Q2 2019 Earnings Call
Ladies and gentlemen, and welcome to the Q2 2019 W.R. Grace earnings Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone I would now like to introduce your host for today's call Mr., Jeremy Rattling, Vice President of corporate development and Investor Relations Mr. Rollins. Please go ahead.
Thank you Sheree Hello, everyone and thank you for joining us today for graces second quarter 2019 earnings call.
With me. This morning are Hudson before scripts is president and Chief Executive Officer, and Bill document Senior Vice President and Chief Financial Officer.
Our earnings release and presentation are posted on our website under the Investor section at Grace Dot Com.
Please note that some of our comments today will contain forward looking statements based on our current view of our business and actual future results may differ materially.
Please see our recent FCC 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, Puttable address our second quarter business performance and recent events impacting our third quarter and full year results.
Bill will cover our second quarter consolidated financial results and provide an update on our outlook. We will then open the call for your questions.
So 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.
Our team delivered a solid second quarter with good sales and earnings growth.
We made significant progress with our commercial and operating excellence initiatives and our strategic growth investments.
For the quarter sales and adjusted EBIT were up 6% and adjusted EPS was up 8%.
Catalyst technologies sales were up 9% and operating income was up 10% on strong organic volume growth and improved pricing.
For the first half Grace's sales and adjusted EBIT were up over 7% and adjusted EPS was up 10% inline with our plan for the full year.
Across the company, our commercial excellence investments are creating value and our focus on value selling continues to produce results in the quarter pricing improved 270 basis points with gains in every business.
FCC catalyst pricing improved well over 200 basis points for the trailing 12 months and momentum remains positive.
Our operating excellence investments are also creating value.
Since Q3 2017, we've made one time investments of $17 million in our Grace manufacturing system, or Gms and have already realized over $15 million in annual earnings benefits.
Primarily from higher production volumes at sold out plans due to increased throughput and reliability.
We've completed Gms implementations at five of our biggest plants and started the six implementation last quarter.
The rollout to our remaining 15 sites will occur over the next two to three years with minimal additional investment.
Based on our success to date, we've upgraded the expected annual benefits of Gms from 50 basis points to 75 basis points. Some of this will drop to the bottom line, but most will be reinvested to support future growth.
I remain very confident in our long term growth outlook the value of the capital and operating investments, we're making and the strong strategic position of our businesses.
The recent events will talk about next do not change that.
Please turn to slide five.
We recently experienced three discrete events that will negatively impact our Q3 and full year results.
We expect these events will reduce full year sales by about 2% and have a net impact to earnings of between 15 and $17 million.
Most of the sales and earnings impact will affect Q3 results in most of the actions to offset the impacts will be seen in Q4 results.
First a north American FCC catalyst customer experience, an explosion and fire at their refinery June 21st as we communicated that day.
The customer has filed for chapter 11 bankruptcy protection and indicated they will not resume refinery operations.
We immediately began commercial efforts to replace the lost volume and expect to see results beginning in 2020, given the sales cycle for FCC catalysts technologies, and our continued focus on value selling.
We also immediately adjusted our manufacturing operations to address the lower demand expected for the balance of this year.
Compared to our prior outlook, we expect this event to reduce our second half earnings by about $12 million, reflecting lost margin the cost of adjusting our manufacturing operations and the potential write off of our accounts receivable.
This is an insured business interruption event, and we have begun discussions with our with our insurer.
It is too early to know the exact amount and timing of the insurance recovery.
We've included our current estimate of insurance recovery for 2019, and our updated outlook for this year.
Second and specialty catalysts, a major customer informed us they are temporarily but significantly reducing production of one of their product lines in response to the decline in global automotive production.
This customer specific inventory correction will result in a meaningful decrease in catalyst sales and production in the second half of the year.
Compared to our prior outlook. We expect this event will reduce full year earnings by about $9 million.
We have also adjusted our manufacturing operations to address this change in demand.
As a note.
We estimate about 7% to 8% of specialty catalyst sales go into automotive end uses.
So this customer inventory correction is a significant change but in a small end market for us.
Finally in materials technologies, we experienced an equipment failure that resulted in a disruption to one of our silicon manufacturing plants that will reduce earnings in the second half of the year by about $8 million, including cost to correct, the failure and higher costs incurred to serve customers and minimize any impact to their operations.
Operations are now restored in the affected plant is fully back online.
Although gms was not yet implemented at this plant the gms disciplines and problem solving approaches helped us minimize the cost and downtime caused by the answer them.
We have taken decisive actions to offset the operational and financial impact of these events.
Most significantly we have eliminated $11 million and operating costs, including head count reductions deferred hiring and other spending reductions.
Our team has responded very quickly to these events they do not change our strategic direction or my conviction about the earnings power of our businesses nor did they change my confidence in delivering our five year financial framework.
Now, let's turn to slide six and look at our second quarter business performance.
In specialty catalysts organic sales were up 11%.
We saw strong demand for our catalyst and licensing technology as customers seek to maximize the value of the resins they produce.
We have received some questions from investors about the Polyolefins market.
At this point, we have seen no significant changes in aggregate customer demand.
Other than the customer specific inventory correction mentioned earlier.
We are closely monitoring demand and inventory levels to ensure we are able to react quickly to any future change.
Our commercial excellence and operating excellence practices help ensure we are well prepared to take action if necessary.
For polypropylene licensing this month this month, we announced our third Unipol license of the year and expect to announce a fourth license in the coming days.
We have a robust pipeline for our unipol process technology, reflecting strong long term demand for polypropylene and for our process and catalyst technologies.
We remain upbeat about the growth opportunities in the licensing business and the benefits it will bring to future polypropylene catalyst sales.
In refining technologies sales were up 6% on good volume growth and strong pricing.
FCC catalyst pricing momentum continued and for the trailing 12 months improved well over 200 basis points.
The business remains on track to deliver greater than 200 basis points of improved price for the full year.
Art continues to see strong demand for HPC catalysts, and we expect this to continue as the demand for cleaner fuels increases and IMO 2020 is fully implemented.
We have seen a delay in sales volumes and art due to timing of startups and catalyst deliveries and expect Q4 to be a very big quarter as we work with our customers to be fully ready for IMO 2020 implementation.
Let's turn to materials technologies on slide seven.
In materials technologies Q2 sales were down 3% on a very tough compare.
Q2, 2018 was a record sales margin and earnings quarter for empty.
This quarter sales were up 2% on a constant currency basis, primarily from improved pricing.
Sales volumes were up slightly on continued strength in consumer pharma end markets that offset weakness in the coatings market and order timing and chemical process markets.
Year to date empty sales increased 5% on a constant currency basis.
Sequentially gross margins and earnings were essentially flat and in line with our outlook from Q1.
We continue to experience good overall demand for our empty products led by consumer pharma, but are seeing some slowdown in demand in the global cloud global coatings markets, The Asia Pacific region, and certain plastics end markets.
In these end markets order rates have slowed but we have seen no signs of an inventory correction developing.
The materials technology team continues to execute its strategy of focusing on faster growing more strategic markets to drive volume growth and margin expansion.
These more attractive end markets are expected to contribute two thirds of the businesses sales growth in the future.
In May we announced that Bill document had been elected Grace as senior Vice President and Chief Financial Officer. Many of you met Bill during Q2 at one of the investor conferences or NDRC.
He is a trusted partner and I'm delighted to have him as our CFO .
I'll now turn the call over to Bill, who will discuss our financial results and outlook in more detail.
Thanks, Hudson turning to slide 10, let's begin with our second quarter results.
Second quarter sales as reported were $514 million up 6% and up 8% on a constant currency top line growth was driven by higher sales volumes and improved pricing in all our businesses.
This more than offset $11 million of currency headwinds due to continued strength of the us dollar versus the euro.
Adjusted gross margin for the quarter was down 40 basis points year over year, primarily due to a very tough compare in Mt sequentially. Adjusted gross margin was up 130 basis points driven by higher sales volumes.
Adjusted EBIT was up 6% adjusted EBIT margin was up 10 basis points year over year and up 250 basis points sequentially earnings for our joint venture, we're down $2 million year over year.
Adjusted EPS for the quarter was $1.16 cents per share.
Year to date adjusted free cash flow was down $42 million due to higher capex spending and timing of working capital changes compared to the prior year.
Now, let's turn to slide 11.
We remain focused on executing our disciplined capital allocation plan to support our organic growth initiatives pursue bolt on acquisitions and create shareholder value.
In the second quarter, we invested $46 million of capital into our plants and are on track to invest between 200 $210 million in 2019, our capacity investments are times in size to meet identified customer demand to this point over 90% of our current growth capital investments are tied to specific customers contracts or licenses, providing a strong line of sight to the demand to support these investments.
In June we announced a small bolt on acquisition in refining technologies, we acquired drive technologies business, including its unique zeolite technology that improves the performance of traditional FCC catalysts, especially in the propylene Max applications.
This is a good example of the type of tuck in acquisitions that helped drive our long term strategies.
In the quarter, we returned $43 million of cash to shareholders through our cash dividends and share buybacks, bringing our total returns year to date to over $66 million.
At the end of this quarter, our net leverage was 3.2 times, a 0.1 times from Q1 due to the acquisition we remain committed to our target net leverage range of two to three times.
We have prioritized the use of excess cash reducing that leverage over increased share buybacks with that said, we remain open to additional strategic acquisitions when compelling bolt ons are available.
Moving to slide 12, let's look at our revised 2019 outlook.
For the full year, we expect year over year sales growth in the range of 4% to 5% down from 6% to 7% and our prior outlook.
At the segment level, we continue to expect 2019 year over year sales growth for specialty catalysts in the high single digits and for refining technologies in the low single digits.
For material technologies, we now expect low single digit topline growth.
For the full year, our revised EPS outlook range is now $4.35 to $4.43 per share down from 453 to $4.62 per share.
And our adjusted EBITDA outlook range is now $475 million to $483 million down from $490 million to $500 million, the $15 million to $17 million of lower earnings includes the expected savings from cost reduction actions and proceeds from insurance recoveries in 2019.
From a timing perspective, we believe most of the adverse effects of these impacts will affect Q3 results.
While most of the cost reduction actions and insurance recoveries will likely benefit Q4.
We expect third quarter, adjusted EBITDA will be down 15% to 19% year over year.
Our adjusted free cash flow range of $235 million to $250 million remains unchanged from our prior outlook.
We expect full year inflation to be about 100 basis points, where the low end of our prior inflation outlook of 100 to 150 basis points.
However, we now see greater headwinds from FX in the second half with the continuing strength of the us dollar.
With that please turn to slide 13, and I will turn the call over the Hudson for closing remarks.
Thank you Bill.
We had a strong second quarter and first half.
It's disappointing that the three events will negatively impact our results in the second half.
Our team has acted with a strong sense of urgency to offset the effects of these events with cost reductions and other actions.
These events delay our progress, but they do not change our direction or our goals.
Grace is a resilient company.
We are not immune to changes in the global macro environment.
But the end market and regional exposures, we have are well diversified and all are very stable.
We have low exposure to emerging market currencies.
And almost no direct exposure to us China tariffs.
Just as important when things do change we have a strong track record of quickly adjusting and taking action where needed.
With that let's open the line for your questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then one key on your Touchtone telephone we ask that you. Please limit yourself to one question and one follow up question. You May then return to the queue. If your question has been answered or you wish to remove yourself from the queue. Please press the pound.
Our first question comes from John Mcnulty with BMO capital markets.
Yes. Good morning, Thanks for taking my question.
So if we look at the at the catalyst customer outage it looks like on an annualized basis. It would be about a $24 million kind of hit I guess as we look to 2020 and in middle East far away, but you're you're taking the actions to try to.
I just find homes essentially for that that catalyst I guess, how much of that do you think realistically you can make up as we look to 2020.
John its Hudson. Thank you for the question.
Let me let me.
Just build out a little bit of color on the on the $12 million in that $12 million. There is lost margin on on sales that wont occur this year.
There is there are some costs that we've incurred.
To adjust our manufacturing operations and there is a write off of the risk and assumed right off of the receivable from them.
Once they filed bankruptcy.
And so the 12 that you are seeing.
Isn't all margin that needs to be replaced through news new selling activity.
Maybe half of it is margin that needs to be replaced by new selling activity.
It will take some time.
We want to maintain our focus on value selling.
I expect benefits beginning early in 2020.
From the new sales efforts, we've undertaken over time, our intention is to maintain our market share in this in this business.
As we've talked about before and.
And it will take us.
A couple of quarters to.
To re strike that balance, but I want to take as much as a year or anything like that.
Got it no. That's hugely helpful. And then just as a follow up on the materials check weakness it sounds like some of it.
Obviously, the North American coating season was it was a bit of a bit of a disaster given all the wet weather and same even with Europe . I guess have you started to see trends improving in some of the areas where were you kind of seen the weakness in the second quarter or is or is it a little bit early for that.
Yes. It's this is something that we saw all starting to develop in Q4 for us.
Mostly mostly in Asia.
And and we saw some stability.
Relative to Q4 and Q1, it looked like things had stabilized and got a little weaker in Q2, but nothing significant. So this is more about year over year weakness than sequential changes in weakness if I can summarize it that way.
Got it thanks very much for the color.
Thank you. Our next question comes from Christopher Parkinson with Credit Suisse.
Great. Thank you.
You've seen some of your key raws season to the second half and although some are naturally hedged directly or indirectly.
Can you just comment on what you're seeing over on your Cogs basket procurement and then just reconcile that with the price trends, we just could it get better sense of.
The gross margin outlook. Thank you.
You bet, Chris so.
For us cash costs on.
Our raw materials peaked in Q1.
In in raw material costs have moderated a little bit since then.
It's not significant I think bill commented.
We thought full year inflation would be between 101 hundred 50 basis points. When we gave our initial expectations back in the beginning of the year, we're seeing it closer to about 100 basis points now and most of what that is is we thought we'd see some higher costs Q2 Q3 Q4.
But it looks now like now that Q1 is going to be the top for us.
Got it and just a quick follow up just on the pricing side and cat Tech you've been doing pretty well. It's been obviously you've had several quarters of just in excess of 200 bips on a TTM basis.
Can you talk about the discipline that you are seeing in the industry is that still doing well, even with the economic malaise and just give us another just give us a little color on how others are acting thank you.
Yeah, No great question, Chris So so I'll take this as a refining catalyst question.
In FCC catalysts.
The where we're we like the environment that we see.
The the demand for.
Transportation fuels has been good.
Production rates and utilization rates for the different competitors seem to be in line with historical levels and so.
That's been constructive for us on the Hydroprocessing catalyst side, we've seen.
We look at it as it as margins because of the metals pass through but we've seen an improvement in margins and in our Hydroprocessing catalyst business.
That reflects the strong demand.
In those products.
Okay. Thank you.
Thank you. Our next question comes from Kevin Mccarthy with vertical research.
Yes. Good morning, Thank you.
I appreciate all the color you provided on the three discrete items.
I was wondering if you could parse it into the expected impact on the third quarter, specifically and kind of bridge us to the the decrement that bill referenced in his prepared remarks.
Sure Kevin it's.
The vast majority of these.
Negatives are going to hit Q3.
And.
If you if you think about each piece.
For the FCC catalyst customer.
There is obviously a part that is lost sales in Q3.
But we also have the cost of the manufacturing adjustment and the receivable.
That we expect to write off in Q3.
On the on the FC customer inventory again, most of that change.
His volume that was expected in Q3.
And there are some costs in there.
That will incur to keep our manufacturing operations in line.
For the Mt. The manufacturing disruption and materials technologies. This happened in Q2, there were costs that we incurred in Q2 about $2 million.
But most of the cost Scott kept up inventory accounting got kept up in Q2, and then will flow through Q3.
And so those are the different pieces Kevin.
If you think about the cost reduction actions.
We began taking action as soon as.
We soon as these events occurred.
Some of those actions have immediate effect.
Most will take some time to get fully implemented and we expect most of the benefits to occur in Q4.
And then our current expectation on the insurance recovery is that it will be 100% Q4, it's going to take us some time to work through all the all of this with the insurance company.
Okay. Thank you for that.
And then.
Just wanted to.
Ask you about the specialty catalyst customer inventory correction.
Was that in polypropylene or a different resin, maybe you could talk a little bit about.
Which region of the world that was in or whether it was multiple regions and.
Your customer concentration in that product category.
This this was one of our largest customers.
And.
They made have they made the decision to significantly.
Reduce the production.
Their production on this product line.
In response to high inventory levels that they were experiencing and.
And Kevin I'm, not going to be able to add more color.
I'm I'm I'm, not going to be able to share any customer confidential information.
Okay. Thank you.
Thank you. Our next question comes from John Roberts with caveat.
Thank you it sounds like IMO 2020 is going to provide a very strong finish to this year is it too early to tell whether things will drop off into early 2020 for you or do you think the strong fourth quarter is going to carry forward into the first quarter.
John Thanks for that question I think that the momentum carries into 2020.
And if you think about if you think about the dynamic that's happening with our customers.
You have.
One one set of customers.
That have.
Been operating hydro processing equipment.
For a while those units are running hard they didnt have to make new investments.
To capture the benefits of IMO 2020.
Call those are run rate customers, where we've seen strong demand for a long time and I expect that to continue.
Then there is another set of customers that have made investments.
To take advantage of IMO 2020.
And those customers are busy this year and some of it will be next year, bringing online a new equipment.
That allows them to take advantage of the new fuel specs and so some of those customers are finishing up those projects this year.
We expect to deliver catalyst to them this year for the projects that finish up next year, we would expect a catalyst.
We would expect to deliver catalyst to them next year. So there will be strengthened both years is.
As our customers fully positioned to take advantage of this.
And then secondly on the MTO catalyst business in China, I know, it's small, but there are still several more MTO startups I think going on this year and into next year and so I would expect that volume demand is pretty good for MTO catalyst or is it just the profitability problem given the MTO profitability and I don't know if you have a lot of Chinese competition, there as well.
Yes, your instincts are right John it's this this was a market.
That we judged to be quite attractive a few years ago.
We made some investments developed some products and entered the market.
And frankly enjoyed a couple pretty good years, but since then the market has gotten a lot more crowded.
The profitability isn't what we want it to be and so we made the decision to shut down those operations.
And take those dollars and reinvest them someplace else.
Thank you.
Thank you. Our next question comes from Bob Koort with Goldman Sachs.
Thank you very much I was wondering on the Philadelphia energy issue is it certain that that refinery won't be restarted and then secondly.
Thinking about replacing.
As volumes elsewhere.
How easy is it to do that.
I guess I get the sense that a lot of these catalysts contracts are very specific to the units you sell into so I'm just wondering how easily you can pivot or displace.
Maybe a competitors' sales that another refinery too.
Offset that loss.
Thanks, Bob the.
The and I'm, just going to share what's been publicly.
Communicated.
In.
In PS is bankruptcy filing they did talk about.
An objective.
Of of trying to restart that refinery or maybe sell that refinery to somebody else that would restart it.
But that would only occur after.
Yes.
Cleanup and reconstruction and so for our for our planning purposes, we're assuming no volume from that location.
This year or even next year.
And.
To the second part of your question.
It does take some time to to sell the REIT catalyst technology.
To a customer, but we're constantly engage with customers and potential customers.
As we learned about the refinery.
Incident.
One of our immediate reactions was okay lets start building a pipeline with customers to replace this volume.
It takes time it is a technology sale is you noted.
I expect little if any benefit this year.
But by the first half of next year I would expect to see the results. The sales cycle is somewhere between six and 12 months, depending on the customer and the amount of technology testing that they want to do.
It's important to note for everybody.
None of this changes our focus on.
Getting value for the technologies that we sell.
Or our focus on.
The pricing momentum that we have.
Great and if I could follow up on IMO.
Sounds like you're seeing some of that business start to come in sight.
As as you see those.
The changes in the shifts you are seeing that to help meet those specs has it changed your view on how the industry is going to.
Meat, IMO 2020, whether whether it's changing fuel mixture, whether it's putting scrubbers on ships has that evolved at all through the year or changed how you think compliance is going to be met there.
I think the medically.
It's all.
Consistent with earlier views, we're not seeing any any changes in customer behavior that are directionally different than than what we would have thought at the beginning of the year.
You know there is timing about how fast scrubbers will be put in place Theres timing is I commented on John's question Theres timing about how fast equipment will come into service and things like that.
But I think thats more about timing than direction.
Terrific. Thanks for the help.
Thank you. Our next question comes from Mike Harrison with Seaport Global Securities.
Hi, maybe just continuing on this discussion about IMO 2020, and the expectations of art.
Having a very strong Q4.
Just wondering what your confidence level is around potentially some of that demand slipping into 2020.
And if that is the case I mean would that just be related to timing and delays or do you feel like there. There maybe is some some change and how they are viewing the regulation playing out.
Thanks, Mike I there is no change in how the regulation is going to play out in our view and we've seen no hesitation.
With our customers in terms of moving forward with their plans.
And so.
Yes, there is some timing here.
As we as we commented in the prepared remarks, we've seen some volume shift.
From Q2 into Q3 and Q3 into Q4.
It's made Q4, a little bigger and art than we had thought at the beginning of the year.
But we've got pretty good visibility into.
Where our customers are with their projects and and so are our best our best visibility into that is reflected in the thinking in in this morning's update.
All right and then I wanted to ask also on the catalyst gross margin number you were up a little bit.
Year over year, but I guess with pricing up.
Crude being fully up and running and potentially helping mix and utilization can you help us understand why that catalyst margin number didnt improve a little bit more.
I focus on it sequentially, which is really where you would start to see the benefits of the most recent pricing activity and the startup of to career and.
I don't have it in the top of my mind.
Oh and Bill just gave me a note.
They'll help me with the sequential improvement in catalyst gross margins, yes, I think another factor in Q2 that helped the margin backlog that we did have a turnaround at one of our specialty catalyst plant. So that had a little bit of a one quarter negative effect on margins as well. Thank you bill but margins were up strongly sequentially.
150 basis points, which which reflects.
The the progress we made with pricing the customer coming back online that you reference offset a little bit bye bye.
The turnaround we had in Q2 that bill referenced.
All right thanks very much.
Thank you. Our next question comes from Mike Sison from Keybanc capital markets.
Hey, guys.
You know when you think.
Oh, Oh, there that's discrete items.
Is it possible to get.
A lot of that business back I guess I've replaced or moved into other areas by 2020.
I would expect most of it to come back in 2020, Mike can and let me let me let me give you some color on that.
On the on the FCC side, we'll get all of that volume back in 2020. It would just be a question of when.
But I would expect first half.
On on the empty on the manufacturing plant disruption there was really very little volume lost it was and we incurred some extra costs to make sure we kept our customers hole.
A little volume lost on Etsy.
You know the customers' inventory correction is is temporary.
We expect them to.
Resumed manufacturing next year, and we would expect them to begin buying catalyst from us again.
Another point that I'll make it at this juncture is is we will have insurance recoveries in 2020 as well.
And so if theres any gap in the recovery from a commercial perspective.
We'll get additional insurance benefits in 2020.
Right, Great and then.
Okay, maybe as you think about FCC catalyst can you maybe walk us through kind of like the underlying growth in the industry as you head into 2020.
They're probably new plants.
All opportunities that.
That that could help.
Support some of the growth next year.
Sure so.
FCC catalyst is.
You know the demand drivers are the growth drivers our demand for transportation fuels.
And demand for propylene coming out of refinery units and and.
Demand for transportation fuels grows 1% to 2% a year.
It's actually a very stable.
Demand pattern, if you look over many years, even if you look back and Oh, eight or nine recession.
Demand for transportation fuels.
As a pretty robust.
Demand series.
And so we would expect that level of demand to continue into next year.
Demand for propylene at a refinery units has been growing and we expect it to continue to grow our our expectation is that it adds.
At least a percentage point.
In growth to the demand for FCC catalysts.
That keeps us in the low single digit for volume growth in FCC catalysts, and and we see that stable next year on on Hydroprocessing catalysts.
That demand is driven in small part by the demand for transportation fuels, but but to a much greater extent by the demand for clean fuels.
You all well know and IMO is a is a is a important part of that especially this year and next year.
But whether its IMO worse or another.
Increase in clean fuels regulation that provides strong support to demand for Hydroprocessing catalyst, we've said high single digits and and that business has been tracking to that for a number of years and I think it will next year too.
Great. Thank you.
Thank you. Our next question comes from Chris Kapsch with <unk> capital markets.
Yes, good morning, I had a follow up on the pricing.
Dynamic and and I guess focused on FCC catalysts I'm just wondering.
If you could just.
I'm, assuming that the restart of decree are sort of given that that refinery configuration was skewed towards propylene maximization I'm, assuming that that had a little bit of beneficial effect on the pricing dynamic I'm wondering if you could just parse out.
On an apples to apples basis, if there's a way to look at that what the pricing comp might look like and I have a follow up.
Chris I without telling you about the economics of a specific customer I'm not sure I can do that but but but I will tell you that that the sequential improvements in pricing and margins.
We're only.
In part due to that one customer.
We are making good progress with many customers and.
I'll, probably just leave it at that Chris.
Okay, and then you commented on sort of efforts to.
I guess to fill the void that could be left from that some if this refinery shutdown Philadelphia is permanent you would attempt to do that without affecting the.
The overall effort to get value for your FCC products, but.
I'm just.
Maybe you could provide more color on that and also just curious like you know ultimately if demand for refined product is healthy.
The global complex, it's kind of a zero sum game, so presumably if that refineries down there is other refineries that are picking up that slack in terms of diesel fuel and gasoline and so forth. So I'm just wondering.
I mean shouldn't you be just naturally picking up.
Some additional catalyst sales to other neighboring adjacent refineries and is that factored into your assumptions at all at this point.
Yeah, No Chris your analysis is exactly right the the demand for transportation fuels.
On the East Coast Didnt change because of this event and so that fuel is being supplied by other refiners.
Either in the region.
Maybe brought up from the Gulf Coast, maybe been imported from Europe and so.
We do have customers, we have other customers on in the East coast, we have customers on the Gulf Coast and in Europe of course, and so there is a little bit of a natural offset.
That happens as those customers.
Pick up the are filled the fill the production gap.
But we obviously don't have a 100% share and so.
As we look to balance our share.
It drops initially.
In a situation like this recovers a little bit as customers fill the other customers fill the gap as you noted, but wouldn't recover fully unless we picked up additional volumes that other customers.
Okay fair enough. Thank you Hudson.
Thank you. Our next question comes from Paretosh Misra with Berenberg.
Thanks, Good morning.
In terms of losing this north American FCC catalyst customer what does it do to your mix like the product Jewish Lincoln Amber at a very high end or maybe middle of the pack.
I appreciate the question I don't think Theres any significant change in mix.
They were buying a good a good value technology for us.
But they were mostly manufacturing for transportation fuels. So.
Balanced.
Good customer it's a it's sad to see this they are highly valued customer.
Got it understood and then the second and I apologize if you already covered that in prepared remarks, but can you give us an update on the hydro processing plant.
Lake Charles.
And what's the current status when do you think it will start making an impact on your revenue. Thank you.
Sure Yes, we're on track for mechanical completion at the end of this year and so no financial benefit this year, but we do expect the plant to start up next year.
Early early next year and and.
With sales and volumes coming as soon as it starts up but it's.
Those volumes are identified.
The selling activities.
Most are already complete and we expect the plant to start up with good utilization.
Great. Thank you.
Thank you again, ladies and gentlemen, if you have a question at this time. Please press. The Star then one can your Touchtone telephone. Our next question comes from Laurence Alexander with Jefferies.
Hi, guys. This is Dan Rizzo on for Laurence how are you.
Good morning, Dan.
Good morning, just in within the material technologies, you mentioned that consumer farmer, you were seeing some some strength there I was wondering if that's because you're taking.
New contract when you're taking share because all the other companies are suggesting within that space that things have been a little soft for full leased for the same quarter in going to a third.
Dan I. Appreciate the question. This is I don't think any of it.
Certainly not any material part of it is with new customers.
I think its existing customers ramping up production of their of their products.
Okay. So.
I mean, so this increased penetration as opposed to just general market strength or I mean, well I mean some of it is just the market. It's it's.
Yeah. This has been a nice growing market for us.
But the but we're outperforming the market.
But and I think thats, primarily with new customers ramping up production of existing products that we've been on already.
Okay.
And then.
I think you mentioned the chemical process. There was some order timing issues that would suggest that you can make that up in the third quarter, then or later in the year or some of it we had a strong first half. This is this is primarily an absorbents.
We had a strong first half Q3 won't be quite as strong as.
As the first half and then a little bit of a recovery in Q4.
Great. Thank you very much.
Ladies and gentlemen, im showing no further questions in the queue. At this time. Thank you for joining our question and answer session I would now like to turn the call back over to Mr., Jeremy willing for any closing remarks.
Thank you Sherry and thank you everyone for your time today and your interest in Grace, we look forward to seeing you in the quarter.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may all disconnect and have a wonderful day.