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PQ Group Holdings Inc. (NYSE:PQG)
Q3 2017 Earnings Conference Call
Nov. 13, 2017, 5:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the PQ Group Holdings Third Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the * key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press * then 1 on your telephone keypad. To withdraw your question, please press * then 2. Please note this event is being recorded. I would now like to turn the conference over to Mike Callahan, Investor Relations. Please go ahead.

Mike Callahan -- Investor Relations

Thank you, Austin. With me on the line, today is Jim Gentilcore, Chief Executive Officer, and Mike Crews, Chief Financial Officer. For reference, this call is being webcast and the earnings release that was issued after the market closed today, as well as a recording of today's call, will be available under the Investor Relations section of our website at investor.pqcorp.com. Some of the information provided today includes forward-looking statements, such as those regard our operating strategy and financial outlook for the rest of 2017, as well as results of operations, financial condition, liquidity, prospects, growth strategies, and product and service offerings. Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially.

These risks and uncertainties include those described in the risk factors of our prospectus filed with the SEC on September 28, 2017, as well as our other SEC filings. Any forward-looking statement speaks only as to the day on which it's made and we undertake no obligation to update any forward-looking statements. The non-GAAP measures that we discuss are detailed and reconciled with our GAAP counterparts in our press release and will also be included in our Form 10-Q when filed with the SEC and will be available in the Investor Relations section of our website. With that, I would like to turn the call over to Jim Gentilcore.

Jim Gentilcore -- Chief Executive Officer

Thanks, Mike. Good afternoon and thank you for joining today's call. Let me start with a summary of the quarter and then highlight some important markers for the execution of our long-term strategy. Mike Crews will then cover our financial performance and share our full-year 2017 guidance. At the end of the third quarter, we reached an exciting milestone in our company's proud 200-year history with the completion of our initial public offering. On this first public company earnings call, I'm pleased to report strong financial performance exceeding our expectations for both sales and adjusted EBITDA, enabling us to increase our expectations for the full year as reflected in our 2017 guidance. On behalf of the entire PQ team, I would like to thank all of the IPO participants for your confidence in our ability to continue driving long-term shareholder value.

For those of you that are just getting to know PQ, we are a leading catalyst and specialty chemicals company operating in two complementary segments. Our environmental catalyst and services segment is a leader in catalyst for clean fuels, emission control, and plastics, with a consistent track record of high, single-digit organic growth and near 40% adjusted EBITDA margins. Growth in this segment is driven by a host of increasing worldwide regulatory requirements and our customers depend on our innovation to keep them ahead of these challenges. Our performance materials and chemicals segment is a clear leader in silicate and specialty glass materials for a diverse set of end margins ranging from personal care to highway safety, with an accelerating organic growth story and adjusted EBITDA margins of 25%.

Growth in this segment was driven by some of the same regulatory requirements, but also consumer preference to use environmentally friendlier substitutes and more of the products they buy. Our two segments share a basis in silicate chemistries and a long track record of bringing innovative solutions in these chemistries to our customers' most difficult problems. As a result, we currently hold the No. 1 or 2 supply position for products generating over 90% of our sales. Our customers range from the world-class chemical and petrochemical companies to small, independent businesses counting on our products and services to further their success. Our business has generated consistently strong margins and cash flow through economic cycles and our IPO enhances our ability to generate free cash flow.

Our capital deployment strategy will focus on additional de-leveraging, attractive organic growth investments, and tuck-in acquisitions. We believe that our business model enables PQ to deliver a combination of growth and consistency that is unique in the specialty chemical sector. The benefits of this model were evident in the third quarter. We had topline year-over-year growth in four of our five products groups, leading off with a 33% increase in sales from Zeolyst, our joint venture with Shell. Overall, we grew by nearly 6% to $392 million against the backdrop of Hurricane Harvey, which affected our sales by around $5.5 million. The topline growth included a good mix of organic and acquisition growth and contribution from new products in both operating segments. Adjusted EBITDA was $120 million, up 5.5%, and delivering a margin just shy of 28%.

With the IPO proceeds, we began our debt-and-payment process with a meaningful offset to our leverage position. Overall, this was a solid quarter out of the gate as a public company. I would like to thank all of our employees for the hard work and dedication during this important time for PQ. For those that went above and beyond for our swift recovery from the hurricanes, a very special thanks. Next, I'd like to cover some strategic highlights and touch a few key areas of development. In our environmental catalyst and services segment, our joint venture was a standout with its 33% topline growth in one of our most profitable product groups. The strong performance was important not only as evidenced at lower sulfur diesel demand is driving higher hydrocracking sales, but also because our new product vitality is beginning to bear fruit in higher volumes of specialty catalysts which will become increasingly more important to the growth of Zeolyst.

Our refining services team continues to advance our customer strategy with long-term contract renewals mitigating our volume and cost risk. Driven by the demand for higher octane levels in the gasoline pool and the strong competitive advantage of our U.S. Gulf Coast refinery customers, our long-term contracts make this a very attractive business. As you can see on page 5 of the earnings presentation, our sales for this important fuels and emissions market grew by 16 year over year in the third quarter. Moving on to the sales in our performance materials, they increased by 16% year over year. In this business, we are the global leader in the production of the specialty glass spheres that make roads safer by providing a bright, reflective marking to drivers and markers today and may be the critical link between the road and autonomous vehicles in the future.

This quarter's growth was achieved through the early success of our new thermoplastic product platform for the highway safety market and the successful completion of an acquisition that adds another important piece to our global position in performance materials. We are pleased to welcome the employees of Silvatech to the PQ team. The addition of Silvatech provides an even stronger platform to launch our new products in Europe and Latin America. Let me highlight one of these important new product platforms called ThermoDrop introduced earlier this year. With only two quarters under our belt since the commercial introduction of this platform, we are very early in the innovation adoption cycle, but we are cautiously optimistic that we have a winner here. There are two primary reasons for this optimism. First, we are a leader in the highway safety market for specialty glass spheres.

Because of our leading position, our customers often come to us first to solve the tough problems. They have been loud and clear on their need for a much better solution as they pursue the growing market for thermoplastics in highway safety. Second, this opens up a new served market but through the same customer channels that have known us as an industry leader for many years. We estimate this to be close to $500 million served available market worldwide where we can leverage our existing infrastructure and relationships, deep customer knowledge, and intellectual property to add a new growth dimension to our performance materials product portfolio. Before turning the call over to Mike, I will add that broadly speaking, we are pleased with our third quarter performance which underscores our fundamental growth drivers.

Our team did a tremendous job of remaining focused and delivering on execution against the backdrop of disaster recovery and the companywide effort to prepare for our initial public offering. As you will hear more specifically from Mike and you will see in our full-year 2017 guidance, we are confident in the remainder of this year and see 2018 as a great opportunity to continue to deliver strong shareholder value to our new public investors. Now Mike will take us through our financial performance in more detail.

Mike Crews -- Chief Financial Officer

Well, thanks, Jim. Good afternoon to everyone on the call. Today I will begin by detailing our consolidated and segment-level results, provide an update on our balance sheet and cash flow, and then conclude by covering our guidance for the remainder of 2017. As Jim noted, we delivered strong results in the third quarter. Consolidated sales excluding the Zeolyst joint venture were $391.8 million, an increase of 6% compared to the prior year. There were three primary factors that influenced our topline sales: broad-based organic growth across our product categories, the favorable impact of contract renewals, and the inclusion of Silvatech. Sales in our Zeolyst joint venture were up 33% to $37.6 million, compared to the prior year. Primarily for higher sales of hydrocracking and specialty catalyst products.

Consolidated adjusted EBITDA in the third quarter was $119.9 million, which marked a growth rate of nearly 6%, compared to $113.6 million in the prior year. On a year-to-date basis, consolidated adjusted EBITDA was $343.9 million, which represents a growth rate of 7% versus the prior year period. Our year-to-date adjusted EBITDA margin was 28.3%, which represents a 70 basis point improvement over the same period last year. Reviewing our results by segment, sales in our performance materials and chemicals segment were up 8% to $277.1 million from $256.1 million in the prior year. Segment growth stemmed from a 5% increase in performance chemicals and a 16% increase in performance materials which principally reflected the inclusion of Silvatech.

PM&C adjusted EBITDA in the third quarter was $65.9 million, or 23.8% of sales compared to $64.6 million, or 25.2% of sales in the prior year. Adjusted EBITDA margin contracted relative to the prior year as a result of including Silvatech's lower margins in the mix and start-up costs associated with ThermoDrop. Third quarter margin pressure from Silvatech was anticipated, as we still have synergies to realize as part of the integration process. We expect our margins to come up over the coming quarters to ultimately exceed the segment average. In our environmental catalyst and services segment, GAAP sales were up 1% to $115.5 million and sales of our shares of Zeolyst joint venture increased by 33% to $37.6 million.

Sales in the quarter were unfavorably impacted by approximately $5.6 million due to the temporary shutdown of refining services facilities affected by Hurricane Harvey, as well as the lower chemical catalyst sales due to record methyl methacrylate sales lines in the prior year, which was in line with our expectations. ECS adjusted EBITDA in the third quarter was $61.9 million, which grew by 10% from $56.4 million in the prior year. Adjusted EBITDA includes $14.4 million in joint venture adjusted EBITDA, which increased $4 million compared to the prior year. The increase in adjusted EBITDA was primarily the result of higher pricing from regeneration services contract renewals and higher joint venture profit from strong demand in hydrocracking catalyst and increased volume in specialty catalyst. The drivers were partially offset by the $4.7 million headwinds located to Hurricane Harvey.

EC&S adjusted EBITDA margin improved by 80 basis points to 40.4% compared to the prior period and was the result of increased pricing in refining services, and favorable risk from the joint venture, which all more than offset headwinds from Hurricane Harvey. As an added point of clarification, when we calculate our adjusted EBITDA margin in EC&S, we include our 50% share of the sales and adjusted EBITDA for the Zeolyst joint venture. Turning back to our consolidated results, gross profit was $102.5 million, or 26.2% of sales, compared to $95.3 million or 25.8% of sales in 2016, an improvement of approximately 40 basis points. Selling general and administrative expenses were $36 million, or 9.2% of sales in the third quarter, compared to $36 million or 9.7% of sales in the prior year. Other operating expenses increased $4.8 million to $19.8 million in the third quarter, as a result of higher losses on asset sales and restructuring and plant closure costs primarily associated with the Silvatech integration.

Equity income in affiliated companies, which is primarily our Zeolyst joint venture, was $10.3 million in the third quarter of 2017, compared to a $4.6 million loss in the prior-year quarter. This change was due to a $4.2 million increase in earnings on approved volume and $10.4 million of lower amortization on the fair value step-up of assets in the Zeolyst joint venture. GAAP pre-tax income during the quarter was $2.1 million compared to a $13.1 million loss in the prior year. Income tax expense during the quarter was $5.2 million, compared to a tax benefit in the prior year of $3.5 million. For the quarter, we reported a GAAP net loss attributed to PQ Group Holdings of $3.4 million, or $0.03 per diluted share compared to a GAAP net loss in the prior year period of $10 million or $0.10 per diluted share.

Adjusted net income, which primarily excludes non-operating income or expenses and the impact of other items that are included in net income that we do not consider indicative of our ongoing operating performance, was $11.2 million or $0.11 per diluted share. This compared to $12.3 million or $0.12 per diluted share in 2016. Note that these net income figures do not reflect the impact of IPO deleveraging, a reduction in interest expense of approximately $13 million per quarter that will begin in the fourth quarter. Our diluted share count for the third quarter of 2017 was just over 104 million shares. Following the IPO and beginning in the fourth quarter, we expect our fully diluted share count, assuming no changes from vested options, to be approximately 133.8 million shares. Taking a look at our balance sheet and cash flow, we finished the quarter with $68.8 million of cash and total debt outstanding of $2.7 billion.

Net of the repayment with IPO proceeds, our current debt outstanding is now $2.26 billion, which leaves us with a trailing 12-month net debt to EBITDA of approximately 4.9X. Subsequent to the end of the third quarter, we used the net proceeds from the IPO to repay a portion of our highest interest rate debt, providing an ongoing interest savings of approximately $54 million annually. We are currently evaluating our options to refinance the remainder of a high-interest note and will provide an update as additional information becomes available. Our cash flow from operations for the year-to-date period was $109.8 million. Capital expenditures through the first 9 months of 2017 were $90.2 million compared to $106.4 million in the prior year on a pro forma basis. We generated approximately $20 million of free cash in the year-to-date period.

Turning to our 2017 financial guidance, our improved outlook on the rest of the year leads us to target sales including sales for the Zeolyst joint venture of $1,585 million to $1,605 million. Adjusted EBITDA of $447 million to $453 million, which would be an increase of 6 to 8% versus 2016 results and other specific line items for the income statement as outlined in the release. We are also targeting capital expenditures for the year to be between $140 and $150 million. With that overview of our financial op results, operator, we're now ready to take some questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. To ask a question, you may press * then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press * then 2. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Our first question comes from Vincent Andrews with Morgan Stanley. Please go ahead.

Neel Kumar -- Morgan Stanley -- Vice President, Equity Research

Hi, this is Neel Kumar calling in for Vincent. I was wondering what type of impact did you see from the Silvatech acquisition in the quarter and can you give us the most color on the expected integration benefits in the transaction?

Jim Gentilcore -- Chief Executive Officer

Let me first just address the general observation. The integration is going well. The team and the people that we expect to stay are staying and contributing already to the combined businesses. We're very excited about where we saw it going in seems to be the way it's working out as we get into the middle of the integration. Mike, do you want to address some of the more specifics?

Mike Crews -- Chief Financial Officer

Sure. From a financial perspective in the quarter, the sales attributable at Silvatech were $13.5 million. If you look at the supplemental presentation that we provided in the bridge for EBITDA, you'll see in the acquisition column, that's the Silvatech contribution of EBITDA of $2 million.

Neel Kumar -- Morgan Stanley -- Vice President, Equity Research

Thanks for that. Then in your guidance, can you just kind of give us a sense of the breakdown EBITDA growth by segment in 4Q? I just want to get an understanding of where you think the increased confidence for the full year is.

Mike Crews -- Chief Financial Officer

As we think about the guidance for the rest of the year and the implied guidance for the fourth quarter, we see a lot of that EBITDA growth being led by the PM&C segment. That is largely because when you look at the EC&S segment, some of the growth that we've consistently had from quarter to quarter was in refining services will continue. But as you look at the Zeolyst joint venture contribution, there's a pretty tough comp in the fourth quarter of last year that mutes some of that benefit in refining services.

Neel Kumar -- Morgan Stanley -- Vice President, Equity Research

Great, thanks.

Operator

Our next is from P.J. Juvekcar with Citi. Please go ahead.

Scott Goldstein -- Citi -- Analyst

Hi, good evening. This is Scott Goldstein on for P.J. Going back to PNC, can you talk about when maybe you expected ThermoDrop's start-up costs cease being headwinds to margins? Going forward, what is the contribution to sales from ThermoDrop rollout going forward? Thank you.

Jim Gentilcore -- Chief Executive Officer

Let me take that first. As far as the start-up costs, I believe that they'll be behind us this year for sure. The contribution on the commercial side you'll see in the heavy striking season that starts in the second quarter of next year. As you recall, the second and third quarters are our strongest sales quarters for that business. This year, we had a chance to have our early adopters start using the product. That's why I mentioned in my prepared remarks about the optimism that we have. The feedback from those customers is strong. We expect to see it in the second and third quarters of next year.

Scott Goldstein -- Citi -- Analyst

Okay, thank you.

Operator

Our next question comes from David Begleiter with Deutsche Bank. Please go ahead.

Katherine Griffin -- Deutsche Bank -- Analyst

Hi, this is Katherine Griffin on for David. First, just wanted to talk about the lower sales into MMA. Just wondering what your outlook is for the rest of the year and for 2018? Do you expect to kind of lap the tough year of comp and maybe see those get better?

Jim Gentilcore -- Chief Executive Officer

Yeah, Mike will talk about the specific numbers. Let me just remind those that are getting to know the company, as I said. We are the exclusive provider of the catalyst for MMA for the largest producer of MMA by about 3X. We're very confident that our long-term position exclusively and with the leader in this market is going to show through the numbers for quarters to come. Having said that, it's a tough comp against last year, so Mike if you want to.

Mike Crews -- Chief Financial Officer

Thanks, Jim. Yeah, last year was a record year. Some of it has to do with when you're doing full charges and top-offs by unit. We had high volume levels in 2016. That's why it indicated that it was in line with our expectations that we would be down this year. There's been a little bit of timing between the third quarter and the fourth quarter, so we expect to get a little bit of that back in the fourth quarter of this year and certainly, we expect growth in 2018 in this category.

Katherine Griffin -- Deutsche Bank -- Analyst

Great, thanks. On silicate catalysts, one of your competitors announced a 6% price increase for silica-based materials in 2018. Just curious about your outlook on pricing in silicate catalysts for 2018.

Jim Gentilcore -- Chief Executive Officer

Sure. First of all, we share their view that this is a time when the demand is high, capacity is being utilized at very high levels. It's a good time for our customers to appreciate the value that we bring. Typically, we are discussing prices with our customers throughout the year and making sure that we're getting paid for the value that we provide. For us, this is a sign of a tight market. The customer is willing to pay for the value that they get. We're glad to see that in some of the markets that they mention specifically that they're finally starting to see that connection between value for the technology and the price that the customer is willing to pay, as we've seen in our catalyst for a long time.

Katherine Griffin -- Deutsche Bank -- Analyst

Okay, great. Thank you.

Operator

Our next question comes from Jeff Zekauskus with J.P. Morgan. Please go ahead.

Jeff Zekauskus -- J.P. Morgan -- Analyst

Thanks very much. In your calculation of adjusted EBITDA, you add back $5.2 million for taxes. Why do you add that back? Didn't you have to pay that?

Mike Crews -- Chief Financial Officer

Jeff, this is Mike Crews. Are you referring to page 13 of the earnings presentation?

Jeff Zekauskus -- J.P. Morgan -- Analyst

Yes, that's exactly right. Why is that an add back?

Mike Crews -- Chief Financial Officer

Well, that's because the first part of that just starts with the net loss to get you to the normal definition of EBITDA. Then the EBITDA adjustments are after that. They're in the lower half of the page.

Jeff Zekauskus -- J.P. Morgan -- Analyst

Okay. In your adjusted earnings to get you to $11.2 million, how much is the adjustment to cost of goods sold?

Mike Crews -- Chief Financial Officer

That's not a number I think I have at my fingertips. We can certainly get that for you.

Jeff Zekauskus -- J.P. Morgan -- Analyst

All right. Can you tell us what price, volume, currency, and acquisition effects were to come up with your 5.8% sales growth?

Mike Crews -- Chief Financial Officer

You can see that on the segment basis. It's probably the easiest place to see it. Did you say sales or EBITDA? I'm sorry.

Jeff Zekauskus -- J.P. Morgan -- Analyst

Sales. In other words, I wanted to know what the components of the 5.8% sales growth were.

Mike Crews -- Chief Financial Officer

We don't have the sales broken out in that manner, but if you look at the EBITDA bridges on pages 7 and 8, that will give you an approximation as you think about the EBITDA effect in the margins of the segment can help approximate the sales numbers. But if you look at EC&S, there was a little bit of volume improvement -- $2.5 million on an EBITDA basis largely lead by the Zeolyst joint venture. We talked about the hydrocracking catalyst and specialty catalyst sales. Then the pricing is really being driven by those contract renewals for regeneration services. Then in PM&C, there's $1 million of FX. Overall, the impact of FX on sales was $4.4 million in the quarter. Then, volume was down a little bit at $1.4 million. A little lower highway on products other than ThermoDrop, as we had a slower, weather-related start to the season.

Jeff Zekauskus -- J.P. Morgan -- Analyst

Okay, great. Thank you so much.

Mike Crews -- Chief Financial Officer

Sure.

Operator

Our next question comes from Laurence Alexander with Jefferies. Please go ahead.

Dan Rizzo -- Jefferies -- Analyst

Hi, guys. This is Dan Rizzo on for Laurence. How are you?

Jim Gentilcore -- Chief Executive Officer

Good.

Dan Rizzo -- Jefferies -- Analyst

Can you break down how the growth in the JV affects mix and how much pricing outpaced raw materials?

Mike Crews -- Chief Financial Officer

The JV improvements were really led by volume. It was not a lot of a cost impact in the joint venture itself. The actual price value mix is spread across the EBITDA bridge components on page 7 of that presentation. When you look at that, there was not a lot of cost inflation as a drag at all because when you look at variable cost, it was invariable by $1.1 million, and that was largely product mix related. We didn't see a lot of issues there with input costs and having an impact on margins.

Dan Rizzo -- Jefferies -- Analyst

Okay. What does the outlook for MMA capacity additions over the next two years?

Jim Gentilcore -- Chief Executive Officer

I think we shared some industry numbers that showed growth in that business in the mid-single digits. As I said, more importantly for us is that our position with the leader in that business by a large margin, 2.3 to 3X the closest competitor, in an exclusive position puts us in good stead when it comes to whatever the actual growth number turns out to be. But I'm sure it was a mid-single digit growth number.

Dan Rizzo -- Jefferies -- Analyst

Thank you very much.

Operator

Our next question comes from Mike Sison with KeyBanc. Please go ahead.

Mike Sison -- KeyBanc -- Analyst

Hey, guys. Congrats on a good quarter.

Jim Gentilcore -- Chief Executive Officer

Thank you.

Mike Sison -- KeyBanc -- Analyst

It looks like you're going to end the '17 with good momentum. When you think about '18, can you maybe qualitatively talk about areas that you should see growth next year, maybe by segment?

Jim Gentilcore -- Chief Executive Officer

Yeah, qualitatively -- and obviously Mike will fill in a lot of this when we guide for 2018 and we report the end of '17. Right now, the catalyst business continues to show momentum into next year. The drivers there, the low-sulfur diesel fuel requirement and for us that's primarily heavy-duty diesel, continues to go strong. There's tailpipe emission control for the heavy-duty diesel and then low-sulfur for any diesel fuels, related fuels in particular. Both of those should carry into '18 with the kind of momentum we're seeing now. We're optimistic. There's not a lot of surprises that we can see out there today in the market momentum for all of our key markets. I think I mentioned, Mike, that if you look at the way our third quarter grew in the imported fuels and emissions market, up 16% year over year. We're confident that we're in a good position that market keeps growing. Frankly, we don't see anything that's going to slow that down in '18.

Mike Sison -- KeyBanc -- Analyst

Great. Then as a quick follow-up, for regeneration services, when you think about the opportunities to maybe win more captive players down the road, can you maybe talk about the pipeline there and maybe also pricing opportunities as you head into '18?

Jim Gentilcore -- Chief Executive Officer

Sure. Let me take the first one. As far as the pipeline opportunities, because of the network that we have, I think we've shared with most people that we have better than half of the market share in the Gulf Coast region, which is where we see most of the growth for alkaloid capacity. Of course, the demand is everywhere where octane blends are increasing in the gas pool. But we're very close to all the customers that are looking to either add capacity themselves or are considering the de-captivation process. We like the pipeline going into '18. We think it's going to get stronger in later years. Then as far as pricing, Mike Crews talked about the contract renewal impact already. That just continues as we spread the contracts out and make sure we've got a good, staggered contract termination for all the contracts. Our customers appreciate the demand is going to get tighter over the next several years.

First of all, they appreciate our cost structure and they want to make sure that we're able to recover costs that we need to pass through. A large part of that market, Mike, is we have pass-throughs included in our contracts. But also on the supply side of it, they want to make sure that they're in line for the capacity that's left and the incremental capacity that we'll be bringing on down the road. That business feels particularly strong to us because of our position and because of what we see as an increasing demand for the octane blend.

Mike Sison -- KeyBanc -- Analyst

Great, thank you.

Jim Gentilcore -- Chief Executive Officer

Thank you, Mike.

Operator

Our next question is from Chris Parkinson with Credit Suisse. Please go ahead.

Chris Parkinson -- Credit Suisse -- Analyst

Great, thank you. Can you take us on a quick end-market walkthrough on performance chemicals? Just what you're seeing in any qualitative preliminary expectations for '18? Then as well in addition to that, any quick thoughts on the cadence for the ramp of ThermoDrop. Thank you.

Jim Gentilcore -- Chief Executive Officer

Sure. First, Chris, just kind of a walkthrough on performance chemicals. Yeah, we see the green tire market, which is the biggest volume market for us there in that area is still going very strong. We also see that the dental silica market continues to be strong and the value the customers pay there-they're at the high end of the value stream for the performance chemicals products. We see generally a good market for a lot of the other silicates besides sodium silicate that we play in, but they're smaller value opportunities for us. Just in general industrial processed chemicals, if you just kind of went around the world like we have on page 5 here, we see the performance chemicals strong in all the areas that we're targeting. The only areas that continue to drop off in volume are the laundry detergents and the pulp and paper, which we've planned for. That's built into our expectations.

That tends to be at the lower end of the value scale anyway. We're replacing it with higher end, higher value margin products. On ThermoDrop, this next year, as I said, we've had two years now where only the early adopters have had a chance to get product because we were just building capacity in '17. But in '18, we expect that quarters 2 and 3 is where we're going to see a strong commercial impact and prove out that we've got adequate capacity to get through '18 and to stage us for growth that we expect in '19 and beyond.

Chris Parkinson -- Credit Suisse -- Analyst

Great, thanks. Can you just talk a little more about your thoughts on the balance sheet? Just any views on both the short and long-term debt and indicative leverage and just how this theme coincides over the next few years along with any near or long-term M&A prospects? Any comments there would be appreciated. Thank you.

Jim Gentilcore -- Chief Executive Officer

Sure. Let me preface by saying that we made it clear that we're going to have a very disciplined approach to our capacity structure. Our first order of the day is to reduce debt and to get our leverage down. Mike shared and will share our goal for de-leveraging. I was to also say that we have a muscle memory, if you will, for how to do these tuck-in acquisitions. In fact, we know how to do transformative acquisitions, as demonstrated by our acquisition from Selve, but frankly, I don't see that in the near future. But the small tuck-ins that are out there, we know how to value them right. Our integration teams know how to get them integrated quickly. Silvatech is a good example of that one. We'll continue to look for those.

I think the priority going forward looking at where we'll deploy capital is primarily pay down the debt, invest in organic growth, and then look for these tuck-in acquisitions that we can create and get at a good value and integrate quickly into our normal operations. Mike, do you want to talk about anything more specifically?

Mike Crews -- Chief Financial Officer

Yeah. I think that the pro forma for the IPO or net debt to EBITDA is at about 4.9X today. We've stated a targeted leverage range of 3 to 3.5X. That's after EBITDA. We believe we can reduce our leverage about a half a turn a year just through the combination of debt paydown and EBITDA growth. One of the great starting points is you have to start with generating a lot of operating cash flow and then you figure out how to deploy that, which we've done to invest in the business and the capacity additions that are allowing us to drive the EBITDA growth of 7% that we've seen historically and that we've seen year to date. When you couple with that the de-leveraging from the IPO and other actions that we may take to improve the capital structure, that's going to drive cash interest savings that's going to provide additional cash flow as well.

Just from the de-leveraging from the IPO, we see another $35 to $40 million next year of lower cash interests. We're set up well to achieve our targets in that area. With a balance between the de-leveraging and where it makes sense for something small on the M&A side, we can look at that as well. We'll have that flexibility.

Chris Parkinson -- Credit Suisse -- Analyst

That's great color. Thank you.

Operator

Our next question is from Robert Koort with Goldman Sachs. Please go ahead.

Robert Koort -- Goldman Sachs -- Analyst

Thanks, guys. Good afternoon.

Jim Gentilcore -- Chief Executive Officer

Hi, Bob.

Mike Crews -- Chief Financial Officer

Hello.

Robert Koort -- Goldman Sachs -- Analyst

Jim, I was wondering if you could help me out with the refinery services in that pricing. I guess it looks like somewhere mid or upper single-digit year-on-year pricing. Is that in a reasonable ballpark? Will that be lumpy going forward? How should we think about your opportunity to continue repricing contracts through the next one to two years?

Jim Gentilcore -- Chief Executive Officer

Good question, Bob. I think that at first, it will be a little lumpy. Our bigger refinery customers, when we do negotiate the contracts, we're negotiating all of their contracts. So without naming the biggest guys, you can imagine that. And, in fact, in 2017, we finished negotiations with our largest customer there. I would expect that you'll see a tailing off a little bit until the next set of contracts comes through. So there will be a little bit of lumpiness, but I think that's the kind of-the range that we saw if we numberize all of '17, is what we would expect over a one to two-year period.

Robert Koort -- Goldman Sachs -- Analyst

Got it. Then when you guys report EC&S, is the volume in the bridge for the EBITDA, is the volume number there inclusive or exclusive of Zeolyst?

Jim Gentilcore -- Chief Executive Officer

It's inclusive.

Robert Koort -- Goldman Sachs -- Analyst

So could I follow up and ask, given how strong those sales were, if we exclude the hurricane impacts, how would you characterize the balance of volume growth in that division?

Jim Gentilcore -- Chief Executive Officer

For Zeolyst, once again, the third quarter was a tough comp. Although, as we said, hydrocracking and specialty catalysts were-that's what really drove up this quarter. I think if you look at --

Mike Crews -- Chief Financial Officer

If you look at the Zeolyst joint venture, what was really driving its improvement was all in volume and hydrocracking and specialty catalyst. Then we talked about the negative impact of Harvey being $5.6 million on sales and $4.7 million on EBITDA. There wasn't a lot of rehab costs in that EBITDA number. That gives you an idea of what the netting items are doing inside that volume. The other thing that tempers that is, as we talked about, the methyl methacrylate sales are down as we expected. That leaves you with a pretty large starting point and then a couple of items between Harvey and MMA that are bringing it back down to that small number.

Robert Koort -- Goldman Sachs -- Analyst

If I can slip a last quick one in-what are your expectations on retiring the rest of the unsecured floating notes and then maybe priorities of cash flow after that?

Mike Crews -- Chief Financial Officer

Coming out of the IPO, we've got about $78.8 million. We're looking very closely at what our options are to do something with that higher cost debt, along with just other items to potentially optimize the capital structure. We're looking at that very closely today. Nothing to report on this call, but as soon as we have some additional information, I can make that available. I think Jim may have touched on some of the priorities for cash. We talked about our de-leveraging target at 3 to 3.5X. We may balance that against some incremental tuck-in M&A at the same time. But our primary goal here is to de-lever.

Robert Koort -- Goldman Sachs -- Analyst

Got it. Thank you.

Mike Crews -- Chief Financial Officer

You're welcome.

Operator

Again, if you would like to ask a question, please press * then 1. Our next question comes from Aleksey Yefremov with Nomura Instinet. Please go ahead.

Matt Skowronski -- Nomura Instinet -- Analyst

This is Matt Skowronski on for Aleksey. Are you still expecting to receive insurance proceeds from Harvey during the fourth quarter or will this stretch into 2018?

Mike Crews -- Chief Financial Officer

This is Mike. It is more likely that will stretch into 2018.

Matt Skowronski -- Nomura Instinet -- Analyst

Okay, thank you. Then following up with a previous question on refining services, did you mean to say that pricing renews on January 1st for those contracts or with your new contracts is that going to be staggered throughout the year?

Mike Crews -- Chief Financial Officer

The contract renewals that you're seeing the benefit for this year were renewed in the fourth quarter of last year. That benefits been accruing to us throughout 2017.

Matt Skowronski -- Nomura Instinet -- Analyst

Thank you.

Operator

Our next question is from Laurent Favre with Evercore ISI. Please go ahead.

Laurent Favre -- Evercore ISI -- Analyst

Good evening, guys. Question from me on net pricing in PM&C. I think it was marginally negative in the third quarter. Can you talk about how and when you think you could get net pricing back into positive territory? Is it a matter of waiting for the passthrough to kick in or are you actively pushing for prices? Thank you.

Mike Crews -- Chief Financial Officer

Hi, Laurent. This is Mike. When you look at the bridge on page 8 of the presentation, are you netting the two between price and variable cost? Is that what you're referring to?

Laurent Favre -- Evercore ISI -- Analyst

Yes.

Mike Crews -- Chief Financial Officer

Yeah, we're favorable on price of 2.6. The variable costs are negative by 2.9. While we had a very high percentage of pass-throughs, there can be a lie from one quarter to the next. But relatively speaking, it's pretty close. The other thing is part of that variable cost unfavorable change is there are some higher shipping costs which are associated with higher volume.

Laurent Favre -- Evercore ISI -- Analyst

I see. Then on raw materials, some of them are actually rated up through the third quarter, partially on the Harvey, again is this something we should have in mind for the fourth quarter or is this in the control in your new guidance?

Jim Gentilcore -- Chief Executive Officer

Laurent, let me just say that first of all, I think we've pointed out that we do have cost pass-through on a good portion of the performance chemicals contracts and an even larger portion of the refining services contracts. And our customers are sensitive. Obviously, TIO2, caustic, natural gas, they're all very familiar with what's happening there. Where we don't have cost pass-throughs specifically in a contract, we're already negotiating with those customers to move those prices up as the input costs continue to go up.

Mike Crews -- Chief Financial Officer

And the potential impact of that as it relates to the fourth quarter has been incorporated into our guidance.

Laurent Favre -- Evercore ISI -- Analyst

Thank you.

Operator

This concludes our question-and-answer question. I would like to turn the conference back over to Jim Gentilcore for any closing remarks.

Jim Gentilcore -- Chief Executive Officer

Thank you. I just wanted to thank everyone for your interest in PQ Corporation. We look forward to demonstrating our focus on delivering shareholder value and reporting on our progress in the quarters ahead. Thank you very much.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 47 minutes

Call participants:

Mike Callahan -- Investor Relations 

Jim Gentilcore -- Chief Executive Officer

Mike Crews -- Chief Financial Officer

Neel Kumar -- Morgan Stanley -- Vice President, Equity Research

Scott Goldstein -- Citi -- Analyst

Katherine Griffin -- Deutsche Bank -- Analyst

Jeff Zekauskus -- J.P. Morgan -- Analyst

Dan Rizzo -- Jefferies -- Analyst

Mike Sison -- KeyBanc -- Analyst

Chris Parkinson -- Credit Suisse -- Analyst

Robert Koort -- Goldman Sachs -- Analyst

Matt Skowronski -- Nomura Instinet -- Analyst

Laurent Favre -- Evercore ISI -- Analyst

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