Q4 2020 PQ Group Holdings Inc Earnings Call
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Good morning, My name is sneaky I know will be your conference operator today welcome.
Welcome to the PQ Group Holdings fourth quarter, and full year 2020 earnings call and webcast.
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I would now like to turn the conference over to now ask me Vice President of Investor Relations. Please go ahead.
Thank you Nikki welcome to everyone joining us for our fourth quarter and full year 'twenty 'twenty earnings call.
Start today with formal remarks from Bill got from Chery, <unk>, Chairman, President and Chief Executive Officer, and Mike crews Executive Vice President.
The officer.
We'll follow with a Q&A session. Please.
Please note that some of the information share today is forward looking information about the company's results and plans, including with respect to this day all of our performance chemicals business and our anticipated end used demand trend in light of the challenges presented by COVID-19, and our 2021 financial outlook.
This information is subject to risks and uncertainties that could cause the actual result from the implementation of the company's plans to vary materially.
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 the earnings release and presentation materials posted on the investors section of our website at Www Dot PQ Corp Dotcom.
With that I'm pleased to turn the call the bulk of them.
Yeah.
Thanks, a lot and good morning, everyone.
'twenty 'twenty can be characterized as a year of accomplishment and transformation for PQ.
I'm proud of and thankful to our entire PQ team.
Julian efforts and achievement, while managing through unprecedented pandemic disruption a significant headwind at the macro level.
Beginning on slide three with safety as always.
Even with the backdrop of Covid challenges and business transformation activities, we had significant improvements year on year with a more than 45 per cent reduction in our total incident rate and nearly 50% increase in the number of HSE perfect day.
This is a direct indication of the engagement and commitment of everyone from the shaping of our sustainable safe and compliant culture.
For our operations.
We swiftly and actively managed costs and production levels low.
Working closely with our customers to meet demand changes there.
This enabled us to maintain our high adjusted EBITDA margin of more than 27 per cent.
Within commercial activities.
We had many notable achievements, adding new customers and volume demand.
Commercializing new products and most of all protecting pricing.
Perhaps no area demonstrates our accomplishments as much as the strategic moves executed in the recent months through our simpler and stronger portfolio transformation.
I could not be more excited about the pace and quality of our teams execution.
In a five month timeframe, we completed the sale of performance materials announced the sale of performance chemicals and <unk>.
Loans on a niche catalysts business flow refining services.
Creating real value at every step.
Through these actions, we have repositioned PQ as a pure play catalysts and services growth company with two leading businesses driving our target company to higher top line growth expanding margins and strong free cash flow potential.
Finally on the strength of our fourth quarter results, we delivered on all our financial objectives with the key one being adjusted free cash flow of $153 million.
With this free cash flow and the performance materials business net sales proceeds we reduced debt by $465 million and return capital to our shareholders through a special dividend.
And we expect to do more I guess in 2021 with the completion of performance chemicals transaction.
Yeah.
I will now turn to slide four for a discussion focused on the core target PQ business end users.
Beginning with refining services.
This business segment was impacted the quickest by COVID-19 stay.
Stay at home mandates, especially during the second quarter led to significant reductions in gasoline demand in the U S.
The second half of 2020 began to see a rebound with consumption recovering to approximately 90% of 2019 levels.
Apart from weather events, such as the recent Texas storm.
Heavily impacted the refinery's production and the overall gasoline stocks, we expect refinery utilization trends to recover and continued improving through 2021.
Once demand as we start to 2019 levels. We believe alkylate production will continue to grow if not even accelerate driven by higher octane fuels mandate.
Virgin sulfuric acid demand from industrial and mining customers began to rebound during the third quarter and reached 2019 levels by year end and we expect this growth in demand to continue in 2021.
Next on catalysts.
We experienced strong demand for hydrocracking catalyst sold through our <unk> joint venture during the first half of 2020.
In the second half most customers deferred catalyst bed change outs due to lower refinery utilization rates, we expect to see a recovery in 2021 as the year progresses, especially in the second half.
Emission control catalyst volume used in heavy duty diesel vehicles decreased during the second and third quarters of 2020 as our customers temporarily curtailed production.
Demand began to rebound near year end, and we expect improvement to continue into 2021.
And our silica catalyst product line.
The ethylene catalyst demand strengthened in 2020 and remains robust due to increased consumer demand for films and packaging in 2020. One we expect the strength to continue throughout the year.
To summarize we are expecting good growth prospects ahead of our core businesses from.
The global recovery, our continued successful operational and commercial execution and from seizing the opportunity.
Favorable secular trends.
Now I'll turn the call over to Mike for an in depth discussion for our results and outlook.
Thank you Paul Gascoigne and good morning.
I am pleased to report, we achieved solid fourth quarter and full year financial results. Despite the impact from the pandemic.
<unk> healthy adjusted free cash flow and then adjusted EBITDA margin of 27 per cent.
Further we completed multiple debt refinancings during the year to optimize financial flexibility.
<unk> reshaped the portfolio by divesting two businesses.
Closed on a strategic acquisition.
I would like to note our discussion of the fourth quarter and full year 2020 reflects continuing operations with performance materials now reported as a discontinued operation.
Beginning with slide five.
We were pleased with fourth quarter results that were in line with our expectations.
This was due to rebounding demand in many of our end users.
And the benefits delivered from the performance chemicals transformation plan.
Next I will review each business segment, and then the outlook beginning with refining services on slide six.
For the quarter sales of $103 million and adjusted EBITDA of $41 billion were down modestly.
Regeneration services saw rebounding volumes as refinery utilization rates moved higher.
Virgin sulfuric acid volumes benefited from higher industrial demand.
Most notable is the continued segment adjusted EBITDA margin of nearly 40%.
She primarily through effective cost containment actions.
Turning to slide seven for catalyst.
For the quarter silica catalyst sales of $21 million declined by $3 million, mainly due to lower muffled, but backer late sales versus the prior year.
The Atlas joint venture sales of $29 million were down 39% as customers deferred hydrocracking catalyst change outs.
Lower emission control catalyst demand for heavy duty diesel trucks also impacted results.
So the trend is improving.
Yeah.
Adjusted EBITDA of $15 million and margins of 30% decline from the prior year, largely driven by the lower sales volumes and unfavorable product mix.
Moving to slide eight for performance chemicals.
Fourth quarter sales increased by 2% versus last year on demand growth in specialty silicones for surface coatings and demand recovery and customer restocking of sodium silicates.
Adjusted EBITDA of $36 million was up 7% and margins expanded by 120 basis points to 22%.
As a reminder, the team launched the business transformation plan in March with a target of $10 million to $15 million in annualized savings.
This project delivered $3 million net savings in the fourth quarter and $7 million for the full year.
Turning to slide nine for adjusted free cash flow and leverage.
For the third year in a row, we generated high adjusted free cash flow with $153 million in 2020.
That includes the cash generated by performance materials through the closing date in mid December.
Over $10 million in cash interest savings from our refinancing earlier in the year and $20 million of lower capital spending helped to offset lower adjusted EBITDA due to the pandemic.
Okay.
The net proceeds from the sale of performance materials, along with cash on hand were used to pay a special dividend to shareholders.
And also to reduce debt by $465 million.
Okay.
As a result, our leverage ratio improved to three eight times at year end, despite lower year on year adjusted EBITDA.
Shifting to slide 10 per our 2021 outlook.
With the pending sale of performance chemicals are sales and adjusted EBITDA outlook is based on the remaining target PQ businesses.
Refining services and cattle.
Okay.
We are projecting GAAP sales of $555 billion to $565 billion.
And Zelus joint ventures.
So $150 million.
Adjusted EBITDA is expected to be in a range of $215 billion to $225 billion.
At the midpoint of these ranges. This would represented approximately 13% increase net sales and adjusted EBITDA for 2021, well above recent growth levels.
Adjusted EBITDA margins are projected to be approximately 31% or 400 basis points above 2020 levels.
As the timing of the closing of the performance chemical sale and the related refinancing is uncertain.
We have made certain assumptions in our guidance for adjusted free cash flow and corporate costs.
For now we have assumed the sale closes on September 30th and we would achieve one quarter of our expected annual corporate cost savings of $10 million to $15 million or $3 million with.
With the rest of the savings is expected to be achieved in 2022.
Adjusted free cash flow is projected to be in the range of $75 million to $85 million <unk>.
Including cash generated by performance chemicals through the assumed closing day.
Okay.
With respect to the first quarter of 2021 per target PQ.
I would note that GAAP sales 'n' Zelus joint venture sales in first quarter of 2020 were approximately $125 million and $30 million respectively.
In 2021, we expect sales to be at a similar level.
Adjusted EBITDA is targeted to be down by approximately 25% versus last year's result of $49 million.
Largely due to lower hydrocracking and specialty catalyst sales at the zealots joint venture and the impact of the winter storm in Texas.
The storm event took down U S Gulf Coast refinery production volumes by 25 per cent.
Bringing utilization levels to the lowest recorded level of approximately 55 per cent.
We estimate that the direct impact on refining services adjusted EBITDA to be in the range of $5 million to $6 million, including repair costs.
Also as Bell gasoline mentioned earlier, we anticipate a stronger second half overall with target PQ adjusted EBITDA, approximately 45% higher than the first half of 2021 do.
Due to the anticipated recovery for transportation fuels.
Refinery utilization and catalyst change out.
Okay.
And finally.
We intend to use the net proceeds from the sale of performance chemicals to pay a special dividend in the range of $2 50 to $3 25 per share.
With a corresponding reduction in debt of $450 million to $550 million.
And we expect leverage to be in the mid to high threes at the end of 'twenty 'twenty, one pro forma for the sale.
To summarize.
We had a solid finish to the year with strong margins and adjusted free cash flow demonstrating the strength of our businesses and flexibility of our cost structure.
We successfully completed multiple refinancings and portfolio activities despite macroeconomic headwinds.
And we returned cash to shareholders in the form of a special dividend, while also maintaining leverage at a sustainable level.
With that I will turn the call back to Bill gas.
Thank you Mike.
Turning to slide 11.
On our last earnings call, we committed to fast track the reshaping of our portfolio towards better margins and improved growth potential and the expanded multiple valuation that it showed results.
Yeah.
With this latest round of significant milestones we have done just that.
As a reminder to drive value for shareholders, we embarked on our simpler and stronger journey in 2019.
My first improving the performance at all of our specialty businesses.
Realizing that the sum of the parts are greater than the whole. The next steps we took were to simplify the portfolio.
We sold two businesses at attractive values and now are positioned to accelerate returns for our investors.
As a high growth pure play catalysts and services company.
And what makes the target businesses more compelling isn't there selective participation from the end use of supporting growth market drivers and they are enabling capabilities for clean energy transition and circular plastics economy.
Closing on slide 12.
I would like to give you a preview of future target PQ has growth potential projecting from 2020 into 2025 time frame.
Focusing here on the organic side only we expect top line growth to be in the high single digit range.
With high operating leverage we would anticipate adjusted EBITDA growth could be also in the high single digit range with margins in the range of mid to high Thirty's and cash conversion higher than 75 per cent.
Additionally, we anticipate to be actively seeking tuck in opportunities to complement our businesses and reinforce our growth trajectory.
We are extremely excited about the future of target PQ for all our constituency and particularly our investors well.
We look forward to you joining us again in a few weeks for our virtual Investor Conference, where we will be able to share more on the strategy the businesses and growth outlook plans.
This concludes our formal remarks and with that we will be happy to take questions.
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And we'll take our first question from David Begleiter with Deutsche Bank. Please go ahead. Your line is open.
Good morning.
Hello, guys I'm back on Slide 12, what do you think what do you think the organic growth would be by segment or are they both have that same range of high single digit.
Hi, David Yes, both both businesses will be growing at about the same level.
So why is there no operating leverage in this in this model here.
The operating leverage as the synergies the efficiency.
Particularly in some areas like.
The refining services business, the new acquisition that we brought in has.
Potential synergies in terms of feedstock with sulfuric acid capability.
The synergy with the distribution and logistics natural finding services gonna get kept 32.
That's the sort of net.
Total operating leverage that we're talking about and catalyst.
The growth potential in the market and the demand on the market plus some of the technology that will be will be brought into the market as well so all of those.
Make sure that our margins are going to stay at that level.
Would you expect EBITDA to grow faster than sales growth or just in line with sales growth.
I do anticipate it and want it to grow faster than sales growth.
Thank you very much.
David It's Mike I would add you know what.
You look at our guidance for 2021, where we're looking at a margin in the range of 31%. So we are projecting here, it's expanding margins over time.
Thank you.
Roger Spitz with Bank of America. Please go ahead.
Thank you good morning.
Back in 2019.
Earnings call I think you gave the split of silica catalysts as 80% polyolefin, 20% and then my dad.
Range matching.
2020, and given that.
Our ratio how does that.
This channel is down so much or get.
MMA catalyst just drop off fairly hard from Q4.
Hi, Roger.
MMA sales is ethane.
Specific purchase orders.
Since the last couple of years.
And would the quarter, where you have a large sale of $5 million to $6 million. It makes an impact on the ratio.
What happens when the difference between the quarters and the years, these usually where that sales sets.
So also last year, we had a large sale of.
Chemical catalysts into any house that was the one that one off sales that may be inflated the numbers <unk>.
Speaking of M&A, because it's always been unclear, where I'm going to take the opportunity to talk about the potential of the MMA business.
The the strength that we have with our with being connected to the leading producer with MMA.
As a as a future growth opportunity as we see some of that.
Frequency of change outs.
Go from a five year.
Frequency two or three year frequency in the next couple of years and as we see addition of.
Plant.
That is going to be installed in North America in 'twenty four 'twenty five we expect to have an accelerated growth in the next couple of years.
MMA sales much more than we've seen in the last couple of years due to the slowness and refineries in operations being kind of health net other limit. So it's a positive component of growth in the next three to five years as you see it and those are consolidated numbers.
Interest in going from a two to five year.
Ginger.
Does the unfavorable catalyst mix suggests that polyolefin catalyst margins are below either your MMA <unk> catalysts margins.
Not really.
Higher margin support products that we sell for for Hydrocracking catalyst they are higher margin, but the rest of the margin that cross catalog sales, it's pretty much around the same level all very strong by the way.
It's the volume sales.
The drop the drop you see is actually a volume, it's a volume and absorption with inventory and all that stuff. That's what happens when the market kind of shuts down a little true, which is pretty much what happened in the second half of last year.
I realised support cattle, you actually have higher margins for the support and the actual catalyst that's interesting. Okay. Thanks. Thank you very much.
If you would like to ask a question. Please press the star and one on you touched on it.
Awesome.
Well move next with Alex <unk> with Keybanc. Please go ahead. Your line is open.
Thank you and good morning, everyone.
Wanted to go back to your target of high single digit growth through 2025, you're forecasting sales growth of 10% to 15% in 'twenty, one and then possibly above trend recovery growth in 2022, So does your projection implied gross.
Slows down perhaps to mid single digit after 'twenty 'twenty two or do you think this high single digit is really there.
The objective for from most of the years in this forecast period.
Hi, Alex Yeah, you're right about the numbers looked like we're going to slow down growth at 2020. One is on the back of 2020.
It's natural to see that tremendous recovery that is going to happen, particularly in our second half of the year. What are you going to see a tremendous rebound I believe that the next five years year on year 'twenty, one all the way to 25, we're going to see at least a single high digit.
Growth across the board.
There was no concern about the fluctuation of course this is a kind of your number right for an average you might see up and downs like in 2023 per instance, we expect to have a peak catalyst refining catalyst here or hydrocracking year. So you will see that a little bit higher and then in 2024 and it will drop a little bit but on average it's going to be a high single digit.
Yeah.
Understood. Thank you goes out some.
And then based on your 2021 guidance on a pro forma basis. It looks like you're still below 2019 sort of high watermark, which makes sense. How do you. How long do you think it might take you to actually reach or exceed the 2019 level can you get there in the back half of this year perhaps.
Or first half of 'twenty, one 'twenty two.
Well as as we said earlier, our adjusted EBITDA margin or adjusted EBITDA in the second half of the year is going to grow.
That's a 40% so you see that there is a strong recovery and there is all the reasons for that first of all if you look at the business of refining services with what's going on in Q1 with the freeze the drop in inventory that is unprecedented.
<unk>.
The demand planning to be increased definitely based on what's going on with the vaccine whether with COVID-19 going into the season of driving which is Q2 late Q2 Q3 and the summer all of these are indications that we're going to see a nice return also on refining.
Note that our 19 exports were at 750000 barrels a day on average.
And in 'twenty 'twenty that average fell down to 650000 barrels, especially in the first part of the year.
He went to down as low as 500, Paragon, we anticipate that to recover.
Two about maybe closer to 700 in 2021, and it's all in the summer and towards the end of the year.
On the catalyst side the way the refineries are being run the way that that change outs have been delight. The way cash has been scars theres no way with its current oil pricing trends that there was not a great rebound on top of that we have.
Demand signatures from the customers, we have new customers knocking them for additional.
Requirements, we have some potential inventory builds by customers. So we definitely see that <unk> is going to be completely a new story. So you combine those two and you have a very strong H D Inc.
Going into a potentially even a strong H one next year based on the economic recovery and everything else. So that's how we feel about that transaction.
Thank you very much.
Youre welcome.
Our next question comes from the line of David Silver with CL King. Please go ahead. Your line is open.
Yeah, Hi, Thank you good morning.
I think I'd like to maybe just start with a question on taxes.
So in the fourth quarter, I mean, even if I exclude.
The foreign tax credit that was there.
I still get a negative.
Tax rate for the fourth quarter or so I'm. Just wondering you know how to think about that and then more to the point for projecting forward.
I noticed there was a pretty sharp drop in deferred taxes and with the recognition of foreign tax credits.
Will your will your tax accrual rate change markedly going forward and will your cash tax rate to be meaningfully different than your tax accrual rate. Thank you.
Yeah.
Hi, David its Mike.
You've asked some good questions taxes is really complicated this time with the discontinued operation for performance materials.
The biggest mover.
First you have the day.
Foreign tax credits that we recognized that we talked about it in the release that's about.
56 million or 42 cents a share.
And that it's a lot of puts and takes and allocations between continued and discontinued operations. So it's really not reflective.
Of what we expect our rate to be Youre right. The deferred taxes went down that's the other side of booking those foreign tax credit benefits that we expect to utilize with the sale of performance chemicals.
Previously, we guided on taxes to be in the 25% range. We think is a U S. Virtually a U S. Only taxpayer that's going to tick up more toward a 30% range and that's the best estimate right now to use for both cash and book.
Okay. That's great. Thank you for that and then I just had a maybe a more strategic question and I'm thinking about the decision to purchase 32 and kind of how it.
In theory kind of fits into your refinery services strategy.
And I'm just wondering if this is I don't know a sign post or a harbinger of what's to come in other words in your opinion are there a clutch of kind of related services that.
PQ with with your people already inside the plant gate can cross sell or Kevin can provide in addition to your base you know sulfur.
Sulfur services. So is this kind of a harbinger of.
Further kind of niche acquisitions that could leverage your positioning.
Your current positioning.
Inside the plant gate and performing these value added services for the refiners. Thank you.
Hi, David.
That is it is actually how you described it let me just take you through the rationale behind Kent 32.
We've been we've been stamped index.
And become became very experimented in and strong and our sulfuric acid capability the growth of that sulfuric acid base market on two fronts. One is on the <unk> business, which you know it goes up and down with a lot of.
Refinery refinery margins and everything.
And the other side is the Virgin market, which goes into a lot of other industries. So you're still you still think that and I consider that is limited in terms of growth potential. So you got to have to add some branch out opportunities, which kind of breaks the bridge the gap between our catalyst business and are finding business what we do.
First in our refining services business is services. This is the armed services arm of PQ, We do best services, we have one of the best logistics capability, the best distribution capability and and we.
We want to capitalize on that came 32 is the actual improvement for the customers and as we go forward I picture that this is going to be more and more off site utilization.
Utilization of <unk>.
The Ah.
So fighting technology, and then came 32 has such a unique patented technology that has been showing a stir.
Eddie growth projects to be growing at double digit going forward with margins higher even than our refining services business and if we plug that together and if we can capitalize on our services capability services strength, our refining in our customer portfolio with refining we can have a nice synergy we will diversify our.
Offering we would continue to be looking at such such capabilities going forward, whether it's a technology or service.
But we believe that our refining services service capability is ours to take on more so we're looking at other other areas. We're looking at the the treatment services, which is a small component of our business that could be a nice M&A in the future. We are also looking at activity on the Virgin sulfuric acid, which we haven't tapped in a lot.
So far because we used to be so focused on the regeneration. So we're very excited about what we did for Cam 32, you'll realize that this acquisition for our refining services. The first day. Many many years of the history of Eco services. So we're excited by that and it will do just exactly what you expected and that's the spirit of tuck in tech.
<unk> they have to be synergetic. They have the synergy has today either on a commercial side customer and increased volume with customer side or also additional.
Tangent activity that would benefit from the platform that is already in place. We're very excited about it and we're most excited about its quality of earnings which is amazing so.
That is the reason why we're doing it.
Okay. Thank you very much I'll get back in queue.
Thank you day.
Okay.
There can be no further questions at this time. Thank you all for your participation. This concludes today's conference and you may disconnect at any time.
Yeah.
Yeah.
Yeah.
Yeah.