W. R. Grace & Co.
Q3 2015 Earnings Call Transcript

Published: 23 Oct 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the W. R. Grace, Quarter Three, 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. As a reminder this conference call is being recorded. I would now like to turn the conference over to Tania Almond, W.R. Grace Investor Relations Officer. Please go ahead.

[Tania Almond:]

Thank you, Abigail. Hello, everyone and thank you for joining us today on October 22, 2015. With me on the call are Fred Festa, Grace's Chairman and Chief Executive Officer; Greg Poling, our Chief Operating Officer and the future CEO of GCP Applied Technologies; and Hudson La Force, our Chief Financial Officer. Our earnings release and corresponding presentation are available on our website. To download copies, go to grace.com and click on investors. 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 of 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. Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures are contained in our earnings release and our website. Our comments on forward-looking statements and non-GAAP financial measures apply both to the prepared remarks and to the Q&A. With that, I'll turn the call over to Fred.

[Fred E. Festa:]

Great. Good morning and thanks, Tania. We had a good quarter with strong execution across the enterprise. Earnings and cash flow exceeded our expectations for the quarter and we are on track to achieve our earnings and cash flow outlook for 2015. We are focused on productivity, capturing raw materials deflation, and driving growth in products and regions where the opportunities exist. Grace is positioned to manage uneven growth around the globe through our uniquely positioned manufacturing assets, strong technology, and product portfolio, and good geographic diversity. In the third quarter, many of our regions saw good growth. Overall, emerging region volume growth was positive, led by growth in the Middle East and Asia, excluding China. China was down mid-single digits, but represents only 5% of our total sales. All three segments improved margins and adjusted EBIT was up slightly at constant currency, despite overall lower sales volumes. Adjusted EBIT return on invested capital increased to over 32%, reflecting the high quality value of our businesses. Hudson will give you the details on Venezuela, but let me net it out for you. Before the effects of increased inflation in Venezuela, Grace's third quarter earnings were about $5 million better than our expectations due to better gross margins and lower operating expenses. We've been working very hard to serve our customers in Venezuela and anticipated the higher sales volume, but did not anticipate the significant increase in inflation that began in September. Let's turn to the businesses. In Catalysts, we beat our third quarter earnings goal and continued making progress in positioning our refining catalysts business for the future. We are strengthening our commercial positions in North America, the Middle East, and Asia, and building a solid foundation for the capacity investments planned for this business. The refining and petrochemical end markets we supply are healthy. Demand for transportation fuels and plastics is good and utilization rates are good for our customers. From an industry perspective, six new FCC units have started up this year with another two expected to start up by year-end. In the U.S., miles driven were up 4% year-on-year in July with gasoline demand up 3% year-on-year. In the fourth quarter, we expect Catalysts earnings to be up double-digits sequentially, assuming the refining turnarounds and customer changeovers remain on schedule. In Materials Technologies, we also beat our Q3 earnings goal, though sales were slightly lower than we wanted. Sales volumes decreased in North America and Asia and increased in Europe and the Middle East. In engineered materials, our plastics end markets were strong and coatings end markets were stable. Darex continues to work through the shift from three-piece cans to two-piece cans while demand continues to grow for our non-BPA technologies. We exited the third quarter in engineered materials stronger than we entered it. Construction Products had good overall volume growth and very good margin expansion in the quarter. Sales volumes grew 5% in North America and double digits in the Middle East and emerging Asia, excluding China. We had negative sales volume growth in China and Brazil, reflecting weaker demand conditions in those markets. The product and regional diversity of our construction portfolio allows us to mitigate the effects of regional slowdowns. We continue to introduce new products and take advantage of growth markets. Across both Grace and GCP, some regions are performing better than others. During these times, we are focused on securing our market positions, introducing new products, staying nimble, simplifying our operations, and managing our capital. I'm pleased that we continue to achieve our earnings and cash flow goals in this environment. We are on track with our 2015 business goals and are well positioned for further growth in 2016. I feel good about the progress we're making positioning Grace for the future. We have demonstrated that we can execute well in a tough global environment, leveraging our technology, discipline productivity focus, and global portfolio. We'll exit 2015 with lean cost structure, new strategic wins, and portfolios positioned to grow in both Grace and GCP. We're both excited about the year ahead. I'll turn the call now over to Greg to provide an update on the separation, and then Hudson will review the quarter in more detail and outlook.

[Gregory E. Poling:]

Thanks, Fred. During the third quarter we made good progress towards standing up GCP Applied Technologies as an independent company. In August, we filed GCP's initial Form 10 registration statement with the SEC, and in September we filed the first amendment, adding the Q2 carve-out financials and responding to the SEC comments on the first filing. We expect to file our second amendment, including the pro forma financial statements, in the next few weeks. We've also made good progress building the GCP senior management team and selecting our future board of directors. We named our CFO, Dean Freeman, in September, and our VP of Strategy and Corporate Development, Naren Srinivasan, earlier this week. The rest of the leadership team and our board of directors will be announced later this year. Operationally, we have worked through a rigorous process to reengineer the future state organizational structures and processes for each company. This work sets up both companies for success after the separation. We have optimized the cost structures of both GCP and Grace and expect to reduce the costs within both companies by enough to offset the added standalone cost of GCP. Of course, that will not be the case on day one, but we do expect to achieve that cost goal within 12 to 18 months of separation. We still have many things to complete before the separation, but we remain on track to spin in the first quarter of 2016. I am very excited about the opportunities we have before us, and I look forward to seeing you during our road show early next year. With that, I'll turn the call over to Hudson.

[Hudson La Force:]

Thank you, Greg. Grace's third quarter sales were $790 million, down 8% as reported, and down 1% at constant currency. Currency reduced sales by $55 million or about 6%. Adjusted EBIT was $173 million, down 4% as reported, and up slightly at constant currency. Currency reduced earnings by about $8 million or 5%. Adjusted EPS was $1.37 per diluted share, up 28% and up 36% at constant currency. Adjusted free cash flow was up 2% to $343 million. On Venezuela, most of you know that we have had declining sales volumes in our Venezuelan subsidiary due to currency and import controls that have limited our ability to import raw materials into the country. After many months of effort, we were able to import a significant amount of raw materials into Venezuela in Q3. Our products go into construction and food packaging, two important sectors, and we're glad that we were able to catch up on past customer demand and supply some future demand as well. Until September 30, we accounted for the results of our Venezuelan subsidiary at the official exchange rate of VEF6.3 per $1, but it is no longer appropriate to do so. Although we had significant success importing raw materials at the official exchange rate in Q3, we may not be able to do so in the future. Effective September 30, we will account for the results of our Venezuelan subsidiary at the SIMADI rate. We recorded a charge of $72 million to reflect this change. From October 1, our Venezuelan subsidiary will be immaterial. This has no significant effect on our 2015 outlook, as the increased earnings in Q3 are roughly equal to the reduction of earnings in Q4 from the devaluation. We also want to be transparent about the effect of this change on future earnings. As you build your new GCP earnings models, you should exclude Venezuelan sales and earnings from your forecasts. The sales and earnings details for 2014 and 2015 are in this morning's release and PowerPoint. For 2014, our earnings were about $20 million, and for 2015 they are about $31 million. During this time, about 70% of Venezuela sales were in SCC, the Specialty Construction Chemicals business; and about 30% were in Darex. In Q3 itself, this ratio was about 80% SCC, 20% Darex. Let's turn to Catalysts Technologies on page seven of our presentation. Catalysts Technologies gross margins were up 90 basis points compared to last year and 10 basis points from Q2. Our plants are running well, delivering good productivity and lower manufacturing costs. We took advantage of lower Q3 volumes to perform additional maintenance in our Curtis Bay facility. The improvements we made will further improve productivity, so the costs of the shutdown will reduce Q4 margins some. We made good progress strengthening our commercial positions in FCC Catalysts in North America, the Middle East, and Asia. And in Specialty Catalysts, we saw double-digit growth in Catalysts volume in Asia, resulting from new polypropylene process licenses sold in recent years. Let's move to Materials Technologies on page eight. Materials Technologies has seen significant headwinds this year from the stronger dollar and reduced demand in Europe and the emerging regions. Nevertheless, gross margins increased to 37%, excluding Venezuela, on lower manufacturing cost and improved pricing. Cash flow performance continues to be good, increasing 2% year-to-date despite 8% lower earnings. We saw some bright spots in Q3. Europe grew for the first time in several quarters, and the Middle East grew double-digits. We did see a slowdown in Asia, with signs of some inventory correction mid-quarter. Please turn to page nine for Construction Products. GCP had good sales volume growth of 5% in Specialty Construction Chemicals and 4% in Specialty Building Materials. Sales were up 5% in North America and double-digits in the Middle East and emerging Asia, excluding China. For earnings, let me give you the numbers with Venezuela excluded for 2015 and 2014. Gross margins, excluding Venezuela, increased 240 basis points to about 39%. And earnings, excluding Venezuela, grew 20% on a constant currency basis. Net debt at the end of the third quarter was $1.9 billion and net debt to adjusted EBITDA leverage was 2.5 times. Our adjusted EBIT return on invested capital was 32%, compared with 30% a year ago, up 260 basis points driven by earnings growth and good working capital management. Let's touch on our outlook, and then we'll open the call for your questions. We are raising our 2015 outlook for adjusted EPS to $5.25 to $5.35 per share on a constant currency basis, up $0.10 from our previous range of $5.15 to $5.25 per share. We expect adjusted EPS to grow 19% to 21% this year on a constant currency basis. We continue to expect adjusted EBIT to be $675 million to $685 million on a constant currency basis, an increase of 8% to 9%. We estimate the currency headwind to adjusted EBIT to be about $60 million and to adjusted EPS to be about $0.55 per share. While the euro has strengthened recently, it is offset by weakness in emerging region currencies. By segment, we continue to expect Catalysts to have a good fourth quarter in FCC, Specialty Catalysts, and ART. We expect sales volumes to grow mid to high single-digits from Q3 and low single-digits from last year's strong Q4. Gross margins will be below Q3 levels, reflecting the planned reduction in FCC catalyst inventory and the flow-through of Q3 maintenance costs at Curtis Bay. We expect Q4 gross margins to be in line with year-to-date margins. Higher sales and inflation in Venezuela affected Q3 gross margins in Materials Technologies and Construction Products. For Q4, we expect gross margins for those two segments to be comparable to Q2 levels. We continue to expect adjusted free cash flow to be at least $430 million for the year. As most of you know, Grace has a low cash tax rate due to our NOLs. This year our cash tax rate will be about 15%, compared with a 34% book tax rate. For the full year, this difference adds about $95 million to free cash flow. On a per share basis, this is about $1.30, which would add roughly 25% to our adjusted EPS outlook. Looking at cash flow from another perspective, at current market prices, our free cash flow yield is about 6%. With that, we'll open the call for your questions.

[Operator:]

Our first question comes from the line of Brian Maguire with Goldman Sachs. Your line is open.

[Brian P. Maguire:]

Hi, good morning, everybody.

[Fred E. Festa:]

Hi, Brian.

[Brian P. Maguire:]

Hey, Hudson, if I did the math right, I think just on the – just to close the loop on the Venezuela issue, it seems like if you were to build a bridge from 2015 to 2016 on EPS, you have about a $0.25 bad guy for Venezuela next year? Is that about right?

[Hudson La Force:]

I haven't done it on an EPS basis, Brian, but per share it's about $0.01 per $1 million. Let me just kind of give you how we think about it. For 2014, I want to give some perspective. I know everybody's trying to build their GCP models. For 2014, we had about $20 million of earnings in Venezuela. For 2015, we planned about $31 million, and that's about what we have year-to-date. Obviously, some of that shifted from Q4 to Q3, but we had expected that $31 million. That will go to zero as we head into 2016 with the devaluation.

[Brian P. Maguire:]

And if the outlook going forward is basically immaterial to earnings, I guess it begs the question why even continue to be doing business in that country? Is there any hope for things getting better or any reasons why you need to continue to operate down there?

[Fred E. Festa:]

Yeah, Brian, this is Fred. I mean, listen, our products are needed down there. We're continuing to operate. We've got assets down there for both products. And we'll be able to operate and continue to do business, but at the SIMADI rate. So in essence, we're making profit down there, but when it gets translated back at the SIMADI rate to U.S. dollars, it's immaterial from that perspective. We'll see where the change takes us going forward.

[Brian P. Maguire:]

Okay. Just if I could shift to the FCC business, Fred, just curious how your conversations with folks out in the industry have gone since you got some business in the last quarter. It seems like you're in a sold-out position. Just wondering how customers are kind of reacting to that, either positively or negatively. And what's kind of the outlook for pricing in the industry going forward now?

[Fred E. Festa:]

Yeah. Just to make sure we're crystal clear, I mean, if you look at our third quarter, similar to our second quarter, we're about flat. I mean, we're just under the 90% utilization for us. We believe we'll be moving that up in the fourth quarter, and then we'll be at basically full utilization as we get into 2016. As I said before, I think 2015 has been the year of a transition on FCC, from – you've got large units coming up, you've got refineries running very hard, you've got refineries trying to get their slates of crude lined out and so on. I think stability is coming back to the industry and I think that stability will be good for the FCC suppliers from a number of aspects. We've been able to get price in FCC based on our ability to show a refiner a new product, demonstrate those results, test those results, and then ultimately share the benefit of those results through our pricing and their benefit. I think as this year has settled down, 2016 is going to be the year that we're going to see more of that.

[Brian P. Maguire:]

Great. Thanks very much.

[Operator:]

Thank you. Our next question comes from line of Mike Ritzenthaler with Piper Jaffray. Your line is open.

[Mike Ritzenthaler:]

Good morning. On the strategic commercial shift within FCC, I don't intend for this question to be too sensitive for this forum, but is this an initiative a matter of just emphasizing certain products or geographies? And is the expectation for the double-digit EBIT growth in Q4 sequentially sort of the beginning of the effects of this repositioning?

[Fred E. Festa:]

Yeah, I mean, second quarter and third quarter, Mike, have been basically flat. We're seeing that come up in the fourth quarter. And then that will continue to expand into 2016. We've made a very strategic intent around our FCC business to be strong where we believe those refiners will be strong for now and in the future. And we believe that is in the Middle East, it's in Asia, as well as North America. Europe, we're positioned in Europe, but we're positioned to be there competitively. But strategically, it's going to be North America, Middle East, and Asia.

[Mike Ritzenthaler:]

That makes sense. Shifting gears a little bit to GCP, I guess, to what extent are we seeing sort of a wave of new construction projects? Just trying to gauge the – clearly a lot of momentum behind that business now, but looking into, I guess, 4Q and, maybe even more importantly, 2016, as construction spending seems to be ratcheting up and different commercial and industrial applications currently moving in that direction, in terms of your outlook for projects that you're bidding on now, things like that, looking out into 2016, are we in a bit of a wave here or is that something that's going to continue do you think?

[Gregory E. Poling:]

Yeah. Mike, this is Greg Poling. Thanks for the question. Actually, we're seeing good project growth in a number of segments around the world. North America, of course, the construction spending is up. We've seen the commercial accelerating for us in the North American market. We've seen good projects in the Middle East and in the ASEAN markets. And one good indicator for us on your question is our pipeline on our Specialty Building Materials, and we're seeing good specification work in those markets where we see the growth. Of course, you see a little bit of downturn in – actually, in Brazil you see some downturn, China, but in the markets that – North America, the UK, the Middle East, the ASEAN countries, we're seeing good pipelines going forward.

[Mike Ritzenthaler:]

Okay. Thanks, Greg.

[Gregory E. Poling:]

Yep.

[Operator:]

Thank you. Our next question comes from the line of Mike Sison with KeyBanc. Your line is open.

[Michael J. Sison:]

Hey. Good morning, guys. Nice quarter there.

[Fred E. Festa:]

Thanks, Mike.

[Michael J. Sison:]

In terms of FCC, Fred, you had mentioned six new refineries for FCC and it's coming this year, or maybe eight in total. How much of the growth in your business does that support? And then when you think about 2016, do you have a forecast of how many units will come on and how much growth that kind of provides you and maybe the industry?

[Fred E. Festa:]

Yeah. I don't have the forecast for 2016. A number of these units are coming on now and some coming on at the end of the year. For us, I believe our capacity utilization by mid-2016 is going to be basically around 95%, which is – for us, it's just (25

[Michael J. Sison:]

Okay, great. And then in a sold-out position, what type of organic growth does that sort of give you in 2016 versus 2015 for Catalysts?

[Fred E. Festa:]

If you look at our FCC catalysts and you look at our Specialty Catalysts, I'm going to give you the Specialty Catalysts first. Our Specialty Catalysts has grown about 6%, about 6% to 8% this year. It'll exit the year in that range on the specialty side of it. From an FCC side, from an organic growth, there's industry growth and then there's unit growth. And I want to be clear about that. From an industry growth, I think the industry growth, our estimation, will be around 3% to 4% on an industry basis. And then based on the unit growth, I think it's going to be a little bit higher.

[Michael J. Sison:]

Great. And then one quick one for Greg. I think you talked about Europe, China, Brazil being down in the quarter. Can you maybe give us the cadence for those regions? Are we bottoming? Is it stable as you look to the fourth quarter and maybe heading into 2016?

[Gregory E. Poling:]

Yeah, sure, Mike. Actually, in Europe, the area that you have some issues because of the geopolitical problems are in Turkey, but the European market, we're actually seeing that coming up and we saw a little bit of growth in some of the core Europe. And UK has been pretty good. I mean Brazil is having both – we get full translation as well as volume declined. I think the Brazil market's going to be challenged on a volume basis next year. And China is slower; it's about 5% of our sales. But frankly, the opportunities in both those countries over the long-term are very good for us and we see some trends in China on the types of construction that should help us. But the near-term outlook in China is a little soft as well.

[Michael J. Sison:]

Okay, great. Thank you.

[Gregory E. Poling:]

Yeah.

[Operator:]

Thank you. Our next question comes from the line of Jim Barrett with C.L. King & Associates. Your line is open.

[Jim R. Barrett:]

Good morning, everyone.

[Fred E. Festa:]

Good morning, Jim.

[Hudson La Force:]

Hey, Jim.

[Jim R. Barrett:]

Hi. Greg, this is a question for you, a two-part question. First, in the earnings release, the improved pricing primarily resulted from inflation in Venezuela. Are you seeing any price improvements in your FCC business in North America? And then the related question is, as you look into 2016, my recollection is that there's a number of petroleum input ingredients for those product lines. Are you seeing any cost savings related to that?

[Gregory E. Poling:]

Sure, Jim. You're right. In terms of the pricing that we saw in the quarter, it was primarily due to Venezuela. We're getting nice margin expansion. We're focused on our mix within the product line in terms of selling appropriate products to drive the mix and meet our customers' demands as their volumes grow. So, in North America, we're seeing that mix shift favorably and we're maximizing on our margins in terms of what we're selling, that similar strategy in each one of these geographies where we're getting some growth. On the input cost, we are capturing the input deflation that you're seeing derived from oil. If you sort of look at our business across the board, maybe it's 25%, 30% of our raw materials come out of that supply chain, the oil-derived, and we're seeing some support there. There's other materials, of course, in these formulations that aren't derived from oil. We are capturing some of that deflation as we go forward.

[Jim R. Barrett:]

Okay. Well, thank you very much.

[Gregory E. Poling:]

You're welcome.

[Operator:]

Thank you. Our next question comes from the line of John McNulty with Credit Suisse. Your line is open. John P. McNulty - Credit Suisse Securities (USA) LLC (Broker) Yeah, good morning. Thanks for taking my questions. So first one was, I believe you had indicated throughout the quarter the Materials platform actually got stronger, I guess. What were some of the drivers behind that?

[Fred E. Festa:]

Yeah. In Europe, we started to see small, but still some positive shoots in our coatings, our silica that went into coatings across the sector as well as in Asia. So, again, starting to feel a little bit better. We'll see if it -- and we're hoping it continues, but we'll see. We're not expecting a tremendous growth in the fourth quarter, relatively flat for Materials third quarter over fourth quarter. John P. McNulty - Credit Suisse Securities (USA) LLC (Broker) Okay, fair enough. And the Darex kind of – I don't know if wind-down is the right way to put it, but the shift on the can side in Asia from two-sided cans to one-sided cans, I guess how far through that – I guess when do we start to anniversary some of the bigger headwinds there?

[Fred E. Festa:]

Yeah, good, John. Let me just explain a little bit. There's two pieces to, no pun intended, to that business. The beverage side, which has shifted from the three-piece to two-piece around the world, that's pretty much done; a little bit of shift still in Asia Pacific. The piece we're seeing now – and beverage is probably 65%, 70% of our business. The shift we're seeing now is in the food cans. We're seeing that in North America, it accelerated a little bit in North America in the third quarter. We're almost through that in North America. And we have that shift to go in Asia Pacific and Europe going forward. It's this quarter probably 1%; going forward it's 0.5% of growth or so as we work our way out of it over the next year or two. John P. McNulty - Credit Suisse Securities (USA) LLC (Broker) Okay, great. And then just one last question on the Venezuelan issue. I think you kind of implied it's about a $30 million hit on the earnings side or on the operating income side. In terms of cash flow, is it fair to assume that that's – it's a much smaller implication?

[Hudson La Force:]

John, this is Hudson. From a GAAP cash flow perspective, we have low working capital requirements there. We have low PP&E requirements and so forth. And so from a GAAP cash flow perspective, it's probably the same magnitude as the earnings. But we've been unable to get cash out of Venezuela for a long time. And so from a practical perspective, this has no implications for cash flow. John P. McNulty - Credit Suisse Securities (USA) LLC (Broker) Got it, okay. Now that's more along the lines of what I was looking for. Okay, great. Thanks very much.

[Operator:]

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

[John E. Roberts:]

Morning, guys. Bloomberg just did a webinar on naphtha and they highlighted that the big exporters of naphtha in the Middle East are going to pull that back into their fuel pool, so that should allow more U.S. condensate to move out into the global market. Is that a trend that would affect the catalysts market materially?

[Fred E. Festa:]

No. It could have a slight positive in Europe, where a lot of those FCC units are naphtha-based, but I wouldn't expect a big dramatic change for us.

[John E. Roberts:]

Okay. And I jumped on late; I apologize if this got asked, but I think it's been a while since you reviewed, if U.S. crude exports open up, how do you think that might affect the dynamics in the catalysts marketplace?

[Fred E. Festa:]

Yeah. For us, since I mean we're spread globally, we've got global assets in Europe, Asia; small assets in North America. So we're able to respond where the crude goes, and to be able to refine that. So we're not worried. We're not worried if that does occur.

[Gregory E. Poling:]

By far, the biggest driver for us is demand for transportation fuels. And how the refineries are supplied has a small effect and oftentimes creates opportunity for us, John.

[John E. Roberts:]

Okay. Is it fair to say almost any change is generally positive because there it's – almost always requires an adjustment that you have to do something different, and therefore you get an opportunity?

[Fred E. Festa:]

Yeah, I mean generally, unless there's a dramatic slowdown in the world economy and people stop driving and consuming transportation fuels.

[John E. Roberts:]

Okay. Thank you.

[Operator:]

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

[Laurence Alexander:]

Good morning. Given the tightness that you're seeing in FCC catalysts and stabilization in the industry, how many years do you think tightness could continue before you would start exploring, through your world scale, capacity addition, and what would be your criteria to do so?

[Fred E. Festa:]

Well, Laurence, as you know, we're planning to put a world scale capacity into the Middle East sometime during 2018. So based on that, the portfolio and the profile we're seeing today, we think the industry will be supported by that.

[Laurence Alexander:]

But I guess after that one, is it reasonable to assume, say, an additional one every three to five years or how do you see the cadence?

[Fred E. Festa:]

No, I don't. I mean if you look, it took -- gosh, I mean, there has been some incremental capacity added. But these are – the blocks are between 10 years and 15 years before the next one would come on. That's our view. And I think at that point in time, you're also going to see some of the alternative fuels maybe take a little bit of that growth out as well. So as we look at it, an important piece to keep in mind is we've got multiple catalyst manufacturing operations. We've got a number of them in the U.S., one in Europe, a small one in Asia. And we're able to throttle back those if there is a dislocation and change versus running one big unit. So we've got some of that flexibility.

[Laurence Alexander:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Edlain Rodriguez with UBS. Your line is open.

[Edlain Rodriguez:]

Good morning. Thank you. Just one quick question. In the slides, this is for Materials Technologies, you noted that North America was down in the quarter. What's driving that decline and do you expect to see a turnaround soon in there?

[Fred E. Festa:]

Yeah, some of it was just some of the segments that we play in. It wasn't dramatically down, but it was slightly down, some of those segments around the consumer segment for us, as well as some of the coating, some of the coating applications. So as we're looking forward into the future, we're seeing a slight uptick hopefully in the fourth quarter here.

[Edlain Rodriguez:]

Okay. And lastly, on Construction Products, are you seeing any relief from raw materials coming down? Because I know last quarter you didn't see much of that. So are you seeing much this quarter?

[Fred E. Festa:]

Yeah, we saw some improvement on the raw materials flow-through and you did see some step-up ex all of the ins and outs on Venezuela on our margin. Some of that is us capturing that raw material improvement as it's flowing through.

[Edlain Rodriguez:]

And hopefully that should continue going forward if costs stay at those levels?

[Fred E. Festa:]

Yeah. I mean we think that it's a fairly good raw material environment for us.

[Edlain Rodriguez:]

That makes sense.

[Hudson La Force:]

Through three quarters, we've captured most of what we'll get this year. Raws have taken a little bit of a leg down recently, but we've gotten most of it in our P&L already year-to-date.

[Edlain Rodriguez:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Tyler Frank with Robert Baird. Your line is open.

[Tyler Charles Frank:]

Hi guys. Thanks for taking the question. Can you talk about the dynamic of the order flows that you're seeing for Catalysts? Are refiners ordering low priced catalysts given the high volumes in the market? And then can you also touch on if there's any update with Takreer, as well as your thoughts on the outlook for the ART JV in 2016?

[Fred E. Festa:]

All right. I'll start with the last first. I mean, our joint venture, we continue to have good results there. For the year, we expect to be close to a double-digit earnings increase 2015 over 2014. And we're continuing to watch when we put the expansion in. The expansion for the ART is scheduled sometime into mid-2018. From a catalysts – you've got to break the catalysts down between the specialty catalysts and our refining catalysts side of it. The Specialty Catalysts will continue to grow at this 6% rate and that will continue into the fourth quarter. Regarding our FCC, it's interesting. I would say through this third quarter specifically, we have seen actually a slowdown of customers willing to try the new product introduction. I think that will probably carry into the fourth quarter. Just based on they're running very hard and to break a new catalyst in, they've got to slow their run rate down. Now there's a number of turnarounds that are happening here in the fourth quarter, and we'll see. So -- but I am encouraged as we get into 2016, I think the stability will come back into the systems and I think there will be a better refresh or relook at some of the new catalysts that we and the industry has developed.

[Tyler Charles Frank:]

Great. Thank you. And can you touch on Takreer or give your thoughts around when we may have more information about that?

[Fred E. Festa:]

I would encourage you to ask Takreer when that unit is going to be up full and running, you know, running at full shake-out.

[Tyler Charles Frank:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Chris Kapsch with BB&T. Your line is open.

[Christopher J. Kapsch:]

Yeah. Fred, you just mentioned a number of refinery turnarounds ongoing and I guess with the lens on sort of domestic refining industry anyway, the operating rates were very strong throughout much of 2015. And then within the last month or so, the utilization rates are down maybe at least 10 percentage points. So I am wondering what the implications are for your – I guess more for ART than the FCC business. Do you have visibility into the type of change out activity that's happening with this what people are describing as a greater than seasonal turnaround season? Are they skimping on the types of catalysts that they are purchasing or just the quality of those catalysts and if you could provide any insights into your visibility into how this turnaround season plays into your demand at ART? Thank you.

[Fred E. Festa:]

Yeah. For ART on the hydro processing side, you've got to really break it down into pieces. I think that from a hydro processing perspective some of the distillate type units making diesel probably haven't run as hard and those catalysts haven't been changed out, at least from what we're seeing haven't been changed out as frequently as they had in the past. From some of the larger fixed bed or ebullating bed hydro processing units, you are saying a turnaround has taken place and I think some of those turnarounds maybe somewhat extended from that standpoint. So it's a little bit of mixed bag on that side of it. Does that answer the question?

[Christopher J. Kapsch:]

Yeah. And then, but just the type of – I mean you must have visibility into – as they do these turnarounds, what sort of catalysts are being changed out? Is there any sense that the appetite given the overall energy industry being under pressure. The appetite for catalysts is skewed towards I don't know, something less than prime virgin catalyst or reconditioned catalyst or just lower priced less efficacious catalyst. Any sort of drifting on their catalyst purchase activity? Thanks.

[Fred E. Festa:]

Yeah, no, I mean – no, we're really – we're not seeing that. We're not seeing that in the hydroprocessing at all and the segment that we're the largest in – which is in our hydrocracking side, I mean it seems it's good. It's good and its good demand there.

[Christopher J. Kapsch:]

Okay. Thanks for the color.

[Operator:]

Thank you. Our next question comes from the line of Matt Nemer (43

[Unknown Speaker:]

Hey, guys. Thanks for the question. Just can you remind me how the existing debt is going to be treated post-spin – the term loan in bonds?

[Hudson La Force:]

So, we've got really two pieces outstanding today, a little over $1 billion of term debt at Grace with about $1 billion of high yield bonds. When GCP separates, they will do their own debt raise. We'll actually quantify that for you all in the pro formas that we'll file here in the next few weeks. They will then pay those proceeds. The lion's share of those proceeds will get paid to Grace. And Grace will use those proceeds to pay down the term debt -- not pay off, but pay down the term debt. And so, at the end of the day, the leverage of the combined companies won't change, but we'll have the effect of having shifted some of it from Grace to GCP.

[Unknown Speaker:]

Okay. So is there a leverage target that we can think about it?

[Hudson La Force:]

Yes. We've said for Grace we would be between 2 and 2.5 times EBITDA. This is net debt to EBITDA is the statistic we use. And for GCP, we said 3 to 3.5 times and nothing has changed in our thinking there.

[Unknown Speaker:]

Great. Thanks. That's all I had.

[Operator:]

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

[Chris L. Shaw:]

Yeah. Good morning. Just quickly and I might have missed it. What's the difference in the – you raised the adjusted EPS guidance, but didn't raise the adjusted EBIT guidance. Was it just the tax rate in there or (45

[Hudson La Force:]

No, just truing up tax rate and a little bit of share count.

[Chris L. Shaw:]

Okay. That's all I had. Thank you.

[Fred E. Festa:]

Super. Thank you.

[Operator:]

I'm showing no further questions at this time. I'd like to turn the call back to Tania Almond for closing remarks.

[Tania Almond:]

Okay, great. Thank you, Abigail. We just want to thank everyone on the call for joining us today. If you have any follow-up questions, you can reach me at 410-531-4590. Thank you very much and have a great day.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.