Q4 2020 W R Grace & Co Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the W. R. Grace and company fourth quarter 2020 earnings call and webcast. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Good question during the session you will 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 Jason Hershiser R. Investor Relations. Please go ahead.
Thank you Denise good morning, everyone and thank you for joining us today for Grace its fourth quarter and full year 2020 earnings call with me. This morning is Hudson La Force, our President and Chief Executive Officer, and Bill document, our senior Vice President and Chief Financial Officer.
Our earnings release and presentation are posted on our website on 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 the actual future results may differ materially.
Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance.
We will 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 and posted on our website.
This morning, Hudson will discuss key fourth quarter highlights and market trends provide of strategy and sustainability update and summarize our outlook for 2021 and beyond.
Bill will then review our financial results and provide additional color on our outlook and key planning assumptions. We will then open the call for questions.
So with that please turn to slide four in our earnings presentation, and I will turn the call over to Hudson.
Thank you Jason Good morning, everyone I Hope you and your families are all safe and healthy.
We have four key messages today first we delivered a very strong finish to the year second we are successfully building our higher growth portfolio, leveraging our number one market positions strong cash flow and customer focus sustainability strategy.
Third we have strong momentum as we begin 2021 and look beyond the pandemic our growth and profitability opportunities are strong and our long term mid single digit sales growth and 40% to 42% gross margin targets are fully intact for 2021, and 2020 to our sales growth will be above.
Mid single digits as our markets fully recover from the pandemic and our recent growth investments pay off.
And fourth we remain confident that our high value businesses industry, leading technologies profitable growth strategy and capital allocation discipline will create substantial value for our shareholders.
With this important goal in mind. We are also undertaking a thorough review of potential strategic alternatives to identify opportunities to maximize shareholder value as we have previously communicated while I can't discuss specifics I want to emphasize that the process is active with the number of potential opportunities we are pursuing.
As is always the case with this type of process. There is no guarantee of the review will result in any transaction or specific outcome. The board Hasnt set of specific timetable for completion of the review process and we don't intend to disclose developments until disclosure is appropriate.
Please turn to slide five.
We ended the year with strong momentum and executed well in a challenging environment. Our Q4 sales earnings and cash flow were at the high end of our expectations, we achieved 12% sequential growth in sales 130 basis points sequential growth in adjusted gross margin and 57%.
<unk> sequential growth in adjusted EPS Q.
Q4 sales and gross margin were more than 95% of pre pandemic levels. In 2020 cash flow was also more than 95% of pre pandemic levels.
We achieved these results by taking decisive actions early in 2020 as the pandemic began to affect economies around the world.
We immediately lowered capital spending improved working capital and reduced operating costs to improve our cash flow for the year.
2020, operating cash flow was $350 million and adjusted free cash flow was $237 million.
While we have not fully recovered from the economic effects of the pandemic. It is clear that our businesses are rebounding well.
We continue to see improving demand trends and are optimistic about 2021 growth.
Importantly, the recent increase in COVID-19 cases has not significantly impacted demand or disrupted our supply chain.
In the fourth quarter, we delivered 5% sequential sales growth in specialty catalysts, driven by stronger end market dynamics strong commercial execution and increasing momentum from customer innovation activities. We signed a record seven unit poll of licenses in 2020 in Q4 trial activity was new.
Nearly two five times first half levels positioning us well for growth in 2021.
In materials technologies, we delivered 7% sequential sales growth and 6% year over year sales growth driven by solid end market demand and strong commercial execution.
Our pharma consumer segment sales grew 21% both year over year and sequentially and our coatings segment sales grew 11% year over year.
<unk> is performing very well and has outperformed its end markets since the pandemic began.
And of refining technologies sales grew 24% sequentially driven by much better end market conditions and strong execution.
Finding demand has continued to strengthen despite increases in COVID-19 cases U S. Refiners have consistently operated above 80% capacity utilization since the last week of December and refined product inventory levels are healthy at or near typical levels.
Cc catalysts to average prices were up 20 basis points in a very difficult year. This.
This is a testament to the high value our customers place on our catalyst technology and technical service.
I'd like to thank Grace is 4000 employees around the world for their continued focus on health safety and meeting our customer commitments during the pandemic and the U S Gulf Coast Hurricanes.
I'm proud of how they managed in 2020 delivering impressive results and a once in a century of year.
Please turn to slide six.
I want to address our strategy for profitable growth and creating shareholder value.
Over the last five years, we have been actively repositioning our portfolio for faster growth.
We pruned businesses transformed our functions to reduce SG&A and corporate costs added strategic bolt on acquisitions in specialty catalysts increased capacity in specialty catalysts and materials technologies and significantly upgraded our global R&D marketing and commercial capabilities.
Despite the pandemic in 2020 recession, we maintained a steadfast focus on building a stronger grace and.
In implementing cost reduction actions, we were careful to protect our growth investments maintain our focus on technology leadership and continue our commercial excellence and operating excellence initiatives and we further integrating sustainability into our strategy.
Our company now drives most of our sales from higher growth high margin businesses specialty catalysts and materials technologies were 62% of sales in 2020 up from 60% in 2019.
Combined these two businesses are 66% larger than refining technologies.
Specialty catalysts sales grew seven 5% organically from 2016 of 2019 and materials technologies sales grew four 9% organically from 2017 to 2019.
Both businesses are poised to continue to grow at these levels or better in 2021 and beyond.
SC as the number one global polyolefin catalysts and process technologies platform with expected sales growth in the high single digits over the next several years.
Gross margins and EBITDA margins are the highest in our portfolio and top tier in our industry.
Our products are indispensable to helping our customers achieve their strategic objectives and sustainability goals.
Empty as number one in specialty silica gel.
With a rapidly growing pharma sub segment, which has delivered double digit sales growth since 2017.
Empty operates in a fragmented $16 billion global market that includes many attractive higher growth higher margin sub segments.
Empty has outperformed its end markets over the last three quarters and we expect it to continue that momentum given capacity additions that came online in 2020 and improvements in our global R&D marketing and commercial capabilities.
With faster growth rates in bolt on M&A SC and empty could be 80% to 90% of Grace's future sales.
R. T. Also holds the number one position in its end markets due to its leading technologies and global technical and manufacturing capabilities.
This business was significantly impacted by the pandemic, but we are seeing solid recovery with Q4 sales up 24% from Q3.
We forecast demand for refinery catalysts will continue to grow slowly for many years to come led by higher growth sub segments like Max Pet Chem resist hydro processing and renewable fuels, which are all areas of focus for us and our customers.
We fully recognize this business faces long term secular challenges and we are well positioned to address these with industry, leading technologies and a strong competitive position on.
<unk> will continue to provide significant earnings cash flow and scale with more than $1 4 billion of operating cash generation.
Generation forecasted over the next five years.
We will leverage this cash flow to continue to fund our growth investments and return capital to shareholders.
Please turn to slide 12.
We expect global refined products demand to eventually peak around the 108% of 2018 levels in the 20 <unk> decade, and then to decline slowly after that.
Industry experts project demand would still be about 75% of 2018 levels in 2040.
Even if the two degree Celsius policy technology and consumer behavior changes are all implemented by 2040.
We are well positioned to address either scenario.
Some investors have asked about recent refinery closures.
Some older disadvantaged refineries are closing and are being replaced with more profitable and more flexible refineries and growing markets in Asia, the middle East and Africa. These.
These new refineries are significant opportunities for us.
They are focused on Max pet Chem applications and require high performing catalysts to achieve their operating objectives.
For a new complex refinery our catalyst revenue per barrel is two four times the revenue from an older less complex refinery.
Please turn to slide 13.
Over the last two years, we've made sustainability of more important part of our growth strategy and operations. We are promoting in ESG mindset to more effectively meet the needs of our customers communities and employees.
Sustainability plays to our technical and commercial strengths.
We are proud of that 49% of last year's sales were tied directly to our customers' sustainability goals and the 62% of our R&D projects are linked to at least one customer sustainability objective.
We see further opportunities as we continue to develop technologies for advanced plastics recycling and renewable fuels.
We are also committed to making grace of more sustainable company and have set clear ambitious environmental goals for 2030.
We will reduce our greenhouse gas emissions by 22% reduce our water use by 10% and reduce our waste by 5% in.
In 2020, we also created the position of Chief Sustainability Officer, and made sustainability, a key element of our strategy.
Our sustainability efforts led sustain Olympics to rank us in the top quintile of our specialty chemicals peer group and eco bought us to rank us in the 95th percentile within the chemicals industry.
CDP rated as a b minus on climate above the chemical sector average of C. In the North American regional average of D.
Please turn to slide 14.
As Bill will address in more detail, we are reinstating our annual outlook for 2021.
Our fourth quarter results demonstrate that our markets are strengthening and we are optimistic about 2021 and the years beyond our execution and focus during the pandemic and hurricanes have resulted in a stronger grace with great energy to pursue our growth opportunities we.
We are well positioned to drive above market growth in many of our end markets. We expect sales to grow mid single digits in the long term with growth higher than that for 2021 and 2022 as we fully recover from the pandemic and benefit from the new catalysts and silica capacity that came online in the second half of.
<unk> 2020.
With that I'll turn the call over to Bill.
Thank you Hudson and good morning, everyone. Please turn to slide 16, as Hudson noted fourth quarter results were in line with our guidance, reflecting strong improvement in demand margins and earnings sequentially from Q3 to Q4, our businesses executed effectively on their plans as we ended 2020 and we are encouraged by the momentum and signs of economic recovery.
As 2021 gets underway.
Fourth quarter sales were up 12% from Q3 with increases in all businesses led by a 24% increase in RT catalysts sales sales were down 7% year over year due to the continuing effects of the pandemic and order timing.
Adjusted gross margin of 39, 5% was up 130 basis points from Q3 on improved demand and higher operating leverage.
Sequentially adjusted EBIT of $96 $2 million was up 38% and adjusted EPS of <unk> 88 per share was up 57% from Q3 Q.
Q4, 2020 included $8 million of Gulf Coast Hurricane related costs. In addition to the $11 million in the third quarter of 2020.
Q4, 2019 included $8 million of insurance recoveries that did not repeat in Q4 2020.
Our full year 2020, adjusted free cash flow was $237 million day on the only 4% from the prior year. Despite of 40% decrease in adjusted EPS in 2020 versus 2019. This performance reflects our team's strong execution and focus on lower lowering working capital.
<unk> capital spending and operating expenses.
We received another $10 million dividend from our art joint venture in Q4 for a total of $20 million in 2020 will continue to pay dividends in 2021.
Now, let's turn to slide 17 to look at segment results.
Catalyst technologies sales were up 14% sequentially versus Q3.
Refining catalysts sales were up 24% driven by higher refinery operating rates, while sales of specialty catalysts increased by 5% from Q3 due to higher sales of P/e and chemical catalysts.
We signed three unit, Paul Polypropylene process technology licenses in Q4, which brings the total to seven for 2020, the highest since we bought this business.
For the full year 2020, FCC price was up 20 basis points, reflecting the strong value of our products.
Fourth quarter catalysts technologies segment gross margin of 40% improved by 80 basis points sequentially, reflecting improved customer demand and operating leverage in our plants.
Operating income of $88 $8 million was up 32% sequentially versus the third quarter.
Income from our art joint venture was up $6 $3 million sequentially, but down $6 $3 million year over year as refiners delayed certain turnarounds to 2021.
Now, let's move to materials technologies on slide 18.
The fourth quarter sales were up 7% sequentially and 6% year over year.
<unk> pharma consumer had another great quarter of 21% sequentially from Q3 and year over year, driven by strong demand for fine chemicals and order timing.
Coatings continued to improve in Q4 with sales up 1% sequentially and 11% year over year, driven by strength in Europe, and Latin America.
Chemical process applications were down 2% sequentially from Q3, and down 12% year over year, driven by weakness in automotive and other industrial applications.
Empty gross margins for the quarter were up 250 basis points over Q3, and 310 basis points.
Over the prior year as a result of higher sales and production volumes of.
Operating income of $29 $1 million rose, 20% from Q3 and 23% for the prior year on improved demand and strong sequential gross margin improvement.
Now, let's turn to slide 19.
As I mentioned earlier, we generated strong cash flow in Q4, driven by actions to maximize the balance sheet flexibility since the pandemic began.
At the end of 2020, our total liquidity was approximately $740 million, including roughly $305 million of cash on hand.
From a debt perspective, we have no significant debt maturities until 2024, and we have not drawn on our revolver over the past year.
In 2020, we temporarily shifted our near term capital allocation priorities to focus on cash flow and liquidity.
Given the economic recovery, we of restoring our long term capital allocation framework.
We will remain disciplined in our approach and continue to invest to drive organic growth on our businesses, while exploring strategic bolt on acquisitions.
We announced today that we will increase our dividend by 10% in 2021 to $1 32 per share on a full year basis. Since we initiated the dividend in 2016, we have increased it for five consecutive years. We also expect to resume share repurchases in 2021.
Our debt leverage peaked at four times at the end of 2020 outside our target range of two to three times, reflecting the pandemic temporary impact on adjusted EBITDA, we expect to reduce net leverage as our business recovers.
As Hudson mentioned earlier on.
<unk> robust long term cash flow is a valuable asset it helps the fund both growth on our businesses and shareholder returns.
We've been disciplined on our capital allocation and growth investments as reflected in our top tier return on invested capital.
We are committed to maximizing shareholder returns over the long term and recognize the importance of the stable growing dividend.
We will complement our priority cash deployment activities with opportunistic share buybacks.
Finally, let's turn to slide 20.
We expect 2021 to be a year of strong recovery for our businesses.
We are encouraged by strong fourth quarter results and expect 2021 sales to be up 7% to 11% due to improved demand across all businesses.
Our outlook assumes that demand for FCC catalysts will will improve throughout 2021 and approach pre pandemic levels by the end of the year.
We expect continued improvement in specialty catalysts on strong consumer driven demand and continued strength of our unit licensing business.
We forecast empty sales will grow year over year with continued strength of pharma consumer and coatings as well as further recovery in chemical process demand.
Sales of hydro processing catalysts in the unconsolidated joint venture will recover in 2021 up more than 15% year over year.
Our full year adjusted gross margins are forecasted to recover to the low end of our historic range of $40 to 42% for the full year improving throughout 2021 on stronger demand and operating leverage.
Adjusted EBIT for 2021 is expected to be between 400 $430 million and adjusted EPS will be between $3 63, and $3 93 per share.
We forecast earnings will steadily increase throughout 2021, setting us up for a strong 2022.
2021, adjusted free cash flow will be between $240 and $260 million capital spending will be between 150 $160 million in 2021.
Our outlook does not assume a double dip recession or a resurgence in the pandemic.
For Q1, 2021, we expect sales to be up 6% to 8% year over year, reflecting both a strong recovery from 2020 and normal seasonality adjusted.
Adjusted EPS for Q1 will be between 77, and <unk> 80 per share now.
Now I'll turn the call back to Hudson.
Thank you Bill please turn to slide 22.
Before we open the call for your questions I want to emphasize today's key messages. We delivered a very strong finish to 2020, we are successfully building our higher growth portfolio, our growth and profitability opportunities are strong and we're actively pursuing opportunities to accelerate value creation. The.
Beyond what our growth plan will create.
I am proud of our team their focus on health and safety and their strong execution in 2020.
We had to make some tough and quick decisions to ensure we met our customer commitments and maximized our short term and long term financial performance I look forward to your questions.
Operator.
Ladies and gentlemen to ask a question. Please press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from Chris Parkinson with Credit Suisse. Your line is open.
Great. Thank you very much now let us sustainable recovery is clearly on site and Youre also on the process of either.
The strategic review can.
Can you just take this opportunity to talk a little bit more about the longer term strategies and <unk> that cash now that the dust has settled as well as Matt tag of especially as margins appear to be performing quite well. So just can you just give us an overall blend of.
About how you and potentially the board are just assessing the opportunities there within <unk>.
They'll be spending cash organically and potentially inorganically. Thank you very much.
Thank you, Chris we've invested a significant amount of capital and effort positioning our specialty catalysts business and our materials technologies business for faster growth.
That work is paying off you've seen it in the historical performance in those two businesses as we highlighted this morning specialty catalysts has grown seven 5% organically over the last few years of materials technologies has grown four 9% organically over the last two years.
These growth rates are in line with our expectations going forward post pandemic and we expect both businesses to grow at this level or better in 'twenty. One 'twenty, two 2021 and 2022 as we fully recover from the pandemic.
From an inorganic perspective, historically, we've made significant investments in our specialty catalysts business.
Those investments helped us build the strong growth portfolio, we have today in specialty catalysts.
We look forward, we see opportunities in materials technologies as well.
It's an area, where we've spent a significant amount of time looking at opportunities to grow that portfolio and to do it in a way that makes us better as a company not just becker something that would be accretive to our growth rates position us to serve our customers, even more effectively and be well positioned for <unk>.
Growth in the future.
That's very helpful.
There's still peers.
To be of modest disconnects.
Adding some investor how some investors are interpreting the grace portfolio within an ESG lens.
Versus a few of the slides you quite frankly previously of release, but it appears you did enhance for us today.
Can you speak to how your portfolio and how your R&D spend fit into the ESG World I know you obviously gave some numbers in your prepared remarks.
How we should be thinking about the existing portfolio of just what incremental opportunities really are developing and once again. It seems like you've mentioned a few in the Powerpoint. Thank you.
Sure one of the things that I like best about our portfolio is how relevant our technology is to sustainability for our customers our customers have objectives to reduce their environmental footprint to reformulate their products.
To make sure that they're providing their customers. The most sustainable project products possible and when they are facing those challenges they look to us to help them solve their problems. It may be reducing the weight of plastic in a in a package or in our manufactured items. It may be.
Reducing the use of water in their process manufacturing it may be re formulating a product. So that it takes out of a chemical that might be harmful to human health or to the environment. These are all end use applications focused on sustainability, where our.
<unk> is helping our customers achieve objectives today and when you add it up across our portfolio.
How you get to that 49% of sales. It includes products that are part of the circular economy.
It includes products that are.
Used for recycling materials.
And as we look forward, we think we can grow that portfolio, 62% of our R&D projects today are focused on opportunities that have clear sustainability linkages.
We have a nice business today in processing renewable fuels.
Of that business has been growing double digits and we expect it to have that type of a growth rate in the years to come and on a longer time horizon the opportunity in advanced plastics recycling is significant for us the.
The market is just starting to address the need to recycle plastics most of that is mechanical recycling today, but in the long term it will be chemical recycling that wins the day and helps.
Our communities achieve their environmental objectives, and Grace is very very well positioned with our catalysts technologies.
Both on the refining side and on the polyolefin side to play a significant role on that effort.
Thank you very much.
Your next question comes from John Mcnulty with BMO capital markets. Your line is open.
Yes, Thanks for taking my question so of Hudson.
You have of core platform in the refining side Youre also looking at.
And so I assume you look at assets that are out there youre also strategically looking at your own assets. I guess first question would be do you see of significant disconnect between how the public markets value refining assets first how the private markets are necessarily looking at those or valuing those types of assets.
Well I think John.
On one of the questions that any investor has to consider is what's the long term outlook for the refining industry.
And as we think about it.
There are a couple of things that are top of my mind.
One is how well demand for transportation fuels play out over the next the next many years as we as we tried to highlight this morning.
We see that as a low single digit growth business for a number of years to come but we recognize that there is a peak in that business. We think it's in the 20 <unk> decade.
And then once that peak is achieved we think theres a slow decline.
That follows that.
Part of it part of the reason why.
There will be continued growth and then of slow decline is because of the size of the installed base.
<unk> there are over 1 billion internal combustion engine vehicles.
In operation around the World, we think that growth to about $1 4 billion over the next decade or so as people in the emerging economies.
Acquire cars.
Light vehicles continue to grow that installed base, we will turnover very very slowly over many years that provides long term stability to this market.
Now that's a forecast experts have done sensitivity analyses on.
On that outlook.
There is the sensitivity that we shared this morning, what if gov.
Governments.
Change policies, what if technologies developed what if all of the consumer behavior changed.
On a pace that's necessary to achieve the the two degrees Celsius goals of the Paris agreement.
That would <unk>.
The reduced the demand for transportation fuels.
Over this timeframe, but even in that scenario of the experts believe that demand would still be 75% of 2018 levels, even if all of those changes occurred.
Now the other thing I think about John is is this is not just about transportation fuel. It's also about.
The technology that provides petrochemical feedstocks.
We call our Max Pet Chem applications, it's technology that helps clean up the fuel.
While the fuel is still consumed over the next many years, we want that fuel to be as clean as environmentally friendly as possible, that's where our hydro processing catalyst come on in.
And over the long term it said FCC catalyst technology that is the key to advanced plastics recycling.
There are still important.
The nice growing nicely profitable sub segments in this business the play to our strengths as well.
Got it thanks, thanks for the color I appreciate the detail on it.
Then maybe just a question about the results so the.
On the catalysts side, you had a modest it looks like in the quarter of modest decline in price is that a function of just a mixed down shift that we've been seeing from from the refining industry or are there specific products where.
For one reason either you are having to give give up on price how should we be thinking about that and how should that how should we think about how that trends as we look through 2021.
Thank you. Thank you John that's of Great question. So what we have seen this started really in the third quarter customers coming to us and saying, hey, we'd like to reformulate to a lower cost catalysts.
As a way for them to save money, while their margins are pressured.
And we obviously have worked with our customers to provide those re formulations.
And those catalysts are sold at a lower price point than our higher performing catalysts.
The vast majority of our customers are still using the catalysts that they were using before the pandemic.
But a fraction of a fraction have decided to switch to a lower performing catalysts and so you see that affect our average pricing as you noted in your question.
As we think about 'twenty 'twenty one.
On the customers that have switched.
Expect them to stay on this reformulated catalysts.
Let's say through the first half of next year.
And then we would expect as refinery operating rates improve we would expect many of those customers to start to switch back to the higher performing catalysts. In fact, we've actually started that conversation with one customer and so we're already seeing at least some interest in.
Switching back to the higher performing catalysts, but I think I think broadly speaking the customers that have switched will stay on that.
Reformulated catalysts for the first half of next year before we see a significant amount of customers switching back to their higher performing catalysts.
Got it thanks very much for the color.
Your next question comes from Kevin Mccarthy with vertical research your line is open.
Good morning.
Hudson I was wondering if you could talk through your specialty catalysts outlook in.
In a bit more into tail on it looks like sales declined.
Roughly 10% in the quarter everything that we see going on downstream in the resin markets for polypropylene and polyethylene.
The trending positively with regard to both demand and price and likewise your outlook sounds quite positive so.
Perhaps you can kind of talk through where you think inventory levels are what youre seeing in January order books, and some of the improved trial activity that you show on slide nine to just kind of give us a better feel for when do you think we might turn the corner in specialty catalysts on the various factors that are giving you confidence there.
Thank you Kevin.
When I think about our specialty catalysts business and the growth momentum that we have it really it really comes down to three things.
A lot of our momentum is tied to the licensing activity that we're doing.
As we noted earlier, we were able to sign seven licenses in 2020.
That is a very strong performance, particularly given the level of uncertainty that was in the marketplace. During the year of course, each license translates into a future catalyst opportunity as well as providing revenue and margin and its in its own right and so those seven.
When licenses add two of base of business that we've been building up over the last few years that will drive catalysts demand in 2021 and in future years.
The other thing that we look at is the level of trial activity.
When we go back to the first part of 'twenty 'twenty.
On the level of trial activity dropped it was it was below our expectations and below historical levels because of the lockdowns because of the impact of the pandemic on on on commercial activity.
But as we worked through 'twenty 'twenty.
We saw the level of trial activity, increasing not just back to normal levels, but to new high levels. We finished 2020 of Q4 with 26 customer trials, which is which is of significant amount of activity for us.
That also.
The corresponds to.
<unk> improved growth rates in 2021.
And then the third thing that comes to mind is just is just broadly our capabilities in this business. We've built a very strong franchise with very broad technology.
We have capabilities that it's difficult for our competitors to match and were crucial to our customers achieving their own business objectives, and I combine those three things and it keeps me pretty optimistic about our opportunity to continue to grow that business well above its end market.
I appreciate the color there.
The second question.
In your prepared remarks when.
When you were discussing.
Exploration of strategic alternatives to maximize shareholder value I think you commented that you see a number of potential opportunities there.
Intrigued by the plural.
Did you mean to imply.
You are engaged with multiple parties or.
It may not be able to get too specific but maybe you can elaborate to the extent you can on on what the process looks like and what sort of timeline you might have the mine.
Kevin.
I appreciate your question and your interest in knowing more.
I'm not going to be able to add more specifics to to what I said in our prepared remarks.
I'll, let them stand on their own.
We are we do have an active process and we are pursuing a number of opportunities.
Okay fair enough thanks very much.
Your next question comes from John Roberts with UBS. Your line is open.
Thank you I guess, one of the strategic options could be the separate materials technologies and I won't ask you to comment on the probability of that but could you at least talk about how integrated to grace materials technology is versus how separable that business might be.
John I actually think of materials technologies as a highly integrated part of our of our portfolio that there is a shared underlying cash.
Chemistry, there's a shared supply chain their share manufacturing assets between our materials technologies silica business and the FCC catalysts business and the specialty catalysts business.
Give each other flexibility and operating leverage and they do share intellectual property.
In supply chain and manufacturing assets. So we do think of it as of as an important part of the portfolio.
And then secondly, it's been a while since we had our normal seasonal pattern.
Grace's results given the pandemic last year in the.
Philadelphia refinery, probably the year before.
Is this youre going to be normal and what would what will normal look like from a kind of quarter to quarter seasonality.
Well, let me let me share my thought and then I'll ask bill to share his thoughts.
We do in a normal year, what we would expect as Q1 to be a bit weaker than the other three quarters.
That's just seasonality.
But the other three quarters would be a comparable I think Q4 is usually our strongest quarter of the year.
For 'twenty 'twenty, one, though I think.
We will see a different pattern.
<unk>.
Insignificant part because our end markets are still recovering.
At the end of 2020.
Refining demand was still about 10% below pre pandemic levels.
We do expect that to improve as we go through 2021, we think by the end of 2021 refining demand will have improve to within 5% of pre pandemic levels and so there should be of steady progress.
As we go through the year on that end market, improving I think specialty catalysts of materials technologies have improved faster than refining.
But we'll see that that sequential progression through the year Bill what would you add to.
To that I think thats right and to your point of Hudson on the refining side, we're expecting to see steady improvement throughout the year, we laid out on.
Page 11 of the deck, where we show our projection on on demand over 2020, So our 2021 that will continue throughout the year.
Fourth quarter will.
We'll be back to a more normal type of a quarter and I think that sets us up for a more normal pattern. As we look ahead to say 2022, but I think this year it'll just be continued steady improvement throughout the year. Both the top line gross margins and earnings as well one of the things that I've been watching carefully.
John is is how.
On the rise in COVID-19 cases during the winter months has translated into economic impacts and as we all know.
The translation to economic impacts has been much smaller than it was back in the spring.
We've seen demand for refined products improve.
Steadily even as the COVID-19 cases were reaching their peak in January and so that gives us a little a little <unk>.
Better visibility into the next months knowing that the increase in COVID-19 cases isn't.
Translating as directly in the economic effect as it did last spring.
Great. Thank you.
Your next question comes from Chris Capps with loop capital markets. Your line is open.
Yes, good morning.
Sort of a follow up on the comments on strategic alternatives in response to John Roberts questions and perhaps the Mcnulty question around sort of the difference in values between price.
The public markets and I'm, asking because I appreciate your comments.
About the desires of the investment community to look at the.
The growth year on parts of your portfolio of the mid and high single digit growth prospects for materials.
Most of the catalysts.
Actively when juxtaposed against what looks like a longer term outlook for low single digit or maybe even flat growth for the refining catalysts business. So I mean I.
I guess, what I'm getting at is you reading between the lines you want investment community the value or two of cord you of better multiple for the growth prospects in those two business, but you're also saying that you do look at the portfolio as an integrated.
Entity that theirs.
There is obviously no.
Manufacturing integration between refining cat in the empty and you think there'd be the synergies. If you were to separate those so I guess the question is this are there any scenarios as you as you look at strategic alternatives, where you would isolate those growth of your businesses as the means to.
To try to unlock some value perceptions were too.
To reflect the maybe the differences in the way of public.
Public market and the private market might value the.
Franchises.
Well, Chris I.
I appreciate your question.
I recognize that you want to try to get a little more detail, but I'm not going to comment more specifically on the alternatives that we're considering.
When I think about the portfolio.
Note there are parts of the business that are growing faster.
One of the important things that refining technologies does for us It gives us scale and it gives us significant amount of cash flow to finance growth and to return.
Our capital to shareholders.
And so these are things that we have to think about as we think about our alternatives, but I won't I'm not going to be able to comment more specifically today Chris.
Okay, and then just as a follow up you mentioned some of the co.
All of their refinery configurations, shuttering and some of the more complex more catalysts intensive ones is on growth opportunities for.
For your business.
Tend to be more southeast Asia, but you also adjusted your.
Your manufacturing footprint.
Sort of.
Canceling the investment you're making in the UAE I'm just wondering it's the cap to.
Lately capitalize on on that on that shift in the global sort of refining industry footprint.
Do you feel like you're aligned well or is there other.
Shifts in your manufacturing footprint that you feel like you need to make to address that.
To match with the longer term opportunity there. Thank you.
It's a great question, Chris I appreciate it.
A couple of things come to mind, when I think about serving our customers around the world regardless of where they are North America Europe, The Middle East Africa Asia.
Latin America, the most important capability that we have on the ground is our sales and technical service capability.
And those employees are positioned all around the world. We've got a very strong presence in every in every geography, where we're close to our customer and we can work directly with them on their refinery operations and optimizing their catalyst formulation of <unk>.
<unk>, our high value products and they can economically be shipped from our core manufacturing assets in North America and Europe, they can be shipped globally.
Without really affecting the competitive <unk>.
Competitiveness of those of those of those products.
And what we found is we're better able to serve our customers in our bigger more flexible manufacturing assets. We've invested a lot in our north American and European catalysts assets. There are a lot of capabilities of lot of flexibility in those.
Manufacturing plants and as our technology continues to involve evolve.
We've concluded that it's more valuable to have that capability and flexibility than it is to be closer to our customers.
Thanks for the color Hudson.
Your next question comes from Mike Sison with Wells Fargo. Your line is open.
Hey, guys good.
A good finish to 2020.
Hudson.
You had the slide talking about advanced plastics recycling does your specialty catalysts business already have an offering there.
And if not is that is that an area, where you may want to decent acquisitions.
Mike. This is of this is a technology.
That is that is pretty well understood its pyrolysis technology.
We are working with customers and other third parties.
On to develop.
The right technologies, but it's still pretty early.
Now the.
The most important areas of innovation R. In the supply chain of plastic waste.
And that really is it's not something that we're focused on it's something that other supply chain participants are focused on.
That market really needs to develop further before customers are going to make scale investments commercial scale of investments in advanced plastics recycling, but when our customers are ready to do that we will be ready with our technologies.
Got it and then.
I was encouraged to see slide 12, you've made a good case why the.
The FCC catalysts industry.
And show some growth of the next several years.
Yes, it doesn't really seem like your competitors aren't really focus there so.
In terms of technology and in R&D.
Where are the opportunities to maybe continue to take share there as I think the others aren't really again focused on that on that market.
Well the end markets that we're focused on.
Where we think our technology really differentiates us is in the Max Pet Chem applications.
These are refineries that are really operating to provide.
The petrochemical feedstocks for downstream petrochemical operations I think of propylene production. That's an important area of focus for us and has been for a number of years.
We remain very focused on hydro processing.
Which we do through our art joint venture.
One of the primary benefits of that technology has to take sulfur out of transportation fuel so that it burns more cleanly and we reduce sox emissions.
And the other area that has become really.
An area of significant focus over the last year is using our catalysts technologies to to process renewable feedstocks.
The low carbon emission fuels.
The smaller business for us today, but one that has been growing double digits over the last couple of years.
Great. Thank you.
Yes.
Your next question comes from Laurence Alexander with Jefferies. Your line is open.
Hi, Yes. This is Kevin on stock on for Laurence Alexander Thanks for taking my question.
I guess my first question has to do with the.
The Capex that you guided to for 2021.
I was just wondering like how were screened that was relative to maybe what the normalized run rate would be.
In order to queue. She has that kind of mid to high single digit growth rate.
Sure. Yes. This is Phil.
Capital for 2021 is I wouldn't say, it's constrained, it's really I'd call it a pretty normal year in that.
Moving to 8% type.
Percentage of sales range. So this is our normal maintenance and reliability capital.
The capital EHS capital productivity.
Productivity capital.
No large growth capital in 2021 as I think we've made some big investments there over the last few years. So I considered a more of a more normal year not a constraint here.
Okay got it thanks.
You may have touched on this but within the materials technologies. The softness that you guys referenced for chemical process industries I guess I was just wondering.
Is that would you say that that sort of softness was indicative of the market as a whole or was there like an adverse maybe mix shifts that impacted your performance relative to the market.
This was really driven by the end markets that that subsegment supplies.
Okay. Thank you.
Yes.
Your next question comes from Matt <unk> with Bahrenburg. Your line is open.
Good morning, Hudson, Bill and Jason So with regard to your ESG initiative I was hoping you could elaborate a bit more on the plastic recycling business as to what grace products actually allow the customer or is it more to help.
Do things faster or cheaper and kind of your catalysts allow your customers to put that.
Of different types of plastics and the feedstock.
Your instinct is exactly right. This is if you know the chemistry. This is this has catalyzed pyrolysis chemistry.
And the the catalyst does a number of things it allows our customers to process.
A more mixed feed which allows them to reduce their feedstock costs. It allows them to convert more of the plastic into useful products, obviously, improving their yields and it allows our customers to drive the produced products into certain directions.
They want to maximize the olefins or maximize other materials, our technology would allow our customers to do any of those objectives.
Got it got it so I guess.
Maybe if of PVC. They can recycle every other all of that's exactly on that thanks.
Yes. Thank you that's a good clarification PVC is a different animal.
But certainly polypropylene polyethylene the.
These sorts of plastics are are very relevant feedstocks into a process like this.
Got it thanks, and just a quick follow up on your comment earlier about the supply chain or feedstock at the end of the <unk> being an issue as to why does the industry Hasnt really taken up any thoughts you can share as to how the situation is different in the U S versus Europe and other parts of the world.
I think the situation is roughly the same globally.
It is it is immature market.
On.
The different levels of recycling.
In different regions of course, but right now the.
Recycling the supply chains are not geared towards feeding this material into a.
Our chemical recycling facility and so those those supply chains need to adjust but I think more significantly.
They need to grow commercial.
Commercial scale chemical recycling requires a significant amount of feedstock.
And that feedstock just isn't available.
Really anywhere today at commercial scale, it's available at smaller scale of course, but not not commercial scale that would generate a significant amount of investment I think thats. The question of time.
Lots of people are working on that.
I'm sure it will happen.
It's just a question of time.
Thanks, guys and thanks for.
All of the color and good luck on mainline.
Thank you.
Your last question comes from Chris Shaw with one of its Christy Your line is open.
Hey, good morning, everyone. Just a quick one on the art HBC catalysts.
What's the sort of.
Coverage path look like there I know theyre, obviously they were running.
Lower rates. So there were obviously buying hbc's at lower rates, but how does that come back to the come back quickly or is it just sort of to get in the back to it's the old sort of.
Growth rates.
Chris.
<unk> impact really was felt mostly in the second half of 2020 and Q4 most significantly.
Because of the the way those catalysts of refreshed and the fixed bed applications.
The demand weakness caused by the pandemic was delayed a little bit relative to the FCC catalysts as we look to 2021, we do expect art to recover.
But we do think it will be slow during the 2021 year more more weighted to the second half.
The second half, though is there do you anticipate there could be a big rush is going to the big lumpy quarter in there somewhere or is it just sort of back again sort of normal growth rates when we hit the second half.
Theres always some lumpiness in this business, but I don't I'm not anticipating any unusual any on.
Usual lumpiness right.
That's great because I was looking for thanks.
There are no further questions queued up at this time I will turn the call back over to Jason Hershiser for closing remarks.
Thank you Denise. Thank you everyone for your time today and your interest in Grace, we look forward to engaging with many of you over the coming months. Thank you on this concludes our call.
This concludes today's conference call you may now disconnect.
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