Q3 2020 W R Grace & Co Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the portal screening Sweeney W.R. Grace <unk> Corp. earnings Conference call.
At this time, all participants are in a bit more.
After the speakers presenting them there will be a question on suspicion.
I'll speak with John during the session you will need to Brent.
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I would now like to have the conference over to U.S. because to me Jeremy Roane, Vice President Investor Relations. Thank you. Please go ahead Sir.
Thank you <unk> good morning, and thank.
Thank you for joining us today for Grace's third quarter 2020 earnings call with me. This morning is Hudson The force, our President and Chief Executive Officer, and Bill doctrine, our senior Vice President and Chief Financial Officer.
Our earnings release and presentation are posted on our website under the Investor section.
<unk> 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 FCC 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 ready.
Reconciliations of non-GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website.
This morning, Patrick will discuss our focus on value creation highlights from the third quarter.
He end market trends and sustainability.
Bill will provide an overview of our financial results and key planning assumptions. We will then open the call for questions.
With that please turn to slide four in our earnings presentation, and I will turn the call over to Hudson.
Thank you Jeremy Good morning, everyone I Hope you and your families are all safe and healthy.
We delivered solid financial results in the third quarter, including strong sequential growth in gross margin and earnings and strong cash flow.
We are encouraged by improving demand trends in many of our end markets and believe the worst of the recession is behind us.
Before we discuss our third quarter results in detail I want to address Kathy Rylands recent resignation from our board, which followed a difference of opinion about our strategic direction.
While I won't discuss the details I think it is important to underscore that there was no disagreement about grace's business unit strategy or operations.
We have a portfolio of high value specialty businesses.
Over the years, we've often pursued opportunities to drive the most value from them.
This open minded approach to creating value led to the spinoff of GCP and the successful acquisitions that built our leading specialty catalyst business today.
Today, our business is significantly impacted by the pandemic.
Our board working with management and our financial advisors is carefully evaluating and thoroughly discussing our value creation opportunities consistent with our longstanding practices and commitment to all shareholders.
At the same time, we're focused on executing our growth plan and advancing our investments to accelerate growth improve our competitive advantages and strengthen our portfolio.
I'm confident our growth strategy and capital allocation discipline will create significant long term value for shareholders.
Now, let's turn to our third quarter highlights on slide five.
Third quarter sales were down 11% year over year in line with our Q3 planning assumptions.
We are encouraged by the improving demand trends in each business and believe Q2 was the trough of the recession.
Materials technologies sales grew 4% year over year on strong pharma consumer demand and solid coatings demand.
Improved demand and higher production rates drove sequential adjusted gross margin improvement of 410 basis points.
Adjusted EBIT was up 9% sequentially.
Adjusted EBITDA would've been up more than 30% sequentially without the financial impacts of Hurricane Laura.
We delivered another quarter of strong cash flow driven by our aggressive actions to lower capital spending improved working capital and reduce operating costs to improve cash flow by $125 million in 2020.
We've captured the full year benefit of the capital spending and working capital actions and are on track to deliver the operating cost reductions.
Year to date operating cash flow was $259 million and adjusted free cash flow was $170 million year over year adjusted free cash flow was up 4%, even though adjusted EBIT was 37% lower.
I'd like to think Grace is 4000 employees around the world for their continued focus on health and safety during the pandemic. Their discipline has ensured that we have consistently met our customer commitments throughout the year.
In addition, I want to recognize the extraordinary efforts of our employees in Lake Charles and throughout the company, who worked tirelessly to maintain supply to our customers and to safely restart our lake Charles manufacturing operations after Hurricane Laura and again after Hurricane Delta.
Their commitment to our customers at a time of significant personal hardship is truly exceptional.
Please turn to slide six.
In specialty catalysts polyolefin catalyst demand is improving in all regions and segments.
Non durable end markets continue to show strength, particularly in hygiene and packaging applications.
Durable end market applications show signs of recovery, but certain segments will likely remain below 2019 demand levels next year.
We expect specialty catalyst sales to continue to improve we've recently introduced 15, new products and are seeing a strong increase in customer trial activity after significant delays due to the pandemic.
These trials are important steps in accelerating sales growth next year.
This week, we announced our fifth license of 2020 and have a robust pipeline for Q4 and 2021.
Our licensing business provides a consistent and visible revenue stream and positions us well for significant future catalyst sales.
Our lifetime plant performance server service offering helps our customers maximize the profitability of their polypropylene polypropylene production operations.
Please turn to slide seven.
In refining technologies demand for transportation fuels has stabilized and we have seen recovery from a deep bottom in the second quarter. So.
Still transportation fuel demand and refinery utilization remain about 10% below normal levels.
The effects of the pandemic will continue to be a headwind until global transportation fuels demand more fully recovers next year.
We remain strongly focused on selling the value of our technology to our customers as they optimize their refinery operations in a difficult environment.
Some customers have switched to lower performing catalyst to minimize their operating costs until demand recovers, but the vast majority of our customers continue to use the high performing catalyst they used before the pandemic.
This has the effect of lowering our average sales price and we now expect average FCC prices to be flat to slightly up this year.
Given the weak conditions in this end market, we proactively reduced 2020 operating costs by about $20 million as part of our overall cost savings effort.
We're driving additional productivity in our manufacturing plans and managing capital spending to ensure our costs and capacity are in line with current market demand.
Please turn to slide eight.
Materials technologies has performed well during the pandemic outperforming many of its end markets in Q2 and Q3.
Q3 sales grew 4% year over year due to better demand in pharma consumer and coatings strong.
Strong pharma performance has been led by Grace is product technologies used in the fight against COVID-19.
We expect pharma consumer markets to continue to perform well and we are encouraged by the rapid recovery in our coatings segment.
And chemical process markets demand continues to improve but the recovery has been slower end markets tied to the hard hit automotive and aerospace sectors, our commercial excellence and customer driven innovation continue to position empty for higher growth and improved profitability going forward.
Please turn to slide nine.
For more than 20 years Grace has been focused on achieving the highest levels of each ines performance, but today customers investors employees and other stakeholders expect more they want to know what else, we can do to improve sustainability for everyone.
We're doing a lot already.
Last year, 44% of our sales directly contributed to our customers sustainability objectives.
Our technologies help reduce plastics content and consumer packaging water use in manufacturing processes and harmful materials and consumer products.
Our technology is also help improve fuel economy reduce energy use and reduced refinery emissions.
For example, our technology is used by customers to reduce sox emissions and their operations.
With Grace technology, our customers eliminate more than 20000 metric tons of Sox emissions each year. This.
This is two orders of magnitude greater than the Sox emissions from our own manufacturing operations.
We're not satisfied with these contributions and know we can do more in the future.
Today, 65% of our R&D projects are tied to at least one customer sustainability driver and we expect our positive sustainability impact to increase as these technologies commercialize.
Please turn to slide 10.
We see two additional opportunities to links sustainability trends and our customer driven approach to innovation to create growth opportunities for grace.
These are game changing technologies in the areas of advanced plastics recycling and renewable fuels.
So these are very small markets today, they have the potential to become significant and the long term.
Most exciting for me is our opportunity in advance plastics recycling our.
Our catalyst technologies and know how can contribute significantly to the long term technical and economic viability of this solution for recycling plastics and reducing plastics waste.
Mixed plastic waste streams are hard to recycle today and this challenge needs to be addressed before plastics can be recycled economically at scale.
For us this looks a lot like problems our FCC team works on every day.
How to turn a challenging complex carbon feedstock into useful valuable products.
Our scientists are working to develop the technologies and business models to make advanced plastics recycling scalable and economic.
Significant sales are still years away, but the long term opportunity is compelling.
Similarly, renewable fuels is an opportunity is.
As an important sustainability opportunity, where our existing technologies and applications know how to help our customers at multiple points in the value chain. This is a small business for us today, but one with high growth potential as our customers invest more in this application.
With that I will turn the call over to Bill.
Thanks, Hudson and good morning, Please turn to slide 12 as.
Such a noted we're very pleased with our solid results for the quarter, which reflects strong execution in our businesses by what is still a challenging operating environment.
We are seeing positive demand trends in most of our end markets.
Going back to Q1, we highlighted the potential impacts of the pandemic.
We took early actions to reduce inventory levels production rates and operating cost to generate cash and maintain our strong financial position as a result, the mitigation actions have positioned us well to exit the recession, a stronger company and fully prepared to capture the recovery.
Now turning to the third quarter results.
Sales were down 11% year over year, primarily due to the effects of the pandemic on global transportation fuels demand and refinery operating rates.
On a sequential basis sales were up slightly from Q2.
Adjusted gross margin was up 410 basis points from Q2, the strong sequential improvement was driven by improved demand and higher operating leverage.
Sequentially adjusted EBIT was up 9% and adjusted EPS was up 14%, which included $12 million or 13 cents per share of hurricane related costs in the quarter.
While this is an insured event the total costs do not exceed our deductible. So we do not expect any insurance recoveries.
Regarding cash flow our year to date adjusted free cash flow was up 4% over the prior year, reflecting our teams strong execution and focus on reducing working capital and capital spending. In addition, we received a $10 million dividends from our joint venture and are expecting additional dividend from art and.
Before as you may recall in mid 2017 or stop paying a dividend to the parents in order to self fund the Hydroprocessing catalyst plant and Lake Charles now.
But the plan is complete.
Spec or it will return to paying annual dividends.
We have made excellent progress in our mitigation actions and are confident we will deliver our full year target of $125 million in cash flow improvements at this point, we have achieved our targets to improve working capital by $45 million to $50 million and lower capital spending by $40 million.
We are on track to deliver our targeted operating cost reductions of $35 million to $40 million.
As a reminder, most of these cost reductions are temporary and will return as demand recovers while.
$125 million of castle actions will benefit 2020, these actions will not limit our ability to generate strong cash flow in 2021.
Now, let's turn to slide 13, and looked at the segment results.
Catastrophic catalyst technologies sales were down 1% sequentially versus Q2.
Specialty catalyst sales were down 2% versus the prior quarter, primarily due to order timing.
We are fighting technology sales were essentially flat sequentially.
Over the prior quarter is to talk to client and transportation fuels demand stabilized, but remains well below normal operating levels as only going affects the pandemic continue to impact global demand.
Global operating refining rates and miles driven.
For the trailing 12 months FCC catalyst pricing improved approximately 150 basis points.
Third quarter quarter segment gross margin improved 260 points.
Sequentially, reflecting significant inventory reductions in Q2 not repeating.
Operating income was down 7% versus the prior quarter, which included $12 million of costs related to hurricane Laura.
Income from our Orchard beds for the quarter was down sequentially $2 million.
While some refinery turnarounds have shifted from the second half of 2020 in the 2021, we expect or its fourth quarter sales to be up significantly as compared to Q3.
Now, let's turn to materials technology on slide 14.
Third quarter sales were up 4% on both a year over year and sequential basis versus the prior quarter.
Cuttings and chemical process applications saw improved end market demand.
Both up sequentially from Q2 to Q3.
Demand and pharma and consumer end markets remained strong in Q3, the below the Q2 levels benefited from strong demand for materials used in customers pivot my team diagnostic kits.
Gross margin for the quarter was up 880 basis points over Q2, as a result of higher sales and higher production volumes as well as significant.
Due to inventory reductions that did not repeat in Q3.
Operating income for Mt was up over 90% versus the prior quarter on improved demand and strong sequential gross margin improvement.
Now, let's turn to slide 15.
As I mentioned, a moment ago, we had strong cash flow performance driven by our actions to maximize cash flow since the pandemic began.
The results speak to the strength and resiliency of our businesses.
At the end of the quarter, our total liquidity was over $700 million, including $269 million of cash on hand from.
From a debt perspective, we have not drawn on our revolver have no significant debt maturities until 2024.
Our net leverage was 3.8 times at the end of Q3 and outside of our target range of two to three times, reflecting the temporary impact the pandemic has had on adjusted EBITDA.
But we have a strong record of deleveraging quickly and expect our balance sheet to de lever as markets recover.
Now, let's turn to slide 16.
We remain committed to our long term capital deployment framework, but as we've discussed we have temporarily shifted our near term priorities to focus on cash flow and liquidity and funding targeted growth and productivity investments.
Importantly, our investment decisions were made with a focus on maximizing near term organic growth opportunities and accelerating our technology and innovation to support customer driven innovation.
These decisions will not impact our ability to grow in 2020 or beyond.
Regarding shareholder returns, we expect to resume share repurchases in 2021, well, considering you're continuing to prioritize investment in our businesses.
Reducing that leverage.
Finally, let's turn to slide 17.
For the fourth quarter, we expect sales to be up 10% to 13% versus Q3.
Led by a solid recovery and are finding technology sales as well as solid growth in both specialty catalysts and materials technologies.
Specialty catalysts, we expect sequential sales growth in Q4.
As end markets are showing signs of improvement and we expect lower impact from customer inventory drawdowns.
Demand for transportation fuels and refinery utilization are both expected to continue to improve sequentially in Q4.
Which will drive an increase in demand for FCC catalysts in Q4.
In materials technologies, we are expecting sequential sales growth from Q3 to Q4, driven by the continued strength of our pharma business and recovery in consumer and coatings offsetting weaker demand in certain industrial end markets, particularly automotive.
We expect continued sequential improvement in gross margin of approximately 100 basis points from Q3 to Q4.
Gross margin will also continue to improve beyond this year and we are confident that work will return to pre pandemic levels of 40% to 42% as demand more fully recovers from the pandemic.
We expect adjusted EPS for the quarter to be in the range of 84 to 88 cents per share, reflecting an increase of 50% to 57% from versus Q3.
And as a reminder, this range includes the impact of the remaining hurricane related costs of $68 million or approximately eight cents per share.
Now I'll turn the call back to Hudson.
Thank you Bill please turn to page 19.
We delivered solid financial results in the quarter, and we're really encouraged by better demand trends our team is executing well in a challenging environment.
Throughout the pandemic Weve remained focused on executing our growth strategy.
The investments, we've made and growth commercial excellence and operating excellence are showing results and we will pay back and we will.
To me are showing results and will pay back strongly is demand fully recovers I'm confident our growth strategy will create significant value for our shareholders.
Let's open the call for your questions.
As a reminder to ask a question you will need to press star one on your telephone.
So we draw your question press the pound all harsh.
Please stand by while we compile the Q1.
Your first question comes from Chris Parkinson of Credit Suisse. Your line is open.
Hi, good morning, just carrying on for Chris.
I was just wondering if you can give me a little bit more color in terms of what you saw in pricing this quarter specifically.
How many Kosovo well not how many customers, but the patterns you've seen in terms of I guess 13 down to a lower quality catalysts or different catalyst and how you expect that to recover into 14 or 2021 as as demand recovers. Thank you.
Hi, Karen this is Hudson. Thanks for the question the what we're saying is is customers.
Making a decision to.
Use a lower performing catalyst is the way to save operating costs.
At a time, where where there.
Their profitability is challenged.
This is something that we work on closely with our customers, we help them determine an alternative catalyst and oftentimes, we'll re formulating a catalyst for them to make sure. It meets their needs and the current economic environment. Now. This is a small number of customers that have made.
This decision.
Vast majority of our customers are still using the same high performing catalyst they were using before the pandemic began but when a customer wants to make a change like this obviously will work closely with them to help them make that change. We do believe this is temporary we think it will continue into next year for the customers that have made this year.
Twice and is there operating operating rates begin to improve next year, we think they'll switch back to the high performing catalyst that they were using before.
Great and then just a quick one on specialty catalyst I mean, it's clear there has been a little bit of customer Destocking Thats continued into three Q.
Can you just give us a high sense of that.
What amount of the stocking you expect is still remaining into four Q and as demand comes back for most of these chemical end markets, how you view.
I guess such catalyst demand trending into 14, and then any preliminary thoughts on 2021 sure. So we solve the greatest amount of customer de stocking in the second quarter. As you may recall from from that discussion we had customers that had had made a disk.
Vision to reduce their safety stock of catalysts.
These were decisions that they made for their own their own cash flow management reasons. Most of that de stocking occurred in Q2. Some did occur in Q3 as well as you noted we think that we're close to the end of the.
The de stocking on a sequential basis and we expect that.
Specialty catalyst sales to improve from Q3 to Q4 in part because that destocking will be coming to an end on a year over year basis, we do still expect specialty catalysts to show negative year over year growth in the fourth quarter.
Because of the comparison to last years.
Fourth quarter, where customers were still building safety stock inventories and so we think that will be a headwind on a year over year basis, as we head into 2021, Karen I feel pretty good about the growth opportunity that our specialty catalyst business has.
As we highlighted in some of our prepared materials. This morning.
The team has done an exceptional job over the last couple of months getting new products into the hands of our customers.
In working through the Trialing activity, that's necessary for our customers to test these products and ultimately introduce them into their regular commercial operations. This is a routine part of this business it's an important.
Element of driving growth long term for this business, but it had had gotten disrupted because of the pandemic.
Trial activity dropped to close to zero.
During the first six months of the pandemic and now it's really starting to pick back up and that's very encouraging for us as we look into next year.
Thank you very much.
Your next question comes from John Mcnulty of BMO capital markets Your lines open.
Yeah. Thanks for taking my question I guess, maybe first a high level. One you highlighted at the beginning of the presentation around how you look to create value for shareholders and kind of the strategic methodology around driving the portfolio for growth.
I guess and look at middle you've done a good job with that especially with some of the specialty catalysts adds but I guess looking forward. It looks like some of the evolutionary changes that have been happening in refinery, maybe even kind of getting more of a revolutionary kind of period, where you've got big oil companies kind of thing peak of oil consumption is going to be the end of this decade.
Eight.
You've got refineries closing so I guess can you speak to how all of that may be changing how you and the board or thinking about the opportunities for growth and maybe the directions that you move and growth.
John This this is a great question and I appreciate you asking it let.
Let me, let me address it in two parts. So I'll, let me talk about how we're thinking about our refining businesses today, and then I'll touch on the second part of your question about what this means for our.
Strategic discussions as a company.
As we look at the refining markets over the long term.
It's clear that there will be a peak demand for transportation fuels.
When we first looked at this data a few years ago, we thought the peak would be in the 2035 to 2040 area.
With the pandemic and the advance in some technologies that peak may come sooner. It maybe as early as 2030 or 2035 as you indicated but I don't think that corresponds with the peak in demand for FCC catalysts.
The FCC unit is a very important part.
Part of refinery operations. It is the its a very important part of producing gasoline for the gasoline pool and.
And maybe more importantly, it's one of the most economic ways to make gasoline by itself only accounts for about 40% of the gasoline pool.
FCC units are also used to make petrochemical feedstocks, primarily a propylene which.
Which will remain in high demand, even after transportation fuel demand reaches its peak and so the role of the FCC unit in the refinery remains important beyond just its role in producing transportation fuels.
The other part of this is the technology in our art Hydroprocessing catalyst joint venture.
No processing catalysts are used primarily to make cleaner transportation fuels to take sulfur out of fuels and other benefits and that demand will remain strong in the years to come we're seeing customers make significant investments in their operations and hydro processing capabilities to meet the end.
Creasing lease stringent fuel standards and so that we expect that business to continue to grow in the near term.
That said.
This is a slow growth business and at some point.
Growth will will reach its peak as I've commented.
We're looking at other ways to continue to make sure that grace achieves its growth objectives part of that is investing in our specialty catalysts business part of that is investing in our materials technology technologies business both businesses have.
Good long term demand growth prospects Grace throws off a lot of cash flow as a company in.
And there are opportunities for us to reinvest that cash flow in our existing businesses.
And to add smart bolt on acquisitions like we've done historically those.
Those acquisitions built our specialty catalyst business and investors and as investors have heard us describe this year, we've looked at opportunities to add on to our materials technologies business.
And when we find the right opportunities with the right financial profiles and the right returns we would want to continue to pursue those opportunities.
Got it that's helpful. And then thanks for all the color on that.
Maybe one other question just a a maybe a smaller nuanced question, but when you. When you look at the arc business. I know you were you were excited about the potential for growth obviously before the pandemic came in and things got pushed out a bit.
That said they can only push these things out for just so long I assume so I mean are we are we looking at a 2021 year, where we could see almost a doubling of that business just based on how much. It's come off in 2020 and also how much pent up demand or maybe pushed out demand may be as we as we look out is that the right way to think about.
Not at all or is that maybe a little bit on the aggressive side well, let me I'm going to address that in two parts John the the catalyst supply to existing operations.
Has been delayed because of the pandemic.
Customers that had turnarounds planned in the fourth quarter primarily have.
We have made decisions to push those turnarounds out into 2021.
And they and they can do that because their operations. They have not run as hard as they normally would have and so the catalyst effectiveness is still high and they can delay the turnaround to change out that catalyst in a fixed bed application.
But but by the same time.
The turnaround that was planned in Q1 might get pushed to Q2. The one plan in Q2 might get pushed to Q3 for the same reason just the life of the catalyst that has been lengthened because our customers haven't been running as hard.
That said I fully expect 2021 to be a stronger demand year for 20 than 2020 was in our art business and Thats, partly because of the second growth driver, which is new startups New unit startups, we've got very good visibility to our customer's plans to start up new units.
And we expect those to start up in 2021, 2022 and 2023 there.
A number of new investments that customers have made that will come online in the next three years.
Great. Thanks, very much for the color guys.
Your next question comes from the line of Kevin Mccarthy of lets call Research. Your line is open.
Good morning, Hudson, how would you characterize the magnitude and the timing of the opportunity related to advance plastics recycling technology for Grace.
This is something that in.
In really just the developmental stages at this point Kevin there.
There are a lot of experiments happening.
By Grace and by other industry participants with technology and with business models.
There there are technical challenges to be addressed there also business model challenges to be a great addressed in terms of capital or capital requirements feedstock availability and things like that and so I think this will take some time to sort out there.
There are some knowns.
Hi, Raul Asus processes are well understood process.
But there is some unknowns around feedstock availability and the pace of capital investment and so I do think this will take some time Kevin.
Okay, and secondly, if I may in your press release you yeah.
You called out an increase in your projected liability for the environmental work.
Thats proceeding in Montana can.
Can you talk about.
What the aggregate spend is likely to be and how you would expect that to flow through the financials in coming years.
Yeah, Kevin Hey, its bill yes, the the.
The adjusted we took this quarter was related to the spillway at the Libbey Mine dam and we did increase that estimate now to $95 million, which will get spent over the next four years.
But as we as we kind of alluded to in the release. This is an important part of our strategy at Libbey.
Getting this project done and getting it done right reduces the overall.
Potential.
Risk of that mine site remediation being a higher costs you might recall, we had a separate charge for that $70 million a couple of years ago. It was we still work through.
Yes that that finalizing that solution with the EPA. The work were doing around the dam and the spillway will help too.
Sure that we can keep the cost.
Within the ranges that we've estimated so it's a it's a long term process.
We're making progress here I think we're also well aligned with the.
10 of Libbey in the Lincoln County, where it's located they support the approach that we're taking as well so still a lot of work to be done to finalize all this it will not have any dramatic cashel implication in any single year.
I said this 95 million to be over four years.
The other 70 that we accrued will be over even a longer period of time and not starting for a couple of years from now.
I see that's helpful. Thank you very much.
Sure.
Your next question comes from Mike Harrison of Seaport Global Securities. Your line is open.
Hi, good morning.
What's just wondering with regard to the hurricane Mora and Hurricane Delta impact due to the timing of that impact.
Differ from your initial thoughts.
And at this point do you have pretty good visibility on when the grid is going to be back up.
And running and you guys stop incurring costs are there still some question marks.
Yes at this point.
You might think the grid is backup we're back on the utility.
We're getting our energy from Entergy, the local utility said the plants back up and running.
We're still finishing some of the clean up on the site, but the sites back up and running the plants are running the energies.
Being supplied locally and.
So I think we've got a.
We're well on our way to wrapping up the cleanup efforts.
All right and then in terms of the refining catalyst business as you look at refinery operating rates around the world can.
Can you give some color on what you're seeing from a regional perspective are there regions, where you were doing quite a bit better than that 24% decline that you posted overall.
And regions that were maybe a little bit worse than that.
Mike its Hudson the.
We do see some regional variations.
Operating rates in the Asia region.
Have been higher than they have been in other parts of the world.
Given the conditions in those markets around the pandemic and so forth.
If we if we look at this over time, what we've seen is back in Q2, we saw a real a real trough everybody is aware of that rates came back sequentially better throughout Q3.
July August September and then in September they they stopped improving at the same rate.
In October has been roughly flat against September and so we're watching this develop closely.
As the second wave of.
Illnesses has started to affect North America, and Europe, we havent seen any significant change in demand, but we havent seen real progress in demand improvement.
All right thanks very much.
Your next question comes from Mike Swanson of Wells Fargo the lines.
Hey, guys.
Especially catalyst business I think you.
Almost doubled that business over the last several years and so.
So when you think about strategically going forward, yes, there are opportunities in different.
The chemical industry that you can maneuver the business into that maybe.
Correlates with your current technology and can you do that organically or do you have to do some acquisitions to sort of maybe brought in that.
That part of the portfolio, which has a which has grown nicely over the last several years.
Mike its Hudson.
Yeah I.
On the specialty catalyst business the the acquisitions that we've made.
Have given us all of the technologies that we that we needed to have we.
We've got a broad technology footprint right now, we're able to supply the needs of our customers across polyethylene and polypropylene in so theres nothing that we that we would have to do in that business.
If there was an opportunity to add an additional technology.
Or maybe some additional manufacturing footprint, we'd certainly look at it but it's not it's nothing that we would have to do at this point.
Outside of the polyolefin catalyst market, we've commented over the years about our interest in investing in chemical catalysts, there attractive chemical catalyst businesses that we think would be nice complements strategically and financially to our current catalyst portfolio.
And and that is something that that we remain interested in it.
It's not likely that we would make significant organic investments in those markets. These tend to be niche markets and.
Not a lot of room for for a new entrant.
But if if if an asset became available to us.
We would certainly be interested.
Got it and then as a quick follow up.
I think you noted in the slides and prepared comments that post.
Post pandemic, you can get back to a 40% to 42% gross.
Gross margin.
And when I look at your global refinery crude run charts and look at the Blue line. It looks like now you start to get to those post pandemic levels in the second half 21 versus the first half. So is it is it challenging to get there in the first half and 21 I know, it's maybe a little bit early the guidance given that forecast.
And does that maybe implied that second half 21, assuming.
Assuming that forecast unfolds, its a doable sort of number.
Well, Mike we're not going to comment specifically on 2021. This morning, we'll we'll certainly share our views when we give our full year 21 thinking in February.
But but I, but I think your analysis.
Makes some sense and the driver for gross margin is it is a combination of things there's there's productivity.
We do and our and our plants on a day to day basis.
We've we've made a lot of effort to improve productivity of our operations.
Obviously improves our cost position and improves our margins, but there are other factors as well, including operating leverage and that's why we've tied getting all the way back to our historical levels to getting back to historical site. That's why we've tied getting all the way back to historical gross margin levels to getting.
Back to historical volume levels because of the importance of volume leverage to our margins that said, it's something that we work on every day to make sure. We're as productive as possible that were manning managing raw material costs and other inflationary items to try to do as well as we can.
Great. Thank you.
Your next question comes from John Roberts on fuel be it your line is open.
Thank you.
The big increase in the pharma.
Sales within materials technology was that new wins that will be sustainable or is that just a cyclical increase from the pandemic that then cycles back down.
John This is Hudson. Thanks for your question. It is a combination of both.
There is an important part of this that is driven by the pandemic.
We're supplying a specialty silicon technologies that are used in pandemic I should say pandemic COVID-19 test kits.
And we're also providing specialty silicon technologies that are used in.
They are happy and treatment of COVID-19 patients.
So that demand has increased significantly it's.
It's remained strong.
Which is which is good for us financially, but its unfortunate in the sense that depend demick has continued but.
But underneath that is also strong improvement in the underlying pharmaceutical business. The team has done a nice job.
Developing new business with new customers, new business with existing customers and I remain optimistic about our pharma business into next year.
And then secondly, assuming refinery runs get back to pre cobot levels in the back half of 2021.
You have replaced the lost share from Pts by then or do you still have some work to do on that.
Yes, John we believe we've replaced the share already.
Not on a volume basis, but on a percent of the market basis.
And so as refinery.
Rates improve.
Obviously expect our volumes to improve but our intent is to maintain our market share that's.
Thats been our strategic content in this business for a couple of years.
And and we're focused on that we want to maintain our market share and drive profitability growth in this business.
By focusing on value selling our technology to our customers. That's our that's our basic strategy and it really hasn't changed.
Thank you.
Your next question comes from Laurence Alexander of Jefferies. Your line is open.
Good morning, I guess first of all on material technologies, how is your segment mix.
Shifting this year I mean, as you guys here or do you think about exiting this year going into next year, whereas farmer consumer as a percentage of the total compared to where it was in 2018 2019.
And then the other question I had was just about the new platforms.
Can you give a sense whether on the renewable fuel side, the revenue per gallon or per ton.
Is significantly different.
Great.
On a comparable traditional diesel or gasoline.
And similarly for the capital as opportunities and.
Michael plastics.
There are technical reasons why this hairstylist fail.
Per ton of plastic printers.
Would be materially different than the current parlous sale going into in crackers.
Thank you Lawrence for those questions, let me start with the empty.
Question, and then I'll I'll shift to the future to the to the other questions.
On M.T.R.R. segment mix, if you went back a.
A year ago, we were roughly a third a third a third.
Tween.
Pharma consumer coatings.
Industrial or a process chemicals.
That mix shift has been changing as we've been focused on the faster growing and more profitable parts of our portfolio.
In in it and even setting the pandemic aside we expected to see consumer pharma consumer the pharma consumer segment to grow faster than the other segments. Although we did expect good growth in the chemicals the chemical process segment.
That's where a lot of our our new coil demand is.
Is is classified so over time, what we were doing was driving mix shift among those three segments and within those three segments towards the faster growing more profitable end markets and.
And we had seen a lot of progress at the at the sub segment level, we had seen about 10 points of mix shift over the last two or three years.
Now with the pandemic, it's accelerated that mix shift in favor of consumer pharma.
That will continue as we move forward.
The mix shift may not be quite as strong next year.
As the co bid as the pandemic hopefully winds down but in the long term, we absolutely expect to continue to drive that mix shift.
On your on your question about the sustainability gross opportunities.
Let me, let me touch on advanced plastics recycling for a moment.
There are two catalysts actually there are three catalyst opportunities for us.
In this end market.
The first is in the high Rollups. This process itself. This is where this is where.
The the plastic waste stream is converted into an oil.
That can be a process that's done with heat and pressure. It can also be a process thats catalyzed, it's a lot like in FCC catalyst.
Very similar application very similar technical challenges that is that is one commercial opportunity for us as this technology evolves.
The second opportunity is in an FCC unit if the if the if the if the product of the pilots. This process. This oil is fed into an FCC unit to be croak co processed with crude oil that's.
That's going to require a different type of catalyst still in FCC catalyst, but a reformulated catalyst.
That creates an opportunity for us.
And then in terms of the polyolefin catalyst itself.
To your specific question it doesn't matter on a on a unit basis, whether the feedstock is from a cracker.
PDH unit or despite robust process you need the same amount of catalyst to convert a unit of propylene into a unit of polypropylene.
And then just lastly, just touching on the renewable fuels is there a significant difference in the revenue.
Opportunities compared to traditional fuels on a per gallon or per ton persist basis.
This this the renewables uses a similar technology to what we're selling into our hydro processing end markets today and the economics are are in line with our existing economics.
Okay fantastic Okay. Thank you.
Your next question comes from Chris Kapsch of Loop capital markets. Your line is open.
Yeah. Good morning, hopefully you can hear me so.
Curious about I glean, a little bit this from.
Conversations with Jeremy Hudson I was wondering if you could address your decision to.
Cancel effectively your your project in your FCC capacity in the UAE at one point.
Yeah. This was deemed strategic given the pipeline of refined rebuilds and the broader middle East in the southeast region, Southeast Asian regions, and and presumably your visibility in getting specked into those designs and processes. So so yes.
A little bit of a pivot, but I'm just wondering if this is a function of a revised view of the markets longer term potential or if you could just elaborate that'd be helpful. Thanks Sherri.
Sure Chris Happy too.
This this.
Project was conceptualize in 2012.
As an opportunity for us to add a new capacity in an important region in the world and at that time, we had a view on long term demand for.
For FCC catalysts, we also had a view on how our technology would evolve over time.
And in the intervening years.
Two things have have developed.
The long term outlook for Rick.
Refining catalyst demand has moderated the growth opportunity today is not what we thought it would be back in 2012.
And so we had to factor that into our decision, making but the bigger issue quite honestly, Chris was around how our technology has evolved.
Are the pace of technology advance in the FCC catalyst business has been pretty fast over the last few years.
We've invested in that business, our customers are demanding more and more sophisticated catalysts from us, particularly is the demand for petrochemical feedstocks in refinery units has increased over the last few years and what what that's led us to is a decision.
And that it's better to keep our refining our manufacturing capability in our big plants. We've got three big plants, one in Europe too in the United States that have a lot of capability and a lot of flexibility and because of that flexibility, we're able to efficiently.
To manufacture new technologies as they are commercialized without a lot of new capital investment.
And.
And that's the better manufacturing strategy for us and it ensures that we are able to continuously provide our best technology to our customers from a from a an efficient global footprint wherever those customers or base.
Okay fair enough and that.
Answer the second part sort of dovetails into a follow up I had on this trade done dynamic and your FCC catalyst business and.
And having that.
Next to building your bigger plants, probably helps in the situation where these customers each refinery customers are thrifting and we've certainly seen this in prior cycles when when their profitability is under pressure what I'm curious about is you know.
When fracking became a thing you were able to innovate.
Develop some FCC catalysts that could get to iron out of that that light tight Keith.
He'd stocks for the refinery and in this instance, you know with the refineries that their demand the yield slate there demand picture has changed dramatically and in some areas more pronounced others diesel probably holding up like gasolines down obviously, the worst is probably kerosene. So I'm just wondering it other than just providing.
Lower costs catalyst for and again this isn't I understand this is not all your customer base just some but.
Other than just sort of providing lower cost operations is there an opportunity to help them change the yield slate to better address the disparate end market demand UBS.
As refined products or is or or are they just trying to get.
Through this and hope for the recovery any color on that would be helpful.
It's a it's a thoughtful analysis, Chris and you're spot on.
The vast majority of our customers are using the high performing technology in and in a lot of that is because they want to be able to maximize the value of what they're producing at their refinery.
Our technical teams have spent an enormous amount of time with our customers since the pandemic began working with them to identify how do they optimize their their profitability how do they optimize their refinery margins in an environment, where demand is changing dramatically.
Relative demand is changing and the value of their products have been changing and so this is what our teams do best there their superb at working with our customers.
To identify strategies.
For maximizing our customer's profitability and then turning that into a catalyst formulation.
And the vast majority of our customers are still pursuing that exact pigment that exact strategy.
All right. Thanks sense appreciate the color.
Your next question comes from Baby Silvana, All C.L. King Your line is open.
Yes, hi, good morning.
I was hoping to just follow up and get a little bit of background on the revenue dynamics earnings dynamics. When you are rewarded to unipol polypropylene licensing.
So I guess, there's multiple ways to pay for a technology Award maybe all upfront tour.
Over a period of time or or related to production.
And I noted you made a comment.
When you touched on that that particular award said it that it would create a longer term revenue stream. So.
If you wouldn't mind can you just walk me through kind of the revenue flows in other words is there an upfront payment is it a longer term payments tied to either a lapse of time more.
Level of production or is it the case, where you can maybe get an upfront payment for the technology, but the longer term revenue stream youve referenced is really with the accompanying sale of catalyst.
And then finally I mean is there.
In the quarter was there a payment received for the technology award or or if not when when might that.
Payment for that award show up in your results. Thank you David Hi, It's Phil.
Yes regarding the Unipol business. The way typical arrangement works is we'll sign a contract with a licensee.
And from the time, we signed the contract for the units up and running might be anywhere from three four or five years, depending on the the project and.
What happens is we get a number of milestone payments during that time.
So yes, there will be cash when they sign a license and other cash at different milestones and then but from a revenue recognition standpoint, we straight line. The revenues at the time, we signed the contract we estimate the value of the contract that we straight line that over the period from signed the license until the units up and running.
So this provides a steady.
Fairly predictable revenue stream for us at.
At any point in time.
We're signing four or five six licenses a year and they're taken three to five years or you can do the math Theres 10, 20, plus licenses in various stages of revenue recognition and you've got milestone payments coming in throughout the year on a number of open licenses at any given time as well.
So that provides a steady stream of revenue cash flow throughout the period of the construction and then beyond that and we have to catalyst sales.
Which.
Which which then provide the longer term.
Sales opportunity beyond that and and we do generally have a long term cattle supply arrangement with our licensees.
We've also continue to provide technical service as I take Hudson mentioned during his remarks as well.
Provide service to continue to help the units run this effectively.
From startup and for years to come beyond that so these are very long term relationships and once we sign the license it provides us long.
Long term opportunity.
Okay.
Okay. Thanks, very much thats it from me I appreciate it.
The King I think we have time for one final question.
Okay.
Last question comes from Chris Shaw of small niche Chris.
Your line is open.
Hey, good morning, everyone. Thanks for that and just keeps on the Fourq you got it for sequential.
Gross margin improvement of 100 basis points, given that I think you're also forecasting a 10% or little bit above that.
Sequential growth and sales I thought the gross margin benefit was less than that.
I would expect that is there some sort of seasonality or mix going on that you expect for Fourq you.
No. It's it's Chris.
Chris It's really driven by the recovery right, we're still not back to our historical rates volumes, both on sales and production and so we'll continue to see this incremental improvement.
We saw from Q2 to Q3, we'll see a three to four.
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Assuming continued recovery into 2021, we'll continue to see the margins improve there so.
It's not a seasonality issue, it's really tied to our overall operating leverage.
But a 10% sequential sales increase doesn't generate a higher gross margin improvement that's just that's the math.
That's the math and you've got to factor that the mix of the businesses and so forth as well, but that's that's the math and we feel pretty a pretty confident thats, where it will land for Q4. It got it and then I know part of the growth strategy that passes and the refinery catalyst to bid and.
No other.
Geography, where the growth is an actual new refineries and you've got that I was curious you know.
The refinery is a world scale refinery the middle east relative to.
Yes, I don't for instance, the T. S. One that closed recently is there does one use more catalyst than the other or they basically the same I mean, it's a newer more efficient one last order that use more because I'm not sure I mean, what is there any sort of.
Change in that besides just the volume.
Chris It's Hudson the biggest difference is really in the value of the catalyst that theyre using.
The new refineries that are being built in the middle East and Asia.
Africa, they're focused on petrochemical feedstocks in addition to transportation fuels.
Into into achieve their output objectives around maximizing propylene they need a very high performing catalyst.
And that's the biggest difference.
Got it Thats all I had.
I'll turn the call back over to the presented some closing remarks.
Thank you everyone for your time today and your interest in Grace, we look forward to engaging with you over the coming months. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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