W.R. Grace & Co. Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 5.14 | About: W.R. Grace (GRA)

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

Q4 2013 Earnings Call

February 05, 2014 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

Brian Maguire - Goldman Sachs Group Inc., Research Division

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

John P. McNulty - Crédit Suisse AG, Research Division

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

Robert Walker - Jefferies LLC, Research Division

Dmitry Silversteyn - Longbow Research LLC

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

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

Dana Ford Walker - Kalmar Investments Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2013 W.R. Grace & Co. Earnings Conference Call. My name is Whitley, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Mark Sutherland, Vice President of Investor Relations. Please proceed, sir.

J. Mark Sutherland

Thank you, Whitley, and hello, everyone, and thank you for joining us today, February 5, 2014, for a discussion of Grace's fourth 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. With that, I'll turn the call over to Fred.

Alfred E. Festa

All right. Good morning, everyone, and thanks for joining us. Our fourth quarter earnings finished as expected with strong results from Materials Technologies and Construction Products. Both businesses had good quarters, delivering double-digit earnings growth and showed continuing sales momentum in the first month of the year -- of the new year. Catalyst earnings declined in the quarter. More important though, Catalyst sales volumes grew 7% sequentially, excluding UNIPOL sales, reflecting the progress we're making and recovering FCC Catalyst sales lost earlier in the year. We have 7 new products in commercial use today and expect them to total about 10% of FCC Catalyst sales in 2014. With this progress, Q1 should be the last quarter for lower year-on-year earnings in Catalyst. By quarter 2, our FCC sales volumes should be recovering nicely and our UNIPOL integration cost will be behind us. Although we're not satisfied with our 2013 performance, I'm proud of the hard work done by our business teams in a challenging year. In Catalyst, our team responded to a very tough first half by accelerating the introduction of new products, including those targeted at shale oil, heavy feeds and propylene maximization.

These products are an important foundation for improved sales and margin this year. Materials Technologies continued to expand margins and deliver double-digit earnings growth in the face of slowing emerging region growth and increased currency volatility. And in Construction Products, continued its upward trajectory, leveraging improved commercial construction activity in North America and better profitability in Europe to increase earnings 21% for the year. At the Grace level, we improved our key profitability metrics for the fourth consecutive year. Segment gross margin increased to 37.1%, our adjusted EBIT margin increased to 18% and EBITDA margin increased to 22%. Adjusted free cash flow increased to $430 million with networking capital days finishing the year at our target. I'd fully expect to achieve our target of more than $1.2 billion in adjusted free cash flow from 2012 through this year.

2013 also was an important year for improving our strategic and competitive positioning. The UNIPOL acquisition makes Grace #1 in polyolefin catalyst and a clear leader in polypropylene catalyst and processed technologies. Earlier in the year, ART signed an commercial agreement with Chevron Lummus Global, the world's largest hydrocracking technology license oil. This expanded relationship helped drive double-digit earnings growth in our -- in 2013.

In Construction Products, we began capturing the benefits of better commercial construction activity in North America, continuing -- continued the restructuring of our business in Europe and completed a small acquisition in Australia that is delivering outsized benefits. And of course, this has been an important time in our bankruptcy proceedings. As you know, on February 3, we emerged from bankruptcy. Ours was one of the most complex, highly contested bankruptcies in U.S. history. I want to publicly thank all of our valued customers, suppliers, employees and investors who placed their trust in Grace during this challenging time. For that, I'm extremely grateful. Many people have asked me, "What will change after bankruptcy?" And the answer is that we will be the exact same company working toward the exact same goals: growing through product innovation, geographic expansion and bolt-on acquisitions in our core businesses; continue to improve our profitability through value pricing, product mix improvement and ongoing improvement in productivity. We will use our strong cash flow as an asset to invest our businesses. We'll continue to reward our investors with high returns on invested capital. With that final point, we are pleased to begin returning cash to shareholders again. Our board has approved a $500 million share repurchase program that we expect to complete over the next 12 to 24 months.

Turning to 2014. We expect adjusted EBIT of $620 million to $660 million, an increase of 13% to 20% compared with 2013. We are well-positioned to deliver our 2014 targets and are excited about the new year.

With that, I'll turn the call over to Hudson to provide some more specifics on the quarter and 2014.

Hudson La Force

Thank you, Fred. Please turn to Page 6, and we'll start with a quick review of Grace's overall results for the quarter. Sales were $777 million, down 3% from last year due to lower FCC Catalyst sales. Adjusted EBIT was $139 million, a decrease of 4%.

Lower earnings in Catalyst Technologies more than offset higher earnings in Materials Technologies and Construction Products and lower corporate costs. As expected, UNIPOL broke even on an operating basis in December before acquisition, integration and transition costs of $8 million. Adjusted free cash flow was $430 million for the year, improved working capital performance and lower cash taxes more than offset lower adjusted EBIT and higher capital spending. Adjusted EBIT return on invested capital decreased to 27% due to lower segment operating income in Catalyst Technologies and higher invested capital due to the UNIPOL acquisition.

Adjusted EPS was $1.09 based on diluted shares of $78.2 million. Our adjusted tax rate was 33%, in line with our expectations.

Let's turn to Catalyst Technologies on Page 7. Fourth quarter sales for Catalyst Technologies were $293 million, down 11%. Sales volumes decreased 9%. Rare earth surcharges and base pricing decreased 6%. These decreases partially were offset by acquisition growth of 2% and favorable currency translation of 3%.

FCC Catalyst sales volumes decreased 8% year-over-year, reflecting the sales lost after our pricing initiative earlier in the year and a tough compare. More importantly, FCC Catalyst sales volumes increased 6% sequentially, including sales of new products introduced in Q3 and Q4. We have 7 new products in commercial use today, and we expect these products to total about 10% of FCC Catalyst sales in 2014. The competitive dynamic appears healthy and focused on product technology and technical service.

Specialty Catalyst sales increased 3% year-over-year. Higher polyethylene and UNIPOL sales offset a decline in other polypropylene catalyst sales, primarily due to the completion of a toll manufacturing contract early last year. The UNIPOL integration is proceeding very well, and 2014 sales and earnings from the acquisition are expected to be in line with our previous comments. 2014 adjusted EBIT will include $9 million to $11 million in acquisition, integration and transition costs with about 3/4 of those costs in Q1. We are achieving cost in capital synergies as planned, with most but not all of the cost synergies captured in 2014 earnings.

UNIPOL depreciation and amortization will be about $15 million in 2014. Our share of ART's net income was $6 million, up 23% from last year, reflecting good growth in our hydrocracking business. Catalyst Technologies' segment gross margin decreased to 38.8% for the quarter compared with 41% last year, primarily due to lower pricing and lower operating leverage. Some UNIPOL acquisition costs are reported in cost of goods sold and reduced gross margin about 70 basis points. Segment operating margin was 27%, a 430 basis point decrease due to lower sales in segment gross margin and acquisition costs of $8 million or about 270 basis points. Looking forward, we expect an improved FCC Catalyst environment in 2014 with industry demand growing about -- excuse me, industry demand growing above the 2% to 3% historical right. New refinery starts in the Middle East and Asia, heavier feeds and continued demand for propylene all point to stronger catalyst demand in 2014.

We've seen some slowdown in European refineries but that should be offset by continued growth in the emerging regions. We expect polyolefin catalyst volumes to grow in the mid-single digits this year.

Let's turn to Materials Technologies on Page 8. Fourth quarter sales from Materials Technologies were $215 million, an increase of 2% from last year. Organic growth of 3% was partially offset by unfavorable currency translation. Sales of silica-based engineered materials increased 5% based on growth in almost all global regions. North America sales increased 13%, Western Europe increased 1% and emerging regions increased 6%. Segment gross margin was 35%, up 70 basis points, primarily due to improved pricing. Segment operating margin was 21.4%, up 250 basis points due to higher sales in gross margin and reduced operating expenses.

During the past 2 years, our Materials Technologies team has made great progress improving the fundamentals of their business. Compared with year-end 2011, segment gross margin has increased 140 basis points and operating margin has increased 250 basis points. This segment is well-positioned to deliver better sales growth and improved margins in 2014.

Please turn to Page 9 for Construction Products. Fourth quarter sales for Construction Products were $269 million, an increase of 4%. Organic growth was 5% and acquisition growth was 2%. Currency translation was 3% unfavorable. Sales in the developed economies, which represent 65% of segment sales, increased 7%. North America sales increased 6% and Western Europe increased 4%. This was Western Europe's second consecutive quarter of year-over-year growth in Specialty Construction Chemicals. Gross margin in Western Europe improved more than 300 basis points due to improved pricing and mix and reduced manufacturing costs. We are pleased with the improvements in our European business results, although we remain cautious about construction spending in the region.

Sales in the emerging regions declined 1%, including unfavorable currency impacts of $5 million or about 5%. Segment gross margin decreased 90 basis points to 35.2% as improved pricing was not sufficient to offset higher raw material and manufacturing costs, including the impact of unfavorable currency movements. For the full year, gross margin improved 80 basis points to 36%. Segment operating income increased 17% year-over-year and operating margin improved 160 basis points to 14.1%. Construction Products' full year segment operating income increased 21% to $152 million with an operating margin of 14.3%, roughly equal to our earnings and margins at their prior peak. With continued recovery in commercial construction spending, particularly in North America, we expect to again grow Construction Products earnings double digits in 2014.

Let's turn to our outlook on Page 11. Our outlook for 2014 adjusted EBIT is $620 million to $660 million, an increase of 13% to 20% over 2013. Given the uncertainties over growth rates in the emerging regions and a likelihood of currency volatility as financial markets adjust to changing global economic conditions and policies, our outlook reflects lower expectations for emerging region sales and earnings in 2014.

We expect full year sales to be $3.3 billion to $3.4 billion with organic growth of 5% to 8% based on an assumed GDP growth rate of 2.8%. We also expect acquisition growth of about 4% in currency and rare earth related headwinds of about 1%. Volume is expected to be a much bigger component of organic growth than pricing. We expect segment gross margin to be in the range of 37% to 39%. Our segment gross margin target has increased by 200 basis points since 2012. For Catalyst Technologies, we expect solid double-digit earnings growth driven by improved FCC Catalyst sales and UNIPOL earnings. We also expect ART's earnings to grow about 20% again. As you know, we are taking a steady and deliberate approach to recovering our position in the FCC Catalyst market. As a result, 2014 will be more back-end loaded than usual. As Fred said, Q1 catalyst earnings will be below last year, reflecting lower FCC Catalyst volumes, lower specialty catalyst volumes resulting from the completion of the toll manufacturing contract mentioned earlier and the UNIPOL acquisition costs. Q2 earnings should grow mid-single digits, then we expect strong double-digit earnings growth in Q3 and Q4. We expect margins to improve at least 100 basis points for the year. For Materials Technologies, we expect mid- to high-single-digit earnings growth on mid-single-digit sales growth and modest margin expansion. This segment is the most sensitive to changes in global GDP and should produce better sales growth as economic growth improves in the developed economies.

For Construction Products, we project another double-digit increase in earnings driven by sales growth and margin improvement. We assume 4% to 5% growth in global construction spending with continued recovery in North America, relative stability in Western Europe and slower growth in the emerging regions. Our plan assumes an average euro exchange rate of $1.35 for the year, about where the exchange rate is today. Other currencies have already changed significantly since we set our plan. Although the net effect of these changes is small at this point, we recognize that currency volatility could have a larger impact on our results over the course of the year. We operate in Venezuela and Argentina and have exposure to currency devaluations in both countries. We have mitigated these exposures but cannot eliminate them. Interest expense of approximately $40 million includes the cost of our exit financing and continuing non-U.S. debt. We completed our exit financing Monday, borrowing $900 million at an average initial rate of just over 3%. The revolver and delayed draw term loan are undrawn at this time. Our earnings will also include approximately $50 million of noncash interest accretion on the deferred payment obligations. The deferred payment obligations were valued at $567 million at emergence and will accrete at a rate of 9.6% per year. We are not adjusting for this expense since it will be included in our results for many years. We expect our 2014 adjusted tax rate to be 35% with a cash tax rate of 10%. We generated a U.S. Federal NOL of approximately $670 million at emergence and obviously want to maximize its net present value. Based on this NOL, the tax benefit of the warrant settlement and other tax attributes we have, we expect to pay no U.S. Federal income taxes into 2018, approximately 2 years longer than previously noted.

We are again targeting adjusted free cash flow of over $400 million, including capital spending of $160 million to $180 million. As you know, we closely manage the timing and size of our capital investments. Accordingly, we may accelerate or delay our planned capital spending depending on how our growth opportunities develop over the year. Let me touch on Q1 and the other quarters before opening the call for your questions. We expect Q1 earnings to be at or below Q1 2013 levels due to lower Catalyst Technologies earnings and higher corporate costs. Q1 has also been affected by the extreme cold weather in North America. We've experienced higher energy costs, limits on gas supply at one manufacturing plant and some disruptions to manufacturing and logistics operations. Together, these effects have reduced our expected Q1 earnings by about $3 million. Obviously, we're working to mitigate these effects but we do not expect to offset them all. Beyond Q1, we expect 2014 to be weighted more towards the second half, reflecting the earnings pattern for Catalyst Technologies I described earlier. We expect earnings to split roughly 45%, 55% for the first and second halves with Q3 the best earnings quarter of the year. 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 Brian Maguire with Goldman Sachs.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Fred, if I -- and, Hudson, if I heard you right, there will be a down year-over-year first quarter for Catalyst. And I believe that probably also implies some sequential erosion. And given the momentum you had sequentially, just curious what's going on there, if it's more of an FX hit in some of those manufacturing and higher energy costs you were talking about? Or if there is anything else going on that might affect the lumpiness that you sometimes get in a JV income? Or any other color on why it might be down a little bit sequentially?

Alfred E. Festa

Well, I mean -- Brian, it's Fred. I mean, primarily, it's -- first and foremost is we've got $9 million to $11 million of the UNIPOL acquisition cost, transition costs, services, inventory write-up, all hitting in the first quarter. That will be behind us with almost all of it exiting the first quarter. That, together with a little bit of, as we talked about the weather issues and so on, are the big drivers there. Regarding the FCC side, we've got a couple of turnarounds, big turnarounds that are planned for major customers, but we're still seeing FCC up sequentially. We'll see it up sequentially over the fourth quarter to the first quarter. So I mean, we feel good about that. We feel good about that side and our adoption of our new products.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay, great. And on Construction, I think you mentioned some raw material pressure. I was curious to see how your efforts to offset that through higher pricing are going and hearing some of the -- your customers out there with 5% or 6% price increases, you might -- they're getting traction. Wondering if you -- what your outlook for construction pricing might be in 2014?

Alfred E. Festa

Yes. I mean, first and foremost, we -- significant raw material increases in the underlying in Latin America and Brazil, Argentina, Venezuela, primarily as a result of currency. We're behind on that. We hope to catch up in the -- by the end of the first quarter on that side. But generally, the market has been good. We've seen announced pricing increases in cement for 2014. We'll see how all those stick. But generally, there's a recognition that the commercial construction activity is coming back and the value pricing is paying off. So again, we need to catch up on the Latin America side, which I think we're well-positioned and the general trends are positive on underlying construction pricing.

Brian Maguire - Goldman Sachs Group Inc., Research Division

And just one last one, if I could, for Fred. Just hoping to get some insight into the board's thinking on the initial side of the share revote. That $500 million seems like it's only kind of in line with the free cash flow you're going to generate over the next, call it, 15 months or so. Your thoughts on opportunities to use the balance sheet to buy back more or maybe pursue some M&A?

Alfred E. Festa

Yes. We looked at it. We want to maintain our financial flexibility. As you know, we've got the agreement to retire the 10 million shares. So we look at that warrant, taking that off the table as part of this program. But we want to keep our financial flexibility open as we go forward. And obviously, we -- we're in active dialogue with the board every quarter and we'll see how this all plays out.

Operator

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

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

First, I just want to offer my congratulations on the emergence milestone.

Alfred E. Festa

Thank you.

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

Yes. And then getting into some of the questions. Can you elaborate a bit about the competitive dynamics in the emerging economies a bit more? How are you responding to the softer economic growth? And I guess I'm asking in the context of the Construction and Materials segment because those seem to be a little bit more GDP sensitive but perhaps you could just kind of elaborate or speak to the broader portfolio as well?

Alfred E. Festa

Yes. Construction and engineered materials, primarily the silica side, is the most sensitive to that. I think what you're going to see this year -- I know what you're going to see this year is us going deeper. We're looking for deeper market penetration in the emerging regions where we have a nice position. In the past, we've grown nicely on it but it's been more across the broader breadth. Construction chemicals, you'll see it. China, cement focused. You'll see it waterproofing focused and across Asia on the specialty waterproofing products. Latin America, you'll see it in the chemicals side for construction. Engineer materials is a similar story. We'll focus deeper on that penetration around the markets that we play well in. In Asia, it's around coatings -- on the coating side and with some new products and so on. So a little bit -- probably a little bit more sharper focus looking for the deeper penetration versus a wider spread.

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

Yes, that makes sense. And then within Catalyst, more specifically, is it safe to assume that the lower base pricing called out in your prepared comments is a -- is it sort of a continuation of this customer and mix phenomenon that we saw in the 3Q results?

Alfred E. Festa

Yes. I mean, it really is a mix. I mean, we -- again, we've been very transparent about this. Regarding Asia, it's a mix of our Asia business. In Asia and some of the state-owned enterprises, that rare earth price mechanism is not an adjusting mechanism and that had some impact on us and so on. But I really do, I really would call it out as a mix versus a degradation of pricing.

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

Sure. Something that can come back over time. Just one last really quick one, maybe for Hudson on working capital. Progress there has been meaningful over the last couple of years, but does it feel at all like the low-hanging fruit has been picked at this point? Or is there more runway, do you feel, going forward?

Hudson La Force

We can definitely continue to improve our working capital. I think in terms of total dollars, the working capital investment will go up in '14 versus '13. But on a days basis or an efficiency basis, we expect to continue to get better.

Operator

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

John P. McNulty - Crédit Suisse AG, Research Division

Just a couple of quick questions. With regard to the emerging markets and in particular China, it sounds like things have slowed a reasonable amount. I guess trajectory-wise, are things getting worse in the area or are they just kind of at a slow pace and you kind of expect it to stay that way?

Alfred E. Festa

Yes, it's slow -- for us, it's probably down from 8% to the 6% type of range on that side. We're not seeing a dramatic decrease. We have been, over the past 24 months, very focused. I mean, we -- we're emphasizing construction. Our cement versus our concrete additives, waterproofing with some new commercial buildings there in that perspective side of it. So it's volatile but I would say over the last probably 4, 5 months, it seems to have steadied around this -- for us around the 6% type growth rate.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, fair enough. And then with regard to the buybacks, should we be thinking about the share repurchases as kind of opportunistic and that's kind of how you'll execute them? Or is it going to be more a pretty steady kind of relatively consistent-type program?

Hudson La Force

John, I think it'll be a mix. There will certainly be a slow and steady piece to this. But even to Brian's earlier point, we will be opportunistic. And if we see an opportunity, we'll be more aggressive about it, no question.

John P. McNulty - Crédit Suisse AG, Research Division

Okay. And then just maybe one last question. Obviously, you've been financially strong for quite a while. But has the bankruptcy reemergence, does that help with any potential customers in terms of opportunities where they just, for one reason or another, couldn't do business with you but now they can? Or is that really not the case?

Alfred E. Festa

No, on the customer side, I mean, we've got over that hurdle probably, I don't know, 8 years ago on that side. I do expect to get some better terms from some of our vendors that have held on by their fingernails of -- because of our Chapter 11 situation.

Operator

Your next question comes from the line of Mike Sison with KeyBanc.

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

Fred, in terms of -- now that you're out of bankruptcy, any changes in the terms of how you manage the company? Are there projects that you can do on a capital basis that maybe you wouldn't have done in the past? Maybe just talk about how -- maybe the opportunities now that you have post-bankruptcy?

Alfred E. Festa

Yes. Tactically, it really hasn't changed. I would say, strategically, where we may be a little more open to explore avenues that could lead down further paths or wind itself to either larger transactions or something on that side, we'll tend to follow that path a little further than -- on the Chapter 11 side. But from a pure acquisition, if we saw a target, that won't change. But I think you'll see us be a little more inquisitive on the other piece of it.

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

Okay. And then in terms of FCC Catalyst, can you give us a feel for where you think industry operating rates ended this year as the year -- as 2014 unfolds? Where do you think that will go and could that be a positive for pricing as you look into '14?

Alfred E. Festa

Yes. From our perspective, we're at just over 90% utilization coming into this year. Our best intelligence says the industry should be close to that rate. There are some major units coming on over '14. So we'll see how that whole dynamic plays out. But I do believe -- I feel good about where we are in our new products with our commercial trials and the commercial uses we had. And as those proved statements continue to play itself out with our customers and potential new customers, that will be the opportunity, the opportunity to capture some value, both from a customer perspective and hopefully from our perspective.

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

Okay. And then when you take a look at your second half outlook and you think about, particularly in Catalyst, where it does seem you have some control, maybe ability to win new wins? And then HPC tends to be a big project order. How much of that outlook in the second half do you think is, reasonably speaking, within your control versus waiting for a second half recovery to sort of flow through as we've had for the last couple of years?

Alfred E. Festa

Yes. You got to cut back. If you look at Catalyst, almost a good 6% of that growth is going to come from our UNIPOL acquisition. We feel good about the UNIPOL side. We've got very good visibility on the licensing side and, generally, very good visibility on the Catalyst sales with that piece of it. ARTs, a lot of big orders, so visibility is very good on that side of it and a big step up in the hydrocracking that will continue. From an FCC standpoint, I think you'll see us be steady and deliberate as we go here and making those improvements. So I -- what's -- as we look at what's complicating the factor is we've got a lot of cost in -- from this inventory step up on UNIPOL, transition services and so on. And the quicker we get off balanced transition, service agreements, the better we have. So we're pushing hard on that side of it.

Hudson La Force

I'll add one thing, Mike, to Fred's comments. We are -- the economic model that this is built on is conservative relative to what the major economic forecasts have for 2014. We think we've kind of stripped out the growth that we've all been waiting for the last couple of years and tried to have a more realistic economic outlook for 2014.

Alfred E. Festa

Yes. I'll add one other piece because this is what we talk about. I mean, on a total earnings EBIT basis for the full year for the corporation, 1/3 of it is coming from UNIPOL, 1/3 of it is coming from volume and growth. And here's the other third that probably wasn't as clear as we should have explained in our statements. The third is coming from productivity. We expect to improve our margins 100 basis points or 1 point, '14 over '13 based on all the restructuring we did in construction in Europe, in the volume leverage given the productivity in the plants that we have. So that we feel good about and have some good visibility. So it's truly 1/3 UNIPOL, 1/3 margin expansion and, as Hudson said, the volume growth side is less than we put in over '13.

Operator

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

Robert Walker - Jefferies LLC, Research Division

This is Rob Walker on for Laurence. Just a follow-up on FCC volume trends. The 6% growth sequentially this quarter, much better normal seasonality, up Q1 versus Q4, better than normal seasonality. I guess this probably can't be explained fully by the new product adoption, is there a bit of a catch up? Or I guess, what are your expectations for volume growth of those products in '14?

Hudson La Force

Well, Rob, as we've said, the new products are a part of what's driving this sequential improvement. But it's all in the context of recovering the market position that we lost middle of 2013.

Robert Walker - Jefferies LLC, Research Division

And what are your expectations for volume growth in FCC for '14?

Hudson La Force

We think we'll exit on a run rate that would have us recovering the volume that we lost this year. It's about 4% up year-over-year.

Robert Walker - Jefferies LLC, Research Division

Okay. And I guess can you provide a little more information about the net operating losses you talked about? Why is there 2 more years of offset?

Hudson La Force

This is a tax planning that we've been able to do, optimizing the tax attributes that we have as a company. And as we took a fresh look at things over the last 3 or 4 months now, with certainty around the timing of our merchants and things like that, we were just able to optimize that strategy and as a result, it gave us a couple more years of a tax shield in the United States.

Robert Walker - Jefferies LLC, Research Division

Okay. And maybe just if I can squeeze one more in. The volume growth in emerging markets in DCP has been pretty flattish the last 2 quarters. Do you expect volume growth in those regions in 2014?

Alfred E. Festa

About 2%.

Operator

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

Dmitry Silversteyn - Longbow Research LLC

Let me add my congratulations on a good way to finish the year in coming out of bankruptcy. A couple of questions, if I may. When you talk about FCC pricing expectations for 2014, and sort of, Fred, you coupled that from possible continuing rare earth pass-through surcharge removals, do you expect FCC pricing to be up in 2014 versus 2013? And is there a goal in mind that you have of sort of the next level of pricing that you're going to try to take this business to?

Alfred E. Festa

Yes. We expect it to be flat, '14 over '13. Now as we keep getting approved statements back on our customer trials and get some good data back on that side of it and that value proves out, there will be opportunities but our expectation overall, it is flat. That's what we [indiscernible].

Dmitry Silversteyn - Longbow Research LLC

Okay. So you're looking for -- at some possible mix-driven price improvement if these new products catch on but not necessarily sort of across-the-board price increase that has been characteristic prior to the rare earth spike of a couple of years ago.

Alfred E. Festa

Yes, Dmitry, that's right.

Hudson La Force

We will see margin expansion as we get our operating leverage back and the productivity that Fred spoke about, but it'll -- it's more controllable than the pricing side.

Dmitry Silversteyn - Longbow Research LLC

Got you, got you. Very good. You provided some pretty good color and granularity on sort of the growth expectations in some of the targeted areas, which you look to grow on the Construction side of the business. You mentioned coatings is an area of growth in Asia for the Materials part of the business. Can you talk about sort of other areas of Materials that are particularly leveraged, let's say, to GDP particularly in North America and Europe? Or it sounds like things are going to do a little bit better versus Latin America and Asia.

Alfred E. Festa

Yes. Let me give you an overview. If you think of our whole general technology segment, we think it can grow between, on a revenue basis, 6% to 7%. We think 4% to 5% of that is going to come from market growth around the globe. And we've got nice positions in the emerging markets, which we'll benefit from. We also have pricing opportunities in the Darex, the coating, Darex coating and sealant platforms. Those are really fundamentally driven by underlying raw material pricing as it goes up. We've been able to capture that side. And then another one, possibly 2% some new products. We've got some new exciting products on the discovery science side, in the bio science side of it, as well as some across-the-board. So we're not betting on a big market recovery in Materials. As I said, there's 4% to 5% and then hoping to pick up or expecting to pick up some -- on the pricing, some new product side of it.

Dmitry Silversteyn - Longbow Research LLC

Got it. Okay. Can you talk about your working capital outlook for 2014? Can you talk about perhaps getting a little bit better rates or terms from some of your vendors? Obviously, the UNIPOL acquisition offers some opportunities to play a lot with working capital. So how should we think about working capital over 2014, '15 timeframe either in absolute dollars or as a percent of revenue? What's your goal?

Hudson La Force

I think from an absolute dollars perspective, our investment in working capital will go up. It'll be a bit of a drag on our free cash flow generation just to support the higher sales growth that we expect, but from an efficiency standpoint, we think of it in terms of net working capital days, we expect to continue to get better. We dropped, I think, it's 5 days from the end of '12 to the end of '13. And as we head from '13 into '14, we're looking to improve another day or 2. And the primary opportunities there, we do think we'll have a little better working capital performance with the UNIPOL business. Fred mentioned that there are some vendor opportunities to extend payment terms, although that frankly, is fairly small. We're already at an average of about 56, 57 days, I think, on our raw material vendor. So there's a little opportunity there but not too much.

Dmitry Silversteyn - Longbow Research LLC

Okay. And then final question. You're coming out with $900 million of emerging finance debt. Your revolver, as you mentioned, is undrawn. Sort of -- so what are your goals or expectations for leverage in either debt-to-EBITDA or debt-to-interest payments, however you monitor this, or however you handicap it inside the company?

Hudson La Force

Yes. We've got a stated target to have our leverage, our EBITDA leverage is the metric we use between 2 and 3 turns. I think where we stand right now is at the very low end of that, just over 2 turns, with the UNIPOL acquisition and the exit financing. We would expect to increase that leverage over time as we do further acquisitions. There's nothing specific right now but that's been part of our growth strategy and I think it will be. And if we did return capital above and beyond our free cash flow, which we are certainly keeping our eyes on those types of opportunities, that would allow us to drive that leverage level up a little bit, too.

Operator

[Operator Instructions] Your next question comes from the line of Jim Barrett with CL King & Associates.

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

I think these -- I have 2 questions, I think, are for you. Given that the company does not now -- expects not to pay federal taxes through 2018, does that increase the inclination of the board to consider a dividend sooner than it might otherwise?

Hudson La Force

No. The -- what we've announced is the share repurchase program, that's our focus for now. And the free cash flow will be higher than it will -- would otherwise have been with the lower taxes but that goes more to the amount of capital rather than the way in which we would choose to return it.

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

Understood. And then on your mark-to-market pension adjustment, the company's not providing an estimate but should I assume that it will be positive if pension assets continue to perform well? Other companies are raising their discount rates.

Hudson La Force

I'm sorry, Jim, I think I missed your question.

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

Yes. Should I assume you're mark-to-market pension adjustment for '14, should I assume that will be positive as it was in '13?

Hudson La Force

Yes. Well, it's a function -- as you know, it's a function of what happens with the market return on our assets and then the discount rate on the PVO. And that's -- right now, we have about 80% of our pension assets in fixed income. We've been down this derisking path as, I think, we've talked about on earlier calls. That said, we have a net short exposure to long-term interest rates. And as long-term interest rates go up, assuming they continue to, yes, we would expect a positive mark-to-market. But you -- we'll just have to see what happens with interest rates this year.

Operator

Your next question comes from the line of Chris Shaw with Monness, Crespi.

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

Just on FCC. I was looking back, you had year-over-year FCC volumes in the third quarter down 8%, which is similar to the fourth quarter despite the sequential increase. Now is that just the part -- seasonality in part to, I think someone mentioned a tough comp earlier. And if it's a tough comp, can you just remind me what made that comp so tough?

Alfred E. Festa

Yes, I mean, it is primarily the comp side of it. We had some big European orders hit in last year's fourth quarter, Eastern European orders that are exasperating that. Remember -- let me just refresh, we've been transparent. We've said that we lost about $65 million of revenue on the FCC side throughout '13. So if you put that in context, we're gradually trying to, with these new product introductions, capture some of that as we go back in '14 term.

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

Right. And then construction products, you spoke this quarter, I think, that emerging market's volumes were down or sales were down much over the volume number. But it sounded like before, you were talking that China was up. Is that just all Latin America? And if so, how much of those is currency? I'm just trying to figure out how bad sort of demand, I guess, for Latin America is just exactly?

Hudson La Force

It's really currency, Chris. We had a $5 million currency bad guy in Q4 just in Latin America. And if you take that out, the emerging region growth in construction in Q4 was plus 4%, I think.

Operator

Our next question comes from the line of Brian Maguire with Goldman Sachs.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Just a couple of quick follow ups. On the 10% of '14 sales you hope to get from the new products, kind of disaggregate or give a sense whether that would be weighted more towards cannibalizing existing sales to existing customers? Or new business wins?

Alfred E. Festa

It will be about 50-50.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay, great. And then the last, I think, for Hudson. Just on the cash tax rate as you extend that NOL out to '18, is it going to stay at 10%? And will the book rate stay at 35%? Or do they start to converge as you get closer to '18?

Hudson La Force

They will start to converge as we get closer to '18. But as you think about '14, '15, '16, I think that 35% and 10% is probably right. Is it 12% instead 10%? Yes. But it's not going to be a 20% cash tax rate. It'll stay low until we burn through all of those tax attributes. And then in the '17 to '18, '19 timeframe, they will converge at -- some mid to maybe higher 20% type number.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay, great. And just one last one. Is there any need to kind of revalue the DPO now that you've reemerged or it can reevaluate the discount rate you're using to present value with?

Hudson La Force

No, once we emerged, it was fixed. And it will be fixed throughout its life.

Operator

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

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

Just a quick follow-up on the industry dynamics within the polyolefin catalyst family. So we've heard that, globally, we should be among certain alkyls and polyethylene catalysts for a couple of years perhaps with the new capacity that's come online. Is the -- is your catalyst business sensitive to that at all? I mean, obviously, UNIPOL is in a separate world from that but just wondering if there's any sensitivity that your catalyst business has to those types of dynamics and if you're seeing something?

Alfred E. Festa

Yes, not especially. Not really. It's on the polyethylene side. If any sensitivity will probably come in some of our single site -- new single site products that are being developed for some customers and that may just be on the timing of that. But generally, no, they're pretty stable with the -- with our current portfolio.

Operator

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

John P. McNulty - Crédit Suisse AG, Research Division

Sorry, just one follow-up. When I think about the catalyst business sequentially, and the guidance that it will be down from 4Q to 1Q, I guess I'm a little bit, I guess, confused as to why that would be. I believe there's a little bit of seasonality that normally would give you a little bit of lift sequentially. I know there's some incremental cost coming in from UNIPOL but at the same time, I thought you also had ART having some business pushed outs from 4Q to 1Q? So I guess when I add them all up, I don't know if I get to it down sequentially all that much. So what am I missing on all this?

Hudson La Force

I think it's down sequentially on earnings. But from a volume perspective, as we look at it, and it goes to a number of the questions we've had on the call, from Q3 to Q4, we see better sequentially; from Q4 to Q1, we see better sequentially. There is some seasonality in Q1 in FCC Catalysts, the turnarounds that Fred mentioned. It doesn't seem to be coming through in the discussion today but we feel really good about the progress we're making in FCC Catalysts on a sequential basis. Obviously, year-over-year, we're still working through the down effects of the pricing initiative. But on a sequential basis, we feel really good about this.

Operator

Your next question comes from the line of Dana Walker with Kalmar Investments.

Dana Ford Walker - Kalmar Investments Inc.

On polyolefin catalysts, can you provide some context? I thought I heard you say you expected the revenue volume to be up low- to mid-single digits. Could you contrast -- assuming that's right, could you expand upon those comments and describe what you saw market-wise and Grace-wise in that category over the last few years?

Alfred E. Festa

Yes. Dana, it's Fred. We saw higher growth in the polyolefin business and one primary driver of the lower growth that we're expecting is one of our major customers, we're toll manufacturing for them. They have brought that catalyst back in-house and that is -- it's 3 points. So it really gets us from the high-mid-single digits to the low-double digits.

Hudson La Force

I think the thing I'd add, just to be clear, that's X the UNIPOL...

Alfred E. Festa

That's right, X UNIPOL.

Hudson La Force

X layering on the UNIPOL benefit.

Dana Ford Walker - Kalmar Investments Inc.

So you were up low-double digit in '13. You expect to be up high-single digit in '14 largely because of the loss of the towing?

Alfred E. Festa

That's correct. X UNIPOL and then you can add UNIPOL to it, that's right, in a same-store basis.

Hudson La Force

And the business is getting bigger, obviously. If the business base gets bigger, maintaining that double-digit growth was -- we were going to slip into the high-single digits anyway.

Operator

That concludes Q&A. I'll now send the call back over to management. Please proceed.

Alfred E. Festa

Thank you, Whitley. And thank you all for joining us. For any questions requiring clarification from this morning's call, please feel free to call Mark Sutherland at (410) 531-4590. Thank you very much.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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