Good morning, and welcome to the PQ Group Holdings Fourth Quarter 2019 Earnings Conference Call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Nahla Azmy, Vice President, Investor Relations. Please go ahead.

Thank you, Kerry. Welcome to everyone joining us for our fourth quarter and full year 2019 earnings results call. We will start today with formal remarks from Belgacem Chariag, Chairman, 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. 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 am proud of our team’s execution in 2019. We believe we delivered solid performance on strategic, commercial and financial fronts, with a focus on driving shareholder value through profitable growth, capital efficiency and free cash flow. I would like to briefly cover some of these key achievements. Starting with safety, we continue to advance to becoming a top quartile HSE performer. The increased focus of the leadership team in the area, combined with intensified safety training resulted in a 15% improvement from 2018 and the lowest incident rate, and level three environmental performance in the last 10 years. On the commercial front, we had excellent results from both our materials and catalysts businesses. The Performance Materials team not only delivered improved pricing in both highway safety and industrial products, but also executed on significant structure cost initiatives. The catalysts surge in volume benefited from continued polyolefin capacity increases and technology share growth in addition to the increased activity level of hydrocracking and MMA refills. As for our strategic portfolio optimization efforts, we continued progressing on the pathways we identified to make our portfolio simpler and stronger. Our focus on capital efficiency enabled and improved and lower capital spend program. Additionally, we successfully realized more than $80 million of asset monetization. Finally, on financial, we are pleased to have successfully delivered on all key measures and commitments. We grew adjusted EBITDA by over 2%, expanded margins by 100 basis points, drove higher operating cash flow and generated record adjusted free cash flow. As we have committed, we reduced our debt by paying back $215 million and improved our leverage ratio by over half a turn. This improves our financial position and enhances our flexibility to…

Thank you, Belgacem, and good morning, everyone. We had a better than expected finish to the year, driven by outstanding results from our catalyst business in the fourth quarter. For the full year, we posted growth in both adjusted EBITDA and margins. Our strong free cash flow generation, combined with our successful asset monetizations enabled us to again meaningfully reduce our leverage ratio. As Belgacem just reviewed the 2019 highlights, I will focus my comments on the fourth quarter results and our 2020 outlook. So turning to Slide 4, fourth quarter sales decreased 7% to $352 million, as improved pricing and a focus on higher margin products across our portfolio were more than offset by lower sales volumes. Adjusted EBITDA of $103 million was down $6 million or 5% on a constant currency basis. The prior year results included a $4 million gain related to insurance recovery proceeds for Hurricane Harvey. Further, the stronger performance of our Catalyst business in the quarter was offset by lower volumes in refining services from additional unplanned customer outages and continued demand weakness from Performance Chemicals. Adjusted EBITDA margin was 26%, in line with the prior year. For the year, margins expanded 100 basis points. Moving to Slide 5 for a detailed review by business segment. Refining services sales of $106 million were down $14 million largely on the pass through of lower sulfur pricing of approximately $7 million. Volumes were lower in our Regeneration Services product lines from higher turnaround costs and unplanned customer outages. In addition, virgin sulfuric acid volumes declined due to weaker nylon demand. Adjusted EBITDA declined $8 million to $42 million on lower sales volume and the $4 million insurance recovery gain in the prior year. Adjusted EBITDA margin remained strong at 40%. Turning to Slide 6 for Catalyst,…

Thank you, Mike. Now I’ll address our performance chemical transformation plan on Slide 11, please. The competitive strength of this business includes a strong base of customer relationships. Built on a long history of collaboration, we have nearly 200 years of history of innovation successes in silicas, silicates and zeolites. Our other competitive strengths included our mobile network and production knowhow which allow us to supply key global consumers locally and reliably. As part of our portfolio review last year, we determined that this business had the potential for significant improvement in capital efficiency, growth and margins. We also saw this potential for strengthened performance could be combined with an ability to flex to change in the macroeconomic environments or conditions. Accordingly, we kicked off a transformation plan to restructure our Performance Chemicals business, focusing on growth and enhanced efficiency through a four-pronged program that is now under way. Beginning with manufacturing excellence, to improve accountability for productivity and best practices across the network, we realigned and centralized the global infrastructure of manufacturing plants under one leadership team. We expect this to improve reliability and optimize throughput in order to drive incremental growth. It should also reduce cost per plant and across the network. On network optimization, we are adjusting our global footprint with a deliberate focus on serving key growth customers more efficiently. This will also reduce our ongoing maintenance capital requirements. On commercial discipline, we are undertaking a differential approach to our engagements with key existing customers and target accounts. Through integrated strategy and planning, we will focus the organization on growth markets and winning product customer combinations. Our key objective is to accelerate growth and improve margins through a combination of value pricing and growing product lines with differentiated end users. This focused approach could also result…

[Operator instructions] The first question will come from Christopher Parkinson of Credit Suisse.

Great. Thank you. So you took some solid strides reducing leverage in 2020 and you’re now below 4 times. Going forward, do your capital deployment priorities changed at all to any degree or is that reduction still your primary priority? And then also, when you’re reviewing the portfolio, has your view changed on what’s truly core? Has that changed at all? And are there any units where you’d consider to grow inorganically? Thank you.

Chris, this is Mike. I’ll take the first part. With respect to capital allocation, we’ve set our stated target on leverage is three to three and a half times with a goal of reducing that leverage half a turn a year which we’ve been systematically doing since we went public in 2017. As you look at 2020, I think, again our primary focus for adjusted free cash flow will be debt repayment with an eye toward getting to that the top end of that range by the end of 2020. So that’s within striking distance, and we feel good about that. Once we get there and get solidly into that range, then I think our capital allocation priorities can change, and we’ll be looking at whether we’re having opportunity for bolt-on acquisitions for some greater inorganic growth to supplement organic growth or we’ll also be looking at return of cash to shareholders with items such as dividends. So, that will all be on the table. It’s something we continue to look at given that we are getting close to our targeted range.

Let me complement the answer on the portfolio, Chris. We have been saying that we consider our four components of the portfolio strong components and we value their contribution to the overall performance. We also said that we’re always open to options to create value and unlock value for our shareholders. We continue to deliver on every single business with the exception of chemicals in the last couple of years that we’re going to get it back on track. We look for areas in these portfolios where we have slowing growth or lower performance in margin and returns below our desired threshold and that triggers our attention. We have been looking at multiple options and we have been executing on smaller components of our portfolio, you noticed. Whether it means the reallocation or consolidation of resources, a sale or a disposal or even move into some logical adjacencies would be things that we consider. So, we’re still making sure that each component of our business is operating right and we’re considering all the options and we’re acting on the subcomponents of actively of these business units to drive results.

That’s great color. Just as the follow-up. Can you just further discuss the expected benefits of your Performance Chemicals transformation in more depth? And how we should think about those initiatives? But specifically, the network optimization opportunity when you refer to growth opportunities, if you could add a little bit more color there, it would be greatly appreciated. Thank you.

Well, the four-pronged components are very complementary, Chris. The network optimization relates to where we operate, how we operate, what value we create. Historically, we have been all over the place. We have operations in places where maybe the - we’re producing products that don’t make sense anymore, looking at future growth and return or maybe we’re operating in places where we need consolidations. So, that is the network. Network optimization is really deciding where we produce and what we produce and how we can optimize our resources and assets. As I said earlier, this in turn will create a critical value in how much we spend on maintenance and how we consolidate productivity without having to invest capital in new facilities and maintenance.

Thank you.

The next question will come from John McNulty of BMO Capital Markets.

With regard to the Performance Chemicals’ transformation is there any incremental cash flow hit as part of this restructuring and transformation that we should be thinking about for 2020? And would that be included in the adjusted free cash flow number that you’ve put out there?

John, yes there will be a cash cost for the initiatives that we’re undertaking and they are incorporated in the guidance that we provided.

Okay. Got it. And then, can you give us some clarity on the change around and I guess the long-term contract that you’ve signed up with taking on the glass beads assets and then dropping off, it looks like the Thermo or swapping the ThermoDrop assets out. I guess, how should we be thinking about the change in sales and in margin profile for the business now that that swap is in place?

John, let me start by kind of bringing things in perspective with ThermoDrop. Thermodrop was a step up technology. It was a good technical and commercial success and made good progress in the customers’ adoptions. However, the earnings and returns were not where we wanted them to be in the time horizon that we had. When we had this opportunity to secure this 10-year contract, actually of glass beads contract with an opportunity to trade that against our ThermoDrop product line, together with the capacity and the facility to produce and to deliver to that contract, we believe that was great outcome that would be a great outcome and will enable us to focus on our core operating capabilities in highway safety industry. Now most of these assets will be - try to deliver the contract and actually it will improve our network with our customers and capabilities. And definitely with time when all this is in place, we’re going to see an improvement in the bottom line because of the complications we’ve had with earnings from ThermoDrop. Mike, you want to add anything on that?

Yes. And it’s going to take us a little time to sort through all the change over here, but we have tried to estimate that as part of our 2020 guidance. And as we think overall for Performance Materials, both sales and EBITDA we see growth in the mid single-digit range. So, that has been incorporated and probably a similar margin profile for 2020 as we would have seen in 2019 with an eye toward potential margin expansion going forward.

Absolutely. And John, I want you to take this not only from a numbers perspective, I mean, I did say three quarters ago that ThermoDrop is a great product that it’s on the watch because it’s either going to be part of the growth portfolio or in the time horizon or we’re going to take actions and we took actions. I think what we’re doing is right for our growth. And I believe ThermoDrop still was great technology, but the time horizon didn’t work. And this is a confirmation of how we scrutinize our portfolio and make sure that everything really aligns with the growth trajectory that we want. If that helps.

No, that’s perfect. Thanks very much for the call appreciate it.

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

Thank you. Belgacem, I’m looking at the Zeolyst JV this year. I know it will be down year-over-year, but just how much will be down in both the sales and equity and earnings basis, you think, for this year?

David, its Mike. What we’ve said is for the catalyst business, the EBITDA will be down low double-digit in 2020 as compared with 2019 with margins that will be similar to 2018 levels. So, that’s a function of the methyl methacrylate sales that came out of ‘20 into the fourth quarter and benefited 2019. The step down just as how many hydrocracking catalyst change outs we have in 2020.

Let me add a color on this.

Yes. I’m sorry.

Yes. Sorry. Let me add a color on how great was 2019 in hydrocrack. I mean, the hydrocracking activity was very strong in 2019. Our capability to sustain that and deliver that capacity was also very successful. This is the second, next two, I think last that I remember, it was 2015 when we had the highest hydrocracking capability. We were pushing it, and we were responding, and that’s probably part of the reasons why we were positively surprised toward Q4 because the team really delivered on that. So, obviously, next year, activity will be lower because this was a very exceptional year. But when you compare next year plans to 2018, we’re still higher. So, directionally, this is still ongoing. This is a great business. It’s just the price of the lumpiness and the POs when they happen altogether. We enjoy it, and then we struggle a little bit with the comparison, but it’s actually a positive trend and we’re very happy with that.

Understood. And just on the Performance Chemicals’ transformation. How much of this $10 million to $15 million benefit do you expect to realize in 2020?

So for Chemicals, we’re also projecting a mid single-digit growth in EBITDA versus 2019 and about half of that we estimate will come from the transformation project.

Thank you very much.

You’re welcome.

The next question will come from P.J. Juvekar of Citigroup.

Hi, this is Karen Amada [ph] on for P.J. So just looking at the Performance Chemicals segment. Volumes were down almost 8% this quarter. And given the outlook for 1Q, I was wondering if you could expand just a little bit on which end markets, you’re seeing the most weakness in?

Yes. For chemicals, 2019 was really about sodium silicate. And it was really pretty macro. It’s across a wide variety of industrial applications. It has accelerated as we’ve gotten into the fourth quarter and also the third quarter with some destocking. As we look at chemicals for the first quarter, we expect it to be up sequentially from the fourth quarter, but still below what we had for Q1 of 2019. So there will be a step down there. I would say one month doesn’t make a year. We’ve got a little bit of green shoot around sodium silicates. So we’re cautiously optimistic there that the rebound is we have an opportunity to be rebounding here in the first few months of the year and that’s why we expect that the second half will be better than the first half for Performance Chemicals.

Let me add a color here again on sodium silicate because it’s just not a regular product. Sodium silicate goes into a variety of industries as this is probably, I figured this is what you wanted to know more. It serves wide a variety of industrial and consumer products, largely in the US and Europe. And we think that the Performance Chemicals sales were lower on the consumer products and industrial end markets consistently for the whole second of the year and then it’s still ongoing in parts of the world in the first quarter as we see. And because of a lot of that impact is a destocking impact because this product goes in many industries. We built in our projection that we’re going to start seeing some recovery in the restocking. You cannot destock forever so, a bit of recovery and destocking in the second half of the year. And that explains our second half’s trend versus the first half in chemicals. You add to that the recovery with the project that will start kicking in the second half of the year, you will have a very differentiated H2 to H1 in chemicals, but positive in the right direction, part of the longer term project recovery.

Thank you very much that’s super helpful.

The next question will come from Roger Spitz of Bank of America.

Yes, good morning. On the 2020 EBITDA walk [ph] between EBITDA to free cash flow, beyond CapEx and cash interest, there leaves another $70 million to $75 million, presumably, that’s taxes and working capital and maybe some other things. I wonder if you could provide some of your assumptions for these other items between the two.

Sure, Roger. This is Mike. So, if you start at the midpoint of our guidance and you can look at our interest expense guidance, but cash interest runs a little lower than that. So, that’s going to be somewhere around $100 million. Cash taxes are typically in the $25 million range. Working capital usage which normally would be about $20 million a year, we expect to be a little lower than that. And then, for the rest of what you have, there’s still a fairly big other, about $11 million of that relates to pension it would also include the cash outlay we’ll have for the transformation project. And then, the rest is really just all other. It’s prepaid the accruals and that’s going to get you right in the range of the midpoint of our cash flow guidance, I believe. Net-net of the $135 million at the midpoint capital expenditures.

Perfect thank you very much.

You’re welcome.

The next question will be from Vincent Andrews of Morgan Stanley.

Thank you for taking our question. This is Angel Castillo on for Vincent. Just a quick question around refining services. You talked about seeing kind of the unplanned outages continuing kind of into the 1Q. So, just curious if you could give us a sense for your expectations for EBITDA in 1Q and then first half versus second half.

We think for both sales and EBITDA and refining service is going to be relatively flat compared to last year. We have talked about some unplanned customer outages over a couple of quarters here. Some of that has extended into the first quarter here in January, so that’s something that we’re managing through. Really not reflective of the underlying demand it has been a mechanical issue here, a mechanical issue there at multiple plants, but those outages are typically not very long. These are not full on turnaround. So, even though we expect to be relatively flat in the first quarter, we do see some growth in certainly in EBITDA growth, which again would be in the mid-single digits. Revenue will likely be lower. We had a $10 million hit in 2019 on passing through lower sulfur pricing. If you watch that before that has no net impact on EBITDA, but it does limit top line growth. And sulfur prices have continued to decline. I think they’re the lowest in about 10 years at this point. So, that’s something that we’re watching, but that has a little bit of impact on the top line, again no impact on the EBITDA and we expect growing EBITDA for refining services we get in throughout the year.

Got it. And then, just on the catalyst side. I was wondering if you could give us a little bit more color. What you’re seeing on the specialty catalyst side? The silica catalyst? Around the polyolefin catalyst side? And then just in terms of the hydrocracking, I guess, I’d be curious whether your comments are kind of referencing also just what you’re seeing in terms of orders at this moment? Or more so just your experience kind of historically what would be a typical year right now in 2020? And kind of how IMO 2020 fits into that?

Great. So, I’ll take on the silica catalyst piece is probably is early innings at this stage. Many of the oil companies will continue to invest in downstream into petrochemicals. While they we’re going through the energy transition. Nearest term, substantial volumes of this PE capacity continues to come online in 2020 and 2022 with significant expansion in US, Russia and possibly China. And we are gaining new business in all these three countries. We see no near term sign of demand dropping or slowdown for particularly our HDPE catalyst which is really what we go to the market with. As you probably hear that there is a lot of concern about the LDPE catalyst for single use plastics, and that is deteriorating. We’re not playing in single-use plastic much, we are HDPE which is growing. And actually, our polyolefin catalyst sales grew double-digit year on year in 2019 and we expect another double-digit growth in 2020. That brings improved value from a margin perspective because a lot of these products are high margin products. What was the second half of the question?

Just curious on the hydrocracking. That’s one of the areas of weakness for that you highlighted for 2020. But just, I guess, as I think about both IMO 2020 and how that plays into that? And then also just whether your comments were in reference to what you’re already seeing in terms of orders for the year? Or whether it’s more based on kind of historical experience of kind of these peaks and that you see in the refining industry?

Yes. On the IMO, we have seen a definite demand increase and it’s reflected in our results in 2019. We still continue to see the demand strong. It’s actually the transition is happening a lot smoother than anticipated. The capacity of production is there. The demand is growing, but the lumpiness of demand is really what’s creating these peaks and troughs. As I said earlier, we don’t see 2020 to be a dramatic drop. It’s just a relative performance to 2019 which was an exceptional year. If you draw the average, we continue to see a positive slope to the demand. IMO 2020 implementation is going to happen with cycles and time and the demand is continuing and refiners are only debottlenecking yet still. So, this could get into more interesting activity on assets, change outs and everything. So, we’re very positive about hydrocracking. The cycles very easily on three to four years - three years, you’ve got a cycle peak and everything. But because of the amount of change outs and the speed at which refineries are running today, that cycle or peaks are getting closer and closer in timeframe. So, maybe 2022 we’re going to see another peak. But between now and then, the growth is still going to be bigger.

Very helpful. Thank you.

The next question will come from Laurence Alexander of Jefferies.

Good morning. Just wanted to follow-up on the virgin sulfuric acid market. To the extent if demand recovers more slowly, are there secondary sources of demand that would be incentivized? And how would that play out? Or are you really sort of hostage to the nylon market at this point?

Let me say a few words on the nylon market just to make sure that we’re aligned. The nylon six market is impacted by basically the destocking happening with one of the two major providers. And the destocking as a result of some stronger supply from the Africa market and the Asia market which we think is not going to be forever, it’s going to be temporary. It does impact because there’s only a couple of players. It does impact the demand. What we also see that, we see that that demand on nylon market reduction is compensated by an increase in mining demand for virgin sulfuric acid because people are looking for fresh virgin, good quality sulfuric acid. So, it’s not balancing out, but it’s compensating for some of that. That’s on the nylon. On the rest of the supply of sulfuric acid, primarily on the refinery side and alkylation is on demand right now, whether it is for the gasoline treatment or whether it is for the Tier 3 gasoline standard implementation which is going to require additional alkylation processes and additional sulfuric acid demand. So, we’re optimistic about the sulfuric acid diversity of the market, the demand growth and I think we’re offsetting the nylon drop with the variety of this diversity. The only challenge in that market is the outages, the unplanned outages. Refineries have run very hard right now and we’ve started seeing some unplanned outages for our customers that there’s really not much to do with. And the sulfuric acid supply is actually tightening simply because of the demand that is going on right now. So, we remain optimistic, Laurence, on that. And we believe, should we start seeing a recovery on the inventory which is probably going to be done by the tightness of the outages that are happening in Q1, the recovery toward the second half of the year will be great.

Thank you.

The next question will come from Jeff Zekauskas of JP Morgan.

Good morning. It’s Silke Kueck. Will there be any accelerated D&A from shutting down like the ThermoDrop plants? Like my memory is that there were some capacity expansions that like came on, maybe at the end of 2017. And how much might that be? Or is that what’s behind the higher D&A guidance for 2020?

Silke, its Mike Crews, that’s a good question. We did bring those assets on in that time frame. Since we are not shutting down these assets but are actually swapping them, there won’t be an accelerated depreciation. We will have to work through the accounting for this exchange and we’ll be able to provide an update on the next quarter call. But to answer your question, there won’t be an accelerated D&A as a result of that transaction.

So swapping means you actually giving the assets to the partner?

Correct. We take two production facilities for glass beads in exchange for our product line.

I understand. Okay. And so, that will expand your - I guess, you sell with tech business. You’re just building upon that?

Correct. I mean, as you think about glass beads, that’s our core operating capability. We already have a rather large network. This improves our network which we think is good for us and good for our customers.

Okay. That’s helpful. And secondly, for your capital expenditure guidance, like my memory - maintenance CapEx is sort of like $100 million. What are the $30 million or $40 million for in gross CapEx? And what are you planning to spend that on?

Yes. Over the last couple of years, we’ve taken a very hard look at maintenance capital. So, you’re correct, it traditionally has been in that $100 million range or perhaps a little more. This year, it’s more in the $90 million range. And as you think about the rest, it’s really geared toward growth. So, we have some debottlenecking opportunities as part of the transformation project in Performance Chemicals, where we’re trying to unlock some additional capacity. And we have some other expansion opportunities in silica catalyst. And then, as you know, we have probably $10 million a year that we spend on cost reduction initiatives that keep our fixed costs below the rate of inflation. Those would be the primary items.

Thanks very much, appreciated.

You’re welcome.

And this concludes our question-and-answer session and also concludes today’s conference call. We want to thank you all for joining today. Have a great day. You may now disconnect.