Ecovyst Inc (ECVT) 2020 Q3 法說會逐字稿

And I'll be your conference operator today. (Operator Instructions) Please note, today's call is being recorded. (Operator Instructions)

I would now like to turn the conference over to Nahla Azmy, Head of Investor Relations. Please go ahead.

Thank you. Welcome to everyone joining us today for our third quarter 2020 earnings 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 information shared today is forward-looking information about the company's results and plans, including with respect to the sale of our Performance Materials business, the strategic review of our Performance Chemicals business and our anticipated end-use demand trends in light of the challenges presented by COVID-19.

This information is 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.

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

Thank you, Nahla, and good morning, everyone, and I hope you and your families are safe and well. First of all, let me tell you that we're very excited to connect with you today as we update you on our performance for the quarter and the most recent strategic moves. Beginning on Slide #3. I would characterize our third quarter performance as one of continued execution against the backdrop of a macro environment that has improved but is not yet out of the woods.

Let's review highlights from the quarter. As always, we'll start with safety. And I'm pleased to report that the results are outstanding. Our accident rates in the first 9 months has been cut in half versus the same period last year. Our goal is to be in the top quartile of safety performance, as reported by the American Chemistry Council and we are meeting that high bar so far in 2020. We continue to operate through the extended COVID-19 health risk environment with rigor, complying with our own processes as well as the global health guidance and recommendations.

With the global economic recovery occurring gradually, we carefully continue to optimize our supply capacity to match the evolving demand picture, while effectively controlling cost. We are also ensuring that we maintain sufficient production flexibility to accommodate the continued rebound in demand.

On the commercial side, we are pleased to announce a meaningful new contract in the Refining Services Regeneration product line. This multiyear supply agreement, starting in late 2021, positions us for a high single-digit increase for annualized Regeneration Services volume. We will supply this from our existing network, having efficiently allocated capital to debottleneck our production capacity.

Within Performance Chemicals, as part of the transformation plan, we announced a price increase across most product lines to reflect the commercial value of our products and services for our customers. The benefit of this announcement will largely be realized in 2021.

In terms of financial results, our top line improved 6% from the second quarter, as we expected. Adjusted EBITDA also was largely in line with the second quarter, resulting in healthy adjusted EBITDA margin of 27%.

The good news, of course, was on the strategic front. Earlier this month, we announced the sale of Performance Materials at an attractive valuation as well as a review of strategic alternatives for Performance Chemicals. These actions represent the most significant milestone to date in our simpler and stronger strategy. This will, in turn, enable us to focus on higher margins and higher growth potential businesses that should drive higher company valuation.

Turning to Slide 4, for more color on end-use demand trends and beginning with Refining Services. Since June, global gasoline demand has been steady at about 90% since 2019 levels, recovering nicely from the trough in April. Gasoline inventories have declined and are now at the normalized 5-year average. This was a result of higher demand on increased miles driven and some reduced supply, as a number of North American refineries closed or idled their facilities.

The recent tightening of supply capacity was incrementally positive for some of our customers in driving their production utilization higher. By August, overall U.S. refinery utilization recovered to about 80%, before the hurricanes caused temporary shutdowns and lingering effects through mid-October. We still expect demand in the fourth quarter to finish in a healthy range of 90% to 92% of 2019 levels.

As for our high-grade virgin sulfuric acid product line, demand from mining came back stronger in the third quarter. We're also seeing industrial and automotive demand drivers improve as we entered the fourth quarter. In September, U.S. automotive sales continued to increase to greater than 90% of 2019 levels.

Moving to Catalysts. As we mentioned in our previous earnings call, we anticipated a softer second half versus the robust first 6 months. Refinery customers continue to focus on cash conservation. Due to lower-than-typical utilization rates this year, refiners are delaying the cost of Catalyst that change out beyond 2020. I would add that the global refinery capacity shut-ins have affected 3 hydrocracking units in the industry while we were not impacted.

Demand related to our emission-control catalysts for heavy-duty diesel applications remains well below prior year levels, though we are starting to see demand improving from trough levels as production returns. On the other hand, for silica catalysts, demand for our products continued to outpace the broader polyethylene market for packaging, containers and fill. We attribute this to our customized solutions along with our products being specified by the largest global producers.

Turning to Performance Materials. In our highway safety road striping business, demand in North America remained stable with road striping activity typically viewed as low cost and essential for safety. We have seen some reduced striping efficiencies due to COVID-related work restrictions in few states. In Europe, primarily Spain, France, Italy and the U.K. demand has been showing steady monthly improvements. We expect fourth quarter demand to be similar to 2019, outside of unusual weather impacts.

In our engineered glass materials business, we saw steady demand improvement in the third quarter that met or exceeded our expectations for various end uses. By September, volume has returned to 95% of prior year levels, largely driven by general industrial and construction activities. We expect this improvement to continue in the fourth quarter.

I'll conclude with the next picture of demand trends impacting the end uses of Performance Chemicals. We have been seeing a surge in personal care and cleaning products for consumer use and industrial service and hospitality. In the third quarter, this subsided as expected. Also, weighing on demand is a slower recovery from certain industrial segments, such as pulp and paper as well as oil and gas. These trends are being partly offset by signs of rising demand for coating and general industrial applications as well as gradual reopening of food and beverage establishments under strict health guidance.

So overall, we are optimistic that the trough is behind us. With the exception of Catalyst, which will have a delayed recovery time line, the reopening and general economic recovery should benefit the rest of our businesses through at least the fourth quarter. Beyond that, the rate of recovery will continue to evolve in conjunction with the global response and containment of the virus extension.

Now I'll turn the call over to Mike for an in-depth discussion of our results and outlook.

Thank you, Belgacem, and good morning. On Slide 5, you'll note this quarter was marked with solid financial performance that largely matched our expectations, but for impacts related to Hurricane law and a hydrocracking order deferred to the fourth quarter that in total reduced sales by $9 million and adjusted EBITDA by $5 million.

We saw top line growth in 3 of our 4 segments compared with the second quarter, and we're pleased to post yet another quarter with healthy adjusted EBITDA margins of 27% on continued cost efficiencies and resilient pricing.

Now let's review each business segment and then the outlook, beginning with Refining Services on Slide 6. Sales of $108 million were down 9% year-over-year, largely driven by the pass-through of $5 million of lower sulfur and other raw material costs. We also saw reduced volumes for Regeneration Services as refinery utilization rates were negatively impacted by a combination of the pandemic and, to a lesser extent, hurricanes in the Gulf Coast region.

I should note, however, that regeneration services volume was up nearly 30% from the second quarter as gasoline inventories began to normalize on a rebound of economic activity. Virgin sulfuric acid volumes also saw a lift of 20% from the second quarter on improving industrial and mining demand trends. Adjusted EBITDA of $44 million declined 14% versus the prior year quarter, largely on lower volumes, while margins remained strong at 41%.

Turning to Slide 7 for Catalyst. Silica Catalyst sales of $23 million declined $2.5 million from the prior year. Double-digit gains in polyethylene catalyst sales were more than offset by the timing of a methyl methacrylate order that was accelerated into the second quarter from the third.

In the Zeolyst Joint Venture, sales of $27 million were about half of prior year levels. As we indicated on last quarter's call, lower utilization rates at our refining customers are extending catalyst life, causing hydrocracking change-outs to be deferred out of 2020. In addition, demand for emission control catalysts remained soft, but in line with the pace of recovery in heavy-duty diesel truck production. Adjusted EBITDA of $12 million and margins of 24%, reflected lighter sales volumes as unfavorable inventory cost absorption offset cost-saving measures.

Moving to Slide 8 for Performance Chemicals. Sales of $149 million were down 12% versus last year, reflecting lower volumes from weaker demand in detergents, cleaning, industrial and oil processing applications. Since the second quarter, sodium silicate sales showed double-digit gains, driven by improving industrial and construction applications. Adjusted EBITDA of $34 million was down 8%, so margins expanded 90 basis points as lower volumes were mitigated by favorable pricing and cost actions and transformation project benefits.

Finally, on Slide 9 for Performance Material. Sales of $105 million declined 9%. North American highway safety demand remained steady. However, striping activity was slowed in some states due to COVID-related work restrictions. This was partially offset by improving volume demand in both highway safety and industrial applications in Europe. Adjusted EBITDA of $25 million was in line with last year, and margins expanded 180 basis points, benefiting from favorable pricing and mix and cost initiatives.

Turning to Slide 10 for our outlook. With solid execution and financial performance to date, our 2020 outlook remains on track. On a consolidated basis and including Performance Materials for the year, we continue to project sales of $1.43 billion to $1.46 billion. Zeolyst Joint Venture sales are still anticipated to be in the range of $120 million to $130 million.

Our adjusted EBITDA range remains $410 million to $425 million, with margins approximately 27%, driving adjusted free cash flow of $145 million to $155 million. This excludes $18 million in proceeds from the sale of a Performance Chemicals product line earlier in the year.

Beginning in the fourth quarter, however, we expect Performance Materials to be reported as a discontinued operation. Consequently, we are providing 2020 guidance to reflect results from continuing operations that exclude Performance Materials. We are, therefore, targeting full year sales, excluding Zeolyst JV sales to be in the range of $1.08 billion to $1.1 billion.

We expect adjusted EBITDA to be in the range of $330 million to $345 million, with margins of approximately 28%, reflecting the relative margin strength of our continuing operations. Adjusted free cash flow was estimated to be in the range of $95 million to $105 million. And as a reminder, that also excludes the $18 million sale of the product line in Performance Chemicals.

At this time, we are suspending adjusted EPS guidance for the year, given we are still working through the tax effects of the divestiture. We intend to use most of the net cash proceeds from the sale of Performance Materials to reduce debt by approximately $460 million and project our leverage pro forma for the sale to be approximately 4x at year-end. Finally, we noted on our call 2 weeks ago that we are expanding our capital allocation program and intend to deploy up to $250 million to a special dividend, subject to Board authorization.

So to summarize our performance and actions, third quarter was largely in line with our expectations; margins remain quite strong for the quarter and the full year; and we're looking forward to completing the sale of Performance Materials, paying down debt and returning cash to shareholders.

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

Thank you, Mike. On Slide 11, I'll discuss the positive trajectory of PQ's strategic journey following our multiport announcements 2 weeks ago. This includes an agreement to sell Performance Materials for $650 million, with expected close by year-end. This brings an attractive valuation of 8.7x last 12 months' adjusted EBITDA, and demonstrates that PQ assets are more valuable than the current trading multiple of the company. We also announced a strategic review for Performance Chemicals, which should -- the valuation warrant could result in a sale in 2021.

The purpose of these activities is to unlock greater shareholder value. It was notable that with the announcement of the sale of our long-standing Performance Materials business, it was recognized that we are selling our lowest margin business at a higher valuation multiple than PQ earns today. As these initiatives advance to their logical conclusions, our company will have taken major steps towards our simpler and stronger strategy. We will have simplified the portfolio and strengthened the platform by emphasizing businesses with both higher margins and higher growth potential.

At this time, I'd like to take you forward to our target portfolio and review why we are excited about such an outcome. We will be focused on Refining Services and Catalysts, where we have leading businesses with excellent customer relationships, products and services that feed into the secular trend of the clean energy transition and circle of plastic economy.

So let's start with Catalysts on Slide 12. We strongly believe our Catalyst business is well positioned for the future growth. We have leading technology and research efforts that will play a critical role in a sustainable economy. Though these trends are still nascent, our technical capabilities have created a leading position serving refining and petrochemicals manufacturers.

Over the last 10 years, with high single-digit sales and double-digit adjusted EBITDA compounded annual growth rate in this business, we've earned an average of about 38% adjusted EBITDA margin. Going forward, the growth trajectories for this business are supported by clear and powerful drivers: the use of silica-based catalysts to make stronger and lighter polyethylene products and the tightening environmental requirements for manufacturing and transportation vehicles.

On Slide 13, for Refining Services, it is key to note that by recycling sulfuric acid catalyst for refiners, we are both helping refiners sustainability profile and supporting the protection of high-octane fuels. Our competitive strength in this business includes an unmatched asset base to serve U.S. Gulf Coast and West Coast refiners under long-term contracts. In addition, this business is diversified by serving the needs of a broader set of industrial customers with virgin sulfuric acid. Over the last 10 years, this business realized mid-single-digit compounded annual growth rate in both sales and adjusted EBITDA and delivered an average of about 32% adjusted EBITDA margin and what about that in the more recent few years.

As the refining space consolidates, we benefit from being contracted with customer base that, we believe, is well positioned to serve an increasing portion of gasoline demand. Additionally, we will continue to grow by serving a diverse set of growing industrial applications with virgin sulfuric acid. Finally, we can leverage our position to further integrate with refinery operations to serve more of their needs as they prepare for the future.

In conclusion, on Slide 14, we are very excited about where we are heading with PQ as we maintain an active agenda of initiatives to drive performance and create value. Moving forward, you will see us continuing to reinforce the track record of our solid execution in both operational and commercial performance. We will maintain the readiness and agility to continue to pivot with what is sure to be changing demand patterns.

We will finalize the timing sale of Performance Materials and implement the expanded capital allocation program. We will advance the strategic review of Performance Chemicals come and look to move in an expedient way from the review to decision to execution. And we'll fast track the reshaping of our portfolio towards better margins and improved growth potential and the expanded multiple valuation that should result.

That concludes the review of our progress and prospects. With that, we will be happy to take questions.

(Operator Instructions) And we will go first to David Begleiter with Deutsche Bank.

Belgacem, just on the Q4 guidance. It appears a bit wide, given you do have October in hand and November order book, I guess, are filling up. Can you talk about the upper and lower ends of that range and what that implies for business momentum over the next couple of months?

Well, based on what we saw in October, we have -- there is no surprises, David. We continue to see that volume recovery. You might be nervous a little bit about the shortness that was in Q3, but that was not volume at all. That was just events.

We continue to see a recovery on volume. Our expectations are -- remain accurate on what we should expect on Q4. And maintaining our guidance for the full year is a simple math and I think that should give you an idea on how Q4 should look like.

Understood. And just on Performance Chemicals. I know it's only been about 2 weeks since the big announcement on Performance Materials. Any additional thoughts as this review under -- begins about Performance Chemicals' future in the portfolio.

No new thoughts. It's just a continued execution of the plan. We have a firm plan. We have done the thinking already. And we have done a lot of homework. And now we're really moving into actions and all the components and steps that will lead us to where we want to be. I think we remain very positive about this process, and we're moving right along.

We'll go next to John McNulty with BMO Capital Markets.

So I guess, look, there's a lot of moving parts when it comes to the Refining Services side of the business and with refinery closures. But that -- it sounds like you're not necessarily exposed to any of them. You've got refiners running it -- or had been running at low rates. Things are accelerating. I guess, can you help us to think about how you're thinking about 2021 in terms of the outlook for the Refining Services business?

Well, it's a good question, John. And I just mentioned in my prepared remarks how we feel about our position with the existing refining environment and the existing customers. We are connected to a very solid customer base. We have very solid contracts. The expectation is a return to pretty much normal.

I said that we are going to be -- utilization will be at the 90% to 92% level. And we have seen that. If you remove the hurricane impact that took place in Q3, things were going in the right direction. So we remain very confident that we're going in the same direction. Knowing the customer base we have, knowing our recovery of the strength of our virgin assets, we maintain the positive outlook for 2021.

Got it. Fair enough. And then it was helpful on the cash flow guidance and, in particular, on the CapEx side, to see what it looks like excluding Performance Materials. And with Performance Chemicals also looking like that, that may be something that doesn't necessarily stick around for much longer. Is there a way to cleave out what does -- what do the remaining businesses or what, I guess, we would call the core businesses, what's the CapEx outlook for them for 2020? And how much of that is maintenance versus how much of it's growth CapEx? Is there a way that you can help us to quantify that?

John, this is Mike. We haven't broken out the chemicals piece yet in quite enough of detail that we had for Performance Materials. If you look at the remaining capital, we're still running at about 80% on maintenance, with about remaining 20% on growth. So as we get a little further down the line with this strategic review, we'll be able to provide more detail around CapEx and other components for Performance Chemicals.

We'll go next to Chris Parkinson with Crédit Suisse.

You know this is a little on your PowerPoint. But can you just speak to the varying demand trends across your chemicals portfolio? And just highlight anything that you think is particularly worth monitoring into 4Q and even '21, just in terms of the divergence is there based on some of your products? And then just also just a very quick remark on what your own perception is of the segment's long-term growth prospects would be greatly appreciated.

Chris, on Performance Chemicals, I think I kind of alluded to what is going on right now. On the industrial side, there's a lot of recovery happening for the end-users of our products. There's a lot of hospitality market that is returning as well in many places.

Even though the recent news about the lockdown in Europe and other places get people nervous, on the longer run, these lockdowns, we believe they would not be the same as the previous ones that we've had early on. So I think if there is anything you need to take from these comments is that the Performance Chemical end-users return is happening and will continue to happen and maybe at different paces or speeds depending on where you are and what it is.

So we saw that. We saw that. You saw that our sodium silicate product sales have returned to a very good level, which was an issue a couple of quarters ago. And a lot of the construction and coating products are recovering.

So I think it might be just hospitality that could be impacted over the next few quarters, but I believe they'll be fine. As for Q4, the quarter -- we're halfway through the quarter pretty much. And I don't think we're going to see any negativity between now and the end of the year.

Does that help, Chris?

Yes, it does. very helpful, as always. I have a follow-up on this, just on -- switching over to Catalysts. Can you just offer some further insights on the conversations that you had with customers? Some of your peers have been highlighting potential trade down and changeover deferrals as still problematic. I mean that also could indicate that there could be pent-up demand in '21. Just how should we be thinking about this from your perspective?

Sure. Look, we have -- we've been looking at Catalysts, of course, since June when things started going down a little bit with the activity in the second half of the year. We have a clear view of what's happening in 2021, up until September of 2021 based on the orders. So we have an idea of what's been pushed out and how much and where. So we do believe that 2021 will definitely some recovery from where we are right now.

And most likely towards the end of 2021, we're going to see -- pending anything else, we're going to see a stronger acceleration of recovery. 2022 will be really the shift. And there is an argument between where the peak is going to be at 2022 or 2023, particularly for hydrocracking. We believe it's towards the end of '22, early 2023, we're probably going to see one of the -- another peak.

And as you noted, when you looked at our peaks and when you look at our -- the peak activity and the way we performed on the peak activity, for the last 10 years every time there is a peak on hydrocracking activity or in that sense, we deliver after the next peak. The trough would have been higher than the previous trough.

So our expectation is when we get to next peak, we'll be at a continued growth slope that is better than what we've had before. So that's why we're very optimistic. This thing has never failed. It has just keep growing. Peaks and troughs, we know when they come. We know the frequency and we know exactly how to handle them. And we're excited about what's really coming in '22, '23, more so than '21.

We will go next to Laurence Alexander with Jefferies.

This is Dan Rizzo on for Laurence. As you focus on sustainability, is there anything that needs to be adjusted or reformulated in your own production process for Catalysts or Refining?

Well, look, the way we look at our sustainability, first of all, supporting the customer and their way to more sustainable, better fluids and reduced emissions. That's our mission. That's why we service the customer.

Our own operations, we have our internal program on carbon reduction and on activity to protect our -- the environment from what we do in our own operations. But we are definitely moving in the same direction with our customers with the recycling of the sulfuric acid and then with the increased capability and capacity of octane increase for the fuels and improving our position with the customers to move in the right direction of their sustainability, I would say, a transition to better fluids.

Okay. And then you mentioned that the hurricanes over the summer and September were somewhat of a headwind. I was just wondering if the recent one, I think there was one last -- this week, if that's causing any issues that you know as of right now?

No. I'm not aware of any particular impact right now. Remember, the one -- the hurricane that took place in Q3, it had several impacts usually on our customers and some on us a little bit, but mainly on our customers and there is always a slowdown in distribution and everything. That's what caused the misses that we've had.

On this one, I'm not aware of anything substantial. So I wouldn't think it's a problem right now.

(Operator Instructions) We'll go next to Vincent Andrews with Morgan Stanley.

This is Angel Castillo on for Vincent. Just wanted to circle back, I guess, on Catalyst. I just noticed on your slide, in terms of the historic Catalyst guidance for the fourth quarter, it looks like you have it kind of moving toward the yellow after a little bit of good performance year-over-year here. In terms of the fourth quarter specifically, is that slowdown from 3Q more of a seasonality? Or is it just comps? Or is there something that's changing beyond that, that leads you believe that, that will slow down here in the fourth quarter?

That's a great observation. I'm glad you're looking at the colors. We believe that yellow color is just a stabilization, it's not going to grow, because we've had a tremendous run previously. So it's a benchmark to the past basically.

So we're confident that the overall growth of Silica Catalyst will continue to be high single digit. And then we -- into the future. And then we're confident that, that is a good position to be right now.

So I would just say that yellow is not a drop in market demand. It's just a benchmark to where we were before over a very strong period of time that the benchmark comparison color goes, if this helps.

Yes. Understood. That's very helpful. And then on your Performance Chemicals, sorry, I think you noted North America highway demand perhaps slowing down a little bit because of COVID restrictions. And as I think about 2Q, it seemed like that business is just fine with the lockdown restrictions during that time. So could you just talk about what's changed in that business, to your point on maybe lockdowns now are different than the past ones? Or is there something different at the government level, local government level that you're seeing that lead you to believe that things are changing in how they're approaching highway striping or anything else?

That's a good question. This is not related to lockdown. This is related to operational procedures. As you are striping -- you're talking about striping on highways. And as you're striping, different states have different policies and standards on the number of people on location, the frequency, the timing and how they do that. That caused a little bit of a precautious process that allowed -- kind of created a slowdown in certain states.

But we operate in many states. So on average, even though we saw that, we continue to see a strong practice and end results in the other states. So it's really nothing to be concerned about as related to lockdown. It's just the way states implement health procedures on the number of people on location and how they execute. That's all, nothing else.

(Operator Instructions) We'll go next to Jeff Zekauskas with JPMorgan.

I have a question about your Zeolyst Joint Venture. If you wanted to exit that joint venture, would Shell have a right of first refusal?

Well, we're not at that stage of -- Jeff, thank you for the question first. We're not at that stage of having that conversation. So first of all, let me remind you that the value of our partnership is the complementarity of expertise with innovation, commercial and operational. And I say, we think that this combination allows both of us to leverage something.

The Shell leverages PQ's expertise in Zeolyst technology, for emission control primarily. And we leverage Shell's expertise in hydrocracking and then maximizing yield in gasoline and distillate.

At this point, we continue to see more advantages to maintaining the structure. We think there is a tremendous growth potential, both on the volume perspective and also on the technology and collaboration perspective. So we're really not talking about that conversation and that's all I can say about this one for now.

Okay. Do you see the hydrocracking market as being pretty dead for 2021 and picking up in 2022? Or do you think that there can be more activity next year?

Pretty dead is a big statement. I don't think it is going to be pretty dead. I think it's going to be an improvement over what we're seeing right now. So 2021 -- if you want to draw a chart of what hydrocracking, what I think personally hydrocracking is going to do, just go to the low point to where we are today and you draw a slope. It depends on what happens. That slope could be stronger or lower into '21, '22 and '23. That's how we see it and we're confident.

Based on the orders we're getting for 2021, we think that recovery is happening. And we'll wait and see how that turns out at the beginning of the year because we have a view of a 6 to 8 months or to 9 months of orders. And our view of the market going forward is -- seems to be accurate for now.

No further questions at this time. And this does conclude today's program. We appreciate your participation and you may now disconnect.