Good day, and welcome to the PQ Group Holdings' Second Quarter 2018 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ms. Nahla Azmy, Vice President of Investor Relations. Ma'am, the floor is yours.

Thank you, Mike. Welcome to everybody joining us for the second quarter 2018 earnings results call. We will start today with formal remarks from Jim Gentilcore, Executive Chairman and Mike Crews, Executive Vice President and Chief Financial Officer. Then we will follow with a Q&A session. Please note that some of the forward-looking statements that we make today about the company's results and plans are a subject to risks and uncertainties that could cause the actual results and the implementation of the company's plans to vary materially. These risks are discussed in the company's filings with the SEC. Reconciliations of non-GAAP financial measures mentioned in today's earnings call and their corresponding GAAP measures can be found in our earnings release and in the presentation materials posted on the investor section of our website at www.pqcorp.com. And with that, I'm pleased to turn the call to Jim.

Thank you, Nahla. And good morning, everyone. Before I review our quarterly and business highlights, I'd like to take a moment to introduce Belgacem Chariag and be the first to publicly welcome him to the great PQ team. I will also ask him to say a few words and then we will turn to the topic of our second quarter performance, which we are also excited to discuss. As you saw from this morning's press release and 8-K, Belgacem will be succeeding me as President and Chief Executive Officer, effective today, and I will be moving into the role of Executive Chairman. By way of background, the board has been working with me on succession planning and Belgacem emerged as an excellent candidate whom several of the board members know well. Belgacem has a deep experience and accomplishments in building global scale for two well-known industrial leaders. The board and I are very pleased to attracted him to lead our company. Belgacem's resume speaks for itself. He most recently served as Chief Global Operations Officer at Baker Hughes, a GE company, after Baker Hughes merger with GE Oil and Gas. With experience at the highest levels of two of the most respected oilfield services companies in the world, there's no doubt that he is a highly qualified leader. With a strong foundation in place at PQ, this is the right time to make this transition. Although I'll be minimizing my day-to-day operational role at PQ, I will remain actively involved as Executive Chairman and will assist with Belgacem's transition to ensure it is a seamless work. Now I'll turn the call to Belgacem for his comments.

Thank you, Jim, and good morning, everyone. First of all, I am very excited and privileged to be joining the PQ team and to be part of this call this morning. The company is currently at a time of great momentum and opportunity and this is only a result of its uniquely positioned portfolio and growing end markets. PQ has a very long history of being on the forefront of customer-centric innovation, and I'm very impressed with the entrepreneurial spirit that runs through this company. And I certainly have a lot to learn in the near future, but I already see great opportunities to continue innovating and capturing the growth. I have recently got to know the board and got to know Jim and definitely got to meet and know his strong management team. And I'll tell you that I'm very excited to work with his team as we outline and execute our vision for the PQ's future. And I do look forward to getting to know many of you in the weeks ahead and to hear your perspective on the company and what we need to work together on. And I'm sure that I will be able to share some of my own initial thoughts on the next earnings call in November once I get to understand the dynamics little bit more. But in the meantime, I assure you, and I want you to know that I'm very eager to get to work. With that, Jim, I'll turn it back to you.

Thank you, Belgacem. Now turning to our Q2 performance, I'll start with some of the highlights and turn the call over to Mike for a more detailed review of our financial results and the outlook for the remainder of 2018. Beginning on Slide 3, we delivered 12% top line and 5% adjusted EBITDA growth in the second quarter, which resulted in a strong first half. Our performance this quarter was further proof of a continued underlying growth in our key markets, specifically our ZI joint venture continues to benefit from the tightening of global standards for cleaner fuels and emissions. We are seeing steady demand growth for our emission control catalyst, due in part to the preparation for the stricter Chinese emission standards and our hydrocracking catalysts, also had a particularly strong quarter, resulting in ZI sales increasing by 61% year-over-year. Second, with our zeolite catalyst product group, we continue to benefit from the new polyethylene capacity coming on stream, which helped our polyethylene catalyst post double-digit sales growth. However, our methyl methacrylate catalysts, which are used in fix bed applications and therefore tend to be lumpy, fell short compared to last year's very tough comp for the second quarter. Third, our Refining Services business had both year-on-year and sequentially higher volumes in both regeneration services and virgin acid demand, which I will discuss in more detail as we highlight this business later in the call. Fourth, in spite of a rainy start to the quarter, our highway safety business posted double-digit year-over-year growth in sales with Sovitec fully integrated and continued progress with customer adoption of our new ThermoDrop product. Most importantly, with these results in the first half, and now that we are into the period of strong free cash flow generation, we are on track to generate the free cash flow necessary to meet our half turn per year leverage reduction goal with an ultimate target of three to 3.5 times. Now Mike will provide a more detailed review of the quarter and outlook.

Well, thank you, Jim, and good morning. I will review the results for the second quarter and our 2018 outlook. Beginning on Slide 4, this quarter marks another period of solid performance for PQ. Sales increased nearly 12% to $435 million and adjusted EBITDA by 5% to $129 million, driven primarily by higher volumes in both Performance Materials and performance chemicals. It was also a very good quarter for hydrocracking catalysts sales within the Zeolyst joint venture. As we discussed last quarter, and similar to the first quarter, adjusted EBITDA margin was approximately 27%, largely impacted by timing of maintenance and turnaround cost, coupled with the pass-through of higher raw material prices in Refining Services. Just to recap, we passed raw material price increases or decreases through to our customers for our contracts. For sulfur specifically, while there's no impact to our adjusted EBITDA or earnings, it does impact our margins. Our cash flow profile continues to improve. First half free cash flow increased $23 million, largely due to lower cash interest. So let's move to a review of the business segment performance, beginning with Environmental Catalyst and Services segment, or EC&S, on Slide 5. Sales increased more than 4% to $129 million and adjusted EBITDA rose to $65 million, largely driven by higher pricing from the pass-through of increased sulfur cost, volume growth in Refining Services and higher Polyolefin Catalysts sales, which was partially offset by lower chemical catalysts or MMA sales, due to the timing of customer orders. Sales in the Zeolyst joint venture grew 61% to nearly $50 million, led by higher hydrocracking catalyst sales from a large number of refinery change outs. Segment adjusted EBITDA margins of approximately 36% declined largely due to the higher maintenance cost and cost pass-through as we previously described. But given…

Thanks, Mike. Please turn to Slide 8. We plan to do a brief overview of one of our businesses on each earnings call over the next few quarters, to help build a deeper understanding of the drivers, the opportunities and the challenges. As I mentioned earlier, we will start with our Refining Services business this quarter, where we have the leading U.S. supply position by a substantial margin and with the location and reliability of our plant network, specifically in the Gulf Coast in California, puts us at the strategic advantage. Turning to Slide 9, you can see this on the map. As a reminder, high-purity sulfuric acid is the principal catalyst in the production of alkylate, a key component for increasing the octane rating in a gasoline fuel. As this catalyst is consumed in the alkylation process, it needs to be regenerated, which is no longer a core competency of most refiners. So our end-to-end service offering takes the spent asset from the refinery through our network of plants and transportation systems and produces the high-purity levels needed by the refiners – lead producers, I should say. Because of the number and location of our plants and the breadth of our transportation logistics, we believe we bring the highest reliability and flexibility to our refining customers, which allows them to focus on optimizing their alkylation capacity, which is their core competence. This high value-added service allows us to structure stable and predictable long-term contracts with cost pass-throughs for most input costs and take-or- pay type provisions. This business model is very similar to the hydrogen CO Pipeline contracts of the industrial gas companies to the refineries. On Slide 10, we highlight the demand drivers and how the refineries are responding to this increased demand with our capacity expansion plans.…

[Operator Instructions] The first question we have will come from Aleksey Yefremov of Nomura Instinet. Please go ahead.

Good morning, this is Matt Skowronski on or Aleksey. Just to start off, in EC&S, how much were raw materials up year-over-year during the quarter? And do you have an update on what your expectations are for raw materials for the full year?

Yes, this is Mike. So, the big one on EC&S was sulfur pricing, which is the dollar-for- dollar pass-through and it was up pricing-wise about 40%, which was consistent with the first quarter. So what we talked about at the PQ level is the ultimate impact of pass-through, which includes a little bit from Performance chemicals as well, is about a 70 basis point drag on margins. And as I said in my remarks, we expect that to be permanent for the year.

Thank you. And as far as weather impact on the highway striping season went, obviously, it was a little bit of a slow first quarter. Are you expecting this to kind stretch into the September month, late October maybe? Or are – is it too early to tell?

Matt, this is Jim. It was also a slow start to the second quarter, which was unusual but with this business, once the weather turns nice, which it is now, they just run hard as long as they can. So we expect this quarter that we're in will be running Fast and Furious and as long as the weather holds up in the fourth quarter, they'll go as late into the calendar year as they can. So we're – as this happens from time to time. It's the nature of the business, we've dealt with it for many years and we're not in any unusual position. We do know that the contractors are running hard to make up that lost ground.

Thank you.

The next question we have will come from David Begleiter of Deutsche Bank.

Thank you. Good morning. In the Zeolyst JV, very strong top line, but margins did compress, I guess, year-over-year and quarter-over-quarter, was anything holding back the margin performance in this business in Q2?

Hi, Dave, it’s Mike. That is a good point. What we've talked about in our outlook for the year and particular to the Zeolyst joint venture as that was going to be a strong year for hydrocracking catalysts that are at a lower margin relative to the Zeolyst average margin. It was a very strong quarter you saw being up 61%. So that is part of the margin mix that we're seeing in the first half. Those sales are concentrated in the first half. We expect less in the second half. That's part of the reason why we expect second half margins to improve.

Very clear, thank you. And Mike just on the tax rate, is that 30%? Is that more of a permanent change? Are you looking that for 2019 as well? Or it should be a little bit lower in 2019?

I wouldn’t apply that to – it'll be somewhere between our original guidance of mid-20s and 30%. When you look at the first quarter, we were pretty much breakeven from our taxable income standpoint. Now we're starting to give with higher U.S. income because of our deleveraging. We're starting to get into a more normalized pattern, while the underlying statutory rates are lower, when you see the fact that we were at about 46% this quarter. If you take out the GILTI in the tax reform, it's been a little higher than that. So given the fact that we've got a better outlook on the year from an income mix across jurisdictions, we're taking that up by about 5%. Having said that though, it has no impact on our cash taxes.

Got it. Thank you.

Next we have Christopher Parkinson of Credit Suisse.

First of all, I love the Fast and the Furious reference, but on the EC&S side, given your intermediate to long-term outlook, especially for the next year, you have some company-specific targets, the JV and some broader market demand drivers such as new industry capacity startups in IMO 2020, et cetera, et cetera. Can you just hit on kind of those three different subjects in terms of your thought process and what investors should be looking for?

Chris, this Jim Gentilcore, I think, let me work backwards to those questions. The big drivers are primarily these regulatory periods that are coming in. So I imagined IMO 020 also China 6, which is affecting transportation emissions – road transportation emissions, I should say, is also on the horizon. As we've seen in some cases it's been pulled in by the Chinese. So those are the two biggest drivers to take more sulfur out of the world's fuels, whether it's on – it's maritime or road transportation. And then the CAFE standards, even with the concern about the President – this administration's view on that, I would say that the automobile design cycle, that the model years get locked in years in advance as we know. So we're already seeing very strong evidence with the automobile manufacturers are moving more and more into these smaller, four-cylinder, very efficient turbocharged engines. So that's a driver on the CAFE standards side. And that – those are really the big drivers that affect our businesses – all five of our businesses, in one way or another. So just some real quick examples, in our Performance Materials & Chemicals business, the lightweighting of any type of vehicle, whether it's electric vehicle or trucks. At the other end of the scale, they all benefit from lightweighting, and that is done with our Performance Material products. But the passenger vehicles benefit from the green tires that use the sodium silicate in producing green tires. So I hope that answered the last part of your question. The drivers that are keeping this business growing are sustainable. We believe that they're – we would see nothing on horizon that would change that direction if – in any way but up. And – so that's the primary demand driver. Excuse me, can you remind me of the first question?

You actually answered both my previous questions as well as probably my follow-up, but a new follow-up just on the PM&C side. Obviously, you mentioned a few drivers there, but specifically within chemical on the consumer side, can you sit on a few of the key drivers you're looking at there, because it seems like things are turning out fairly advantageous for you guys?

Yeah, okay Chris, on the consumer side, as many of you know, we've shifted very hard towards the higher-end consumer products and away from the laundry detergents and pulp and paper that were big drivers for us not too many years back. So as consumers – as more consumers around the world, because of the growing consumer class around the world, they use more toothpaste and make ups and some wound care applications then that will drive our performance chemicals. And that is partially what's behind the growth that you're seeing. In addition to that, there is also the growth in the fluid cat cracking catalyst that – where our sodium silicate is used. So some of the producers of the SSC catalysts are using our product more and more. And as we just talked about briefly, the green tires are in the Performance Chemicals Product group so that's where the sodium silicate goes to silica, which goes into tires.

Thank you very much.

Next is Bob Koort with Goldman Sachs

Good morning, this Dylan Campbell on for Bob. You mentioned earlier that the margin impact from passing through higher raw material costs for both PM&C and EC&S, would you be able to – if you can provide a little bit of color of how much of your pricing growth for each of the segment came from this cost pass-throughs?

Yeah, If you look, Dylan, at that page that we provide, it shows the major change factors, which I think is Slide 13. You should get to that. What you'll see on the EC&S side is that the price really covered the variable cost change and most of that was sulphur. There's a little bit of caustic soda in there. But it is pretty much in line. On the Performance Materials & Chemicals side, there's – we've more than covered the variable cost increase with price. I would point out that – I referenced we had start-up costs last year in thermal drops. That's running through that line as well. But I'd say it's very close on the EC&S and a little bit better than what we've got on the variable side and PM&C.

Got it, that is helpful, thanks. We have seen a little bit more visibility in terms of that polyolefin expansions entering the market. I was just curious, kind of, how much of volume you're currently seeing or I guess expect to see from these expansions. And when do you expect this growth to start hitting your numbers for silica?

What we have talked about previously with the capacity expansions would be 4% to 6%, just on North American capacity expansion. But we're growing faster than that by two to three points just due to the fact that we're expecting with the licensed ores that are winning technology.

Yeah, what we are seeing there Dylan is that we're in the – we're now in the, kind of, midterm of this particular expansion, and there's a number of factors that are helping us. One is that there's a shift to more silica-based catalyst being used by the ACP – by all polyolefin producers and that helps us. And as we've said, we take that our underlying growth – our growth would be close to two time the rate of the underlying 4% CAGR for that business.

Got it, thank you.

The next question we have will come from John McNulty of BMO Capital Markets. Please go ahead.

Yeah, great, thanks for taking my questions. In the volume area, you would high – in EC&S, you would highlighted the MMA side, you had very tough comps there. If you take that out of the equation, how should we think about how volumes grew in the business?

Well that was double digit growth for the high dense – for the catalyst for polyethylene, John. So the positives were the polyolefin catalyst for HDPE. Region was, kind of, flat, but recall we had turnarounds that were going offset, impacts our volume as well. But to be flatter up about 1%, I think is good, given the fact that we had those operational change outs going on. Virgin volumes were up about 4% in the quarter and then offsetting some of that was the lower methyl methacrylate sales.

Got it, perfect. And then on ThermoDrop, I know this was the first, kind of, full year out, and I believe there's a question mark as to whether or not you're going to need new capacity for next year. I guess how should we think about if you've, kind of, hit that stage, where you are going to need that next load or if it takes maybe another year to grow into what you've already got? And then I guess also, the impact of what that would mean for CapEx for you as we look forward?

Yeah, John. At this point, we're watching closely. We're ready to spend capital when we need it. Some of the points to remember, it only takes us 10 months to build one of these plants. So it's a bit different than our big chemical plants. And it takes us about $10 million. So it's comfortably in the range of our $40 million that we spend on growth capital every year. So we're watching it closely. We're – qualitatively we're excited about where we are. We'll let you know when we're at the point that we'll be adding CapEx to that particular product.

Great, thanks very much.

Next we have Jeff Zekauskas of JP Morgan.

Thanks very much. Just looking over your results, it seems that you have some margin deterioration in 2018 versus 2017, exclusive of whatever the raw material pass-throughs are. Can you talk about that? What are the pressures that are allowing your EBITDA to grow at a much slower rate than your sales growth? And how fast can you remedy that?

Hi, Jeff, this is Mike. So, we’ve talked about the 70 basis points just related to pass-through and really, a lot of the rust of it is related to mix. So we – what we said our outlook for the full year, we talked about it being a high year for hydrocracking catalyst sales. Those were at a lower margin relative to the portfolio average. So there's a little bit of that there. While we do expect it to be another good year for hydrocracking, that mix will start to remedy itself a little bit in 2019. We've had the lower methyl methacrylate sales in the first half, and we've had the turnaround costs, which are really – that's just a temporary thing. We had three large turnarounds in the first half of the year, we've got two small ones in the second half. So some of that is really just either timing or sales mix and we do think any – even at where we are today at 26.6%, while it is off a bit from the 28%, it's still very strong for us as a company.

And Jeff, this is Jim, and I would just add to that, that we're firmly committed to this blending up that we expect in the midterm. The mix issues, that Mike talked about, will always be there from a quarter-to-quarter basis. But if you look at where the growth is coming from and the fact that these margins are stable in each of those product areas, we do expect that in the midterm it will blend up. And will..

So for my follow-up can you quantify like the level of maintenance expenditure in the quarter or in the first half, relative to the second half? And in your description of silica catalysts, you described it as timing, but silica catalysts shrunk in 2017. They've not grown in the first half of 2018 and I think philosophically, what you thought is that MMA would be a very large improvement to volume over an intermediate period of time. Do you now have a different view? Like, where do you think silica catalysts revenues are going for 2018 or 2019 or 2020.

This is a little more lumpy versus just a pure consumable like you'd see in the HDPE markets. So we had a very strong year in 2016, which was a first charge, which is actually the first charge plus a spare. So that's a big year. In 2017, we would have naturally been down. In 2018, we're a little short of where our expectations are. Some of that due to the fact that the catalyst is performing very well, which has delayed some of the top off. But the other thing to remember though, it is a nice contributor from a margin perspective, but it's not a major driver of the performance. So within EC&S, what's really going to significantly drive our performance is going to be the continued demand growth in high density polyethylene, the continued regen of Virgin asset to volume growth. And then Zeolyst, while it moves around from quarter-to-quarter, will be – tends to be strong year-over-year.

And what about the maintenance expenses?

If you look at that Slide 13, I referenced before, that's running through the other category. If you look at the EBITDA which was $16 million. So that's I'd say first half versus second half, we'll be at a mid-single digit improvement net, net.

So it is $5 million.

Right.

Okay great thank you.

And next question we will have will come from Mike Sison of KeyBanc Capital Markets.

Hi, good morning this is Connor Cloetingh for Mike. So I was just wondering it looks like in the first half on the topline, you're growing double digits excluding zeolite, but based on your full year guidance, it looks like year-over-year, you'll decelerate to low single-digit growth. Can you talk about what's driving that? On both the EC&S and PM&C side of businesses?

Yes, some of that, it's really more a function of the pass-through of the higher sulfur cost. So we've got that in the actual results for the first half but we haven't really built that and we don't know where the pricing is going to be. So that's part of it. We just haven't pushed that first half increase through for the full year.

And then on the PM&C side, it looks like you'll know with the strong growth you have in the first half that it would have to slow down quite a bit as well.

Some of that is the fact that we closed on the Sovitec acquisition in the middle of June last year. So you're seeing it's not really comparable in the first half but it's more on the same store basis in the second half. But even having said that, we've said that PM&C will grow in the high single digits. So we still forecast the top line growth there.

Okay, great, and just one follow-up on IMO 2020. Are you expecting any step change in the zeolite business? Starting may be mid 2019 as refiners start to prepare for that? Or how is you're thinking about that over the next year?

They are starting to prepare for it in 2019. But we don't see it as a step change. It will accelerate our growth in the short-term and then, kind of, start to take off once the regulations in place. The timing and compliance, the ability of the large port infrastructures to be ready for this is still developing. So we wouldn't call it a step change at this point but we do expect acceleration in the growth rate for that business for us.

Alright, great thank you.

And the next question we have will come from P.J. Juvekar of Citi.

Hi, this is Scott Goldstein on for P.J. In PM&C, how much of the volume growth did Sovitec contribute? And what can we expect for the rest of the year or I guess in third quarter?

Sovitec, that majority of the increase was Sovitec. So really, it was led by transportation safety. You've got the inorganic, which if you look at the total company, we're up some $45 million I think, 60% of our growth overall was organic. 35% was inorganic. So it's the largest component.

Okay, thank you. And in Performance Chemicals, I think we've seen a couple of quarters where the margins have been impacted by mix. Is it fair to say that this – that the mix has shifted more towards industrial applications. And longer term, I know you touched on it before but how do you see your mix in PM&C shifting from industrial products to consumer products, which is where I think you can get higher prices?

Right, some of that has been the function of industrial demand and some of the incremental sales have been at lower margins. We've been selling a little more I think in Latin America. So we tend to have lower margins there. But to your point, longer term, that's been a strategic focus for us to shift out of the lower-margin products, and we'll continue to innovate with our customers on the development side, focus on consumer cleaning, personal care, coatings, areas where there are higher margins available.

Okay thanks very much.

Welcome.

[Operator Instructions] We're showing no further questions at this time. We will conclude our question-and-answer session and today's conference call. Again, we thank you all for attending today's presentation. At this time you may disconnect your lines. Thank you, again, everyone, take care, and have a wonderful day.