Good day, and welcome to the PQ Group Holdings Second Quarter 2020 Earnings Conference Call. Please note, today's event is being recorded. 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 for our second 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 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.

Thanks, Nahla, and good morning, everyone. As we begin today on Slide 3, I'm pleased with PQ's impressive second quarter performance, which was marked by multiple achievements across several disciplines. I'll start with the operational and commercial areas, where we are executing well despite the stiff headwinds at the macro level. I applaud the team for tremendous performance in safety, health, commercial and cost management that shows great commitment and care at all levels of the Company. In safety, our year-to-date recordable injury rate is a substantial 65% improvement compared to prior year. The safety improvement is even more commendable since we are operating in an environment with increased risks and distractions. The health and safety of our employees remain our highest priority before all other considerations at PQ. And from a human standpoint, we are highly sympathetic to those who have been impacted by the virus, and we hope for a speedy recovery for them, along with all their affected families and friends. Operationally, I'm pleased to report that year-to-date, we've had no material business interruptions and only minor contained effects from the virus at our operations around the world. Commercially, our performance reflects our strong customer relationships. We worked closely with customers during the rapidly changing demand conditions in the second quarter, and we will continue to do so through this current period and what is likely to be an uneven demand recovery. During the quarter, we focused on safeguarding our existing business and securing new contracts. In Performance Chemicals, for example, we solidified our core base business with nearly 15% of our expected future annual volume, now locked in under long-term contracts, incorporating improved commercial terms. Turning to our financial performance. Both our financial results and financial actions during the quarter were quite significant considering the overall situation. Revenues of $360 million for the quarter led to adjusted EBITDA of $113 million, which came in ahead of our recently increased guidance. Adjusted EBITDA margins for the quarter were in line with the previous year at 28%, a very strong result against the macro backdrop. This is a direct result of focused execution from each of our businesses as they delivered on cost management initiatives to offset the impact of lower demand. Additionally, we moved quickly to take advantage of favorable conditions in the financial markets. During the second quarter, we completed a comprehensive refinancing. We extended maturities, reduced our cost of capital, and significantly lowered our cash interest costs. And Mike will share more of that in a few minutes. Across the PQ portfolio, we reduced capital spending by about $15 million and monetized three additional noncore assets leading to approximately $27 million of cash proceeds. Our performance in a fluid environment puts us in a good position to reinitiate full year 2020 financial guidance and raise our adjusted free cash flow target to $145 million to $155 million. While the timing of the recovery remains uncertain, we are seeing some improvement in the third quarter. We also believe we have firm processes in place to manage our cost based on the speed of recovery. I would also emphasize that our good work to drive progress in margins, costs and capital does not detract from our longer-term focus on building business capabilities to capture growth on recovery. For instance, we continue to spend smartly within the Performance Chemicals business. We have been taking out costs to adjust for our volumes, with an eye towards making our business stronger through a more focused manufacturing footprint and better efficiency. Recently, we redeployed the engineering team efforts from deferred capital projects to address optimizing furnace operations and overall performance to flex with variable global demand. This effort is intended to reduce fixed manufacturing costs and preserve the long-term life of the furnaces and operational integrity in any demand environment. This has the benefit of reducing future maintenance and capital costs, achieving more efficient throughput and lowering cost per unit while retaining skilled employees and key competencies within the business. Moving to Slide 4 for a review of demand trends for our key end users. I'll briefly review second quarter dynamics and our expectations for the balance of the year. Given the unprecedented disruptions within the macro economy, it is comforting that approximately 70% of our product sales are expected to come from end uses that we see as either stable or improved in the second half of the year. I'll begin with Refining Services, which was the fastest and the most impacted business, but also has the potential for quicker recovery. The stay-at-home mandate early in the quarter led to rapid and significant reduction in gasoline demand in the U.S. As driving resumed towards the end of the second quarter, gasoline consumption quickly recovered. By the end of June, use returned to about 90% of 2019 levels, which was faster than we expected. In the second half, we are cautiously optimistic that demand could stay at or above this level with a blend of reopening activities but also likely containment setbacks within the states. The virgin sulfuric acid product line experienced automotive and industrial production demand declines in line with our prior outlook. While virgin acid demand is improving, we expect acid regeneration to rebound at a quicker pace. Shifting to Performance Materials. We see this business continuing to exhibit resilient performance. In North America, road striping activity has been stable, resulting in steady volumes and stable pricing. In Europe, we are starting to see signs of demand recovery as countries reopen and customers return to work on previously approved projects. We expect continued steady performance for the balance of the year in highway safety. For engineered glass materials, this past quarter's demand was impacted by weak automotive, industrial and construction activities, particularly in Europe. For the balance of the year, we are seeing modest improvement for these end uses. I'll move next to Catalysts, which delivered strong results through the second quarter while presenting rather challenging end-use trends for the remainder of the year. Silica Catalysts are driven primarily by polyethylene demand and, to a lesser extent, MMA. We have little exposure to polypropylene. Demand in the polyethylene product line benefited during the second quarter due to increased demand for packaging and containers. However, we do expect some easing of demand during the second half. In the Zeolyst Joint Venture, demand for hydrocracking catalysts was strong in the second quarter with change-outs accelerated by some customers. With refineries now focused on cash conservation, however, a number of our customers are shifting second half 2020 change-outs into 2021. Demand for emission control catalysts for heavy-duty diesel vehicles slumped in April on temporary closures of production capacity. For the balance of the year, we anticipate a mild recovery with sales well below the prior year. Finally, in Performance Chemicals, we are starting to see evidence of improvements from where we sit today. Assumption for personal care, cleaning products and detergents exceeded our expectations through the second quarter and are expected to normalize in the second half. Demand for beer and coatings, which has been impacted during the second quarter, are now improving. As we expected, industrial demand applications were the most impacted. While we are starting to see some improving order patterns consistent with increased global economic activity, we still anticipate a slow recovery given automotive production and general industrial trends. In summary, despite this highly challenging time, the strength of our diverse portfolio is coming through with a variety of highly specialized and competitively positioned products. This gives us the best possible stability, quality and resilience. And enables us to continue to drive strong free cash flow generation despite the uncertainty ahead. I'll now turn the call over to Mike for an in-depth look at our results and outlook.

Thank you, Belgacem, and good morning. I would characterize our quarterly performance as positive amid the unprecedented economic slump that impacted volumes and sales. We pared back production costs, SG&A and capital spending in a rapid manner with quick benefits. This allowed us to hold the line on our favorable margin position and boost free cash flow generation. Turning to our consolidated results on Slide 5. You'll see the impact from the sharp second quarter economic slowdown that was caused by the downturn in many end uses. This was particularly true with lower gasoline consumption from stay-at-home mandates as well as weakness in demand for several industrial applications. Our favorable consolidated margin was a function of expanded margins in three segments: Refining Services, Performance Materials, and Performance Chemicals, partly offset by some compression off of a high base in Catalysts. Pricing was mixed across the segments, with the real margin story coming on the cost side. We took quick actions to hold the line on cost by managing production levels and reducing discretionary spending, overcoming the pressures that lower volumes might otherwise have had on unit cost. I would also note that adjusted free cash flow totaled $44 million for the quarter, well above the prior year, reflecting capital discipline, portfolio optimization, and reduced interest costs. Simply put, the team has done a great job of controlling the controllables despite the challenging external forces. Let's briefly review each business segment, beginning with Refining Services on Slide 6. Sales of $90 million were down 23%, largely on lower volumes as reduced driving miles impacted refinery utilization and weaker automotive and industrial demand affected virgin sulfuric acid sales. Volumes came in better than the 25% decline we had anticipated on our last earnings call. Timing within the quarter was significant with sales approximately 10% higher in June than they were in April, largely fueled by the rebound in U.S. driving behavior versus at the beginning of the quarter. Adjusted EBITDA of $35 million declined 18% as we were able to mitigate the declining volumes with cost optimization. This included substantially reducing contractor use, delaying discretionary spend, reallocating employees for maintenance projects and furloughing some employees. As a result, margins of 39% reflect an improvement of 220 basis points over the prior year. Turning to Slide 7 for Catalysts. On a constant currency basis, Silica Catalysts sales of $25 million increased significantly, 24% over the prior year. Polyolefin catalyst demand and the timing of chemical catalyst orders benefited from continued global strength for packaging and engineering plastics. In the Zeolyst Joint Venture, sales rose 5% to $41 million on increased change-outs for both hydrocracking and specialty catalysts. This more than offset reduced sales for emission control catalysts due to cutbacks in heavy-duty diesel truck production. The effects on adjusted EBITDA were largely driven by unfavorable fixed cost absorption as we reduced production to align with lower demand. You may recall that this time last year, we had the opposite dynamic. We built inventories ahead of a record third quarter. This segment continued to maintain a robust adjusted EBITDA margin of 38%. Let's now turn to Slide 8 for Performance Materials, where sales declined 11% on a constant currency basis. We did see steady North American highway safety volumes and favorable pricing across most product lines. These benefits were more than offset by a slower and delayed recovery in European highway safety, along with weakness for industrial applications and engineered glass materials. While adjusted EBITDA of $27 million was 5% lower on a constant currency basis, we expanded margins 160 basis points to 26% through lower operating and discretionary expenses. Moving to Slide 9 for Performance Chemicals. Sales of $143 million were 15% lower on a constant currency basis. Favorable sales mix and price movements were offset by 18% lower volumes, which declined slightly more than the 15% we expected. Results were primarily driven by reduced demand for sodium silicates across multiple applications. At the same time, the global specialty silica business was nearly sold out in many product lines related to personal care and food additives. Adjusted EBITDA of $34 million declined 12% on a constant currency basis, but we expanded margins by 70 basis points versus the first quarter to reduce global furnace operating and maintenance costs, improved product throughput and lower overall product unit costs. Turning to Slide 10. We were pleased to complete the refinancing of our senior secured notes earlier this month, continuing a string of positive debt-related activities that we have been advancing for some time. We obtained a new term loan that extended the maturity to 2027 and lowered cash interest costs by 275 basis points based on current interest rates. The combination of refinancing actions this year has lowered annual cash interest by nearly $19 million and enhanced our financial flexibility. I would also note that the earliest debt maturity is now 2025. Reviewing our actions since the 2017 IPO on the right side of the slide, it's clear that the Company has delivered substantial debt reduction and cash interest savings. In less than three years, we have reduced debt by approximately $770 million and lowered cash interest costs by $100 million. This marks significant progress toward our commitment to reduce leverage and drive higher free cash flow. Before I leave the balance sheet, I will note that PQ's liquidity is strong with $285 million of availability, including $89 million of cash on hand, which enables us to continue to weather the challenging market conditions. Shifting to Slide 11. With our current visibility into demand trends, we are now comfortable with reinitiating our annual 2020 outlook. We are forecasting full year sales, excluding Zeolyst Joint Venture sales, to be $1.43 billion to $1.46 billion. Zeolyst Joint Venture sales are anticipated to be in the range of $120 million to $130 million. We expect adjusted EBITDA to be in the range of $410 million to $425 million, with margins approximating 2019's level of 27%. Within each of our business segments for the balance of the year, Refining Services volumes are expected to improve as gasoline demand continues to recover. We're expecting gasoline demand within 10% of prior year levels with some lagging recovery in demand for virgin sulfuric acid. We look for Performance Materials' highway safety demand to remain steady in North America and continue to improve in Europe. At the same time, we're likely to see some pockets of softness in demand for engineered glass materials. Performance Chemicals volumes are expected to improve from the first half while remaining suppressed relative to 2019 levels. And Catalysts volumes are expected to be down on lower hydrocracking catalyst sales as refineries can serve cash and delay change-outs to 2021. We also expect to reduce the emission control catalyst sales from low heavy-duty diesel production as well as lower chemical catalyst sales as customer orders were accelerated into the first half of the year. This would partly be offset by continued healthy polyolefin catalyst demand. As a result, we expect Catalysts adjusted EBITDA to decline approximately 50% in the second half of 2020 versus the first half. Comparing the third quarter to the second quarter, we are targeting high single-digit sales improvement, with increases in most segments more than offsetting a double-digit decline in Silica Catalysts. Zeolyst Joint Venture sales are expected to be down approximately 25% relative to the second quarter. All in, we expect adjusted EBITDA to be largely in line with the second quarter. This is based on consolidated margins that are expected to remain high while reflecting a slight easing from the second quarter. With continued favorable operating cash flow, lower interest costs, and reduced capital spending, we are now raising our adjusted free cash flow outlook for the full year to $145 million to $155 million. Note this does not include $18 million of cash proceeds from a Performance Chemicals product line sale that we completed in July. So to summarize our performance and actions, we had a good quarter with both high margins and cash flows. We've taken a number of effective actions to further improve the portfolio and balance sheet. We expect the second half of the year to show improving trends in most business end uses. And we believe 2020 will be another year of strong adjusted EBITDA margins and adjusted free cash flow generation. With that, I will turn the call back to Belgacem.

Thanks, Mike. Turning to Slide 12. We'll review additional portfolio activities during this past quarter. PQ has a portfolio of uniquely positioned specialty businesses. We are actively strengthening and simplifying our businesses to reallocate resources in a manner that will accelerate future growth while maintaining strong margins and targeting improved leverage. We were successful in completing several transactions. In Performance Chemicals, a noncore product line was sold for 8x 2019 EBITDA without a material impact to sales or adjusted EBITDA. And we will continue to manufacture these products for the buyer under a multiyear tolling agreement. Note that this transaction officially closed on July 1 and is not reflected in our financial statements for the second quarter. Additionally, we sold two idle properties in the Performance Materials and Performance Chemicals business. Combined, these three transactions generated sales proceeds of about $27 million. You'll also recall that last quarter, we announced the Performance Materials swap of our ThermoDrop product line in exchange for beads production facilities, secured with a long-term supply contract. I would note that this new asset is performing as expected, with a potential to realize synergies ahead of schedule. Year-to-date, PQ cash generation has been improved by approximately $30 million, and we continue to look for additional opportunities for further improvement. Turning to Slide 13. I'd like to emphasize the priorities that will receive our greatest focus in the second half of 2020. Our safety performance now ranks in the top quartile of the industry. And we will maintain our sharp focus in this area during the second half. Our team will continue to navigate through the ongoing value chain challenges presented by COVID-19 pandemic. We take our commitment seriously to protect our people, our customers and the community in which we operate while ensuring the continuity of our businesses. We will, of course, strive to achieve our 2020 financial targets, including delivering on higher adjusted free cash flow in the range of $145 million to $155 million. We will continue our clear focus on cost management and capital discipline while ensuring that we have the capabilities and positioning to seize opportunities as economic recovery unfolds. And finally, we will continue to explore additional ways to positively reshape our portfolio. I will provide updates as potential projects ripe into maturity. That's a brief review of our progress and prospects. I'm proud of the performance of the PQ team in the second quarter. Despite the global uncertainties, I believe we are positioning the Company well for the second half of 2020 and beyond. Thank you. And at this time, we are ready to take questions.

Today's first question comes from Christopher Parkinson with Crédit Suisse.

This is Kieran on for Chris. I was just wondering, in the Silica Catalysts business, you had a particularly strong quarter, and a lot of this seems attributable to a pull-forward in demand, particularly in kind of the polyolefin catalyst portion of the business. Can you dial in a little bit into the trends you were seeing in May and June versus April? And then any preliminary read-throughs you can give us from July would be really appreciated.

All right. Kieran, thank you for the question. The visibility we had at the beginning of the quarter for the Silica Catalysts business was kind of not very clear in terms of delays of orders that were going to happen at the end of the year. We did have a nice run with some accelerated activities from our customers into the quarter, which impacted the results. We also did have an MMA order that was meant to be in the third quarter that was pulled in also at the demand of the customer because of that need at that time, which created a visibility in the second half of the year with a little bit of gaps, one, on the preliminary MMA order, which is now removed. Hoping that maybe there will be the ability to pull in something in the fourth quarter from the next year MMA demand as the demand continues to be steady. The MMA orders are very clear. The long leads are like, I don't know, 6 to 9 months or 8 months orders. So to pull in an order from a quarter to another doesn't happen very often. As far as Catalysts, hydrocracking catalysts, the customers have kind of pulled back in terms of the plans, and there has been a lot of delays that are pushed to 2021. We know exactly which orders have been delayed. And we don't know exactly when they're going to take place, is it the first quarter or the second quarter. But we know for sure, they are taking place. And all in all, there is about 20% to 25% of orders that were supposed to happen in the H2 and are now moving to 2021, hopefully, in the first half.

Great. And then just quickly regarding margins, three out of your four segments experienced significant margin improvement this quarter, likely due to effective cost-cutting measures. As we look ahead to the latter half of the year and into 2021, could you provide some insights on the margin strategies you are implementing, such as cost reduction, raw material management, or fixed cost absorption? How should we understand the trajectory of these factors as we progress through the remainder of the year and into 2021?

Yes, we provided guidance for the full year at around 27%, which aligns with 2019 levels. We achieved 28%, consistent with the first half of last year. There may be some fluctuations in the mix, but the advantages from the cost savings we have implemented will persist throughout the year. Therefore, our guidance remains at 27% for the full year, which indicates the potential effects of mix changes in the second half.

And this is Mike. There is no significant impact from raw material pricing due to the pass-through nature of our contracts, so it does not affect our expectations positively or negatively.

And our next question today comes from Bob Koort with Goldman Sachs.

This is Tom Glinski on for Bob. So first question, just on the free cash flow and EBITDA guide. So it implies about a 35% conversion rate from EBITDA to free cash, and this compares to about 25% to 30% in recent years. Just how should we think about the sustainable level of cash conversion going forward into next year and 2022?

I think part of the reason that you're seeing the conversion improve is because of lower interest costs as rates have come down, but more importantly, with all the refinancings we've done, I mean, our weighted average cost of debt now is down to about 3%. So that continues to be a nice tailwind for us. And we're managing working capital tightly. And we do, with adjusted free cash flow, have some asset sale proceeds in there as well. So that's part of the reason you see it go up. So as you look at just in general, we're going to have what our EBITDA profile is, lower cash interest, we'll continue to monetize assets as we have over the last two years, and all of that supports the free cash flow trends that you've been seeing over the past 12 to 24 months.

Great. And then on the monetization of assets. So you did $30 million in the first half of the year. Could you just speak to the pipeline for the second half? What conversations have looked like? And then also if any bolt-ons were to become available, what part of the business would you be most focused on?

We have a list of priorities for smaller transactions. To remind you, we consider anything with unacceptable growth potential or lower returns as a candidate, depending on its fit in our portfolio. We've completed six transactions year-to-date, which is a significant activity, with some coming at the end of the quarter. We have a pipeline of opportunities for the rest of the year to explore. While I can't disclose how advanced those conversations are, they are part of our chemicals transformation project, along with some other items that may materialize in the second half of the year. We will maintain a pipeline into next year as we focus on optimizing the quality of earnings and businesses. These smaller transactions are aimed at generating good free cash flow while also enhancing the overall earnings quality of the business.

And our next question today comes from Vincent Andrews with Morgan Stanley.

This is Angel Castillo speaking on behalf of Vincent. I wanted to follow up on the mergers and acquisitions or the assets that have been divested. There's clearly been significant progress in that area, along with the management of the ABL Facility, refinancing of the debt, and strong free cash flow. You also announced a repurchase authorization earlier this year. I would appreciate it if you could share your thoughts on capital allocation today. How are you approaching it? Considering the possibility of further portfolio monetizations, as we look ahead to debt repayment next year and a potential increase in EBITDA, is there a chance for buybacks next year? Would you prefer to focus on potential acquisitions? How is this overall strategy evolving?

That's a great question. Let me start, and then I'll let Mike complement my answers. First of all, the generation of cash is an objective, one, to improve the quality of the portfolio; two, is to be able to support our debt reduction. We do have a target of debt reduction. And we do have a target of leverage that we haven't deviated from, and we continue to do that. As we move on to the next phase, we will be looking at some additional financial flexibility that will allow us to go after assets, probably technologies or some bolt-ons as well as the further or even more possible option is for us to pay some dividend to our shareholders. So once we get to the level of debt and the level of leverage that is comfortable by the way we're looking at it, the flexibility is going to allow us to do more in terms of dividend and also in terms of bolt-on. We do have our eyes on several opportunities that we're looking at that we think that will fit well. But we can't afford to do that right now. We prefer to stay focused on the leverage piece until we get there. That's what the distribution is in terms of use of our cash and use of these asset sales proceeds.

And I would say, more near term, with use of cash, debt reduction is still our #1 priority. We are going to remain cautious here in the near term just because of not complete visibility as to what the rest of the year looks like. So that's why we haven't set our debt repayment target yet. It's something we're still continuing to evaluate. But either way, when you look at net debt-to-EBITDA, we began the year at 4x, and we indicated in the slides that we still expect it to be at 4x. So a little pause in our half a turn a year, but given what you see going on in the world, I think holding our leverage at these levels is a pretty good position to be in. So we'll do a further evaluation. We'll decide how much debt we're going to repay, and then we'll move into the outlook for 2021.

That's very helpful. And maybe to piggyback off of that, in terms of, obviously, the improvement, a lot of that is driven by EBITDA. So as we think about 2021, obviously, not a lot of visibility yet and who knows where things will go. But how would you characterize what you're seeing kind of from an end market improvement as we go into the back half of the year and as you start to contemplate 2021? Could we get you back to 2019 type levels? Or how would you characterize your early thoughts on 2021?

It's a bit early to discuss 2021 with certainty. Let me explain why we felt confident to adjust our guidance for the end of the year. The COVID-19 pandemic took everyone by surprise, leading to sudden reactions from governments and companies alike. However, it is becoming clear that economies need to keep functioning, which is why we're seeing a global reopening. Conversations with our customers indicate that they are preparing to confront the challenges posed by the pandemic, taking precautions while returning to work and adapting practices to support economic growth. This understanding gives us the confidence to assess the trajectory of growth, identifying what will recover quickly and what may take longer. This allows for an informed expectation for the year's end. Once we near that point, assuming all projections hold true, we can begin to consider 2021. Growth in GDP will刺激 sectors like industry, construction, and automotive, alongside a continued recovery in our chemicals business. The favorable environment for driving is expected to boost our Refining Services back to previous levels of 90% to 95%, indicating potential growth or stability for the coming year. Catalyst projects that were postponed to 2021 will return, though the extent of their use remains uncertain. Overall, 2021 looks promising compared to our current situation, but I suggest waiting a couple more months to get a clearer picture before we finalize our views on the year. For now, the outlook is more optimistic, based on the recovery trends we're observing between now and December 2020.

And our next question today comes from PJ Juvekar with Citi.

This is Kendall Marthaler speaking on behalf of PJ. Following up on that last answer, how soon do you anticipate results, particularly for the industrial segment of Performance Chemicals, will improve once global GDP and industrial production start to rise? Will this have an immediate effect on your results, or will there be some delay?

That's a great question. It depends on which products we're discussing, mainly sodium silicates, as they are an important part of our business. Sodium silicates are used in various industries. Typically, before we receive an order for sodium silicate, our customers are prepared to blend products to create the final products for the market. I believe our orders for sodium silicate will start coming in soon if GDP growth remains steady. Given what has occurred in the last six to nine months, I think we will likely see a restocking event. This means customers will order more than they initially need to start building momentum with their own orders. Once the industrial, automotive, and construction sectors stabilize a bit, we can expect a gradual recovery. It may be slow between now and the end of the year, but it could improve significantly moving forward, as this is a crucial aspect of GDP growth. I am optimistic that the chemicals sector will slowly rebound at first, primarily due to the necessary restocking in the market after several months of low inventories.

Our next question today comes from David Begleiter with Deutsche Bank.

Belgacem, I'm just going to follow up as well on '21, but more specifically Catalysts, given the moving parts, especially in the back half of the year. Without trying to quantify next year, can you just maybe highlight the pieces that may have been pushed out to '21 or may not repeat versus the strength in Q1? Any help there would be appreciated.

Let me break it down a bit, starting with the Catalysts, specifically focusing on the hydrocracking catalyst, the Zeolyst JV, and the Silica Catalysts. I'll begin with the Silica Catalysts, which is split into MMA and polyethylene. We saw a ramp-up in polyethylene levels and capacity from the first quarter to the second quarter, and now it seems to be stabilizing at a decent level for the remainder of the year. Regarding MMA, we have taken orders this year and anticipate more orders for next year, indicating a consistent demand. The critical factor will be the hydrocracking catalysts and the speed of recovery, along with how much refiners can delay these orders and change-outs while operating their refineries at high capacity. I expect 2021 will be a strong recovery year for Catalysts. Reflecting on 2015, we believe that was a peak year for hydrocracking, and 2019 was also a significant year for that segment. Ideally, we should see 2023 as the next peak, but with recent developments, 2022 might also end up being a peak year for hydrocracking demand, while 2021 will serve as the buildup toward that peak. I hope this clarifies things.

Yes, the guidance we're providing is based on current spot rates. It has moved up a little, but it's not been that significant in either direction. We experienced a greater impact from the euro and, I believe, the Canadian dollar in the second quarter. Overall, we don't anticipate it having a substantial impact.

And our next question today comes from Laurence Alexander with Jefferies.

Can you elaborate on the customer feedback regarding the usual seasonality in August and December, and how it may be affected this year? Additionally, could you provide insight into the segments of the business where delays are causing a ripple effect throughout the entire channel, rather than a surge in demand like we saw in 2021? Specifically, how much volume do you estimate was lost compared to what was simply postponed?

I'm sorry, the first part of the question, it was almost muted. I didn't hear it. I don't know if everybody did. Would you mind repeating it, Laurence?

What kind of feedback have customers given you regarding the typical seasonality in August and December in your more industrial-facing businesses, specifically about the low not being needed this year due to the disruptions in the first half of the year?

I haven't heard of any changes or specific feedback from the customers regarding this matter yet. We might be able to gather that information as we approach the second half or the end of the year.

Can you provide an estimate of the portion of sales that you expect to be pushed into next year? Then, when we consider the bridge for next year, we can derive your underlying demand dynamics from that information.

It's challenging to estimate the sales that were shifted to next year. The situation is that there have been delays in orders for industrial products, particularly in the chemicals sector, along with some delays in hydrocracking orders for the second half of this year. Looking ahead to next year, if everything goes as expected, we anticipate a rebound in industrial orders as recoveries occur. We're hopeful for a restocking event that would lead to a surge in chemical orders, but we can't quantify that yet because it's still uncertain. Regarding hydrocracking, I mentioned that 20% to 25% of the sales volume for the second half of this year has been deferred to 2021. We're not sure if this constitutes a total shift or is in addition to existing orders. We'll have a clearer picture by the end of Q3 since hydrocracking orders have a lead time of 6 to 7 months. If we continue to receive more orders in Q3, that 25% might be additional to our normal orders. If the orders don’t increase, it will simply replace our prior expectations. Essentially, we could end up delaying our production, which we hope won’t happen. This is what we currently understand about the volume trends for 2021.

And ladies and gentlemen, today's final question comes from Colton Bina with BMO Capital Markets.

This is Colton Bina on for John McNulty. So I guess my first question is, earlier on, you made an interesting comment about having about 15% of the sales volumes in Performance Chemicals locked into long-term contracts now. I was wondering if you could just talk a little bit more about that. Are there plans to make that a higher percentage of volumes that are locked in? Is there specific products within Performance Chemicals that are being put into these contracts? Any color you could give there would be great.

That's great. Typically, the ratio of your locked-in contracts tends to grow over time. This comment is primarily meant to highlight the quality of the contracts rather than the volume. The 15% figure will vary based on when the contracts come up for renewal. We're pleased that we've managed to extend those contracts on favorable terms, which is crucial in this negotiating environment to ensure they are fair for both us and the customer, locking them in for 2 to 3 years. This approach allows us to secure volume. We will continue this strategy leading up to year-end and are monitoring our progress. In a few quarters, we might have a clearer picture of whether we can reach the typical range of 60% to 70% locked-in contracts, with the remainder being more transactional. In this quarter, we've locked in 15% at favorable terms and decent pricing. That's the key point I wanted to emphasize.

Okay. That's helpful. And then just one other question. So you guys have done a really good job with portfolio transformation over the last year end. It sounds like you have some big plans for the next 12 to 18 months. But Belgacem, I was wondering, what are you kind of tracking and looking at within the Company to help decide when you're happy with the portfolio and when the portfolio transformation has kind of gotten into the place where you want it to be?

That's a great question. There are two key components. One is reducing the size of the portfolio, and the other is enhancing the business's value through high growth potential and good earnings quality. Currently, we are focused on this. Over the years, we have established numerous assets globally and are consistently working closely with our customers in various countries. With the transformation of our chemicals business, we've made the decision to consolidate some assets to better serve our customers with fewer resources, which will improve our profitability through enhanced utilization and production efficiency. These are the initiatives we've outlined. Additionally, we need to eliminate assets that hold no value to strengthen our cash position. We completed six transactions in the first half of the year and a couple last year, and we'll continue this trend. Longer term, we are evaluating our overall portfolio. Your question likely pertains to what PQ will look like two to three years from now. We have a vision that we are aligning with market realities, opportunities, and shareholder value. We are actively exploring options, and once they materialize, we will provide a clearer picture of the company's future and efficiency. Our portfolio consists of four distinct components that perform well in the current environment, but we believe we can achieve greater success by honing our focus. Addressing our current challenges, such as leverage and debt, through asset monetization, could strengthen our company further and enhance shareholder benefits. Operationally and commercially, we are performing well, but we haven't yet delivered significantly higher value to our shareholders, which is our primary goal now—improving our portfolio is crucial in this effort. Since my arrival, our emphasis has consistently been on the portfolio, and we are making progress. Hopefully, we can share more about our plans in the future, but we cannot disclose that at this moment.

And our next question comes from David Silver with CL King.

Yes. So I had a question, I guess, on cash flow and working capital and then maybe a more organizational effectiveness question. So maybe this is for Mike. But one area where your company's financials were a little bit unusual, at least in my opinion, was in working capital usage. So in the first half, I think your net working capital change was actually a pretty significant usage, I have, $64 million-or-so use. And virtually every other company I follow in the first half of the year has seen a reduction in working capital or a release that has boosted their cash flow. So I was just wondering if you could comment on your expectations for full year net change in your working capital? And how that might play into your adjusted free cash flow estimate which, I think, you raised the midpoint a little bit of $145 million to $155 million?

David, thanks. You're pretty close there on the first half. We were down a little over $60 million. That was $20 million better than the prior year. But I think the thing that's important to remember is because of the seasonality of our business, particularly in Performance Materials, that drives a lot of our cash usage, so this is typical. We're actually better than we've been traditionally. And PQ makes all of its free cash flow in the back half of the year. In the second quarter, we also had an outflow. It was only about $15 million, but that was $25 million better than the prior year. As it relates to the full year, we typically would have a usage of working capital as the business grows of about $19 million a year. At this time last quarter, we had expectations that we may be able to improve upon that. But what we're seeing is the benefits we're getting from additional liquidation of inventory and the cash associated with that is being offset by expected higher receivables at the end of the year as some sales have shifted toward the end that won't get collected. They'll be outstanding there at 12/31. And that compares to last year where sales had really dropped off, and we had collected a lot of cash. So working capital is not really driving the improvement. It's the asset sales that we've done and it's the lower cash interest that we see with the refinancing. Those are the 2 big drivers.

I apologize in advance if this next question is too complicated. Belgacem, I would like to hear your thoughts on maintaining organizational effectiveness. From the margin performance across segments, it's clear you responded quickly and effectively to adapt to the new business reality brought on by the pandemic. As you look ahead for the remainder of the year, which functions of your company do you think can be sustained at the current level of efficiency and effectiveness indefinitely? What are the potential challenges? Are there areas where you can maintain the current operations for a while, but eventually may encounter obstacles in organizational performance? I’m considering aspects like major maintenance or turnaround expenses at your main production facilities, as well as higher-level R&D that requires collaboration across different chemical or material specialties or with customers for advanced testing. Overall, do you foresee any areas where operating in this unique environment might pose challenges to sustaining your current efficiency and effectiveness?

You're welcome, David. In an environment like this, there are three key aspects to consider. First, your costs, which pertain to how you operate. Second, your sales capabilities and how well you optimize them. Finally, since we're a production company, we need to focus on productivity and efficiency. We've addressed our costs, and our company has maintained a lean structure for years. This made it easier for us to adapt to the new environment by identifying what we needed to do and executing effectively. We retained our competencies but reallocated resources and set productivity improvement targets based on our operations. We managed maintenance to fit within a timeframe that wouldn't disrupt production, avoiding simultaneous furnace shutdowns. On the commercial side, we refocused our account management. We aimed to connect more deeply with our customers by understanding their needs better, engaging them in conversations, and staying ahead in terms of what satisfies them, including contracting, delivery, and quality. We implemented these strategies, and the immediate positive impact on this quarter's results was due to the organization being prepared for it. I believe none of our businesses will struggle to maintain their current cost level. If the market continues to recover, we expect to see top-line growth, an enhanced commercial organization, and more contracts. Any additional costs incurred to achieve this, whether related to operations, transportation, or personnel, will align with our target margins. Our margins reflect our goal of generating at least 26% to 28%. We recorded a 29% adjusted EBITDA margin, and we anticipate operating at that level unless there’s a significant change in our mix. Going forward, I am committed to maintaining high earning quality in our businesses while also pursuing growth. This involves timing our investments and ensuring our organization remains focused. This is the standard for our operations moving ahead, and I do not see this as a temporary situation. I hope this answers your question, David.

And ladies and gentlemen, today's final question comes from Silke Kueck with JPMorgan.

I was wondering if you can comment about the consumer business that's within your Performance Chemicals business? And how that fared in the quarter? I was surprised that the volumes were as weak as they were given that there's sort of a consumer component in it. That's my first question. And secondly, I was wondering whether you can comment about the level of cost savings that you achieved in the quarter? And whether there's a component of it that's temporary that you expect to come back? And how soon it might come back?

I'll take the consumer and Mike will take the margin. Is that okay?

Definitely.

All right. Well, the consumer, I mean, some of our aspects of the business are consumer based. All the detergent products, all the personal care products are consumer based. We saw a ramp-up in the second quarter during the pandemic because from a health perspective and the industries needed to sell those products. So we saw a ramp-up of some of those, including solid detergent, which is a pure consumer product. That was not doing very well before because it's been kind of competing with the liquid detergent. But it came back for a while. It's now leveling off. So some of the consumer product demand bubble that took place in the second quarter, which is, some of it's continuing here. It's going to level up. The most components that we're watching right now is the industrial component, is the coating, is the construction, is the automotive, and how we see that returning to the proper GDP level growth which is going to be an easy recovery, slow recovery into next year. And the rest I talked earlier about how maybe there will be a rush of ramp-up of orders in those. I don't expect consumer products to be a big event in the next 6 to 9 months, it's more the recovery of the industrial products, if that's what you meant. And yes, is that okay with this first part?

Okay. And on the cost reductions, we had about $14 million in total, of which $4 million related to turnarounds that were deferred, and they've been deferred out of 2020. So all of those cost savings that we have are permanent to the year.

And ladies and gentlemen, there's no further questions. This concludes today's question-and-answer session and today's conference. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.