Good day, and welcome to the PQ Group Holdings Second Quarter 2020 Earnings Conference Call. [Operator instructions] 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 was 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. 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 is 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..

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 3 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 2 idle properties in the Performance Materials and Performance Chemicals business. Combined, these 3 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..

[Operator instructions] 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 a 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 I guess just quickly in terms of margins, most -- I mean 3 of your 4 segments had a deepened margin improvement this quarter, and that seems to be probably due to the fact that you're really executing on cost cutting. I just -- looking to the back half of the year into 2021.

Can you just give us some rough framework about how we should think about some of the margin levers you are pulling, whether it's cost cutting, maybe raw materials or fixed cost absorption benefiting you? And how we should look at that bridge as we go throughout the rest of the year and into 2021?.

Yes. I mean -- yes, we did guide to a full year at around the level of 2019, 27%. We generated 28%, which is pretty much in line with last -- first half of the last year. There might be some movements from a mixed perspective, but the benefit of the cost savings that we have will continue through the end of the year.

So I think our guidance is about 27% for the full year. That gives you an idea of the impact on some of the mix changes in the second half..

And this is Mike. No other -- no significant impact from raw material pricing due to the pass-through nature of our contracts. So that's not a positive or a negative to the expectation..

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?.

Tom, we had -- we've always had a list of priorities in terms of transactions, smaller-sized transactions. Again, let me remind you, the rules are, anything that has no -- none less than acceptable level of growth potential or anything that has a lower return is always a candidate depending on where it fits in the portfolio.

I consider that we've done like 6 elements year-to-date. That is a huge activity. Some of them came in just at the end of the quarter. We do have a pipeline for the rest of the year of things to look at. I can't really talk to you how far we are in the conversation, but part of our chemicals transformation project.

There's a few other things that we're looking at that might come in the second half of the year. We will continue to have a pipeline even through next year as we're optimizing the quality of earnings and the quality of businesses that we have.

These are about the smaller transactions that generate good free cash flow, at the same time improve the quality of earnings of the rest of the business..

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

This is Angel Castillo on for Vincent. Just a follow-up on the M&A or the assets that you'd sold off. Obviously, a lot of progress around that and also you've managed the ABL Facility, refinanced the debt, strong free cash flow, and you announced a repurchase authorization earlier in the year.

So just -- I was wondering if you could walk us through your capital allocation view today.

How are you thinking about it? And with potential for further portfolio monetizations, as we think about debt repayment into next year and perhaps improvement in EBITDA, is it possible to see buybacks next year? Would you lean more toward potential bolt-ons? Just how is that evolving overall?.

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?.

Well, Angel, it's a little bit early to really speak to 2021 with a lot of confidence. Let me help you kind of see why did we have the confidence to guide for the -- change our guidance or fix our guidance for the end of the year. COVID-19 pandemic issues that started several months ago were unknown to everybody.

And reactions were abrupt by everybody, by governments, by companies, by the whole system. And then after a while, everybody is now realizing that economies have to keep going, and that's why there is reopening around the world.

And as you go around the world and talk to customers, which is what we do, we understand that everybody is planning to go against this thing and fight it by being careful and by going back to work and by readjusting our work practices to be able to continue to grow the economy.

Therefore, that gave us the courage and the understanding that, okay, with the slope, you move the slope of growth, what is going to come back faster? What is going to take a bit longer? You build that in and you can come up with an expectation of what the end of the year is.

Based on getting there, once you get there or almost in the way there, if everything, all the theories are confirmed, you can start thinking of 2021. GDP's growth is going to drive, if we see GDP, it's going to drive industrial. It's going to drive constructions. It's going to drive automotive.

And you're going to see some of our chemicals business kind of continuing the recovery.

The lack of lock-in or the good environment for driving will continue the growth of our Refining Services to the level of 90% to 95% level where it used to be before, which means we're going to see a decent growth or maybe a stable position of where we are now and slightly above for next year.

Catalyst things that were moved into 2021 are going to come back. Now how much of that is going to be utilized in 2021 is another question. But 2021 is definitely a positive year with respect to where we are right now and how we see the end of the year.

But I would wait another couple of months until we see how things are going and we can build an opinion, and we will let you know in that time, how we see 2021. But for now, it's more positive for sure, but building on the recovery that we're seeing in the trends we're seeing right now between now and December of 2020..

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

This is Kendall Marthaler on for PJ. Just kind of going back off that last answer, how quickly would you expect the results, especially for the -- kind of the industrial business for Performance Chemicals to rebound once you start seeing GDP and industrial production growth coming back globally.

Is that kind of an immediate impact on your results? Or is there any sort of a delay or a lag?.

That's a great question. It depends on which products. And we're talking primarily about sodium silicates because -- which is a good component of our business. And sodium silicates gets into a lot of industries. Usually, before we get an order for sodium silicate, our customers are ready to blend product to produce the end product for the market.

So I believe our sodium silicate orders are going to start coming sooner than later if that GDP growth is consistent, and I believe because of what happened in the last 6 to 9 months, we're going to probably see a restocking event.

The restocking event is going to mean customers are going to order more than they would need at least to start to build that momentum with their own orders.

So once the industrial and automotive and construction comes back a little bit steadier, we're going to see a nice, steady recovery, maybe slow between now and year-end, then it could be a nicer as we go forward because that is really a key component of that GDP growth.

So I'm optimistic that the chemicals business is going to rebound slowly, probably at the beginning, but then it's going to rebound simply because of restocking, which is definitely needed in the market after 6 or 9 months of dry 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..

Well, let me kind of break it down a little bit, David. I'll break the Catalysts into the hydrocracking catalyst piece, the Zeolyst JV and the Silica Catalysts piece. Let me start with the Silica Catalysts. It is also broken down into the MMA and the polyethylene.

The polyethylene levels and capacity and demand that has been going on so far, we had a ramp-up in the second -- almost first quarter to the second quarter. It's now leveling out, and we think it's going to continue to be leveled out at that decent level for the rest of the year. MMA, as you know, it's orders, we took the orders this year.

We will have orders. We know there is orders for next year. So you can take that as a consistent. The game changer is the hydrocracking in Catalysts and how fast the recovery is going to be. And how much can refiners sustain pushing -- delaying these orders and pushing change-outs because they're going to run their refineries really hard.

So I believe the 2021 is going to be a good rebounding year for Catalysts. Let me now take you back to 2015. We believe 2015 was a peak year for hydrocracking for us. Then 2019, last year, which is fresh in our memory, was a great year for hydrocracking. Theoretically, we should see 2023 as a nice -- the next peak.

Maybe with this event, we could see 2022 as a real peak of hydrocracking demand, but 2021 will be a build-up to that peak. I hope that helps..

Very, very helpful.

And Mike, just on FX, what are your assumptions in the back half of the year? And if you were mark-to-market to today's spot rates, what does that imply for your full year EBITDA guidance?.

Yes. The guidance that we're providing now is based upon current spot rates. So there hasn't -- it's moved up a bit. It's not been that material either way. We had more of an impact from the euro and, I think, the Canadian dollar on the second quarter. So generally speaking, we don't expect it to have a significant impact..

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

Just sort of to flesh out the customer comments a little bit more.

How much are they giving you color on sort of the typical August and December seasonality and the degree to which that might be canceled this year? And then the second one is, can you give us a sense for chunks of business where there won't be -- when they're pushed back, the entire channel gets pushed back as opposed to you having a surge in demand in 2021? I mean, so how much like volume do you think was lost as opposed to just delayed?.

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?.

Well, with respect to the normal sort of seasonality in the August and December lows in your more industrial-facing businesses, what kind of feedback have customers given you about those -- that low not being needed this year given how disruptive the first half of the year was?.

Well, I don't -- I haven't heard of any changes or any specific feedback from the customers in this respect yet. We might be able to get that information as we get closer to the second half or the last part of the year..

And then for next year, is there -- can you give a sense for just the sort of chunk -- can you just aggregate the chunk of sales that you believe is sort of pushed into next year? And then when we think about the next year bridge, we can then extrapolate your underlying demand dynamics from there?.

Well, it's difficult to take the sales that were moved and you kind of add them up on next year. Here's what happened. You've got delays in orders for all the industrial products, mostly the chemicals products. And you also got some delays in the second half of this year of hydrocracking orders.

Now what happens next year, as I said earlier, we will see if things go as we see it today. We will see a rebound in orders for the industrial as recoveries happen. So it is not going to be maybe -- I hope it will be on top of what they would normally buy, but we hope for a restocking event, whereby we're going to get a rush of orders and chemicals.

Can't quantify that. Not because I don't want to, because it's not known yet. On the hydrocracking, I said 20% to 25% of the volume sales for the second half of this year have been pushed to 2021.

Now would we consider that as a full push and then as a replacement of the beginning of 2021? Or will it be on top of the existing orders? We will know that as we go through Q3 because orders in hydrocracking are 6 to 7 months lead time. So in Q3, if we continue to get more orders, then you can comp that 25% on top of the normal orders.

If we don't, you're just replacing the previous plan with that number. Basically, you're pushing the mountain ahead, which hopefully is not the case. But if it is, that is the closest indication we have today on how the volumes are moving through 2021..

[Operator Instructions]. Today's next 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. I mean, typically, your locked-in contracts kind of ratio kind of grows with time. And the comment is made primarily to illustrate the quality of the contracts more so than the volume. The 15%, the percentage will depend on when the contracts come for renewal.

What we managed to do, what we're happy with is that we extended those contracts with good terms, which is the most important thing in an environment like this where you negotiate in good terms, decent terms, fair for both the customer and us and lock them in for 2 to 3 years. It's a volume locking.

And we're going to continue doing that between now and year-end, and we're tracking that. And maybe in a couple of quarters, we will have a lot better idea on how big, do we have a 60% to 70%, which is typical to have 60% to 65% to 70% locked-in contract and the rest is almost transactional.

We're at -- we've locked in 15% in this quarter alone at nice terms and decent pricing. That's the objective of mentioning this comment, Colton..

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. And there's 2 components. There's the components of making the portfolio smaller components adding value to the business, meaning high potential of growth, good quality of earnings. And that's what we're focusing on right now. We do -- we have built over the years, a lot of assets around the world.

We are always operating closer to customers. So we have a lot of assets in different countries. We -- with the transformation of our chemicals business, particularly, which impacts this, we've decided that we're going to do a proper network and exercise, where we're going to consolidate some assets to serve customers at a wider range with less assets.

So we get more -- we profit more from utilization, efficiency and production capability. So those are the projects that we've just described. And then you've got assets that have no more value. So we need to make sure our cash is strong. We did 6 transactions in the last 6 months -- in the first 6 months of the year. We did a couple last year.

We're going to continue to do that. Longer term, we're looking at our portfolio as a whole, and that's probably your question.

Portfolio as a whole is what is PQ going to look like 2, 3 years down the road? We have our view, and we are shaping the view that we have with the reality of the market, with the reality of the opportunities and the value to our shareholders. We're actively looking at options.

We will be -- once these options materialize, we will be able to kind of throw out there the direct description of what the Company is going to look like and how efficient it is. You know our portfolio is made of 4 components. They're totally different components. They work well in an environment like we have today.

But maybe we can do better by being more focused.

And maybe if we resolve for our unknowns and issues that we have today, like the leverage, the debt, the lack of flexibility through some assets monetization, we can be an even stronger company and our shareholder is going to start benefiting a lot more than they are today because execution-wise, operationally and commercially, things are going very well.

But we haven't gotten to a point where we return much higher value to our shareholder, and that's our objective, and that's our first goal right now. And the portfolio is the most important piece in that. That's why you noticed that everything we do is around the portfolio. Since I arrived, that's all we do, and we're getting there.

Hopefully, in time, we'll let you know more about what we're thinking, but we can't do that today..

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..

Okay. And I'll apologize in advance. I hope this next question isn't too unwieldy. But for Belgacem, I mean, I was wondering about your views on kind of maintaining your organizational effectiveness here.

So I mean, in my opinion, from the margin performance in the segments, I mean, you were able to react quickly and effectively to adapt to the new business. Reality is the new environment with the pandemic.

And I'm just wondering, as you look ahead to the balance of the year, I mean, what portions or what functions of your company do you imagine can -- could be sustained at this current level of efficiency and effectiveness more or less indefinitely? And what are the pinch points? What are the areas where maybe you can sustain in the current environment for a certain amount of time, but at some point, you hit the wall maybe of organizational effects in this? So I'm thinking about things like major maintenance or turnaround expenses at your -- efforts at your major production facilities.

I'm thinking about your higher level R&D, where you might have to have interactions between different chemicals or material specialties or collaborate with customers to do some advanced testing.

So if you look at the overall organization, just are there any areas where at some point, operating in the current kind of unusual environment, you might see some issues with maintaining your current level of efficiency and overall effectiveness?.

You're welcome, David. Look, the three elements that you look at in an environment like this. You look at your cost, which is how you operate. You look at your ability to sell, which is your sales and commercial optimization.

And then the third one, since we're a production company that produces products to be sold, you look at the productivity and efficiency. And that's what we tackled. We tackled our cost. And this company has always been lean for years.

And I think it was very, very easy for the organization to adapt to the new environment by deciding what we need to do and working effectively; keeping the competency around, but shifting it, making sure that we move that around and reassign production; take targets of productivity improvements, a certain number of percentage or basis points on improvement of productivity based on what we do; managing the maintenance, not cutting the maintenance, but managing the maintenance to allow it to fit in a time where you don't impact your production, you don't shut down furnaces at the same time.

This is very operational. On the commercial side is to -- what we did is refocused our account management, get closer, know more about what the customers' thoughts are, have conversations and be way ahead of the curve in terms of talking about what makes the customer happy, both in contracting with them and then delivery and quality.

These are the elements that we wanted to do, and we did. And the reason it impacted this quarter immediately is because, I think, the organization was ready for that. So I don't think any business, any of our business will struggle, staying at this level from a cost perspective.

If we continue to see some recovery in the market, we're going to see top line growth. We're going to see a stronger commercial organization. We're going to see more contracts.

And any additional cost that's going to go in to deliver that, whether it's cost of operating, cost of transportation, people, you name it, it's going to be in line with our target margins. And our margins that you see is the margin that we targeted because we think we are a company that should generate at least 26%, 27%, 28%.

We did 29% adjusted EBITDA margin. And we should be able to operate at that level as long as our mix doesn't change significantly. So going forward, I have no intention of letting off the pressure of having a high earning quality in our businesses, and at the same time, not missing on growth.

So it's about timing the investment, keeping the organization focused, and this is the standard of our operation going forward. And honestly, I'm not even thinking that this was temporary at all. I don't know if this answers your question, David..

No, it's very interesting..

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..

Absolutely..

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?.

Yes..

All right. Well, Mike, you can take it from here..

Okay. Thank you. 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..