Ecovyst Inc (ECVT) 2018 Q1 法說會逐字稿

Good morning, and welcome to PQ Group Holdings' First Quarter 2018 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 of Investor Relations. Please go ahead.

Thank you, Debbie. Welcome to everybody joining us for our first quarter 2018 earnings results call.

We will start today with formal remarks from Jim Gentilcore, Chairman 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 Investor section of our website at www.pqcorp.com.

And now, with that, I'm pleased to turn the call to Jim.

Thank you, Nahla. We're pleased to have all of you join us today. I'll start with a review of our 2018 goals and our first quarter highlights, and then I'll turn the call over to Mike for a more detailed review of our financial results and 2018 outlook.

But first, let me say, how proud I am of this team's execution.

Despite the challenging and prolonged weather headwinds impacting several of our product groups and our customers' operations, we delivered a strong first quarter performance with healthy top line and bottom line growth. And we are set up well for our next 2 quarters, which are typically our strongest.

Our diversified portfolio delivered again, with a combination of growth and earnings stability. In fact, if you flip ahead to Slide 14 in the appendix, you see an amazing stability, even through the Great Recession of 2008 and 2009.

Now if you'll turn to Slide 3, just a quick refresh of our stated 2018 goals, which we initially shared with you on our year-end earnings call in March. With this solid start to the year, we continue to expect sales and adjusted EBITDA growth at 2 to 3x GDP. And given our sustained high-end adjusted EBITDA margins near the top of our peer group, we are on track to deliver free cash flow of $120 million to $140 million in 2018.

As we communicated in our last call, our top priority for free cash flow is a disciplined debt repayment to reach our target leverage ratio in the range of 3 to 3.5x. Given our confidence in our full year 2018 outlook, and the momentum we have heading into our typically strong second and third quarters, we plan to pay down $50 million of our debt in the second half of this year. And we'll continue to evaluate our ability to do even more.

Finally, as I mentioned in our previous call, I'm very excited about our innovation pipeline, as some of our key new products are starting to ramp up. In our Zeolyst joint venture, 2 families of emission control catalysts have been rolled out and are now moving through the sampling phase. These are structures with improved low-temperature activity and better overall selectivity, which are extremely important in lowering tailpipe emissions; and also, the basis for our penetration efforts in China.

In silicate catalysts, we've recently introduced new anti-blocking silicas for PET films, also important for the fast-growing Asian markets.

And as we have discussed before, our innovative ThermoDrop product line is proving to be a disruptor in thermoplastics for the highway safety industry. These are a few examples of our success in new product launches. And it raises our confidence that we are keeping our product vitality at the high end of the specialty chemicals markets and enabling their respective product groups to blend their margins upward.

Turning to Slide 4. Our first quarter results set us up well for the full year. We delivered 10% top line growth, which drove nearly a 7% increase in adjusted EBITDA year-on-year, and a 27% adjusted EBITDA margin. This marks the third straight quarter as a public company, in which we have executed on our financial commitments; and our sixth straight quarter of consecutive year-over-year sales and adjusted EBITDA growth, again demonstrating our consistent performance.

During this quarter, we successfully completed our term loan refinancing, which not only locked in additional interest savings, but also further strengthened our balance sheet flexibility.

Finally, the solid performance and momentum from our existing product groups in both segments this quarter, we are well positioned with key growth pillars that will show strong contributions in the coming quarters. More specifically, let's review these key growth pillars.

The first is the global commitment by several producers of polyethylene relating to future PE capacity expansions, where we are 1 of 2 leading global suppliers of silica catalysts and supports.

We believe, in this addressable market of $700 million, that the next tranche of new investment from 2018 to 2021 is tilting towards silica-based catalysts and away from alternative PE catalyst technology. This favors the growth in our finished catalyst and support businesses, where we will grow at twice the underlying growth rate.

The second is our leading U.S. position in the regeneration of sulfuric acid for the alkylation process, driven by the need for higher octane blends in the gasoline pool.

As you know, the rapidly growing demand for smaller high-compression engines is at the heart of this growth. With the announced sulfuric acid alkylation expansions, expected to be online by 2021, the global market is expected to increase to approximately $900 million for our regeneration catalysts. And the North American market, where we are the clear supply leader, accounts for 2/3 of this addressable market.

And the third pillar, with an addressable market size of approximately $500 million, is our new ThermoDrop product line. As we have previously indicated, this product has the opportunity to significantly change the face of highway safety, a safer, more efficient delivery solution to meet the growing demands for thermoplastics on our roads and airport runways.

And in fact, I just learned that this week we -- actually yesterday was the third highest sales day for this highway business in the -- on the record books for PQ.

So with these solid prospects ahead, our entire team is focused on execution and consistently delivering on our 218 (sic) [2018] commitment, to drive value for our shareholders.

With that, I'll turn it over to Mike.

Well, thank you, Jim, and good morning.

I will review the results for the quarter, our capital structure and 2018 outlook, beginning with our first quarter results on Slide 5.

Our first quarter represents a solid start to the year. This financial performance demonstrates not only the underlying strength in our key end markets, but also the benefits of a diversified product portfolio.

Results were driven by sales growth in both segments, which produced 7% adjusted EBITDA growth, and an adjusted EBITDA margin of approximately 27%.

For discussion by business segment performance, please turn to Slide 6 for our Environmental Catalysts and Services segment or EC&S.

Sales increased more than 5% to $117 million, largely driven by higher pricing from the pass-through of increased sulfur cost. This helped to more than offset lower volumes from the January freeze on the Gulf Coast that reduced utilization at some of our refining services customers.

Sales in the Zeolyst joint venture increased 17% to $38 million, primarily from continued strong demand for emission control catalysts.

Adjusted EBITDA rose 4% to $58 million, benefiting from stronger earnings from the Zeolyst joint venture that offset the timing of plant maintenance costs and lower weather-related volumes in refining services.

Segment adjusted EBITDA margins of approximately 38% were lower than prior year, largely due to the impact of cost pass-throughs. As a reminder, refining services product group is largely covered by long-term contracts, of which nearly 90% have cost pass-through provisions. Under these contracts, as sulfur costs rise, so do sales dollars, which means that adjusted EBITDA is relatively flat if the margin percentage declines.

Turning to the Performance Materials and Chemicals segment or PM&C on Slide 7.

PM&C sales were up 12% to approximately $250 million, primarily driven by contribution from the Sovitec acquisition and favorable currency. Performance materials grew by 17%, due primarily to Sovitec, offsetting a slow start to the highway striping season, given the extended winter conditions.

Performance chemicals grew nearly 11% on higher sodium silicate demand for consumer products as well as favorable currency.

Adjusted EBITDA increased 9% to $57 million. This was largely driven by favorable currency and higher sodium silicate sales, coupled with the absence of startup costs associated with ThermoDrop that occurred in the prior year.

Adjusted EBITDA margin was 23%, slightly lower than the previous year, primarily due to product mix and higher weather-related production costs.

Next I'll discuss our capital structure on Slide 8.

As Jim touched on earlier, we successfully completed the refinancing of our term loan in early February. This effectively achieved 3 goals for improving our capital structure. We had $14 million of additional annualized cash savings that helped to reduce our overall borrowing cost to approximately 5%. We extended maturities, and we maintained our prepayment flexibility. With this latest refinancing, we've reduced cash interest by $90 million in total from pre-IPO levels.

Further, we've interest rate caps in place through mid-2020, covering $1 billion of our variable interest rate debt. As a result, a 1% increase in LIBOR rates would only increase our cash interest by $2 million for the rest of this year.

We operate from a position of financial strength. As you can see on Slide 14 of the appendix that Jim referenced earlier, we have demonstrated a track record of consistent adjusted EBITDA growth through economic cycles.

Our low cost and flexible capital structure is complemented by product and geographic diversification, cost pass-through provisions and a high-value specialty portfolio that provides a base of stability and also growth opportunities.

Our confidence in our free cash flow outlook and our commitment to continue to reduce leverage by 0.5 turn a year are the basis for our plan to pay down at least $50 million of debt in the second half of 2018.

Now please recall that the first and second quarters are seasonally the lowest for cash flow generation, while Q3 and Q4 are the strongest.

Finally, on Slide 9, I'll review our full year outlook.

With solid performance in the first quarter, we are maintaining our financial guidance as discussed on our year-end earnings call.

Fundamentally, as we saw in 2017 and Q1, we expect continued healthy growth trends in our end markets. With our key customer positions, we're projecting top line growth of 5% to 7% in 2018, excluding the Zeolyst joint venture sales.

More specifically on the segment mix, we anticipate that EC&S will grow in the mid-single-digit range, while PM&C will grow in the high single-digit range.

Our forecast of 4% to 8% growth in adjusted EBITDA incorporates our share of the Zeolyst joint venture's EBITDA.

While some of the mix and pass-through margin trends are expected to continue in the second quarter, we see improvement in the second half of the year based on product mix, leading to full year margins largely in line with 2017.

Capital expenditures are expected to be $150 million to $155 million, and include approximately $40 million for growth capital.

On D&A, please note that we have provided the Zeolyst joint venture D&A component separately, as that is also added back to calculate adjusted EBITDA, but is excluded from adjusted net income.

Finally, our effective tax rate is still anticipated to be in the mid-20% range. I would note the impact of U.S. tax reform is complex. We will provide an update, if and when adjustments to our provisional estimate recorded at the end of last year, are required.

This also excludes the impact of the global intangible low tax income tax, or GILTI, implemented under U.S. tax reform, since it does not impact our cash taxes.

Free cash flow is anticipated to range between $120 million and $140 million, significantly up from last year by approximately $145 million to $165 million. As seen in the bullets on this slide, this is largely driven by $50 million of lower refinancing costs; $55 million of lower interest costs; lower anticipated working capital usage of $20 million, with the balance from higher adjusted EBITDA.

So to summarize, the first quarter was a good start on our 2018 goals. Results this year will demonstrate PQ's strong and sustainable free cash flow profile, and we are focused on debt repayment beginning in the second half of the year, with a targeted debt reduction of at least $50 million.

With that, I'll turn the call back to Jim.

Thank you, Mike. Please turn to Slide 10 for a quick reminder of our key investment highlights.

We have leading positions in our core end markets, many of which are driven by environmental trends that drive our top line growth at 2 to 3x the rate of GDP.

Our products and services add value well in excess of customer input costs, which is why we are able to generate high and sustainable margins and strong cash flow through all cycles.

And it is our expectation that our margins will continue to expand in the midterm, with a shift in mix in favor of our Environmental Catalysts and Services segment, with its inherently higher margins and growth rates.

So in closing, as we have shown you, PQ has a long history with its unique and diversified specialty portfolio consistently driving solid performance in all cycles. We are building on this strong foundation. We have now delivered consistent performance for 3 quarters as a public company and much longer in our 200-year history.

We have a balance sheet with the right flexibility for this type of specialty business, and a cash flow profile that will allow us to continually lower our leverage position.

With the tailwinds of strong underlying growth in our key markets, we are firmly focused on capturing growth and highly sustained margins, driving strong performance to drive meaningful value expansion for our shareholders over the quarters to come.

Thank you all for being with us today. And we look forward to meeting with many of you in the coming weeks.

Operator, we are now ready for questions.

(Operator Instructions) The first question comes from Christopher Parkinson with Crédit Suisse.

This is Kieran on for Chris. I was wondering if you could discuss some of the key raw materials where you're seeing price increases within EC&S. And maybe discuss the outlook for rest of 2018?

Sure. This is Mike. The biggest one, I think, we referenced was on -- in the second quarter, was the sulfur cost. So year-over-year, we've seen sulfur pricing go up a little over 60%. And based on our outlook for the rest of the year, we would expect that to continue. And you can see what the margin impact. And again, because that particular commodity is dollar-for-dollar, it doesn't impact EBITDA, but it does impact the margin percentage, because you have higher dollars.

The other major one within EC&S would be caustic, which is up about 30% for the year. We also expect that to continue. That's one where we actually have more of a margin protection component, where the percentage wouldn't actually decline like it does for caustic. So those are 2 of the big ones. Natural gas is relatively flat. Even with that percentage, it's a relatively small component. And we still feel good about our outlook for our ability to generate volume and also price to cover any raw material cost increases that may occur.

Great. And then just a quick one on the demand for sodium silicates. Can you just speak a little bit about the end markets, where you're seeing particular strength there, I think you mentioned consumer products. Within consumer products, is there anything specific that you would point out?

This is Jim Gentilcore. For the quarter -- for the first quarter, a lot of that was sodium silicates for consumer care. So think laundry detergents as well as toothpaste to makeup market. So that's what drove the first quarter. We still feel that later on this year, you'll see continued growth in the green tire market, which is a big portion of our sodium silicate market. Still growing very well, as miles driven around the world keeps increasing. So those are probably the 2 biggest ones.

The next question comes from Aleks Yefremov with Nomura Instinet.

In PM&C, should we expect sequential improvement in the second quarter to be larger than typical seasonal pickup, just because of the weather issues that were -- you had experienced in 1Q?

Yes, for sure, Aleks. I think that, as we said, for us to have a record day, not the highest day, but third-largest day, this early in the season, just talks about the momentum that we have going into the second quarter. And all of the weather delays that we have in the first quarter, we do get them back over the highway striping season basically. It's not -- it won't all be in the second quarter. But we would expect that we'll see this kind of momentum increasing in the second and third quarter.

Understood. And just wanted to follow up on the green tire issue. I think that there is some, sort of, uneven numbers in the tire market in general. I just want to make sure, you don't see any headwind in your tire business related to end demand. Do you see a, sort of, sustained growth?

Yes, we do. We haven't seen any unusual dislocations in our business.

Got it. And final question, if I may. On the debt paydown of $50 million, you're guiding roughly to $130 million free cash flow this year. So where is that delta going? Is it just the timing of when you expect to spend the remainder FCF on these debt paydowns, or $50 million plus is, sort of, the range that you're thinking about?

This is Mike. Where we guided to $50 million, it was at least $50 million. So that's the starting point, given the fact that we are only part of the way through the year. We still have the striping season to kick in, the driving season for refining services. So that is our starting point. We view that as a minimum. As we have more visibility, we would look to provide an update as we get further into the year. All with an eye toward the overarching goal we have, which is to reduce leverage by 0.5 turn a year, and that still is our target.

Mike, just a follow-up. So I think should we expect essentially all the free cash flow to go towards debt paydown this year, by the end of the year or by early 1Q '19?

Well, what we have said is, we would pay down a minimum of $50 million in the second half, which is our position for today. And we'll provide updates as we get a little further into the year.

The next question comes from John McNulty with BMO Capital.

Quickly, on the refining services side, where you were impacted by the weather. Can you quantify what that was? I assume that's business that does not come back unlike the road painting business that likely does?

This is Mike. That business was low-single-digit millions. It was not a huge number. It was really concentrated generally with just a handful of customers. So that likely, given high utilization rates, gets pushed off into '19, but we're looking to backfill that with others spot sales in the virgin asset market and some other opportunities we have identified.

I'm sorry, John. Just to add that, the Gulf Coast -- it's way past January now; we are all forgetting how cold it got down there in January. But that affected a lot of our businesses down there. We're already seeing that we're -- with pent-up demand that we're recovering it. And as Mike said, one of the advantages of our refining services business is that we can shift that, when it's not being used, away from refining services to other virgin asset sales. Although, our preference, as we've said before, we will continue to tilt towards refining services, because that gives us the most stable profitable growth for the assets that are produced for catalysts in operation.

Got it. Okay. I appreciate the color on it. I guess, another question. With regard to your catalyst business or hydrocracking catalyst business, in particular, does that business do better given a higher crude environment? I guess, how should we think about that as refiners try to take advantage of the widening spreads? Does that move the needle at all or are they pretty much trying to max you out anyway?

The biggest driver of that business, John, is the demand for diesel fuels for heavy-duty truck -- Class 8 truck transportation around the world. So obviously, higher oil prices are going to be a bit of a headwind on that business, but when you look at the -- I mean, it's really driven by the overall strength of economies around the world. You have to move the products. And if you move the products, you have to move them with trucks and ships and rail, and all those things are going to be using lower sulfur diesel fuels over time. So we don't see any immediate dislocation because of higher energy prices here, unless it were to affect the entire economy.

Got it. Okay. That's helpful. And then I guess the last question, just in the catalyst business in general. It seems like we're starting to see a more inflationary environment, and while some of that I think is tied into the raw material side, some of it just seems like it's more of trying to realize a greater portion of the value that's being created. I guess, what are you seeing in terms of, kind of, the real pricing beyond just raw material pass-throughs for your catalyst business?

I would say, in general, as we've said before, John, this is a very much a value-based pricing function that we have in the catalyst businesses. We are -- we feel like we're at the higher end of those -- because of our products, we're at the higher end of those markets as far as our margin. That's why you see the close to 40% margin in that business. Each time we negotiate a new contract, and now I'm talking about everything but the refining services business, which has a very different longer-term take-or-pay oriented contract structure. But for the other catalysts, the value is quickly reflected in the pricing and it turns more frequently than the longer term take-or-pay, kind of, contracts. So we get a chance especially when we're bringing new products as some of the ones that I mentioned earlier today. When we get -- bring those to market that's when we get a chance to really recognize and realize the value of the new products.

The next question comes from David Begleiter with Deutsche Bank.

This is Katherine Griffin on for David. So just wondering, first, on kind of given the new -- the ramp-up in new capacity on the Gulf Coast, what is your outlook for polyethylene demand through the rest of the year? And, sort of, on that point, what -- is there like an industry utilization rate that you assume in thinking about the cadence of demand through the year?

Well, what we're watching particularly is that, we've all heard of the -- I believe it's 15 million tons per year of new capacity that's coming on over this 2018 to 2021 period. And each one is the catalyst of choice, the design win, if you will, that happens at each plant expansion is the way we track that incremental business for us. So it's not so much capacity utilization as, when is the new capacity coming on? What will -- have we won it or not? Have the licensors chosen our catalyst or our catalyst support? And that's what allows us to, in fact, have a very high confidence level that we are shifting away from -- or towards our silica catalyst in these near-term expansions. And actually, we see it over the full 3 years that we're talking about here. So --.

Okay. And since last quarter, has your macroeconomic outlook changed at all? I know you mentioned new products into the Asian and China markets specifically. But are there any regions in particular that have gotten better or worse in terms of growth?

Frankly, I think it's pretty much steady as it goes, is the way we see it. Although, because we're starting from a relatively small base in China and even -- not as small but a small base in Asia, those increases are very helpful to us on a micro level. And as I did say, we're early in the commercialization of those products, but encouraging signs.

What is that time line like in terms of, I think, you had mentioned sampling. So from sampling to commercialization, about how long does that take?

Well, if there's sampling this year, we would expect revenue this year as well. So by fourth quarter, we're going to start to see the beginning in the ramps for those new products.

The next question comes from Vincent Andrews with Morgan Stanley.

Just a question on margins and particularly in PMC. I mean, obviously, it's very easy to understand the weather-related impacts in the quarter, and some of it, you'll get back; some of it'll be a little bit different, but you did guide to full year margins continuing to be flat. So if you could maybe just bridge us the rest of the year, how margins progress? And how maybe with little bit of a dividend 1Q, you make it up in the balance of the year to stay flat year-over-year?

Yes. This is Mike, Vincent. As you looked at the first quarters, we had a slower start to the highway season. We knew that was occurring throughout the latter part of the first quarter, but some of that was offset by backfilling with some additional sales in performance chemicals. But the mix of those were such that the margin on those sales were actually a little bit lower than what we would normally have in performance chemicals. It was just the nature of how the mix shook out for that period.

So as we get -- and I guess, I would add to that, so the cold weather, we had some higher production-related costs in performance chemicals whether we had gas interruptions, there's some optimization that we had to do to keep volume up. So those were some incremental costs in the quarter as well, which we would expect to offset for the rest of the year. So the combination of working through the offsets for that and then improving mix for PM&C in total as we get into the second and third quarters will drive us back to where we think we need to be in the latter half of the year.

The next question comes from P.J. Juvekar from Citi.

This is Scott Goldstein on for PJ. So I -- just on your capital allocation, when -- are you prioritizing reaching your net leverage range, 3 to 3.5x before you would consider tuck-in acquisitions? Or are there any, kind of, deals that would compel you to consider doing M&A before paying down or reaching that leverage range?

Well, we -- as we've said in the past, Scott, we believe that we can do -- that we can -- that the overriding rule is that we're going to hit that leverage range over the next couple of years, as we've said. We've also said that, even within that constraint, if you will, that there is opportunity for us to do bolt-on acquisitions, where we know the assets well already. We feel very confident that we can get them at good value, that they would be immediately accretive, that we know how to find the synergies, but after all of that, we've also said that these are not significant deals that would knock us off that course to 0.5 a turn correction per year.

Okay. Understood. And maybe I could go into sodium silicates. I think, on the last call you mentioned that you found some spot opportunities from some of the Chinese competitors coming offline due to environmental regulations. During this quarter, have you seen some of those competitors come back online? And just -- do you, maybe, see more opportunities like that over the next year?

Yes, we did see -- we haven't seen any broad trend that says that there -- that the Chinese are bringing those plants back online, but we did continue to see spot opportunities, and some of that, unfortunately, is in the lower range of our margins even when we're in a good position here. It's not as high margin for us as some of the other silica products that we make. But so we're going to continue. We feel, we'll continue to see these spot opportunities, and we're selective because we want to make sure we're going after the best margin for all that business. Our plants around the world are running at very high utilization rates. So we can be selective with these spot opportunities. What we're hearing but not seeing in our own business that some of these plants have passed the tracks that they have to run on behalf of the Chinese regulators. But we haven't seen them come back online yet.

We've -- but there are -- and then our performance materials business, in the glass business, we've seen a different kind of phenomena. The Chinese are now putting more attention on their own domestic markets for highway, obviously, for infrastructure, so we're seeing less indication of performance materials or our microsphere products from the Chinese coming into the U.S. market. So a combination of those spot opportunities and the more domestic consumption of Chinese goods looks to favor our performance materials and chemicals business over the next couple of quarters, but we don't have a very clear picture yet. These are just early indicators.

The next question comes from Roger Spitz with Bank of America.

For certain silicates -- are you able to provide a sort of a year-over-year numerical volume growth number for sodium silicates?

Yes, I would say, when you look at Page 12 that provides the price volume mix kind of breakdowns by segment. Within PM&C, the impact on highway was kind of low-single-digit millions in the quarter, and that was largely offset by the sodium silicate.

Okay. And in HDPE catalysts, I'm trying to determine how smooth or lumpy some of that business can be, because we're right now going through a period when a lot of guys are adding new HD plants. How lumpy or smooth -- and how much -- what is your split of catalysts that you may sell directly to HDPE producers versus catalyst supports, which I'm presuming that you're selling to others who are putting together the final catalyst to sell to the HDPE producers. If I understand your business right?

Yes, a couple of pieces. So first of all, when we try to explain the way the lumpy function, if you will, in our catalyst business, we look at whether we're talking about fixed bed or a consumable. Fortunately, in the case of HDPE, the catalyst is consumed with the production of the polyethylene. So it's not lumpy in the way we would talk about a hydrocracking fixed bed reactor. That's a lumpier kind of business. So HDPE is not lumpy at all in its consumption. What -- so I think that was the first part of your question.

The second part, about how we sell through, early on, it's really our alignment with the licensors -- -- with the catalyst licensors. And we feel that we're in very good position with this first tranche of new HDPE and linear low-density polyethylene expansions that are coming on stream because we already know who the licensors are, we know our relationship with them and in fact, we're already starting to provide products. So we have a high confidence level that this trend we are seeing is holding true that we think we will be able to grow at twice the market rate than HDPE itself is growing.

Thank you for that, and if I can add to that, I appreciate that. But the -- part of the lumpiness, I was thinking, also was the fact that with new -- when a guy puts up a new HDPE plant, that first catalyst load is -- presumably might add some lumpiness. Now that's just 1 plant, but there are a lot of plants coming on. So I was thinking that, that the first load lumpiness. And with the split between direct to an HDPE producer and to another catalyst guy who's putting together the final catalyst, do you sell at all any final catalyst to the HDPE producers? Or all of your catalysts and catalyst supports go to others who are finalizing the catalyst and then selling it to the actual -- the guy who is actually making the HDPE?

We sell to both. We sell directly to the HDPE producers and we sell to the catalyst licensors in some cases. And it's -- it varies from year-to-year. But we sell through both channels. And we do sell end catalysts. Our chrome silicate catalysts are end catalysts, not just support. And I'm not -- I don't believe that we would see any material lumpiness because of that first fill on expansions.

The next question comes from Laurence Alexander with Jefferies.

It's actually Dan Rizzo on for Laurence. Can you just tell us how the change in marine fuel standards is affecting or is going to affect, or how you think it's going to affect the sulfuric acid recycling business?

We don't see this having effect on the -- on our regen business, the sulfuric acid business. The real impact is going to be on lower sulfur fuel -- so there's going to be a significant part of the high sulfur bunker fuels that are used in marine transportation applications, that are going to have to start switching in 2020 to a lower sulfur content. And there's several paths to get there. The fastest and most likely path of least resistance, if you will, is going to be to blend down the bunker fuels, which are 3.5% sulfur today to the 0.5% diesel fuels that are used in heavy-duty diesel applications today.

So the impact on us, which will be significant starting in 2020, in a positive way, will be in our hydrocracking sales through our Zeolyst joint venture. I -- the refining services business for us is just for the alkylation products that are used in gasoline, in the octane-blended gasoline. So we don't see any direct correlation between those 2 -- between IMO 2020 and the effect on our refining services business.

All right. And then just, and I'm sorry if I missed this, but would you say that the Chinese environmental reforms, is that having a larger impact than you thought previously, maybe last year or earlier this year?

Yes, I think back to my earlier comments, Dan. It looks to us like some of the capacity, and this is almost exclusively in our performance materials and chemicals business. Some of the capacity that they have used to compete globally is going to be taken off-line and kept off-line. We believe that some of those plants will not pass the new regulations ever, so they will just take them out of -- it will be assets that come out of service. The other ones that are being updated, obviously, have a higher capital cost associated with them now, but they will continue to provide product, especially in Asia, but as I said, the last dimension is that we're seeing more domestic consumption of Chinese products in China. And this is just in our performance chemicals and materials universe.

The next question comes from Bob Koort with Goldman Sachs.

This is Dylan Campbell on for Bob. Can you talk about, I guess, the impact of IMO 2020 on your business? And how a change in marine fuel standards are likely to drive demand for hydrocracking?

That's -- the question that I just answered for the last caller was about that very issue. So the IMO 2020, which we think will increase the demand for hydrocracking, low sulfur fuels that are produced through the hydrocracking process that uses our catalyst. And it will be significant, but it's not in the -- certainly, not in the '18, '19 time frame.

Got it. And can you give some additional data or color around, kind of, what you're seeing with ThermoDrop? And, kind of, give us kind of your expected cadence for the adoption rate, and what we can kind of plug-in or expect in earnings in '18 or even '19?

Well, I mean, I can talk qualitatively. I mean, the point that I just made about hitting a record sales day, one of our record sales days, this early in the season is an indication about how strong ThermoDrop is. I think I've shared with many in the past that we believe that this is -- that each plant will give us somewhere in the range of $10 million of EBITDA at full utilization. And that we can build new plants in about 10 to 12 months.

The next question comes from Bill Hoffmann with Investcorp Credit Management.

Just a final question on the Zeolyst JV. As you look towards some of this additional capacity coming on stream for your customers, any thoughts on the capital requirements at Zeolyst and, sort of, balancing that on distributions coming out of there?

Yes. As you know, Bill, all of our expansions to date, and we believe in the foreseeable future, are funded from the JV. So neither party has put additional capital in. Not in the '18, '19 time frame, perhaps farther down, as we get a better feeling for what this opportunity, what the IMO 2020 opportunity is, how it's going to materialize, that might change. But I can't imagine that we wouldn't be able to deal with the expansions from the joint venture itself.

Okay. So I mean, today you've enough capacity there, you would generate growth, and then you'd target 2020 for potential future additional capital?

Yes, yes. We have expansions underway now that are going to add capacity where we need it. And then, in the 2020 time frame, we could -- and those plant expansions tend to be in the $30 million to $40 million range. But we don't see that (technical difficulty) required, that hasn't already been approved and under construction. We don't see that in the '18, '19 time period.

Okay. And then just second question. We've seen a significant recovery here in the U.S. oil patch. And back in the day, you guys sold product into that market. Is that still something that has an attractive opportunity for you? Or is that something that could develop as those fracking rates continue to recover?

Yes, that's a good question, Bill. And we are, in fact, seeing some good signs there. We've reorganized our business, so that oil and gas is now handled by 1 group, where we take products out of performance materials and performance chemicals, and we're bringing them to the market in a more cohesive way. It's still small compared to what it was for us back at $100 a barrel oil days, but it is a very encouraging sign. And we intend to continue to look for opportunities to expand our involvement in that business.

The next question comes from Mike Sison with KeyBanc Capital Markets.

This is Connor Cloetingh on for Mike. So I just had a question on your MMA business. I think it was late last year, there was an announcement about a new MMA process. Do you see that as an opportunity to maybe make catalyst for their business? Yes, just wondering, if you had any thoughts on that?

I'm not quite sure, which one you're talking about.

Evonik. There you go.

So that -- Yes. Our understanding is that product does not -- that process still doesn't have the same advantage as the leading process that has been developed already and is being utilized by the leader in that marketplace. The largest player there, Mitsubishi, is several times larger than Evonik or any of the other MMA catalyst producers. And a lot of it is because this new catalyst that they introduced a few years back, where we're the exclusive supplier for that catalyst, is a much more efficient process as we understand it.

Okay. And then could you give us -- I'm sorry. I was just wondering if you can give us an update on the timing of the new [Lucent] plant, or when do you see that being -- the fill in there?

The site has not been yet announced, but we expect it will have to be announced shortly, because they will be -- their plans are to bring that on in next year or early the year after that.

The next question comes from Jeff Zekauskas with JPMorgan.

It's Silke Kueck for Jeff. As you sort of manage your some of the raw material cost headwinds and some of the early weather issues, do you, sort of, have a cost savings target in mind for this year? And if you do, what is it?

We haven't put out a specific cost target. We're constantly looking to lower cost where we can or limit the impact of inflation, which is why we have about $10 million of cost-reduction capital built into our maintenance spend. But there is no hard target. I mean, this is a -- it's a business that's been run -- it's been well invested but run very lean, and I think it's evidenced in the 28% margins that we have here. So it's all -- it's incremental and disciplined with no real step change. Where you see significant cost reductions are where we do things like the business combination with Eco Services, or with the Sovitec acquisition is where the big step out cost efforts may occur.

And in terms of -- when I look at your balance sheet, so, year-over-year and sequentially like your receipt was up a little bit, your inventories, is that a function of currencies or what's, sort of, behind it? And do you have like a working capital target for the year?

That's a good question. So the sales are up based upon -- or the -- excuse me, the receivables are up just based on higher sales. The inventory is up for 2 reasons. One is to continue to build the inventory for our new ThermoDrop product. And also, with the slower start to the highway striping season that we still got some inventory on hand at the end of March, that we wouldn't normally expect to be there. And we will work that out through the rest of the period as we get through the selling season, before we start building again at the end of the year.

And then what we have said on working capital was, you look at the $120 million to $140 million free cash flow target, I believe we had about a usage of $40 million last year and we expect -- while still would have usage in '18 that it would be a $20 million improvement. So as the business grows, we intend to use about $20 million of working capital.

Okay. And my last question, sort of, has to do with like, mix, so when I look at your silica catalyst business and your zeolite catalyst business, like, if you could choose to sell incremental -- I don't know what the right metric was, like, a pound of catalyst either to like the HDPE market or the M&A market or the emission control market or the hydrocracking catalyst market, like, where would you sell it to?

I'll let Mike answer that, but let me just preface it by saying that, these are different materials. The materials used in the HDPE business are not made in the same plants with the same processes or with the same technology as those that go into either hydrocracking or even our emissions control business. So there is not -- and I would just add that the margins for all of them are very good. They're all very consistent in that upward 30-some, above 40% range.

Yes, I think that's the key point. The capacity is not interchangeable. We have said previously within the Zeolyst joint venture that low to high, the hydrocracking can be 40% of sales to a total of 50% of sales. We do expect a higher hydrocracking catalyst year this year, which is part of why we said on the last call that, that may have a negative -- slight negative impact on our overall margins for 2018.

At this time, there are no further questions in the queue. I would like to turn the conference back over to Nahla Azmy for some final remarks.

Thank you, Debbie. I just wanted to bring your attention to a few spring conferences in which we will be participating. They are the Goldman Sachs Basic Materials Conference in New York on May 16. The Deutsche Bank Global Industrials and Materials Conference in Chicago on June 7. And the BMO Chemicals Conference in New York on June 26. So we are definitely very excited to see many of you in the next few weeks. And with that, again, thank you for your time with us and interest in PQ.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.