Good day, ladies and gentlemen, and welcome to the PQ Group Holdings' Third Quarter 2018 Earnings Conference Call. All participants are currently in a listen-only mode and there will be an opportunity for you to ask questions later during the conference. [Operator Instructions] Please also note that this conference is being recorded. I would now like to turn the conference over to Nahla Azmy, Vice President of Investor Relations. Please go ahead.

Thank you, Chris. Welcome to everybody joining our third quarter 2018 earnings results call. We will start today with formal remarks from Belgacem Chariag, President and Chief Executive Officer; 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 presentation materials posted on the investor section of our website at www.pqcorp.com. With that, I'm pleased to turn the call to Belgacem.

Thank you, Nahla. And good morning, everyone. I'd like to start by sharing my initial impressions three months into my tenure and also review with you the key value drivers that we are focused on to deliver shareholder value. First, the market drivers are fundamentally strong and relevant to our business. Octane demand is growing, market standards are constantly tightening in existing region and increasingly extending to new markets. Local regulations for cleaner low sulfur fuels are more restricted. Demand for inorganic product derivatives is increasing in areas like personal care. And transport safety and regulations are pushing for safer and better road visibility. Second, our portfolio businesses is unique as it responds to the market drivers with leading position in most growing markets. And third, innovation is a competitive advantage. It has always been a driving force in the company's 200 years history and remains one of its strongest potentials for the future. During this initial period, my team and I revisited our current strategy, its success factors, as well as its macro sensitivity. We are closely challenging many aspects of the business including both structure on operational cost, capital efficiency and technology delivery models. We are also exploring further growth through adjacencies and geographical footprint expansion in specific markets. In addition, we are closely evaluating our portfolio with an objective to make a dynamic, simpler and stronger. And finally, we are rapidly building clear pathways to operationalize our strategy. Our goal is to deliver on the key value drivers, profitable growth, effective use of capital, generation of strong free cash flow and leverage reduction. Turning to the summary of the third quarter results on Slide 4. Our sales performance in the quarter continues to demonstrate a healthy underlying demand drivers in our key end markets. In refining services, we have a leading U.S. supply position and demand for sulfuric alkylation, regeneration services is increasing. We captured growth in terms of both volumes and pricing, in regeneration services as well as in virgin acid sale. In Silica Catalyst and support, we have a number two global position. The demand in polyethylene is shifting in favor of silica based technology thereby increasing demand for our polyethylene catalyst which delivered double digit sales growth. Disappointingly, a strong feel performance was offset by higher operating costs, which drove adjusted EBITDA down slightly this quarter. We believe that most of these costs will not carry beyond 2018. The key highlight of the third quarter results was our free cash flow performance, which tripled compared to our year ago, despite the decline in adjusted EBITDA. Now Mike will provide a more detailed review of the third quarter and our full year 2018 outlook. Mike?

Thank you, Belgacem and good morning. Before addressing our third quarter results in detail, I would note that we were pleased with our top line growth, particularly in the EC&S segment. At the same time, our cost performance in certain areas was disappointing which led to a slight decline in adjusted EBITDA. Adjusted free cash flow however was strong in the quarter which we used to repay $80 million in debt and make solid progress toward our deleveraging commitments. I will our review these results in our revised 2018 outlook beginning with Slide 5. Sales increased 9% to approximate 427 million. The EC&S refining services product group had a very good quarter in terms of operating performance and demand for regeneration services and virgin acid. Within PM&C, North American highway sales also contributed to the increase, while performance chemical sales were flat. Foreign currency had a 2% negative impact on our overall revenue growth. Adjusted EBITDA declined 1% to 118 million. Strong results in the EC&S were more than offset by higher cost in PM&C. We do however continue to see price increases in cost pass through provisions that more than offset higher raw material costs. Adjusted EBITDA margin was 26% or 220 basis points below the prior year. The main drivers of the decline were $5 million of unbearable cost absorption in EC&S which impacted margins by 120 basis points. And within performance materials, weaker European highway sales and lower margins in both North America and Europe accounted for another 4.5 million or 100 basis points of the reduction. Next I'll review the performance of each of our business segments, beginning with the environmental catalyst and services segment on Slide 6. Sales increased 21% to approximately $140 million, largely driven by outperformance of refining services. With a major turnaround…

Thanks Mike. Please now turn to Slide 10. As we did on the last call, we are providing an overview of another one of our product groups. Last quarter, we reviewed refining services. Today, we will continue with the EC&S segment to cover Zeolyst International or ZI. Starting on Slide 11. ZI was formed in 1988 as a 50/50 joint venture between PQ and Shell. Shell leverages PQ's expertise in zeolite technology, and PQ leverages Shell's expertise in hydrocracking to maximize yields of gasoline and distillates, while at the same time removing sulfur. ZI is the first mover in zeolite fuel and emissions control technology. Its business model expanded to capture growth as environmental emission standard increased globally. ZI today provides critical high technology specialty products to customers in three end markets, hydrocracking, transportation and petrochemicals. Hydrocracking and specialty catalyst are largely event driven, while emission catalyst for transportation have a steady growth profile. Strict regulations for reducing sulfur in fuel pools continue to be enacted on a global basis. Hydrocracking is the most profitable method for refiners to meet sulfur standards, while maintaining yields for one of the most profitable product stream. Hydrocracking catalyst to fix that in a strategic section of the refining process that is replaced every three to four years. Premature failure is very costly of which the cost of catalyst is only a small component. The JV is a sole supplier of hydrocracking catalyst to Shell, but most of our sales are to third party refineries. We also provide precursor support to many of the hydrocracking catalyst suppliers positioning ZI as a leading supplier to most of the global hydrocracking supply chain. Our specialties zeolite catalysts, special products are used in advanced emission control technology called selective catalytic reduction or SCR to reduce the amount…

Thank you very much. [Operator Instructions] Our first question is from Christopher Parkinson of Credit Suisse. Please go ahead.

Good morning. This is Kieran on for Chris. I was wondering if you can discuss the trends that you're seeing in highway and safety regulations particularly in particular performance materials and how you think - how you see that impacting ThermoDrop's adoption going forward. And then on that one, just how you think about incremental investments into ThermoDrop as we look out into 2019 and 2020? Thank you.

Thank you. This is Belgacem. The increased scrutiny on the highway safety is growing. As we look and talk to states one by one and look at the regulations, we believe that that is going to continue. And it's getting tighter, there is conversations about the regulations implementation of longer larger sizes of stripes more visible stripes looking after possible improvements around rainy days and water also aging populations in certain states. So the fundamentals of the market growth is following that trend. And when it comes to the second part of the question was about how that impacts ThermoDrop. We believe and we have started experimenting nice expansion in our sales of ThermoDrop in the last two quarters particularly into various states outside of our initial state which was Texas into Eastern Coast states of California, Florida which gives us hope and understanding that the data is true and then the expansion is happening. Now going forward, we are also absorbing certain challenges with making sure that our expansion is proper. We want to see a return on investment in our ThermoDrop and we can expand any time we like, we just want to make sure that that time is chosen based on performance, the right volume and the right return on the project.

Right, thank you. And just quickly switching over to regeneration services, I mean you saw a very strong quarter in 3Q. Can you just talk a little bit more about what the key drivers of that demand were and how you see that you know kind of extrapolate our towards the future when we look out for 4Q and then into 2019? Thank you.

Yes, Kieran, this is Mike. You may recall in the first half of the year, we had a more heavy schedule for turnaround at our plans, so with those behind us, while we've seen strong demand throughout the year some of that growth was tempered a bit just due to the maintenance that we needed to do internally. So with the bulk of those behind us that's why you're seeing stronger demand for regeneration services. And also complimentary at a similar level actually is the virgin acid demand has been quite strong particularly in the natural resources area. So both of those have been quite good and we expect those trends to continue into 2019.

Great, thank you very much.

Thank you very much. The next question is from Vincent Andrews of Morgan Stanley. Please go ahead.

Thank you. Good morning, everyone. There was a comment in the prepared remarks about competitive pressure on pricing. Could you just elaborate a bit specifically on the products what's causing that dynamic and whether you think that will continue as we exit '18 into '19?

Well - thank you, Vincent. I think, let me first give you just a little bit of an introduction on introducing disruptive technologies. Every time you introduce disruptive technologies, you go through almost three phases, one is the adoption phase than the expansion and the efficiency phase. In the adoption phase, you go through a creation of volume. And what we noticed is as we trying to create volume, you're coming into markets there is full of competition. And specific to ThermoDrop, as we started introducing and increasing the adoption in the market, we obviously see, you see a normal reaction to a disruptive technology on pressure on pricing. Therefore you become absolutely careful on how much you persist and staying in those places as opposed to going to different markets whether it's valuation of your actually yield and value creation from that technology which is ThermoDrop. So it's natural behavior from the market to see pressure. It's a question of how much you expect prior to go into the markets and how you react to it. They did have an impact in certain markets for us and that's why we expanded to additional markets to gain more value.

But it's fair to say that the extent of the price competition was greater than you anticipated, is that correct?

I would say the response of the competitive was stronger than we anticipated.

Okay. And as a follow-up, you also made some comments on the portfolio simpler and stronger I believe are the words you used. I can only assume that means you're thinking about maybe trimming the portfolio a bit, I'm sure you won't tell us exactly what your plans are but can you just give us at a high level you know sort of what the sort of framework is you think about when you look at the portfolio and want to simplify, what do you think makes the portfolio complex and what do you think would make it stronger?

That's a great question. Look the portfolio today as it is, I find it very solid and relevant to the market driving that I described earlier. And the business margins I find them also in the right place. So you could argue there is no reason for us to do anything. But what we did is as a new CEO, my team and I are very energized and looking at every business opportunity to look at with a fresh pressure. So we are challenging everything in terms of the relativity between the businesses size wise, as well as the commonality between the businesses for efficiency creation. When the businesses are two completely different businesses then to create some efficiencies and integrate some of the aspects from the productivity perspective becomes a little bit more difficult. So if you think the business as a standalone business is a very relevant, very strong and our objective is to look at what businesses can we start benefiting from across the portfolio and is there anything that can bring value coming into our portfolio and is there anything in our portfolio that maybe is something that we should look at running it in a different way. This is a high level view. We have no specific plans to share with anybody. But we have some interesting leads of conversations internally about how we believe our portfolio should be, I would say simpler or more, you can benefit more from integrating it and stronger by making sure we only have the strong businesses and the right side businesses. That is what I meant by that description.

Thank you. That was very helpful. I'll pass along.

Thank you very much. The next question is from Robert Koort of Goldman Sachs. Please go ahead.

Yeah, hello everyone. This is Chris Evans on for Bob. Maybe just on the cost side, just curious if one you could break out on your consolidated EBITDA margins, you know I think you set down 220 bps, you know what that would be X pass through, I think you did on a segment level? And then just specifically you know can you give us more color or granularity on what exactly costs you're incurring and sort of the cadence and why you think that '19 you think you largely lap those higher costs?

Hi Chris. Yes, this is Mike. So what I had referred to as the PQ level was two main items. One is unbearable cost absorption, most of which is in the EC&S and that is comprised of really two phenomenon. The first one would be like in the case of refining services, we had a lot of turnarounds in the first half of the year. We were leading inventory through that smaller bills. As we really took off and particularly in spot sales of virgin acid in the third quarter, we were unable to replenish those inventories resulting in higher fixed costs. In other cases, our methyl methacrylate sales are lower than what our expectation was and we've prudently decided to take the action to reduce our production to meet that lower demand that we're expecting for the rest of the year, again also impacting fixed cost. If you look at and that was at the PQ level on absorption. We do break out some of the basis point adjustment for the individual segment, you'll see that on Slide 6. And then the other would be within performance materials which I said was about 4.5 million or 100 basis points at the PQ level. And that's really a function of some of the competitive pressure on pricing that they'll get on ThermoDrop coupled with some higher costs for production and delivery/logistics as we moved out of Texas into broader geographic markets during the quarter and we'll expect some of that to continue into the fourth quarter as well. And then also in the European highway business where we shut down a couple of locations as a part of the integration with Silvatech still settling through where the production needs to be in the delivery of sales across the various countries in Europe. So having said that you know this is and Belgacem noted disruptive technology, but when you look at performance, materials on our beat business, we can meet specs in all 50 states and deliver quite effectively. This is a situation where we're going into new markets, we're learning as we go. There's a bit of additional cost at this point, but we think we have plans to be able to tighten up our supply chain and make that much clearer going into next year.

That's really helpful color. And then maybe excluding the Zeolyst part of the business, pretty good volume growth elsewhere, just curious given maybe some of your peers in chemicals have referenced softening demand or maybe some destocking from customers, you know if you could speak to kind of the healthier end markets and if you do see any trade or macro concerns on the horizon?

Yes, if I just look around the product groups, we've talked about resigning services which has been very strong within silica catalyst, polyolefin demand very strong, some of that's mitigated by the fact that our MMA sales are a bit lower, but that's a specific customer to specific plan and that's going to vary as their operating performance vary. So there's really no underlying trend there. Demand for ThermoDrop has been very strong, the North American Class B business for highway safety also been very strong. When you talk about destocking and some slowing, I probably would reference that around performance chemicals. In the first half, both the first quarter, second quarter we were up 10% or 11%. We've seen that slow a little bit, I think there could be some destocking going on. We don't see any macro weakness from a demand perspective, so I suspect that maybe part of the issue. We've also seen foreign exchange also being a tailwind in the first half of the year to a bit of a headwind in the second half.

It's great color, Mike. Thank you.

You're welcome.

Thank you. The next question is from David Begleiter of Deutsche Bank. Please go ahead.

Hi. This is Katherine Griffin on for David. I guess first, can I just ask you what's the driver of the revised CapEx guidance, what were the changes there?

We tend to tighten that as we go on throughout the year. A couple of things, some with the lower EBITDA, we're closely managing cash. We always take a hard look at what our maintenance projects are and then in this particular case, we have major rebuilds that we do at individual plants we had, one that shifted from last year into this year for example. You know we looked at what we could do at the end of this year. We had a couple more life left on one of our rebuilds we move one of those out, with a couple of smaller items. And the other thing would be on the growth side, there's a couple of smaller projects just weren't ready. So it's within the normal variance I would say of how we move capital around, but we're also very focused on free cash flow and that's one of the levers we can build in short other areas.

Understood, thank you. And I guess again just to talk more about raw materials in PM&C. Could you just may be now go over again kind of what the components are of that raw material cost inflation and then if you have any visibility as to when those, my debate I know it seems like in 2019 that's you'll see that come off but, yeah if you could just talk more kind of about the trends in raw material inflation?

Yes, if you look at Slide 17 in the package that we provided, you know first off we do have pass through provisions in about 45% of our North American performance chemical contracts and we tend to get price to cover raw material cost as well. And you'll see if you compare at the EBITDA level, the price variances to the very low cost, we've been successful in doing that. So most of what we've seen natural gas in the in the U.S. has been very flat, up a little bit in Europe. The bigger impact from higher raw material costs is really been in refining services were sulfur prices are still up about 60% year-on-year and caustic prices are up about 30%. But again because of the high pastor nature in the refining services business, we've been able to cover that as well. The one other item I would note outside of raw materials and I think you've probably heard from other companies are freight and logistic costs are going up and you know we do seek to obtain price increases to cover that as well.

Great, thank you.

You're welcome.

Thank you. Next question is from J.P. Juvekar of Citi. Please go ahead.

Thanks. Good morning. This is Scott on for P.J. So I guess you know in terms of deleveraging your goal is to have turn for year, do you see any other ways to accelerate that pay down or accelerate that pace like other opportunities to reducing costs or reduce the CapEx like you did this year or maybe improve working capital?

Thanks for the question P.J. Look of course, delivering remains on top of our priorities as you know. We got a few priorities and delivering really remains on top of it. And we shared with you our plan to reduce leverage through the plan that we shared with you with reducing turns, half a turn. To the more comfortable level that we believe would be the right thing to do for us. Now there are other options to do that of course and we are looking at all the options, but the priority remains just to stick to our plan. Now the indirect question is, would you just tell some businesses to pay some of that debt. And I can tell you that using divestiture to accelerate the plan is an option but it's not definitely a priority for now. We believe that our business portfolio is so strong and is still delivering at, it still creating a lot of value. And until there is a compelling reason for improving our portfolio in line with our strategic views and we will continue our strategy exactly as it is in terms of delivering with a half a turn a year for the next couple years until we get to the comfortable level. Does that answer your question P.J.?

Yes, it does. Thanks for the color. And maybe if we can go to performance chemicals, I think you know earlier in the year you mentioned soft spot opportunities in China on the silicon side and some your competitors there were forced shut down due to environmental regulations, how does - your competitors remain shut down and do you think that remains tailwind for you going forward?

This is Mike. We've had some benefit earlier in the year in that market. We also had some benefit from higher sales in the Latin America albeit at lower margin, but some of that has abated and that's why you see a little bit lower expectations for the second half of the year.

Okay, got it. Thanks for the color.

Thank you. [Operator Instructions] Our next question is from Laurence Alexander from Jefferies. Please go ahead.

Good morning. I guess couple questions. On the comments you made about simplifying the portfolio, can you talk a little bit about how you think about the tradeoffs between EBITDA growth, EBITDA stability and return on capital, because the current portfolio if I'm looking at the slides, you know they have at the back looks like it hasn't had a two year EBITDA decline at any point in the last decade, so I mean even with the financial crisis? The second question is, as you think about the acceleration in the hydrocracking capacity growth that you show in the slides, does refinery catalysts for you have a multiplier effect to that or should we just sort of layer it in with like roughly one times model blotter?

Thank you. Let me take the first question, the first question about the portfolio first. Yeah, you're right about the portfolio stability, it's one of the most attractive pieces of our business as the portfolio stable from a margin perspective and growing EBITDA. And the conversation about simplifying the portfolio is definitely more of a contingent strategy in our going forward strategy as opposed to the reaction to anything wrong right now. So as I explained earlier, what we're trying to do is make sure that we have businesses that not only continue to maintain a stable performance but hopefully can grow. And as we connect the businesses together, there is probably some efficiency on the table that we can capture that will probably take our margins to a higher level. So our ambition is to not only to keep the stable performance but to grow with the market in certain areas. We do see some businesses, some of our components of the business reacting going forward from a growth perspective as an industry, slightly different. Not everything is still valid from it was like seven or eight years ago from the market potential on the ships and the business, so we want to be ready for that. That's the simplicity of the portfolio. We also want to make sure that every business that is in portfolio has an impact on its own and has a performance on its own, but also can contribute to some potential integrated I would say efficiency through the utilization of our assets, our people, our resources in general. So that is the idea of simplicity. I can't tell you more than that, but we do have some components in our business that we're looking at. And you know what time things don't make sense anymore and today they don't make sense anymore because behind that layer of the big group business, there is a lot of smaller businesses that are in, a lot of components and subcomponents that we're looking at. That's how granular we're looking at the market and the business to try to keep it simple, keep it going and not only be stable but also grow the market at a faster rate. What was the second question?

The second question was just on the hydrocracking, it looks as if in the charts you have capacity growth accelerating 200-300 basis points. Do you see a multiplier effect for the catalyst business or is it just proportional?

Yeah, I do see a multiplier effect for the catalyst business of course with the size and volume. I don't think there is any concern about that. I think it's actually in our favor. And you could see, if you look at the charts at the bottom, you see the market growth and you see up in the market at the bottom and you can see the difference in performance. So our performance in the market is something that to extend that's what we're excited about it.

Thank you

Thanks Laurence.

Thank you very much. The next question is from Aleksey Yefremov of Nomura Instinet. Please go ahead.

Thank you. Good morning, everyone. Mike sorry to kicking back to this question, but make can you explain once again the inventory depletion issue in EC&S, why did it happen, is it sort of a onetime reset in costs and just maybe give some more color on this?

Sure. I wouldn't call it onetime I mean in any given quarter, quarter depending on what your sales volume is doing relative to production, you can be either building or relieving inventory. But the impact is usually on net basis not that large. So is a little bit more pronounced as we came out of the turnaround in the first half of the year in refining services. But that also - you know we are disappointed with where the MMA sales forecast is for the year and we had to reduce production to not build them into where we were going to need this year. So it was really the combination of those two. And there's a little bit in the Zeolyst joint venture as well for an EBITDA perspective as it relates to hydrocracker catalyst. So it was a bit of a confluence of events across all three of those in this quarter which is why the magnitude was higher and worthy of note.

Understood, thank you. And then on the virgin acid market, do you expect prices to rise this year and could just - if so, could this trend continue in 2019 and also maybe can you elaborate on the end demand, I think you mentioned natural resources, what exactly is helping that market?

Yeah, it's been an interesting dynamic because the demand has been there particularly in the mining industry, we've not seen new supply come into the market which means prices remain pretty strong. I don't know that I would necessarily characterize the ability to continue to do that we're just going to have to see as we get into next year. So it's an area that is a bit of a swing benefit for us depending on what the market dynamics look like. So we're pleased with where we are through the first nine months of the year, but I think it's one of those where you really have to watch it quarter-by-quarter.

Thank you.

Thank you very much. Since there are no further questions, that will conclude this conference call. Thank you for joining and you may now disconnect your lines.