W.R. Grace & Co. Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.24.13 | About: W.R. Grace (GRA)

W.R. Grace & Co. (NYSE:GRA)

Q1 2013 Earnings Call

April 24, 2013 11:00 am ET

Executives

J. Mark Sutherland - Vice President of Investor Relations

Alfred E. Festa - Chairman and Chief Executive Officer

Hudson La Force - Chief Financial Officer and Senior Vice President

Analysts

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

Robert Walker - Jefferies & Company, Inc., Research Division

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

John Mcnulty

James Barrett - CL King & Associates, Inc., Research Division

Patrick Duff

Christopher L. Shaw - Monness, Crespi, Hardt & Co., Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2013 W.R. Grace & Co. Earnings Conference Call. My name is Cathy, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Mr. Mark Sutherland, Vice President of Investor Relations. Please proceed, sir.

J. Mark Sutherland

Thank you, Catherine. Hello, everyone, and thank you for joining us today, April 24, 2013, for a discussion of Grace's first quarter 2013 results released this morning. Joining me on today's call are Fred Festa, Grace's Chairman and Chief Executive Officer; and Hudson La Force, our Senior Vice President and Chief Financial Officer.

Our earnings release and the corresponding presentation are available on our website. To download copies, go to grace.com and click on Investor Information. Links are available on the upper right corner of the page.

As you know, some of our comments today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. 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 also discuss certain non-GAAP financial measures, which are described in more detail in this morning's 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 on our website.

Our comments on forward-looking statements and non-GAAP financial measures apply both to the prepared remarks and the Q&A. We want to remind everyone that this webcast contains time-sensitive information that is accurate only as of today. Any redistribution, retransmission or reproduction of this call without company consent is prohibited.

With that, I'll turn the call over to Fred.

Alfred E. Festa

Good. Thanks, Mark, and good morning to everyone on the call. As noted in our pre-announcement and this morning's release, our results fell short of our expectations for the quarter.

Sales and earnings were impacted by customer operational issues, order delays and a weaker economic environment than we had planned.

What was more disappointing for us was the need to revise our 2013 outlook. In any given quarter, there are always events that are unfavorable but they tend to be offset by favorable events. This is inherent to our business. This quarter, the events however, did not balance out. By itself, this would not have caused us to revise our full year outlook. We would have been able to take actions to replace the lost earnings.

However, when these events are compounded with a weaker economic environment and of the lower FCC Catalyst and volumes we expect during our pricing transition, we believed it was appropriate to provide you with an updated view that takes all of these changes into account.

Global economic environment is clearly weaker than we expected, especially in Europe. We're seeing this in reduced demand across many of our businesses. We know that many of you are thinking about our 2014 goals. Even though the required growth from 2013 has increased, we remain focused on achieving these targets. We are making important progress in our growth programs, and we remain as focused as always on expanding our margins for both pricing, productivity and cost control. In addition, we expect benefits from the new FCC Catalyst pricing in 2014.

More broadly, we have solid market-leading franchises in each of our segments and our business fundamentals remain strong as demonstrated by our increasing margins and cash flow.

When stronger global economic growth resumes, we'll be ready to accelerate our growth and leverage the improvements we are making to our competitive positions.

Let me highlight several items from the quarter to demonstrate our efforts to build a stronger enterprise. In late February, we announced an exclusive agreement with Chevron Lummus Global, that allows our joint venture to sell hydroprocessing catalysts to their licensees and others for catalyst unit refills. This is an excellent win-win agreement as it allows both parties to do what they do best. CLG is the leading hydroprocessing technology licensor of fuels and lubricants and they have a superb win rate for the installation of new Hydroprocessing technology.

ART expands the product portfolio to cover a full range of hydroprocessing catalysts. It also provides additional reach into higher growth segments by building on ART's manufacturing and technical sales expertise. Refining customers will benefit as hydroprocessing catalyst supply and technical service are streamlined with ours as a single point of contact.

We also recently closed a waterproofing products acquisition in Australia. Although small, with revenues of about $10 million a year, this is the type of bolt-ons we like, providing complementary product technology, good cost synergies and immediate earnings accretion. This acquisition gives us access to higher growth markets and broadens our technology portfolio.

In March, we announced changes to our FCC Catalyst pricing, which included eliminating the rare earth surcharge pricing mechanism and increasing the resulting new base prices by 10% or as contract terms allow. This increase is necessary to support Grace's continued investments in product technology, technical service and manufacturing capacity.

We are early in a multiquarter of negotiation with our customers. In the short term, we expect some volume weakness as customers exercise their negotiating prerogative to trial alternative catalysts and we are confident that our sales volume will recover toward the end of this year as FCC Catalyst demand firms and we work through the trial period.

Our customers face increasing complexity with a broad range of potential crude sources and increasing demands for environmentally friendly fuels and chemical feedstocks.

Improvements in catalyst technology are often the solution to our customers' challenge, and we are focused on ensuring our technology provides the highest value possible.

One final comment regarding our Chapter 11 emergence. Monday, June 17 has been set as the date for all oral arguments before the Third Circuit Court in Philadelphia. We continue to be confident that we will receive favorable rulings from the court and we continue to target emergence by the end of this year.

Thanks and I'll turn the call over for Hudson for more specifics on the 2013 outlook.

Hudson La Force

Thank you, Fred. Please turn to Pages 4 and 5, and we'll start with a quick review of Grace's overall results for the quarter.

Sales were $710 million, down 6% from last year. Pricing decreased 5% due to lower rare earth surcharges and currency translation was unfavorable at 1%. Volumes were unchanged. Sales in Western Europe declined 9%, excluding the impact of lower rare earth surcharges. Gross margin improved 50 basis points to 37.2% compared with last year, due to lower manufacturing costs.

Adjusted EBIT was $105 million, down 6% from last year, as lower sales more than offset lower manufacturing costs and operating expenses. Adjusted EBIT margin was unchanged year-over-year at 14.8%, and adjusted EBITDA margin increased 50 basis points to 19.2%.

Adjusted free cash flow was $66 million for the quarter, more than double last Q1, driven by working capital reductions. Adjusted EBIT ROIC was just under 35%. Earnings growth and good working capital performance are offsetting recent investments in new capacity and bolt-on acquisitions. Adjusted EPS was $0.81 based on diluted shares of 77.2 million.

Let's turn to Catalyst Technologies on Page 6. First quarter sales for Catalyst Technologies were $267 million, down 15% from last year.

Pricing decreased 14%, driven by lower rare earth surcharges.

Sales volumes decreased 0.4%, reflecting the impact of lost sales due to customer operational issues, inventory reductions and order delays.

Catalyst Technologies' gross margin was 40.3% for the quarter, a decrease of 170 basis points, primarily due to lower sales, year-over-year differences, and rare earth inventory accounting and lower operating leverage.

Q1 2012 benefited from improved operating leverage as inventory was built in anticipation of plant maintenance shutdowns in the 2012 second quarter.

Segment operating income was $77 million, down 22% from a year ago, and down more than $15 million from our plan.

As described in our earnings release, about $7 million of the decline was due to operational issues at 4 large customers. These issues included 2 refinery fires, a delayed refinery start up and a one-time polyolefin catalyst destocking. These earnings are not recoverable.

We experienced an additional earnings impact of about $5 million from delayed orders from 5 large customers. We expect to recover these earnings in future quarters.

Segment operating margin decreased 270 basis points to 29%, as lower gross margin and lower ART earnings more than offset reduced operating expenses.

Our share of ART's net income was $5 million, down from last year due to the delayed sales. These results include the initial earnings from the CLG agreement.

Looking forward, we expect strong sequential improvement in our catalyst results, with Q2 sales and earnings growing double digits from Q1.

For the full year, we expect Catalyst segment operating income to be below 2012, on lower sales and higher margins.

Our FCC Catalyst business has experienced an unusually volatile 3 years. The dramatic increase and decrease in rare earth costs, the ongoing shift in refining capacity from Europe and North America to the Middle East and Asia, and other changes represented significant opportunities and obstacles for this business.

During this time, we've stayed focused on helping our customers solve their most challenging problems. We've made significant advances in product technology and invested or committed millions in R&D, new manufacturing processes and capacity around the world.

At the same time, we have experienced significant growth in our Polyolefin Catalyst business, which provides a very attractive complement for our FCC and HPC Catalyst portfolio.

Our long-term results in Catalyst Technologies reflect the strength of our 3 Catalyst franchises. On current expectations, 2013 Catalyst earnings will be up more than 50% from 2010, on more than 700 basis points of operating margin expansion.

Let's move to Materials Technologies on Page 7. First quarter sales for Materials Technologies were $215 million, an increase of 0.5% from last year. Increased pricing of approximately 2% was offset by unfavorable currency translation. Sales volumes were unchanged.

Sales in emerging regions increased 8% in the quarter to 41% of segment sales as we saw strong demand for Engineered Materials and Packaging Technologies in developing Asia, particularly China.

Sales in Western Europe, which represented 32% of segment sales declined 4% due to weaker end use demand, particularly for automotive and can coating applications.

Gross margin was 35.1%, up 330 basis points due to lower manufacturing costs and improved pricing.

For operational reasons, we built inventory in certain products in Q1, which will be sold in Q2. As a result, Q1 gross margins were a little higher and Q2 gross margins will be a little lower.

First half margins should average about 34%. Segment operating margin was 20.6%, up 370 basis points due to higher gross margin and lower operating expenses.

Please turn to Page 8 for Construction Products. First quarter sales for Construction Products were $229 million, up slightly from the very strong year ago quarter.

Organic growth of approximately 2% was offset by unfavorable currency translation, largely from the Brazilian real and Japanese yen. This was the segment's 10th consecutive quarter of positive price and volume growth, which demonstrates the steady, though slow, improvement in secular construction trends.

Emerging region sales grew 12% year-over-year, mostly due to good growth in Latin America, including the gains provided by our July 2012 acquisition in Brazil. Emerging regions now represent 37% of segment sales.

Sales in North America declined 2% in total, as a 4% sales increase in Specialty Construction Chemicals was offset by a 7% decrease in Specialty Building Materials. The decline in Specialty Building Materials sales was due in large part to weather. Q1 this year was typically cold and wet, while last year's Q1 was unusually warm and dry, allowing for more construction activity, including residential reroofing in North America.

Sales in Western Europe were down more than 14% due to continued market weakness and our decisions to exit low-margin businesses in the region.

As noted in our February call, we expect 2013 to be another down sales year in Western Europe and we'll continue to focus on rightsizing this business.

Although the GCP Europe business unit is profitable, its returns are below our targets. We are continuing to implement cost reduction initiatives in this business and have decided to exit a small loss-making joint venture in the EMEA region.

Segment gross margin improved 130 basis points to 35.5%, due to ongoing success in recovering raw material cost increases, as well as benefits from volume leverage and productivity gains. Segment operating income was up 11% year-over-year and operating margin improved 100 basis points to 10% due to gross margin improvement and reduced operating expenses.

We continue to expect double-digit earnings growth for Construction Products this year, driven by sales growth in the emerging regions and North America.

Leading indicators for commercial construction spending in the U.S. have turned positive, including commercial construction starts, architectural billings index and residential construction activity.

Based on current trends, we should see improved sales volume growth in the second half of this year.

One last comment on Q1 before moving to our outlook. We focus continually on productivity and cost control across the company. Improved manufacturing productivity contributed to our gross margin improvement this quarter. We also reduced SG&A cost by almost 6% year-over-year, driven primarily by restructuring and other cost reductions in 2012.

Let's now discuss our outlook. As you know, we've lowered our outlook for 2013 adjusted EBIT to $540 million to $560 million, an increase of 4% to 8% over 2012. This is a reduction of $20 million or about 3.5% from our original February outlook.

In broad terms, about $10 million of the revision is due to factors we experienced in the first quarter, including the lost catalyst sales and the Venezuelan devaluation, while the remaining $10 million is due to lower growth expectations in all 3 segments.

We expect to partially offset these lower sales with further improvements in our manufacturing costs and operating expenses.

To sum up our outlook. We now expect sales to be just under $3.2 billion with organic growth of 4% to 6%. We continue to expect gross margin to be in the range of 36% to 38% with a 100 basis point improvement in adjusted EBIT margin from 2012.

Adjusted free cash flow should be over $400 million again, in line with our 3-year target of over $1.2 billion.

Please continue to use a book effective tax rate of 34% on adjusted earnings and a cash tax rate of 14%. Diluted shares outstanding at year-end should be about 78 million shares.

Given our weak Q1 earnings, we now expect the first half, second half earnings split of about 44-56, compared with a 46-54 split we expected in February. As Fred referenced in his remarks, we didn't like lowering our outlook. We believe being transparent with you is more important, especially in this period of economic uncertainty.

Our intent is to incorporate our best judgment about the opportunities and risks we have and to provide an outlook that is as accurate and balanced as possible. Although Q1 was below our expectations and yours, our business fundamentals remain solid. We have great businesses with great growth opportunities, exceptional margins and high cash flow.

We are managing for the long-term and creating new value for our customers and for you every day. With that, we'll open the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] First question is from the line of Mike Ritzenthaler from Piper Jaffray.

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

On the pricing in catalysts, I'm navigating through the year-over-year weirdness of discontinuing the rare earth surcharge while lifting the base pricing. Clearly, the value in use sales proposition doesn't change but are there any historical snippets to help us understand more granularly, how this cycle differs from past cycles in terms of difficulty or length, given that you had indicated in your prepared remarks, Fred, the strategy is expected to ultimately improve in 2014? I'm trying to get a sense for the risk of slippage, which is the expectation and that seems reasonable versus more permanent losses and how that's being navigated or mitigated?

Alfred E. Festa

Yes, let me take a crack at that, Mike. First of all, in any given year, about 1/3 of our FCC business turns over. So meaning, we can negotiate the contract. About 1/3 of it is available for repricing in any given year, that's a generality of it. And as you -- as we and others initiate new pricing, it allows our customers at that point to say, hey! you know what? I've been being hounded by a customer, your competitor XYZ, let me take a shot at running a trial of their product. We've incorporated that in. So if you look at our 2013 on a volume basis, we think our FCC volume will be around only 1% up for the year 2013, reflecting about 1/3 of those -- 1/3 of the contracts available per pricing. For FCC Catalyst in total, we think it's about 3% for the volume for the total year. So we're going to push through this. We think it's the right thing to do and we think it does set up the value creation going forward. That's how we framed it out.

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

Yes, that does make sense. And can you update us on the state of the polyolefin catalyst destocking? Well, within polyethylene, I guess more specifically, was it more or less contained with the large customer that you had highlighted in your prepared comments? And I guess maybe a broader question, has anything changed within the macro backdrop that affects the volume for 2013? I think previously, we had discussed something around 78%. Is it less than that or is it a pricing...

Alfred E. Festa

Yes -- no, it's a good question. Polyolefins, we think it's going to grow around 5%, down from the 7% to 8% we thought in this year. And that really is based on some global economic criteria that's happening around Europe and the Middle East. That destocking is in one customer around polyethylene, just based on that demand. As they've built a lot of inventory, I think they've -- well, I know what they -- they've just told us that the global demand has softened for the time being. So if you think of our forecast for this year in our specialty catalyst, we think it's about a 5% -- we forecasted a 5% grower into this 2013. We think it will bounce back next year based on a couple phenomena. One, hopefully there's a better economic climate out there, plus, the introduction of 2 new products that we have both in polypropylene and polyethylene, should get us back to that high single digit growth that we've experienced.

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

Okay. And then with the positive bias to concrete prices over the last couple of months in North America and emerging regions, do you think that the lift in the Specialty Chemicals has started to manifest itself in the 1Q results or is that -- do you think that that's still something on the comp?

Alfred E. Festa

No, I think it's on the comp. I think a couple of things. One, the weather hasn't helped so we haven't really got a good view of it yet because there hasn't been a lot of pouring, especially in the northern pieces of northern regions. The other thing quite candidly is as you know, our customers, the big cement mills went out with 10% price increase. Our intelligence said that has not been sticking. Now, let's see what happens coming out of the first quarter. As weather improves, will they be able to capture that? And then that pulls along a lot of the chemicals as well but that's how we're thinking about it in our 2013 look.

Operator

The next question is from the line of Laurence Alexander from Jefferies.

Robert Walker - Jefferies & Company, Inc., Research Division

This is Rob Walker on for Laurence. I guess I understand it's early at this point but what are your expectations, if any, in terms of an impact from catalyst demand from shale oil?

Alfred E. Festa

Well, with what we're seeing, we candidly think that this is the impact on catalyst. We candidly think it's going to be neutral. Yes, there is -- shale oil is lighter oil but we believe everything we've tested so far, that there are some metals and they are iron specific, that will require -- that will eat up some more catalyst. So net-net of -- you're going to get some more bottoms of more heavier oil, net-net of some of the light shale oil. We think that -- what we're forecasting, is that impact is going to be neutral for the amount of catalyst it's using.

Robert Walker - Jefferies & Company, Inc., Research Division

And then I guess just given the recent signs of industry discipline and around FCC Catalyst in terms of pricing, why haven't you increased your volume expectations from prior guidance?

Alfred E. Festa

We believe that as we transition, as I mentioned, as we transition to the new pricing, it gives opportunities for our customers, opportunity to test new catalysts and through trials and others. So we've assumed as I said, about a 1% volume increase for this year.

Operator

The next question is from the line of Mike Sison from KeyBanc.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

In terms of your outlook, Hudson, for the earnings split first half, second half. I guess, when I look at what you did in the first quarter, it would imply that second quarter would be kind of like 24% of the midpoint for the adjusted EBIT. Is that the way to look at it?

Hudson La Force

Honestly, Mike, I didn't do the math that way. But I'll trust your math.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

That's sort of the way we need to look at it, right?

Hudson La Force

Yes.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Okay, cool. And then for catalyst, I thought you said that for this year, it would be up 50% from 2010 levels?

Hudson La Force

I said more than 50%.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

More than 50% from 2010 levels. Okay, and that would imply that, I mean, it looks like Materials Technologies is going to have another very strong year end GCP as you know, would have another strong year. Is that the way to sort of model it out?

Hudson La Force

We think so. I mean, the Construction business that we said was going to be up double digits this year. I think Materials Technologies will have good earnings growth on margin expansion, a little bit of sales growth, margin expansion and good cost control. When I said the 50% up on catalyst, that wasn't intended to be guidance. We were intending to characterize the earnings power of this business over a period of time. So don't -- we didn't intend to be precise on that 50%.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Okay. And then the loss to sales from the large customers, the operational issues they have occurred and the delays that the 5 customers for ART -- are those link -- how long is that lingering in 2Q?

Hudson La Force

It will be over a couple of quarters. It's not all from Q1 to Q2. Some of this will be later in the year.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Okay. And then just last one. I saw that you have a new sales agreement with -- in ART with Chevron Lummus. Can you just give us a feel for potential there, longer-term?

Alfred E. Festa

Mike, it's Fred. We're excited about it. This year, we believe ART will grow its earnings by double digits, maybe even close to 20%. And with the agreement that we have around the hydrocracking and the loop side of it, we believe that will continue -- that rate of growth will continue over the next 2 years, '14 and '15 at that level. So we're very excited about it. What it does is, as we look at it, we believe that the majority of share that's being won in the hydrocracking, new technology, is Chevron Lummus and we want -- and if we want to be able to have that share in the hydrocracking catalyst side. So we're bullish.

Operator

The next question is from the line of John McNulty from Crédit Suisse.

John Mcnulty

Just a couple of quick questions. With regard to the $5 million that was delayed in earnings, tied to some of your delayed customer sparks, do you get that back -- all of it back in 2013 or does some of it drag out into '14 as well?

Hudson La Force

I think 99% of it is going to be '13, John.

John Mcnulty

Okay, fair enough. And then when you think about the 2014 target, which sounds like as of now, you're still pretty convinced you can get to, you're looking at what looks to be about a 20% EBITDA increase from '13 to '14, kind of based on the middle of your range for this year. So I guess, if you can maybe give us an update as to how you actually get there and how much of it is kind of self-help or self-driven and how much of it's macro driven just so we can get a better feel at how realistically you're going to be able to get to those targets?

Alfred E. Festa

John, this is Fred. Let me take a shot at it, how we think about it and we obviously think about it in detail. But if you think of just volume growth, volume growth in '13 for us across all our businesses will be around 3% to 3.5% when it all shakes out. We believe volume growth for '14 has to return back to its more historical levels of 4% to 5%. So pure volume growth across all our businesses back to 4% to 5%, that incremental volume on the installed base we have has a nice contribution margin with it. That's a big chunk of it. Think of productivity. Now, we've been successful expanding our overall margin about 100 basis points or 1 point. You're going to see in the second quarter, restructuring actions that we've taken, mainly in Europe, that gives us the confidence that we can be repetitive in that productivity or expanding those margins another point above where we -- what we've done in '13. The third piece of it is around some key growth programs, initiatives we have, that will accelerate over '13. It's around a couple of polyolefin, new catalyst that I talked about that will reaccelerate that growth from this year of 5%, up to -- back up to high single digits again, as well as the ART earnings on that trajectory rate. Last piece of it, which is a significant piece as well, is the success on the FCC Catalyst. We need to be successful on moving this industry higher on the FCC Catalyst pricing. Do the math on that and we're moderately successful and you add all these pieces together, that's why we haven't come off from the 2014 targets.

John Mcnulty

Great. Maybe, one follow-up on that. On the pricing change that you've had in the catalyst side, have you seen any change relative to kind of historical moves as to how your competition is reacting to that?

Alfred E. Festa

I can tell you, we have got some price already based on the announcement that -- I think, it was mid-March that we put out. I don't think the dynamics have changed. Competitors have new catalysts, they are eager to get in front of the customer to trial. But that happens all the time. So the short answer is no, I haven't seen anything. We have got some pricing already and we'll work through it through the year.

Operator

The next question is from Jim Barrett from CL King & Associates.

James Barrett - CL King & Associates, Inc., Research Division

Fred, when you look out to 2014 and beyond, the proposal by the EPA to reduce sulfur content of gasoline from 30 to 10 parts per million by '17, is that a relatively minor eventuality if it comes to pass or what's your level of optimism and significance you place on that event?

Alfred E. Festa

We think it is significant and especially if it culminates across the globe in a step down. In China, as well as Asia, as well as Latin America. And if you look in China, why we get excited about it is the Chinese have decided or predominantly decided they're going to get at it through putting hydrocracking in as a first phase. So if that does come to fruition, this will be a good thing for both our industry and W.R. Grace.

James Barrett - CL King & Associates, Inc., Research Division

Okay. And not to belabor the point about the FCC pricing, but the fact that you expect, as that certain customers will trial other competitors, does that suggest that not all of your competitors have also announced similar price increases? Because certainly, one has been very visible about it.

Alfred E. Festa

Yes. I think it's too early. I mean, listen, everybody -- it's easy to do announcements. Where the real proof is what happens as we play this out and it really is early. But I think given what the industry is facing, the refining industry is facing, with new regulations around sulfur, different slates accrued based on the light and the shale coming in, other bottoms at cracking issues, the industry needs to count on the catalyst suppliers to continue to invent new solutions to their issues. It's the cheapest way to get at it and I think they will. So that's where we're at.

Operator

The next question is from the line of Patrick Duff from Gilder.

Patrick Duff

First, Fred or, excuse me, Hudson. I just wanted to check. I didn't do a DSO but the inventories looked a little high relative to your kind of rate of growth last year and particularly, relative to the kind of volumes in the business. Would you think of -- I know it was overall, pretty good working capital turns here in the first quarter. Do you see inventories being a source of cash for you over the course of this year from where we are now?

Alfred E. Festa

The answer is yes. We're still working through kind of the last bits of high value rare earth inventory. That's being replaced at lower cost. So that helps us. Materials Technologies did build some inventory in Q1 for operational issues. That will be sold in Q2. And construction did its normal inventory build as they prepare for the stronger Q2 construction season.

Patrick Duff

Okay, all right, great. And then just as we look at the revised guidance and then you're kind of looking out on how this is going to set us up for next year and whether or not we've kind of totally captured the overall economic environment. I guess, just a couple of recent data points. I mean, it seems from a macro basis, March was probably the weakest month of the quarter for a lot of companies. I don't know how you would feel about that statement. But then, some of the data points that are coming out lately, we did see a tick down in the ABI index, $54 to $51. We're seeing really, kind of low operating rates in the -- in at least the U.S., North American refining and I think the gas inventories are about 2.5%, 2.8% higher year-over-year. I mean, I know it's always difficult and you're doing your best job to give us your sense of how the rest of the year is going to be playing out. But as you kind of sit and look at the latest data points that are coming in for the businesses that you are selling into, how would you describe your overall level of confidence that you're capturing the magnitude of the change in economic environment that you are calling out?

Alfred E. Festa

Pat, it's -- we would not have lowered our guidance if it wasn't but for the general economic weakness, especially in Europe. We're seeing a little bit in China and then a few places around some of the Latin America. We've factored that in. Now, we hope we've factored in enough of that and maybe hope -- and maybe on the positive side, that we'll see some surprises on that piece of it. But we wanted to ensure, as we looked at it, that we weren't fooling ourselves given what we saw in 2012. So when we looked out, we said how bad could '13 be on a volume basis on Europe and so on? And I think we've factored in some of that. I mean, our overall volumes will be, as I said, just pure volume growth would be about 3% and I mean, we've got a franchise in the construction side that's going to grow well. So I think it's balanced. Our contingency planning is around the cost side and we've accelerated some of those actions around Europe and some of the restructuring and some operations we're shutting down, as well as some sites we're consolidating that. So we're not waiting, but we'll get off, trying to get ahead of that.

Hudson La Force

I think Fred, you've balanced it nicely. We don't want to miss the growth opportunities. We're focused on that, but we've got to prepare for a weaker environment and that's the productivity side of the equation.

Patrick Duff

All right. I'm sorry, if I may just kind of lob one more in. Fred, when you talked about the drivers to 2014 and around the areas that you highlighted, the bolt-on acquisitions was not in that menu of opportunities. We know there is a potential sizable acquisition that might happen here, much bigger than a bolt-on. But just maybe more generally, any kind of thoughts or updates on the likelihood is of at least, some bolt-ons maybe coming into the fore? I know you mentioned Australia, but anything else that you're feeling any more optimistic on?

Alfred E. Festa

Yes. The pipeline on the small ones, they're there. They do feel -- they feel good. We're -- as we've highlighted Australia because when we do the bolt-on, I wanted to give you a context that we generally think they are accretive and they generally are accretive. So those will come in. They'll come in based on the normal timing. We're working it, we are not -- let me step back. We're not constrained to do those. We're not constrained by our cash position or constrained by what we think the market environment is. On the large one that could come available, we think we're well positioned. We think we're well positioned for that and based on some of the things we've done.

Operator

The next question is from the line of Chris Shaw.

Christopher L. Shaw - Monness, Crespi, Hardt & Co., Inc., Research Division

Just a follow-up I think, a couple of other questions that people were trying to get at. If at FCC, some of your competitors have also indicated some price hikes. Is there any opportunity for you to achieve some trial volumes away from them when they enact their price increases?

Alfred E. Festa

Yes, sure. It's a natural phenomena that happens both ways. Yes.

Christopher L. Shaw - Monness, Crespi, Hardt & Co., Inc., Research Division

But that wouldn't be enough to offset what you're -- some of the other stuff you're losing to peers, I guess?

Alfred E. Festa

I mean, we've factored in, as I said, about a 1% volume growth and so on. We want to make sure that given that the refining industry is going to go through the next 24 to 36 months, that the value of catalyst we really truly represent is priced in. And it'd be a shame if the industry didn't take advantage of that situation.

Christopher L. Shaw - Monness, Crespi, Hardt & Co., Inc., Research Division

Can you tell me in Construction Materials, typically if you've lost some -- maybe not even lost, but if sales were a bit weaker due to the weather, is that something that gets made up over the course of the year or it gets pushed to the next quarter or is it just something that just doesn't happen and you don't really ever make it up? Do you have experience with that?

Alfred E. Festa

Yes. I mean, it generally tends to get pushed. What happens is, you got a bad winter. For us, it's on the residential reroofing side of it. If they can't start reroofing until later into the season, some of that may get pushed into the next season. You just can't get it all in. That's the issue on it.

Operator

You have no further questions at the moment. [Operator Instructions]

J. Mark Sutherland

Catherine, I think we're all set for this morning's call. We had a good Q&A session here. Why don't we wrap up the call. I'd just like to leave my direct dial phone number for any further questions or clarification from analysts. My dial -- direct dial number is (410) 531-4590. And with that, we'll end the call. Thank you all for attending.

Operator

Thanks for joining in today's conference. This concludes the presentation. You may now disconnect, and have a very good day.

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