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PQ GROUP HLDGS INC COM USD0.01 (NYSE:PQG)
Q2 2019 Earnings Call
Aug 08, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to the PQ Group Holdings second-quarter 2019 earnings conference call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Nahla Azmy, vice president of investor relations. Please go ahead.

Nahla Azmy -- Vice President of Investor Relations

Thank you, Chad. Welcome to everyone joining us for our second-quarter 2019 earnings results call. We will start today with formal remarks from Belgacem Chariag, 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 forward-looking statements that we make today about the company's results and plans are 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. And now with that, I'm pleased to turn the call to Belgacem.

Belgacem Chariag -- President and Chief Executive Officer

Thank you, Nahla and good morning, everyone. And thank you for joining us this morning. I'll begin on Slide 3, with the progress we have made during the second quarter in the key areas of our business. First on safety.

And through active and frequent global communications interactions, and recognitions we are continuing to drive heightened awareness in order to create a fully interdependent and safe work environment. The executive team, the business leaders, and the employees are well aligned, and focused on our target of reaching top quartile performance. Second, on our commercial activities. This quarter reflects another outstanding results from the team executing on price actions for our value-added products and services across our entire portfolio.

Further, in refining services, we extended two meaningful contracts covering approximately 15% of our volumes through 2023 and 2025 on favorable terms. And in silica catalysts, our polyethylene sales grew by double digits for the fourth consecutive quarter as polyethylene plants continue to come online predominantly in the U.S. and China, and new business regain for existing capacity in the Middle East. Additionally, we also recently won new business in Europe and the U.S.

as a result of our Korean towing partnership. Third, on our portfolio optimization strategy, and having concluded our assessment of the portfolio, we are now in the process of executing on our plans. On our previous call, we indicated that these plans include the sale of specific non-core assets at the product-line level that could be of more value outside PQ. I'm pleased to share that we recently completed the sale of a portion of our nonstrategic sulfate product line from within our performance chemicals business for $28 million.

This transaction value implies a multiple of 10 times 2018 adjusted EBITDA, which is an indication of the minimum value proposition for many of our business components. We have other actions under way within the businesses and the portfolio overall. And we expect to update you on our progress as we execute on them. Finally, on the second-quarter financial results, we delivered strong results with adjusted EBITDA growth resulting in margin improvements of 150 basis points versus the same period last year.

Our team's execution on the commercial and operational front drove the outstanding efficiency performance, even against the backdrop of slowing global demand growth, unfavorable weather, and foreign currency headwind. Our portfolio not only benefits from a diversity of secular demand drivers, but also the strength of our customers' position. That does and will continue to provide stability and sustainability through changing macroeconomics conditions. We are reaffirming our 2019 adjusted free cash flow guidance to a range of $125 million to $145 million, excluding proceeds from the recent sales transaction.

And we remain committed to using free cash flow to repay debt in the second half of 2019. We have already repaid $100 million of our term loan facility this month, and we expect we will repay at least a total of $150 million for the year. With that, I will turn the call to Mike for his financial review.

Mike Crews -- Executive Vice President and Chief Financial Officer

Well, thank you, Belgacem and good morning. We are pleased to report solid operational and financial performance for the second quarter that led to higher adjusted EBITDA and margins. And strong cash flow generation coupled with proceeds from an asset sale allowed us to repay the $100 million of term loan in August. So beginning with Slide 4, with a review of our consolidated related results.

Sales of $432 million were in line with the prior-year period. On a constant-currency basis, sales increased 1.4%, driven by price increases across the portfolio, which helped offset lower volumes. Adjusted EBITDA of $132 million increased 2.8% or 4.6% on a constant-currency basis. Improved operational performance in both refining services and catalyst drove most of the upside, offsetting the impact of weaker demand in performance chemicals.

Adjusted EBITDA margin of 28% increased approximately 150 basis points. Shifting to a discussion by business segment and refining services on Slide 5, sales rose 5% to $117 million. We benefited from favorable mix and higher average pricing, with the rolloff of a legacy contract for virgin asset that was at below market levels. Volumes were lower, driven mainly by unplanned customer outages that extended into the second quarter from the first quarter.

Adjusted EBITDA was up 3.6% on higher sales to approximately $43 million, and adjusted EBITDA margin remains strong at 36.5%. Then next on Slide 6 for a review of catalysts, silica catalyst sales of nearly $21 million rose 21%, driven by continued strong demand for polyethylene catalyst, coupled with an order that accelerated into the second quarter from the second half of 2019. Zeolyst joint venture sales of approximately $39 million were down 21%. This was attributable to over timing for hydrocracking and specialty catalysts as expected, and shipment delays due to flooding in the Midwest.

Adjusted EBITDA of $29.6 million was up 25%, resulting in a margin of 49%. The outperformance was driven by favorable product mix and higher absorption of fixed cost as we built inventory to meet shipments planned for the third quarter. Some of this benefit will reverse as we sell through inventory in the second half of 2019, and along with a higher proportion of hydrocracking catalyst sales, we expect margins in this segment for 2019 to approximate prior-year levels. Now for performance materials on Slide 7, sales of $119 million were down 6% or 3.5% on a constant-currency basis.

Continued higher pricing for highway safety products, coupled with a favorable mix was more than offset by lower volumes. This volume decline was largely attributable to poor North America weather conditions that impacted our highway safety product sales, lower ThermoDrop volumes as we selectively focus on customers who recognized the premium value of this product, and a slowdown in Europe for weaker industrial and automotive end users. Adjusted EBITDA of $29.2 million increased 2.1% or 3.9% on a constant-currency basis and margins improved by 200 basis points to 24.6%. This was the result of capturing price increases, favorable product mix, and lower freight costs with better utilization.

Turning to Slide 8 for performance chemicals, sales of nearly $178 million were down 3.3%, but were flat on a constant-currency basis as higher prices mitigated slowing demand in Europe and Mexico and for consumer cleaning products, globally. Adjusted EBITDA was $41.2 million, down 8% or 4.8% on a constant-currency basis resulting in a lower margin. While our price increases covered higher raw material costs, lower adjusted EBITDA margin were largely due to weaker demand, higher maintenance costs and an unfavorable currency impact of $1.5 million. Moving to Slide 9 for our 2019 guidance, with our solid first half performance and expectations for continued portfolio stability despite some pockets of softness in Europe, we are well-positioned to meet our key financial objectives for 2019, specifically adjusted EBITDA and adjusted free cash flow.

With respect to our sales outlook, through the first half of the year, we've experienced headwinds from the pass-through of lower sulfur costs and lower volumes, and expect further deterioration in sulfur pricing. We are therefore adjusting our sales outlook to be in the range of $1.58 billion to $1.6 billion from $1.64 billion to $1.67 billion to reflect the estimated full-year impact of these factors. However, based on higher pricing, favorable mix, and effective cost management, we are maintaining our 2019 adjusted EBITDA guidance in the range of $470 million to $485 million, with adjusted EBITDA margins similar to 2018 levels. For depreciation and amortization, we now expect to be in the range of $185 million to $195 million, down from $190 million to $200 million, given some capital spending has shifted to the second half of the year.

As a result of the lower depreciation and amortization, we are raising the lower end of our adjusted diluted EPS guidance to be in the range of $0.77 to $0.93 per share. As a reminder, amortization expense for acquisition-related intangibles is not added back as part of our definition of adjusted diluted EPS. This represents approximately $0.28 per share for 2019. Moving to the outlook at the business segment level, for refining services we expect sales to be down slightly by low single digits, reflecting lower sulfur pass-through while adjusted EBITDA is expected to increase in the low single-digit range, driven by higher average pricing.

For Catalyst, we expect silica catalysts and the Zeolyst joint venture sales and segment adjusted EBITDA growth in the double-digit range from expected robust sales demand for polyethylene, MMA and hydrocracking catalyst. Performance materials sales are expected to be down slightly year over year on lower volumes but expect high single-digit adjusted EBITDA growth of pricing drop-through, favorable mix, and improving logistical costs. Finally, for performance chemicals, we expect sales to be flat and adjusted EBITDA down low single digits due to anticipated weaker demand in Europe, favorable foreign exchange, and that the benefits of higher prices are only offsetting higher raw material costs. For the third-quarter 2019, we anticipate GAAP sales largely in line with Q2 levels on the pass-through pricing of lower sulfur costs.

Zeolyst joint venture sales are expected to be strong on higher hydrocracking catalyst sales. Adjusted EBITDA is expected to be in line with the second quarter, but up low double digits versus the prior-year third quarter, given the timing of orders for hydrocracking and specialty catalyst sales in the Zeolyst joint venture, and improved results from performance materials as higher demand and lower costs are expected to drive growth on the prior year. So to reiterate our key financial objectives, we are on track to generate adjusted free cash flow in the range of $125 million to $145 million, which is excludes the sale proceeds from the sulfate salts product line. We continue to dedicate free cash flow to debt repayment as evidenced this week with our recent reduction of our term loan by $100 million.

It's our expectation that by year-end, our net debt to adjusted EBITDA leverage ratio will fall to approximately 4 times. With that review of our second-quarter results, I will now turn the call back over to Belgacem.

Belgacem Chariag -- President and Chief Executive Officer

Thank you, Mike. And as we have done on the past earnings call -- earnings calls and in order to provide a more in-depth discussion of each of our business today, today we'd like to review performance chemicals. Turning to Slide 10 for an overview of the performance chemicals portfolio. We are a leading global provider of silicates, with nearly 200 years of developed materials science, innovation, and production expertise.

Silicates and silicate derivatives serve diverse end users and customer applications, and this diversity drives very stable results. We believe our business is one of the most competitively positioned, globally supplying to leading multinational industrial and consumer product manufacturers. This position is enabled by a few factors. First, the breadth of our global infrastructure is unparalleled in terms of scale and geography.

For our sodium silicate product line, we are at least 2 times larger than the nearest competitor. We have the advantage of geographic diversity while maintaining close proximity to our customers, which is important given that the high water content limits shipping distances. Further, our production routes are flexible to manage material supply reliability and cost. Second, our vertically integrated production stream from sodium silicates to specialty silicas, and other silicate derivatives enables us to serve higher-margin, niche end users such as food, personal care, and surface coating.

And third, we've built long-standing customer relationships of more than 50 years with key industry leaders through our track record for innovative solution and supply reliability and quality. This partnership with customers allows us to secure mid to long-term contracts for nearly two thirds of our sales, with in many cases the ability to pass-through changes in raw materials costs. Let's now turn to Slide 11, and here we'll review the end uses and some examples of the environmental and demand trends driving steady and sustainable growth of our products. Favorable demand trends for our products include population growth, urbanization, a growing middle class in the developing world and growing consumer preference and tightening regulations for safer and more environmentally friendly products.

Silicates and silica are derived from coarse sand, which makes them natural and inert materials. And as such, they are able to replace many other chemicals. Examples of such substitutions include phosphates for detergent applications, formaldehyde-based adhesives in construction materials and plastic microbeads in exfoliating personal care products. From the examples of the slide, our products have many end users and provide solutions for customer products performance needs including as enablers flow aids, solidifying agents and more.

As we move forward, to build up the strong base and part of the undertaken strategic assessment, we are targeting some meaningful new capacity optimization action that would accelerate our mid long-term growth profile improve our margins and drive better capital efficiency. To conclude on performance chemicals, this business is diverse, globally positioned and responds to several inevitable growth drivers. It provides a strong foundation to PQ portfolio with its stable financial performance including sustainable margin of strong cash flow generation. In closing of this call, I would like to leave you with the following thoughts: our differentiated portfolio businesses has proven history of delivering stable results in changing macroeconomics environment.

We had solid first half performance that positions us to deliver on our 2019 key financial objectives. Given the first half performance, coupled with order commitments in our catalyst business, we anticipate that our second half result will be stronger than the first half of the year. We will continue to execute and communicate on our plans to optimize our portfolio, and streamline our businesses to be simpler and stronger. And finally, we are fully committed to driving shareholder value through capital efficiency, generating strong free cash flow and progressing toward our leverage targets.

That concludes our prepared remarks and we're now ready for questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] The first question will be from John McNulty with BMO Capital Markets. Please go ahead.

John McNulty -- BMO Capital Markets -- Analyst

Thanks for taking my questions, and congratulations on a solid quarter in what's -- looks like a tough environment out there. With regard to the portfolio looking -- you've made a good solid move. It looks like this past quarter I guess, what can we see -- or it sounds like there are other sales to come or other tweaking of the portfolio to come. I guess do you think any of that can be done before the rest of the year is out? Or is this something that really kind of pushes into 2020 as we look out?

Belgacem Chariag -- President and Chief Executive Officer

Hi, John, thanks for the question. Let me quickly walk you back to what happened in the last three quarters. In the last of the year, we went into this announces of our portfolio. We studied the businesses.

We started to look at how they fit together and how the portfolio can remain strong and be even stronger. We made a decision to delay the organization and enable the businesses to be stand-alone so that we can dig deeper and understand the components of the business. Step 3 is we went into each business and we looked at the components of the business and some product lines, and we made an evaluation based on future growth potentials give ability, and the impact on the current portfolio. And then we started -- we built a list of elements that we will follow-up on.

One of them was what we just actioned on, on the salt business that we managed to execute on time and at a very, very good value that I believe was the right thing to do for us. What's next would be a continuation of the similar exercise that we started. As I said in my remarks, we're looking at many other things, we're looking at the portfolio as a whole, and we believe there will be some things going on. I can't give you the right time, but I think we're very, very active today and I expect to see some things happening in the future, and we will definitely keep you up to speed.

John McNulty -- BMO Capital Markets -- Analyst

Great. Thanks for the color on that. And then I guess in the refining services segment I guess maybe two questions there, how many other asset contracts would you say you currently have there below market that will eventually roll off? And then I guess the second one would be, just given the condition of their refining market right now, which looks difficult, are you seeing any incremental interest in those refiners possibly shifting their captive asset production to outsourcing it to companies like yourself?

Mike Crews -- Executive Vice President and Chief Financial Officer

Hi, John, this is Mike. So with respect to the repricing, there's a lot that has taken place over the last few years. We tend to do 20% to 25% per year. This one was different in particular, it was a legacy contract that came over with the acquisition of Eco Services.

And you may recall that we had a gain in the fourth quarter of last year because that contract terminated, and we wrote off the deferred contract liability that we have for that. So that went away in the fourth quarter. So as that capacity became available, it got replaced with higher price business that's why we talked about having higher average pricing year over year. With respect to the refiners, we're not really seeing anything in terms of major shifting your has -- there's probably 10% of the population that is considered to be captive.

We have converted some captives over the last couple of years. I think 2015, '16 was the last one. So they're episodic, it's whenever the refiners decide they have to make that capital commitment and whether they want to tie themselves to just one asset plant versus the advantage we have with the network. So don't see anything in the near term horizon on that, particularly as it relates to current market conditions.

But it's something we look at very closely because we can provide a lot of value with those conversions.

John McNulty -- BMO Capital Markets -- Analyst

Got it. Thanks very much for the color.

Operator

Our next question will be from Christopher Parkinson with Credit Suisse. Please go ahead.

Christopher Parkinson -- Credit Suisse -- Analyst

Great. Thank you. You've done a true analysis on the subsegment basis, so when you look at your business mix respective growth rate assumptions and subsequent working capital needs. What should we expect on the cash conversion the from versus what assumptions are currently making into the $125 million to $145 million this year, is there any big changes over the next two years? Thank you.

Mike Crews -- Executive Vice President and Chief Financial Officer

Yeah. This is Mike. Across the segments, the cash conversion, if you're talking about EBITDA minus capex over EBITDA tends to run from the upper 60s to the low-70s. Refining services in particular has gotten to the upper end of that range as we continue to put in some good debottlenecking projects.

So I think probably not a step change in that cash conversion. I think what you see is some of the smaller potential development, I think it's going to be something that could be separated that doesn't have the growth rate that you're looking for relative to other opportunities in the portfolio, that we maybe at a crossroads in our own the side that says do we really want to recapitalize for this market, and if its got value in somebody else's hands we can do that. But that's more of a modernization rather than a significant rating in the cash conversion ratio.

Christopher Parkinson -- Credit Suisse -- Analyst

OK. Thanks. And just a quick follow-up, there's been a few moving parts in catalysts of the silica and the Zeolyst JV, can you just comment on the additional puts and takes on order timing etc. during the second half on how the street should be thinking about your price volume outlooks for '20? Just any help putting the pieces together for the outlook there would be helpful.

Thank you.

Mike Crews -- Executive Vice President and Chief Financial Officer

Sure. I'd be happy to. First off, in the second quarter, we had a very, very strong quarter there were a couple of moving parts. We did note it in the slides if you saw that that we had and is our -- it represents our 50% share where the big gain on the sale of the JV had in the right investment.

But that was less than the third of the $6 million increase that we had in the quarter. The rest of it really related to that order that shifted out in the second half into 2Q. And then I mentioned some favorable absorption from the inventory build because we're expecting very good sales in the third quarter, but that would be net of -- we were quite a bit lower on volume as would have noted on the Zeolyst joint venture, where sales were off 20%, which is also just timing. So we expect as you look at -- we've had two strong quarters in the silica catalysts area with the polyethylene demand, which has been great.

We expect the third quarter for the Zeolyst sales to be the strongest quarter of the year. And that's why with that, led us to the sales and EBITDA guidance that I provided you that around being in line with the second quarter on sales, and GAAP sales and then on the EBITDA, which would include our share of the Zeolyst JV.

Belgacem Chariag -- President and Chief Executive Officer

I'll just add that every quarter has a different type of colors because the mix of the products that we produce and ship, changes. And as the mix changes you'd see emphasis on margins up or down based on that mix. So there is a nuance of the mix that plays the role in the areas between quarters. On volumes, yes it's growing.

On margins, it could be up and down based on the mix. Just keep that in mind.

Christopher Parkinson -- Credit Suisse -- Analyst

Thank you.

Operator

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

David Begleiter -- Deutsche Bank -- Analyst

Thank you and good morning, and very nice quarter. Belgacem, I know it's early to discuss 2020, but if you assume just similar economic growth, ie. slow for next year, how should we think about your EBITDA progression in 2020 versus 2019 on a very high-level basis?

Belgacem Chariag -- President and Chief Executive Officer

Well, to be honest, David, it's just we're really focused today on delivering on our current plans. We as I described, we see our resilience being confirmed. In this environment that is unstable and simply us because of the quality of the businesses that we have. Like everybody else, we're going to be seeing some of the headwinds on volumes every once in a while.

I have no concerns. No major concerns about our ability to deliver -- the environment will dictate what really happens. So it's a big early for me to talk about the EBITDA progression in 2020, but what I can tell you is the fundamentals, the growth drivers, and the fundamentals of our businesses especially as we continue to look for opportunities to maintain good solid business components should be favorable pending what happens in the market between now and year out.

David Begleiter -- Deutsche Bank -- Analyst

Understood. And maybe just on performance materials, the weather impact on sales, ThermoDrop etc., are they lost for the year? Or are they caught up in the back half of the year?

Mike Crews -- Executive Vice President and Chief Financial Officer

No. It tends to be caught up and when we had weak or poor weather conditions in the first quarter, and then ran into in the last 225 years second-worst rainfall in the U.S., but those orders tend to stack up and get picks up later in the year. We had a very good July. So once the rain stopped the strapping commenced and we've seen really good flow in the first month of the quarter.

So we're happy with that, and it's just ultimately and will depend on how long the warm weather goes into the fourth quarter. But we're very happy with the rebound that we've seen here at the beginning of the third quarter.

David Begleiter -- Deutsche Bank -- Analyst

Great. Thank you very much.

Mike Crews -- Executive Vice President and Chief Financial Officer

You're welcome.

Operator

The next session will be from Vincent Andrews with Morgan Stanley. Please go ahead.

Unknown speaker

Hi, this is Andrew Casino on for Vincent. Just a question around your guidance, if you think about the lower end of the guidance, I guess what are the rest that you see and what is really embedded in that? And just more broadly what are the kind of risk that you see in the broader economy in your business that you'd be worried about?

Mike Crews -- Executive Vice President and Chief Financial Officer

Well, I'd say we took the midpoint down some $60 million, a third of that would relate to the lower sulfur pricing, but you should recall that that's dollar-for-dollar. That has no impact on EBITDA, which is part of the reason why we can we reaffirm our EBITDA target. So it could be additional deterioration in sulfur pricing that gets passed through the lower sales. As you look at the first half of the year, we talked about weather and materials.

That has impacted chemicals as well. We had the unplanned customer outages in refining services that had crossed full quarters. So we think that's behind us. So for refining services, I mean we feel pretty good where is that sits, I'd say the bigger risk is probably in chemicals.

You've seen the performance, the flat to slightly down not bad given where we are and what others are seeing in this macroeconomic environment, which is a testament to the stability and diversity that we have within that portfolio, but I'd say a little more risk in Europe. We had a lot more impact from foreign exchange year over year in the first half than we're currently projecting in the second half, which is based on FX rates as they sit today, so that could be some additional downside.

Belgacem Chariag -- President and Chief Executive Officer

Let me add one thing on the chemical side and it's true that chemicals -- performance chemicals is probably the area that has a lot more uncertainty overall. We, as I mentioned in the prepared remarks, the going forward, immediate going forward is we're going to be scrutinizing further our chemicals portfolio. We are -- we have reorganized the business awhile ago. So we are now looking at efficiency creation, debottlenecking, we have about 38 facilities that produces products around the world.

Efficiency of the product, capacity increase, debottlenecking, and then the efficiency and logistics and distribution. Further efficiency would be a some of the areas where we would use to kind of counter some of the market headwinds and that represents what of the fewer risk that we see between now and year-end. And that's going to be work to do in Q3 and Q4.

Unknown speaker

Perfect. That's very helpful. Thank you. And I guess just following-up on that.

That work that you will be doing in 3Q and 4Q, when can we kind of expect the benefits of that to start to flow through in the P&L?

Belgacem Chariag -- President and Chief Executive Officer

Some of it the efficiency would be immediate in terms of value creation and some of it will probably be kind of trickling into the next year. But some of it -- my objective is to get some of that immediately so we counter this deterioration and hopefully, it won't be there for long.

Unknown speaker

Thank you, and congrats again on a great quarter.

Mike Crews -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

[Operator instructions] Your next question comes from Aleksey Yefremov with Nomura Instinet. Please go ahead.

Aleksey Yefremov -- Nomura Instinet -- Analyst

Thank you. Good morning, everyone. Do you see any demand for alkylate following recent refinery closure in the U.S. and could this benefit PQ directly over the next few quarters?

Belgacem Chariag -- President and Chief Executive Officer

Yeah. I think when the -- between closures or there's been some other fires that have impacted the capacity it's not been huge, but where you've seen that geographically what that does is it shifts demand down to the Gulf Coast where we have a very strong position. So yes. We do see that as favorable given that generally speaking, were going whether it's individual events or just the way the market has shifted.

You do see demand shift and pullout of the Gulf Coast and West Coast we're in a very strong position.

Aleksey Yefremov -- Nomura Instinet -- Analyst

Yeah. And just following-up on that. I realize you don't have guidance for 2020, but will you be able to grow volumes in refining should there be additional demand?

Mike Crews -- Executive Vice President and Chief Financial Officer

Yes. We've been doing several debottlenecking projects over the last three or four years that have provided additional capacity.

Aleksey Yefremov -- Nomura Instinet -- Analyst

And just if I may follow-up again, so how should we think about that potential demand growth? Is it low single-digit, mid-single digit next year for refining?

Mike Crews -- Executive Vice President and Chief Financial Officer

Yeah. I mean it's a little early to tell, but generally speaking we would expect refining to be in the low single-digit range.

Belgacem Chariag -- President and Chief Executive Officer

Potentially a little higher.

Mike Crews -- Executive Vice President and Chief Financial Officer

Yeah. Potentially a little higher and a lot of it just depends on how many turnarounds we're doing in any given year. We have a lot this year, fewer next year, which means lower cost and more operating days. So that can be a positive as well.

Aleksey Yefremov -- Nomura Instinet -- Analyst

Great. Thanks a lot.

Operator

The next question will be from Robert Koort with Goldman Sachs. Please go ahead.

Dylan Campbell -- Goldman Sachs -- Analyst

Good morning. This is Dylan Campbell on for Bob. When you look at the kind of free cash flow guidance for 2019, I think the first half was pretty flat and implies a decent step up into the second half, I think it's pretty normal comparing that seasonality. I was just wondering if you could just give some type of bridge first half to second half 2019?

Mike Crews -- Executive Vice President and Chief Financial Officer

Well, yeah. You're correct, we tend to be pretty flat we're up $10 million I think on a year-to-date basis versus last year. But we are usually pretty flat in the first two quarters, just due to the seasonality of the business. Particularly as it relates to performance materials and when their sales occur starting in the second quarter and start to get collected in the third quarter.

So the cash flow guidance is basically all in the second half, the cash flow targets that we have for this year are a little higher, particularly on the operating side than we had last year. But I think a good view of our visibility into the cash flow is the fact that we've paid down $45 million of term loan at the end of the third quarter last year. And today, we sit here in August with $100 million payments. So we feel good about our cash flow outlook.

Dylan Campbell -- Goldman Sachs -- Analyst

Got it. Thank you.

Operator

[Operator signoff]

Duration: 37 minutes

Call participants:

Nahla Azmy -- Vice President of Investor Relations

Belgacem Chariag -- President and Chief Executive Officer

Mike Crews -- Executive Vice President and Chief Financial Officer

John McNulty -- BMO Capital Markets -- Analyst

Christopher Parkinson -- Credit Suisse -- Analyst

David Begleiter -- Deutsche Bank -- Analyst

Unknown speaker

Aleksey Yefremov -- Nomura Instinet -- Analyst

Dylan Campbell -- Goldman Sachs -- Analyst

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