Good morning, and welcome to the PQ Group Holdings Second Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [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, Chad. Welcome to everyone joining us for our second 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. 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 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 our website at www.pqcorp.com. And now with that, I'm pleased to turn the call to Belgacem.

Thank you, Nahla, and good morning, everyone, and thank you for joining us this morning. I'll begin on Slide 3 with the progress we have made during the second quarter in the key areas of our business. First, on safety, and through active and frequent global communications, interactions and recognitions, we are continuing to drive heightened awareness in order to create a fully interdependent and safe work environment. The executive team, the business leaders and the employees are well aligned and focused on our target of reaching top quartile performance. Second, on our commercial activities. This quarter reflects another outstanding result from the team executing on price actions for our value-added products and services across our entire portfolio. Further, in Refining Services, we extended 2 meaningful contracts covering approximately 15% of our volumes to 2023 and 2025 on favorable terms, and in silica catalysts, our polyolefin sales grew by double digits for the fourth consecutive quarter as polyethylene plants continue to come online, predominantly in the U.S. and China, and new business we gained for existing capacity in the Middle East. Additionally, we also recently won new business in Europe and the U.S. as a result of our Korean towing partnership. Third, on our portfolio optimization strategy, and having concluded our assessment of the portfolio, we are now in the process of executing on our plans. On our previous call, we indicated that these plans include the sale of specific non-core assets at the product line level that could be of more value outside PQ. I'm pleased to share that we recently completed the sale of a portion of our nonstrategic sulfate salt product line from within our Performance Chemicals business for $28 million. This transaction value implies a multiple of 10 times 2018 adjusted EBITDA, which is an indication…

Well, thank you, Belgacem, and good morning. We are pleased to report solid operational and financial performance for the second quarter that led to higher adjusted EBITDA and margins and strong cash flow generation, coupled with proceeds from an asset sale, allowed us to repay the $100 million of term loan in August. So beginning with Slide 4 with a review of our consolidated related results. Sales of $432 million were in line with the prior year period. On a constant currency basis, sales increased 1.4%, driven by price increases across the portfolio, which helped to offset lower volumes. Adjusted EBITDA of $132 million increased 2.8% or 4.6% on a constant currency basis. Improved operational performance in both Refining Services and Catalyst drove most of the upside, offsetting the impact of weaker demand in Performance Chemicals. Adjusted EBITDA margin of 28% increased approximately 150 basis points. Shifting to a discussion by business segment and for Refining Services on Slide 5, sales rose 5% to $117 million. We benefited from favorable mix and higher average pricing, with the rolloff of a legacy contract for virgin asset that was at below market levels. Volumes were lower, driven mainly by unplanned customer outages that extended into the second quarter from the first quarter. Adjusted EBITDA was up 3.6% on higher sales to approximately $43 million and adjusted EBITDA margin remains strong at 36.5%. Turn next on Slide 6 for a review of Catalyst. Silica catalyst sales of nearly $21 million rose 21%, driven by continued strong demand for polyolefin catalyst, coupled with an order that accelerated into the second quarter from the second half of 2019. Zeolyst Joint Venture sales of approximately $39 million were down 21%. This was attributable to order timing for hydrocracking and specialty catalysts, as expected, and shipment delays…

Thank you, Mike. And as we have done on the past earnings call -- earnings calls and in order to provide a more in-depth discussion of each of our businesses, today we would like to review Performance Chemicals. Turning to Slide 10 for an overview of the Performance Chemicals portfolio. We are a leading global provider of silicates, with nearly 200 years of developed material science, innovation and production expertise. Silicates and silicate derivatives serve diverse end uses and customer applications, and this diversity drives very stable results. We believe our business is one of the most competitively positioned, globally supplying to leading multinational industrial and consumer product manufacturers. This position is enabled by a few factors. First, the breadth of our global infrastructure is unparalleled in terms of scale and geography. For our sodium silicate product line, we are the least -- at least 2 times larger than the nearest competitor. We have the advantage of geographic diversity while maintaining close proximity to our customers, which is important given that the high water content limits shipping distances. Further, our production routes are flexible to manage material supply reliability and cost. Second, our vertically integrated production stream from sodium silicates through specialty silicas and other silicate derivatives enables us to serve higher-margin, niche end uses such as food, personal care and surface coating. And third, we've built long-standing customer relationships of more than 50 years with key industry leaders through our track record for innovative solution and supply reliability and quality. This partnership with customers allows us to secure mid to long-term contracts for nearly 2/3 of our sales, with, in many cases, the ability to pass-through changes in raw materials cost. Let's now turn to Slide 11, and here we'll review the end uses and some examples of the…

Thank you. We will now begin a question-and-answer session. [Operator Instructions] The first question will be from John McNulty with BMO Capital Markets. Please go ahead.

Thanks for taking my question and congratulations on a solid quarter in what's looks like a tough environment out there. With regard to the portfolio, look -- you've made a good solid move, it looks like this past quarter, I guess. What can we see or -- it sounds like there are other sales to come or other tweaking of the portfolio to come? I guess do you think any of that can be done before the rest of the year is out? Or is this something that really kind of pushes into 2020 as we look out?

Hi, John. Thanks for the question. Let me quickly walk you back to what happened in the last 3 quarters. In the last year, we went into this announces of our portfolio. We studied the businesses. We started to look at how they fit together and how the portfolio can remain strong and be even stronger. We made a decision to delay the organization and enable the businesses to be stand-alone so that we can dig deeper and understand the components of the business. Step 3 is we went into each business and we looked at the components of the business and sub-product lines and we made an evaluation based on future growth potentials, capability and impact on the current portfolio. And then we started -- we built a list of elements that we will follow up on. One of them was what we just actioned on, on the salt business that we managed to execute on time and at a very, very good value that I believe was the right thing to do for us. What's next would be a continuation of the similar exercise that we started. As I said in my remarks, we're looking at many other things. We're looking at the portfolio as a whole, and we believe there will be some things going on. I can't give you the right time but I think we're very, very active today and I expect to see some things happening in the future, and we will definitely keep you up to speed.

Great. Thanks for the color on that. And then I guess in the Refining Services segment I guess maybe two questions there. How many other asset contracts would you say you currently have that are below market that will eventually roll off? And then I guess the second one would be, just given the condition of their refining market right now, which looks difficult, are you seeing any incremental interest in those refiners possibly shifting their captive asset production to outsourcing it to companies like yourself?

Hi, John. This is Mike. So with respect to the repricing, there's a lot that has taken place over the last few years. We tend to do 20% to 25% per year. This one was different in particular. It was a legacy contract that came over with the acquisition of Eco Services. And you may recall that we had a gain in the fourth quarter of last year because that contract terminated and we wrote off the deferred contract liability that we had for that. So that went away in the fourth quarter. So as that capacity became available, it got replaced with higher price business. That's why we talk about having higher average pricing year-over-year. With respect to the refiners, we are not really seeing anything in terms of major shifting. There has -- there's probably 10% of the population that is considered to be captive. We have converted some captives over the last couple of years. I think 2015, '16 was the last one. So they are episodic. It's whenever the refiners decide, they have to make that capital commitment and whether they want to tie themselves to just one asset plant versus the advantage we have with the network. So don't see anything in the near term horizon on that, particularly, as it relates to current market conditions. But it's something we look at very closely because we can provide a lot of value in those conversions.

Got it. Thanks very much for the color.

Our next question will be from Christopher Parkinson with Credit Suisse. Please go ahead.

Great. Thank you. It sounds like you've done a true bottom-up analysis on the sub-segment basis. So when you look at your business mix, respective growth rate assumptions and subsequent working capital needs. What should we expect on the cash conversion front versus what assumptions are -- you are currently making into the $125 million to $145 million this year? Just any big changes over the next 2 years? Thank you.

Yes. This is Mike. Across the segments, the cash conversion -- I mean, if you're talking about EBITDA minus CapEx over EBITDA tends to run from the upper 60s to the low-70s. Refining Services, in particular, has gotten to the upper end of that range as we continue to put in some good debottlenecking projects. So I think probably not a step change in that cash conversion. I think what you'll see is, for some of these smaller potential divestment items, it's going to be something that can be separated, that doesn't have the growth rate that we're looking for relative to other opportunities in the portfolio, that we maybe a crossroads in our own side, that says, do we really want to recapitalize for this market, and if it's got value in somebody else's hands, we can do that. But that's more of a monetization rather than a significant rating in the cash conversion ratio.

Okay. Thanks. And just a quick follow-up. There's been a few moving parts in Catalysts and the silica and the Zeolyst JV. Can you just comment on the additional puts and takes on order timing, et cetera, during the second half? And how The Street should be thinking about your price volume outlooks for '20. Just any help putting the pieces together for the outlook there would be helpful.

Sure. I'd be happy to. So I mean -- first off, in the second quarter, we had a very strong quarter. There were a couple of moving parts. We didn't know it in the slides, if you saw that than we had. And it's our -- it represents our 50% share with a big gain on the sale of the JV had in the Rive Investment. But that was less than the 1/3 of the $6 million increase that we had in the quarter. The rest of it really related to that order that shifted out in the second half, into 2Q. And then I've mentioned some favorable absorption from the inventory build because we're expecting very good sales in the third quarter but that would be net of -- we were quite a bit lower on volume, as you would have noted, on the Zeolyst Joint Venture, where sales were off 20%, which is also just timing. So we expect -- as you've looked at -- we've got 2 strong quarters in the silica catalysts area with the polyolefin demand, which has been great. We expect the third quarter for the Zeolyst sales to be the strongest quarter of the year. And that's why what that led us to the sales and EBITDA guidance that I provided you around being in line with the second quarter on sale, not as GAAP sales, and then on the EBITDA, which we include in our share of the Zeolyst JV.

I'll just add that every quarter has a different type of colors because the mix of the products that we produce and ship, changes. And as the mix changes, you'd see emphasis on margins up or down based on that mix. So there is a nuance of the mix that plays a role in the variance between quarters. On volumes, yes, it's growing. On margins, it's going to be up and down based on the mix. Just keep that in mind.

Thank you.

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

Thank you. Good morning and very nice quarter. Belgacem, like I know it's early to discuss 2020, but if you assume just similar economic growth, i.e. slow for next year. How should we think about your EBITDA progression in 2020 versus 2019 on a very high-level basis?

Well's to be honest, David, it's just -- we're really focused today on delivering on our current plans. We -- as I described, we see our resilience being confirmed in this environment that is unstable and simply it's because of the quality of the businesses that we have. Like everybody else we are going to be seeing some of the headwinds on volumes every once in a while. I have no concerns, no major concerns about our ability to deliver but the environment will dictate what really happens. So it's a bit early for me to talk about the EBITDA progression in 2020 but what I can tell you is the fundamentals, the growth drivers, and the fundamentals of our businesses especially as we continue to look for opportunities to maintain good solid business components, should be favorable pending what happens in the market between now and year out.

Understood. And maybe just on Performance Materials. The weather impacted sales, ThermoDrop, et cetera, are they lost for the year? Or are they caught up in the back half of the year?

No. It tends to be caught up and when we had weak or poor weather conditions in the first quarter and then ran into this -- in the last 225 years of second-worst rainfall in the U.S. But those orders tend to stack up and get picked up later in the year. We are all -- we had a very good July. So once the rain stopped, the striping commenced, and we've seen really good flow in the first month of the quarter. So we're happy with that. And it just -- ultimately, it will depend on how long the warm weather goes into the fourth quarter. But we're very happy with the rebound that we've seen here at the beginning of the third quarter.

Great. Thank you very much.

You're welcome.

The next session will be from Vincent Andrews with Morgan Stanley. Please go ahead.

Hi. This is Andrew Casio on for Vincent. Just a question around your guidance. If you think about the lower end of the guidance, I guess, what are the risks that you see and what is really embedded in that and perhaps just more broadly what are the kind of risks that you see in the broader economy in your business that you'd be worried about?

Well I'd say we took the midpoint down some $60 million, 1/3 of that would relate to the lower sulfur pricing but you should recall that that's dollar-for-dollar. That has no impact on EBITDA, which is part of the reason why we can we reaffirm our EBITDA target. So it could be additional deterioration in sulfur pricing that gets passed through via lower sales. As you look at the first half of the year, we talked about weather and materials. That has impacted chemicals as well. We had the unplanned customer outages in Refining Services that had crossed both quarters. So we think that's behind us. So for Refining Services, I mean we feel pretty good where that sits. I'd say the bigger risk is probably in chemicals, you've seen the performance be flat to slightly down, not bad given where we are and what others are seeing in this macroeconomic environment, which is a testament to the stability and diversity that we have within that portfolio but I'd say, a little more risk in Europe. We had a lot more impact for foreign exchange year-over-year in the first half than we're currently projecting in the second half, which is based on FX rates where it sits today, so that could be some additional downside.

Let me add one thing on the Chemical side and it's true that chemicals -- Performance Chemicals is probably the area that has the lot more uncertainty overall. We, as I mentioned in the prepared remarks, the code forward, immediate going forward is we're going to be scrutinizing further our chemicals portfolio. We are -- we have reorganized the business a while ago so we are now looking at efficiency creation, debottlenecking, we have about 38 facilities that produces products around the world. Efficiency of the product, capacity increase, debottlenecking, and then efficiency and logistics and distribution further efficiency would be some of the areas where we would use to kind of counter some of the market headwinds and that represents what were the only -- one of the fewer risks that we see between now and year end. And that's going to be at work to do in Q3 and Q4.

Perfect. That's very helpful. Thank you. And I guess just following up on that, that work that you will be doing in 3Q and 4Q, when can we kind of expect the benefits of that to start to flow through the P&L?

Some of the efficiency would be immediate in terms of volume creation and some of it will probably be kind of a tripling into this -- next year. But some of it, what I -- my objective is to get some of that immediately so we can't resist deterioration and hopefully, won't be there for long.

Okay. Thank you. And congrats on a great quarter.

Thank you.

[Operator Instructions] Our next question comes from Aleksey Yefremov with Nomura Instinet. Please go ahead.

Thank you. Good morning, everyone. Do you see rising demand for alkylate following recent refinery closure in the U.S. and could this benefit PQ directly over the next few quarters?

Yes, I think when the -- between closures or there's been some other fires that have impacted capacity that's not been huge but where you've seen that geographically, what that does is it shifts demand down to the Gulf Coast where we have a very strong position. So yes, we do see that as favorable given that, generally speaking, we're going weather its individual events or just the way the market has shifted it. You do see demand shift and pull out of the Gulf Coast and the West Coast, where we have a very strong position.

Yes. And just following up on that. I realize you don't have guidance for 2020. But will you be able to grow volumes in Refining should there be additional demand?

Yes. We've been doing several debottlenecking projects over the last 3 or 4 years that have provided additional capacity.

And just if I may follow-up again. How should we think about that potential demand growth? Is it low single-digit, mid-single digit next year for Refining?

Yes. I mean, I think, it's a little early to tell but, generally speaking, we would expect Refining to be in the low single-digit, right now -- yes, potentially a little higher. A lot of it just depends on how many turnarounds we're doing in any given year. We have a lot this year, a fewer next year, which means lower cost and more operating days. So that can be a positive as well.

Great. Thanks a lot.

The next question will be from Robert Koort with Goldman Sachs. Please go ahead.

Good morning. This is Dylan Campbell on for Bob. When you look at the kind of free cash flow guidance for 2019, I think the first half was pretty flat and implies a step up into the second half. I think, it's pretty normal considering that flat seasonality. But I was just wondering if you could just give some type of bridge first half to second half 2019?

Well, yes. You're correct. We tend to be pretty flat. We're up $10 million I think on a year-to-date basis versus last year. But we are usually pretty flat in the first 2 quarters, just due to the seasonality of the business. Particularly as it relates to Performance Materials and when their sales occur starting in the second quarter and start to get collected in the third quarter. So the cash flow guidance is basically all in the second half. The cash flow targets that we have for this year are a little higher, particularly on the operating side than we had last year. But I think a good view of our visibility into the cash flow is the fact that we've paid down $45 million of term loan at the end of the third quarter last year. And today, we sit here in August with $100 million payments. So we feel good about our cash flow outlook.

Got it. Thank you.

Ladies and gentlemen, this concludes our question-and-answer session.