MALVERN, PA — PQ Group Holdings Inc. (NYSE: PQG) reported results from continuing operations1 for the fourth quarter and year ended December 31, 2020.
For the fourth quarter, the Company reported sales of $281.5 million matched the fourth quarter of 2019, reflecting a rebound in demand. Net loss was $182.8 million with $1.35 diluted loss per share and Adjusted net income was $82.5 million with Adjusted diluted EPS of $0.61 per share. The fourth quarter and year-end results included the impact of a non-cash goodwill impairment charge for Performance Chemicals of $260.0 million, or $1.92 per share, and the recognition of deferred tax assets associated with foreign tax credits of $56.3 million, or $0.42 per share. Adjusted EBITDA totaled $81.8 million, with Performance Chemicals benefiting from demand recovery and the successful implementation of its business transformation plans, which were offset by refiners recalibrating their activity and delaying change-outs in the Catalysts segment.
For the year, lower sales demand due to the global COVID-19 pandemic impacted sales volumes, partially offset by aggressive cost actions undertaken at all the business segments. Sales were $1,107.4 million, a decrease of 7.7 percent from 2019. Net loss was $176.3 million with $1.30 diluted loss per share. Adjusted net income was $136.9 million with Adjusted diluted EPS of $1.00 per share. Adjusted EBITDA totaled $338.0 million.
“Within the confines of the pandemic-influenced year, PQ delivered solid results in 2020, generated $153 million of adjusted free cash flow and drove an Adjusted EBITDA margin of more than 27 percent. The PQ team demonstrated steadfast character dealing with the uncertainties and complexities of the situation, supporting customers, protecting the business continuity, while tightly managing operations,” said Belgacem Chariag, PQ Chairman, President and Chief Executive Officer. “We are also excited at our growth prospects for 2021 and beyond, as we stand at the cusp of our most notable accomplishments within our ‘Simpler + Stronger’ portfolio transformation. As the economy begins to turn the corner, we are now positioning to be a high growth pure-play catalyst and services company that enables customer transitions to cleaner fuels and a circular economy for plastics.”
(1) Continuing operations for 2020 include the Company’s Refining Services, Catalysts and Performance Chemicals businesses.
Review of Segment Results
As anticipated, most of PQ’s customers experienced increased end use demand during the fourth quarter, ranging from packaged products to automotive sales. The construction and mining segments also demonstrated demand strength. The company expects stronger demand recovery in the second half of 2021 across all sectors, with most end uses improving at varying paces.
Refining Services saw North American gasoline demand partially recover in the second half of 2020 and end the year approximately 10 percent below 2019 demand levels, with U.S. refinery utilization rates in the low-to-mid-80 percent range. Looking ahead, utilization is expected to improve during the second quarter of 2021 and into the active summer season, especially with the anticipated progress in vaccination rates. As demand stabilizes, alkylate production is expected to continue to grow on higher octane fuel blending. Virgin sulfuric acid demand ended the year higher than 2019 levels as a recovery of mining and auto production improved heading into 2021.
For the quarter ended December 31, 2020, sales of $103.2 million decreased 2.3 percent versus the same period in 2019. Lower regeneration services volumes driven by reduced refinery run rates were partially offset by higher spot sales for virgin sulfuric acid. Adjusted EBITDA of $40.7 million decreased 2.9 percent on lower volumes and product mix.
For the year, sales of $401.9 million decreased 10.1 percent versus the same period in 2019. With the onset of the global pandemic, demand for regeneration services was impacted by lower refinery production rates as lower miles driven resulted in high gasoline inventories. Virgin sulfuric acid volumes were flat compared to prior year as the COVID-19 impact on industrial and automotive applications gave way to a recovery in the second half. Adjusted EBITDA of $157.2 million declined 10.5 percent due to lower overall volumes, partly offset by cost containment actions.
Sales for hydrocracking catalysts were strong in the first half of 2020 but tapered off in the second half as lower refinery utilization delayed the need for fixed-bed change-outs. Demand for the Company’s emission control catalysts used in heavy-duty diesel vehicles decreased since the first quarter of 2020 as their customers temporarily curtailed production to align with demand. Offsetting these impacts was higher polyethylene catalyst demand in 2020 on increased consumer consumption of films and packaging. The Company expects higher catalyst demand in the second half of 2021 versus the first half, as polyolefin catalyst growth continues and refiners begin to restart hydrocracking and specialty catalyst change-outs.
For the quarter ended December 31, 2020, Silica Catalysts sales of $20.9 million decreased 10.3 percent versus the same period in 2019. Continued favorable demand growth for polyolefin catalysts was more than offset by lower methyl methacrylate sales. Zeolyst JV sales of $28.9 million declined 38.9 percent on lower hydrocracking orders due to deferred catalyst change-outs by refineries and the pace of recovery for custom and emission control catalysts. Adjusted EBITDA of $14.8 million decreased 47.9 percent due to lower sales volumes and unfavorable product mix.
For the year, Silica Catalysts sales of $94.0 million increased 9.7 percent versus the same period in 2019, benefiting from higher sales volumes for polyolefin catalysts. Zeolyst JV sales of $128.6 million declined 24.5 percent largely due to lower demand for hydrocracking and specialty catalysts following a robust 2019 that saw the second-highest year on record followed by deferrals in 2020 customer change-outs. Results also reflected lower emission control catalyst sales on heavy-duty diesel production. Adjusted EBITDA of $74.5 million decreased 30.9 percent on reduced sales volumes from Zeolyst JV.
Industrial demand continued to strengthen driven by automotive and coatings applications and the early signs of restocking within the global supply chain. In the fourth quarter, PQ experienced its best sales and Adjusted EBITDA results for Performance Chemicals since the first quarter of 2020.
For the quarter ended December 31, 2020, sales of $158.2 million increased 1.8 percent over the same period in 2019. This improvement was largely driven by recovery of sodium silicate for industrial applications and continued healthy demand of specialty silicas for personal care and surface coatings. Adjusted EBITDA of $35.5 million increased 7.6 percent on improved sales volumes and improved costs from the company’s business transformation initiatives.
For the year, sales of $614.7 million decreased 8.3 percent versus the same period in 2019 on lower global demand for sodium silicates across multiple customer industrial applications. Adjusted EBITDA of $142.4 million decreased 6.0 percent as favorable business transformation cost initiatives were more than offset by lower sales volumes.
Cash Flows and Balance Sheet
For the year ended December 31, 2020, cash flows from operating activities from continuing operations decreased $22.3 million to $205.4 million, compared to $227.7 million for the same period in 2019. This decrease was primarily driven by a decrease in net income.
On December 31, 2020, the Company had cash and cash equivalents of $135.5 million and total debt outstanding of $1,426.4 million. During the year ended December 31, 2020, the Company repaid $467 million of long-term debt and the net debt to Adjusted EBITDA ratio was 3.8x as of December 31, 2020.
On March 1, 2021, the Company announced that it has entered into a definitive agreement to sell its Performance Chemicals business to a partnership between Cerberus Capital Management, L.P. and Koch Minerals & Trading LLC for a purchase price of $1.1 billion.
Upon the anticipated close in 2021 and finalization of net cash proceeds, PQ plans to return capital to shareholders through a special dividend of $2.50 to $3.25 per share (subject to Board approval and declaration), which is expected to result in a debt reduction of $450 million to $550 million.
In addition, on March 1, 2021, PQ closed on its acquisition of Chem32, LLC from its founders for a purchase price of $44 million to complement the Company’s Refining Services business. Chem32 is a leading supplier of catalyst pre-activation services used in the production of traditional and renewable fuels. This addition, with its patented technology and services, is expected to grow rapidly and generate higher margins.
2021 Financial Outlook from Continuing Operations
With the announced sale of Performance Chemicals, PQ will be reporting this business as a discontinued operation beginning in the first quarter of 2021. Consequently, the company is providing 2021 guidance from continuing operations for Target PQ, which reflects the Refining Services and Catalyst businesses and excludes Performance Chemicals, as below:
- Sales of $555 to $565 million(2)
- Adjusted EBITDA of $215 to $225 million
- Adjusted free cash flow of $75 to $85 million
(2) GAAP sales only; Excludes proportionate 50 percent share of Zeolyst Joint Venture sales target of $140 to $150 million.
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