Q3 2020 PQ Group Holdings Inc Earnings Call
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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 today for our third quarter 2020 earnings call.
We will start today with formal remarks from bulk out some cherry <unk>, Chairman, President and Chief Executive Officer, and my Crazy Executive Vice President and Chief Financial Officer, then we will follow with a <unk> session.
Please note that some of the information shared today is forward looking information.
The company's results and plans, including.
Including with respect to the sale of our performance materials business. The strategic review of our performance chemicals business.
And our anticipated end use demand trend in light of the challenges presented by call. It 19.
This information is subject to risks and uncertainties that could cause the actual results and the implementation of the companys plans to vary materially.
These risks are discussed in the Companys 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 peak.
Q Cork outcome.
With that I'm pleased to turn the call to block out some.
Thank you and all and good morning, everyone and I Hope you and your families are safe and well.
First of all let me tell you that we're very excited to connect with you today as we update you on our performance for the quarter and the most recent strategic moves.
Beginning on slide number three I would characterize our third quarter performance as one of continued execution against the backdrop of the macro environment that has improved.
Not yet out of the woods.
Yes review highlights from the quarter.
As always we start with safety and I'm pleased to report that there was also outstanding.
Our accident rates in the first nine months has been cut in half versus the same period last year.
Oh boy it used to be in the top quintile of safety performance as reported by the American Chemistry Council and we are meeting that high bar so far in 2020.
We continue to operate through the extended go with 19 health risk environment.
Complying with our own philosophy.
As well as the global health guidance and recommendations.
Well the global economic recovery occurring gradually we carefully continued to optimize our supply capacity to match the evolving demand picture was effectively controlling costs.
We're also ensuring.
That we maintain sufficient production flexibility to accommodate the continued rebound in demand.
On the commercial side were pleased to announce the meaningful new contract into refining services regeneration product line.
This multi year supply agreement starting in late 2021.
I wish it was us for a high single digit increase were annualized <unk> regeneration services volume.
We will supply this from our existing network, having efficiently allocated capital to de bottleneck all production capacity.
Within performance chemicals.
Part of the transformation plan, we announced a price increase across most product lines to reflect the commercial value of our products and services for our customers.
This announcement will largely be realized in 2021.
In terms of financial results on the top line improved 6% from the second quarter.
As we expected.
Adjusted EBITDA also was largely in line with the second quarter, resulting in healthy adjusted EBITDA margin of 27%.
The good news of course was on the strategic thought.
Earlier this month, we announced the sale of performance materials at an attractive valuation as well as a review of strategic alternatives for performance chemicals. These.
These actions represent the most significant milestones to date, you know simpler stronger strategy. This will in turn enable us to focus on higher margins on higher growth potential businesses that should drive higher company valuation.
Turning to slide four for more color on end use demand trends and beginning with refining services.
Since June global gasoline demand has been steady at about 90% of 2019 levels.
Recovering nicely from the tail off in April guest.
Gasoline inventories have declined and I know, what the normalized five year average.
This was the result of higher demand on increased miles driven and some of the U.S supply has a number of north American refineries closed or idled facilities.
This recent tightening of supply capacity was incrementally positive for some of our customers in driving their production utilization higher.
August overall, U.S. refinery utilization recovered to about 80% before the hurricanes caused temporary shutdowns and lingering effects. So little October.
Still expect the amount in the fourth quarter to finish in a healthy range of 90% to 92% of 2019 levels.
As for our high grade version support gossip product like demand for mining came back stronger in the third quarter were also seeing industrial and automotive demand drivers improve as we enter the fourth quarter in September U.S. automotive sales continue to increase the greater than 90% of 2019 levels.
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Moving to gatos.
We mentioned in our previous earnings call, we anticipated a softer second half versus the robust for six months.
Refinery customers continue to focus on cash conservation.
Due to lower than typical utilization rates. This year refiners are delaying the cost of capital is that change outs beyond 2020.
I would add that the global refinery capacity shutdowns has affected three has a cracking units in the industry.
Well, we were not impacted.
Demand related to all emission control catalysts for heavy duty diesel applications remains well below prior year levels, though we are starting to see demand improving from trough levels as production returns.
On the other hand for silicon catalyst demand for our products continue to outpace the broader polyethylene markets for packaging containers and Phil.
Attribute this to our customized solutions, along with our products being specified by the largest global producers.
Turning to performance materials, you know highway safety road striking business.
Demand in North America remain stable, well drilled striving activity typically viewed as low cost and essential for safety.
We have seen some reduced driving efficiency due to cost related work restrictions infuse dates.
Europe, primarily Spain, France, Italy, and the UK demand has been showing steady margin improvement.
We expect fourth quarter demand to be similar to 2019, Oh, sorry of unusual weather impact.
In our engineered glass materials business, we saw steady demand improvement in the third quarter that met or exceeded our expectations for various end use this pricing.
Hi September volume has returned to 95% of prior year levels largely.
Largely driven by general industrial and construction activities. We expect this improvement to continue in the fourth quarter.
I'll conclude with a mixed picture of demand trends impacting the end uses of performance chemicals.
I've been seeing a surge in personal care and cleaning products for consumer use and industrial service and hospitality and the third quarter. This subsided as expected also weighing on demand is a slower recovery from certain industrial segments, such as pulp and paper as well as oil and gas.
These trends are being partially offset by signs of rising demand for coding and general industrial applications as well as gradual reopening of food and beverage establishment under strict tell guidance.
So overall, we are optimistic that the trough is behind us well.
With the exception of catalysts, which will have a delayed recovery time line, the reopening and general economic recovery should benefit the rest of our business. It seems at least the fourth quarter.
Beyond that the rate of recovery will continue to evolve in conjunction with the global response and containment of the virus expansion.
Now I'll turn the call over to Mike for an in depth discussion of our results and outlook.
Like you don't Ghassan and good morning all.
Slide five you'll note. This quarter was marked with solid financial performance largely matched our expectations bumper impacts related to hurricane Laura and a hydrocracking order deferred to the fourth quarter, but in total reduced sales by $9 million and adjusted EBITDA by $5 million we.
We saw top line growth in three of our four segments compared with the second quarter and were pleased to close yet another quarter with healthy adjusted EBITDA margins of 27% on continued cost efficiencies and resilient pricing.
Now, let's review each business segment, and then the outlook beginning with refining services on slide six.
Sales of $108 million were down 9% year over year loss.
Largely driven by the pass through of $5 million with lower sulfur and other raw material costs.
We also saw reduced volumes for regeneration services as refinery utilization rates were negatively impacted by a combination of a pandemic and to a lesser extent hurricanes in the Gulf Coast region.
I should note however that regeneration services volume was up nearly 30% from the second quarter as gasoline inventories began to normalize on a rebound of economic activity.
Burgeon sulfuric acid volumes also saw a lift of 20% in the second quarter on improving industrial and mining demand trends.
Adjusted EBITDA of $44 million declined 40% versus the prior year quarter, largely on lower volumes, while margins remained strong at 41%.
Turning to slide seven for catalyst.
So what's the catalyst sales of $23 million declined two and a half million from the prior.
Double digit gains in polyolefin catalyst sales were more than offset by the timing of a buckle, but backer late order that was accelerated into the second quarter from the third.
And the deal this joint venture sales of $27 million were about half with prior year levels.
As we indicated on last quarter's call lower utilization rates are finding customers are extending catalyst life.
Hydrocracking jobs to be deferred out of 2012.
In addition demand for emission control catalysts remain soft but in line with the pace of recovery in heavy duty diesel truck production.
Adjusted EBITDA of $12 million and margins of 24% reflected lighter sales volumes unfavorable inventory cost absorption offset cost saving measures.
Moving to slide eight for performance chemicals.
Sales of $149 billion were down 12% versus last year, reflecting lower volumes from the weaker demanded detergents gleaning industrial and oil processing application.
Since the second quarter sodium silicate sales showed double digit gains.
And by improving industrial and construction applications.
Adjusted EBITDA of $34 million was down 8%, but margins expanded 90 basis points as lower volumes were mitigated by favorable pricing and cost actions and transformation project.
Finally on slide nine the performance material.
Sales of $105 million declined 9%.
North American Highway safety demand remained steady however, striking activity was slowed in some states due to cope with related work restrictions.
This was partially offset by improving volume demand in both highway safety and industrial applications in Europe.
Adjusted EBITDA up $25 million was in line with last year and margins expanded 180 basis points benefiting from favorable pricing and mix and cost initiatives.
Turning to slide 10 for our outlook.
With solid execution and financial performance today, our 2020 outlook remains on track.
On a consolidated basis and including performance materials for the year, we continue to project sales of $1.43 billion to $1.46 billion.
Do you list joint venture sales are still anticipated to be in the range of $120 million to $130 million.
Our adjusted EBITDA range remains 410 to 425 million with margins of approximately 27%.
Driving adjusted free cash flow of $145 million to $155 million.
This excludes 18 million in proceeds from the sale of the performance chemicals product line earlier in the year.
Beginning in the fourth quarter. However, we expect performance materials to be reported as a discontinued operation.
Consequently, we are providing 2020 guidance to reflect results from continuing operations that exclude performance materials.
We are therefore targeting full year sales excluding deal. This JV sales to be in the range of $1.08 billion to $1.1 billion.
We expect adjusted EBITDA to be in the range of $330 million to $345 million.
With margins of approximately 28%.
Reflecting the relative margin strength of our continuing operations.
Adjusted free cash flow is estimated to be in the range of $95 million to $105 million.
As a reminder, that also excludes the $18 million sale product line to performance chemicals.
At this time, we are suspending adjusted EPS guidance for the year, given we are still working through the tax effects of the divestiture.
We intend to use most of the net cash proceeds from the sale of performance materials to reduce debt by approximately $460 million and project our leverage pro forma for the sale to be approximately four times a year it.
Finally, we noted on our call two weeks ago that we're expanding our capital allocation program and intend to deploy up to $250 million to a special dividend subject to board authorization.
So to summarize our performance in action.
Third quarter was largely in line with our expectations margins.
Margins remain quite strong for the quarter and the full year and.
And we're looking forward to completing the sale of performance material paying down debt and returning cash to shareholders.
With that I will turn the call back to Brad.
Thank you Mike.
Slide 11, I'll discuss the positive trajectory of PQ strategic journey following our most important announcements two weeks ago.
This includes an agreement to sell performance materials for $650 million with.
<unk> is expected to close by year end.
This brings an attractive valuation of 8.7 times the last 12 months adjusted EBITDA.
And demonstrates the PQRS assets are more valuable than the current trading multiple or the company.
We also announced the strategic review for performance chemicals, what should the valuation warrant could result in a sale in 2021.
The purpose of these activities is to unlock greater shareholder value.
Notable that with the announcement of the sale of our long standing performance materials business. It was recognized that we are selling our lowest margin business at a higher valuation multiple then PQ earns today.
As these initiatives and bonds to their logical conclusions our company well if taken major steps towards our simpler that's stronger strategy.
We will have simplified the portfolio and strengthen the platform I emphasizing businesses with both higher margins and higher growth potential.
At this time I'd like to take it forward to our target portfolio.
You why we are excited about such an outcome.
We will be focused on refining surfaces, and catalyst, where we have leading businesses with excellent customer relationships products and services that feed into the secular trend of the clean energy transition and the circular plastic economy.
So let's start with catalyst on slide 12.
We strongly believe our catalyst business is well positioned for the future growth.
We have leading technology and research efforts that will play a critical role in a sustainable economy.
No. These trends are still nascent our technical capabilities have created a leading position serving refining and petrochemicals many factors.
It was about 10 years.
With high single digit sales and double digit adjusted EBITDA compounded annual growth rate in this business.
On an average of about 38% adjusted EBITDA margin.
Going forward.
Subject to lease for this business are supported by.
Clear and powerful drivers do use of silicon based catalyst to make stronger I made a polyethylene products.
And the tightening environmental requirements for manufacturing and transportation vehicles.
On slide 13 for finding services.
It is key to note that by recycling sulfuric acid catalyst for a fine there's well, both helping refiner sustainability profile and supporting their production of high octane fuels.
Oh competitive strength in this business include an unmatched asset base to serve U.S. Gulf Coast West Coast refiners under long term contracts. In addition, this business is diversified by serving the needs of a broader set of industrial customers wouldn't urgent sulphuric acid.
Oh, the last 10 years this business realized mid single digit compounded annual growth rate in both sales and adjusted EBITDA and delivered an average of about 32% adjusted EBITDA margin and well above that seem to more recent few years.
And the refining space consolidates, we benefit from being contracted with customer base that we believe is well positioned to serve an increasing portion of gasoline demand.
Additionally, we will continue to grow by serving a diverse set of growing industrial obligations with version Sulphuric acid finally.
Finally, we can leverage our position to further integrate with refinery operations to serve more of their needs as they prepare for the future.
In conclusion on slide 14.
We are very excited about where we are heading would be cute as we maintain an active agenda on initiatives to drive performance and create value.
Moving forward you will see us continuing to reinforce the track record of our solid execution in both operational and commercial performance.
We will maintain the readiness and agility to continue to do it with what is sure to be changing demand patterns.
We will finalize the timely sale of performance materials and implement the expanded capital allocation program.
[noise] fastest strategically performance chemicals.
I live in <unk> in an expedient way someone review decision to execution.
And we will fast track the reshaping of our portfolio toward better margins and improved <unk> potential and the expanded multiple valuation that should result.
That concludes the review our progress and prospects with that we would be happy to take questions.
And ask a question today, Please press star and one on your Touchtone phone you may withdraw yourself in the question queue bypassing the pound key again that is star one.
And we will go first to David <unk> with Deutsche Bank.
Hi, Thank you good morning.
Oh Gosh, I guess on the Q4 guidance a it appears a bit wide given you do have October and in November order books, I guess, a filling up you talked about the offer a lower ends of that range and what that what that implies for a <unk> business momentum over the next couple of months.
[noise] [noise] well based on what we saw in October we have there was no surprises David we are we continue to see that ER volume recovery.
Ah you might be nervous a little bit about the the shortness that was on Q3, but that was not volume at all that was just events. We continue to see a recovery on volume our expectations are remain accurate on what we should expect on Q4 and and maintaining our guidance for the full year is a simple math and nothing.
That should give you an idea on how Q4 should look like.
Understood and just on performance chemicals I know, it's only been about two weeks then see a big announcement on the fourth materials, but any additional thoughts I guess your view on under under on begins about before making performance chemicals that feature in the portfolio.
No no no news no new thoughts is just the continued execution of the plan. We have affirmed plan we have done to thinking already we have done a lot of homework and now we're really moving into actions and and all the components and steps that will lead us to where we want to be a I think where we remain.
Very positive about this process and we're moving right along.
Very much.
[laughter] go next to John Mcnulty with BMO capital markets.
Yeah. Thanks for taking my question. So I guess look there's a lot of moving parts. When it comes to the refining services side of the business and with no refinery closures, but that you know it sounds like you're not necessarily exposed to any of them you you've got refiners running it or had been running at low rates things are accelerating I guess can you help us to think.
About how you're thinking about 2021 in terms of the outlook for the refining services business.
Well that's a good question, John and I I just mentioned in my prepared remarks, how we feel about our position with the existing refining environment and the existing customers. We are connected to a very solid customer base.
We have a very solid contracts the expectation is a return to pretty much normal I said that we are going to be utilization will be at a the 90% to 92% level and we have seen that if you remove the hurricane impact that took place in Q3 things were going.
In the right direction. So we remain very confident that we're going in the same direction, knowing the customer base, we have and knowing our recovery of the the strength of our version asset we maintain a positive outlook for 2021.
Got it fair enough and then it was helpful on the on the cash flow guidance and in particular on the Capex side I'm, just see what it looks like excluding performance materials I.
With with performance chemicals also you know looking like that that may be something that doesn't necessarily stick around for a much longer is there a way to cleave out what does you know what do the remaining businesses or what I guess, what we would call. The core business is what's the capex outlook for them for 2020, and how much of that is maintenance versus how much of its growth Capex is there a way that you can uh huh.
Just to quantify that.
Hi, John This is Mike we haven't broken out the chemicals piece, yet and quite the amount of detail that we had.
Cereal if you look at the remaining capital we're still running at about 80% on maintenance.
With about 20, the remaining 20% or.
So as we get a little further down the line with good strategic review will be able to provide more detail around capex and other components for.
It's chemicals.
Got it thanks very much for the color.
Well go next to Chris Parkinson with credit Suisse.
Great. Thank you.
It's a little on your Powerpoint can you speak to the varying demand trends across your chemicals portfolio. Just highlight yeah anything that you think is particularly worth monitoring into fourq, even even 21 just in terms of the divergence is there obviously some of your products and then also just a very quick remarks on what your own perception is that the segment's long term.
Growth prospects I would be greatly appreciated thank you.
Hi, Chris on performance chemicals, I think I kind of alluded to what is going on right now.
The industrial side, there's a lot of recovery happening before the end users of our products. There's a lot of hospitality a market that is returning as well in many places even though the recent news about the lock down in Europe and other places gets people nervous on the longer run a these locked down.
We believe that would not be the same as the previous ones that we've had early on.
So I think that if there was anything you need to take.
Take from these comments is that the performance chemical and uses return is happening and will continue to happen and maybe at different paces are speeds, depending on where you are and and what it is so we saw that we saw that you saw that our sodium silicate product sales have returned to a very good level, which was an issue a couple of quarters ago.
And a lot of the construction, then and and coding products are all recovering so I think it might be just hospitality that could be impacted or the next few quarters, but I believe we were going to be fine I spoke to you for the quarter as we're halfway through the quarter pretty much and I don't think we're going to see any any.
Negativity between now and <unk> and he ended the year.
Does that help.
It does it does very helpful. As always Oh I just follow up on that just on switching over to catalyst can you just offer some further insights on the conversations you're having with customers. You know some of your peers have been highlighting potential trade down and are you know changeover deferrals I still problematic I mean that also could indicate that's gonna be pent up demand.
2021, just how should we be thinking about this from your perspective. Thank you.
Sure. Thank you look we have we've been looking at catalyst of course since since June when things started going down a little bit with the with the activity in the second half of the year, we have a clear view of what's happening in 2021 up until September of 2021 based on the waters. So we have an idea.
Oh, what's been pushed out and how much and where so we do believe that 2021, well definitely some recovery from where we are right now.
Most likely towards the end of 2021, we're going to see pending anything else, we're going to see a stronger acceleration of recovery 2022 will be really the shift and there was an argument between where the peak is going to be at 2022 or or or or 2023, particularly useful hydrocracking.
We believe it's towards the end of 22 early twenties 23, we're probably going to see one of the another.
Another peak and as you noted when you looked at our peaks.
And when you look at all the peak activity and the way we performed on the peak activity for the last 10 years every time there was a peak on on a hydrocracking activity or or in that sense, we deliver higher than the previous peak the trough would have been higher than the previous drops. So our expectation is when we get to the next peak will be at a at a can.
<unk> a growth.
Slope that is better than what we've had before so that's why we're very optimistic. This thing has never failed its just keep growing.
Peaks and troughs, we know when they come we know the frequency and we know exactly how to handle that and then and we're excited about what's really coming in 22 and 23 most of what I'm 21.
Great. Thank you for the color.
Sure.
Well go next to Laurence Alexander with Jefferies.
Hi, good morning.
Good morning, This is Dan Rizzo on for Laurence.
As you focus on sustainability is there anything that you need to be adjusted <unk> for me to your own production process well for catalyst refining.
Well look the way we looked at Oh, our sustainability.
First of all supporting the customer and better way to more sustainable.
Fluids, and ER and reduced emissions, that's our mission that's why we service the customer our own operations, we our internal program on on carbon reduction and on activity to protect or or the environment from what we do in our own operations, but we are definitely moving in.
In the same direction without customers, where the recycling of the sulfuric acid and then with the increased capability and capacity of octane increase for that for the fuel and improving or improving top position with the customers to move into right direction up their sustainability I would say a transition to better fluids.
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Okay. Thanks.
Then you mentioned that the hurricanes over the summer in September were somewhat of a headwind I was just wondering if the recent ones I think there was one less this week, if that's causing any issues that you know as of right now.
No I'm not aware of any particular particular in fact right now I remember the one the hurricane that took place in Q3 you know.
It has several impacts then usually on our customers and someone asked a little bit, but mainly on our customers and there was always a slow down and in distribution and everything and that's what caused the Miss is that we've had on this one I'm not aware of anything substantial so I wouldn't I wouldn't think it's a problem right now.
Thank you very much.
You're welcome.
Hey, guys nice.
Starting one.
Next to Vincent Andrews with Morgan Stanley.
Hi, Thank you for taking my question. This is angel Castillo on for Vincent.
Just wanted to circle back I guess on catalyst I just noticed on your on your slide in terms of the silica catalyst guidance for the fourth quarter it looks like.
You have a kind of moving toward a yellow after in a little bit of it.
Good performance year over year here in terms of the fourth quarter, specifically is that slow down from from Threeq you more of a seasonality or is it or is it just comps or is there something that's changing beyond that and easy to play that will slow down here in the fourth quarter.
That's a great observation I'm glad you're looking at the colors.
We believe that yellow color is just a stabilization it's not it's not going to grow because we've had a tremendous run previously so it's a benchmark to two to the past basically so we're confident that the overall growth of silica catalysts will continue to be high single digit.
And then we layer in into the future and then Ah we're confident that a that is a good position to be right. Now so I wouldn't I would just say that yellow is not a drop in market demand. It's just a benchmark to where we were before over a very strong strong period of time at that.
Benchmark comparison color cooks.
If this helps.
Yeah.
Understood. That's very that's very helpful. And then underperformance cabin or kind of course, sorry, I think you noted North America highway demand or perhaps slowing down a little bit because of cold Lake restrictions and if I think about twoq you. It it seems like that business. They just fine with the lockdown restrictions during that time so.
Could you just talking about what's changed in that in that business to your point on maybe Lockdowns now are different than the past ones or is there something different at the government level local government level that you're seeing that lead you to believe that you know things are changing and how they're approaching I was driving that right now.
[laughter]. That's a good question. This is not related to lock down. This is related to operational procedures. As you all are swiping, you're talking about strike bring on the highways and as he was driving different states have different policies and standards and the number of people on location the frequency that timing and how they do that that caused a little bit.
Oh, the pretty cautious.
Process that allows a kind of created a slow down in certain states, but you know we operate in many states. So an average well even though we saw that we continue to see the.
The strong practice and and results in the other states. So it's really nothing too good to be concerned about as a related to lock down. It's just the way states implement health procedures on the number of people on location and how they execute ER, that's all nothing else.
Okay, great. Thank you.
And again that is star one.
Well go next to Jeff's Dukakis with JP Morgan.
Oh, thanks very much.
It's a question about your the CLS joint venture I mean, if you wanted to exit that joint venture would shall have a right of first refusal.
Well, we're not at that stage of yeah. Thank you for the question first we're not at that stage of having that conversation. So first of all let me remind you that the the value of our partnership is the comps and integrity of expertise with innovation commercial and operational.
And I said, we think that that this combination allows both of us to lever some things to show leverage is PQRS expertise in zeolite technology for emission control, primarily and we lever shelves expertise in hydrocracking, and then maximizing yielding gasoline and distillate at this point, we continue to see more.
Our advantages to maintaining the structure, we think there was a tremendous growth potential.
Both on the a volume perspective, and also on the technology and and collaboration perspective. So we're really not talking about that that conversation and that's all I can say about this one for now.
Okay.
Do you see the the hydrocracking market as being pretty dead for 2021 and picking up in 2022 or do you think that there can be more activity next year.
Pretty dad is a is a big statement I don't think it is going to be pretty dead I think it's going to be an improvement over what we're seeing right. Now. So 2021, if you want to draw chart of what hydrocracking, what I think personally hydrocracking is gonna do he's going to the low point, where we are today and you drill slope it depends on what happens that slope could be stronger.
Or lower into 21, 22, and 23, that's how we see it and there were more confident based on the orders were getting for 2021, we think that recoveries happening [noise].
And well wait and see how that turns out at the beginning of the year because we have a view of a six to eight months went through nine months of orders and our view of the market going forward is that seems to be accurate for now.
Okay. Good. Thank you so much.
<unk>.
[noise] [noise] further questions at this time.
And this does conclude today's program. We appreciate your participation and you may now disconnect.
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