Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the fourth quarter 2019, W.R. Grace Company earnings Conference call.
This time all participants are in listen only mode. After the speaker presentation. There will be a question answer session to ask a question. During this session you will need a press star one on your telephone if your core any further systems. Please press star zero. Please be advised to today's conference is being recorded.
Now I'd like to hand, the conference over to your Speaker today, Jeremy Rowan Vice President Investor Relations. Please go ahead Sir.
Thank you Sydney Hello, everyone and thank you for joining us today for Grace with fourth quarter and full year 2019 earnings call.
With me this morning are Hudson before Grace's, President and Chief Executive Officer.
And Bill documents senior Vice President and Chief Financial Officer.
Our earnings release, some presentation are posted on our website under the Investor section a great Dot com.
Please note that some of our comments today will contain forward looking statements based on our current view of our business an actual future results may differ materially.
I see our recent FCC filings, which identify the principal risks and uncertainties that could affect future performance.
Well discuss certain non-GAAP financial measures, which are described in more detail in this morning's earnings materials reconciliations of non-GAAP financial measures.
And other associated disclosures are contained in the earnings materials and posted on our website.
This morning, Hudson will touch on our 2019 performance.
Our 2020 outlook and progress around our key strategic initiatives.
Bill will then review our business results and provide additional color on our outlook.
So with that please turn to slide four in our earnings presentation, and I'll turn the call over to Hudson.
Thank you Jeremy good morning, everyone.
This morning, we have three key messages.
One our team delivered solid results in a very challenging 2019.
Two we expect slow sales growth in 2020, given the weak global manufacturing environment and the significant uncertainty from the Corona virus, but we expect stronger earnings and cash flow growth.
And three we made tremendous progress on our strategic growth initiatives in 2019, strengthening our foundation for long term growth.
Now, let me add some detail to each of these points.
As you'll recall, we experienced for discrete events in the middle of 2019, which affected earnings by approximately $36 million.
Three of these events affected customers and were outside of our control.
The fourth was a manufacturing disruption from an equipment failure in our materials technologies business.
Following these events, we acted decisively to adjust our manufacturing operations reduced costs and identified new sales opportunities.
Our aggressive response allowed us to offset more than half of the negative effect of the four event in less than two quarters.
Sales earnings and cash flow all grew in 2019.
We improved pricing expanded adjusted gross margins by 70 basis points and delivered adjusted free cash flow of $247 million.
Q4 earnings and the P.S., where at the high end of our revised outlook range and cash flow was at the high end of our original February 2019 outlook.
These are strong indications of our team's ability to execute in a challenging environment.
Please turn to slide five.
As you well know the global manufacturing environment weaken significantly in the second half of 2019.
Industrial production weekend as did classics demand and refined products demand.
According to industry consultants U.S. domestic polyolefin plastic demand decreased 5% in 2019, and U.S. refinery production decreased 2%.
In January the Corona virus emerged as a significant new uncertainty.
We're concerned for the individuals affected by the virus and have taken steps to protect the safety of our employees in China and other countries.
At this point there is limited information about how much the virus may spread and how it may affect global economic conditions.
Many China customers are still close due to the extended lunar new year holiday.
Clearly there will be an impact in China and other countries as companies adjust to the effects of the virus.
Our outlook adjustment assumes direct and secondary effects from customers in China and outside of China, but does not assume that the virus triggers a broader recession.
China sales are 5% to 6% of our total global sales.
We expect information on the virus to change daily in the coming weeks and are monitoring developments closely.
We are establishing our 2020 outlook in a period of increased uncertainty.
Last week, we fully expected to affirm the preliminary sales and earnings outlook. We gave you in October.
But given the uncertainties related to the current of Iris, we're reducing our outlook slightly and widening our outlook range.
For the full year, we expect sales to grow zero to 3% adjusted EBIT to grow 6% to 10% and adjusted EPS to grow 8% to 12%.
Earnings are growing faster than sales based on expected margin improvements in 2020, and the onetime nature of the 2019 discrete events.
Q1 will be the weakest quarter of the year based on for roughly equal factors.
First we expect lower customer demand based on the week manufacturing environment at the end of last year.
This will be most evident in chemical catalysts for industrial applications, and Silicas for coatings, and industrial applications with lower customer demand and some inventory destocking.
Second and our refining technologies business, we expect weaker demand due to significantly higher than normal refinery turnarounds in Q1.
While we expect total refinery turnarounds for the full year to be about flat with 2019, they're up more than 60% for our customers in Q1.
FC say FCC sales will also reflects sales loss after the customer refinery fired last June.
Art will be back half weighted following a very big Q4 before the effective date of the new IMO regulations.
Third we have adjusted our outlook for the potential effects from the Corona virus.
Including sales to China customers and customers outside of China.
Obviously, we expect this to hit Q1 hardest.
And fourth in Q4, we reduced manufacturing rates in response to lower demand to ensure our inventory levels remained in line.
Under absorbed costs from this action will reduce Q1 earnings.
This disciplined approach reduces earnings in the short term, but improves cash flow.
Together, we expect these temporary factors to reduce Q1 sales by low double digits versus Q1 19 with adjusted EPS is 65 cents to 72 cents per share.
I expect these macro effects to be short lived and I'm confident in our full year outlook and the benefits, we expect from our new growth capacity, new products commercial excellence and operating excellence initiatives.
Please turn to slide six.
We made tremendous progress on our strategic growth initiatives in 2019, strengthening our foundation for long term profitable growth.
We have strong strategic positions in our catalysts licensing and specialty silica jobs businesses and we don't take that for granted we're making a number of investments to accelerate our growth and extend our competitive advantages.
Over the last three years, we have invested over $250 million in new growth capacity and more than $26 million in our commercial excellence and operating excellence initiatives.
These investments are starting to pay back and we expect the payback to accelerate in 2020 is the new growth capacity comes online mid year, and the commercial excellence and operating excellence investments mature.
As we've communicated the Grace manufacturing system investments alone added 75 basis points to 2019 gross margins.
We have many other opportunities to improve profitability.
Most recently, we initiated an FCC manufacturing network optimization program that will reduce our manufacturing costs by $6 million annually when fully implemented in Q2.
We remain focused on managing costs and inventory levels and driving productivity through the grace manufacturing system.
When I step back and consider the progress we've made plus the strong customer demand for our high value technologies. The sustainability benefits, we delivered to our customers and the fundamental growth drivers in the end markets, we supply I.
Im confident in our ability to deliver mid single digit sales growth in the long term and our ability to deliver our earnings and cash flow targets.
Please turn to slide seven.
[noise] sustainability has become much more important to our customers are investors and to us.
For decades, we have helped our customers achieve their product performance and manufacturing process goals.
During this time, helping customers solve their problems became a core part of our value model.
Today customers are asking us to help them achieve their sustainability objectives, as well and a significant portion of our sales come from products specifically intended to do so.
Our products and technical services help our customers improve the efficiency of their processes and products.
Reduce energy water and raw material use cut harmful emissions and reduce waste.
They help our customers make products that meet the toughest environmental standards and address rising consumer and regulatory expectations for sustainability human health and safety.
Last year, we introduced this chart to you highlighting our products the directly contribute to our customers sustainability objectives.
In 2018, these products totaled $1 billion or 38% of sales, including our joint venture.
In 2019 that total increase to 1.1 billion or 44% of sales.
And we expect the total to continue to grow.
Over 65% of our current R&D activity is focused on new products for our sustainability portfolio and our top three growth capital investments are for these products as well.
We also focused on sustainability through operating excellence continually tracking progress toward our goals of no one hurt nothing out of place and no harm from our products.
The discipline of continually improving the efficiency and performance of our manufacturing and integrated supply chain is deeply embedded in our culture and our culture and annual operating plans.
I'll now turn the call over to Bill, who will discuss our business performance and full year 2020 outlook in more detail.
Thanks, Hudson and good morning, let's turn to slide nine in the fourth quarter catalyst technology sales decreased $15 million, primarily due to lower sales volumes, including the 22 million dollar impact related to discreet items. The decline was partially offset by about 150 basis points of improved pricing and were far.
Any technology sales were down 6% lower sales volumes, primarily due to the customer refinery shut down in June 2019, partially offset by improved pricing for the trailing 12 months.
See pricing was up well over 200 basis points. Our commercial team is actively working to replace lost sales volume, while maintaining our disciplined value selling strategy.
Especially catalyst sales were down 1.6% due to two discrete events the customer specific inventory correction and the attack in the middle East as well as slower global manufacturing environment for the year, we announced six new Unipol polypropylene process technology licensing totaling approximately 20.
500, kilo tons of annual resin capacity, which will continue to drive long term catalyst and debt or sales.
Segment operating income was up $20 million, including $1.6 million and higher income from our joint venture and $8 billion of business interruption insurance proceeds.
Operating margin for the quarter was 34.7%.
Excluding the $8 million of business interruption insurance operating margins would've been 32.6% our policy has a $25 million limit and we expect to receive additional insurance recoveries.
Related to this event in 2020.
Moving to slide 10.
Materials technologies fourth quarter sales were up 2% when a constant currency basis, driven by improved pricing consumers pharma sales were up 10% in the quarter wherever weaknesses in coatings end markets continued.
Operating income for the quarter was down $1.7 million the decline and drop in operating margin were primarily due to a 4 million dollar impact of actions to control inventory levels in response to the slower global manufacturing environment.
Now, let's turn to slide 11 for a review of our consolidated results for the fourth quarter.
Q4 sales were down $505 billion down 2% on constant currency sales decline was primarily due to a 4% impact from the discrete items.
Adjusted EBIT was up 13% on improved pricing as well as lower manufacturing and operating costs adjusted EBIT margin was 26.6%, including a 1.6% benefit from insurance recoveries.
Adjusted EPS was $1.31 cents per share up 15%.
Please turn to slide 12 for a review of our full year 2019 results.
For the year sales were up 3% on a constant currency basis, driven by improved pricing of 240 basis points across all businesses and the Q1 benefit from the 2018 specialty catalyst acquisition.
Sales volumes in the second half were down 5% after solid mid single digit growth inline with our original outlook in Q1 in Q2.
The impact the discrete event so the second half sales volumes was 3.5%.
For 2019, we also grew our adjusted earnings and adjusted free cash flow adjusted EBIT was up 3.6% on improved price and favorable mix. Our team's strong execution of mitigation plans delivered $20 million of cost savings and insurance recoveries to partially offset.
The $36 million of reduced earnings created by the four discrete events.
Importantly, these decisive actions resulted in strong adjusted free cash flow of $247 million.
Turning to slide 13.
In 2019 rebates to significant progress.
On our strategic growth investments.
Three major strategic growth capacity investments come online in 2020. These investments will begin to contribute to sales and earnings in the second half of 2020, but more importantly will support our long term growth.
In 2019, we invested $194 million of capital for nearly half the investment dollars directed towards high return strategic investments.
For the year, we returned over $100 million of cash to our shareholders, including $73 million of dividends to $30 million and share buybacks.
Finally, we achieved our goal of reducing our net leverage ratio below three times by year end 2019 in the second quarter. We told investors that we would prioritize deleveraging over additional share buybacks purpose was to focus on lowering our net leverage our target range of two to three times by the end of the year.
Finally, let's turn to slide 14, and take a look.
At the key assumptions underlying our 2020 outlook.
Well the slower global manufacturing environment in 2020.
And uncertainty around the krona virus tempers our outlook for the full year, we're confident in our plan and ability to execute our businesses are well positioned to capture growth in our end markets and to expand margins grow earnings and drive strong cash performance for the full year. Our plan reflects a modest revenue growth of zero to 3%.
With improved pricing.
And higher sales volumes across our businesses.
We expect 2020 adjusted EBIT in the range of $500 million to $520 million up 6% to 10% and adjusted EPS at a range of $4.73 before dollars 91 cents per share update to 12% earnings growth and margin expansion will be driven by higher gross profit lower manufacturing costs and continue better.
Fits of our Gms and commercial excellence investments.
For 2020, our quarterly earnings profile is more heavily weighted to the second half. We expect Q1 adjusted EPS to be between 65 cents and 72 cents per share down significantly year over year.
Headwinds in the first quarter include the Q4 effects of inventory control actions significantly higher than normal refinery turnarounds in Q1.
And weak demand for chemical catalysts and silica products in China, given the uncertainty around with front a virus.
Looking at the second half of the year the Tailwinds from the major capacity additions the decrease in refinery turnarounds and continued benefits of Gms give me confidence and delivering our plan.
Our 2020 adjusted free cash flow is expected to be between 260 and $280 million up from $247 million in 2019.
The strong cash generation reflects higher adjusted EBIT and a partial Europe dividends from art.
Capital expense is estimated to be approximately $195 billion.
For 2020, we expect to cash paid for legacy matters will be approximately $20 million.
Finally in 2020, we expect to continue to prioritize reducing our net leverage in the range of two to three times, while continuing our share repurchase program at a conservative level that said, we continue to evaluate accretive bolt on acquisitions and we'll balance these opportunities with maintaining our load net leverage ratio with that.
Now I'll turn the call back the Hudson for some final thoughts. Thank you Bill.
Our team delivered solid results in a very challenging 2019, the new year brings new challenges in the macro environment and I expect us to deliver solid results this year too.
We've made tremendous progress with our growth investments and grace value model initiatives and my excitement for our long term sales and earnings growth opportunities has increased we're confident in our strategic direction and the long term earnings earnings power of our businesses.
We look forward to your questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound <unk>. Please standby, while we compile the Q and a roster.
And our first question comes from Christopher Parkinson with Credit Suisse. Please proceed with your question.
Thank you so your floating trona virus as a formal headwind in 20, which is just disproportionately hitting one Q just given your actual exposure in China keys walks through the other buckets you mentioned on your thought process and the total global effect so to speak so I guess demand procurement.
Customer hesitancy guarding inventories just any color on those would be appreciated. Thank you.
Okay. Thank you Chris This is Hudson so as we thought about this we're expecting.
Effects.
From customers that are based in China, who are seeing either lower demand for simply aren't able to operate because of the restrictions on travel or logistics or the availability of their workforce.
But we don't think that will be that effect will be limited to China based customers.
We have customers in other countries, who are who will who are manufacture their products for export to China, and we think those local China effects will backup and start to affect customers outside of China as well.
From a from a supply chain perspective from a great supply chain perspective, the effects or are pretty limited.
We have.
The major material that we sourced from China is rare earth.
As we've talked on other calls we have significant inventories and contingency plans around rare earth.
That we've put in place for other reasons, but there.
Just as effective and just as operable in this situation.
We don't have any man any greystone to manufacturing operations in China, and we have about 50 employees in China and so.
That hopefully covers the landscape in terms of the.
The effects that we expect to see Chris.
Thank you and just as a corollary of the first question. Your once you got it does vary a little weaker than some of his for anticipating.
Just walk us through the key buckets driving this caution in one Q outside of kind of Iris, but then potentially more importantly can you just highlight on some of things kind of towards the end of Q in the second half you mentioned art contributions, but what are some of the other things we should all be considering the investment community. Thank you Chris I appreciate the question so.
When I think about the the negatives affecting Q Q1, it really it really breaks down to four things, they're roughly equal in size in terms of their effect on earnings the Corona virus is one.
We expect the effects of the current a virus to be.
Most significant in Q1, we would expect.
Some Q2 effects and I guess I should add a little color to this.
We expect the the Corona virus effects to be pretty significant in the short term.
But not that long in duration, we would expect them to.
Start to wane by Q2.
And now and I'll say I'll I want to acknowledge this is based on the information that we have at this time.
But but it is our expectation.
One too.
We did see weak demand in Q3 in Q4. It was most notable in the.
A chemical catalysts business, that's part of our specialty catalyst business and in our coatings in industrial end use applications in materials technologies, we expect that to continue into Q1.
There is some reduced demand there's clearly some destocking that is occurring not so much of our products, but of our customers products, they're working to control their inventories.
The third effect is this.
This this.
Significant increase in the amount of refinery turnarounds in Q1.
It's sorta unprecedented to have as many refineries and turnaround status.
And that at the same time in Q1.
And the last piece, Chris is though the unabsorbed costs from our Q4 manufacturing actions rolling into Q1.
If you think about those they're all temporary either Q1, maybe a little bit of Q2 effects that will will pass and when we get into the second half of the year the tailwind start to kick in as Bill hit on some of these in his remarks, we've got the new plant starting up.
We expect art to be stronger in the second half than the first half and we expect some productivity.
Improvements that will run through the personnel in the second half and part of why the second half is as strong as it is from a growth rate perspective is because we're comparing to a weak second half last year. That's when all the discrete events happened and thats, adding about 10 percentage points.
The year over year growth in the second half just because of that compare against the discrete events last year.
Thank you.
Thank you next question comes from Kevin Mccarthy with vertical Research partners. Please proceed with your question.
Good morning.
In slide six of your Jack you reference Threeq capacity expansions in 2020, and polyolefin catalysts, Hydroprocessing catalysts and cordele silica.
Do you expect those expansions to be a net positive for a net negative and 2020 in other words just wondering.
You know if the can be loaded sufficiently to overcome whatever incremental depreciation burden you might have from those units maybe kind of talk through how you're thinking about that relative to your 2020 guidance.
It's a great question, Kevin. Thank you, we do expect them to be net positives in the second half and and you're exactly right that the depreciation will kick in.
But we do expect a good initial volumes in all three of these plants.
And and as a as a strategy one of the things that we've done is his focus and on.
These grace.
What we call Gms, the Grace manufacturing system initiatives to make sure we're generating productivity dollars and cost savings across the whole portfolio.
So to reinforce the profitability of these investments as we as we go forward.
Okay. That's helpful and then as the second question.
Wanted to ask about the magnitude and possible timing of insurance recoveries that you anticipate in 2020.
Yes. This is bill yeah, we're continuing to work with our insurer and we would expect to to be able to recover the balance of the policy in 2020.
Probably more heavily weighted to the first half.
So bill is that $17 million.
That's right that's the that's what's still available under the policy and we we expect we'll be able to.
Okay.
What the balances.
Okay. Thank you very much.
Thank you and our next question comes from Bob Accord with Goldman Sachs. Please proceed with your question.
Hi, guys. This is Anthony Walker on for Bob.
On the full year guidance, how much of the earnings Bridge would you say is in your control for 2020, you quantify the year over year impact from one time items that about half of the expected increase what percentage of the heroic your increases driven by cost out initiatives or other self help opportunities.
Anthony its Hudson.
There's a significant part a self help in our and our 2020 plan and and.
It includes the.
The plant expansions coming online that Kevin asked about a moment ago.
It does include productivity initiatives.
We're seeing some lower inflation in the second half of the year.
And so there's a lot.
We consider in our control.
Okay, Great and then.
Following up on the last question as well can you provide an update on the progress, replacing the lost business associated with the customer bankruptcy from last year. Thanks.
Of course, we so this event happened in June of last year June of 2019.
We immediately began.
Implementing approaches with customers to try to replace that lost volume.
But the sales cycle on this this type of volume.
Can be long and we want to do this in a way that does not.
Change our value selling strategy or is in any way a disruptive from the industry perspective, and so we have approached customers.
We've started product.
Introductions with them testing new products, the kind of high value products that we want to have in our portfolio for the long term.
Well down the path on that but we wouldn't expect that volume to be commercial until late this year.
Thank you and our next question comes from John Mcnulty with BMO capital markets. Please proceed with your question.
Good morning, Thanks for taking my question.
With regard to the the impacts that are Nicking, one Q. It seems like if you're if if I'm understanding it right. You basically took one percentage point of EBIT out of your full year guide tied to the Corona virus. So.
Call. It I guess that would that would equate to about $5 million or so is that the way we should be think when you say kind of all four of these buckets are roughly equal is that the right way to be thinking about what the what the earnings impact is you know aside from the sales impact that you've already given clarity around.
Thank you John it's a it's a good way to frame it and I think you're right. The if you think about the delta.
Q1, 19 to Q1 20.
That's what we're trying to bridge for you all in and.
The way you came added I think is is a insightful way as well we took.
We took.
5 million off the top end relative to what we had said in October.
We took $5 million off the top end of our EBIT guidance and $10 million off the bottom end of our EBIT guidance as the as the adjustment for the Corona virus.
And to your point, we put almost all of that into Q1.
It.
It may prove to be conservative I hope it proves to be conservative.
But at this point it it's appropriate given what we know about.
The virus in the business the commercial effects.
Got it and then with regard to your your cash flow. So you put up some solid numbers.
In 2019 that you're going to see some decent growth in 2020, as well not even with kind of still a little bit of an above average capex spend I guess, how can you know now that your leverage ratios are down below three I guess, how are you thinking about capital deployment. It sounds like debt reduction still is kind of a priority, but I guess how are you.
Weighing that verse first buybacks versus M&A opportunities et cetera.
Yes. This is bill.
Yeah, we're continuing to same strategy, we talked about middle of last year, where we're going to put the emphasis on deleveraging over share buybacks. If I'm just looking at those two by themselves, but as I mentioned to we're continuing to look at the acquisition opportunities and and so if the right right opportunity comes along we'll we'll certainly.
Yeah.
Ill take a close looking it up potentially use some of our cash for that or if it's a significant enough. We consider taking additional benefit if it's the right deal.
Got it thanks very much for the color.
Sure.
Thank you next question comes from John Roberts.
Please proceed with your question.
Thank you the a weaker auto industry is affecting the polypropylene industry does that have any impact down the road for your polypropylene catalysts and licensing businesses or maybe a lag or delayed weakness that you might see.
John It's it's Hudson.
We've seen from an investment perspective.
In terms of customers continuing to make investments in future polypropylene capacity, we've seen that as a strong growth driver we've seen it in the six licenses that we.
Announced last year, we have expectations for additional licenses in 2020, and so we see our customers investments.
At a pretty steady rate.
In terms of them, then bringing new capacity on auto is obviously a portion of total polypropylene.
End use demand I think its order of magnitude, 15% something like that.
So it certainly weighs on how our customers think about it but we havent seen that manifest in terms of delayed projects are diminished cadence of projects.
Okay and is there anything you can tell us about the lummus technology process is underway can you say, that's something grace is not involved with or.
Do you think it might change the competitive dynamics in any of your markets, depending on who we sold two.
Yeah. This Jeremy.
I wouldn't comment on.
The inactive process that's out there, but in terms of the competitive dynamics I don't I don't see a transaction I'm, especially one that they announced.
Yes, impacting the balance or or or the our joint venture relationship.
Thank you.
Thank you.
You can come from Mike Tyson with Wells Fargo. Please proceed with your question.
Hey, guys.
Yeah, we take a look at Q1 it looks like it just Steve it will be down double digits in line with.
Kind of though the EPS outlook so I.
I guess it implies Q3, Q4, Q pretty strong double digits <unk> can you maybe walk us through some of the timing of the your FCC customers coming out of maintenance turnarounds and and you know do you see that double digit recovery into Q or is it still little bit.
You know kind of lagging into Threeq, you and and in the second half the year.
Mike its Hudson when I when I look at all of the factors.
The timing of the turnarounds the effects that we anticipate from just we customer demand and the Corona virus I think the stronger growth will be in the second half.
Q2 will be better than Q1 of course, but not as strong as the second half and.
And it really is the second half, where we'll we'll see the bigger benefits from.
The plants coming online some of the productivity programs that we're anticipating that we're working on.
And just the mathematical effect.
The discrete items, all hitting last year's second half.
We'll get it we get about 10 points of year over year EPS growth, just because of the discrete events not repeating in the second half.
Got it and and then in terms of FCC pricing any thoughts there.
Going forward and and it and just any general thoughts you know oil prices have collapsed and and I know you've talked about this in the past let me just remind us what the FX are on grace given the volatility in oil prices sure. It's a great question Mike So.
Let me start with pricing and then I'll and then I'll broaden out the App in 2019 last year, we had a strong year for FCC pricing, we were above our to a 1% to 2% range.
North of 200 basis points of pricing last year.
And and our guidance for 2020.
Is consistent with our long term expectations, 1% to 2% FCC pricing.
Some years will be better than that as we've said some years, maybe not as good but we expect that to be the long term.
Pricing growth and FCC.
In terms of a broadening out your question.
You know refinery demand softened refined product demand.
Softened in 2019.
There was still growth the the global transportation fuel demand grew 0.8% in 2019, but that was down from 1.5% to 2% growth in the in the two or three years earlier 2018 2017.
And in North America, specifically.
Refinery production actually dropped 2% last year.
Refineries were tightening up on inventories.
In responding to weaker economic conditions.
Think about fewer trucks over the road fewer ships on the oceans is trade patterns changed and so forth.
Refinery margins dropped.
There at the low end of their five year range right now and that's I think that contributes to the amount of turnarounds that we're seeing in Q1, we have seen customers.
Extend the duration of their turnarounds.
We have I don't think we've seen a customer initiated turnaround for this reason, but we have seen customers extend turnarounds.
But what does that mean for us as you think about our business.
Were driven our our FCC catalyst demand is driven by two things production levels of transportation fuel.
And increasingly production levels of propylene out of FCC out of FCC units and and.
And and whether a refinery has weaker or stronger margins as long as they're running we're going to see that demand flow through to us oftentimes.
A change in a refiners margin profile will cause them to want to change their operating strategy or their catalyst, which always creates opportunities for us we welcome those kinds of changes.
Got it thank you very much.
Thank you and our next question comes from Mike Harrison with Seaport Global Securities. Please proceed with your question.
Hi, good morning.
Was wondering if you can talk a little bit more detail you can you kind of mentioned the lower transportation fuel demand leading to some of the increase turnaround activity.
But can you maybe talk about that in the context of IMO 2020, and maybe how that's impacting FCC in HPC demand any surprises on how ammo 2020 is playing out so far.
Thanks, Mike if I, if I step back and think about.
The transition into IMO 2020, and what we're seeing so far I think there there are three things that I I would take note one is.
For our hydro processing business the art joint venture.
We had incredibly strong Q4.
As customers were trying to be is ready as possible for the for the January one effective date.
That is translating into a weaker first half of 2020.
As customers sort of push.
Their demand into 2019.
But in the long run.
I am a 2020 will continue to drive demand.
For our art business.
While the effective date has occurred all of the capacity that refiners needs to manufacture compliant fuel is not in place yet and if we look out over the next to even three years, we see projects by our customers to continue to add capacity hydro processing capacity. It will continue.
Due to drive demand for our catalyst that's the best of the sort of the macro view Mike.
At a more immediate perspective.
Our FCC customers.
Many of them have adjusted their operations.
To make sure that their maximizing their margins given the changes in demand for different fuel types and given the relative.
Margins for the different fuel types I.
I think for the most part those adjustments have been made.
Sorry, I, we're getting some keyboard in the background, but.
The I think for the most part Mark Mike those adjustments have been made.
We have seen customers.
The change the way, they're operating their refinery, it's not as significant effect on us one way or the other.
We want to make sure our customers are running their FCC units hard that's the driver for us and our FCC business.
And different customers.
Have different strategies several.
At times, we've been asked the question about some U.S. based refiners and the strategies that they've talked about.
Those are those are appropriate strategies for each for those refiners, but but I wouldn't extrapolate them to the rest of the world not every customer can adopt those same kind of strategies and the third point I'd make Mike is is what we're seeing.
In internal the Grace in terms of our own logistics costs.
We're not seeing any changes in.
In fuel costs being passed through by our shipping partners.
And I think what was our read is that.
The upside effects of IMO 2020 are being mitigated by weak demand more broadly.
[noise] Alright, and then no wanted to ask question on the materials business can can you touch on what you're seeing in the coatings space. So I think a lot of your.
Architectural customers are the architectural coatings companies that we look at our expecting actually a better start.
The first half of the year presuming that weather.
Is more more more than it was last year, but it sounds like you're.
Looking to worked on inventory levels. So can you just reconcile the outlook there.
Sure.
Good question that we so architectural is a small part of our coatings business.
The much bigger part is industrial coatings.
And consumer durables like furniture and white goods.
Thats really where are our coatings businesses expose.
Alright, thanks very much.
Thank you and our next question comes from Ben Kallo with Baird. Please proceed with your question.
Hi, Thanks for taking my question.
That's a breakout.
The impact that you're seeing on the quota partners by quite a different segments and then my second question.
Just one overall you'd mentioned diesel.
Weakness how much you asked to fuel standards in Europe.
Perfect going out with these okay.
But.
Thank you.
Sure then.
In terms of the Corona virus effects.
I think the effects in the refining business will be very small.
We are our sales into China of FCC catalysts are literally zero.
And I don't think there are significant effects on customers outside of China.
Assuming this doesn't tip into a broader recession.
And so in S.C. and empty.
Both of those businesses have sales in China of about 8% to 9% of their total sales.
And they also supply customers that are manufacturing outside of China for for for export into China and.
So I think the effects that we'll see we'll be more significant NFC and empty.
Less significant NRT.
And I'm, sorry, Oh, and you asked about diesel so.
The the I. I think from the data that we see we think the biggest effects on diesel demand are really driven by economic activity rather than regulatory change.
Thank you and as a reminder to ask a question. Please press star one and our next question comes from Laurence Alexander with Jefferies. Please proceed with your question.
Hi, This is a Adam do you this on for Laurence Alexander today.
I was wondering the materials technologies business.
We self sales volumes, improving in North America, and Apacs sequentially have you seen any sort of positive inflection point in these geographies.
The Adam Thanks for that question the growth that we're seeing in North America.
It is really driven by two things, it's driven by our pharma business, our consumer pharma business, where we've had great results and it's driven by our colloidal business.
The coil business is is.
One of the big three new capacity additions that we've talked about earlier on the call and so that's where the drivers are in North America.
In Asia.
You know China had been weak for us for.
Oh gosh four quarters.
And in Q4 Q3, we started to see a little a little stabilization.
And in Q4.
We saw a solid improvement in China, it's what you're seeing in your numbers.
I think that will be arrested somewhat because of the outbreak of the corona virus, but I'm optimistic that once the effects of the virus of pass through that that underlying economic strength is still there.
Got it. Thank you that's really helpful. And then my last question I was wondering can you just give a little more detail on the M&A landscape and are there any area. If you used to be interested that are less interesting now.
The for us.
We think about opportunities in both the catalyst business and the materials technologies business.
There was a question earlier on the call I think it was mcnulty that asked at about the.
The process, that's going on right now with lummus.
We're not going to comment any more specifically on that.
Although all acknowledge.
We have said many times in the past we've commented many times in the past about our interest in CMG. We have said that we're not interested in all of lummus.
On the materials technology side.
We have spent a lot of time in that business over the last year looking at opportunities.
It's an area of interest for us.
When we look at the adjacent addressable markets, we see attractive growth opportunities and attractive profitability opportunities.
And I expect us to continue to spend time in that area.
Thank you very much.
The Q and this concludes our acuity session I'll now turn the call back to Jeremy Rowan for any further remarks.
Thank you Sydney. Thank you everyone for your time today and your interest in Grace, we look forward to seeing many of you on the road over the coming months. Thank you.
Ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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