Ecovyst Inc. Q1 FY2020 Earnings Call

Good morning. Welcome to the PQ Group Holdings First Quarter Earnings Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Nahla Azmy, Vice President of Investor Relations. Go ahead.

Thank you. Welcome to everyone joining us for our first-quarter 2020 earnings results and COVID-19 update 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 anticipated impact of 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 the 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. Good morning and thank you all for joining us today. I would first like to acknowledge this unprecedented and challenging time that all of us are managing through. We hope that you and your families are safe and healthy, and our hearts go out in sympathy to all those families who have experienced a loss as a result of the COVID-19 pandemic. In the short time since our last call, we have seen a tremendous disruption in our global economy, the chemical space and market demand across many types of products. This has been driven by a confluence of events: The rapid global spread of COVID-19, the sharp drop in oil prices, and the sudden onset of a recession. As a result of these developments, governments and corporate leaders have had to take extreme measures to protect their people and communities. Starting on Slide 3 for an overview of our first quarter activity. As always, we'll begin with safety. On our last earnings call, we shared that our 2019 performance was the best in the last decade. We made further strides this quarter, resulting in more than 65% improvement in total recordable injury rates over the first quarter of last year. Further, the number of our health, safety and environmental perfect safety days increased nearly 27% over this time last year, reflecting a visible commitment and dedication of the whole organization. Moving to a summary of our first-quarter results, which reflected minimal impact from COVID-19. We delivered a year-on-year 3% adjusted EBITDA improvement on 2% higher sales with stable, strong margins. The solid result was driven by volume growth in three of our four businesses, particularly catalysts and performance materials. Refining services also benefited from higher volumes from increased production time and new contract wins for virgin sulfuric acid into industrial applications. Performance chemicals volumes were down year on year but rebounded sequentially by more than 10% from the prior quarter due to restocking by certain customers. This quarter was also marked with the COVID-19 rapid spread and sudden impact. I'm incredibly proud of how the PQ team has responded. They have been instrumental in navigating through these extremely challenging operating circumstances, focusing on health and safety and optimizing business operations, successfully minimizing disruptions in order to meet customer demand. Given the criticality and end-use diversity of our business and given our proactive efforts to strengthen our balance sheet and liquidity position, we believe our portfolio will continue to demonstrate its significant resilience during this crisis. We expect this will result in adjusted free cash flow of $130 million to $150 million and adjusted EBITDA margins in the mid-20% level for the year. Turning to Slide 4 for an operational update during the COVID-19 pandemic. Our highest priority through this crisis has been the safety of our employees, our customers and suppliers. In early March, we established a rapid response team consisting of our executive leadership team and had functional leaders and rolled out a corporate pandemic plan. I'd like to reiterate I'm extremely proud of and grateful I am to our leadership, management team and all the employees for their tireless efforts and quick actions to implement the safety guidelines recommended by the various governments around the world and the global health organization. We timely suspended work travel and instituted clear practices enabling people to be working from home or safely operating at the work site. We believe this helped contain the contamination and spread of the virus to our PQ employees. Of our 3,300 employees, a total of eight employees have tested positive, all of which are improving or have returned to work. After safety, our next most critical order of activity has been maintaining business continuity for our customers. Our business and manufacturing facilities meet the criteria for an essential business, as is the case with most of our customers and suppliers. We are proud that our product supports, materials, and catalysts are essential components for critical end products such as surgical masks, packaging materials, cleaning products, personal care and pharmaceutical items, respirators, hospital beds, and personal protective equipment. The good news is that PQ did not experience a material impact on its business operations to date. For our manufacturing facilities, we have experienced only minor disruptions and shutdowns. Most were either temporary or not material. On the supply chain side, we had only minor delays due to logistics. We are working to ensure we will have backup or alternate supply sources for key materials should there be significant disruptions or shortages from current suppliers. Moving to Slide 5 for a discussion of end-use trends for the near and midterm. It is clear that COVID-19-related stay-at-home mandates, coupled with the shock of the oil price collapse, have resulted in significant demand destruction, which has brought on a sudden and steep recession globally. On a macroeconomic level, both developed and emerging economies are expected to contract in 2020. The most acute impact is expected in Q2, with an uncertain recovery pattern in the second half of the year as the virus is potentially contained. For PQ, we strongly believe in the long-term fundamentals underlying each one of our businesses. That said, the lockdowns have sudden and severe impacts on consumer behaviors and the demand patterns of our customers, which created uncertainty in our outlook for the rest of the year. Starting with our Refining Services business, which typically benefits in times of low oil and gasoline prices. Despite this, we now anticipate that demand in this business could be materially impacted due to the unprecedented stay-at-home orders. This has significantly reduced miles driven and consequently, lower demand for gasoline products from our refining customer base. To frame these impacts, U.S. refineries have curtailed production by 30%. Gasoline inventory levels are near all-time highs. Year-end and April gasoline demand declined by more than 45%. And miles driven declined by more than 50%. These factors have driven a material loss of demand for regeneration services, although some of the impact should be partially moderated by the contractual minimum volume commitments. As for the balance of our business in this segment, we expect virgin sulfuric acid to see weaker demand for end-use in nylon and mining applications, at least in the near term. Next, on Performance Chemicals, which we expect will be negatively impacted for the balance of the year. With a forecast decline in U.S. industrial demand of more than 8% in 2020, we expect a material impact on our sodium silicates business, which is 50% of sales and serves a broad and diverse set of industrial end users. Partially offsetting this, and in March, we saw a boost in demand for consumer cleaning products, specifically soaps and detergents, that appear to be staying strong through this pandemic. Within specialty silicas, which is approximately 25% of sales, personal care uses also surged in March due to consumer stocking up for home lockdown. We believe this will continue. However, this positive trend has been offset by reduced demand for beer gels and surface coating on consumer home shut-ins. Turning to Catalysts, we continue to forecast a strong first half performance on firm customer orders, with some uncertainty in the second half as refiners might slow the rates of catalyst change-out. For silicate catalysts, which largely serves the polyethylene market, overall projections are for flattening PE demand. However, we will see healthy demand outperformance due to the shift to our preferred silica technology from both new PE capacity coming on stream and incremental demand from existing global capacity, where our products are specified in production. Additionally, domestic demand has benefited from COVID-19-related surge for films, flexible packaging, and blow molded bottle applications for medical and packaging consumer end users. Evidence of this robust growth is the U.S. flexible plastic packaging demand, which increased 44% in Q1 2020 versus 2019. For the 50% Zeolyst JV, through the second quarter, we anticipate solid performance on firm orders. However, there could be some delays in sales of hydrocracking catalysts or customer change-outs. This is due to the impact of transportation disruption, coupled with the turmoil in the oil industry, particularly as utilization rates for the U.S. refineries are currently down to 70%. Additionally, demand is expected to be lower for emission control catalysts since production of commercial vehicles is forecast to be down more than 30% in 2020 versus 2019 on manufacturing closures. Finally, our performance materials business, which will exhibit the most resilience and stability in performance during this pandemic, particularly for its replacement highway safety reflective beads. 47 states are continuing road marking activity, with some states actually accelerating projects during this low-traffic period. Further, while most of our business remains steady given the normal striking replacement cycle, we are monitoring discussions at all branches of the U.S. government for the potential for an infrastructure bill this year. In summary, and while the second quarter appears to be hit very hard, the duration and intensity of economic impact resulting from COVID-19 pandemic is still unknown and may vary considerably by industry. We anticipate that the impact on our business over the balance of the year will be mixed, which makes it difficult to provide a full-year financial forecast at this time. We believe the diversity of our businesses, coupled with the specialty nature of their end users, will help to mitigate the severity of demand disruption for PQ overall, and we will be actively managing our business operations to align with customer demand while maintaining flexibility for recovery. Now let me turn this over to Mike for his review of financial results, liquidity, and outlook.

Thank you, Belgacem, and good morning. We were pleased with our first-quarter results, which reflected solid performance across the portfolio on improved volumes. During the quarter, we took the opportunity to lock in lower interest rates by repricing and extending our term loan and asset-based revolver. These timely actions have provided us additional financial flexibility during the COVID-19 pandemic. I'll begin by discussing first-quarter results, then our current financial position and outlook, starting on Slide 6 with a review of our consolidated results. On a constant-currency basis, sales of $362 million increased 2% on higher volumes in refining services, performance materials, and catalysts. Adjusted EBITDA of $103 million was up 3% on a constant-currency basis, primarily on higher sales volume and improved results in the Zeolyst joint venture. Margins were in line with the prior year at 26%. I will now briefly review each business segment, beginning with refining services on Slide 7. Sales of $101 million declined 5%, largely on the pass-through of $9 million of lower sulfur pricing, which more than offset increased virgin acid volume from higher production on less turnaround downtime in the current year. Adjusted EBITDA of $37 million declined 6% on higher raw material usage and production costs related to plant start-ups following unplanned maintenance outages. Turning to Slide 8 for catalysts. Silica catalyst sales increased 58% to $25 million, benefiting from higher polyolefin catalyst demand to serve a global customer bringing new capacity online and incremental volume from existing producers. In addition, MMA catalyst sales increased on an order accelerated from the second quarter as acrylic demand rose late in the quarter. In the Zeolyst Joint Venture, sales were up 10% to $32 million as demand for emission control catalyst returned to normal levels. Adjusted EBITDA of $23 million increased 26% on higher sales volume and margins were consistent with the prior year. In addition, favorable product mix offset lower absorption of fixed costs as we sold through our inventory to meet planned shipments. Turning to Slide 9 for performance materials. Sales increased 10% to $66 million on higher highway safety demand in North America as favorable weather enabled an early start to the striking season. Adjusted EBITDA of $14 million increased 30% with margins rising by over 300 basis points, benefiting from volume growth, coupled with lower raw material prices and favorable mix. Moving to Slide 10 for performance chemicals. Sales of $174 million fell 1% on a constant-currency basis. Volumes declined across the product portfolio but were most impacted by reduced demand for consumer cleaning and personal care in Latin America. However, we saw double-digit improvement versus the fourth quarter, driven by sodium silicate demand on customers restocking after they reduced inventories in the second half of 2019. Adjusted EBITDA of $41 million declined 3% on a constant-currency basis, with margins slightly lower as reduced volumes more than offset favorable pricing. I will now discuss our cash flow, debt profile, and liquidity position on Slide 11. Adjusted free cash flow was lower versus the prior-year quarter largely due to timing of receivable collections and dividends from the Zeolyst Joint Venture. We have been proactive to position PQ with sufficient liquidity and financial flexibility. Early in the quarter, we extended the maturities and lowered the interest rates of our term loan and ABL credit agreement and upsized the ABL by $50 million. Prior to the end of March, we drew $60 million on the ABL to enhance our cash position. We have no significant debt maturities until November 2022 and have no material covenants that require us to maintain a leverage ratio at a particular level. We ended the quarter with available liquidity of $236 million, which we believe is sufficient to manage through a sustained economic downturn. Moving to Slide 12 to discuss our outlook. As Belgacem discussed, we are seeing lower demand as a result of the COVID-19 pandemic. We expect that the most significant impact will be in refining services on fewer miles driven due to stay-at-home mandates. Demand for sodium silicate for industrial applications and chemical manufacturing in performance chemicals is expected to be the next most impacted given the weaker macroeconomic outlook. In performance materials, highway safety demand has been stable in North America to date. However, outside of North America, demand for engineered glass materials and highway safety products has been weaker. While increased demand for our polyolefin catalyst is expected to continue within Catalysts, the Zeolyst Joint Venture may experience timing-related delays for hydrocracking and specialty catalyst orders as customers can extend life cycles with lower utilization. As a result of this uncertainty, we are withdrawing all annual guidance except for adjusted EBITDA margin and adjusted free cash flow until we gain more clarity. We do, however, have better visibility on a short-term basis. For the second quarter, we are forecasting sales excluding Zeolyst Joint Venture sales to be $360 million to $375 million, driven by volume growth in Catalysts, offset by an estimated 25% volume decline in Refining Services and an estimated 15% volume decline in Performance Chemicals. We expect adjusted EBITDA to be in the range of $95 million to $105 million, with margins slightly below the mid-20% range on lower volumes, coupled with unfavorable product mix in Catalysts. We are taking action to improve free cash flow in response to lower expected adjusted EBITDA. This includes reducing capital expenditures by $15 million in the first half of 2020, working capital improvement and cash interest savings from the recent debt refinancings and lower interest rates. We had 2 asset sales in the first quarter, and we'll continue to pursue opportunities to monetize noncore assets. We anticipate these actions will result in adjusted free cash flow in the range of $130 million to $150 million for the year. In addition, with the steps we are taking to reduce operating and SG&A costs, we are targeting adjusted EBITDA margins in the mid-20% range for 2020. We plan to maintain a defensive posture on cash to maintain financial flexibility until visibility on second half results improves. Deleveraging continues to be our top priority, but will occur later in the year as seasonal cash generation is realized. In summary, we delivered a solid first quarter driven by higher demand. We have sufficient liquidity to navigate through this crisis. We are taking significant steps to further enhance cash flows and liquidity. With that, I will turn the call back to Belgacem.

Thank you, Mike. Turning to Slide 13 for a brief update on our portfolio optimization strategy. We remain committed to growing and strengthening our leading specialty positions. We are also focused on maintaining strong margins to drive improved free cash flows in a changing macro environment. We are still targeting additional monetization of noncore assets, with a few in advanced stages. As a reminder, to date, we have completed the Performance Materials asset swap, which expanded our beads business with a long-term supply arrangement. We sold a 49% interest in a joint venture in South Africa and entered into a long-term toll manufacturing agreement with a former JV company, and we monetized a noncore asset sale within Refining Services. With regards to our transformation plan for Performance Chemicals, we launched the work streams in February. However, given some COVID-19-related constraints on implementation, we now anticipate a delay for completion by one or two quarters. We continue to target an annualized adjusted EBITDA benefit of $10 million to $15 million. We also anticipate improved cash flows from lower working capital and capital expenditures. In closing, on Slide 14. The safety, health and well-being of our employees will always be our single-highest priority in any circumstance or environment. Now with the pandemic, we have and will continue to be even more vigilant in taking extensive precautions. We are balancing our operational productivity with current customer demand needs while ensuring we have flexibility to scale up or down as demand shifts. We have additional levers within each business to optimize cash to improve liquidity through reductions in capital and discretionary spending should the impact of the pandemic extend beyond 2020. And while we cannot provide clarity beyond the second quarter given the uncertainty related to the timing and pace of economies reopening, particularly throughout the U.S. and Europe, we continue to believe that PQ's portfolio will demonstrate its resilience during this crisis. This is on the basis of the diversity of end users, the criticality of our products and services to our customers for their success and the strength and earnings quality of each of our individual businesses. We expect this resilience to result in the delivery of stable margins and strong free cash flow this year despite the ongoing disruptions and uncertainty. With that, we have concluded our formal remarks. We wish you and your families a safe and healthy time ahead, and we look forward to connecting with you over the course of this year. Thank you, and we're now ready for questions.

Our first question is from Christopher Parkinson from Credit Suisse. Please go ahead.

Good morning. This is Kieran on for Chris. I was just wondering if you can walk me through some of the key tailwinds and headwinds that you foresee impacting margins in Q2 and then in the second half of '20. Specifically, how should I be thinking about the cost absorption, raw materials, and maybe any product mix impact? Thank you.

Yes, Kieran, this is Mike. I think from a second-quarter standpoint, the thing to look at is what I referenced in my remarks, which would be the volume declines that we expect in refining services at 25% and then chemicals at 15%. So refining services are a function more of the decline in miles driven; you have high gasoline inventories. Typically, low oil prices would be good for us right now, but with the stay-at-home mandates, that really negatively impacts miles driven. So with that reduction in volume, we're going to see a resulting impact on sales and EBITDA for refining services. And then chemicals, we see sodium silicate weakness just due to a weak macro environment. On the raw materials side for chemicals, we tend to pass through any changes in raw material pricing, so don't expect a huge impact there. Absorption, there was a fairly large effect on absorption for the Catalyst group in Q1, a little over $5 million. We'll see that same phenomenon, probably more into the high single-digit in Q2. So our Catalyst sales will be up. We expect EBITDA will be down year on year. It was a very tough comp, nearly $30 million in Q2. We do have the absorption phenomenon. Well, you may recall that we said we will have favorable absorption as we built inventory to meet 2020 sales commitments. We'll see that reverse itself in the first half of this year.

Great. Thank you. And then maybe just a quick follow-up. I know it might be a little preliminary, and it might be covered in your remarks. But are there any areas that you would say were a little bit more challenging or any pockets of strength that you saw in April that you might be able to reference as we think kind of Q2 results and the rest of the year? Thank you.

Kieran, for our forecast or estimate that we gave you, we fine-tuned it based on what we saw in April. The impact on refining services, with the lockdown, is impacting it the most. As we go back into reopening the economies in many places, we're going to see that easing up. And the other industries, which are served by our performance chemicals business will still be a little bit impacted, at least through Q3. And as things go back to normal, we should see slight improvements. So it's really nothing different from what we guided you to.

Yes. Thanks for taking my question. With regard to the refining services business, obviously, it's under a decent amount of pressure right now. I know there are expectations, at least in the industry, that refining utilization rates, as we progress even through Q2 and certainly toward Q3, could bounce back somewhere in the 10 percentage points to 15 percentage points in terms of operating rates. So I guess how should we think about how that starts to impact the refining services business? And how quickly will you feel it? Is there inventory in the channel that we should be kind of thinking about? Are there take-or-pay thresholds that you have to work through before you start to see the incremental benefits? I guess how should we be thinking about how that business comes back?

Hi, John, great question. Obviously, currently, the refining services business probably has the highest impact with the lockdown double effect. It's the lockdown from miles driven, as well as the pricing. And the inventory that is really high today will deplete as the economies reopen. And I'm sitting in Houston. I'm looking off my office, and I haven't seen the highway full of as many cars as I'm doing it right now for the last couple of months. So people are coming back to driving. We're going to see some depletion of the inventory with time. As for the take-or-pay, you need to understand that it's a protection measure; it only covers 60% to 70%. It covers more than 85% of our regeneration business, but it covers components of the cost. It is done there not to replace reduced volume, but it's there to protect. I think it's very useful for our margin. That's why our margins shouldn't be seeing a tremendous drop. As we restart, we will increase the volume rates because what we did is we reduced the rates of the manufacturing facilities without stopping anything. We just increase the rate of production, and we should see a nice incremental as we bring that up. So, we're not concerned about the low side; we're rather waiting for the right timing for that to start recovering. And the faster it recovers, the faster we see the value of Refining Services and back to the standard normal margins, hopefully by year-end.

I have a question about Page 5, where you illustrate the performance of the businesses with colors like red, yellow, and green. Can we interpret that the green indicators suggest flat to improving performance, the yellow ones indicate a decline of around 10% or between 0% to 10%, and the red signals worse outcomes? Are we on the right track with this understanding, or is there a different perspective to consider?

You're not far off. The way we're looking at it is relative to what we normally would expect. For Refining Services, obviously, the impact is large, so it's read. I wouldn't put percentages there. But yes, you're right. Anything below 10% is not considered that serious. The Catalyst business is still very strong. And anything that could happen to the Catalyst business between now and year-end would be just pushes and delays and the typical moves. Performance Materials is very strong in highway. There is improvement to be made on EGM. So, we hopefully expect that EGM brings it back to green, and that's the description of the yellow. And Chemicals is purely because it's dependent on a couple of industries that might be lower between now and year-end, yet there are some components of the Chemicals business that are more positive than it's represented here on personal care and some of the detergent and other stuff that is still under demand, at least for the next quarter or two.

Can you talk about the cost actions you're taking this year to offset the impact of the COVID-19 pandemic? And also, I believe you were expecting an incentive comp headwind this year. Will that be the case given the lower earnings we're seeing at least in the first half of the year?

Thank you, David. I'll begin with this, and then Mike can provide additional details on the second part of your question. Our actions were timely; as we recognized the issue, we focused on balancing productivity, customer demand, and operational costs. Over the last 60 to 90 days, we reviewed every aspect of our expenses. Our priorities were maintaining cash and ensuring stable margins. We took steps to avoid jeopardizing our flexibility to ramp up as the market recovers. We reduced discretionary spending, postponed unnecessary capital investments, and scrutinized daily expenses, product costs, and efficiency improvements, which impacted our Q2 results. Additionally, we have further actions planned depending on how long these challenges persist. We project stability in our margins and are confident in our ability to execute our plans effectively. Should the market recover more rapidly, with increased demand and restocking, that would positively impact our margins. However, today we are discussing a balanced approach to what may occur in the upcoming quarters. Mike, do you have anything to add?

Yes. On the second part of the question around incentive comp, David, you're correct, we were expecting a bit of a headwind there. I think it's likely that we will not have that now.

Very good. And Mike, just on the cash flow. Can you talk about what type of working capital release you would think could occur this year? And any updated thoughts on debt paydown this year?

Yes, we have revised our cash flow target for the year and are still managing our working capital. We anticipate that reducing inventory will provide some benefits, which will have an impact on EBITDA, but it is a worthwhile investment. Initially, this could be around $10 million, although we will confirm that later. We have updated our cash flow estimates based on what we currently know, including the EBITDA outlook for Q2, the capital expenditures for the first half of the year, and some interest savings. We mentioned that the $15 million cash interest figure is year over year, with part of that included in our original guidance, suggesting it might be closer to $7 million. As we gain clearer insights into EBITDA, we will continue to update our cash flow guidance for the year. Debt repayment remains our top priority using excess cash flow, and we intend to act prudently and cautiously. Since we typically generate most of our cash in the second half of the year, we will provide an update on our total debt paydown as cash generation becomes clearer.

Hi, everyone. This is Tom Glinski on for Bob. So first on price/mix. Across the portfolio, it was pretty strong in the first quarter outside of the lower sulfur pass-through. So could you just speak to the sustainability of the strength there and perhaps a depressed demand environment in the second quarter?

Let me start by saying that pricing has not been an issue for this quarter. This is primarily because we have maintained close relationships with our customers, ensuring they understand the reasoning behind our pricing. Additionally, we have a robust pass-through program for our cost increases, which helps preserve our pricing capabilities. We've received some random inquiries from customers about reducing prices, but this is not a trend, and we've managed those effectively. We believe there is potential for pricing improvements in the upcoming quarters as we continue to implement our transformation in performance chemicals, which we expect will enhance our pricing opportunities. What was the second half of your question, Tom?

That covered it. And then just kind of pivoting to that performance chemicals transformation program. You previously highlighted with the fourth quarter and then, again, the first quarter here, the expectation for $10 million to $15 million addition to annualized EBITDA. How should we think about progress on that in light of the current environment? Is there any reason progress could be either accelerated or deferred?

Tom, we've discussed four different programs within the performance chemicals transformation. Due to the current work environment, we have prioritized what needs immediate attention and what can wait. We remain dedicated to achieving annualized savings of $10 million to $15 million through this program. However, there will be some delays in starting implementation due to contractor availability, permits, and complicated approvals during lockdown. We are still focused on manufacturing excellence and network optimization, and some of the sales from asset disposals are a result of these efforts. Importantly, we haven’t abandoned our commercial discipline; we are continuing to develop our commercial program, which will help us maintain pricing strength and approach customers with a value perspective as volumes increase. We didn’t concentrate on the integrated business management aspect, like supply and demand planning, which takes more time and incurs high consulting costs. Consequently, we've shifted our focus toward generating cash and potentially increasing value in the fourth quarter. We believe we will create some value this year, but most will materialize and be annualized throughout 2021 and certainly by early 2022. There is no change in the program, just a possible delay of a quarter or two.

Hi, good morning. This is Kara Enomoto on for P.J. Juvekar. I just wanted to ask on polyolefins demand. I know you said it remains very much stable. So I was wondering if you had any further visibility into inventories there and if you have seen any demand drop-off following initial demand boost from stockpiling activities? And then just secondly, I know you said pricing broadly is holding up, but if you could specifically comment on FCC catalyst and how that pricing is holding up.

Thank you, Kara. Let me comment first on the demand. We still see demand was strong in the quarter. And into the second quarter, we still see demand stable as we expected it going forward. We don't see any meaningful inventory-related drop. Most orders are in place, and we have a clear visibility to what could happen between now and the year. We did plan this year to have a very strong growth versus last year anyway when it came to polyethylene. Now for pricing, we haven't seen, and we don't expect any change in pricing. And we anticipate for polyethylene that the forecasted activity could be disrupted maybe a little bit in terms of timing, depending on what the value chain changes in terms of scheduling and everything. But we don't see a major shift. The year will end up almost flattish year over year from a market perspective. But for PQ, our business will definitely see nice growth year over year by the end of the year.

I guess two questions. First, on the productivity program, what is your current thinking in terms of how many years you can reload the program before you shift to one where you just have productivity offsetting cost inflation?

Laurence, it's Mike. I think when you look at the transformation program, where there'll be a step change in cost improvement, as it relates to the reload, there's a lot of work that we've been doing as a company over the last 10 to 15 years to offset fixed cost inflation. Generally, when we set our targets for the year, we have fixed cost increases that are well below the cost of inflation. So, there's still a lot of opportunity here as we work on our logistical models and work on our customer engagement strategy such that we think over the next 2 to 3 years at a minimum that we're going to see step change benefit as we get to the full run rate and then we'll reload for the next set of opportunities. But we're doing the opportunities to offset cost inflation on a year-to-year basis currently.

So, if you can extend this, it sounds then, 3 to 5 years, what are the kind of structural bottlenecks that are harder to go after that you're not going after now, but that you see as the big chunks of opportunity further out?

Well, I think what we started with from a program perspective is what can we do, where are the quick wins, what are the easier things to do, what's going to have the most impact? You always have a pipeline of opportunities. I mean, it remains to be seen what the full value of that's going to be. It's a little bit like our R&D program. You put a lot of things into the funnel. As they crystallize, you identify the benefit, commercialize it and move on. So we're in the first phase of the transformation program. We have a set of targets that are going to get to the next run rate, as Belgacem said, 1 to 2 quarters later. I think once we get that, we get to the full run rate, then we'll see what the next evolution of the program is.

So, Laurence, I want to add one more point. We have specific targets for improving productivity during the initial period, including targets for uptime and production efficiency. Additionally, we have set clear goals for reducing operational costs at our plants, which will guide our decisions on consolidating and reallocating production across our assets. We believe we have more assets than necessary, with some that will eventually be phased out. Once we achieve this, as Mike mentioned, it will establish the benchmark for future improvements. However, we expect the most significant gains from easy opportunities to occur within the first 12 to 18 months, though it seems we may be looking at a 24-month timeframe due to some delays.

And then on the slippage in refinery catalysts, are you resetting up for a bulge in 2021? Or how are you thinking about this slippage into next year?

It is very challenging to predict who will take a step back. It depends on when the refiners will choose to schedule their maintenance. We expect a trend in the latter half of the year, with some delays pushing into 2021, which will affect our hydrocracking catalyst beds. I anticipate some disruptions in the second half, but not excessively. Additionally, based on this, many turnarounds may occur in the first half of next year, potentially impacting 2021 as well. However, we are not focused on 2021 at this time. Our goal is to maintain as much of this strength as possible. As previously mentioned, for the second quarter, we based our comments on confirmed orders. For the third and fourth quarters, we are still closely monitoring the situation with customers, generally with six to seven months of accuracy based on their plans. We do expect some delays and shifts between quarters, possibly extending into next year, but not significantly.

Good morning, everyone. This is Angel Castillo on for Vincent. Just had a quick question around the free cash flow. If I just take the roughly $100 million at the midpoint that you guided to for EBITDA and just annualize that and kind of look at kind of the change year over year versus the flattish free cash flow, you kind of guided to from a year-over-year perspective, can you help me bridge the difference there? It seems to be like EBITDA would come down by about $70 million if you annualize the second quarter and the first quarter. And so as I think about 2020 free cash flow guidance flattish, how much of that is EBITDA improvement versus working capital or other puts and takes that you've kind of discussed?

Yes. This is Mike. Thanks for the question. When I refer to the target updates for this year, because we have not given annual guidance for EBITDA, we've got a bit of a mismatch in terms of what we're able to update today and what we still have to update in the future. We don't have visibility to the EBITDA in the second half at this point. So what we've done is we've taken a look at the original target that we had, the items that we can update today, which would be the second-quarter EBITDA performance, what capital expenditure reductions that are known, and our savings on cash interest. I think annualizing the first half in this environment may not make a lot of sense. So I'm not sure that I would focus on the math from that standpoint. I would just look at the changes that we have and the key factors that we've discussed today. And then as it evolves into the third and fourth quarter, we'll be able to provide additional information as we have more clarity.

Well, Angel, the target remains clear about us looking at our portfolio in great details from major components, as we've said it over and over. Obviously, the current environment is not obvious in terms of what to do. We do have conversations and reviews on trigger lines and trigger points and trigger times for us moving forward with anything, and we will make that considering the market, the value, the timing, and the size of the opportunity. So really, there's nothing more details we can say here, except that we will make sure we don't do the wrong thing. We're focusing rather on smaller opportunities on cash generational opportunities, right moment, and to maximize our cash and also to take care of some of the concerns we had within our portfolios on smaller pieces and components as was our strategy from the beginning. But definitely, it is not the perfect environment right now. And as opportunities show and the environment becomes more interesting and more valuable, we will make a decision we have to make.

Thank you. Good morning. In catalysts, without the first-time polyolefin fill and the Q2 MMA volume pulled into Q1 from Q2, what would have been the year-over-year volume growth?

Your question is around what got pulled into Q1 on MMA?

Yes, partly that. Your volume increased by 57% year over year. However, a portion of that was due to the advance of MMA catalyst volumes. Additionally, there was a one-time fill of a polyolefin reactor, which likely used a significant amount of polyolefin catalysts. So, I'm considering that these two factors are somewhat one-time occurrences. If you were to exclude those two, what would the year-over-year volume increase in the catalysts segment have been?

Yes. Between the new sale, the MMA timing, we also had some hydrocracking catalyst sales that moved out of Q1 and into Q2. The net of all that, I would say, is about a third of the volume impact.

Okay, a third of it. Got it. And then secondly, I think you mentioned that in catalysts, absorption added $5 million, which I assume meant $5 million of EBITDA, which was, in fact, your year-over-year increase in EBITDA, if I understood that correctly. I would have thought...

No. I'm glad you brought that up. If that was your understanding, I misspoke. There was unfavorable absorption in the quarter of a little over $5 million, which negatively impacted EBITDA. We expect a similar issue next quarter because we are depleting our inventory this year and not absorbing those fixed costs, while last year we were building inventory and absorbing. So not only is this year negative, compared to last year's positive, it has a magnifying effect.

Roger, this is Belgacem. I just want to make sure that we don't get into a lot of itemized details on movements between quarters and everything. In every quarter for catalysts, there's always things moving in and moving out. I look at it on a higher level compared to last year. There were things moving in last year. There are things moving out. And this year, you got MMA coming in. I would probably single out MMA. But on the orders and volumes, they keep moving in and out on the quarter. So it's very difficult to really try to put your arms around an apple-to-apple comparison. I just want to caution you with that because I would probably consider MMA as an event because the frequency of MMA orders is less, but volumes could move anytime. Just remember, our last quarter of 2019, how the volumes moved up on everybody. And as we expected Q1 to be lower, it didn't. Just make sure that you keep that in mind as you're looking at these numbers.

I wanted to follow up on the MMA catalyst business. If I'm correct, that segment has been a positive surprise for at least two consecutive quarters and deserves mention among your businesses. It seems to be a bright spot in the current pandemic environment. I'm curious about the possibility of demand continuing to exceed traditional levels significantly. What opportunities do you see for expanding your sales, perhaps globally or to different customers? Also, could you clarify the replacement cycle for MMA? Is it an annual replacement, every three years, or is there a typical timeframe for that industry?

This is Belgacem. I want to share some insights on the MMA cadence. It's not an annual cycle but rather occurs roughly every 1 to 2 to 2.5 years, depending on utilization. Our planning is informed by discussions with our primary customer, who has specific facilities producing MMA in Asia and the Middle East. We receive clear guidance on when to expect orders, timed with other activities at those facilities. Sometimes, orders can be accelerated due to events at the sites where they want the product sooner. This has happened a few times. Conversely, there were periods when we faced delays due to a manufacturing facility not being ready, which negatively impacted our performance. Recently, demand has been rising over the past 3 to 6 months, and we anticipate that long-term demand will support the addition of another facility, which our main customer plans to build in North America by 2025. Overall, this partnership looks promising in the long run. In the short term, we hope to see continued demand strength in the first quarter, but this hinges on actual orders. Currently, there are no significant orders to discuss, aligning with our expectations. However, we may see slight improvements. That's all I have to say on this topic, and I hope this answers your questions.

If I could follow up on a different point. When you hold a market-leading position, I believe that in times of high demand, your focus is on operations, and when demand decreases, you start considering strategic options. I'm referencing your recent agreement with INEOS in Catalysts as a model. I'm curious if the disruptions and slow down in your Refining Services business present any chances to either gain market share or encourage customers to consider outsourcing. In other words, what capital-light growth opportunities do you see around your larger businesses in this current disruptive and uncertain environment?

That's a great question. Every business unit has its standard plan, including a strategic outlook for the year and three years ahead, focusing on growth scenarios we've committed to. The developments in the first quarter unexpectedly changed the landscape, necessitating a reevaluation of our strategy and the introduction of additional short-term, easily achievable actions to ensure that we can address any setbacks to our growth. An example of this is INEOS. Our agreement with INEOS, signed last year, aimed to enter markets we wouldn't have otherwise, specifically the Ziegler-Natta market, which is the largest in the catalyst space. All business units are thinking similarly, exploring partnerships, alternative sales channels, and new collaborations to make our products more accessible. Some of these initiatives are already underway, while others will roll out, though not always with significant announcements or collaborations. It’s crucial to highlight that in the chemical sector, particularly with our performance chemicals, we have a broad global footprint impacting numerous industries. Our transformation plan includes a commercial strategy aimed at establishing new sales channels and opportunities, whether through acquiring new customers, forming partnerships, or engaging in exchanges to boost sales growth. All these efforts are ongoing, linked to our long-term growth vision rather than just addressing immediate challenges.

Our next question is from Roger Spitz from Bank of America. Please go ahead.

Thank you. Good morning. In catalysts, without the first-time polyolefin fill and the Q2 MMA volume pulled into Q1 from Q2, what would have been the year-over-year volume growth?

Your question is around what got pulled into Q1 on MMA?

Yes, that's partially correct. Your volume increased by 57% compared to last year. However, this was partially due to the advance of MMA catalyst volumes and a one-time polyolefin reactor fill, which likely involved a significant use of polyolefin catalysts. Therefore, these two factors are somewhat unique. If we exclude those two, what would the year-over-year volume increase in the catalysts segment have been?

Yes. Between the new sale, the MMA timing, we also had some hydrocracking catalyst sales that moved out of Q1 and into Q2. The net of all that, I would say, is about a third of the volume impact.

Okay, a third of it. Got it. And then secondly, I think you mentioned that in catalysts, absorption added $5 million, which I assume meant $5 million of EBITDA, which was, in fact, your year-over-year increase in EBITDA, if I understood that correctly. I would have thought...

No. Actually, I'm glad you brought that up. If that was your understanding, I misspoke. There was unfavorable absorption in the quarter, a little over $5 million, which negatively affected EBITDA. We anticipate experiencing the same situation next quarter because we are selling out of inventory this year and not absorbing those fixed costs, unlike last year when we were building inventory and absorbing. Therefore, not only do we have a negative this year, but compared to the prior year's positive, it has a more pronounced impact, if that helps.

Roger, this is Belgacem. I just want to make sure that we don't get into a lot of itemized details on movements between quarters and everything. In every quarter for catalysts, there's always things moving in and moving out. I look at it on a higher level compared to last year. There were things moving in last year. There are things moving out. And this year, you got MMA coming in. I would probably single out MMA. But on the orders and volumes, they keep moving in and out on the quarter. So it's very difficult to really try to put your arms around an apple-to-apple comparison. I just want to caution you with that because I would probably consider MMA as an event because the frequency of MMA orders is less, but volumes could move anytime. Just remember, our last quarter of 2019, how the volumes moved up on everybody. And as we expected Q1 to be lower, it didn't. Just make sure that you keep that in mind as you're looking at these numbers.

I wanted to follow up on the MMA catalyst business. If I'm not mistaken, it has been a positive surprise for at least two consecutive quarters and deserves recognition among all your businesses. It seems to be a bright spot in the current pandemic situation. Could you share your thoughts on the possibility of demand continuing to exceed traditional levels significantly? Additionally, what opportunities do you see for expanding sales globally or to different customers? Also, could you remind me about the replacement schedule or timeline for MMA? Is it typically replaced once a year, every three years, or what is standard in the industry?

This is Belgacem. I want to share a general comment about the MMA cadence. It's not fixed to an annual schedule, but typically occurs every one to two and a half years, based on usage. Our planning is influenced by discussions with our primary customer, who operates specific facilities producing MMA in Asia and the Middle East. There are clear guidelines for when orders should be placed, as they are aligned with other operational factors in the facilities. Occasionally, orders are increased or expedited due to events at the facilities that require quicker access to the product. There have been instances like this before. In contrast, about a year or two ago, we faced challenges when a manufacturing facility was not ready, leading to delays that negatively impacted our performance. We've noticed an increase in demand over the last three to six months and anticipate that longer-term demand will support the establishment of another facility, which our main customer plans to build in North America by 2025. Overall, this partnership appears to be promising in the long run. In the short term, we hope the strong demand observed in the first quarter will persist, but we can only confirm that based on actual orders. Currently, there are no significant orders to discuss, indicating that our outlook remains unchanged, although a slight improvement is possible.

Yes. If I could follow up in a slightly different area. When you have a market-leading position, I believe that when demand is high, you focus on operations, and when demand softens, you begin to think strategically. I'm referring to your recent agreement with INEOS in Catalysts as an example. I'm curious if the disruption and slowdown in your Refining Services business might present opportunities to gain market share or encourage customers to consider outsourcing. In other words, what might be some capital-light growth opportunities surrounding your larger businesses that you see as potential opportunities in the current disruptive and uncertain environment?

That's a great question. Every business unit has its typical plan, including strategic goals for the year and the next three years, with various growth scenarios that we have committed to. The events of the first quarter were unexpected and have caused us to reevaluate our strategy. We are now looking to implement additional short-term actions to ensure that our growth is maintained despite current challenges. For example, our agreement with INEOS last year aimed to enter markets we previously did not participate in, specifically Ziegler-Natta, which is the largest market in the catalyst sector at that time. Each business unit is similarly focused on either forming partnerships, exploring new sales channels, or finding areas where we are not currently active to create collaborations that make our products accessible in the market. Some of these efforts are already in place, while others will be launched, although perhaps not as prominently as larger announcements. It's crucial to note that in the chemical sector, particularly with our performance chemicals, we have a significant presence globally and engage with numerous industries. Our transformation plan includes a commercial component that aims to establish sales channels and new opportunities, whether through acquiring new customers, partnerships, or exchanges to boost sales growth. These initiatives are in progress and are aligned with both our immediate issues and our long-term growth objectives.

Our next question is from Roger Spitz from Bank of America. Please go ahead.

Thank you. Good morning. In catalysts, without the first-time polyolefin fill and the Q2 MMA volume pulled into Q1 from Q2, what would have been the year-over-year volume growth?