Ecovyst Inc (ECVT) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PQ Group Holdings Third Quarter 2018 Earning Conference. (Operator Instructions) Please also note that this conference is being recorded. I would now like to turn the conference over to Nahla Azmy, Vice President of Investor Relations. Please go ahead.

Thank you, Chris. Welcome to everybody joining our third quarter 2018 earnings results call. We will start today with formal remarks from Belgacem Chariag, President and Chief Executive Officer; and Mike Crews, Executive Vice President and Chief Financial Officer. Then we will follow with a Q&A session. Please note that some of the forward-looking statements that we make today about the company's results and plans are 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 earnings release and presentation materials posted on the Investors section of our website at www.pqcorp.com.

With that, I'm pleased to turn the call to Belgacem.

Thank you, Nahla, and good morning, everyone. I'd like to start by sharing my initial impressions 3 months into my tenure and also review with you the key value drivers that we are focused on to deliver shareholder value. First, the market drivers are fundamentally strong and relevant to our business. Octane demand is growing. NOx standards are constantly tightening in existing regions and increasingly extending to new markets. Global regulations for cleaner low sulfur fuels are more restrictive. Demand for inorganic product derivatives is increasing in areas like, personal care, and transport safety and regulations are pushing for safer and better road visibility. Second, our portfolio of businesses is unique as it responds to the market drivers with leading positions in most growing markets. And third, innovation is the competitive advantage. It has always been a driving force in the company's 200 years' history and remains one of its strongest potentials for the future. During this initial period, my team and I revisited our current strategy, it's success factors as well as its macro sensitivity. We are closely challenging many aspects of the business, including both structural and operational costs, capital efficiency and technology delivery models. We are also exploring further growth through adjacencies and geographical footprint expansion in specific markets. In addition, we are closely evaluating our portfolio with an objective to make it dynamic, simpler and stronger. And finally, we are rapidly building clear pathways to operationalize our strategy. Our goal is to deliver on the key value drivers: profitable growth, effective use of capital, generation of strong free cash flow and leverage reduction. Turning to the summary of the third quarter results on Slide 4. Our sales performance in the quarter continues to demonstrate the healthy underlying demand drivers in our key end markets. In Refining Services, we have the leading U.S. supply position and demand for sulfuric alkylation regeneration services is increasing. We captured growth in terms of both volumes and pricing in regeneration services as well as in virgin acid sale. In silica catalysts and support, we have the #2 global position. The demand in polyethylene is shifting in favor of silica-based technology, thereby increasing demand for our Polyolefin Catalysts, which delivered double digit sales growth. Disappointedly, our strong sales performance was offset by higher operating cost, which drove adjusted EBITDA down slightly this quarter. We believe that most of these costs will not carry beyond 2018. The key highlight of the third quarter results was our free cash flow performance, which tripled compared to our year ago despite the decline in adjusted EBITDA. Now Mike will provide a more detailed review of the third quarter and our full year 2018 outlook. Mike?

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

Next I'll review the performance of each of our business segments beginning with the Environmental Catalyst and Services segment on Slide 6. Sales increased 21% to approximately $140 million, largely driven by outperformance in Refining Services. With the major turnarounds from the first half behind us, we benefited from higher volumes and prices in both regeneration services and virgin acid product lines. In addition, Polyolefin Catalysts volumes continued to deliver double digit growth offsetting lower-than-expected hydrocracking and MMA sales, primarily from deferrals to 2019. While strong sales drove improved adjusted EBITDA, margins declined 240 basis points from the year ago period to 38%. Most of this decline related to unfavorable cost absorption in Refining Services or strong sales depleted inventories, and in silica catalyst where production was reduced to meet lower MMA demand. This and the continued higher sulfur cost pass-through more than offset the benefit to margins from increased refining services demand and lower maintenance and turnaround costs in the quarter. I'll now turn to the Performance Materials & Chemicals segment on Slide 7. PM&C sales increased 4% to approximately $288 million. Performance Materials increased 10% due to higher ThermoDrop sales offsetting lower European highway volumes due to weaker demand. Performance Chemicals sales were largely flat with the year ago period as price increases were offset by unfavorable foreign currency impact and slower consumer cleaning sales owing a strong first half. Adjusted EBITDA was $63 million with margins of nearly 22%. Both declined from the year ago period largely due to competitive pressure on pricing and increased costs including freight as we increased volumes and delivered ThermoDrop to new markets. In addition, we experienced higher manufacturing and logistics costs in Europe as we shifted production between legacy PQ and Sovitec locations to better match demand. In both cases, we have clear plans in place to address these issues to improve margins for 2019.

And turning to Slide 8 for discussion of our free cash flow. As you may recall, due to seasonality, we typically use cash in the first half of the year to build inventory and then generate most of our cash in the second half of the year. Adjusted free cash flow increased to $75 million, more than triple this time last year. The increase was largely attributable to lower cash interest payments and higher dividends from the Zeolyst joint venture. Cash generated in the quarter was used to repay $80 million of debt, bringing our leverage ratio down to 4.6x versus 4.9x at the end of last year. We also extended our interest rate hedging through July 2022 with a new $500 million cap that begins when the current cap ends. With 3 quarters of the year behind us, I would now like to discuss our updated outlook for the full year 2018 on Slide 9. We now expect full year sales to be in the range of $1.58 billion to $1.6 billion, up from our previous guidance and reflecting the year-to-date benefit of cost pass throughs. At the segment level, we still expect EC&S sales growth in the mid-single-digit range, and PM&C growth in the mid to high single digit range. We are now forecasting full year adjusted EBITDA in the range of $460 million to $465 million. The lower outlook reflects third quarter financial results and our expectations for a weaker fourth quarter on lower demand in Performance Chemicals and continued cost pressures in Performance Materials. In addition, hydrocracking catalyst sales are projected to be lower than our original projections from sales that have shifted to 2019. Adjusted EBITDA margin for the year is expected to improve in the fourth quarter and for the year, approximate first half 2018 levels. Notwithstanding the reduction in our adjusted EBITDA outlook, we are tightening our free cash flow outlook for the year to $125 million to $140 million. This is driven by the strong year-to-date cash performance, coupled with a reduction in capital spending. And during the fourth quarter, we plan to repay additional term loan debt.

So to summarize, we expect high single digit sales growth this year due to continued healthy underlying demand drivers. We continue to benefit from price exceeding our variable cost through a combination of value pricing and pass through provisions. Plans are in place to eliminate approximately $10 million of higher cost experience this year. And our adjusted free cash flow profile is robust and we will continue to delever.

With that, I will turn the call back to Belgacem.

Thanks, Mike. Please now turn to Slide 10. As we did on the last call, we are providing an overview of another one of our product groups. Last quarter, we reviewed Refining Services. Today, we will continue with the EC&S segment to cover Zeolyst International, or ZI. Starting on Slide 11. ZI was formed in 1988 as a 50-50 joint venture between PQ and Shell. Shell leverages PQ's expertise in zeolite technology and PQ leverages Shell's expertise in hydrocracking to maximize yields of gasoline and distillate while at the same time removing sulfur. ZI is the first mover in zeolite fuel and emissions control technology. Its business model expanded to capture growth as environmental emissions standard increased globally. ZI today provides critical high-technology specialty products to customers in 3 end markets; hydrocracking, transportation and petrochemicals. Hydrocracking and specialty catalyst are largely event driven while emission catalyst for transportation have a steady growth profile. Stricter regulations for reducing sulfur in all fuel pools continue to be enacted on a global basis. Hydrocracking is the most profitable method for refiners to meet sulfur standards, while maintaining yields for one of the most profitable product streams. Hydrocracking catalyst is a fixed bat in a strategic section of the refining process that is replaced every 3 to 4 years. Premature failure is very costly, but which the cost of catalyst is only a small component. The JV is the sole supplier of hydrocracking catalyst to Shell. But most of our sales are to third-party refineries. We also provide precursor support to many of the hydrocracking catalyst suppliers, positioning ZI as the leading supplier to most of the global hydrocracking supply chain. Our specialty zeolite catalyst special products are used in advanced emission control technology called selective catalytic reduction or SCR to reduce the amount of nitrogen oxides in exhaust gases by more than 90%. And finally, we also produce specialty zeolites that are precursors for the production of petrochemical catalysts. These specialty catalysts include aromatic catalyst that upgrade aromatic byproduct streams and dewaxing catalysts that improve lube oil performance and diesel cold flow performance. Let's now go back to the hydrocracking and transportation product lines which are the biggest potential drivers for ZI's growth for the next few years. First, on hydrocracking on Slide 12. Refiners have been investing in hydrocracking capacity worldwide to meet tighter fuel regulations to reduce sulfur emissions. Sulfur must be removed before NOx removal can be attempted. Given our advanced technology and customer positions in both support and finished products, we have been able to grow faster on average than the rate of capacity expansion by increasing our supply share. And we expect that to continue. Now on Slide 13. And as you can see on the chart, continued global investment in hydrocracking capacity is expected for the coming years, primarily driven by some key emerging countries, particularly China. This capacity should be online to meet the implementation by China of emissions control of its transportation industry in 2020 as well as IMO 2020. 2019 should be a healthy year for hydrocracking. Given the fact that orders for catalyst occur 3 to 6 months in advance of operations or refill and considering our current backlog, we expect our hydrocracking sales in 2019 to continue driving our growth rate ahead of the market capacity. Moving to diesel transportation industry on Slide 14. The U.S. Environmental Protection Agency and European Union have led other nations in terms of standards that limit the amount of nitrogen oxides, carbon dioxide and other emissions for diesel engines. Current truck standards, Europe 6 type have largely been in place since 2010 in North America and 2014 for the European market. These standards are expected to continue to tighten in the 2020 to 2025 time frame. Expectations are that other regions will implement similar standards at the end of the decade, specifically China who announced moving to China 6, which is the equivalent of Euro 6, starting 2020. India has similar plans, but less confirmed implementation time line at this stage. Here, we show the latest forecast for volume and mix in HDD vehicle by region along with the estimates of catalyst consumption per vehicle, resulting from the move to tighter standards. These trends should drive higher demand for our catalyst contents over the next several years. And as China implements European emissions standards by 2020, catalyst consumption is set to increase significantly relative to previous years based on actual HDD vehicles production. So to summarize on ZI. Over the coming decades, the world will require more and cleaner energy driven by rising populations, improving living standards, climate change and the need for improvement in air quality in our cities. Our zeolite innovation platform is flexible and versatile as a support in various applications to meet the demand for tighter fuels and emissions standards globally. Our strong partnership and track record with Shell offers a baseload capacity for our investments while ensuring and that we are technology leaders in various catalyst developments. We expect continued growth ahead of the market given our leading position and technology. I do hope that this overview gave you better understanding of our Zeolyst International part of the business and the value it brings to the current and future developments in the environmental refining and specialty chemicals space. Before I close our comments for this call, I would like to reiterate my belief in the market fundamentals and relevance to our businesses. Our immediate focus is to streamline our priorities and execute on each and every pathway. Selective profitable growth, stringent cost management, effective capital utilization and strong free cash generation. We will continue to reduce the leverage and actively evolve our portfolio to be simpler and stronger. That completes our remarks, and we're now ready for questions.

(Operator Instructions) Our first question is from Christopher Parkinson of Crédit Suisse.

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

Thank you. This is Belgacem. The increased scrutiny on the highway safety is growing. As we look and talk to states one by one and look at the regulations, we believe that, that is going to continue. And as it is getting tighter, there is conversations about the regulations -- implementation of longer, larger sizes of stripes, more visible stripes looking after possible improvements around rainy days and water, also aging population in certain states. So the fundamentals of the market growth is following that trend. Now when it comes to the second part of the question was about how that impacts ThermoDrop. We believe, and we have started experimenting nice expansion in our sales of ThermoDrop in the last 2 quarters particularly into various states outside of our initial state, which was Texas, into Eastern coast states of California, Florida and the Carolinas, which gives us hope and understanding that the data is true and then the expansion is happening. Now going forward, we are also observing certain challenges with making sure that our expansion is proper. We want to see a return on investment on our ThermoDrop, and we can expand anytime we like, we just want to make sure that, that time is chosen based on performance, the right volume and the right return on projects.

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

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

The next question is from Vincent Andrews of Morgan Stanley.

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

Well, thank you, Vincent. I think -- let me first give you just a little bit of an introduction on introducing disruptive technologies. Every time you introduce disruptive technologies, you go through almost 3 phases; one is the adoption phase, then the expansion and the efficiency phase. In the adoption phase, you go through creation of volume, and what we noticed is as we try to create volume you're coming into markets that is full of competition. And specific to ThermoDrop, as we started introducing -- increasing the adoption in the market, we, obviously, see -- you see a normal reaction to a disruptive technology on pressure on pricing. Therefore, you become absolutely careful on how much you persist in staying in those places as opposed to going to different markets where there is valuation of your, actually, yield and value creation from that technology, which is ThermoDrop. So it's natural behavior from the market to see pressure. It's a question of how much you expect prior to going into the market and how you react to it. It did have an impact in certain markets for us and that's why we expanded to additional markets to gain more value.

So -- but it's fair to say that the extent of the price competition was greater than you anticipated. Is that correct?

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

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

That's a great question. Look, the portfolio today, as it is, I find it very solid and relevant to the market drivers as I described earlier. And the business margins, I find them also in the right place. So you can argue that there is no reason for us to do anything. But what we did as the new CEO, my team and I are very energized and looking at every business opportunity to look at it with a fresh perspective. So we're challenging everything in terms of the relativity between the businesses size-wise as well as the commonality between the businesses for efficiency creation. When the businesses are 2 completely different businesses, then to create some efficiencies and integrate some of the aspects from the productivity perspective becomes a little bit more difficult. So if you think the businesses as a stand-alone businesses, they're very relevant, very strong and our objective is to look at what businesses can we start benefiting from across the portfolio and is there anything can bring value coming into our portfolio. And is there anything in our portfolio that maybe is something that we should look at running it in a different way. This is the high-level view. We have no specific plans to share with anybody, but we have some interesting leads of conversations internally about how we believe our portfolio should be. I would say, simpler, or more -- you can benefit more from integrating it, and stronger by making sure we only have the strong businesses and the right size businesses. That is what I meant by that description.

The next question is from Robert Koort of Goldman Sachs.

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

Chris, yes, this is Mike. So what I had referred to at the PQ level was 2 main items: one is, unfavorable cost absorption, most of which is in EC&S. And that is comprised of really 2 phenomenas; the first one would be, like in the case of Refining Services, we had a lot of turnarounds in the first half of the year. We were depleting inventories through that smaller builds as we really took off and particularly in spot sales for virgin acid. In the third quarter, we were unable to replenish those inventories resulting in higher fixed cost. In other cases, our methyl methacrylate sales are lower than what our expectation was, and we've prudently decided to take the action to reduce our production to meet that lower demand that we're expecting for the rest of the year. Again also impacting fixed cost. If you look at -- and that was at the PQ level on absorption. We did break out some of the basis point adjustments for the individual segment, you'll see that on Slide 6. And then, the other would be within performance materials, which I said was about $4.5 million or a 100 basis points at the PQ level. And that's really a function of some of the competitive pressure on pricing that Belgacem noted on ThermoDrop coupled with some higher costs for production and delivery/logistics as we moved out of Texas into broader geographic markets during the quarter, and we'll expect some of that to continue into the fourth quarter as well. And then also in the European highway business where we've shut down a couple of locations as a part of the integration with Sovitec still settling through where the production needs to be in the delivery of sales across the various countries in Europe. So having said that, this is -- and Belgacem noted disruptive technology, but when you look at Performance Materials in our bead business, we can meet specs at all 50 states and deliver quite effectively. This is a situation where we're going into new markets. We're learning as we go. There's a bit of additional cost at this point, but we think we have clear plans to be able to tighten up our supply chain and make that much cleaner going into next year.

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

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

The next question is from David Begleiter of Deutsche Bank.

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

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

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

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

Next question is from J.P. (sic) [P. J.] Juvekar of Citi.

This is Scott on for P.J. So I guess in terms of deleveraging, your goal is to delever by about half a turn per year. I think -- do you see any other ways to perhaps accelerate that debt paydown or accelerate that pace, like are there opportunities to maybe reducing costs or reduce the CapEx like you did this year or maybe improve working capital?

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

Yes, it does. And maybe if we can go to Performance Chemicals. I think earlier in the year you mentioned you saw some spot opportunities in China on the silica side and some of the -- some of your competitors there were forced to shut down due to environmental regulations. Have those -- do your competitors remain shut down? And do you think that remains a tailwind for you going forward?

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

(Operator Instructions) Our next question is from Laurence Alexander from Jefferies.

I guess, couple of questions. On the comments you made about simplifying the portfolio, can you talk a little bit about how you think about the trade-offs between EBITDA growth, EBITDA stability and return on capital because the current portfolio if I am looking at the slide that you have at the back, looks like it hasn't had a 2-year EBITDA decline at any point in the last decade. So -- even with the financial crisis. The second question is, as you think about from the acceleration of the hydrocracking capacity growth that you show in the slides, does refinery catalyst for you have a multiplier effect to that or should we just layer it in with like roughly 1x multiplier?

Thank you. Let me take the first question about the portfolio first. Yes, you're right about the portfolio stability. It's one of the most attractive pieces of our business as the portfolio is stable from a margin perspective and a growing EBITDA. And the conversation about simplifying the portfolio is definitely more of a contingent strategy in our going forward strategy as opposed to the reaction to anything wrong right now. So as I explained earlier, what we're trying to do is make sure that we have businesses that not only continue to maintain a stable performance, but hopefully can grow. And as we connect the businesses together, there is probably some efficiency on the table that we can capture that will probably take our margins to a higher level. So our ambition is to not only to keep the stable performance but to grow with the market in certain areas. We do see some businesses, some of our components of the business reacting going forward from a growth perspective as an industry slightly different. Not everything is still valid from it was like 7, 8 years ago from the market potential and the shifts in the business so we want to be ready for that. That's the simplicity of the portfolio. We also want to make sure that every business that is in portfolio has an impact on its own and has a performance on its own, but also can contribute to some potential integrated, I would say, efficiency through the utilization of our assets or people or resources in general. So that is the idea of simplicity. I can't tell you more than that, but we do have some components in our business that we're looking at. And with time, things don't make sense anymore, and the day they don't make sense anymore because behind that layer of the big group business, there is a lot smaller businesses that are in. There are lot of components and subcomponents that we're looking at. That's how granular we're looking at the market and the business to try to keep it simple, keep it going. And not only be stable, but also grow with the market at a faster rate. What was the second question?

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

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

The next question is from Aleksey Yefremov of Nomura Instinet.

Mike, sorry to come back to this question, but maybe can you explain once again the inventory depletion issue in EC&S? Why did it happen? Is it sort of a onetime reset in costs? And just maybe give some more colors on this.

Sure. It's -- I wouldn't call it one time, I mean, in any given quarter-to-quarter depending on what your sales volume is doing relative to production. You can be either building or relieving inventory, but the impact is usually on a net basis, not that large. So it's a little bit more pronounced as we came out of the turnarounds in the first half of the year in Refining Services. But then also -- we are disappointed with where the MMA sales forecast is for the year. And we had to reduce productions and not build inventory that we weren't going to need this year. So it was really the combination of those 2, and there's a little bit in the Zeolyst joint venture as well from an EBITDA perspective as it relates to hydrocracking catalyst. So it was a bit of a confluence of events across all 3 of those in this quarter, which is why the magnitude was higher and worthy of note.

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

Yes, it's been an interesting dynamic because the demand has been there, particularly in the mining industry, we've not seen new supply come into the market, which means prices have remained pretty strong. I don't know that I would necessarily characterize that as the ability to continue to do that. We're just going to have to see as we get into next year. So it's an area that's a bit of a swing benefit for us depending on what the market dynamics look like. So we're pleased with where we are through the first 9 months of the year, but I think it's one of those where you really have to watch it quarter-by-quarter.

Ladies and gentlemen, since there are no further questions that will conclude this conference call. Thank you for joining. And you may now disconnect your lines.