Q2 2020 PQ Group Holdings Inc Earnings Call
[music].
Good day and welcome to the PQ Group Holdings second quarter 2020, <unk> earnings Conference call.
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Please note today's event is being recorded.
I would now like to turn the conference over to Nahla Azmy head of Investor Relations. Please go ahead.
Thank you welcome to everyone joining us.
Our second quarter 2020 earnings call.
We will start today with formal remarks from dog cafeteria, Chairman, President and Chief Executive Officer, and my Crazed Executive Vice President and Chief Financial Officer.
Then we will follow with acuity session.
Please note that some of the information chair today. These forward looking information about the company's results unplanned.
Including with respect to our anticipated end use demand trends.
In light of the challenges presented by Covet 19.
This information is subject to risks and uncertainties that could cause the actual results.
And the implementation of the company's plans to very material like.
These risks are discussed in the company's filings with the FCC.
Reconciliations of 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 of our website at Www Dot PQ Corp Dotcom.
With that I'm pleased to turn the call to back off him.
Thanks knowledge and good morning, everyone.
As we begin today on slide three I'm pleased with peak you Didnt record second quarter performance, which was marked by multiple achievements across several disciplines.
I'll start with the operational and commercial areas, where we are executing well despite the stiff headwind at the macro level I applaud 15 for children and their performance in safety health commercial and cost management that shows great commitment and care at all levels of the company.
In safety our year to date recordable injury rate is a substantial 65% improvement compared to prior year.
The safety improvement.
He is even more commendable since we are operating in an environment it increased risks and distractions.
The health and safety of our employees remain our highest priority before all other considerations that PQ.
And from a human standpoint, we are highly sympathetic to those who have been impacted by the virus.
We hope for speedy recovery for them, along with all get affected families and friends.
Operationally I'm pleased to report that year to date, we've had no material business interruption and only minor contained effects from the virus at our operations around the world.
Unfortunately.
Our performance reflects our strong customer relationships.
We work closely with customers during the rapidly changing demand conditions in the second quarter and we will continue to do so through this current period and what is likely to be an uneven demand recovery.
During the quarter, we focus on safeguarding existing business and securing new contracts.
In performance chemicals for example, we solidified our core base business with nearly 15% of our expected future annual volume now locked in under long term contract incorporating improved commercial terms.
Turning to our financial performance.
Both our financial results and financial actions during the quarter were quite significant considering the overall situation.
Revenues of $360 million for the quarter led to adjusted EBITDA of $115 million, which came in ahead of our recently increased guidance.
Adjusted EBITDA margin for the quarter was in line with the previous year at 28% very strong results against the macro backdrop.
This is a direct result of focused execution from each of our businesses as they delivered on cost management initiatives to offset the impact of lower demand.
Additionally, we moved quickly to take advantage of favorable conditions on the financial markets. During the second quarter, we completed a comprehensive refinancing.
The extended maturities produced our cost of capital and significantly lowered our cash interest costs.
And Mike will share more of that in a few minutes.
Across the PQ portfolio, we reduced capital spending by about 15 million and monetize three additional noncore assets, leading to approximately $27 million of cash proceeds.
Our performance in a fluid environment puts us in a good position to initiate.
Full year 2020 financial guidance and raise our adjusted free cash flow target 245 $255 million.
While the timing of the recovery remains uncertain, we are seeing some improvement in the third quarter. We also believe we have from processes in place to manage all costs based on the speed of recovery.
I would also emphasize that our good work to drive progress in margins cost and capital does not detract from our longer term focus on building business capabilities to capture growth on recovery.
For instance, we continue to spend smartly within the performance chemicals business, we have been taken out cost to adjust for our volumes.
With an eye towards making our business stronger through a more focused manufacturing footprint and better efficiency.
Recently, we redeploy the engineering team effort from deferred capital projects to address optimizing furnace operation and overall performance to flex with variable global demand.
This effort is intended to reduce fixed manufacturing costs and preserve the long term life for the furnaces and operational integrity in any demand environment.
As has the benefit of reducing future maintenance and capital costs.
Achieving more efficient throughput and lowering cost per unit, while retaining skilled employees.
And key competencies within the business.
Moving to fight for for a review of demand trends for our key end users I'll briefly review second quarter dynamics, and our expectation for the balance of the year.
Given the unprecedented disruptions.
Within the macro economy. It is comforting that approximately 70% of our product sales are expected to come from end users that we see as either stable or improved in the second half a year.
I'll begin with refining services, which was the fastest and the most impacted business, but also has the potential for quicker recovery.
Stay at home mandates early in the quarter led to rapid and significant reduction in gasoline demand in the U.S. as driving resumed towards the end of the second quarter gasoline consumption quickly recovered.
By the end of June use return to about 90% of 2019 levels.
Which was faster than we expected in the second half, we're cautiously optimistic that demand could stay at or above this level with a blend of reopening activities, but also likely containment setbacks within mistakes.
Diversion sulphuric acid product line.
Sure production demand declines in line with our prior outlook while version acid demand is improving we expect acid regeneration to rebound at quicker pace.
Shifting to performance materials, we see this business continuing to exhibit resilient performance in North America roads, driving activity has been stable, resulting in steady volumes and stable pricing.
In Europe, we are starting to see signs of demand recovery as countries reopened and customers return to work on previously approved projects.
We expect continued steady performance for the balance for the year in highway safety.
For engineered Das materials. This past quarter's demand was impacted by weak automotive industrial and construction activities, particularly in Europe for the balance of the year. We are seeing modest improvements for these end users.
I'll move next to catalyst, which delivered strong results through the second quarter, while presenting rather challenging end use trends for the remainder of the year.
So like a catalyst is driven primarily by polyethylene demand.
And to a lesser extent mmm.
We have little exposure to polypropylene.
And in the polyethylene product line benefited during the second quarter due to a link to increased demand for packaging and competitors. However.
We do expect some easing of demand during the second half.
In the release joint venture demand for Hydrocracking catalyst was strong in the second quarter will change outs accelerated by some customers with refineries now focused on cash conservation. However, a number of our customers are shifting second half 2020 change outs into 2021.
Demand for emission control catalyst for heavy duty diesel vehicles slumped in April on temporary closure is a production capacity.
For the balance of the year, we anticipate a mild recovery with sales well below the prior year.
Finally in performance chemicals, we are starting to see evidence of improvements from where we sit today.
Consumption for personal care cleaning products and detergents exceeded our expectations through the second quarter and are expected to normalize in the second half.
Demand for beer in coatings, which had been impacted during the second quarter are now improving.
As we expected industrial demand applications, where the most impacted.
While we are starting to see some improving order patterns consistent with increased global economic activity, we still anticipate a slow recovery given automotive production and general industrial trends.
In summary, despite this highly challenging time the strength of our diverse portfolio is coming through with a variety of highly specialized and competitively positioned product.
This gives us the best comfortable stability quality and resilient and enables us to continue to drive strong free cash flow generation. Despite the uncertainty ahead.
I'll now turn the call over to Mike for an index look at our results and outlook.
Thank you bill gasoline and good morning.
I would characterize our quarterly performance is positive amid the unprecedented economic slump that impacted volumes and sales.
We pared back production cost that's July a capital spending in a rapid manner with quick benefits.
This allowed us to hold the line on our favorable margin position and boost free cash flow generation.
Turning to our consolidated results on slide five.
You will see the impact from the sharp second quarter economic slowdown there was caused by the downturn in many end users.
This was particularly true with lower gasoline consumption from stay at home mandates as well as weakness in demand for several industrial applications.
Our favorable consolidated margin was a function of expanded margins and three segments refining services performance materials and performance chemicals.
Partly offset by some compression of a high base and catalyst.
Pricing was mixed across the segments with the real margin story coming on the cost side.
We took quick actions to hold the line on costs by managing production levels, and reducing discretionary spending overcoming the pressures that lower volumes might otherwise have had on unit cost.
I would also note that adjusted free cash flow totaled $44 million for the quarter well above the prior year, reflecting capital disciplined portfolio optimization and reduced interest costs.
Simply put the team has done a great job of controlling the controllables despite the challenging external forces.
Let's briefly review each business segment, beginning with refining services on slide six.
Sales of $90 million were down 23% largely on lower volumes as reduced driving miles impact of refinery utilization and weaker automotive and industrial demand affected burgeoned sulfuric acid sales.
Volumes came in better than the 25% decline we had anticipated on our last earnings call.
Timing within the quarter was significant with sales approximately 10% higher in June and they weren't April largely fueled by the rebound in U.S. driving behavior versus at the beginning of the quarter.
Adjusted EBITDA of $35 million declined 18% as we were able to mitigate the declining volumes with cost optimization.
This included substantially reducing contractor use delaying discretionary spend reallocating and poised for maintenance projects and Furloughing Sun employees.
As a result margins of 39% reflected improvement of 220 basis points over the prior year.
Turning to slide seven for catalyst.
On a constant currency basis silica catalyst sales of $25 million increased significantly 24% over the prior year.
Polyolefin catalyst demand and the timing of chemical catalyst orders benefited from continued global strength repackaging and engineering plastics.
In the zealots joint venture sales rose, 5% to $41 million on increased change outs for both hydrocracking and specialty catalyst.
This more than offset reduced sales for emission control catalyst due to cutbacks in heavy duty diesel truck production.
The effects on adjusted EBITDA were largely driven by unfavorable fixed cost absorption as we reduce production to align with lower demand.
You may recall that this time last year, we had the opposite dynamic we built inventories ahead of a record third quarter.
The segment continued to maintain a robust adjusted EBITDA margin of 38%.
Let's now turn to slide eight for performance materials, where sales declined 11% on a constant currency basis.
We did see steady North American highway safety volumes and favorable pricing across most product lines.
These benefits were more than offset by a slower and delayed recovery in European Highway safety.
Along with weakness for industrial applications and engineered glass materials.
While adjusted EBITDA of $27 million was 5% lower on a constant currency basis, we expanded margins 160 basis points to 26% through lower operating and discretionary expenses.
Moving to slide nine for performance chemicals.
Sales of $143 million were 15% lower on a constant currency basis.
Favorable sales mix, a price movements were offset by 18% lower volumes, which declined slightly more than the 15% we expected.
Results were primarily driven by reduced demand for sodium silicate across multiple applications.
At the same time, the global specialty silica business was nearly sold out and many product lines related to personal care and food additives.
Adjusted EBITDA $34 million declined 12% on a constant currency basis, but we expanded margins by 70 basis points versus the first quarter to reduce global furnace operating and maintenance costs improved product throughput and lower overall product unit cost.
Turning to slide 10, we were pleased to complete the refinancing of our senior secured notes earlier. This month, continuing a string of positive debt related activities that we have been advancing for some time.
We obtained a new term loan that extended the maturity to 2027 and lower cash interest cost by 275 basis points based on current interest rates.
The combination of refinancing actions. This year has lowered annual cash interest by nearly $19 million and enhance our financial flexibility.
I would also note that the early step maturity is now 2025.
Reviewing our actions since the 2017 IPO on the right side of the slide it's clear that the company has delivered substantial debt reduction and cash interest savings in less than three years, we've reduced debt by approximately $770 million and lowered cash interest costs by $100 million.
This mark significant progress toward our commitment to reduce leverage and drive higher free cash flow.
Before I leave the balance sheet I will note. The PQRS liquidity is strong with $285 million of availability, including $89 million of cash on hand, which enables us to continue to weather the challenging market conditions.
Shifting to slide 11.
With our current visibility into demand trends, we are now comfortable with re initiating our annual 2020 outlook.
We are forecasting full year sales, excluding zealots joint venture sales to be $1.43 billion to $1.46 billion.
The list joint venture sales are anticipated to be in the range of $120 million to $130 million.
We expect adjusted EBITDA to be in the range of 400 tend to $425 billion with margins approximating 2019 level of 27%.
Within each of our business segments for the balance of the year.
Refining services volumes are expected to improve as gasoline demand continues to recover.
We are expecting gasoline demand within 10% of prior year levels with some lagging recovery in demand for version sulfuric acid.
We look for performance materials Highway safety demand to remain steady in North America and continue to improve in Europe.
At the same time, we're likely to see some pockets of softness in demand for engineered glass materials.
Performance chemicals volumes are expected to improved from the first half while remaining suppressed relative to 2019 levels.
And catalyst volumes are expected to be down on that were hydrocracking catalyst sales as refineries conserve cash and delay change out to 2021.
We also expect reduced emission control catalyst sales from low heavy duty diesel production as well as lower chemical catalyst sales as customer orders were accelerated into the first half of the year.
This was partly be offset by continued healthy polyolefin catalyst demand.
As a result, we expect catalyst adjusted EBITDA to decline approximately 50% in the second half of 2020 versus the first half.
Comparing the third quarter to the second quarter, we're targeting high single digit sales improvement with increases in most segments more than offsetting a double digit decline and silica catalyst.
Zealots joint venture sales are expected to be down approximately 25% relative to the second quarter.
All in we expect adjusted EBITDA to be largely in line with the second quarter.
This is based on consolidated margins that are expected to remain high while reflecting a slight easing from the second quarter.
With continued favorable operating cash flow lower interest costs that reduced capital spending we're now raising our adjusted free cash flow outlook for the full year to $145 million to $155 million.
Note. This does not include $18 million of cash proceeds from a performance chemicals product line sale that we completed in July.
So to summarize our performance and actions we had a good quarter with both high margins and cash flows.
We've taken a number of effective actions to further improve the portfolio and balance sheet.
Expect the second half of the year to show improving trends in most business on uses.
And we believe 2020 will be another year of strong adjusted EBITDA margins and adjusted free cash flow generation.
With that I will turn the call back to book asset.
Thanks, Mike turning to Slide 12 will review additional portfolio activities during this past quarter.
PQ has a portfolio of uniquely positioned specialty businesses, we are actively strengthening and simplifying our businesses to reallocate resources in a manner that will accelerate future growth, while maintaining strong margins and targeting improved leverage.
We were successful in completing several transactions in performance chemicals and noncore product line was sold for eight times 2019, EBITDA without a material impact of sales or adjusted EBITDA and we will continue to manufacture these products for the buyer under a multi year tolling agreement note that this transaction.
Finally closed on July Onest and is not reflected in our financial statements for the second quarter.
Additionally, we sold two idled properties and the performance materials and performance chemicals business.
Combined these three transaction generated sales proceeds of about $27 million.
You'll also recall that last quarter, we announced the performance materials swap of our thermal drop product line in exchange for these production facilities secured with a long term supply contract I would note that this new asset is performing as expected with the potential to realize synergies ahead of schedule.
To date PQ cash generation has been improved by approximately $30 million. We continue to look for additional opportunities for further improvement.
Turning to slide 13, I'd like to emphasize the priorities that will receive our greatest focus in the second half of 2020.
Our safety performance now ranks in the top quartile of the industry and we will maintain our sharp focus in this area during the second half.
Our team will continue to navigate through the ongoing value chain challenges presented by Cobot 19 pandemic.
We take our commitment seriously to protect our people our customers and the community in which we operate while ensuring the continuity of our business.
We will of course strive to achieve our 2020 financial targets, including delivering on higher adjusted free cash flow in the range of 125 $255 million.
We will continue our clear focus on cost management and capital discipline, while ensuring that we have the capabilities and positioning to seize opportunities as economic recovery unfolds.
And finally, we will continue to explore additional ways to positively reshape our portfolio and will provide update as potential projects ramping to maturity.
That's a brief review of our progress and prospects I'm proud of the performance of the PQ team in the second quarter. Despite the global uncertainty I believe we are positioning the company well for the second half of 2020 and beyond.
Thank you and at this time, we are ready to take questions.
Thank you we will now begin the question answer session.
To ask a question newer press Star then one under Touchtone phone, if you're using the speaker phone. We also you. Please for Dr. headset before pressing the keys to enjoy your question. Please press Star then too.
Today's first question comes from Christopher Parkinson with Credit Suisse. Please go ahead.
Hi, good morning, Karen on for Chris.
Hi, just wondering how the guy on the into silica Talis business, you had a particularly strong quarter and a lot of it seems attributable to a pull forward and demand, particularly in kind of the polyolefin catalyst portion of the business.
Can you dial in a little bit into trends, we're seeing in.
May and June versus April and then any preliminary rates as you can give us from July would be really appreciate it.
All right Ken. Thank you for the question the visibility we added the beginning of the quarter core silica catalysts business was what's going on not very clear in terms of delays the orders that were going to happen in the end of the year, we did have a nice.
Run with some accelerated activities from our customers into the quarter, which impacted the results. We also did have a m- order that was meant to be in the third quarter that was pulled in also of the demand of the customer because of that need at the time, which created.
A visibility in the second half for the year would a little bit of gaps one on the.
Preliminary MME order, which is now removed.
I'm, hoping that maybe there will be the ability to pull in something in the fourth quarter from the next year and the made demand as the demand continues to be steady you know the MME orders are very clear.
The the long leads are like I don't know six to nine months or eight months orders so add to pull in an order from a quarter to another doesn't happen very often.
As far as catalyst hydrocracking.
Catalyst.
The customers have kind of pulled back in terms of Oh, the plan and there has been a lot of delays that are pushed to 2021, we know exactly which orders have been delayed and we don't know exactly when theyre going to take place a that the first quarter second quarter that we know for sure they aren't taking place and all in all the result.
20% to 25% of orders that were supposed to happen and HTML bookings in Q2.
220, 21, hopefully in the first half.
Great and.
And then I guess just quickly in terms of margins. Most I mean 304 segments had a decent margin improvement this quarter and that seems to be partly due to the fact that youre really executing on cost cutting I just looking to the back half of the year 2021 can you just give us some rough framework about how we should think about some of the.
Second levers you are pulling whether its cost cutting measures raw materials are fixed cost absorption benefit in new and how we should look at that bridge as we go throughout the rest of the year end into 2021.
Thank you Yeah, I mean, yeah. We did we did guide to to a full year at.
Around the level of 29 PM, 27%.
We generated 28%, which is pretty much in line with large first half of last year, there might be some movements from a mix perspective, but the benefit of the cost savings that we have will continue to go the entity. So I think no guidance is about 27% for the full year that gives you an idea.
The impact on some of the mix change again the something.
Great. Thank you. This is Mike no other no significant impact for raw material pricing due to the pass through the nature of our contracts. So that's not a positive or negative.
Oh.
Thank you I appreciate it.
You're welcome.
Our next question today comes from Bob <unk> with Goldman Sachs. Please go ahead.
Hi, everyone. This is Tom Lenski on for Bob. So first question just on the free cash flow and EBITDA guide that implies a note at 35% conversion rate from EBITDA to free cash that's compares to about 25% to 30% in recent years, just how should we think about the sustainable level cash conversion.
Going forward into next year in 2022.
I think part of the reason that you're seeing that conversion improve is because of lower interest costs as rates have come down, but more importantly, with all the refinancings. We've done I mean, our weighted average cost of debt now is down to about 3%. So that continues to be a nice tailwind for us we're managing working capital tightly.
And we do with adjusted free cash flow has some asset sale proceeds in there as well. So that's that's part of the recent you see it go up so.
As you look at just in General you were going to have what our EBITDA profile is lower cash interest will continue to monetize assets as we have over the last two years and all that supports the free cash flow.
Trends that you've been seeing over the past 12 to 24 months.
Great and then on the monetization of assets. So you did $30 million in the first half the year can you just speak to the pipeline for the second half what conversations that book like him and also if any bolt ons, where it can become available what part of the business would you be most focused on.
Thank you.
Hey, Tom we had that we've always had a list of priorities in terms of.
Transaction smaller size transactions again, let me remind you. The rules are anything that has no none at less than acceptable level of growth potential.
Or anything that has a lower return is always a candidate depending on where it fits in the portfolio I consider that we've done like six fix elements year to date that is a huge activity.
Some of them came in just the ended the quarter, we do have a pipeline for the rest of year of things to look at I can't really talk to how far we are in that some of the conversation, but what about chemicals transformation project. There's a few other things that we're looking at that might make come into second half of the year. We will continue to have a pipeline even through next year.
As we're optimizing the quality of earnings at the quality of business itself.
These are.
About the smaller transactions that generate.
Good free cash flow at the same time improve the quality of earnings of the rest of the.
Okay.
Awesome. Thank you.
Yeah.
And our next question today comes from Vincent Andrews with Morgan Stanley. Please go ahead.
Hi, Thanks for taking the question. This is angel Castillo on per Vincent I'm, just a follow up on.
That does M&A or the assets that you sold off I, obviously, a lot of progress around that and also human today be out facility refinance the debt Tropic Ashland.
You announced the repurchase authorization earlier in the years. So just I was wondering if you could walk us through you know your capital allocation view today, how are you thinking about it and you know with potential for further portfolio monarch stations as we think about debt repayment into next year and perhaps improvement in EBITDA.
Is it possible to see buybacks next year would you lean more toward potential bolt ons, just just how is that evolving overall.
That's great question, let me start and I'll, let Mike complement my my answers first of all the generation of cash is a an objective was to improve the quality in the portfolio to is to be able to support our debt reduction we do have a target of debt reduction and we do have a talk.
Going to Blubbers that we haven't deviated from and we continue we continue to do that.
As we move on to the next phase.
We we will be looking at.
Some additional flexibility financial flexibility that will allow us to go after.
Assets, probably technology, there is some bolt ons as well as the that further or even more possible.
Option is for us to to pay some dividends to our shareholders. So once we get to the level of debt of 10, the level of leverage that is comfortable by by the way we're looking at it.
Taxability of can allow us to be to do more in terms of pump dividend and also in terms of bolt on we do have our eyes on several opportunities that we're looking at that we think that would fit well we can afford to do that right. Now we we prefer to stay focused on the levers piece.
Until we until we get there.
That's that's what the distribution is in terms of use of our cash and use of these asset sales.
Proceeds.
And I would say more near term with use of cash debt reduction is still our number one priority. We are going to remain cautious here in the near term just because of not complete visibility as to what the rest of the year looks like so that's why we haven't set our debt repayment target yet that's something we're still continues.
And to evaluate.
But either way when you look at net debt.
To EBITDA, we began the year at four times and we indicated in the slides that we still expect to be at four times. So are a little pausing or half a turn a year, but given what you see going on in the world I think holding our leverage at these levels and so there's a pretty good position to be and so we'll do a further evaluation will decide how much that we're going to repay and gold.
Moving to the outlook for 2021.
Yes, that's very helpful and maybe could you give back off of that and in terms of obviously the improvement a lot of eyes is driven by EBITDA. So as we think about 2021, obviously not a lot of visibility yet and are on you know who knows where it would things will go but.
Howard how would you characterize what you're seeing kind of from an end market improvement you know as we go into the back half a year and as we as you start to contemplate 2021.
Could we get feedback to 2019 type levels or how would you characterize yeah you early thoughts on 2021.
Well Angeles, it's a little bit early to two really speak to 2021 with a lot of confidence. Let me help you kind of see where why would why did you have the confidence to guide for this change our guidance or external guidance for the end of year coping 19 endemic issue that started several months ago what.
I don't everybody and reactions were abrupt bye bye everybody by governments companies by the whole system.
And then after a while everybody is now realizing that economies have to keep going and that's why there was reopening around the world. Then as you go around the world and talk to customers dishes, which is what we do we understand that everybody is planning to go against this thing I've highlighted by being careful and by going back to work and by Readjusting, our work work practices to be able to.
We continue to grow the economy, therefore that gave us a courage and the end the understanding that okay with us in a slope you moved the slope of growth.
What is going to come back faster what is going to take a bit longer you build that in and you can come up with an expectation of but the end of year is based on on getting there once you get there or almost in the way there if everything all the theory is our confirmed you can start thinking up 2021, GDP growth is going to drive if we see GDP.
Going to drive industrial there's going to drive constructions during the dry automotive and you're going to see some of our chemicals business kind of continuing the recovery.
The.
The lack of lock in or the good environment for driving a will continue the growth of our refining services to the level of 90% to 95% level work, but it used to be before which means we're going to see a decent growth or maybe a stable position of where we are now in slightly above plan if here.
Catalyst things that were moved into 2021 kind of come back now how much of that is going to is going to be utilized 2021 is another question, but 2021 is definitely a positive year with respect to where we are right now and how we see the end of year.
But I would wait another couple of months until we see how things are going then we can build an opinion then we will let you know.
And that time, how we see 2021, but for now it's it's more positive for sure but building on the recovery that we're seeing in the trends, we're seeing right now between now and December 2020.
Very helpful. Thank you.
Sure.
Our next question today comes from P.J. Juvekar with Citi. Please go ahead.
Thanks. So this is kinda Martha Carter on for PJ.
And just kind of going back off that that last answer how quickly would you expect their results, especially for the kind of industrial business for performance chemicals to rebound once you start seeing GDP and industrial production growth coming back globally is that kind of an immediate.
Impact on your results or is there any sort of the delay or lag.
That's a great question as it depends on which products and we're talking primarily about sodium silicate, okay, which is a good component of our business and sodium silicate gets into a lot of industry, usually before we get an order for sodium silicate our customers are ready to blend product to produce the and parts for the market. So I believe or so.
Sodium silicate orders are going to start coming sooner than later, if that GDP growth is consistent and I believe because of what happened on the last six to nine months, we're going to probably see a restocking event restocking event is going to main customers are going to order more than they would need at least to start to build that momentum with their own orders. So once the industrial and automotive and could.
Structuring comes back a little bit steadier, we're going to see a nice lift steady recovery, maybe slow between now and year end then it could be it could be a nicer as you go forward because that is really a key component of Oh that GDP growth. So I'm optimistic that the chemicals business is going to rebound.
Slowly probably at the beginning but then it's going to rebound simply because of restocking, which should definitely needed to the market after six or nine months of dry inventories.
Great. Thank you very much.
You're welcome.
Our next question today comes from David Begleiter with Deutsche Bank. Please go ahead.
Thank you, Doug I must have fallen as well on 21, but more specifically catalyst given the moving parts, especially the back half a year.
It without trying to quantify next year. He just maybe highlight the pieces that may have been pushed out the 21, everybody that may not repeat first of the strength in Q1 any any help there would be appreciated.
Well, let me, let me kind of break it down a little bit David I'll break the catalyst into the hydrocracking data, let's face it Vila JV and the silica catalyst based let me start with the silica catalyst. It is also broken down into the M&A and the polyethylene.
Polyethylene levels and capacity in demand that has been going on so far and we had a ramp up in the second.
Almost first quarter to the second quarter. It's now leveling out any we think it's going to continue to be leveled out at that decent level for the rest of the year and I may have you know its orders we took the orders. This year. We will have orders. We know there was orders for next year. So you could take that as a consistent.
The the game changer, as the hydrocracking and catalyst and how fast the recoveries going to bait and how much can refiners sustain pushing delaying these orders and pushing change outs, because theyre going to run that refineries really hard so I believe.
The 2021 is going to be a good rebounding year for catalogue. Let me now take you back to 2015, we believe 2015 was the peak year for Hydrocracking for US then 2019 last year, which is pressuring our memory was a great year for hydrocracking theoretically we should see 2023 as a nice in the next speak maybe with this.
So then we could see 2022 of the real Pico hydrocracking demand, but 2021 will be a build up to that peak.
Hope that helps no very very helpful and my guess FX, what do you what are your assumptions that back half of the year and if your mark to market to today's spot rates for them play for Europe for your EBITDA guidance.
Yeah. The guidance that we're providing now is based upon current spot rates.
So there hasnt, it's it's moved up a bit has not been that material either way, we had more of an impact from.
The Euro and I think the Canadian dollar on the second quarter. So.
Generally speaking it we aren't expected them to significant impact.
Thank you very much.
Welcome.
Your next question today comes from Laurence Alexander with Jefferies. Please go ahead.
Hi, just to flush outside of the customer comments, a little bit more how much are they giving you color on sort of the typical August in December seasonality and the degree to which that might be cancelled. This year alone and then the second one is can you give a sense for chunks of business where.
They can they won't be read there when they're pushed back the entire channel gets pushed back as opposed to having a surge in demand in 2021, I mean, so how much like.
Volume do you think was lost as opposed to just delayed.
I'm sorry, the first part of the question. It was almost muted I didn't hear it I don't know everybody that would you mind repeating it Laurence.
So with respect to the normal sort of seasonality and all the August in December loans, and Youre more industrial facing businesses.
What kind of feedback of customers given you have out those that low not being needed. This year, given how disrupted the first half of the year was.
Well I don't I don't I haven't heard of any any changes or any specific feedback from the customers the disrespect yet.
We might we might be able to get that information as we get closer to the to the second half for the last part of the year.
And then for for next year, there can you give a sense for just the.
Can you just segregate the chunk of sales that you believe is sort of your pushed into next year and then when we think about next year Bridge reason then.
Strapped plates are underlying demand dynamics from there.
Well, it's difficult to take the sales that will move then you kind of add them up on next year, Here's what happened you got you got delays in orders for all the industrial products, mostly the chemicals products and you also got some delays in the second half of this year of Hydrocracking orders now what happens next year as I said earlier.
We will see if things go as we see it today, we will see a rebound in orders for the industrial as recoveries happened. So it is not going to be maybe I hope it will be on top of what they would be normally buy but we hope for a restocking event, whereby we are going to get a Russia borders and chemicals.
Can't quantify that not because I don't want to you because it's not known yet on the hydrocracking, I said, 20% to 25% or the volume sales for the second half of this year has been pushed to 2021 now would we consider that has a a full push and then that's a replacement at the beginning of 2021 or will it be on.
Top of the existing orders, we will know that as we go through Q3, because orders in hydrocracking or six to seven month.
Lead time, so in Q3, if we continue to get more orders then you can comment that 25% on top of the normal orders. If we don't you just replacing the previous plan when would that number basically you're pushing the mountain ahead.
Which hopefully it's not the case, but but if it is that is that is the closest indication we have today on how the volumes are moving to twice 21.
Thank you.
Sure.
Ladies and gentlemen, as a reminder, right to ask a question. Please press Star then one.
Next question cultural Coconino with BMO capital markets. Please go ahead.
Hi, everyone. This is colton bean on for John Mcnulty.
So I guess my first question is earlier earlier on you made you made an interesting comments about having about 15% of the sales volumes in performance chemicals locked into long term contracts now I was wondering if you could just talk a little bit more about that is there are there plans to make that a higher percentage of volumes that are locked.
Then is that specific products within performance chemicals that are being put into these contracts. So any color you could give there would be great.
That's great I mean, typically you know you're you're locked in contracts kind of ratio kind of grows the time.
And the comment is made primarily to illustrate the quality of the contracts more so than the volumes that 15% will depend to the percentage will depend on when the contract completely new what we managed to do what we're happy where there is that we extent, we extended those contracts with good terms, which.
He is the most important thing in an environment like this where you negotiate a good terms decent terms fair for both the customer Ns and lock them in for two to three years, it's a volume locking and we're going to continue doing that between now and year end that we're tracking that and maybe in a couple of quarters. We will have a lot better idea on how big do we have 60.
70%, which is typical got 60 to 65, 70% locked in contract and the rest is almost transactional where at that we've locked in 15% in this quarter loan at a nice nice terms and and decent pricing. That's the objective of Oh mentioning this this common core.
Okay. Thank you that's helpful. And then on just one other question. So you guys have done a really good job with portfolio transformation over the last year and it sounds like you have some big plans for the next 12 to 18 months, but Oh gas I was wondering what are what are you kind of tracking and looking at within the company to help to.
Aside when Youre happy with the portfolio and when the portfolio transformation has kind of got into the place where you want it can be.
That's great question, then that these two components as the components of making that portfolio smaller components.
Adding value to the business, meaning high potential of growth good quality of earnings and that's what we're focusing on right. Now we do we have built over the years a lot of assets around the world. We are always operated closer to customers. So you have a lot of assets in different countries, we would the transformation of our chemicals business, particularly.
Which impacts this we've decided that we're going to do a proper network and exercise where are we going to consolidate some assets to serve customers that a wider range with less asset. So we get more we profit more from utilization efficiency and and production capability.
So those are the projects that we've just described and then you've got assets that have no more value. So we need we need to make sure cash is strong we did six transactions in the last six months in the first six months of year. We did a couple last year, we going to continue to do that longer term, we're looking at our portfolio as a whole and that's probably your question portfolio as a whole is.
What is PQ going to look like two years down the road we have overview.
And we are shaping the view that we have with the reality of the market, where the reality of the opportunities and the value to our shareholders were actively looking at options. We will be once these options materialize, we will be able to kind of throw out there. They the rack description of for the company is gonna look like and and.
And how efficient it as you know our portfolio has made a four components, they're totally different components. They work well in an environment like we have today, but maybe we can do better by being more focused and maybe if we resolve for our unknowns and issues that we have today like the leverage the debt there.
Lack of flexibility through some some assets monetization, we can be an even stronger company in our shareholder it's going to start benefiting a lot more than than they are today 'cause execution wise operationally and commercially things are going very well, but we haven't gotten to a point, where we returned much higher value to our show.
Old and that's our that's our objective and that's our first goal right now and the portfolio is the most important piece and that that's why you noticed that everything we do is around the portfolio. Since I arrived that's all we do and we're getting there hopefully in time, we'll let you know more about what we're thinking but we can do that today.
Alright. Thank you have some good color I know yeah, we look forward to hearing more on it so thank you.
Thank you called.
And our next question comes from David Silver with C.L. King. Please go ahead.
Yeah. Thank you.
So I had a question I guess on cash flow in working capital and then maybe a more organizational effectiveness question.
So maybe this is for Mike, but one area, where your company's financials were a little bit unusual leased in my opinion was in working capital usage.
So in the first half I think your net working capital change was actually a pretty significant usage I have 64 million or so use.
And virtually every other company I follow in the first half of the year has seen a you know a reduction in working capital or release.
That has boosted their cash flow. So I was just wondering if you could comment on your expectations for full year.
Net change in your working capital and how that how that might play into your adjusted free cash flow estimate, which I think you raised the midpoint a little bit of 145 million to 155 million. Thank you.
Hi, David Thanks, you're pretty close there on the first half we were down a little over 60 million that was $20 million better than the prior year, but I think some things. It's important to remember is because of the seasonality of our business, particularly in performance materials.
That drives a lot of our cash usage. So that this is typical were actually better than we've been traditionally and the PQ makes all of its free cash flow in the back half of the year.
In the second quarter. We also had an outflow it was only about $15 million, but that was $25 billion better than the prior year.
As it relates to the the full year.
We've typically would have a usage of working capital as the business grows of about $90 million a year.
At that at this time last quarter, we had expectations that we maybe able to approval on that but what we're seeing is the benefits were getting from additional liquidation of inventory in the cash associated with that is being offset by expected higher receivables at the end of the year as some sales have shifted toward the end that there won't be collected though.
The outstanding there at 12, 31 and that compares to last year, where sales at really dropped off a we had collected a lot of cash. So working capital is not really driving improvement. It's the asset sales that we've done at its the lower cash interest that we see with the refinancing those are the two drivers.
Okay. Thank you for that and I'll apologize in advance I have to next question isn't too on wheel D., but.
You know for Bell gas some I mean I was wondering about your views on kind of maintaining your organizational effectiveness here. So I mean in my opinion, you know from the margin performance in the segments. I mean, you were able to react quickly and effectively to adapt to the new business.
Realities that new environment, you know.
With the pandemic and I'm just wondering as you look ahead to the balance of the year I mean, what portions or what functions of your company do you imagine.
Can you know that the same that this current level of efficiency and effectiveness more or less indefinitely.
And what are the pinch points what are the areas, where you know maybe you can sustain in the current environment.
You know for a certain amount of time, but but at some point you.
Hit the wall may be of organizational effectiveness on thinking about things like major maintenance or turnaround expenses that you are made efforts that your major production facilities I'm thinking about your higher level R&D, where you might have to have in or you know interactions between different you know.
Chemicals are materially specialties are collaborate with customers to do some advanced testing. So when you look at the overall organizations are there any areas, where you know at some point you know operating in the current kind of unusual environment you might.
You might see.
Some issues with maintaining your current level of efficiency and overall effectiveness. Thank you.
You're welcome David look that three out and that you look at and environment. Like this you look at your call.
Which is how how you operate.
You look at your ability to tell which is your sales and commercial optimization and then the third one instance, where production company that produces products to be sold you look at the productivity and efficiency and that's what we tackled we tackled so our costs in this company has always been lead.
For years, and I think it was very very easy for the organization to adapt to the new environment by deciding what we need to do as working effectively.
Keep in the competency around but shifting it making sure that we moved stuff around that we assign a production take targets our productivity improvement a certain number of percentage or basis points on improvement of productivity based on what we do.
Managing the maintenance not not cutting the maintenance, but managing the maintenance to allow it to 215, a time, where you don't impact your production you don't shut down furnaces at the same time this is very operational.
On the commercial side is to what we did as we focus our account management get closer no more about what the customers thoughts or have conversation and the way ahead of the curve in terms of.
Talking about what makes the customer happy that both and contracting with them and then delivery and quality.
These are the elements that we wanted to do and we did and the reason that impacted this quarter immediately because I think the organization was ready for that so I don't think any business any of our business will struggle staying at this level from a cost effective.
If we continue to see some recovery in the market, we're going to keep topline growth, we don't see it stronger commercial organization, we're going to see more contract and any additional cost that's going to go into deliver that whether its cost of operating costs of transportation people you name. It it's going to be inline with our target margin.
And our margin that you see the margin that we targeted because we think we're a company that should generate.
At least 26 27, 28% we didn't 29%.
EBITDA adjusted EBITDA margin that we should be able to operate at that level as long as our mix doesn't change significantly so going forward I have no intention of letting off the letting up that pressure off being.
Having a high earning quality in our businesses and at the same time not missing on growth. So it's about timing the investment keeping the organization focused and this is the standard of our operation going forward and I am not honestly I'm not even thinking that this was temporary at all I don't know it fits and.
So your question thanks.
No. It's very interesting thing. Thank you for sharing your thoughts on that I appreciate the color.
Thank you sure you look.
And ladies and gentlemen for his final question comes from Soaker Tour with JP Morgan. Please go ahead.
Hi, good morning, how are Ya.
Good morning, good morning.
I was wondering what you can.
Comment about the.
On the consumer business, that's within your performance chemicals.
And you know how that see out in the quarter I was surprised to the volumes, where its weakest aware getnet theirself consumer component and that that's my first question and secondly, I was wondering whether you can comment about the level of cost savings that you achieved in I'm in the quarter and whether that's a component of it that.
Temporary that you expect to come back and how soon it might come back. Thank you very much.
Thank you I can take and Tim.
Thank you again I don't like will take they take the Martin is that okay.
All right well the consumer I mean, some of our aspects of the business our consumer base.
The other detergent products all the all the.
Personal care products, our consumer based we so we saw a ramp up in the second quarter during the dynamic because from a health perspective, and the industries need it to sell those products. So we saw ramp up off of some of those including solid detergent, which is a pure consumer product that was not doing very well before because it's been.
In kind of competing with the liquid detergent Buddy he came back for a while it's now leveling off so some of it can consumer product demand.
A bubble that took place in that second quarter, which is some of it continuing here in about is going to level out.
The most components that were watching right now is the industrial component is the is the coding is the construction is automotive and how we see that returning to the proper GDP level growth.
Which is going to be an easy recoveries small slow recovery into next year and the rest I talked about earlier, but how maybe there will be a rush of ramp up of orders and though I don't expect consumer products to be a big event or in the next six to nine months, it's more the recovery the industrial product. If so if that's what you meant.
And yet is that okay with the sports bar.
Yes, Okay, all right well might you can take a premier.
Okay. Thank you and on the cost reductions.
We had about.
$14 million, a total of which 4 million related to turnarounds that were deferred and they've been deferred or others 2020. So all of those cost savings that we have our permanent to the year.
Thanks very much at all.
You're welcome.
And ladies and gentlemen, there's no further questions. This includes there's question answer session ends today's conference. We thank you all for attending today's presentation. You may now disconnect your lines and another wonderful day.