GCP Applied Technologies Inc.
Q4 2016 Earnings Call Transcript

Published: 2 Mar 2017

[Operator:]

Good day and welcome to the GCP Applied Technologies' Fourth Quarter 2016 Earnings Call. All participants will be in 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, Vice President Investor Relations. 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, as with the press release and corresponding slides for the propose sale of Darex to Henkel. 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 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 to the Q&A. References to EBIT referred to adjusted EBIT and references to margin referred to adjusted gross margin or adjusted EBIT margin as defined 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 our fourth quarter financial results and 2017 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:]

Thank you, Joe. Good morning everyone and thanks for joining us for our fourth quarter earnings call. Let me start by saying I am pleased with what we’ve accomplished in our first year as a public company. We successfully launched the new company, built a talented team and created a strong financial and strategic platform. In 2016, we grew our revenues 2%, adjusted EBIT 7%, and expanded margins by about a 110 basis points. We delivered cash flow of $114 million and adjusted EPS at a $1.41. We’ve completed two bolt-on acquisitions Halex and SensoCrete and we are developing a strong pipeline of potential M&A prospects. We are positioning the company for long term growth and remained focused on our customers and innovation. This morning, we are excited to announce we’ve received a binding offer from Henkel to acquire our Darex Packaging Technologies business for $1.50 billion. Given the proposed purchase price, this transaction creates an opportunity to monetize the Darex business at an attractive multiple to proceeds of which we can reinvest in our GCP construction businesses. The proposed transaction with Henkel will provide an efficient tax structure with after tax proceeds in the $800 million range before deal and other onetime costs. We are participating in the consultation process with the relevant Works Councils and Unions. And once we’ve completed this process, we expect to enter into a definitive purchasing sale agreement. The proposed transaction will be subject to the customary closing conditions. That includes regulatory approvals, but we are expected to close in the middle of 2017. The Darex business will be a complementary fit with Henkel's Adhesives and Technologies portfolio. And GCP will become a focus construction products and technologies company. We will have a strong balance sheet for internal investments and bolt-on acquisitions. Our pipeline for bolt-on acquisitions is healthy. We will remain disciplined in executing on acquisitions and focus on companies that have attractive margins, synergy potential and low capital intensity in businesses that we understand. Now looking forward to 2017, the construction markets are generally healthy. North America construction market remained strong and Europe is recovering. The Asia Pacific region is mixed depending on the country and project timing. And Latin America especially Brazil is stabilizing. We are seeing raw material inflation across the supply chain and are implementing price actions across our product lines to offset this inflation. In 2017, our capital expenditures will include capital expansion for our PREPRUFE product line, to build out a Verifi Performance Center in Cambridge, Massachusetts and an upgrade of our technical service facilities in Singapore. Dean will walk you through the details of how we’re looking at our worldwide markets in just a minute, as well as our 2017 guidance. And I would like to comment on a number of our growth programs. In our specialty concrete and cement business, Verifi in-transit concrete management system continues to gain attraction. We are securing new customers and existing customers are expanding a number of trucks on which they install the Verifi system. This demonstrates the product is providing value to the customers who have used it over the past year. We’ve had good success winning new projects for our TYTRO Shotcrete system as well as acceptance of our air track for precast and prestressed concrete. Next week at the Con Expo Show in Las Vegas which is one of the world’s largest concrete industry shows, we are launching two new high value admixture products. CONCERA is an admixture which enables the production of highly flowable concrete using conventional mix designs. This is new to the industry and the product will reduce placement time and labor. We are also launching Corena [ph] a new product that mitigates the negative effects of poor quality aggregates on concrete. This product should provide reduce cost to a number of aggregate users in the read mix chain. We’ve remained focused on expanding margins in the concrete admixture business both for pricing, productivity and some commercial rationalization to improve the profitability of the business. In specialty building materials, we are focused on continued penetration of our PREPRUFE products in the pre-applied waterproofing market and are making it invested to expand capacity in this segment. We are excited about the gullible launch of our Silcor liquid waterproofing and some new Perm-A-Barrier with barrier products. We are seeing growth in the Halex business around the flooring underlayment product line and it offers new construction and repair and renovation opportunities to the company. We are working through our integration process, it is on schedule and we expect that process to improve margins in the Halex business in the second half of the year. We’re excited about the number of products and technologies we’re introducing to the market and working on in our laboratories, as well their ability to impact our financial performance going forward. I’d now like to turn the call over to Dean for a few more details and a discussion of our results and 2017 guidance.

[Dean Freeman:]

Thank you, Greg, and good morning, everybody. Today’s discussion excludes Venezuela for 2016. Just as a reminder, we have included a schedule showing the results in the appendix of our press release and earnings slides. GCP’s consolidated revenues were flat at $331 million in the fourth quarter. Construction revenues were up slightly as strong growth in North America was partially offset by lower sales the European region and persist an economic weakness in Brazil. Our Darex Packaging business was essentially flat down less than 1% in the quarter. Just looking at the regional sales for the construction businesses in the fourth quarter, North America construction revenues were up approximately 8%. The region benefited from 6% growth in our building envelope business, continued growth in our residential business and the additional of Halex. SCC’s concrete admixture business grew modestly in North America in the fourth quarter. And as expected, we did continue to see weakness in EMEA which was down about 8% in the quarter for our construction businesses, due primarily to the geopolitical events in Turkey and the U.K. In Latin America, revenue for our businesses declined 2% with growth in Mexico offset by declines in Brazil. Asia Pacific declined 5% in the fourth quarter. The Asia Pacific performance was impacted by project timing in the SBM business, specialty building materials business, our specialty construction chemicals business declined 3%, strength in China, and Vietnam was offset by lower sales in Malaysia and Thailand. In the fourth quarter, GCP’s consolidated adjusted EBIT declined 7.6%, primarily due a $2.5 million of gain on the land sale in the fourth quarter of 2015. The decline was also due an increase in selling expenses and our specialty building materials business designed to support commercial initiatives that are positively impact growth in 2017. A little bit more color on our segments. SCC grew adjusted EBIT by 4% in the fourth quarter. SCC produced adjusted gross margin expansion of 280 basis points to 36.6%, due larger the price, raw material deflation and productivity. The adjusted EBIT margin expanded 80 basis points to 11.1% largely on the improvement in gross margins. SBM segment operating income declined 4.6% in the fourth quarter, as gross margins declined 100 basis points to 45.1% largely due to lower margin mix and the dilutive impact of Halex which we expected. As we complete the integration process, Halex margins will improve as Greg talked about. Segment operating margin for SBM was 24.1% or 210 basis points lower as a result of the lower margin mix and sales and marketing investments that we made in the business. For Darex, adjusted EBIT declined 27%, largely due to increase in allocated expenses and the gain on the sale of land in the fourth quarter 2015. We exclude the impact of that land sale the adjusted EBIT would have been down about 5%. Adjusted gross margins increased 50 basis points to 34.6% during the fourth quarter as favorable raw material deflation was partially offset by lower pricing in volumes. Surrounding out the consolidated results for GCP in the year, we had interest expense totaling 64.6 million, tax rate was 30%, adjusted EPS was a $1.41 on a share count of 71.7 million, and we delivered a $114 million of adjusted free cash flow in the year. We invested 45 million of CapEx consistent with our plan and less than 4% of sales for the year. So, let me turn to 2017 outlook. As we lapped the devaluation of Venezuela, we will include these results in our guidance as well as in our quarterly updates. Here is a slide in the deal presentation posted on our website to choose our guidance for 2017 with and without Darex. And I just ask please me mindful as this customary we will report discontinued operations and restructuring line items in future results when the proposed deal closes. So let me just talk about our regional expectations first. In the construction markets in North America, we expect slightly better growth in 2017 than in 2016. And the increases in infrastructure spending in North American are likely to impact 2018 in future years. In Latin America, we should see growth accelerating in the second half as we lap the year-over-year declines in 2016. In Europe, we expect improved yet still moderate growth rates as core Europe recovers, despite continued challenges in Turkey and the U.K. The Middle East will be depended on continued infrastructure spending. And we expect modest growth in 2017 in Asia Pacific, particularly in China. And as we saw on 2016, growth will depend on specific country performance in immerging parts of Asia. Based on these expectations in 2017, we anticipate consolidated constant currency revenue growth of 4% to 6%, this includes Darex. And our construction businesses, we expect growth of 5% to 8%. We expect continued improvement in our EBIT margin, particularly in the specialty construction chemicals. And to offset inflation, we’re taking price actions and executing on productivity initiatives across our supply chain. We expect adjusted EBIT growth of 5% to 9% consolidated including Darex. And our construction businesses on a standalone basis including about $25 million of legacy Darex administrative cost, expect to deliver EBIT of 8% to 14% in 2017. We are working on the effective tax rate impact on ongoing earnings and we expect consolidated CapEx to be around 4% of revenue again on the consolidated revenue including Darex. And without Darex, it would be about 5% of total construction revenue. We’re forecasting 5% to 11% consolidated adjusted EPS growth and 10% to 15% growth for the construction businesses again on a standalone basis and includes the impact of a legacy Darex administrative cost. Adjusted free cash flow in the consolidated basis will be about $100 million. Currently we are estimating that on a standalone basis, the construction businesses will generate approximately $40 million to $50 million of adjusted free cash. Post transaction, we intend to initiate cost reduction of approximately $10 million to $15 million over 18 month period. We’ll have further updates on subsequent earnings calls. Looking at how we see the distribution of adjusted EBIT on a quarterly basis, 2017 quarterly earnings; seasonality will be more closely resembled historical seasonality of 2014 and 2015 as opposed to what we saw in 2016. This is largely result of lapping of normally mild winter weather in 2016, large project timing in our SBM business shifting from the first half of the year to the second half and the full run rate effect of higher incremental corporate costs associated with standing up the company. So including Darex, we expect about 13% to 15% of our 2017 consolidated adjusted EBIT in the first quarter. The construction businesses standalone will generate about 8% to 10% of the total year adjusted EBIT in the first quarter. Last year for some of the reasons that I mentioned, our construction businesses generated about 20% of its annual adjusted EBIT in the first quarter. The balance of the quarters will follow more historical seasonal trends with the second quarter expected to be the strongest follow by the third quarter and the fourth quarter seasonally weaker. Slide 11 of our earnings presentation shows more detail on the quarterly distribution of our adjusted EBIT for 2014 through 2016. Lastly just making a comment on our capital deployment priorities, our financial strategies based on three core principals, deploy capital for growth in high performance businesses with attractive returns to grow shareholder value, operate with moderate leverage of preserves flexibility through construction cycles and return capital to shareholders overtime. And with that I’ll turn it back over to Greg.

[Gregory Poling:]

Thank you, Dean. I just like to wrap up before we take your questions. We’re confident we are positioning the business for growth and value creation. We have a high performance team that’s focused on launching new technologies for our customers and we’re poised to continue to execute on M&A opportunities that advance our strategic agenda. We’ve remained focused on the process necessary to complete the proposed transaction around the Darex business. We thank you for joining the call and we’d be happy to talk your questions.

[Operator:]

Thank you. We will now begin the question-and-answer session [Operator Instructions]. Our first question comes from Jim Barrett with C.L. King & Associates. Please go ahead.

[Jim Barrett:]

Can you hear me?

[Gregory Poling:]

Yeah, there you are.

[Jim Barrett:]

Okay, good morning and congratulations on the transaction.

[Gregory Poling:]

Thank you.

[Jim Barrett:]

Dean, I think this is the question for you, you’ve indicated after tax gains of $800 million by selling Darex, if the tax rate in U.S. were to - the corporate tax rate were do decline from 35% to 2015 retroactively to January 1, would that change the math at all?

[Dean Freeman:]

Look, I've certainly don't want to speculate on how the tax rate may or may not change as a result of certain policies. I think what you're seeing there the net result is a transaction that combined with Henkel was structured very efficiently and obviously with legal entities in mind in our foreign exchange funds for distribution achieved a level of proceeds that we think is strong. But other than that I wouldn't speculate on any forward looking changes that may happen.

[Jim Barrett:]

Okay. And Dean, give the prospects call again your debt that’s callable in early 2019. How do you view expanding the tax from that deal in the interim, would you envision maintaining a cash stockpile to call in that debt?

[Dean Freeman:]

Well, I think as Greg pointed out, and sort of as we've alluded to I think we're going to be focused on our priorities, first is close the transaction and getting through the final sort of regulatory matters to execute on the deal. And then our priorities are going to be on high growth returns, both organically and inorganic opportunities. I think our framework obviously includes looking at our debt covenants and being thoughtful about shareholder returns as well. But I think at this at this stage of the process our priorities are on growth and on closing the transaction.

[Jim Barrett:]

And my last question as you mentioned a cut in corporate - cut in expenses rather a $10 million to $15 million. Should we view that as largely coming from corporate overhead and the elimination of Darex or you also envision further cost reductions in the two construction divisions?

[Gregory Poling:]

Let me answer, this is Greg. I think you should think about that relative to the infrastructure that it's around the world to support the Darex business as we go forward. It's going to be a 12 to 18 month process. We’ll work through that and you know frankly we're in discussions and consultations today with our employees around the world, so going further on that at this time. But it's associated with the Darex.

[Jim Barrett:]

Okay. Thank you again.

[Gregory Poling:]

Great.

[Operator:]

Our next question comes from Michael Harrison with Seaport Global Securities. Please go ahead.

[Jacob Schowalter:]

Good morning, this is Jacob on for Mike.

[Dean Freeman:]

Hi Jacob.

[Gregory Poling:]

Hey Jacob.

[Jacob Schowalter:]

So just in terms of the acquisition, I know you guys put on your side that you want to focus on high performance products or organic growth and new products and technologies, but is there any specific like part of the business that you’re targeting with your pipeline?

[Gregory Poling:]

Yeah, I think from a from an M&A pipeline you should think about us as looking at businesses and construction additives are similar to the types of businesses we're in. Especially building materials as a large segment, we think we're competing about a $10 billion to $15 billion market. Repair and renovation is an area we as you know with Halex we picked up some repair and renovation specialty products that we think have the opportunity to create new categories. Those are the types of things we want to invest in businesses we understand complimentary have synergies and there's also a bucket for us the enabling technologies as we did last year with a little sensor accrete [ph] deal. We stepped up our technology position around verify if we can find opportunities on the technology side we’ll also do that. But it's going to be things that are companies that are in businesses that we understand that are complimentary and sort of keep the profile of our company intact.

[Jacob Schowalter:]

Okay. And then on a different note, we've been hearing a lot about labor cost inflation recently and you guys have the range of product line that reduced labor requirement and I know you talked about that new one that you're introducing, that reduces placement time and labor, so is that value proposition starting to gain more traction with customers these days?

[Gregory Poling:]

Yeah, it's a great question. Look as we see not only you know some places in the world you've seen a little bit of labor inflation it hasn't stepped up at the pace that that it might, and we're also seeing raw material inflation. And when you're selling products that have productivity opportunities as inflation kicks in that value becomes more pronounced. So I mean if you think about our Verifi system where we're selling quality, we're selling productivity and positioning on the business as their cost goes up those productivity gains increase. So it would be true and had mixtures and in any place where we're able to take labor out of the construction placement, those costs go up, it's a better advantage, that’s true.

[Jacob Schowalter:]

All right. Thank you for answering my question.

[Gregory Poling:]

Great, thank you.

[Operator:]

Our next question comes from Laurence Alexander with Jefferies. Please go ahead.

[Unidentified Analyst:]

Good morning guys, it’s Dan [ph] is on for Laurence.

[Gregory Poling:]

Hi Dan.

[Unidentified Analyst:]

How are you? Did you give and maybe I apologize if I missed it. Did you give what the cost basis for Darex was and how the pending course will be allocated between Darex and GCP?

[Gregory Poling:]

No we didn’t.

[Unidentified Analyst:]

All right. Are you going to?

[Gregory Poling:]

No I think that what we’ve said is that we expect tax - after tax proceeds axe any deal cost or one-time items to be you know in the range of $800 million, and I think that's where we'll leave that conversation.

[Unidentified Analyst:]

Okay. And then just outside of the geo and you mentioned in your comments that Europe was still kind of sluggish, I mean are there things getting better at all or just any color in Europe in terms of which way it's trending as we look forward?

[Gregory Poling:]

Yeah, look last year there were a number of events - especially in some markets where we have a nice position. We have a nice position in the UK. We have a nice position in Turkey, and there was some geo political events that took place there. We're seeing some of the core European markets starting to show some recovery, and we think that's a good sign. And frankly the Middle East which with the decline that we saw in the oil price we were a little hesitant in Middle East, but we see them continuing to build some infrastructure there, there's some timing on projects, that will impact to us through the year, but we're seeing some good infrastructure projects in the Middle East. And I’d be sort of looked out at the age [ph] as data for sort of core Europe you're talking 1.5% , 2% type of growth rate, but giving where construction's been in that part of the world in that - we’ll take it.

[Unidentified Analyst:]

Okay. And then finally, do you envision any time in the future where you kind of quantify what would Verifi is doing in terms of adding to revenue or and/or operating income?

[Gregory Poling:]

Well, I think you'll start to see the Verifi business as we go through the year impacting. Frankly for an awful lot of reasons many of which are our competitor we're not giving out our some product line data, but we're seeing good double digit, high double digit growth last year, and as I said in my script what's very encouraging is, we have new customers, and some good excitement and there'll be a lot of talk about Verifi of CONEXPO show. But our existing customers are picking up the number of trucks on their fleets where they're putting the system. So that means if you have it on and you're running it, you're seeing value if you're adding to your fleet. So we're incurred Verifi and continues to say this is a process that is an industry change, it takes time to implemented go out, but we like what we're seeing.

[Unidentified Analyst:]

Thank you very much.

[Gregory Poling:]

You're welcome.

[Dean Freeman:]

Thanks Dan.

[Operator:]

Our next question comes from Connor Cloting with KeyBanc Capital Market. Please go ahead.

[Connor Cloting:]

Hi good morning guys.

[Gregory Poling:]

Morning.

[Dean Freeman:]

Good morning.

[Connor Cloting:]

So I was hoping if you could kind of comment on the competitive dynamics that you're seeing in North America. We've kind of noticed that there's been a large competitor that's been fairly aggressive and trying to penetrating gain share here. I was wondering if you have notices and if so what are you doing to come back these you know…

[Gregory Poling:]

Rather than get any specifics around what other companies are doing, let me tell you how we think about the competitive landscape. We have nice market position especially in North America in both the cement concrete and the SBM products. In our view with the world is if we add value from a product and technology standpoint, continue invest as we’ve done this year in technical service and our selling capabilities that we’re going to win in the market place based on that value. And we’re focused on continuing to step up and accelerate the value opportunities. You see in the SCC business, we’ve made some decisions that are allowing us to improve the margins in that business and we’re going to continue to work in the segment of the specialty to concrete admixture business that as the margins that frankly support the value we’re bringing to customers. So we’re focused on the higher end, we’re focused on strong margins and we want to deliver add value to our customers. And well it’s a competitive marketplace, it always has been and we think technology and service is the way to win here.

[Connor Cloting:]

Okay, great. Thanks for that. And I guess to kind of follow-up on that. Are you expecting much an area of price increases for both SCC and SBM in 2017 or well the price mixed more becoming from a shift selling these more of these higher value products?

[Gregory Poling:]

But we’ll continue to drive the shift on the higher value products as they roll through the systems. So that’s a continued focus for us strategically. And as you know we came out, we reconfigured some of our R&D, made some moves, it takes a while for some of those products to start to come out of the pipeline and we’re focused on that we talked about that today. But we are seeing inflation move through the global supply chain. And in all of our businesses when we see inflation where we expect to go capture that and we are seeing some pricing in fact it’s an area we’re focused on this year that frankly historically the last year or two I haven’t seen a lot of that. So yeah you will see some price this year.

[Connor Cloting:]

All right, thanks for answering my questions.

[Gregory Poling:]

You’re welcome.

[Operator:]

Our next question comes from Chris Shaw with Monness Crespi. Please go ahead.

[Chris Shaw:]

Hey, good morning, everyone, and well done in the Darex deal.

[Gregory Poling:]

Thanks, Chris. We’re still working through a process.

[Chris Shaw:]

First question, clarify in the release, the guidance you gave for the top line is 46% based on constant currency, but in the Darex presentation, you also have the 46% growth, but the note says it’s using the January 2017 FX rates, is that just saying that there’s not that much of an impact on year-over-year?

[Gregory Poling:]

Yeah, we’re using January FX rates, so you would expect that our outlook represents those which is about the rates that we expect to achieve at the end of the year.

[Chris Shaw:]

So, year-over-year there’s no big impact from currency then on the top line, because when you are using constant currency and when you’re using January rate?

[Gregory Poling:]

Yeah the guidance, the guidance is at the concert currency rates for January, we used in January.

[Chris Shaw:]

Oh, okay. Sorry.

[Gregory Poling:]

Yeah

[Chris Shaw:]

So and then the question post deal, how much does your geographical exposure changes at all?

[Gregory Poling:]

Yeah, good question. I think it probably shifts a little bit to North America because the SBM business has a strong position in the North America and the Darex business was very geographically balanced. So the exit of - if the Darex business exit, you’ll see a little bit more exposure in the North American market. Our concrete businesses is got pretty good geographic balance but some other product lines in SBM are residential, are fit for using in this segment, frankly the acquisition of Halex will globalize that product line but it was primarily a U.S. or North American based product line. So it will shifted it some and we had a good position in Darex, have a good position across Asia Pacific, and a very nice position in Latin America with Derek. So it does shift.

[Chris Shaw:]

But that’s then and not withstanding anything think the new administration does, do you expect your tax rate then to go up?

[Gregory Poling:]

I would tell you that we’re working through the forward looking tax rates on the company and give us a little time and we’ve been working on this deal. I think our focus has been on the tax efficiency on the transaction. But given today’s tax rates, we have to sort of work through the whole balance of it. There’s a lot influx on tax rate now going forward.

[Chris Shaw:]

Then just also on the guidance about Darex, on say the EBIT line, is there any of the $10 million to $15 million in the corporate costs that you’ve talked about in that guidance or is that offer like 18, 19?

[Gregory Poling:]

I think primarily we’re sort of saying that those costs are going to take a little time here given the timing of the transaction and it’s going to be more of an 18 event. We’re going to work through the expense side in a diligent manner, but frankly to support the transaction and what might take place in terms of exits, we’ve been - we’re looking at this without a lot of support from cost reduction.

[Chris Shaw:]

Yeah, great. Thanks a lot.

[Operator:]

Our next question comes from Chris Kapsch with Aegis Capital. Please go ahead.

[Chris Kapsch:]

Yeah. Good morning, guys. So following-up on this slide that you referred to with your 2017 growth framework and guidance, and I’m focused on without Darex column I guess, where you point to organic or the top line growth of 5% to 8%. And I am just trying to sort of connect that to the qualitative comments about growth prospects by region. So I am just wondering if you could parse out but like maybe by business or region sort of maybe what - it looks like to get to that sort of growth rate, it’s North America that’s going to carry do the heavy lifting there especially with your SBM disproportionate exposure in North America. But I’m just wondering if you could parse out like what needs to happen either by business or by region ex-Darex to get to say the high end of that range and then what might happen surprised you negatively to bring it towards the lower end of that range? That would be helpful.

[Gregory Poling:]

I mean look at on the negative side what I would tell you is this year we had some impact on some unexpected geopolitical events in markets in which we’re in and some that we’re expect, I mean Brazil has been going through a transitional period, we’ve got a nice position in Brazil and as that works out we expect a lap there. And we would like to have that stabilized and we’re projecting that. Turkey and the U.K. are another couple market to the impact. So what could bring us to the lower end of the range is those types of events in markets in which we have a nice position. You’re correct, the U.S. market both from an overall perspective is relatively healthy and we think that there’s spending on additional infrastructure extends that coverage going out. Halex had some growth. We expect on the 5 to 8 range. Some of what’s in there some pricing as you start to see the inflation come through and fundamental market growth. And then we have to be successful with these new product introductions. And I’ve talk through a number of those in my comments but we like what’s going on with the exceptions on Verifi, we think we’ve got a very nice liquid waterproofing product that last year had mid-teens growth and we were rolling that out around the worlds of air barring products. So new products both in terms of ones that we have in the market in our introduction is what brings us to the higher end of that range.

[Chris Kapsch:]

Okay. And then just on that same side if just the follow-up on the flow through to the EBIT growth of 8% to 14%, now I think you referred to some of the I don’t know of stranded costs is the right term for some of the Darex related support costs. But just that 8% to 14% EBIT growth expectation, does that contempt, are you giving yourself credit on a pro forma basis for the elimination of certain costs and if that’s the case, would it be the 5% to 15% that you talked about or the 25 that you referred to?

[Gregory Poling:]

Yeah, look at in terms of the projected as I’ve said we’re working through now that we have a buying offer those cost structures we expect that takes some time. We have to go through the process to have the deal proven close, and then we have to support the transition, so we're not contemplating a lot of cost savings in 2017 impact in our EBIT numbers. So I think that's the best way for me to answer that. I think there are some legacy costs that we're going to maintain in the company in order to implement our growth programs from both an internal and external basis and that’s the difference between those two numbers we're going to have some legacy costs that we continue to have in the company allows us to grow around the world where we expect to do so.

[Chris Kapsch:]

Okay, so the 8% to 14% ex-Darex EBIT growth doesn't contemplate much if any elimination of legacy costs associated with post that transaction it sounds like, so therefore it must be a combination a mix and pricing that helps you exceed the top line growth. So I’m just wondering if you could just kind of help us understand what really helps the margin expansion, the implied margin expansion there, is it more about mix or more about pricing or really a little bit about everything?

[Gregory Poling:]

I would tell you that we have had some success in the second half of year, as we’ve said, we would work on the construction chemical side business to improve our margins. And so we picked up that improvement going into you and I have to remember for us first and fourth quarters are lower quarters and may not be the most indicative with sort of the margin, but we like the improvement we're seeing in the SCC business, that’s price, that’s productivity, there's some rationalization going on to the earlier caller and the new products. And then we also have some pick up as we talked about, we have Halex in the growth numbers, but when we bought that we said it would take us into the second half of next year to pick up some of the integration opportunities. We're working those quite, we are on track, but we won't see the impact to that until later in the year, so you've got some integration work on our last acquisition its start to show up as well. And then the third thing I would say is that the mix on the new products, Dean tried to give a little bit of that in his color. In SBM our project timing has shifted and we see some good project work in second and third quarter those tend to be the pre-proofs [ph], the high end margins under larger infrastructure and big projects that helps our margin. We'll probably see it in the second and the third versus the first. But we've got pretty good visibility to the pipelines on those products. And those are being sold on a value sell. And I think frankly that the industry is seen inflation and so there will be some price.

[Chris Kapsch:]

Okay, that's helpful. And then just finally, let's say we fast forward, I don't know, six, nine months and you presumably if sounds like priority one is closing this Darex deal. The company does have a new profile without what you would refer to kind of as Darex was combined with GCP, when spun from grace, partly because of the steady and healthy cash flow characteristics. So on a go forward basis like - like what's the right capital structure in terms of leverage for the NewCo [ph] in your view and then how much capacity therefore do you think you have for additional bolt-on once you get beyond closing the Henkel deal?

[Gregory Poling:]

I mean, we’ll give some further guidance on sort of the leverage structure going forward, but right now, we think we have the capacity to add to the growth in the construction business. We think that the transaction was conducted in terms of allowing us to have that cash available. We would like to always have like the cash flow and margins of the Darex business. But given the multiple here we think dispositions us, not only to have a modest leverage going forward, but be able to execute and improve on our construction businesses. We've got a nice pipeline there, and I think this gives us the flexibility to do that. I think one of the callers or Dean implied hear to out here, we can rework our debt structure and that will also be helpful. So we think this gives us a lot of flexibility.

[Chris Kapsch:]

Okay. Thank you.

[Operator:]

Our next question comes from Roger Spitz with Bank of America Merrill Lynch. Please go ahead.

[Chris Ryan:]

Hi, this is Chris Ryan on for Roger, thanks for taking my question. Are we correct that you can use the Darex proceeds to repay bank debt, CapEx or purchased assets, but with the excess proceeds you only have to make a par offer for the bonds, and there's nothing else that required you to take out the bonds?

[Dean Freeman:]

Yes, in the language of the covenants there is language that suggests over 360 days, plus 180 days to reinvest. We'd be required to pay down the term loan, I think it's another 460 days on the high yield bonds at par. But there's also language in the covenants that gives us some, I’ll call it relieve, if we have to repatriate cash offshore and more to do that. So we'll evaluate that obviously we're giving ourselves latitude to deploy the capital in accordance with how we talked about our strategy, but that's in fact right the high yield bonds would have to be redeemed in par.

[Chris Ryan:]

Okay, thank you. That's my questions.

[Dean Freeman:]

Yup.

[Operator:]

[Operator Instructions] Our next question comes from Jim Barrett with C.L. King & Associates.

[Jim Barrett:]

Greg, how would you characterize your two new concrete admixture products, are they evolutionary in nature or would you view them as more proprietary, and more impactful than a typical line extension?

[Gregory Poling:]

It’s good question Jim. I think on both of them, the flowable concrete product is going to take a little bit of learning like a number of these products from the customers to learn how to extract the value. Essentially we're going to be able to place concrete as if it was very high flowable concrete, but haven’t go where they wanted to go and that's a labor savings you have to push through the process. I don't think I'd call it a revolutionary in terms of change the industry type of product, but I think it gives our customers an edge in terms of creating some value especially when linking up with the placement contractors on the concrete side. I know it's about labor productivity, and time and we think it's a nice product, look it's new. We've done quite a bit of testing. We're going to put out of the market next week at CONEXPO and the real proof will be in our customer's acceptance of it, but we think it's a good one. And on the aggregate management that really drives there's an issue with specific aggregate where clay in heat allows you have problems in terms of managing your concrete and using those aggregate. So if you can use a wider range of aggregates, it’s a lower cost play. We think that one is going to be good, again it take us some time to get them into the market people to accept them to create value, but we think they're both good additions and we’ll continue to - what we want to be doing an admixtures, putting products out there and our customers look and say we're providing a value across their whole system.

[Jim Barrett:]

And then secondly, I saw the Halex display at surfaces on G&A 19 is the flowing industry employing distributors specifically are they a source of further bolt-on acquisitions for the company?

[Gregory Poling:]

We have identified specially building materials in general, and I would tell you that if we can find a company that has the type of product. I mean, as we said, when we bought it there's a specific underlayment product on with that Halex business that’s going in and replace in traditional proxy undercoating. And we think that’s a category accretive, and we're seeing some very good traction with that. And as we run it around our global organization, train our organization, get them up the speed. We really like that flooring activity, the people we've picked up with the Halex acquisitions are experts added. So if we can find some of it in there, we'd like it.

[Jim Barrett:]

Okay, thanks again.

[Dean Freeman:]

You’re welcome.

[Gregory Poling:]

Thanks Jim.

[Operator:]

As it appears that we have no further questions. I would now like to close out the question-and-answer session, which will in turn and today's conference call. Thank you for attending the presentation. You may now disconnect.