W.R. Grace & Co. Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.23.13 | About: W.R. Grace (GRA)

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

Q3 2013 Earnings Call

October 23, 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. Sison - KeyBanc Capital Markets Inc., Research Division

Brian Maguire - Goldman Sachs Group Inc., Research Division

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

John McNulty - Crédit Suisse AG, Research Division

Laurence Alexander - Jefferies LLC, Research Division

Tyler Frank - Robert W. Baird & Co. Incorporated, Research Division

Dmitry Silversteyn - Longbow Research LLC

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

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 W.R. Grace & Co. Earnings Conference Call. My name is Shequanna and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Mark Sutherland, Vice President of Investor Relations. Please proceed, sir.

J. Mark Sutherland

Thank you, Shequanna. Hello, everyone, and thank you for joining us today, October 23, 2013, for a discussion of Grace's third 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 to 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. And with that, I'd like to turn the call over to Fred.

Alfred E. Festa

Good. Thanks, Mark, and good morning to everyone, and thank you for joining us. I'm pleased with our third quarter results. Materials Technologies and Construction Products delivered good sales growth and terrific earnings growth. Sales in Materials Technologies increased 3% and earnings increased 18%. Our strength in product technology, applications development are driving improvement in both price and mix while our disciplined operating approach drives manufacturing productivity and good expense control. Sales in Construction Products increased 5% and over 8% organically. Earnings increased 24% and operating margins increased 250 basis points year-on-year. This strong earnings growth comes from higher sales in North America, very good operating leverage and all of the restructuring actions we've taken over the last few years. In Catalyst Technologies, we achieved our sales and earnings targets in a tough quarter and made great progress with our new FCC Catalyst. As you recall, these [indiscernible] new technologies improved shale oil processing, heavy-resid processing and propylene production. Last quarter, we highlighted a number of new products that we are just beginning to introduce. Since then, feedback from our customers has been positive and we've started receiving orders for the fourth quarter deliveries. One example, we recently launched a new catalyst family under the ACHIEVE brand name. This suite of products is targeted at maximizing C4 olefins and octane, a common deficiency when conventional catalysts are used with shale oil feedstocks. Customer trials have been successful, and we expect to begin shipments in the fourth quarter. .

Two weeks ago, we announced an agreement to acquire the UNIPOL polypropylene licensing and catalyst franchise. UNIPOL is a strong business and a great strategic fit with our existing polypropylene portfolio. The people are very well regarded in the industry, and we are excited to welcome them to the Grace team. The technology significantly strengthens our core capabilities in polypropylene. We've received positive feedback from our customers who see this as an opportunity to work even more closely with us. We agree and we expect the acquisition to lead to new business opportunities in the future. We remain subject to a confidentiality agreement until closing and cannot comment on the UNIPOL financials or valuation metrics until then. I know you want them, you want more information on the business and we will disclose additional details after closing. We expect to complete our regulatory filings this week and expect to close before year end.

$500 million is a significant investment for Grace. It was important to me that this investment met 3 key criteria: First, it had to be core to our business; second, it had to produce returns in line with our overall investment profile; and third, it had to produce hard dollar cost in capital synergies. We are confident we can successfully integrate this business and have strong plans for growing this franchise in the years to come.

This investment will increase our leverage ratio but does not change our intention to return cash to shareholders after emergence.

Let me turn to 2014 for a moment. In our second quarter call, we lowered our 2014 macro growth assessment to match the 2013 growth rates. Since then, we've seen signs of improved growth in North America and Europe. We've also seen some slowdown in the emerging regions. Over the next 2 months, we'll continue to assess the macroeconomic environment as we complete our 2014 plan. Despite the shifting macro environment, I really like what we are doing to improve the growth in the year ahead. Our growth programs continue to progress. North American and European commercial construction markets are showing signs of better growth and, of course, the FCC Catalyst business will show growth after a very tough 2013. As always, we'll continue to focus on those things that we can control: driving our product technologies to the next level, serving our customers well, and achieving our productivity goals. We'll provide you with full 2014 outlook when we release fourth quarter earnings in February.

Before concluding my comments, I'd like to bring you up-to-date on our bankruptcy. We have completed the Third Circuit process for 4 of the 5 appeals. We are still waiting for the Third Circuit to rule on the default interest appeal. For the 4 appeals that are complete at the Third Circuit, the deadlines for any appeals to the Supreme Court are December 3 and 4. At this point, we do not know whether anyone will appeal. Because of this, and given where we are in the year, we can no longer reasonably expect to emerge this year. If there are no appeals to the Supreme Court, we have a ruling on the default interest issue, we would expect to emerge by the end of January. If there are appeals filed, our emergence would be delayed probably 2 to 3 months. We think it is very unlikely the Supreme Court will hear any of these appeals. But we think it would take 2 or 3 months for any of these appeals process to conclude. We should know more by December 5, and we will update you at this point. I'll now turn the call over to Hudson.

Hudson La Force

Thank you, Fred. Our third quarter and year-to-date results are summarized on Pages 5 through 7. I'll comment on a few highlights at the Grace level and then discuss the 3 businesses.

Sales in the quarter were $771 million, down less than 1% from last year. Base pricing and sales volumes both increased about 1% but were more than offset by lower rare earth surcharges and unfavorable currency translation. Sales growth generally improved in the developed markets but slowed in the emerging regions after many quarters of double-digit growth. Adjusted EBIT was $131 million, an increase of just over 1% from last year. Gross margin improved 20 basis points, adjusted EBIT margin improved 30 basis points and adjusted EBITDA margin improved 40 basis points, driven by strong performance in Materials Technologies and Construction Products, and despite weaker sales in Catalyst Technologies. Adjusted free cash flow was $239 million for the 9 months, compared with $286 million last year.

2012 benefited from a significant reduction in working capital resulting from the decline in rare earth costs last year. Rare earth costs continued to decline this year but more slowly. Adjusted EBIT return on invested capital was 33.8% on a trailing 4 quarter basis compared with 34.6% in the prior year quarter. Adjusted EPS was $1.07 per diluted share, which includes a $0.04 benefit from a lower effective tax rate.

Let's turn to Catalyst Technologies on Page 8. Third quarter sales for Catalyst Technologies were $274 million, down 8% from last year. FCC Catalyst sales declined 15%. Sales volumes declined 7% and the decline in rare earth costs reduced sales by about 8%.

The sales decline was in line with our expectations at the beginning of the quarter. Specialty catalyst sales increased, driven by 12% higher sales volumes, better pricing and favorable currency translation. Strong sales of polyethylene catalysts and chemical catalysts more than offset lower polypropylene catalyst sales resulting from the conclusion of a large supply contract earlier this year. Segment gross margin was 39.2% for the quarter and segment operating margin was 28.3%, also in line with our expectations at the beginning of the quarter.

Our share of ART's net income was $3 million, down $2 million from last year, reflecting the lumpy order patterns typical of this business. For the first 9 months, ART's net income was up 24% and we expect ART to have a good fourth quarter with earnings up, solid double-digits for the full year. We continue to be pleased with the progress of our new hydrocracking catalyst activities, which are contributing to ART's double-digit earnings growth. For Q4, we expect total Catalyst segment sales to return to Q2 levels or a little better. We expect segment gross margins for the quarter and the year to be just under the year-to-date average.

Let's move to Materials Technologies on Page 9. Third quarter sales for Materials Technologies were $220 million, an increase of 3% compared with the prior year quarter, driven by higher sales volumes. Sales of silica-based engineered materials increased 5%, led by emerging region growth of 8%. Growth in the developed markets was 4%, led by growth in North America and Western Europe. Sales of silica gel used in coating and other applications grew in Europe for the second consecutive quarter. Sales of packaging products grew about 2% organically but this was more than offset by unfavorable currency translation. Sales in emerging regions, which represent just over half of this product line sales, increased less than 1% as growth in China and Eastern Europe was offset by lower sales in Latin America. Sales in developed markets declined 2% with weak food and beverage container demand in North America and Europe. Segment gross margin was 34.8%, a 200 basis point improvement from last year and a 110 basis point improvement compared with the second quarter. The increase reflects improved pricing, lower raw material costs and manufacturing productivity. Segment operating income grew 18% to $47 million. Segment operating margin improved to 21.3%, an increase of 270 basis points year-over-year. The Materials Technologies team is making great progress with this business. Sales are growing, margins are up and they continue to build a foundation for stronger growth in the future.

Please turn to Page 10 for Construction Products. Third quarter sales for Construction Products were $278 million, an increase of 5% over last year. Organic growth was more than 8% but sales volumes grew over 6% and pricing improved over 2%. Total sales in North America increased 7%. Sales of Specialty Building Materials increased 16% from a week prior year quarter. Sales of Specialty Construction Chemicals increased 3% year-over-year, and 8%, sequentially. Sales in Western Europe increased 8%, led by a 26% increase in Specialty Building Materials and a 1% increase in Specialty Construction Chemicals. Although we are encouraged by the positive growth rate and the very strong SBM growth, we remain cautious about construction spending in Western Europe. We may be near the demand bottom but there are few strong sustainable the drivers of construction in the region. Gross margins for our Europe region increased more than 500 basis points from last year, driven by the pricing productivity and restructuring actions that we have taken over the last several years.

Emerging regions sales growth was 2% as reported, with 9% before the unfavorable effect of currency translation. Sales grew in Latin America, Asia and Eastern Europe but have declined in the Middle East. Construction segment gross margin improved 90 basis points to 36.3% in part due to favorable mix from increased SBM sales. Segment operating income grew 24% to $46 million, and segment operating margin improved by 250 basis points to 16.4%.

For the first 9 months of 2013, operating margin was 14.4%, surpassing the 2007 peak of 14.1%. Construction Products is delivering very good incremental margins driven by good operating leverage in North America and the emerging regions, improved profitability in Europe and good expense control. Q4 is the hardest quarter to forecast because of the uncertainty of weather impacts on construction activity in the northern hemisphere. Construction would generally continue unaffected during cold weather but rain and snow will slow or stop it. So far, sales are in line with our expectations but obviously, weather conditions in November and December are unknown at this point.

We are affirming our prior outlook for adjusted EBIT of $560 million to $570 million. We expect adjusted EBITDA to be $685 million to $695 million. These ranges include lower pension expense of approximately $45 million from the Q4 adoption of mark-to-market pension accounting and exclude closing costs and any 2013 earnings impact from the UNIPOL acquisition.

We expect Q4 sales to improve sequentially with the improvement in catalyst sales, and we expect gross margin to improve slightly from Q3. We reduced our book effective tax rate from 34% to 33% this quarter, reflecting the tax implications of the delay in our emergence. Our cash tax rate expectation remains 14% for the full year.

With the increase in our stock price, diluted shares have increased slightly. We now expect diluted shares to be a bit over 78 million shares at year end.

One final note before we open the call for your questions. We realize there are some items open as we approach the end of the year. The financial effects of the UNIPOL acquisition, the effects of adopting mark-to-market pension accounting and the status of our bankruptcy. We expect to be able to disclose additional information about all 3 of these items by mid-December, and we'll probably host a conference call at that time. We want to make sure you have the most current information available before the year ends. We'll update you on the date as soon as we confirm it. With that, we'll open the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Mike Sison representing KeyBanc.

Alfred E. Festa

Mike?

Hudson La Force

Mike, we don't have you. Operator?

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

I think there's -- can you hear me?

Alfred E. Festa

Yes. [indiscernible]

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

Sorry about that. In terms of the UNIPOL acquisition, maybe staying away from numbers, but can you give us sort of a feel, what type of products you're picking up? How it fits well with you guys longer-term? And maybe -- this is a business that was out there a couple of years ago, what changed that -- gave you more interest this time around?

Alfred E. Festa

Yes, let me hopefully not stray too far from what we're not supposed to say but as you know, it's made up of licensing polypropylene manufacturing assets, as well as catalyst to supply those assets once it's completed. For the last couple of years, we've been -- well, maybe the last 5 years, we've been investing heavily in the polypropylene catalyst both through acquisition with some acquisitions we did 4 or 5 years ago with Borealis, as well as new technology advancements with some major customers. So we've been supplying polypropylene catalyst. As well as over the past 2 years, we've worked closely with this unit as we announced in prior through a licensing arrangement we have on some technology that we've been working with for the past few years. So all that put in perspective, gives us good comfort that this was the right fit for us at the right time.

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

Okay, great. And then, in terms of FCC Catalyst, you talked that the new technologies are getting some traction. In terms of timing and how those could maybe start to proliferate into volume growth, any thoughts there? Is it something more of a next year timeframe before you see some meaningful volume gains there?

Alfred E. Festa

I think double-digits growth in the third quarter was pretty meaningful for us, and we'll have double-digit growth going into the fourth quarter as well from our specialty catalyst. So it is taking hold onto that side of it and we would continue to expect it to grow, and we do continue to expect it to grow in 2014 as well. Stepping back at the total catalyst level, the hydroprocessing that's going through ART, both sequentially as well as year-over-year, we've seen double-digit growth. We expect that to continue and we're pleased on the FCC side with the technology, the trials, the look we've been getting -- the looks we've been getting and so on. And so we feel good about where we are right now.

Hudson La Force

Mike, I'll just add. Your point is right that we'll gain momentum on these new products as we head into 2014. But we do expect them to run through the Q4 P&L and make a difference in the quarter.

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

Okay, great. And last question on FCC. You've been pretty confident, Fred, that 2014 is a year when industry utilization rates will tighten up. One of your competitors suggests they can expand capacity a little bit more than I think most thought, heading into next year. Any thoughts there? And your plan for capacity expansions heading into 2015?

Alfred E. Festa

Well, as we've said before, we think the industry, our customers, our refiners, need some new products, need some new technology -- I mean, you see, there's -- some of our customers are under pressure as you look at their margins in certain regions of North America as well as Europe. We believe that the introduction of these new products will help alleviate that and ultimately, we'll be able to share in that value. As you know, we've announced the Abu Dhabi joint venture expansion. I mean, we continue to -- or the joint venture, we continue to do all the engineering work on that. And timing on that will depend on the new start ups as they unfold but we're confident that the industry dynamics will be healthy next year.

Operator

You're next question comes from the line of Brian Maguire representing Goldman Sachs.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Sort of a related question. The FCC Catalyst volumes were down around 8%. I think that's kind of in line with your guidance. Just wondering if you think that this will be the low point for that year-over-year number looking out over the next 12 months? And whether you think we're going to stay close to that level or until the anniversary this quarter? Or as you commercialized some of these new products, do you think there's room to get that materially closer to a breakeven number?

Hudson La Force

In terms of negative year-over-year volume growth, Brian?

Brian Maguire - Goldman Sachs Group Inc., Research Division

Yes, yes. Just on the FCC Catalyst part of it.

Hudson La Force

We -- so, as you think about comparisons next year versus this year, Q1 was weak -- Q1 of '13 was weak because of the operating issues that we had -- you may remember there were a number of customer-driven operating issues in Q1 that made Q1 a weak quarter for us. Q2 was a strong quarter for us on catalyst from a volume -- FCC Catalyst from a volume perspective. Q3, obviously, we've been talking about. We expect Q4 to be a better FCC Catalyst quarter. It will grow sequentially from Q3. In terms of the patterns next year, I think the year-over-year compares, the Q1 of '14 to Q1 of '13 compare, that will be a relatively easier compare because, again, of these customer operating issues that affected our volumes in Q1. Q3 will be an easier compare next year, obviously. Q2 and Q4 will be tougher compares. We're not ready to give you exactly what the growth patterns are going to be next year. We can do more of that in February.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay, great. And then just on the specialty catalyst or I guess, polyolefin catalyst part of the business. The volumes were up really nicely in the quarter on a year-over-year basis. It seemed like that was one that suffered from a little bit of destocking in the last couple of quarters. So I was just trying to get a sense, how much of this you think is just some restocking that might be a little bit temporary versus how much of this you think is sustainable?

Alfred E. Festa

Yes, I think the destocking is behind us now. It will depend on the global macroeconomics. If they continue to stabilize and improve, we'll continue to see that growth, across our polyolefin catalyst, both polyethylene as well as polypropylene.

Operator

Your next question comes from the line of Mike Ritzenthaler representing Piper Jaffray.

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

With a -- just a follow-up on UNIPOL, and I guess, the polyolefin catalyst industry more broadly, what are the characteristics of that industry in particular that led you to that UNIPOL decision? This is a bit of a follow-up to Mike's question earlier. But we've seen others in the space entering into joint ventures and other economic sharing arrangements because they're concerned about being able to secure volumes. That type of thing doesn't necessarily paint a great picture of a long-term competitive dynamics. But I'm guessing Grace's technology offerings and market approach and things like that will be fundamentally different as we've come to expect?

Alfred E. Festa

Yes, I mean, what we like about that, the polypropylene catalyst, is-- and we've seen it. We've seen it with -- that our catalyst has got the attraction of the new investments and the new investments that are specifically selling a higher-grade or better-performing polypropylene engineered material and those catalysts have been used -- our catalysts have been used in the new Borealis developments and the investments they made in the Mid-East as well as SABIC in Saudi Arabia. So we continue to believe that there is no reason that the UNIPOL catalyst, as we merge it into ours and the technology it brings, that we won't continue to play at that higher-end polypropylene catalyst and ultimately, it's the polypropylene solutions for our customers as they continue to upgrade -- upgrade those catalysts -- upgrade those polymers.

Hudson La Force

I'll just -- I'll add a point to Fred's, Mike. The -- some of the divestment decisions that you talk about at the polypropylene level, yes, but at the catalyst level, we see this as very attractive. We hear from our customers that Catalyst Technology will become increasingly important to them in the future.

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

Okay, interesting. In the release on catalysts, the discussion -- it discusses the lower pricing. Obviously, there are surcharges but it also mentions lower refinery catalyst base pricing. I was wondering if you can elaborate on that base pricing component. How much of that year-over-year delta is base pricing? Is there a mix issue that materialized in these numbers that will abate or is there some other artifact that we're seeing?

Hudson La Force

This -- it's about 1% or 2% in the year-over-year. And more than anything, it's customer and product mix.

Operator

Your next question comes from the line of John McNulty representing Crédit Suisse.

John McNulty - Crédit Suisse AG, Research Division

With regard to the acquisition, I believe at the time you put out the release, you indicated that it really wouldn't have any impact in terms of your returning cash to the shareholder. So, I guess, I'm wondering how if that's the case, whether you're comfortable taking on more leverage in the near-term and once you get through the bankruptcy process? Or if it's just maybe pushing out the shareholder or the share buybacks? Or how should we be thinking about that?

Alfred E. Festa

Yes. Let me give you a top view and then Hudson can dive into it. We've always said we're comfortable in this leverage ratio of 2x to 3x. What it'll ultimately do is we'll take on more leverage initially after emergence to make sure that the fund -- to fund this side. But we're not looking at any kind of delay in shareholder returns.

Hudson La Force

I think Fred captured it, John. This is still within the overall leverage profile we've talked about and I would include in that both the acquisition and the amount of share repurchase we've talked about. We can do both and still stay within the leverage profile we've talked about.

John McNulty - Crédit Suisse AG, Research Division

Okay, great. And then with regard to the Construction business, you'd indicated, I think, 2% pricing, I guess? What's driving the pricing there? And do you think that's something we can kind of see going forward?

Alfred E. Festa

We hope we can see it going forward. I mean, there is definitely better market conditions out there. We watch very closely the price of cement. Cement has been trending up. We've been able to be successful with some new products, as well as there is a recognition -- some of the raw materials fundamentally underneath the chemicals, the cement -- or the concrete additive chemicals are increasing. So we need to make sure that our margins are protected on that side. So it's really a combination of better market dynamics and also, recognition of the industry on some of the raw materials, so...

Hudson La Force

There's a technology piece to this, too. We talk about it more in catalysts than the other segments but all 3 of these segments have a pricing dynamic that's driven by improving technology at the product level.

Operator

Your next question comes from the line of Laurence Alexander representing Jefferies.

Laurence Alexander - Jefferies LLC, Research Division

Just a couple of quick questions. On the specialty catalysts, how are volumes up year-to-date? I mean, so if you just aggregate it across the 3 quarters?

Alfred E. Festa

You're talking just the polyolefin, especially?

Laurence Alexander - Jefferies LLC, Research Division

Just the polyolefin specialty catalyst?

Alfred E. Festa

Yes. I think they're up single digits.

Hudson La Force

Mid single-digits, yes.

Alfred E. Festa

Mid single-digits. We've seen the acceleration, obviously, in the third quarter, where it went to double digits.

Laurence Alexander - Jefferies LLC, Research Division

Okay. And as you think about the -- excluding the Dell acquisition, probably similar trend next year?

Alfred E. Festa

Yes, I mean, we're having good momentum in the third quarter, as you know. We think that our visibility in the fourth quarter is good. We think it will sequentially grow, double digits again. And again, we'll have a better judge as we look at the overall macroeconomic trends for '14. But we're coming off a good base right now.

Hudson La Force

If you look back over the last couple of years, this business has kind of alternated between high single-digits, low double-digit growth. I think we've said sort of a multiyear, if we look multiyears into the future, we expect it to grow mid to high single-digits. And where we are in any one quarter, there's a little lumpiness to this, nothing like ART, Laurence, but it does have a little lumpiness. But this is a good strong growing business for us.

Laurence Alexander - Jefferies LLC, Research Division

And then, just in North American construction, how are -- how do you see volume trends right now if you back out the impact of the wet weather? I mean, do you have any sense for underlying trends?

Alfred E. Festa

We have seen some acceleration, some pickup in -- through the third quarter, specifically in the September. Some pickup in the early October time frame. So again, generally, we're seeing some uptick but we're cautious as well. I mean, as Hudson said in the prepared remarks, weather does impact it. I will tell you, we did see in September, October an infrastructure spending, which I think is related to the government shutdown across both state and federal projects, that did slow. But the general economic underlying fundamentals seem to be accelerating.

Operator

[Operator Instructions] Your next question comes from of Tyler Frank representing Robert W. Baird.

Tyler Frank - Robert W. Baird & Co. Incorporated, Research Division

I was wondering if you can just touch on the 3 business units and give me a sense of what you think the biggest risks are for 2014.

Alfred E. Festa

Overall, the macroeconomic environment -- if there is a considerable slowdown, that will generally ripple through all of our product lines from that standpoint. Volatility in the emerging regions, as you know, we're -- almost at 30% tied to the emerging regions -- if there's extreme volatility like we saw in the first quarter with Venezuela on the whole pricing -- on the whole currency issue. So that volatility in the emerging region is a caution for us as we think about it. And I would say, lastly, it would be around the refining side that our customers continue to remain healthy. And on the whole crack spreads and the margin side of it.

Tyler Frank - Robert W. Baird & Co. Incorporated, Research Division

Okay, great. And then for the Material segment, do you guys have any color for how you're expecting Q4 to pan out?

Alfred E. Festa

Yes, I mean, we continue to expect Q4 to be similar to Q3. We've done a lot in the operational restructuring of that business, as we've talked about, getting that gross profit margin up and we've seen very good results on that side of it. Were also pleased with -- in the silica side, both the uptick in Europe as well as North America. The packaging, we're reading our customers press releases as well, we're looking at our customers, it's been -- and the whole packaging, the canned side and the bottle side has been somewhat slow. We'll see as we go into the fourth quarter.

Hudson La Force

There's a normal seasonal weakness as we go from Q3 to Q4 in this business, and I think you'll see that. But the year-over-year should be in line, just as Fred said.

Operator

Your next question comes from the line of Dmitry Silversteyn representing Longbow Research.

Dmitry Silversteyn - Longbow Research LLC

Just wanted to ask a quick question on the UNIPOL acquisition. The manufacturing facility that you picked up for making polypropylene, I'm assuming there's going to be some kind of a supply contract from the selling company to go with it. Do you have longer-term plans of getting basic in petrochemicals as a result of this entrance? Or will this always be sort of a side business and the catalyst development will be the main driver of UNIPOL going forward?

Hudson La Force

Just to clarify, Dmitry, it's a polypropylene catalyst manufacturing asset. We're not producing polypropylene.

Dmitry Silversteyn - Longbow Research LLC

That's a relief. Because the way -- and that's what I thought I read but the way you said it, it sounded like you were actually going to be making polypropylene.

Alfred E. Festa

[indiscernible] catalyst.

Dmitry Silversteyn - Longbow Research LLC

And when you -- obviously, it's too soon to talk about it in detail since you haven't closed on the deal. But as you look at the assets that you're buying versus the assets that you've developed internally, is there going to be a possibility or an opportunity to rationalize your manufacturing footprint somehow either regionally or with respect to new products versus sort of the workhorse products?

Alfred E. Festa

Yes, it's too early to talk about that from -- because of the confidentiality we have. We do, as I've said earlier, we think we have good synergies both technologically, supply chain, as well as operationally.

Dmitry Silversteyn - Longbow Research LLC

Okay. The licenses that you will pick up with this business with third parties, your expectation is to retain those licenses as -- being the fact that you're going to be a merchant/supplier now versus a competitor? And do you look for that opportunity to expand and gain customers that are not licensees but actually purchasers of the product?

Alfred E. Festa

Yes, the license offers opportunities. And as you know, we've been a merchant/supplier as well. So we think it's positive. We think it's positive. We'll be able to give you, as we get into the year, more strategic direction on how we're thinking and so on.

Operator

You're next question comes from the line of Chris Shaw.

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

With now -- with the UNIPOL deal sounds like it fits kind of nicely into what you're guiding for, M&A growth for 2014. Does that mean you're probably -- your M&A activity would slow down? I mean, does this preclude you from doing other deals in the future? Or do you still think there's a pipeline out there for you?

Alfred E. Festa

Yes, we think the pipeline is good. Deals of that size that -- it'd have to be the right type of deal. We've been very successful with a lot of bolt-on deals in the $50 million to $100 million and the pipeline looks good for that as -- to improve our product mix as well as geographic mix, and we'll continue to do this.

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

Okay. And then on Materials Technologies, following up with some other questions, a great job on the margins there, is that pretty much sustainable at these levels? Because that looked like -- that looked almost like 4-year highs and then if they're sustainable, can you actually go higher in the future?

Alfred E. Festa

We've said we weren't happy with the margins below 35%. We had a target to get it to 35%. That business unit did a terrific job. As you know, you're either going up or you're going down. So we will -- as we flush out our plans, we will have more discussion on what -- and pressure does that. What more can be done and we're looking at that very closely. But as we've said, really, the improvements are coming through: application development, the change in the mix, higher-end silica, operationally improving our operations from an asset utilization, as well as productivity standpoint, and finally, if there's bolt-ons that we can add to that.

Operator

Your next question comes from the line of Chris Kapsch representing Topeka Capital Markets.

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

Yes, I had some follow-up questions on the refinery catalyst business. You had mentioned some mix shifts in that business. I'm just curious now with rare earth prices, in lanthanum specifically, having sort of come off and back to more normalized levels and maybe reaching steady-state there, I'm wondering if the customers are now shifting back a little bit towards the higher rare earth containing products at all, and if that's affecting your mix demand equation? Or are they sticking with the lower rare earth containing products?

Alfred E. Festa

Yes, they're sticking with the products that really have been introduced from a rare earth perspective over the last 12 months. We don't see any big shift or pushback to loading up those catalysts with rare earth.

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

Got you. And then, so just looking at the sort of WTI versus Brent spread, which almost reached parity earlier this year and now it's sort of widening again, just wondering if that's something that has any influence on your customer or product mix in terms of them looking to optimize their operations? Generally, it's looked at as a positive for refiners economics but I don't know if it affects their catalyst purchasing decisions whatsoever.

Alfred E. Festa

Well I mean, these changes -- the narrowing of that spread if -- in a specific refinery if it has a margin compression on their margin, they're looking to the catalyst supplier. Can we help them out? Can we run? Can we get a better yield? They're more open to looking at new products at that point in time when the slates either change or there is a dynamic in the economics of those slates. So in an overall perspective, we need to keep -- our customers need to be healthy but overall, that changes are generally healthy for the catalyst supplier.

Christopher Kapsch - Topeka Capital Markets Inc., Research Division

Okay. And then just more of a general question about the intent for -- to return cash to shareholder post emergence. And have you conveyed -- I know you sort of -- sort of -- order of magnitude conveyed, what sort of buyback you might be considering but in terms of the mechanism, is it likely to be a Dutch tender? And then, given the changes that you mentioned about the timeline of emergence, does that affect your -- the timing on that particular event?

Hudson La Force

Chris, we haven't talked yet about the mechanism. We'll do that at the point where we start doing something. Our intention has always been to start right after emergence and whether that's January 1 or February 1 or April 1, you should expect us to start fairly quickly.

Operator

You have a follow-up question from the line of Mike Ritzenthaler representing Piper Jaffray.

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

Yes, on the cost efficiency or productivity side, Fred, you'd mentioned just a little earlier that it had helped materials. Also corporate expense is a little lower than we had expected. Is there -- I guess, my question is, is there more to come on the cost efficiency side in '13 as different programs are implemented? And could things accelerate in '14? Or will we be more annualizing what's been accomplished in '13 next year?

Alfred E. Festa

Yes, I would say it will be more annualizing what we have accomplished in '13. Now, if the macroeconomic trends go the other way, we've been -- as you know, we're pretty quick to get ahead of the cost curve. But everything we see today, it will be more of a lap than an annualizing.

Operator

At this time, there are no further audio questions. I would now like to turn the call back over to Mr. Sutherland for closing remarks.

J. Mark Sutherland

Thank you, everyone, for joining us this morning. We've enjoyed our conversation with you. If there are any direct follow-up questions, please feel free to call me on my direct line at (410) 531-4590. And we'll be signing off now. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!