GCP Applied Technologies Inc.
Q3 2016 Earnings Call Transcript

Published: 9 Nov 2016

[Operator:]

Good morning and welcome to the GCP Applied Technologies. Inc, Third Quarter 2016 Conference Call. All participants will be in a listen-only mode [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Joe DeCristofaro. Please go ahead.

[Joseph DeCristofaro:]

Thank you. Hello everyone and thank you for join us on today's call. With us on the call are Greg Poling, President and Chief Executive Officer; and Dean Freeman, Vice President and Chief Financial Officer. Our earnings release and corresponding presentation slides are available on our website, to download copies please go to gcpat.com and click on the Investor's tab. Some of our comments today will be forward-looking statements under the U.S. Federal Securities Laws. Actual results may differ materially from those projected or implied due to a variety of factors. We will discuss certain non-GAAP financial measures, which are described in more detail in this mornings' earnings release and on our website. Our comments on forward-looking statements and non-GAAP financial measures apply both to the prepared remarks and for the Q&A. References to EBIT referred to adjusted EBIT and references to margin referred to adjusted gross margin of adjusted EBIT margin as to find in our press release. Greg will start us off today with the business updates and insides into 2017. Dean's commentary will include highlights of third quarter financial results in 2016 guidance. We are discussing these results excluding the impact of Venezuela and we have provided a reconciliation of the financial information in our press release. All revenues and associated growth rates in this discussion are stated on a comparable constant currency basis, which adjust for the impact of foreign currency. With that, I will turn the call over to Greg.

[Gregory Poling:]

Thanks Joe. Good morning and thank you for participating on today's call. We delivered strong EBIT margins in cash flow performance in the third quarter. The GCPs consolidated revenues were negatively impacted primarily due to market conditions in Europe and weaker demand in North America, which occurred mostly in July. Our construction revenues were down 2% in the quarter and are up 3% year-to-date. Our Darex Packaging business grew revenues about 3% and on continued strength in our coatings business. Adjusted EBIT for construction businesses combined increased 8% in the quarter on a solid earnings performance in our specialty constructing chemicals business, which grew adjusted EBIT 27% on a 350 basis points margin expansion. Adjusted EBIT for a construction businesses has improved 24% year-to-date. This morning, we are pleased to have announced the acquisition of Halex Corporation, a supplier commercial flooring under limit a products. Halex with revenues of approximately $45 million will be integrated into our specialty building materials businesses. Halex includes a specialty product called VersaShield, which is an innovative moisture barrier underlayment. We believe the product has the potential be a category creator in interior building underlayment flooring applications as it provides improved performance in a lower installed cost. Halex flooring products are sold for both new construction as well as renovation products. Once integrated and when synergies are completed by the end of 2017, we expect Halex to deliver EBIT margins equivalent to GCP's average margins. We also expect Halex to be accretive to earnings in cash flow in the first year. We welcome the Halex employees to GCP and we look forward to working together to deliver on the opportunities for growth we see for this business. Now on to the third quarter. Despite a convergence of external factors, with negatively impacted our revenue in the third quarter. We were able to deliver improved EBIT margins and cash flows. This demonstrates resilience of our business model. GCP also made good progress in commercializing in technologies including growth in our pre-cast product, air barriers and verified concrete management system. For the remainder of the year, we are focused on execution to close out the quarter. The integration of Halex and positioning GCP to capture opportunities for 2017. And I would like to provide some insights into our framework as we look out into the next year. Our outlook for worldwide construction markets since 2017 is below, single digit growth with much of that growth weighted towards North America and Asia Pacific. Flat growth in the EMEA region and we will see improvement in Latin America due to the lapping of negative impacts of lower commercial activities in 2016. We will continue to focus on market penetration with our leading technologies including our pre-applied waterproofing products. Self adhered residential underlayment membranes, our new spreadable and pre-cast concrete admixtures, our verified concrete management systems and our innovative BPNI formulations. And of course, we will look for growth for our new VersaShield product line. Our SBM specialty building materials pipeline is similar to the pipeline we carry into 2017, although it is weighted to the back half of the year. The acquisition of Halex is expected to add approximately three points of revenue growth to GCP, and we expect the can packaging market to grow in the low single digits. Our expectation for inflation is to remain relatively stable and we will continue to focus on margin improvement across our businesses through both price increases and productivity. [indiscernible] on our SCC specialty construction chemicals business we expect to continue to see improvements in the trailing 12 month EBIT margins through the sales of higher margin products, continued focus on productivity and additional commercial rationalization designed to improve the quality of our earnings. As to the seasonality of our revenues next year, we expect the first quarter to be weaker on a comparable basis to the prior year quarter, with year-over-year growth picking up in the second half of the year. We will provide guidance on 2017 revenue, earnings and cash flow during our fourth quarter earning call in February. Now, I would like to turn the call over to Dean for more detailed discussion on our results.

[Dean Freeman:]

Thanks Greg and good morning everybody. Joe mentioned today's discussion will be excluding Venezuela as you know we devalued the currency of our Venezuela subsidiary at the end of the third quarter 2015 and we are finally lapping the quarterly effect of that as of the end of the third quarter 2016. The third quarter is the quarter most impacted by the Venezuela devaluation on a year-over-year basis and for your reference we've included the schedule in the appendix in both the press release and in the earnings slides. GCP's consolidated revenues were down 1% to $346 million and up 3% on a year-to-date basis. Adjusted EBIT declined slightly in the quarter versus prior year and was up 12% year-to-date. Adjusted EBIT margins increased 40 basis points in the quarter due to strong performance by our specialty construction chemicals business as Greg mentioned. On a year-to-date basis, adjusted EBIT margins expanded 170 basis points due largely to volumes mix with the continued positive effects of raw materials inflation and the productivity improvements, which partially offset the impact of unfavorable effects on price. \ Looking at our revenues in more detail, the combined construction revenue declined 2% in the quarter, principally as a result of Europe, which was negatively impacted by geopolitical events including the Brexit vote and the Coup Attempt in Turkey. Overall, EMEA was down 5% in the quarter, but is up 3% on a year-to-date basis. North America construction revenues were up approximately 3% in the quarter and about 8% on a year-to-date basis. The North America region benefited from 10% growth in building envelop business as well as continued growth in our residential and fire protection businesses. SCC had softer volumes in North America to beginning of the quarter. However, we have seen order rates improved in the segment throughout the fall months. In Latin America, revenue for our construction businesses decline 8% to a 30% decline in Brazil partially offset by growth in countries such as Mexico, Columbia and Argentina. We will lap the affects of the market decline at Brazil in the fourth quarter. In Asia-Pacific, our construction revenues decline 5.5% in the third quarter and are down about a point on a year-to-date basis. Asia-Pacific performance was impacted by project timing in our specialty building material business, which had a number of large projects in China in Australian in the third quarter of 2015. Our specialty construction chemical business grew about 1% and increased volume primarily in Australia, Vietnam and in China. Our Darex packaging business delivered growth of nearly 3% and is up about 1.5% on a year-to-date basis. Regionally sales for Darex and both Latin America and Asia were up across all product segments. Majority of the sales increased came from our coatings business, which was especially strong in Latin America due to new formulation introduction and a shift in can production as region where Darex has a strong market position. Looking at our segment margin. SCC’s adjusted gross margin of 38.3% improved 330 basis points due to a favorable raw material deflation in price, which was partially offset by the negative impact of FX and lower admixture volumes. Adjusted EBIT margins expanded 350 basis points to 14.2% again, largely on the improvement on the gross margins. Year-to-date, SCCs margins improved 300 basis points year-over-year to 11.4%. At the end, adjusted gross margin increased 100 basis points to 46.5% due to favorable price raw material deflation and productivity, which were partially offset by the negative impact of foreign exchange. Adjusted EBIT declined 4% to $25.6 million and margins were 80 basis points lower at 25.4% on higher expenses as we invested in sales initiatives and higher G&A allocation cost. On a year-to-date basis, adjusted EBIT has grown 21% and margin expanded 330 basis points to 27.9% driven by the higher volumes and favorable product mix throughout the year. For Darex, adjusted gross margins declines 70 basis points to 34.4% during the third quarter as productivity and volume were more than offset by the negative impact to foreign exchange, product mix and lower pricing. Adjusted EBIT was down versus a prior year due to lower gross margins in the increase in general and administrative expenses. Rolling out the consolidated results for GCP in the quarter, interest expense totaled $18.8 million; the effective tax rate was 30.9%, which includes the impact of the early adoption of ASU 2016. Adjusted earnings per share were $0.35 with diluted share count of about $72.2 million and we delivered cash flow for the first nine-months of 2016 of $71 million on track with our expectations while we've invested $32 million of CapEx so far this year and plan to hold that more than 4% for the full-year. Let me turn to 2016 outlook and note that my comments exclude the results of Halex. In the fourth quarter we do not expect to recover the revenue shortfall from the third quarter and we do expect EMEA region to continue to be soft. We are reducing our top-line revenue guidance to 1% to 3% growth in the full year basis versus our previous guidance of 4% to 6%. We're also narrowing our adjusted EBIT range to 210 million to 218 million and our adjusted EPS range to a $1.38 to a $1.45 per share while delivering approximately $100 million of adjusted free cash flow. And with that, I'll turn it over to Greg for closing comments.

[Gregory Poling:]

Thank you Dean. In the third quarter we continued to deliver improvement in the quality of our businesses despite lower than expected revenues. Our margins and cash flow remained healthy as we focus on factors within our control. We continue to make progress on our strategic initiatives and we are pleased to be executing on our bolt-on acquisition strategy with the addition of Halex to our portfolio. As we look out into next year, we will build on our geographic diversity, our strong market position and innovative products while continuing to focus on improving the quality of our business to deliver superior value to our customers and shareholders. With that, Dean and I would be happy to take your questions.

[Operator:]

[Operator Instructions] Our first question today comes from Ivan Marcuse from KeyBanc Capital Markets, please go ahead with your question.

[Ivan Marcuse:]

Hi, thanks for taking my questions. The first one I guess more the topic of the day is, how would you gauge your sensitivity to your businesses and increased infrastructure spending. Like how much of a percent of sales would you say that are related to U.S. infrastructure spending and do you have any idea what the sensitivity is to your sales and earnings and increases in that spending, or I guess how would you gauge it.

[Gregory Poling:]

Ivan, look, for us as you sell the admixture products clearly any increase in infrastructure is a positive for us. People will build more airports, bridges, dams anything that uses those types of waterproofing concrete products is a plus. Today if we have to measure it, it's not always easy to follow the products through to their end use, but about 30% of what we sell ends up in infrastructure. It does vary around the world, for instance Middle Eastern infrastructure has been good for us, North America infrastructure has been not as strong, but we'll benefit as governments around the world and people invest in infrastructure it's good for us. So it would depend on how much it would drive sort of concrete and cement production for the SCC business and to more sophisticate the infrastructure investment, the better that is for water proofing business.

[Ivan Marcuse:]

Okay as is it safe to say, you said 30% construction sells are our infrastructure related roughly and then a third of your sales are in the U.S. so 10% of total sales would be U.S. infrastructure related or is that the right way to think about it?

[Dean Freeman:]

Yes, no. the way I guess I would describe it is, if you look at the constriction businesses, I would say about two-thirds of those revenues are really commercial and of that two-thirds commercial I would say probably I would say single-digits high single-digits related to infrastructure in and of itself. The rest is our commercial mix commercial construction.

[Gregory Poling:]

But if we get a pickup in construction activity in North America. Due to investment in infrastructure will get our piece of that growth. So if you get fundamental growth increase in the construction market due to infrastructure investment by the government that's going to be a positive for us on the growth and we will pick up our piece a there. And the reason it’s about a third, it has more to do with how much the mix of construction is at any given time. Clearly if they are building bridges, tunnels, subway systems, all of those sophisticated with drive up our mix. If you building just a highway in a normal situation it would be good for admixtures but not as much waterproofing. So there is sophisticated construction in the city, urban centers our mix will go up. We will pick up piece of that.

[Ivan Marcuse:]

Okay, great. Thanks for that detail and then in your SBM segment, I know the margins came down as higher SG&A cost. Is that related to acquisition related cost and how much acquisition related cost specifically with Halex we are in the quarter and what kind of cost should we expect with inventory adjustment et cetera in the fourth quarter related to this acquisition?

[Gregory Poling:]

Yes the acquisition cost are not in that numbers, what is in that number is some allocations as we spend the company the share of allocations with the public company got shifted a little bit as our product mix got shifted. So there is a little bit of allocation shift, we are on our budget for the total business, but is shifted a little bit between businesses and some of that is investment and sales activities. With the margins yes, we had a slight decline in our margins, but these are very strong margin businesses and we invested in some sales activities in Asia as well as the U.S., a little bit of marketing. So that's what is in those numbers. The acquisition cost will be broken out and be below the line I think.

[Dean Freeman:]

Yes, as issue the third quarter results we will see a little piece there.

[Ivan Marcuse:]

Okay, and then the last question, I'll jump back into the queue. Your interest expenses of the refi for the full-year, how should I think about this going forward, I know it popped up on the onetime cost, but now with the refi it's going to go lower, right. So would you gauge it for the year or I guess on a quarterly basis whatever you want to get it to me?

[Dean Freeman:]

So we picked up about 125 basis points savings for on a full-year basis. And I think for the balance of the year I think it was about a $0.5 million total savings.

[Ivan Marcuse:]

Okay great. Thanks.

[Dean Freeman:]

Yes.

[Operator:]

Our next question comes from Jim Barrett from C.L. King & Associates. Please go ahead with your question.

[James Barrett:]

Good morning everyone.

[Gregory Poling:]

Hi Jim.

[James Barrett:]

Hi, Greg or Dean, I had a question for you on Halex, it looks like a technological a very good fit. If Halex your current distributors I’m assuming or is it so to flooring distributors. Can you talk about its route to market?

[Gregory Poling:]

Yes, great Jim, in fact it's a very interesting question because one of the fits we like here is a portion of the Halex business about probably 60% to 70% is going into renovation. Some of that of course goes through the typical distribution similar to what we would do with ice and water shield, so big box and lumber yard those types of things. The rest would go through specialty flooring distribution. So the specialty flooring distribution is new to us, but some of the renovation retrofit distribution we think is a real overlap with some of our existing business. And then as a piece of that business Jim that goes direct to the contractor and user we're used to that but you have the sales people come along with the business. So we do think there is some good distribution overlap especially in some of our SBM distributed businesses.

[James Barrett:]

Any idea - I know it may not be well measured what the market share of their core product is in that space?

[Gregory Poling:]

You know let me put it to you this way. We bracket the underlayment business U.S. at about a $1 billion and this is a relatively new methodology to go in this underlayment and use membranes for that. So rather than give you a market share as we bring in the company we'll talk about how it’s impacting our business, but you are competing with sort of normal two part epoxies that are used traditionally for these applications. So it's similar to if you go back whatever it was, 25 years ago we started putting self adhered membrane under shingle roofs, this we think is a category that's new.

[James Barrett:]

Any like synthetic underlayment on the roof, it sounds like it's growing above the - partly due to size, partly due to the technology growing above the rate of the underlying market.

[Gregory Poling:]

Yes. So we expect the segment of the acquisition that has this technology and grow at a faster rate than the market. We did get some traditional products and pieces to go through the distribution, they have good margins, we'll work that side but the VersaShield product line where we're looking at the underlayment business we think we're going to have that same opportunity to be two plus ex the market, because it's got a cost performance advantage.

[James Barrett:]

Okay, and last and Greg you may not want to comment on this, I know it's at three facilities, is there the potential to integrate their manufacturing footprint into some of your existing plants that make underlayment and/or similar products.

[Gregory Poling:]

Jim it is a little early to talk about the specifics, but I will tell you part of how we improve this acquisition to give it equivalent margin EBITDA margins to our business is to integrate it into our infrastructure and sales footprint on a manufacture shelf. There are some opportunities across the business and we also expect there will be some opportunities to globalize as well.

[James Barrett:]

All right. Well, thank you very much, congratulations.

[Gregory Poling:]

Thank you.

[Operator:]

And our next question comes from Laurence Alexander from Jefferies, please go ahead with your question.

[Unidentified Analyst:]

Good morning, it's [indiscernible] for Laurence. In terms of Darex and the performance there, is there any lingering effects from switch in the technology from three piece to two piece cans, is that kind of played out already or is it still kind of lingering.

[Gregory Poling:]

I think as we said with that, the switch has some legs on it to go in the future, we haven’t seen as much of an impact this year as we did last year, because we had one of our accounts make the switch last year and impacted. But this quarter wasn't a big impact on it, what we saw this quarter was some good growth in our BPNI and some of our coatings business and we saw some shift of business relative to Latin America being stronger. And I would say the coatings business mix was a stronger portion of the business. Now that tends to go up and down a little bit the packs and what cans are being manufactured in shifts quarter-to-quarter. So I wouldn’t look at that as a trend as I would with three piece to two piece. We had a good quarter with our coatings business and fairly stable growth stable business on the sealant side that's what the impact was.

[Unidentified Analyst:]

Okay, thank you and then is just with the benefit from raw material, lower input cost that seems to be kind of still with the quarter. I mean is that something that’s going to peter out has been earnings in 2017?

[Gregory Poling:]

As we look at this, there is two prices to that. One is the productivity side and we are building out with our operating plan, productivity that I would bracket as consistent with the productivity we got this year. We are looking at the raw materials going out relatively stable. I mean you are not going to see the kind of drops that we saw and we will monitor to that piece pretty carefully. But we would expect to continue to be able to deliver productivity and Dean I would say on the split this quarter was probably more raw material delivery of probably two thirds of it was raw material. We had some pricing and then we have the productivity. Productivity piece will keep driving going forward.

[Unidentified Analyst:]

All right. Thank you very much.

[Gregory Poling:]

Yes.

[Operator:]

And our next question comes from Chris Shaw from Monness Crespi. Please go ahead with your question.

[Christopher Shaw:]

Good morning everyone. How are you?

[Gregory Poling:]

Good Chris how are you doing?

[Dean Freeman:]

Good Chris.

[Christopher Shaw:]

Good. I think starting in the SCC segment, I assume heading into the quarter you thought North America would be a little bit better. What change and I was wondering was there any - I know it was strong at the beginning of the year, because of sort of the weather. Was there any sort of left over like pull forward that caused the weakness in North America this morning?

[Gregory Poling:]

It's a good question Chris. As we look at it and I don’t want to blame weather, but it was a wet areas especially in some southern parts of a country earlier in the quarter and that hurt us and frankly if you just look at the cement statistics in July sort of they were down double-digits 13%. I don’t know that I have the best explanation for that July; we've seen that business in terms of our order book rebound this month or getting to good order flow. There is discussion in July that people had difficulty on the way the vacation fell. It was just a tough July and that's what flowed through the numbers. We're not going to recover that July, but the order books are getting steadier as we go into the fall. So I’m not sure if we pull a little business forward because of the weather and in the earlier quarter that also could be a part of it. But July was just soft.

[Christopher Shaw:]

Okay and then a couple of margin question on the segment. I guess starting SDM, I think margins were up around 300 basis points in the second quarter, but are down this quarter. What is just the big movement there that might be missing?

[Dean Freeman:]

Really in the first half would be year they really benefited from mix and obviously the volume. If you look at the sequential volumes being down the bulk of that is the impact of lower mix coming out of the first half of the year so. They saw a good mix on the first half and the third quarter was just a weaker product mix as well as the volumes declines.

[Christopher Shaw:]

Maybe I’m thinking about mix the wrong way. The North America was up fairly strongly. I assume that would have been a higher margin region for the segment relative to the ones that were down. Is the mix happening just in the product [Indiscernible] then?

[Gregory Poling:]

Well the mix can be, I mean if you look at sort of the underlayment product category in the first of the second quarter, we saw improvement in volumes there. In third quarter it was more of the building envelops, still very profitable. But then largely and I'm just talking North America, the offset in Asia and the declines in Europe were also an impact on the margins as the volume came down.

[Dean Freeman:]

We have some good margins in that business in Asia, our Asia business especially segment on some projects was timing. And we think we had some timing and our pre-proof product line is also a very nice margin business and frankly big projects there moved the mix a little bit. So it's a shift in the product line within where the projects are as much as it is overall region.

[Christopher Shaw:]

And then a similar question for Darex, I think it might have been just high on the margin in my forecast for the quarter, but it came in less than I thought. Is there anything there typically that you can highlight.

[Gregory Poling:]

Yes, I mean sealant business was a little softer and the can coatings business was stronger and we had a little bit of higher revenue coming out of Latin America and that shifted the mix on us, on the margins a little bit. As we have said in our discussion, our raw material program is good, the productivity is good there, there is a little bit of price in that decline of the margin on contracts and you see some of the deflation as we have said come through on some of these set contracts as well. So we had a strong coatings quarter and that does drive the mix a little.

[Christopher Shaw:]

Yes, I guess the mix seems to be hard for us to model. All right, thanks a lot guys.

[Gregory Poling:]

Yes.

[Operator:]

And our next question comes from Eric Karlsson from Bodenholm, please go ahead with your question.

[Eric Karlsson:]

Thanks so much for taking my questions. Firstly, could you help us understand how your pricing is looking at the moment on a year-on-year basis and also what your price adjustment plans are for 2017.

[Gregory Poling:]

Yes, I think we'll hold the 2017 price until we give the guidance and also have a chance to chat with our customers about the pricing there. We've seen some price, we've been able to recover price in Latin America, specifically we've had some price in the SBM business that have flowed through. And that's where you saw the improvement in the third quarter relative to that business. That's where the bulk of it is, we look at the opportunity where we're creating value to bring those prices up and we can give you a little bit of view into that for 2017, but I think I'll wait just because we would like to get up to our customers and discuss it with them first.

[Eric Karlsson:]

Right and I would love to understand the weakness you are seeing in EMEA in a little bit more details, because I look at other construction related names with big European exposure. I'm generally not seeing that trend, do you think it's all the environment that you are seeing and it's nothing internal that you need to adjust or do you think there also might be some internal issues for you there? Thank you.

[Gregory Poling:]

It's a great question, let me give you a couple of statistics, our business in the UK for the first half of the year was up mid double-digits, and was down 5% in the third quarter. Our business in Turkey in the first half of the year was up low double-digits and was down 18% because of the Coup. I mean we were just shut down from doing some business there. And overall, our Middle Eastern business and as we've said, I think we've said this going into the quarter we expected with the lower price oil. I think our regional mix, because of our business in some of those countries had a little bigger effect than you might see in the overall European. But there is no question, we were impacted by those external events in those marketplaces and we will continue to work on our structure and our cost and our products, but they are important markets for over the long-term.

[Eric Karlsson:]

Very good and just on the Halex, sorry if I missed this, but what is the EBIT margin right now in Halex?

[Gregory Poling:]

We haven't given out the EBITDA margins. We have said that we expect to get those by the end of the year to equivalent of GCPs average by the time we have it integrated and completed that process.

[Eric Karlsson:]

And then can I just follow-up on that. Overtime is there any reason they couldn't reach the SBM divisional average. I’m not talking next quarter or so, but in a couple of years of time?

[Gregory Poling:]

I think we've got a nice objective out there, we would like to bring it in and frankly as the higher technology products gains more position, we would expect that next to be positive. Let me we put it that way.

[Eric Karlsson:]

I'll take that as a yes. Thank you very much gentlemen.

[Gregory Poling:]

Thank you.

[Operator:]

[Operator Instructions]. Our next question comes from Erwin Douglas from Baird. Please go ahead with your question.

[Erwin Douglas:]

Hi guys. Thanks for taking the question here, a lot of good ones already been asked and answered, but want to dig a little into 2017. The commentary around the second half shaping up to be better than the first half of the year. Can you give us a little bit more of color as to what leads you to believe that the year will evolve with that sort of cadence?

[Gregory Poling:]

Some of it is the comps that we have. We had the stronger first quarter, I mean you sort of have some inverse on the comps. We are planning on the more normal seasonality relative to both weather and season than we had last year. I mean lot of construction got done in the first quarter last year. We think this is going to be a more normalized situation when we look back over our history. I think that's the big driver in looking at this. We'll continue to work to penetration and new products to same, but we think it's going to be a more normalized seasonal quarter. And frankly if you see some improvement on some infrastructure its' going to take a little time to move that through the process. And I would also tell you that some of the geopolitical issues if they stabilize it takes some time to move those through. So that's really how we bracketed it.

[Dean Freeman:]

Yes, just the clarify the normal seasonality is typical to first quarter is the weakest quarter, the second is the strongest. Modestly lower in the third quarter and then lower again in the fourth quarter with the fourth typically being a little bit stronger than the first depending on the weather other dynamics. So that's the normal seasonality than we expect to see.

[Erwin Douglas:]

Okay that's very helpful and moving on the Darex packaging. How do you see that - I mean do you have the indications whether or not you will see the change happened this of next slight down in the three piece to two piece conversion hit in 2017 or do you not have that level of site?

[Gregory Poling:]

We don’t have the level on our customer site they would be what to tell you oh it’s going to have. We think that you know we are in the later innings of that transition with our existing customer, we didn't see as much of an impact in this year so far as we saw over the previous year. And we think it's probably going to be relatively consistent and stable, but I can't give you that granularity on 2017 on that shift.

[Erwin Douglas:]

Okay, no is understood there, but also just wanted to go back to the comment about the July business. So I guess I think of these projects as typically being kind of in the pipe and once they are in there they are likely to happen. So just trying to understand a little bit better why some of the business that didn't materialize in Q3 won't be coming to you guys in subsequent quarter or two.

[Gregory Poling:]

Look if the projects are going to get built, we'll get them over time. We just don't think that the project pipeline is going to recover in a quarter from that downturn we saw earlier in the quarter. It takes a longer time to pull itself through and you just didn't have as much activity where we're doing business in July. Actually I think a number of especially in the SCC business our customers have good backlogs and they are running pretty hard, so they pour as much as they can pour. So I think that's the issue, you also run out of time in some parts of the world because of the weather. I mean clearly there is parts of the world where it doesn’t impact, but you do run out of time on the winter side as you get out through the end of the year.

[Dean Freeman:]

I think again, when you saw that the sort of the broad demand cycle in the first half of the year, as events sort of unfolded, certainly as we think about Turkey and the events in the UK, I think it was just a pause.

[Gregory Poling:]

I think Dean is right, in North America as people pointed out on the call, you probably got a little pull forward in the summer, before the summer as well. So it's our best call on it. You know July was a weak month for us.

[Erwin Douglas:]

Okay, understood. Well thanks very much guys, I appreciate the time.

[Gregory Poling:]

Yes.

[Operator:]

And ladies and gentlemen with that we'll conclude today's question and answer session. We do thank you for joining today's presentation. You may now disconnect your lines.