonable balanced approach to what's going to happen or what could happen until next few quarters.
Oh, Mike could you add any I do want to add anything on us.
Yeah on the second part of the question around incentive comp David you're correct, we were expecting a bit of a headwind there I think it's likely that we will not have that now.
Very good it might just on the cash flow keep talking about what type of working capital capital release, you would think could be could occur this year.
Any updated thoughts on debt pay down this year. Thank you.
Yeah, you saw revised target for the year for cash flow still working through the working capital likely there'll be some benefit from inventory reduction there will be an EBITDA consequence associated with that but it's worth the cash to do so preliminarily that could be in the $10 million range, but that's still remain.
Needs to be C., so what we've done with the cash flows we updated for the things that were were up now which includes the EBITDA profile for Q2, I mentioned, the cash or the capital expenditures for the first half the year.
And then some interest savings and we noted on the slide the 15 million for the cash interest as year over year. Some of that was in our original guidance.
Numbers, probably more like a a 7 million dollar number.
So we'll continue as we had better visibility into the EBITDA.
Continue to provide updates on our guidance on cash flow for the year, but.
Providing what we can't today, I mean debt repayment.
It is still our top priority to repay debt with excess cash flow, we're going to be prudent about it wont to be cautious as you know we generate really all of our cash in the second half the year. So once the cash generation.
Becomes a little more clear then we'll have an update on what our total debt pay down will be.
Thank you.
You're welcome.
Our next question if somebody core from Goldman Sachs go ahead.
Hi, everyone. This is Tom Basinski on for Bob So first on price mix across the portfolio. It was pretty strong in the first quarter.
Got it below or separate pass through so could you just speak to the sustainability.
There are perhaps a depressed demand environment second quarter.
Let me start up pricing haven't been an issue at least for the for that for for the the quarter.
And that is simply due to the fact that we have stayed very close a one to our customers.
Ensuring that.
We are convinced our customers others Liquidio I pricing too we do have a strong Pos through a program for our cost increases, which means it's kinda saves our pricing capabilities. So we have had approaches from customers random approach is not not a trend on.
On on pricing reductions that be managed.
Very well, we actually think Oh pricing has room for improvements and the comment few quarters. When we start implementing more and more transformational performance chemicals, which was probably cover supposed to be opportunities.
On pricing.
What was the second half of the question.
Huh.
Dot dot covered it and then I'm just kind of pivoting to that performance chemicals transformation program. You previously highlighted in the fourth quarter and then again the first quarter here are the expectation for 10 to 15 million. In addition to annualized EBITDA or how should we think about progress on not in London.
The current about and is there any reason progress can be either accelerated or deferred.
Thank you Josh.
The top we did remember we talked about for a different programs within or work streams sort of performance chemical transformation, what we did because of the current.
Work environment, as we reprioritized what needs to happen not one what needs to happen later.
We're still committed to our annualized.
Savings of 10 to 15 million through the program. However, there will be delays because of the difficulties to start implementing if you think simply because unavailability of contractors and permits and approvals are sometimes very complicated and everything is locked down we continue to working on manufacturing excellence and.
On our network optimization and a lot of some of these cells that you're going to say from asset sales or a product I guess.
However, the most interesting part of our efforts is also on the commercial discipline. We didn't we didn't throw it away we kept working on commercial discipline and this commercial program is going to allow us to maintain our pricing strategy and it's going to allow us to really approach it from a value perspective with customers has volumes pick up.
What we didnt spend time on or is the integrated business management component, which is the supply and demand planning, which takes longer time and attendance expensive when it comes to consulting efforts and stuff like that so we rebalanced focus on creating cash.
And potentially creating more value it towards the fourth quarter. We do we do believe that we're going to see some value created for this year 2020, but most of the value will be done within that annualized throughout 2021. It definitely by early 2022, no change in the program with baby slippage up quarter <unk>.
That's great. Thank you.
Our next question is from P.J. Juvekar from Citigroup.
Go ahead.
Hi, Good morning, and this is Canada on for P.J. Juvekar I just wanted to ask on that Polyolefins demand I know you said it remains the same much stable I was wondering if you had any further visibility into inventories that and if you have seen any demand drop off falling initial demand.
It's from stockpiling activities.
And not just secondly, I know you said pricing probably is holding up but if you could specifically comment on FCC catalysts and how that pricing is holding up thank you.
Thank you cat the let me comment first on the on demand, we still see demand was strong in the quarter and into second quarter was still see them on a stable as as we expected it going forward.
We don't see any.
Any meaningful.
Inventory related to drop or most up most orders are in place and we have a clear visibility to what could happen between now and San Diego. We did planned. This year, we'll have a very strong growth of course, that's lost here anyway. When it came to a so called Oh, Yeah Blake.
Now for pricing we.
We haven't seen.
Scene, and we don't expect any any a penny change.
In pricing and we anticipate a for polyethylene that the the forecasted activity.
Would be disruptive maybe a little bit in terms of timing, depending on what the value chain changes in terms of scheduling and everything but we don't see major shift we the year, we'll end up almost flattish year over year from a market perspective, but for PQ, Oh business will definitely see nice gross.
Year over year by the entity.
Oh.
Our next question is from the Laurence Alexander from Jefferies.
Go ahead either.
Hi, there good morning, So I guess two questions first or.
<unk> program.
What is your current thinking in terms or how many years you can regular program before.
Sure sure to one where your trust pounce on productivity or certain cost inflation.
Hi, large it's Mike I think when you looked at the transformation program, where they'll be a step change in cost improvement as it relates to the reload. There's a lot of work that we've been doing as a company over the last tend to see.
15 years to offset fixed cost inflation generally when we set our targets for the year, we have fixed costs.
Increases are well below the cost inflation. So there's just so lot of opportunity here as we work on our logistical models and work on our customer engagement strategies, such that we think over the next two to three years at a minimum that we're going to see step change benefit as we get to the full run rate and then we'll reload for the next set of opportunities.
But we're we're doing the the opportunities to offset cost inflation on a year to your base is currently.
So [laughter] extend this sounds done three to five years.
What are the recruit bottlenecks in are harder go after that you're not going after now partner excuse, but big chunks of opportunity farther out.
Well I think what we start with from a program perspective is what what can we do were the quick wins what are the easier things to do what's going to have the most impact you always have a pipeline of opportunities I mean, it remains to be seen with a full value of that's going to be a it's a little bit like our R&D program, you put a lot of things into the funnel as they Chris.
The wise you you identify the benefits commercialize it move on so we're in the first phase of the transformation program. We have a set of targets that are going to get to the next run rate as they've got some said one to two quarters. Later I think once we get that we get to the full run rate that we'll see what the next evolution of the program else.
So lorenzen.
Laurence just to add one more color.
The we have very specific targets for productivity improvement over the first appeared to talk.
Very specific in terms of percent Uh huh.
Time and productivity.
And also we have a very specific target in terms of cost of operations into plants, which leads to Oh, I'm, making decisions on reconsolidate consolidating and reshuffling per day production throughout our assets. We believe we have more assets than we need fewer assets that will disappear.
And once we get there as Mike said that is gonna be the benchmark to future improvements, but the biggest improvements on low hanging fruits what happened in the first 12 to 18 months now no probably more and more so 24 month period than 18 months pay something.
And then on the slippage in refinery countless or we signed up for a boat in 2021 or how are you thinking about because you don't look at your into next year.
She was very difficult Florence to really predict who is going a little move backwards Ah. It's about when are the refiners will decide to schedule their turnarounds.
There will be tendency, we expect them to second half of the yeah. There will be some movements into 2021 child behave turnaround send a therefore change outs.
Our our ER hydrocodone hydrocracker catalyst.
ER beds I believe we're gonna see disruption in the second house, but not tremendous and maybe we're gonna see say based on this we gonna see a lot of the movements up turn around into the first half of next year, which could create a sub also impacts what 2021, but we're not in 2021 at this stage.
Well, we try to do as bad as they are maintained as much as possible. The strength as we said 10, they tend to remarks or for the Oh second quarter, we base our comments on for borders and for the third or fourth quarter or we're still monitoring that with customers usually within six to seven bumps I of course.
Based on the programs, what we do anticipate there could be some delays.
After between the quarters and maybe into next year, but not material.
Okay, great. Thank you.
Thank you.
Our next question is from Vincent Andrews from Morgan Stanley.
Yes.
Hi, good morning, everyone mrna steel on because anything.
A quick question around a free cash flow.
I just take the roughly 800 million items at the midpoint are you guided to for EBITDA, and just annualize that and kind of looked at kind of the change year over year and versus you know the flattish or free cash that you kind of guided to from a year over year perspective.
How many bridge that different there seems to be like either that would come down by about 70 million. If you annualize the second quarter and the first quarter and so as I think about 2020 recast for guidance flattish how much of that is EBITDA improvement versus working capital or other puts and takes that you kinda Scott.
Yes. This is Mike thanks for the question.
When I referred to the target updates for this year, because we have not giving annual guidance for EBITDA, we got a bit of Oh mismatch in terms of what we're able to update today and what we still have to update the future. We don't have visibility to the EBITDA in the second half at this point so what we've done as we've taken a look at the original target that we had.
The items that we could update today, which would be the second quarter EBITDA performance, what capital expenditure reductions daughter, known and our savings on cash interest I think annualizing. The first half in this environment may not make a lot of sense I'm I'm not sure that I would focus on the math from that standpoint, I would just look at the changes that we have in the key factors that we.
Discuss today, and then as it evolves into the third and fourth quarter won't be able to provide additional information as we have more clarity.
Got it very helpful and in terms of our portfolio optimization or I am going I guess divestitures of non core assets.
Just talk about the puts and takes Argus, the and the balance between divesting assets that don't make sense right now for because GE versus perhaps have asking at <unk> in a difficult market and making sure they get the right value for these assets.
Well I drew a tab the target remains clear about us looking at our portfolio and great details.
From a major components as we've said it over and over.
Obviously, the current environment as not does not obvious in terms of what to do.
We do have conversations and reviews.
On a trigger trigger lines and trigger points and trigger Tom score.
Moving forward with anything and we will make that considering the market value.
Timing of the size of the opportunity so really there's nothing more details you can say here except that.
We will make sure we don't they don't do the wrong thing, we're focusing rather on smaller opportunities some cash generational opportunities like moment and to maximize.
They are cash and also to take care of some of the concern we had within our portfolio is on smaller pieces and components as was our strategy beginning.
But definitely it has not perfect environment, right now and as opportunities show and the environment becomes more interesting.
And more valuable we will make a decision we have to make.
And Kevin Spacey.
Our next question is from Roger said from Bank of America.
Go ahead.
Thank you Ed good morning.
Cattle warning right.
Without the first time polyolefin sell and the Q2 and then they buy him pulled into Q1 from Q2, what would have been that you're over your volume growth.
Your question is around the what got pulled into Q1.
<unk> I think it partly that I mean, your volume was up 57% year over year.
However, part of it was.
I'll pull Florida that and they bought a catalyst firenze and the second part you spoke about in the prepared remarks was a one time polyolefin reactor Phil first time it sounded like a first time, we ask ourselves, which presumably is that first time, yes, you know a lot of oil from catalyst something.
Came close to our kind a one time me think about it if you want to say not look at those two what would have been the year over year by.
ER increase and the catalyst segment.
[noise] between between the new sale the and then they timing. We also had a high some hydrocracking catalyst sales that moved out of Q1 and into Q2, the none of all that I would say.
About a third of the volume impact.
Okay got it.
And then secondly, I think I you mentioned that in catalyst absorption added 5 million, which had some men 5 million <unk> dot.
<unk>, which wasn't that you year over year increase any EBITDA, if I understood that correctly I would've thought no actually the Oh I'm sorry to stop you know, it's actually I'm glad you brought that up if that was your understanding I've spoken directly with the if there was unfavorable absorption in the quarter. It was a little over $5 million. So it negatively impact.
Hi, good EBITDA.
And we expect the same phenomenon next quarter.
Because we're selling out of inventory this year and not absorbing those fixed costs versus we were building inventory last year and absorbing you've got to not only do you have a negative this year, but compared to the prior year positive. It's the has a more of a magnify them back did that helps.
Absolutely, so youre selling out of inventory youre producing more got it.
Sure Yeah, Yeah sure about thanks for the clarification.
Hey, Roger this is still got some I just want to make sure that we don't get into a lot of.
Itemized details on movements between quarters, and everything and every quarter for catalyst, there's always things moving in that moved out.
Got it on a higher level compared to last year. The war things moving in last year. There are things moving out and this year you got that may come in and I would probably single out every day, but on the orders a volumes they they keep moving in and out in the quarter. So it's very difficult to really try to put your arms around to an apples.
Apple comparison I just want to caution you would that because I would probably consider M&A as an effect because.
The frequency of Oh that many orders is less but volumes could move any Tom just remember our last quarter of 29 team how the volumes hooked up on everybody.
As we expected Q1 to be lower it didn't so that's not just make sure that you keep that in mind that you're looking at these numbers.
That's a career clarification.
Our next question is some David so from C.L. King go ahead.
Okay. Thank you I was actually hoping to follow up on the and then a catalyst business. So if I'm correct I think the that's been a positive surprise for at least two quarters in a row in a in a positive surprise you know that it merits mentioned.
Amongst all your businesses.
And it does seem to be a a bright spot you know when would the a pandemic world. We're in so I'm just wondering what what might be the possibility that that maybe.
You know the demand strength could.
Continue to exceed you know traditional levels by a meaningful amount and what are the opportunities for your maybe to expand your sales I don't know globally order or two different customers and could you also just remind me I'm I'm not totally familiar with this but what is the replacement cadence or the timetable for.
And that May is it replaced once a year every three years, what what is typical for for that industry. Thank you.
Oh right Hey, this is bagasse about let me just make a comic generic comment on ebay.
Since it is not an annual cadence, but it's it's almost every one to two to two and a half years depending on utilization.
So the way we planned this is based on the conversation. So our main customer who we have very specific facilities that produce at midnight in Asia and into Middle East.
And then we have very clear.
Guidance on when the order should be because its timed with other stuff around the facilities every once in awhile orders get increased or gets pulled in based on that that take place and they in the facilities that are they want to have access to the products to be it sooner. It happened a couple of.
Ah, but however on the other side a year ago or a couple of years ago, we were having the opposite problem where were manufacturing facility wasn't ready and things were pushed which was a very negative on our performance.
Demand has increased and the last three to six months, we could see that a week. It also see that future demand or longer term not not immediately is gonna be justifying. The addition of another facility, which our main customer has announced building.
And in North America for 2025, so from a longer term this looks like a very interesting a promising partnership that we have from a short term we hope that.
The strength of the demand on the first quarter could continue but we can only materialize that based on orders. So there's no orders that are material for us to talk about so which means it is what we think it is right now that doesn't mean, we couldn't see slight improvement.
That's what I have to say on that I hope I answered your questions.
Yes. Thank you if I could just follow up in a slightly different area, but.
You know when when your market when you have a market leading position my my theory or my opinion or is that you know when demand how you focus on operations and when demand softened you start to think maybe strategically so [noise].
I you know I'm using your recent agreement with any is in a catalyst sends a model, but I'm just wondering if the disruption and the slowed down in let's say your as an example of your refining services.
Isn't it does that present any opportunities to either gain share or too you know arrange for a customer to begin to outsource in other words.
What might be some capital like you know growth opportunities surrounding your larger businesses that you think might be.
Opportunities in the current kinda disrupt disruptive uncertain environment. Thank you.
That's a great question every single business unit.
As.
The the typical plan.
They have their strategic look for the year for three years, whereby they would scenarios of growth, which we have committed to now this happen whatever happened.
The first quarter.
It is really a surprise to the whole thing. So then you have to.
We sit back and rethink that strategy and then introduced additional short low hanging fruit actions that you have to do to make sure your growth a catch up.
Mitigated or lack of gets mitigated because of what's going off from what's going on so our any also wasn't example, and the strategic nature of the any also agreement that we saw last year was to penetrate markets. We wouldn't participate in otherwise what should be vigna, Nada, which has a largest market.
Ah in the catalyst space at the time.
Every business unit has similar thinking in terms of either partnering.
Selling through different channels.
Looking at other places, where we're not selling and contracting some partnerships to allow us to have our products available in the market and they are being used today some of them at some of them well come online, but maybe not at the magnitude of a big announcement or a big topic.
Collaboration the most important thing I want to leave with you is on the chemical space, which where we have a performance chemicals, that's where we are present in more places around the world pretty much and that's where we touch so many industries. We do have you know transformation plan the commercial piece.
What I talked about earlier that talks about that creating sales channels and opportunities that could be just new customers. The classic way, what partnerships or X changes or to support growth itself and so all those are ongoing and they are connect.
Not to the short term issue, but also to the long term view about gross.
Thank you very much.
Yeah well.
There are no more questions and the Q.
The conference call is now conclude that.
Thank you for attending today's presentation you may now disconnect.