Q1 2020 Earnings Call

Ladies and gentlemen, thank you for standing by welcome to be Q1, 2020, W.R. Grace encode earnings conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you'll need to press star one.

On your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to turn the call over to Jeremy ruined Vice President Investor Relations in corporate development. Please go ahead.

Thank you Denise.

Thank you for joining us today.

First quarter 2020 earnings call.

Good morning, or some of the force Grace's President and Chief Executive Officer, and build often senior Vice President and Chief Financial Officer.

Our earnings release and presentation are posted on our website under the investors section at Grace Dot Com.

Please note that some of our comments today will contain forward looking statements based on our current view of our business and actual future results may differ materially.

Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance.

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 our earnings materials posted on our website.

This morning, Hudson will provide an update on graces response to the cobot 19 pandemic and review our second quarter demand assessments and planning assumptions Bill will provide a brief summary of our first quarter results and discuss our strong financial position. We'll then open the call for questions.

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 I Hope you and your families are off safe and healthy.

We have three key messages this morning.

First our team acted early and effectively to fully implement our pandemic response, including significant new safety protocols throughout our global operations.

We formed our Cobot 19 response team in January and we're already closely monitoring the outbreak at the time of our last earnings call on February four.

Then and now our first priority has been health and safety of our employees.

We have also focused on business continuity to ensure we deliver continue delivering value to all of our customers.

Our manufacturing operations and global supply chain have not been materially affected by the pandemic and all of our manufacturing sites are operating at this point.

I want to publicly thank my leadership team and our 4000 employees for their exceptional creativity adaptability commitment and discipline you have made a significant difference to your fellow employees into our customers and their customers around the world.

Second we've taken decisive actions to mitigate the economic effects of the pandemic and to ensure we generate strong free cash flow this year.

As always we are using cash flow to guide our economic response decisions, we are lowering capital spending by $35 million to $40 million, improving working capital by $35 million to $40 million and reducing operating costs by $25 million to $30 million.

As Bill has said, we will remain nimble and take immediate additional actions if necessary.

And third we're carefully balancing the short term with a long term, though our pandemic responses required significant attention. We have maintained our focus on our strategic growth initiatives.

The pandemic does not change our strategy or the long term value of our growth plan. In fact, the investments we've made over the last several years give us significant new capabilities to deliver value to our customers and strengthen our long term relationships with them.

Please turn to slide five and I'll review, how we're assessing demand for Q2.

I know this is a busy slide but I wanted to be transparent and how we're assessing near term demand in our three segments.

Understanding demand is critically important to effectively managing our operations working capital and costs, we are triangulating customer information economic and industry data inventory levels and our own experience in prior downturns to plan Q2.

In refining technologies demand will be hit hard in this downturn, especially while government stay at home orders are in effect.

In April refinery customers have reduced crude runs by about 20% so far and we expect further reductions in Q2 before demand for refined products stabilizes.

Estimates from Hs and wood Mackenzie indicate that the drop in refined product demand. This year will be significantly more than it was in 2008 2009.

Many of our refinery customers are also affected by the significant drop in crude oil prices.

Historically, lower crude prices would lead to lower fuel prices and greater demand for transportation fuels given the pandemic in the stay at home orders that demand response is not occur.

This significant demand decline is temporary and does not change our long term business strategy.

We improved pricing in Q1, and our plans include improved pricing in Q2.

We remain committed to maintaining our global market share and focused on delivering innovative products and technical services to our refining customers.

And our joint venture, we expect first half results to be in line with our original plans for this year.

Art sales and earnings are weighted to the second half of the year due to order timing following the IMO 2020 implementation and the startup of our new Hydroprocessing catalyst capacity.

In specialty catalyst.

For polyolefin catalysts will also be significantly lower in Q2.

We see demand in non durable applications like packaging and consumer items down and demand in durable into use applications down more significantly.

We are carefully monitoring resin and catalyst inventory levels as good indicators of future demand changes.

We have recently seen some increase in resin inventories, indicating some customers will have to reduce production volumes to rebalance inventories.

For catalysts, some customers are building inventories to improve security of supply while other customers are reducing inventories to improve their cash flow.

Overall, we expect a net reduction in customer catalyst inventories in Q2.

We signed two new Unipol polypropylene process licenses in Q1 and expect to announce them later this year.

Our licensing pipeline remains strong and we expect another good licensing year customers are continuing to invest for their future growth.

Materials technologies will also experienced lower demand in the quarter in Q2, we see significant demand increases in pharma applications in some non durable consumer categories.

But this will be more than offset by a significant decrease in durable end use applications in coatings and chemical process.

Overall empty customer inventory levels are in line with end market demand.

Accordingly, we expect to see some inventory correction in Q2, but not at the same level as we saw in 2008 2009.

As a highlight we're proud to be supplying specialty silicas that are used in cobot 19 diagnostic test kits and therapies, although a small part of our overall business sales in these applications are expected to add about 400 basis points of growth to the consumer pharma segment. This year.

Please turn to slide six and I'll summarize our response to lower demand and how we're managing uncertainty in the macro environment.

Based on our segment demand assessments, we're planning for graces Q2 sales to be down 20% to 25% from last year.

We are using this assumption to set our production plans sourcing plans and cost reduction plans.

In response, we're lowering our capital spending $35 million to $40 million by deferring projects originally intended to add capacity or de bottleneck operations that don't create near term value given current demand levels.

We are completing our three larger capacity additions and expect them all to safely startup by mid year as planned.

We have not reduced DHS or maintenance capital.

For operations, we are aggressively reducing production volumes and inventories to improve working capital by $35 million to $40 million. This is one of our best levers to maximize cash flow and ensure our cost stay aligned with demand.

If demand is less than Weve planned will further reduce production volumes to ensure we achieve our inventory targets.

In addition, we're reducing cost in our commercial functional and manufacturing operations by $25 million to $30 million. This year, some manufacturing positions will be affected by furloughs or other cost reduction actions beginning this quarter.

Our gross margins will be affected by our response to the pandemic.

While we continue to plan pricing and mix improvements this year, they will be offset by the negative effects of lower production and inventory levels.

In Q2, we expect a 200 to 300 basis point decline from lower fixed cost absorption.

This will continue well production volumes are at reduced levels.

In addition, we expect another 300 to 500 basis point decrease in gross margins in Q2, as we reduce inventory.

With less inventory fixed costs that were previously included an inventory will now hit earnings.

We expect gross margins to recover as demand increases and our inventory adjustment completes.

Given the heightened uncertainty in the macro environment, we're using three deliberate strategies to ensure we adjust quickly as conditions change.

Most important is our discipline and using cash is our primary operating and financial metric.

Cash, especially inventory is always the steris decision, making metric, especially in times like these.

Second we are tenaciously testing and retesting demand assumptions.

We have been deliberate about triangulating, our demand estimates with customers industry data and our own experience.

We're also carefully monitoring customer and end market inventory levels as an important signal a future demand changes.

We've seen a 12% decrease in sales since the end of March and we are reducing production volumes, even faster to achieve our inventory goals, we will remain nimble and take immediate additional actions if necessary.

Last we've made flexibility high priority, while we have reduced costs weve been careful not to jeopardize our ability to respond to changes in demand we want to be able to quickly slow production. Further if demand is lower than we planned and we want to be able to quickly respond to capture growth opportunities when the recovery.

Begins.

Please turn to slide seven.

As I commented last quarter, we've made tremendous progress with our strategic growth initiatives significantly strengthening our foundation for long term profitable growth and extending our competitive advantages.

The pandemic does not change our strategy or the long term value of these initiatives. It may delay our payback in some cases, but in other cases, we're seeing a significant benefit from our investments.

For example, our investments in commercial excellence have made us more effective selling remotely to customers.

We invested $6 million in over 50000 employee hours to upgrade our commercial capabilities in the last few years, including a global Salesforce dot com implementation and intensive value selling in negotiations training.

Using the tools and training we've deployed our materials technologies sales team added almost 800, new sales opportunities in their sales pipeline in Q1.

Specialty catalysts and account team completed a virtual two day technology ideation workshop with one of our biggest customers.

And our refining catalyst businesses are using remote technology to provide technical support to customers facing significant changes to their businesses.

They've even worked with customers to remotely startup in FCC unit and Hydrocracking unit.

And operations, we're maintaining our startup schedules for our three new plants. Despite the disruption of the pandemic. Our teams are using creative new ways to safely worked through startup procedures qualify products with customers and ensure startup success.

Clearly, we're not letting the pandemic slow us down.

In fact, our intent is to sustain these investments to ensure we are well positioned for the recovery. The disruption caused by the pandemic is temporary and does not change our strategic direction or my conviction about the earnings power of our businesses with that I'll turn the call over to Bill.

Thanks, Hudson and good morning, let's turn to slide nine for summary of our first quarter results to sum up Q1 or sales earnings and cash flows.

Aligned with the expectations, we communicated to you in February which included our estimated impact related to pivot 19.

Sales for the quarter were $422 million and down 10%, including an estimated impact a 4% or $20 million for pivot 19.

170 basis points of improved price more than offset 100 basis points of unfavorable FX.

Adjusted EPS of 71 cents for the quarter was down 22 cents per share the estimated impact to the pandemic was 10 cents per share.

Adjusted free cash flow was down $34 million due to alert lower earnings of $22 million and $19 million of higher capital expenditures as we work to complete several strategic growth investments, including our new coil silica plant in Germany.

Specialty catalyst capacity expansions as well as the new Hydroprocessing catalyst plant.

Now, let's go to slide 10, and briefly look at segment performance catalyst technology sales were down 12% lower sales volumes, partially offset by 210 basis points of improved price.

Refining technology sales were down 7% the decline in sales volumes was driven by higher refinery turnaround activity in the closure of a north American refinery customer last year.

FCC catalyst pricing was up over 200 basis points for the trailing 12 month period.

In specialty catalyst sales were down 17% year over year, including an estimated 10% impacts related to pivot 19.

Lower sales volumes in chemical catalyst for industrial applications were in line with expectations.

Moving to slide 11.

Cereals technology sales were down 5%.

Closing, a 200 basis point headwind from FX lower sales volumes included 2.5%.

Impacts related to curve at 19 that primarily affected coatings and chemical process applications.

Now, let's turn to slide 12.

We are confident that are lower strong financial position will enable us to successfully navigate economic uncertainties presented by the pandemic.

First at the end of Q1, we had over $600 million of available liquidity, including over $190 million of cash on hand.

We continue to run various stress test models and our businesses that we're very comfortable with both our current cash position and our ability to generate cash under each scenario we analyzed.

Second we have resilient cash flows we acted early to implement our response plans and took decisive actions to support cash flow. We expect ultimately drive about $100 million of cash from Capex working capital.

And operating cost initiatives this year.

As we look beyond Q2, we are ready to flex our business and cost structure. If the economy approves of the second half we will ramp up production quickly to meet increase customer demand if demand does not improve we will keep our foot on the break or break harder. If we have to the same goes for capital spending we have slowed down or post.

Certain growth investments to preserve cash we have the flexibility to restart these projects.

Well, we have clear signals.

Of an improvement in underlying markets are further slow capital if that is warranted.

Finally, we have a very solid balance sheet or annual debt service pension obligations and long term debt maturity profile is very manageable.

We have no long term debt maturities until September 2021.

Please turn to slide 13.

Where we have provided a chart summarizing a few key points about our pensions.

At the end of Q1, our net pension liability was $521 million. This includes both advanced funded and unfunded pay as you go defined benefit plans the advanced for the plans or more typical plans with the company funds a trust to plate paid benefits to plan participants. These plans are well funded.

We will only require approximately $2 million per year funding for both us and non us plans for each of the next three years.

The remaining $445 billion of the pension liability is for pay as you go plants, primarily related to our German operations. These plans do not require advanced funding under these plans the 2020 pension costs of $16 million and cash contributions of $15 million are consistent with prior years and indicative.

Of each of the next three years.

We thought it was important to address our pension liabilities, so everyone understands the dynamics.

Because we received some questions on this recently.

Is important it is important to recognize that the pension expense and cash contributions for all of these plans are included in our EBITDA EPS and cash flow of metrics, specifically, some analysts maybe double counting the financial effects by treating the pension liabilities as debt, while also including the pension costs.

Just in their EBITDA calculation.

Now lets turn back turn to slide 14, before I turn the call back to Hudson.

The capital allocation framework doesn't change as a result of covert 19, but we've deliberately shifted our near term priorities.

To reflect today's economic uncertainties, we lowered our planned capital spending for 2020 from about 195 million to 155 million to $165 million as we've discussed.

Acquisitions remain an important part of our long term strategy, but we are taking a conservative approach and slowing down these activities given the economic environment.

In terms of return of cash to shareholders. We are fully committed to maintaining our dividend, but we have temporarily suspended our share repurchases.

We will continue to evaluate our capital allocation priorities as economic conditions evolve.

With that please turn to slide 16, and I'll turn the call back to Hudson for some final thoughts. Thank you Bill Grace is well positioned to safely and successfully navigate the operating and financial challenges of the pandemic, we havent experienced management team with a proven track record of effectively adapting to dynamic and chat.

Challenging conditions, we are taking decisive actions to adjust to the economic effects of the pandemic.

Customer relationships are strong our workforce is healthy and highly committed and we have resilient cash flows and a strong balance sheet.

Finally, I am highly confident in the essential elements of our value creation framework. The grace value model, we are well positioned to capture growth drive profitability and deliver significant cash flows for the long term.

I look forward to your questions.

Ladies and gentlemen to ask a question. Please press star and the number one on your telephone keypad, we'll pause for just a moment coupled acuity roster.

Your first question comes from John Mcnulty with BMO capital markets. Your line is open.

Yeah. Good morning, Thanks for taking my question glad everybody is doing well in a safe.

So a question on the up it looks like when we look at the gross margin hit your that you're calling for for to Q. The biggest portion of that is going to be tied to inventory reduction I guess question. How long do you expect that inventory wind down to take and should we think about it as being different from from.

The capital aside to the to the material Tech side, how should we be thinking about that.

John This is Hudson Thanks for your question.

I think the vast majority of the of the inventory reductions will be completed by the end of Q2.

We have our targets in place at all of our plants. Our management system is tight and we expect to do this fairly quickly.

Got it and then I guess I'll follow up on slide five first of all was helpful. Fly there's a lot of information on it when I look at the when I look at the forecast for refiner re utilization rates.

Obviously as a 20 to 25 point drop right now.

If I'm looking at it right.

The the levels return to kind of a one Q ish type level by June or July and then push higher throughout the year.

As we kind of look to the back half of the of the of the year is there any reason to think that you wouldn't see a similar snap back in your volumes for one reason or another.

It's a good question, John and I and I.

As we're looking at this work we're triangulating information that we have from our customers information that we're getting from industry consultants like like Woodmac, NHS and others and other segments.

And in our own experience in prior downturns in our and our intention is.

Not really to call the direction.

Demand is going to come back at X pace or why pace, but really to stay flexible so that whatever pace. It comes back to.

We'll be able to adjust our operations up or down that said is just as context.

We've got a pretty broad footprint.

In the refining industry and I would expect our experience.

To mirror the Ics.

The the experience of the industry as a whole.

And John I realize I didn't answer the second part of your first question, you're asking about the the.

The inventory reductions in the different segments, it's roughly the same across the different segments.

Got it thanks very much for the color.

Your next question comes from Bob Court with Goldman Sachs. Your line is open.

Thanks, Good morning, this move Anthony Walker on for Bob.

Yes, I will.

Comprised a little bit by the price performance in catalyst and your ability to maintain pricing in light of the.

20% to 25% anticipated step down in the second quarter.

I think that is likely to continue our should expect pricing to level out or even potentially decline into the back half of their.

Anthony It it's Hudson.

Our our strategy is the same what we're focused on on product innovation in these businesses, we're focused on selling value to our customers.

And that strategy hasn't changed and you saw the benefits of it in Q1 and as I've said, our intention is to continue to drive.

Great and then on raw materials, you highlighted that as potential.

For the headwinds that you're seeing on the gross margin line you didn't help us think poor thank for how meaningful that potential relief could be and then just the timing of realization in the personality to see ending the first quarter do you expect to see any in the second quarter. Thanks.

We did we saw some improvement in Rals in Q1 relatively small and we're expecting additional improvements as the year goes on and we'll start to see that in Q2.

Yeah.

Your next question comes from Mike Harrison with Seaport Seaport Global Securities. Your line is open.

Hi, good morning.

Hey, Mike.

Was wondering if you can give us an update on the capacity addition for the art joint venture. It did did that end up getting completed and it's up and running or is that one of the project that.

Is being delayed or deferred in your capex outlook.

Mike It it is proceeding as planned.

It was mechanically complete in Q1, and we're working through commissioning activities right now and we expected to start up in the middle of the year.

We still feel good about demand in our business, obviously, it will be affected by the downturn and refining.

But that market the hydroprocessing catalyst market will continue to grow.

And we'll be hat, we'll be happy to have that capacity online and started up.

Yes.

Alright, and then another question on one of the chart. So one of the tiny little charts on slide five there.

One of them shows crude distillation unit so.

Utilization rates and my question for you is our FCC units generally running at about the same rated so see you numbers that are show up on that chart or is it a case where.

It's overall CD utilization is down.

Maybe the FCC unit it is not down quite as much the FCC units running harder.

Can you help us understand what's going on there.

Sure Mike we included it with the intention that it'd be a proxy for FCC utilization.

And if you're a refiner and you have an FCC unit you want to do everything that you can to run it in to run it as hard as you can.

It is a source of significant profit.

For our refinery customers and they're running they want to be running their FCC unit.

All right thanks very much.

Your next question comes from John Roberts with CBS. Your line is open.

Thank you you had a large number of refinery customers down in the first quarter did they all restart by April or have some some of them stay down into the June quarter here.

John most of them did start up as they had planned.

But some did stay down for economic reasons, and and that's reflected in our thinking about Q2.

Okay, and then sometimes a crisis will provide a catalyst for industry structure change no pun intended.

We've got a number of oil companies that participate in the catalyst industry and again, China has been captive do you think this kind of crisis period here will provide any.

Major changes to the industry structure.

It's an interesting question, John and as I've thought about it.

I think I'd go back to the fundamentals of this industry.

And whether its refining catalysts or polyolefin catalysts.

At the end of the day.

The catalysts have value to our customers because of what it allows them with the catalyst allow them to do in terms of the productivity of their operations and the value of the products that they can create and these really our technology purchases for our customers it's reflected in.

The margins.

That we have and it's reflected in the close relationships that we have with our customers and the formulation for all of this the business model is technology development of products.

Strong collaboration and innovation skills and strong technical service skills.

These are the things that our customers value from us and they are the things that they're ultimately paying for.

And these are capabilities that we've built up over decades.

And they're not really disrupted by something like this and quite.

You know to the.

To the contrary I don't think disruptions like this creates significant new opportunities for competitors.

Because you can't develop these sorts of capabilities overnight.

I go back to the auto nine downturn I go back to the big disruption that was call it caused.

By rare Earth to few years ago, and those events Didnt change the industry structure and I think the industry structure will will survive this event as well.

Thank you.

Your next question comes from Mike Sison with Wells Fargo. Your line is open.

Hey, guys glad to hear you all are safe and sound.

Hey, Hudson.

Starkly, you've talked about driving miles being a key driver for FCC catalyst then.

I think everybody understands lie to you so weak.

No as as folks get back to work in and yes, Thats, maybe an area that could be more V shape. When do you think you would see.

That improvement.

In Europe in your numbers.

As the year on hold.

Well, Mike it's.

Thats a great question in and we're not in a position today to really forecast when the window recovery will begin.

I I, John asked a question and I and I wanted to give John Mcnulty when I was responding to him I wanted to make a broader point about.

Our our our strategy here is not to try to predict a recovery or to make decisions that are dependent on a certain assumption about how things play out from here.

We want to be balanced and nimble so that if the recovery happens quickly we can.

Since back with it if things take longer.

Then we'll stay focused on on reducing inventories and costs.

That said I think.

Once it begins.

It will read through pretty quickly for us certainly on the refining side supply chains are very short in that market and I would expect it to read through very quickly for us.

Understood and then.

Hi, I know it's difficult to.

To sort of.

I'll talk about your long term plans these days, but.

Any help but maybe thinking about where maybe a normalized margin for the business could get back to and.

Post a.

Closest crisis, whether it be next year or longer term.

Yeah, maybe how rebuild some of the earnings power for US is as things hopefully get better over time.

Mike It's a very important question and I am I appreciate you asking it I fully expect for our margins to fully recover.

As demand recovers.

We were.

Taking cost actions to reduce our costs the inventory correction is transitory.

And the productivity investments that we've made over the last couple of years that havent fully paid off yet will will pay off fully as our demand recovers. So I think in it in a nutshell.

I fully expect our margins to recover as as a as the recession passes by.

Great. Thank you.

Your next question comes from Ben Kallo with Baird. Your line is open.

Hi, Thanks for taking my question.

So could you just talk through your deferred.

Customer bases.

Stripped of nutrient customer basis, and then on refining could you remind us just slipped in the last downturn, how refiners flex well.

Replacing their countless are both the FCC, sorry, HPC, sorry, so what kind of lag that takes before or pressured part actually if take a string out there Joe strictures. Thank you.

Yes, Thanks, Ben So the Algo I'll go segment by segment.

In the refining in the refining segment.

Refiners are obviously pressured right now by reduced demand.

For fuels.

In terms of of how they respond to that from a catalyst perspective.

There is not a lot of inventory of catalysts its a.

I am speaking about FCC at this point.

It's a it's a product that is continuously added into the FCC unit on it on a day to day basis.

And we're shipping to customers on a daily and weekly basis to keep them to keep them supplied it's a it's a short short supply chain and in a single fries.

The on the HPC side.

The the.

The physical dynamic is different HPC catalysts are.

In.

Used in a fixed bad configuration, and those catalyst or changed out periodically typically coinciding with the refinery turnaround and so what what drives the specific demand for HPC catalyst is a refinery turnaround or a new unit startup.

When new equipment is started up.

In the short term.

That demand because it's tied to turnarounds is pretty resilient refiners are they want to complete their turnarounds on the schedules that they've.

Identified and planned for in the long term refinery turnarounds, maybe pushed out some if they're running.

If they're running slower than they can extend the the cycle time between turnarounds and we may see that effect later in our Hydroprocessing catalysts business.

On the specialty catalysts business.

Our customers.

Are going to experienced some demand declines.

Nothing like what the refinery customers will experience.

And they have the ability to adjust their operations to match those.

Those demand declines just like that refiners do.

From a catalyst perspective, it's more like FCC catalysts, where the catalysts are added in a fixed proportion based on the amount of resin that our customers are producing and so if our customers are operating there they're consuming catalysts.

They order on a less frequent basis, they tend to carry more inventory of catalyst in our refining customers do.

And that's why we expect to see some inventory reduction.

Of catalyst inventories in Q2 by some customers and we are seeing a difference in philosophy, some customers have been increasing their catalyst supplies.

Catalyst inventories firsts security of supply reasons, but other customers have been reducing their catalyst inventories.

For their own cash flow reasons in Q2, the catalyst inventory reductions will outweigh the catalyst inventory increases.

And then for materials technologies.

The material that we provide is is usually a manufacturing.

Process aid or and in product ingredient for our customers and so its consumes continuously as our customers are either.

Manufacturing their products or running their processes in terms of end markets for that business Ben It's it's a pretty it's a pretty.

Wide diversity of end uses we tried to summarize it simply on page five by categorizing it into Nondurables think consumer pharma and use applications and then more durable applications that would be driven more by construction activity and things like that.

That was a broad overview, but I want to check and make sure I addressed your question.

So with that said I I guess, just as far as financial stability, but you just on the cow aside.

Could you just covered wireless I know those deferred mcallister buyers of different mixes of integrated refiners versus kind of smaller refiners and could you kind of give us some sense about just thinking about that so much slower quarters at the start closing down.

Our risk to others.

Okay.

Given our market share our our customer base.

Broadly reflects the market.

We are tilted towards customers that value technology.

The Grace a catalyst technology in their operations as opposed to customers that are just focused on catalyst costs, that's probably the real.

Defining characteristic of our of our customer base.

As a as us as a broad statement.

You know as we've talked to our customers.

We're not seeing any slowdown in payments from them or or anything like that if thats. What you were getting a.

Great.

Thank you.

Your next question comes from Chris Kapsch with loop capital markets. Your line is open.

Yes. Good morning, So there's been a couple of questions on the gross margin degradation that didn't have a follow up though if you look at the inventory drawdown is transitory like you suggested Hudson.

I'm curious about the 200 to 300 bips of of.

Degradation, which I guess is a function of just the end market weakness is that comparable across the two different segments.

Or more pronounced in the catalyst segment and then.

If you look back to the 2000.

2008, 2009, great recession, I guess in 2009 in 2010.

Graces gross margin was up pretty substantially so I'm wondering if you could just compare and contrast like the.

Differences in the industry structure the for the Mitigants that happened then that allowed you to increase margins, whereas it looks like we'll see subdued margins may just be a function of FCC pricing at the time. Thank you.

Thanks, Thanks, Chris the you're right the two or 300 basis point decline that component really is just driven by demand levels.

Production volume levels I think of it is under absorbed fixed costs.

As we operate at a reduced manufacturing rate.

The fixed variable cost mix between the two businesses between catalyst and materials is roughly the same.

And so I think you can you can use those data points to look at both segments.

And when you compare today.

To the 2008 2009.

Time period from a from a margin perspective, the biggest differences are.

Around FCC catalyst pricing and raw material costs back in a way to know nine we were.

Going through a period, where where grace is a company with significantly raising FCC prices FCC catalyst prices and those price increases started in 2008.

Before the recession began and they continued.

They continued through the through the downturn and into 2009, but the other big component was.

Pretty dramatic decrease in raw material costs that occurred at that time and you may recall.

It was a period of very high inflation and commodity costs, we were affected by that.

In commodity costs really collapsed.

In Q4 O aid in the early part of Onein in that and that benefited us significantly.

Today, we are seeing some decrease in commodity costs, but nothing on the scale that we saw back and await no not at least not at this point.

Fair enough. Thank you.

Your next question comes from Kevin Mccarthy with vertical research your line is open.

Good morning.

For you and the clearly an operating cost.

Reduction range of 25 to 30 million wondering.

Talk about how you would expect that level of savings to flow through the income statement in the second quarter and beyond.

Hi, Kevin Thanks for the question.

Yeah, I would take that number and spread it over the rest of the year.

We began.

The cost reduction actions in Q3 excuse me.

Sorry in March.

Three of Q1 and in that so they'll start to benefit Q2.

And most of these we can implement pretty quickly.

Great and then.

With regards to the reduction in the capital budget.

$35 million to $40 million.

Talk about with projects you cancel this any projects you still intends to execute.

On a post colm basis.

What what exactly is changing within the budget.

Sure.

The so first what we're keeping.

Each ines investments.

Safety related.

Maintenance related.

Those are our continuing as planned.

Those are important to me obviously.

The big growth investments that are.

The ones, we've talked about the Hydroprocessing catalyst investment the.

The colloidal silica investment in empty.

In a couple of smaller projects in the specialty catalyst business, we're completing all of those.

They were 95% complete.

In Q1 anyhow in obviously it made sense to complete those and start up which we're doing now.

The demand that we want to supply with those investments is still there.

These investments were made to coincide with customer investments.

And so the economic logic of those investments is still sound.

There were other investments that were I'll call growth investments sorry, there's there's one more category that were that we're continuing and these are cost productivity investments. So think of think of investments in our manufacturing operations that are being made to lower costs are lower energy consumption were content.

Doing with those.

The ones, where we've delayed.

These are these are investments that were.

Based on anticipating growth.

In 21, and 22, and 23 2021 and 22 in 2003 or were de bottlenecking investments, where we wanted to improve throughput in a specific operation those investments have been delayed because the business reason for making them.

Has has shifted out we'll still make those investments.

But we will make them when it coincides with the recovery and increase in demand.

Thanks.

The color and the well.

Thank you Kevin you too.

Your next question comes from Laurence Alexander with Jefferies. Your line is open.

Hi, This is Adam view this on for Laurence today in terms of operating cost reductions could you provide a little bit more clarity surrounding cost reductions and.

Where exactly are they coming from more are they more employee head count or productivity and then in a prolonged downturn I was wondering.

How much more flexibility do you have to cut costs without losing the ability.

The quickly adjust to it demands snap back.

So these cost reductions are broad based Adam they're coming from our commercial.

Commercial parts of the company.

The manufacturing organization the functional organizations.

And.

But your point about.

Sort of staying nimble is important and and we.

We're making reductions that are.

Zine to match the changes that we see in our end markets, but also keeping a balanced towards not changing our ability to grow when the recovery begins and also not changing our flexibility.

I want to one of the messages I want to be clear about today is this idea of.

Of us being flexible because we can't predict exactly what's going to happen and so.

We're making adjustments that reduce our cost without affecting our flexibility.

Okay. Thank you and then my last question.

It's on FCC pricing I was just wondering how how do you continue to maintain pricing through the balance of the year in this current environment.

Well, our focus is on creating value for our customers and and capturing that value and that really hasn't changed as a business strategy.

And we had a good progress in Q1.

And we're going to retain the focus on that strategy as we go through the end of the year.

Okay. Thank you very much.

[noise] again to ask a question. Please press star one of your telephone Keypad. Your next question comes from Paretosh Misra with Baron break your line is open.

Great. Thanks for taking my questions. So firstly on raw materials.

Can you talk about how you're currently buying alumina.

Is that spot or contract and just trying to figure out given that prices have come down fairly sharply in the last several months.

When do you start seeing benefits that in your BNL.

We do by alumina under long term contracts.

With negotiated pricing, but there are repricing mechanisms in those contracts.

And and so is as prices come down we would expect those to flow through to us overtime.

Okay Fair enough and then on your end market exposure I believe in the past, yes that that your automotive exposure is I.

I think 7% to 8% off specialty catalyst. So can you remind us where are you currently now perhaps across your portfolio and is there a way to think off your exposure also to the aerospace our air traffic end market.

The your memory is right our end market exposure in a specialty catalyst to automotive.

Build is about seven or 8%.

On aerospace.

We have a we have an exposure.

To jet travel not not to.

Yet manufacturing, but jet travel in our refining catalyst business.

Obviously with with a mouse flown down consumption of jet fuel is down that would be our biggest exposure to aerospace.

Thanks, Scott and if I could just ask one last quick one on the licensing business I was hoping if you could provide some more color.

How is that part of the business like the affected by this downturn and I think you said you sign two new licenses any kind of.

Anymore color on that how big those are relative to your typical depicts a license.

You bet no I, we did sign two licenses in Q1, we have not announce the details of those yet.

But they're in line with typical license sizes for us.

From a longer term perspective, really what drives demand in our licensing business. Our is long long term demand growth for polypropylene and as our customers look too.

Build their capacity to supply the long term growth in polypropylene, they look to us to the technology partner.

In the process design, that's really the demand driver for that business and customers make these decisions.

Three five sometimes seven years in advance of their construction intentions, and so things like.

An economic downturn.

Don't really slow their long term planning I'm sure project timing changes for customers, obviously project timing changes for customers, but the long term demand drivers are intact for polypropylene.

Thank you really appreciate that.

There are no further questions queued up at this time and from the call back over to Jeremy Rowan.

Thank you Denise. Thank you everyone for your time today and your interest in Grace, we look forward to speaking with you and hopefully seeing many of you on the road over the coming months. Thank you.

This concludes today's conference call you may now disconnect.

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