Good morning, and welcome to the PQ Group Holdings First Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event 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, Danielle. Welcome to everyone joining us for our first quarter 2019 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 appeared then we will follow with a Q&A session. Please note that this some of the forward-looking statements that we make today about the company’s results and plans are 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 on today’s call with their corresponding GAAP measures can be found in our earnings release and presentation materials posted on the investors section of the website at www.pqcorp.com. With that, I’m pleased to turn the call to Belgacem.

Thank you, Nahla, and good morning, everyone. I’ll start with a few highlights on Slide 3. On safety, our objective is to make continued progress towards achieving the American Chemistry Council OSHA top quartile performance. On top of our strong improvements in 2018 and through the end of April, our performance further improved by about 25%. The energy level and commitment displayed by all PQ employees embracing our HSC activities and new programs are very encouraging and indicative of our ability to achieve our aggressive targets. Regarding our portfolio, last quarter, we launched a strategic review of our portfolio with a goal to make it simpler and stronger. Since then, as a first step, we reorganized into a four businesses to drive accountability and transparency effective March 1st. The new structure is now operating at full speed. Further, we continued to make good progress with our portfolio optimization pathways. Within the business units, we have identified specific non-core assets at the product level that could be of more value outside of PQ. We have entered into advanced discussions of the sale of certain of these assets, and we hope to have something to announce within the coming months. On the technology front, we are moving forward with the transformation of our processes and making strides on the identification and implementation of innovative projects that will further support growth in our business portfolio. Next on commercial activities. I am pleased with how the teams have been executing on new and renewal contracts, successfully mitigating materials and other cost inflations. In Refining Services, for example,, we have been successful in renewing or extending many of our existing contracts with improved commercial terms. We have also been able to win contracts with new customers, both in regeneration and virgin sulfuric acid markets. I…

Well, thank you, Belgacem, and good morning. Our first quarter results came in slightly better than our expectations. Unfavorable foreign exchange and timing of customer demand was more than offset by another strong quarter from Refining Services and good commercial execution that led to price improvements in all four business segments. This puts us on a solid path toward achieving our 2019 financial objectives. Let’s move to a more detailed discussion of our first quarter results in 2019 outlook. Beginning on Slide 5 for our consolidated results, sales of $359 million declined 1.9% versus the prior year quarter. On a constant-currency basis, sales increased 1.4%, this was driven by higher average selling pricing partially offset by lower sales volumes. Price increases were strongest in Refining Services and also in Performance Materials. Adjusted EBITDA of $101 million declined 6.4% or 3.8% on a constant-currency basis. Improved performance from Refining Services was more than offset by lower sales in our Zeolyst Joint Venture due to order timing as well as higher cost in Performance Materials. Adjusted EBITDA margin of 26% was slightly lower on higher anticipated corporate cost. We expect these costs to be in the range of $10 million to $11 million per quarter. Turning to our business segment discussion. And as a reminder, we changed our segment reporting this quarter to the four business units, Refining Services; Catalysts, which includes the Zeolyst JV; Performance Materials and Performance Chemicals. Starting with Refining Services on Slide 6. Sales increased more than 5% to $106 million. We achieved higher pricing from contract renewals and both the regeneration services and virgin sulfuric acid product lines. This was partially offset by lower generation sales volumes due to unplanned customer outages and weaker virgin acid demand for nylon applications. Adjusted EBITDA rose 12% to nearly $40…

Thank you, Mike. As part of our ongoing series to provide an overview of our business during our earning calls, today we will be discussing silica catalysts. This follows, obviously, discussions on Refining Services and Zeolyst Joint Venture on previous calls. Turning to Slide 11. With population growth, urbanization and rising middle-class income, global consumer demand for high-strength lightweight plastic is expected to accelerate in the near to medium term. For more than 40 years, we have been providing customized and innovative catalyst products and process solution to the leading producers and licensors of polyethylene, or PE, and methyl methacrylate, or MMA. We have two product lines within our silica catalysts. In the polyolefin resins product line, we supply finished chrome and silica catalyst directly to high-density polyethylene, or HDPE, producers and licensors. We also tailor catalyst support used in both gas phase and slurry phase processes for HDPE and for linear low-density polyethylene, or LLDPE. In the chemical Catalyst product line, we produce catalysts for the Alpha-based MMA technology, and we are the exclusive supplier of its leading global manufacturer. Also within this product line, we serve other customers as an exclusive provider for custom silica-based catalysts. We have a track record and a competitive advantage in our ability to collaborate with customers and provide solutions based on our differentiated wide range of silica with tailored surface area, full volume, particle size and shape. Although, we have numerous examples of partnering and innovative solutions, I’ll just highlight a few this morning. Customer A needed a tougher HDPE resin without compromising chemical resistance for a fuel tank application to lightweight cars. We developed a new catalyst to deliver the target parameters and achieved their goal. We also collaborated with customer B to develop a new HDPE grade with increased chemical…

[Operator Instructions] The first question comes from John McNulty of BMO Capital Markets. Please go ahead.

Yes, good morning. Thanks for taking my question. So with regard to the silica catalysts business, it looks like it did better than, I guess, what you were guiding to on the last call. So I guess I’m curious, when you think about the puts and takes, like, where was the surprise on the upside for you in that segment? I guess how should we be thinking about that going forward?

John, this is Mike Crews. I appreciate your call. On the catalyst group itself and the new segment base as you got silica catalysts and Zeolyst both, we indicated we were going to be down about $10 million on the Zeolyst side. We came in just a little bit better and it’s really timing between the hydrocracking catalysts and the specialty catalysts sales that we have, which is really going to be the theme in each of the quarters as I laid out in some of my remarks. And then we also had some favorable mix on the silica catalysts side that led to some of the upside.

Great, thanks. And then with regard to the streamlining of the portfolio sounds like you’re making some pretty solid progress there. I guess, is there a way to think about how much EBITDA would kind of fit into what you would view as non-core at least as it potentially that could be non-core? How should we be thinking about that as you kind of finish up the streamlining process?

John. Look, we said that we were working on the overall portfolio on the business level and looking at how everything fits in the portfolio. We also said that we’re going to look at every single business and look at these sub-product lines or product lines and see the fit to those businesses. Some sub-product lines make sense to be outside, of course. What that does is, at the end of the day, there is going to be a loss of EBITDA from those businesses but also there’s going to be generation of value and some cash. At this stage, it’s very difficult to say anything more than that, we are in the middle of a conversation with serious potential buyers and we’re close to coming to the conclusion and we will let you know all the details required as we finalize the deal.

Got it. And then maybe one last question. On the capacity restart that you had in the Performance Materials segment, can you quantify what the hit was on that and also, I guess, how to think about how much it might add to EBITDA earnings as that asset’s up for the remainder of 2019?

Yes. The cost of restart that production was in the $1 million to $2 million range and the benefit that we’re going to see over the rest of the years incorporated in our range.

Got it. Thanks very much for the color.

Thank you.

Thank you.

The next question comes from Robert Koort of Goldman Sachs. Please go ahead.

Good morning. This is Dylan Campbell on for Bob. Just a quick follow-up on, I guess, the non-core assets. What characteristics do you look for when you’re considering which ones are non-core and which ones are core? Is it that they’re absolute margin, is it the volatility, is it the overlap with the remainder of the business? You just kind of provide a little bit of color in what you’re looking at?

Thanks, Dylan, for the question. I think most of what you mentioned is valid. First thing is the growth capability of the business under our management, to the – potentially the capital intensity of the business and, of course, the quality of earnings that, that business should bring.

Got it. Thanks. And on silica catalysts, I appreciate the helpful color and breakdown of that business. But for polyethylene and the catalysts to go to that business or that segment, you put out 4% or 5% CAGR through 2024, but I believe most of the U.S. capacity is going to be online by this summer. Kind of what is your breakdown between the U.S. exposure versus international customers?

Well, the CAGR that you see there is the global CAGR, the 4% to 5%. I think it’s a question of timing. Primarily, maybe the U.S. market is going to come along a little bit faster. And then, the international market is following based on the investments that are coming online. The relationship with licenses and customers is really what we’re basing all this information on.

Thank you.

The next question comes from David Begleiter of Deutsche Bank. Please go ahead.

Thank you. Belgacem, just again on the non-core assets. Is timing this year and should we expect all proceeds used to pay down debt? And also, any potential bolt-ons on the ops on the other end of this process that you see might fit here??

Thank you. The timing this year, yes, the use of cash to pay back debt, yes. Other opportunities on bolt-on, we’re looking at several other opportunities as well based on the strategy but there is really nothing that we can update you on at this stage.

Very good. And just on nearer-term business trends, can you discuss what you saw in April and anything you see in your May order books. Is business improving? Is it just seasonality? Is it something more than that?

Sure. April, first of all, the first quarter started, from a weather perspective for some businesses, kind of slow. The order books were – from outside the catalyst business – were normal, regular and little bit of slowdown in some of the components of the chemicals business, which we can elaborate on. Then in April we saw an improvement in activity pickup particularly for materials, which is the beginning of the season where we are very excited about how that starting – the strength at which it’s starting. And we also by April we started seeing firmer commitments in our catalyst orders for the year, which makes us extremely excited because this it’s going to be one of the best years of catalyst that we’ve had in a few years. So that’s what April is bringing.

Thank you.

The next question comes from Christopher Parkinson of Credit Suisse. Please go ahead.

Hi. This is Harris Fein on for Chris. Can you just discuss some of the trends that you’re seeing in the raw material basket? And any visibility you have into any raw material inflation headwinds abating or any internal initiatives that you have to offset them?

Yes. This is Mike, I’ll answer that question. Some of the material inflation that we’re seeing has really been concentrated in our purchases of sand and soda ash and then also on caustic in Europe, which is a bit contrary to what the index was doing in Q1. So we may see a little bit of relief in that as we move throughout the year. And we also had some higher sulfur pricing in Q1, and we expect that to abate later in the year. So the way we attack that as we look at multiple suppliers, we had multiyear contracts, which have actually kept a lid of some of this inflation over the past couple of years. So we are seeing some inflation this year. Having said that, I think, in the quarter, we were up nearly $6 million on variable cost, but we had pricing of more than about $12 million in excess of that. So we are capturing price across the business and we are able to offset those raw material inflation.

And it looks like the regeneration services business is still trending well, can you discuss any of the key pockets of strength that you have that are driving that business? And how sustainable you see this level of growth just for 2Q and for the full year?

Yes. For the full year we see a Refining Services for both sales and EBITDA in those low single-digit range, a little bit lower than what you see in Q1, some of that is a factor of the turnaround cost that we said would be $5 million higher this year versus last year. And then we had that insurance gain from Hurricane Harvey last year that was pure EBITDA. So that’s a bit of a headwind so the growth will temper out as we get into the latter part of the year. But having said that, the volume is there, we have long-term contracts, we’ve renewed contracts at higher pricing which you saw in the results that we had for first quarter so it’s going to be a good year for Refining Services.

Let me add – this is Belgacem. Let me add one more comment on Refining Services. The first quarter of this year was one of the toughest quarter for the business, simply because of the events that took place that were completely out of control such as fires in plants, and delays to – customers delays to complete the turnarounds and all those elements have contributed and, despite that, the performance was really good. So we’re excited about – once this is behind us, we’re excited about the growth potential as Mike mentioned specific details on – from a cost perspective and we’re excited about volume improvements hopefully in starting Q2.

Great. Thank you.

The next question comes from Vincent Andrews from Morgan Stanley. Please go ahead.

Hi. Thanks for taking my question. Just a quick follow-up around the non-core assets. You mentioned some opportunities that you might be considering. I was just curious if you could, one, size those several opportunities that you might be looking into? And a from a bolt-on perspective just maybe what businesses those might be in?

Well, that’s a tricky question to answer directly, knowing where we are right now. So let me give you an element on the size, not a number. I said we are looking at a product line, not a business, at this stage, which is part of the business component. So don’t expect the size to be large at this stage. The bolt-ons are usually smaller, they are small components within businesses. Now we’re not here talking about anything that we mentioned before such as overall portfolio, business fit and everything, that activity is still ongoing but there is nothing to update you at this stage on that.

Great. And then just on the – I guess, just on the volume side or more so on the demand-side for Performance Chemicals, you noted weaker demand within the consumer products. I was wondering if you can give us a broader sense of your expectations for the rest of the year. And that and how it will go throughout the quarters?

Yes, we saw a couple of factors. There was some limited restocking that we think we saw in the first quarter. Some of that may have been weather related with what you saw on the Upper Midwest has impacted our operations, our ability to produce, our customers’ ability to produce and take product, and we had expedite some shipments across the network in order to meet some customer commitment. So we see that abating in the second half of the year and we should see that demand invert.

Thank you.

The next question comes from Aleksey Yefremov of Nomura Instinet. Please go ahead.

Good morning. This is Matt Skowronski on for Aleksey. You mentioned contract renewals in Regeneration Services. Can you kind of give us an idea of the length of these contracts, given you had long-term contracts in the past? Additionally, how much of your regeneration Services are derived from long-term contracts now?

About – I’d say on the contract size or contract length, excuse me, it’s 5 to 10 years. We tend to renew about 20% each year, the total amount under long-term contract is about 70%. And then for what we have under contract, over 90% of those have passed their provisions so that gets us a lot of revenue – visibility on the revenue.

So I’ll add one more thing here. The contract renewal timing and planning is happening exactly as we anticipated. Very successfully, long-term contracts are still being extended even beyond Q1. The good news in refining is actually more than just renewing contracts, is the fact that we win new customers. You know that the sulfuric units – new alkylation sulfuric units market haven’t seen a new unit recently for at least four, five years. And the first one that came to service and is commercial today is one that we – a 5,000 barrels capacity one that we won. Now, we believe that’s a nice opportunity for us to make sure that we remain not only extending contracts at favorable terms but also grabbing growth as it comes along from a new constructions or new capacity. So we’re very excited about that.

Understood. And thank you for the color today on MMA catalyst. Kind of looking forward, are you expecting to benefit from the capacity additions that happened recently or the capacity additions that are supposed to come online this year? Or are those outside of the region that you typically sell into?

Well, we do have an existing capacity that is ongoing today. With the capacity addition that took place for MMA, I talked about the largest plant in Saudi Arabia that we benefit from that already. Now the commitment and engagement on orders have firmed up for the second half of the year as I mentioned. The going forward, this capacity will continue as we are the sole supplier for two plants – the two main plants for the technology. We continue to be benefiting from the growth of production. And then on the longer run, there will be need for capacity within three to four years, I expect there is a need for additional capacity probably in this market right here. And we would be well positioned to grow with the technology with this particular customer that we have.

Thank you very much.

The next question comes from Jeff Zekauskas of JPMorgan. Please go ahead.

Good morning. This is Silke Kueck for Jeff. As a question of clarification, what you said is that 70% of your refining business is on a long-term contract, so does that mean that when I look at your price increases what else it’s like $18 million, that $6 million is raw material pass-through and then $12 million is base price. Is that the way to look at it?

Yes.

Okay. That’s helpful. Secondly, has the destocking that you’re experiencing in environmental control catalysts. Has that changed in April and May? Or is it still a similar environment?

We reference some destocking on the Performance Chemicals side that was mainly related to consumer products. With respect to – are you referring to emission control? Is that what you’re talking about?

Yes. I always got back in emission control.

Okay. Yes, excuse me, I misunderstood your question, yes. Some of that there was one product that was nearing the end of its life and that end-of-life got accelerated so that was down in 1Q, there will be a little bit of carryover because we had expectations for some minor orders in 2Q, we will replace that volume but that volume will come in the second half so it’s not made up immediately.

And lastly, have you identified any manufacturing assets that – in your business review that may be shut down? And how quickly will that happen? And do you think there will be any accelerated G&A that may – it may experience from the write-down?

This is Belgacem. Yes, we have been very active looking at our manufacturing efficiency and assets looking at their production uptime, and we have identified certain elements that needed to be reviewed by the businesses and they are in the middle of that. We will be acting on some of them before year end, so there is no definite ones at this stage and these are pure assets, pure manufacturing assets. What I was referring to earlier from a strategic perspective was actually a product line, combined with assets and so that’s an activity, the other activity is pure assets production base and efficiency improvement. This is happening as we restructure the business and then had four separate businesses. We created councils that look at efficiency, and our manufacturing logistics and distribution and they’re coming up with some great ideas, which we should be able to execute a few of them at least this year and the rest next year.

Thanks very much for the update.

Thank you.

The next question comes from Mike Sison of KeyBanc. Please go ahead.

Hey. Good morning. In terms of, if you think about the proceeds you can get from the divestitures and your free cash flow, how much quicker can you get – could that help you get to your goal of debt to EBITDA to 3x, I think is your goal?

Well, our goal, Mike, our goal is clear in terms of delevering after 30 year using our cash to delever as a priority. And we’ve been saying that and we will deliver on that. What we’re talking about here is a strategy improvements in terms of business capabilities and efficiency, which will help us accelerate that. Now depending on what opportunity goes out, I can’t quantify at this stage, but I know what it is but I can’t disclose it at this stage. It will help accelerate the delevering, it will help the cash elements until we work on a bigger opportunity, which will also have the proceeds primarily going into delevering, which will help us even accelerate further that delivering so priority is to maintain our strategy of a half a turn and the second position is to whatever opportunity we have on the portfolio will probably be prioritized toward delevering to get to the level that we anticipated between 3 and 3.5 sooner than later.

Right. Great. And then a lot of companies have reported and given an outlook for 2Q that’s a little bit more challenging and then the second half is, for most folks, has tended to be stronger. So when I think about your outlook for 2019, can you maybe help us understand, kind of, the sequential improvement that you think you’ll see in 2Q? And then, what needs to happen to have that stronger second half, if that’s kind of the case for you guys as well?

Yes. Hi, this is Mike. As we look at – and we’ve seen the same thing where people are feeling a bit challenged in the first half and looking at economic recovery or less macroeconomic weakness perhaps in the second half, when you look at a lot of what’s going to drive our performance in the second half, and particularly in the third quarter, will be in the Zeolyst Joint Venture, there’s the hydrocracking catalyst sales. We all know that’s lumpy, we’ve communicated where we thought we’d be in 1Q. Also have given some guidance around where we think we’re going to be on 2Q. There is just – those are event driven, we have firm orders and for what those purchase orders say is we expect a very good third quarter there that will drive the second half of that business. As it relates to Performance Materials, that’s seasonal, in a low quarter, we expect it to be a low quarter in 1Q, we start with April to see volumes ramp up, we were a little weaker in Europe with a slow start due to weather, but North America has been strong, we expect that to continue. On the chemical side, we’ve been a little bit challenged for some of the destocking items that I’ve referenced so we expect that to pick up as well, and I think those are the primary drivers. But overall, I mean, we feel like we have pretty good visibility. Refining Services has continued to have very strong quarters as Belgacem noted. That’s steady as it goes. We do feel like we have decent visibility looking at the second half and that’s why we’ve given the outlook that we have.

All right. Great. Thank you.

You’re welcome.

[Operator Instructions] The next question comes from Laurence Alexander of Jefferies. Please go ahead.

Hi, guys. This is Dan Rizzo on for Laurence. Just one quick question, would a federal infrastructure bill be a benefit to your business? Or are you more tied to state budgets?

What was that question?

It was around federal infrastructure. It definitely could be a benefit on the Performance Materials side to the extent there is additional construction that would be. We generally have a replacement business on Performance Materials for the highway business, but that would certainly be an adder to us if there was additional construction going on in the U.S.

Okay. And then you mentioned about footprint optimization and looking at things. Is there a target capacity utilization rate you guys want to get to? And where are you currently? Or do you not look at it that way?

We do look at it that way. We run at very high utilization rates particularly on the chemical side and also on the Refining Services side. So there will be areas where – and that’s part of why you do the portfolio review because there may be geographic pockets where you used to have higher utilization that have come down, product mix may have changed. So that certainly is one of the criteria because we do like to run assets as highly utilized as possible.

Okay. Thank you.

This concludes our question-and-answer session, and the conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.