W. R. Grace & Co.
Q2 2017 Earnings Call Transcript

Published: 27 Jul 2017

[Operator:]

Good day, ladies and gentlemen. And welcome to the second quarter 2017 W. R. Grace and Co. earnings conference call. At this time, all participants are in a listen-only mode. And later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Tania Almond, W. R. Grace's Investor Relations Officer. Ma'am, you may begin.

[Tania Almond:]

Thank you, Amanda. Hello, everyone, and thank you for joining us today, July 27, 2017. With me on the call are Fred Festa, Grace's Chairman and Chief Executive Officer; Hudson La Force, President and Chief Operating Officer; and Tom Blaser, Senior Vice President and Chief Financial Officer. Fred will start with the highlights, Hudson will review more detail on operations, and Tom will go over the financials. Then we will open it up for Q&A. Our earnings release and corresponding presentation are available on our website. To download copies, go to grace.com and click on the Investor tab. Some of our comments today will be forward-looking and are made under Section 27A of the Securities Act and Section 21E of the Exchange Act. Actual results may differ materially from those projected or implied due to a variety factors. Please see our recent SEC filings for more details on the risks that could impact Grace's future operating results and financial condition. We will discuss certain non-GAAP financial measures, which are described in more detail in this morning's earnings release and on our website at grace.com. Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures are contained in our earnings release and website. Our comments on forward-looking statements and non-GAAP financial measures apply both to the prepared remarks as well as the Q&A. And with that, I’ll hand the call over to Fred.

[Fred Festa:]

Thank you. And good morning to everyone joining us at this early hour. Overall, I'm pleased with the way we're managing the company. We're generating good cash flow to support our growth plans. We're aligning our supply chains to capitalize on new opportunities and we're managing the customer outage announced earlier this year. Grace's strong performance continued through the second quarter, with sales up 10% and adjusted EPS up 14%. Organic sales volumes were up nearly 5% in the quarter. Our refining technology group is capturing new FCC business, security trial volumes that will pay dividends into 2018 and beyond. ART joint venture continues to execute on a high grading strategy, while capturing new unit builds to secure future growth. I'm also pleased with this group's new product commercialization success, highlighted by the surge in MTL revenue. Demand across our polyolefins business is robust, led by polypropylene, and is especially strong for our non-phthalate catalyst. This morning's announcement of a license agreement with CKPC for a unit that will be the world's largest single polypropylene train is a great example of our ability to win in the marketplace on the strength of our technology. We've seen the licensing business bounce back. Since the beginning of 2017, our contract backlog is up more than 50%. Materials Technologies continues to be successful in a strong market for silica gel, colloidal and other industrial applications. The delays in fine chemicals and nutraceutical orders is dampening performance in this segment, but the focus on operational excellence and productivity actions around capacity position the business for long-term growth. I’ll now turn it over to Hudson to provide some more additional details.

[Hudson La Force:]

Thank you, Fred. Let's start with FCC catalysts where our results reflect good market growth and very good commercial performance for our technologies. From a market perspective, low crude prices continue to support good demand for gasoline and propylene from FCC units. Global gasoline demand grew 1.9% in Q2, with miles driven in the United States up 1.2%. Global refinery utilization also increased 1.9% over last year. For our business, FCC catalyst sales were up 10% year-over-year, reflecting significant new accounts and new trials, driven by the value and performance of our resid and propylene technologies. Although the customer outage has affected our sales and margins this year, our strategy is unchanged. We're focused on delivering value to our customers in the most demanding FCC applications. The more demanding the application, the more value our customers realize from our product and technical capabilities. Importantly, our successes in Q2 set the stage for longer-term growth as well. In the next three years, we expect multiple FCC units to start up in Asia, the Middle East and Africa. Some of these units will be large and are being built to produce petrochemical feedstocks similar to the units we began supplying in Q2. We have a solid position in this high-value product segment. While we work to grow sales, we remain focused on pricing. Average FCC catalyst prices were up slightly in Q2, excluding the effect of new business and big market sales. We continue to work very closely with our customer, following a fire at their refinery early this year. In our Q1 earnings call, we said that we did not expect any catalyst sales to this customer in 2017. Recent media reports have indicated that the refinery may not be back to normal operations until 2019 when repairs from the fire are expected to be complete. It is possible to run the FCC unit in a modified mode, while the other refinery units are repaired. And we are working closely with our customer to evaluate that option. We expect to have a better view of this in the fourth quarter. While it is possible that we will have some catalyst sales to this customer next year, we have adjusted our business plans to assume no sales in 2018. ART had another good quarter and enters the second half with strong visibility to Q3 and Q4 demand. Growth this quarter was driven by good ebullating bed sales and new hydrocracking opportunities. We expect our revenue to be up double-digits this year with improved product margins, reflecting the strong demand for our hydroprocessing technologies. As you know, we are adding capacity to supply the continued growth in this business. MTO sales continued to grow nicely in China, with another customer beginning to trial our MTO catalyst during the quarter. We expect to introduce our second generation MTO catalyst before the end of this year. Let's turn to Specialty Catalysts. Our Specialty Catalysts business grew 26% in Q2, with good demand in almost every region. We continue to see strong demand for our high performance CONSISTA non-phthalate polypropylene catalysts and last year's acquisition of the LYNX product lines is tracking ahead of our earnings and synergies expectations. We expect to meet or beat our post-synergy EBITDA multiple target of 8.8 times. From a market perspective, demand for plastics continues to grow faster than global GDP as evidenced by our customers' significant new capacity investments. In polypropylene, 19 million metric tons of capacity is expected to come online in the next five years, with China growing at more than 8% annually and North America more than 4% annually during this period. We are well-positioned to capture a significant share of the catalyst requirements of these new plants. We are also well-positioned to capture new polypropylene process licenses and continue to see high levels of activity in our licensing business. This morning's announcement is a great example. This will be the largest single train PP unit in the world, able to use our technology to produce a full range of resins, from basic [indiscernible] polymers to more sophisticated random and impact copolymers. Our licensing pipeline is healthy and growing, with more than ten opportunities expected to reach decision points in the next six to nine months. With our win rates, we're optimistic about opportunities for both licensing and polypropylene catalysts. In polyethylene, over 1.3 million metric tons of new US Gulf Coast capacity is coming online within the next 6 to 12 months. We are working closely with several customers on new catalysts for these units and expect good growth over the next two to three years as these plants reach full utilization. In addition, customers are starting to focus on further polyethylene capacity investments in the 2021 to 2023 timeframe. For Materials Technologies, sales grew 5% year-to-date, excluding the product lines exited last year. Growth has been strongest in coatings applications in Asia, emissions control applications in Europe, and process adsorbents applications in oil and gas. Solid growth in the silica markets has been offset by much lower sales in our pharma fine chemicals business. After many years of strong growth, we have seen a significant slowdown with several customers experiencing regulatory delays or lower demand for their products. We are rebuilding our pipeline of opportunities, but don't expect sales and earnings growth to resume until next year for this business. Let's discuss operations and then I'll turn the call to Tom. As you know, from watching our results over many years, manufacturing productivity has been a significant source of margin expansion for us. This year, we have experienced growing pains in a few of our plants where higher sales growth rates have increased capacity utilization. Higher costs in these plants have offset our productivity gains and impacted our margins. We've taken a number of steps to address these issues and expect to have them resolved before year-end. Raw material inflation has also added to our costs this year, but we think most of the inflation is now behind us. We expect sequential inflation to slow, though year-over-year inflation will continue through year-end. Importantly, we completed a major five-year turnaround at our largest plant in the quarter. The site was completely shut down for about three weeks. The turnaround was completed successfully, on time, on budget and with no one hurt. With that, I'll turn the call over to Tom.

[Thomas Blaser:]

Thank you, Hudson. Before we get into the numbers, I'll provide some additional context that I believe will help in understanding our result year-to-date and our guidance for rest of year. To do that, I want to draw your attention to page seven of the business update where we've provide a gross margin bridge, illustrating the main drivers of our year-over-year margin change through the first half. First is the net effect of acquisitions and divestitures, which contributed to a 5% favorable comparison on sales year-to-date, but were a 110 basis point drag on margins, each of which was in the range we expected. We lapped the effect of these transactions by the end of Q2. Second, the advent of the customer outage and the new business capture mentioned by Fred and Hudson earlier contributed 140 basis points to our gross margin decline year-to-date. This new business not only generates cash flow, but it also sets up for future margin expansion in 2018 and beyond. As an offset to this effect, we've recognized $13 million of insurance recoveries year-to-date and expect to reach our $25 million policy maximum during 2017. These recoveries are not included in gross margin and do not fully offset the absence of this business and the additional cost of pivoting our FCC supply chain. Year-to-date gross margins including these recoveries would've been 160 basis points higher than as reported. Third, as Hudson mentioned, we're experiencing higher input and operating costs. Year-to-date, these higher costs have had a 160 basis point impact on gross margins. We believe inflation is beginning to ebb and we are confident in our ability to address the growing pains and our operating performance, which contribute to increasing margins on a sequential basis for the rest of the year. Now, let's turn to the quarter results. Grace's second quarter sales were $430 million, up 10% on strong volume growth versus Q2 last year. Adjusted EPS for the quarter was $0.84 per diluted share, up 14% from last year. adjusted free cash flow for the first half was $136 million, which compares to $132 million a year ago and represents approximately 50% of our full-year expectations. Adjusted EBIT for the quarter was $104 million, up 8%, including $10.6 million of insurance recoveries. Operating margin was 24%, down 40 basis points over last year due to lower gross margins and partly offset by the insurance recoveries and higher RJV [ph] earnings. Our adjusted EBIT return on invested capital on a trailing four-quarter basis was 24.6%, up 30 basis points from the start of the year. Looking at our business segments, Catalyst Technologies sales were up 15% versus last year on volume growth, including the effect of the polyolefin catalyst acquisition and our fast-growing MTO catalyst business. Regional mix continues the shift we saw in Q1, with North America volume down 2% and other regions up, including strong growth in Asia and Latin America of 57% and 29% respectively. Adjusted gross margin of 40.4% as reported was down 580 basis points due to regional product mix and higher input and manufacturing costs. This mix effects were mostly driven by the rebalancing of our FCC sales in the wake of the continuing customer outage and the effect of the polyolefin catalyst acquisition. Adjusted EBIT grew 16% in the quarter versus last year, including the benefits of improved RJV earnings and the insurance recoveries. Sequentially, Catalyst Technologies sales grew 9% with a 120 basis point improvement in gross margin. Turning to Materials Technologies, sales were up 1% excluding the exited product lines and down 3% versus last year on a reported basis. 4% growth in our silicas business was more than offset by lower sales in pharma fine chemicals. Sequentially, Materials Technologies sales grew 5%. Gross margins were down 320 basis points and adjusted EBIT was down 14% primarily due to product mix, with higher silicas and lower pharma fine chemicals, regional mix and higher manufacturing costs. In the second quarter, we spent $20 million on share purchases at an average per share price of approximately $71. Today, we announced our quarterly dividend equal to $0.21 per share with payment expected on September 7. Now, let's pivot to our 2017 outlook. We are maintaining our full-year guidance. More specifically, we expect sales on a constant currency basis to be at the high-end of the range, EPS to be closer to the middle of the range, and EBIT and EBITDA to be in the lower half of their respective ranges. Adjusted free cash flow is expected between $260 million and $275 million, including capital expenditures of $150 million to $160 million. Our outlook assumes an average euro exchange rate for the year of $1.11 compared to $1.10 last year. For the third quarter, we expect total sales growth to be in the low to mid-single digits over last year as we have lapsed polyolefin acquisition and the Middle East customer startup. We expect EPS to increase by more than 10%, including the effect of improving gross profit, continuing insurance recoveries and lower effective tax rates. In closing, we remain committed to our disciplined approach to profit improvement, cash generation and capital allocation management as we deliver increasing value to our shareholders. With that, I’ll turn it back to Fred for closing remarks.

[Fred Festa:]

Thanks, Tom. As we enter the second half of the year and prepare for 2018, our businesses are well-positioned to continue to capture the growth we see in our markets. We've taken our first look at 2018, including the extended customer outage and no insurance recoveries. As we stand today, I am confident we can achieve a minimum 7% earnings per share growth, continue to generate high cash flow to fund our growth, increase our dividend and continue our share repurchase program. Obviously, we'll work to improve our position in the upcoming months. Just as important, we're still on track with the five-year framework we presented in May. With that, I'll open the call up for questions. Tania?

[Tania Almond:]

Go ahead, operator.

[Operator:]

Thank you. [Operator Instructions]. And our first question comes from the line of Chris Parkinson of Credit Suisse. Your line is open.

[Christopher Parkinson:]

Thank you. Let's get off TAKREER for a second and refocus on the core business. Just given some of your comments on refining utilization, the new business acquisition in 1Q, hybrid market sales, et cetera, what do you think are going to be the true key drivers for catalyst tech in 2018 in terms of both growth and margin? And while I’m sure FCC should probably be the focus here, can you also touch on HPC and ART and then also anything in spec cats worth noting. Thank you.

[Fred Festa:]

Go ahead, Hudson.

[Hudson La Force:]

It's a great question, Chris. This is Hudson. So, when you think about the big drivers, I’ll break it into what drives growth for FCC, for ART, our HPC business and for specialty catalysts. For FCC, it really boils down to two things. One is the demand for transportation fuels, which has remained strong with low crude prices, and the second is the demand for propylene coming from FCC units as a chemical feedstock. The world is short on propylene and more and more of our customers are investing to produce propylene or turning their FCC units to produce propylene. That's a great opportunity for us. The basic strategy of buying resid-type fuel – type crude and converting that into propylene is a high – it's a hard – it's a complex, demanding application in the FCC unit and our catalysts play very well there to make a big difference for our customers. The other thing that's a growth driver for FCC catalyst business are MTO catalysts in China. And we've, over the last year or two, established a nice position there. We're still that penetrating the market and expect to see continued growth into 2018 and beyond. For the hydroprocessing catalysts, it's really – demand has really been driven by two things. One is tighter regulatory frameworks around fuel quality. And the second is the world shifting towards more harder-to-process crudes. Both of those create investment opportunities for our customers around resid processing units, hydrocracking units and that's driving demand for our hydroprocessing catalysts. That demand is up significantly this year and we expect it to continue to grow over the next two or three years. And then the third piece, polyolefin catalysts, what we call our specialty catalyst business, it's ultimately driven by the demand for plastics. And with the position that we've established, both the process licensing position and also the polyethylene and polypropylene catalyst position, we are participating very nicely in the growth in that market. And I think we're growing -- not I think, I know we're growing faster than the market, again, partly because of the combination of licensing and catalysts that we have and the value of our high-performing polypropylene catalysts. Chris, let me stop there and check to see if that gave you the color you wanted.

[Christopher Parkinson:]

That did. It just led into the follow-up I was going to have. Our expectations, or the Street expectations, really been for a bit of a lull for licensee deals, but you’ve had some pretty solid announcements in the past few quarters and pretty good one this AM. Can you just kind of update us on the – your thoughts on the cadence throughout the balance of 2017 and 2018 and then also any implications on the margins as well over, let's say, the intermediate to long term. Thank you.

[Hudson La Force:]

Sure. No, great question again. So, we – I don't mind saying. We've been a little surprised too at how fast licensing has come back. Six or nine months ago, we were prepared for a couple years of kind of trough licensing activity. And what we saw at the end of last year was a real increase in the number of inquiries. Six months later, those processes have matured. We're starting to see customers make decisions. We expect additional decisions in the next six to nine months. And the trough was shorter than we thought, which is great. And licensing comes at a very high margin, as you understand, and that will be a margin good guy for us in specialty catalysts over the next couple of years.

[Christopher Parkinson:]

It's great color. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Kevin McCarthy of Vertical Research Partners. Your line is open.

[Kevin McCarthy:]

Yes. Good morning. On slide seven, as it relates to FCC, I think you mentioned some new business acquisition costs. Would you discuss the nature of those, whether or not it's related to your insurance recovery efforts or separate from that, and maybe elaborate a little bit on the income statement impact there?

[Hudson La Force:]

Sure, Kevin. This is Hudson again. These are not directly related to insurance in any way, but they are related to our response to the customer outage. And one of the things that we had to deal with in Q2 was what was the duration of that outage. And it had been an uncertainty for us. We wanted to make sure that we had a strong business base for this year and for 2018, regardless of how the outage – what the timeline turned out to be on the outage. And so, we did spend some money establishing some new customers. You should think of these as sort of one-time costs associated with setting up our business with a couple new customers.

[Kevin McCarthy:]

Okay. That's helpful. And I guess a broader question, as I look across the chemicals industry, we've seen a lot of verticals within that consolidate – coatings, agriculture, to name a few. Activity in catalysts has been relatively modest. You’ve had the polyolefin catalyst deal yourself last year. As you look out three-plus years, do you see meaningful opportunity for consolidation in the industry? Or rather, is the case that the technology is so specific that the industry does not lend itself to meaningful consolidation?

[Fred Festa:]

Hey, Kevin. It's Fred. I think there will be consolidation, but in a little different framework than you pointed out. I think the consolidation will come between catalyst producers and licensors. There is a strong undertow both from our customers as well as the industry out there to supply a full range package. And that package includes technology from a licensing/engineering side, as well as the catalyst solution. And where we combine these, we've seen it. What we've done on the ART joint venture with the alignment with CLG on that side, it's paid huge dividends. We've seen it when we acquired the UNIPOL licensing business from Dow and then combined it with our catalyst side and so on. And our customers continue to change their technology, they're looking at it from both standpoints. And we're involved in a situation right now, as you know, in the Middle East with our unit down, and we've partnered directly with the technology provider of that unit. And as we look at this and how do we modify the catalysts, how do they modify the FCC unit to get the best performance. So, that's the combination I think that will happen further as we down the line.

[Kevin McCarthy:]

I appreciate that perspective. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Robert Koort of Goldman Sachs. Your line is open.

[Christopher Evans:]

Thanks, everyone. Good morning. This is Chris Evans on for Bob. I was wondering if we could talk a little bit about the insurance coverage around TAKREER. Sounds like you're getting about $27 million which will run out at the end of this year and then expecting no volumes from TAKREER in 2018. So, I guess, the question sort of top level is do you expect when you go into 2018 that other opportunities around FCC can make up that $27 million insurance payment?

[Fred Festa:]

Yeah, yeah. What we've said – I wanted to put a marker out there because this is on everybody's mind. The insurance recovery is about – the max we get is $25 million based on everything we see right now. We will go through that in 2017. We also wanted to take a – given the past, we wanted to, I won't call it conservative, but realistic on when this unit will really start up. So, we've taken all that volume out. Given everything that we have today – and I feel good about the positioning of our businesses. I feel good about where we are on FCC, especially good on the specialty catalyst side of it. I wanted to give you a framework where I think we are at right at this point. Now, obviously, we've got some good momentum and we're going to continue to work that over the next – let's say, we've got 18 months till 2018 runs out. So, that’s really the high point of it as we work through it.

[Christopher Evans:]

Got you. And then, in this year, I believe your prior guidance around ART was actually maybe for – I think when the year started was for it to be flat year-over-year if you're comping on a pretty good performance in 2016. It looks like you're newly crushing the first half numbers from last year. So, should we expect a different cadence in the second half or a continuation of the real strong results we've seen in the first half?

[Hudson La Force:]

Chris, this is Hudson. We have had good performance in ART. Some of this is timing within the year – this year's timing compared to last year's timing. We do see strong growth in ART. The earnings will be up for the year over last year. And I’ll leave it there.

[Christopher Evans:]

Wil the second half be up as much as…?

[Hudson La Force:]

No. No, that's – sorry, maybe I was too subtle. That was the point of my timing point. This year's first half was strong relative to last year's first half. This year's second half won't be as strong relative to last year's second half. But on a full-year basis, ART will be up year-over-year.

[Tania Almond:]

Next question, operator.

[Operator:]

Thank you. Our next question is from the line of Ben Kallo of Robert W. Baird. Your line is open.

[Benjamin Kallo:]

Hi. Thanks for taking my question. I guess, could you just talk a little bit about the 7% EPS growth as a minimum and what drives that the most? I guess, without asking for more guidance, but is it topline or is it margin improvement or how should we think about that? Thanks, guys.

[Fred Festa:]

Yeah. Let me give you a little bit of it. It is top line, obviously, as we've built a very good backlog going into 2018. On the margin side, listen, a lot of those margin issues are under our own control. As Hudson said, I think we've had a little growing pains. We've run some of these operations very, very hard. We've decided to take a turnaround in the fourth quarter in one of the catalyst operations really to get some of the reliability performance back to where we need to do. So, that's an additional opportunity on that side of it. It's really the combination of those aspects to it. I would say, relative to the outage, the cost of the outage – we incur more costs than we initially thought we would as we – changing our systems, changing those supply chains, lining out where to progress in one plant versus another and so on and so forth. And we've spent a lot of time in the first half of the year lining that out and that will be all lined out as we exit 2017.

[Operator:]

Thank you. Our next question is from the line of Michael Sison of KeyBanc Capital. Your line is open.

[Michael Sison:]

Hi, guys. Nice quarter there. In terms of 2018, appreciate your giving us an outlook – sort of a minimum outlook there for EPS. I'm just curious, if TAKREER was online, how much more EPS growth would you get? And then, can you redeploy sort of that capacity that maybe you're kind of waiting for that to come back on to other areas and make that up?

[Fred Festa:]

The risk of giving 2018 was, Mike – the risk of saying anything about 2018 was just – of going further – I don't want to go further into that. I wanted to give you a point estimate as where we are today on that side of it. Obviously, if TAKREER comes up, we can redeploy that capacity within the FCC business we have and it will impact it from both the margin standpoint as well as the revenue side.

[Hudson La Force:]

I’ll add one thing, if I may. We do have enough flexibility in our capacity, Mike, to supply TAKREER when it comes up and to supply the business that we're acquiring now.

[Michael Sison:]

Got it, okay. And then you talked about specialty catalysts, looks like demand there continues to be really strong, and you talked about new catalysts that you're coming up for polyethylene and polypropylene. Anything in particular that customers are looking for in terms of that catalyst and how can that continue to drive new growth?

[Hudson La Force:]

It's a great question, Mike. So, when you look at the world from the eyes of our customers, they're pushing their performance to higher, more demanding plastics applications for their polypropylene and polyethylene products. And a big, big part of that equation is catalysts. It's what's driving the demand for our CONSISTA non-phthalate polypropylene catalyst. It's a high-performing catalyst that gives our customers the ability to make much higher value resins in their operations, which is obviously higher margin and more money for them. Similarly, on the polyethylene side, the commercial work, the technical work that we're doing with our customers right now is really focused on helping them create higher value resins, so that they're making more money. And that's our basic business model.

[Michael Sison:]

Great. And just one quick follow-up there. Any opportunities, Fred, maybe to do more acquisitions in this area?

[Fred Festa:]

Yeah, there are. And our pipeline is good. I would tell you that we're studying, as we always do, a number of opportunities. And I'll leave it at that.

[Michael Sison:]

Great, thank you.

[Operator:]

Thank you. Our next question comes from the line of Chris Kapsch of Aegis Capital. Your line is open.

[Chris Kapsch:]

Yeah, a couple of follow-ups. Just on the, I guess, spot market business that you acquired, can you just talk about the timing, when did that flow through? And typically, the sort of independent refiners [indiscernible] good characterization put this up for bid for a period of time, one, two, three years. Can you characterize the wins here for the supply agreements that you've acquired?

[Hudson La Force:]

Chris, Hudson again. Good question. It allows me to clarify something maybe. The big wins that we had in Q2 were not spot business. One was a multi-year long-term contract with a customer in Asia. There were some setup costs associated with that account as we begin – it's a new customer, new units and there were some set-up costs associated with that. The other one is a trial with another – this one is a trial with another Asian refiner, a resids, a propylene type application, very high demanding application and we're trialing a new catalyst technology with them. And so, those really were the biggest opportunities that drove our growth in Q2. We did have some bid business. That’s part of the business that’s always part of our portfolio. I don't think it was any more or less in Q2 than it typically is. Usually, those are fairly short duration, probably a year, give or take.

[Chris Kapsch:]

Okay. So, in terms of what was weighing on the gross margin, was it more the former two strategic wins or was it more the bid business or was it both?

[Hudson La Force:]

It's mostly the two strategic ones.

[Chris Kapsch:]

Okay. But just to be clear, those are situations that you won based on the performance of catalysts, not on pricing, correct?

[Hudson La Force:]

No, that's right. And to further clarify, these are one-time costs, not ongoing costs.

[Chris Kapsch:]

Right. And then, I wanted to follow-up also on your characterization of the drivers for the catalyst industry more generally in response to, I believe it was, Chris' question. You mentioned demand for transportation fuels and then this shift towards propylene maximization. One driver that you didn't mention for FCCs, although in the context of HPCs you did, was really just the crude slate and I think also just crack spreads in general drive demand for FCC. The heavier the crude slate, the wider the crack spread, the more likelihood to process the heavier crude, which takes more FCC demand. Is that a correct characterization, first of all? And then, can you talk about, with the light-type, shale-derived oil coming back onstream with the rig counts and so forth. Can you just talk about your outlook for the global slate of crude and how that may influence FCC demand over the next couple of years?

[Hudson La Force:]

Yes, Chris. I think your characterization of everything is how we see it too. When I rank the drivers of our growth, demand for transportation fuels is first in terms of significance. Second is the demand for propylene coming out of FCC units. And then third, you get into the effects that you're starting to discuss around crude slates and things like that. That is part of the equation, but it's a smaller variable than the first two.

[Chris Kapsch:]

Okay. And then indulge me with just one more because you talked about a couple of new units coming on in, I believe, the Middle East and Africa. And those could be substantial I guess, given that the overall FCC industry is still running tight. But in the context of teaming up with an EMC company or a licensor – process licensor, do we know – do you guys know if you are the catalyst of choice or is that still something that's in negotiation, you're trying to sell to the technology licensing companies or the EMC companies for those large projects? Thank you.

[Hudson La Force:]

For the most part, Chris, those are separate decisions that our customers make. And the point that Fred was making earlier is that there's a lot of value to be created by starting to collaborate and combine those decisions. But, today, the customers do treat those as separate decisions. And to your specific question about are we the catalyst supplier of choice, the answer is hell yes.

[Operator:]

Thank you. Our next question is from the line of John Roberts of UBS. Your line is open.

[John Roberts:]

Thank you. In the silicas materials technology segment, volume in the continuing product seems to be growing less than the end market growth rates of pharma and coatings and consumer and chemicals. What's the organic growth outlook like for the continuing products there?

[Hudson La Force:]

So, on the silica side of this business, we think we're growing a bit faster than the underlying end markets. What you're seeing is the effect of the headwind from our fine chemicals business into pharma, which has been down significantly this year.

[John Roberts:]

Okay. Can you break that out, so we can actually see what the silicas growth is? Or when does fine chem sort of wash out of the numbers here?

[Hudson La Force:]

The silicas growth is 4%, 5% year-over-year in the first half. And then, we're getting a headwind on fine chemicals, obviously.

[Fred Festa:]

We really washed it out of the numbers for the second half completely on that side of it, second half 2017. And at this point in time, we've not included a large pickup into 2018.

[Hudson La Force:]

Fred's comments are on fine chemicals.

[Fred Festa:]

Fine chemicals.

[John Roberts:]

Okay. With the TAKREER FCC unit down, that gasoline demand must be made up by other refiners. Can you actually tell if you’ve picked up your share of that incremental demand that’s gone elsewhere or because the gasoline market is so large and as inventory changes, you can't really tell if you're picking up some of the lost TAKREER FCC demand and just other units running harder across the industry.

[Hudson La Force:]

We can't tell specifically at the unit level. But, generally, that gasoline demand is being made up in the Middle East and Europe. And we've got good market positions in both of those regions.

[John Roberts:]

Do you think you’ve picked up your share as that's moved around or you’ve lost – obviously, it's a net negative [indiscernible].

[Hudson La Force:]

I have no reason to think we've lost any position.

[John Roberts:]

Okay, thank you.

[Operator:]

Thank you. Our next question is from the line of Mike Harrison of Seaport Global Securities. Your line is open.

[Michael Harrison:]

Hi. Good morning.

[Fred Festa:]

Good morning, Mike.

[Michael Harrison:]

I was wondering, on the polypropylene licensing side, you've announced a couple of deals now. I was wondering if you could give a little bit of a better sense of the magnitude and the timing of the revenue and earnings contribution? I guess, in general, should we expect to see those start to contribute about six months from the time they're announced? And then, specific to the deal you announced today, you're saying it's going to be serving the biggest polypropylene line in the world and part of a bigger chemical installation. So, is this project going to be longer in duration and maybe take longer to start to contribute and see the longer-term contribution?

[Hudson La Force:]

So, we're not going to quantify the value of individual licenses, but the way that we see the revenue flow, typically, there is a small amount of revenue at the time of sort of upfront in the project when engineering packages are delivered and so forth. And then, the during the startup period of the unit, we recognize revenue as we're doing work supporting our customer with that startup period. And then once the unit is up and running successfully, we get a final payment. And that's the final piece of the revenue recognition. For any one unit, that probably could run over – it depends on the unit – two to three-year cycle where all of the revenue from a license would be recognized.

[Michael Harrison:]

All right. And then, switching over to the materials side of the business, you called out the higher manufacturing costs there. I was wondering if you could just give a little more color on that. Is that a scale issue where you had exited products and, obviously, not getting some of this fine chem pharma volume yet. Can you talk about some of the other issues that are going on there?

[Hudson La Force:]

Sure. One of the pieces is – we commented briefly in the script that we had an outage at our largest facility.

[Fred Festa:]

Turnaround.

[Hudson La Force:]

Sorry. Wrong word choice. A turnaround – let me be really clear. A planned maintenance turnaround at our largest facility. And that, obviously, impacted costs. It showed up some in the catalyst business. It showed up in the Materials Technologies business as well. That’s a piece of it. We did have some hiccups in a couple of the plants in Materials Technologies during Q2 as well. And frankly, we had – as we compared to last year, we had really good costs last year that didn't repeat, and part of it is just the year-over-year comparison.

[Michael Harrison:]

And can you quantify the impact of the turnaround in terms of EBIT?

[Hudson La Force:]

We spent – not all of this is running through Q2 earnings, but we spent a few million dollars in maintenance costs and a couple of million dollars in capital.

[Michael Harrison:]

All right. Thank you very much.

[Operator:]

Thank you. Our next question is from the line of Laurence Alexander of Jefferies. Your line is open.

[Laurence Alexander:]

Good morning. A couple of longer-term questions. If you look at the pipeline of catalysts or large projects that you spoke about as candidates or targets, has that changed your thinking about the longer-term CAGR for the catalyst business or is that just more supportive of your long-term target? And given the way you characterize 2018, it will be easy to walk away from this call with the impression that 2019 is set up to be a bit of a hockey stick kind of year, both with the full ramp of these larger catalyst wins flowing through, coupled with TAKREER finally turning on and so forth. Is there anything on your radar that would mitigate, would offset or argue for some caution on the longer-term 2019/2020 trajectory?

[Fred Festa:]

Yeah, Laurence, this is Fred. Let me answer the second part of it. Again, we feel very good. Hopefully, it came out in the call. We feel very good about the positioning of the market and the demand that we've seen, not only from an FCC standpoint, but from specialty, the license picking up and so on. So, the market feels very good and our products are well positioned to capture that. So, I don't see anything today that is a headwind out there, 2019 and beyond, at this point in time. And the volume that we're securing are generally longer-term contract-type volumes, both across our businesses and including the license side of it. My last point was that's why I talked about the framework guidance that we put out in May. I'm comfortable with that guidance. You see that on the revenue growth side. And I think it's supportive of what we're doing now. And we'll see. We'll see if, over time, we can move that up. But at this point in time, I'm comfortable on that guidance.

[Laurence Alexander:]

Okay, perfect. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Chris Shaw of Moness, Crespi. Your line is open.

[Chris Shaw:]

Hey, good morning, guys. Just some sort of clarifying questions. On the insurance recoveries, is there opportunity for insurance recoveries in 2018 as well or is this a one-year thing?

[Thomas Blaser:]

Chris, it's Tom. It's one loss and has a maximum of $25 million. And like we said, we will get through that by the end of this year. So, there won't be any insurance proceeds related to the customer outage in 2018. And that is factored into the guidance we gave earlier and our feeling about the minimum 7% EPS growth.

[Chris Shaw:]

Okay. I wasn’t sure how that worked year-over-year. And then, the new wins for FCC, somewhat they've redirected them to TAKREER, when those wins become, I guess, more mature in a year or so, is that the kind of business – would you expect the margin in that business to be higher than what TAKREER was earning or it's higher than normal segment or at least in line with normal FCC [indiscernible].

[Hudson La Force:]

Yeah. Chris, Hudson. Once we get past these upfront costs, these are our great margin customers. And they're using our best catalyst technology, and that creates an enormous amount of value for them and we capture some of the value. We expect those customers to be positives for our margins going forward.

[Chris Shaw:]

Okay, thanks. And then just finally, Materials Technologies and the slowdown in some of these pharma customers, how quickly did that turn on you? I’m just curious. Is this something that you would have seen maybe earlier – at the beginning of the year or leading into the year or is this something where they suddenly just had to turn off the spigot themselves and thus the demand has gone away?

[Hudson La Force:]

Yeah, it was a little different with each customer. In a couple of cases, these were regulatory developments that were different than expected. In a couple of cases, they were slowdowns in demand that we saw coming. But I think we were off in the degree.

[Chris Shaw:]

Just curious, how does that color your – how you guys go about getting – filling the pipeline – do you change the sort of – not the customers themselves, maybe the type of products you're looking to supply.

[Hudson La Force:]

It's a good question, Chris. This is where we've kind of taken a step back and said how do we want to manage the pipeline and product portfolio for this business. And frankly, as y'all may recall, we have a new president leading this business. She's got a great experience in this space. And she's got a lot of insight into how to do this well going forward.

[Chris Shaw:]

All right. Thank you.

[Operator:]

Thank you. Our next question is from the line of Roger Spitz of Bank of America. Your line is open.

[Roger Spitz:]

Thank you very much and good morning. Do you expect the business interruption insurance to be able to make it all the way through Q4 2017? You’ve got a max, I guess, you're saying, of $25 million. Or does it run out somewhere in the middle of Q4 or at the end of Q3?

[Thomas Blaser:]

Roger, we've got a couple of different scenarios in our outlook, so the timing is kind of hard to pin down, but we know by the end of the year it will be exhausted.

[Roger Spitz:]

And in Chinese MTO, even talking about strong, I guess, volume growth there for you, is that a matter of your new product taking share perhaps a little bit from your older product or from other people's products? What I’m trying to think about is underlying MTO demand, we believe Chinese MTO cost position is relative to the olefins cost curve and how often the Chinese run their MTO plans. I’m just trying to understand what is the growth pattern here.

[Hudson La Force:]

So, our strategy is to capture our fair share of the existing MTO units. And there is a question about how much capacity will be added in the future for the economic reasons that you referenced. But that's not something we're playing for right now. Right now, we are focused on capturing our fair share of the existing operations and we're doing it with better technology. We've got a technology that allows our customers to run their units better and make more money, and that's what's driving our penetration in that market.

[Fred Festa:]

Yeah. Let me add one other point on that, Hudson. And we have a local manufacturing operation. We're making catalysts in China, so that coupled with the technology we're bringing, we've been successful.

[Roger Spitz:]

Got it. And by the way, is that a continuous feed or you put in a load and when it gets used up, they drop the load and replace?

[Hudson La Force:]

The latter.

[Roger Spitz:]

The latter. And can you talk anything about the proposed Abu Dhabi FCC catalyst plant? I suspect it's pushed back to some extent. Can you talk anything about the timing?

[Hudson La Force:]

It is still something we are absolutely committed to doing. As we have been, we're managing the timing of that investment relative to the demand in that region.

[Roger Spitz:]

Thank you very much.

[Operator:]

[Operator Instructions]. And we do have a follow-up question from the line of Robert Koort of Goldman Sachs. Your line is open.

[Christopher Evans:]

Thanks. Chris again. Just on these new FCC projects you're working on, I was wondering if you can give a read on the price mix that you guys might be looking at or customers are looking at, if there's going to be any uplift from that. And then maybe just any commentary on the current pricing that you saw in the second quarter and you think you might get for the rest of the year?

[Hudson La Force:]

So, as I commented, Chris, these are high-value catalyst applications and they create significant value for our customers. We do capture our fair share of that value. And I'll leave it there in terms of customer pricing.

[Christopher Evans:]

Just really quickly, does the pushback at TAKREER, does that delay in anyway your expansion in that region and then lower your CapEx for the next to 18 months or so?

[Hudson La Force:]

We do want to time that investment with demand in the region and we're continuing to spend money on that project now. But the big spending will be timed with the demand in that region.

[Christopher Evans:]

Thank you.

[Operator:]

Thank you. We also have a follow-up from the line of Chris Kapsch of Aegis Capital. Your line is open.

[Chris Kapsch:]

Yeah. Just I wanted to have a follow-up on the materials tech and the fine chemicals weakness in particular. Are those more – I think you mentioned pharma fine chem. But are they all pharmaceutical customers or they're also agricultural customers? The reason I ask is I just want to kind of understand if it's regulatory developments that's causing weakness there that could suggest – I don't know – generic competition, influencing the demand for your customers, products, if there's anything in ag, it could be just some cyclical drivers, so just a little more color parsing that out will be helpful. Thank you.

[Hudson La Force:]

This is pharmaceutical principally. We do have some nutraceutical applications. Nothing in agriculture.

[Chris Kapsch:]

Okay, thanks.

[Operator:]

Thank you. And at this time, I’m showing no further questions. I’d like to turn the call back over to Ms. Almond for closing remarks.

[Tania Almond:]

Great. Thank you very much. We'd like to thank everyone for joining us on the call today. If you have any follow-up questions, you can reach me at 410-531-4590. Thank you. And have a great day.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everybody, have a great day.