W.R. Grace's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.23.14 | About: W.R. Grace (GRA)

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

Q1 2014 Earnings Conference Call

April 23, 2014 11:00 AM ET

Executives

J. Mark Sutherland – VP, IR

Alfred Festa – Chairman and CEO

Hudson La Force – SVP and CFO

Analysts

Brian Maguire – Goldman Sachs

Michael Ritzenthaler – Piper Jaffray

Robert Walker – Jefferies

Ben Kallo – Robert W. Baird

Dmitry Silversteyn – Longbow Research

James Barrett – CL King & Associates, Inc.

Ernie Ortiz – Credit Suisse

Christopher Shaw – Monness, Crespi, Hardt & Co., Inc.

Michael Sison – KeyBanc Capital Markets

Operator

A very good day to you ladies and gentlemen, and welcome to your W.R. Grace & Co., First Quarter 2014 Earnings Conference Call, hosted by Mark Sutherland, Vice President of Investor Relations. My name is Chris and I will be your conference coordinator today. During today’s conference, all lines will remain on listen-only. [Operator Instructions]. Thank you. At this time, I’d like to turn the call over to Mr. Mark Sutherland to begin. Please go ahead.

J. Mark Sutherland

Thank you, Chris and hello everyone, and thank you for joining us today, April 23, 2014, for a discussion of Grace’s first quarter 2014 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. A link to the slide deck is available under the Events navigation tab. 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’ll turn the call over to Fred.

Alfred Festa

Good. Thanks, Mark and hello to everyone. Thank you for joining us this morning. I’m pleased that we’ve started the year with increased sales volumes in all three segments. Catalyst Technologies sales volumes increased 10%, Materials Technologies increased 2% and our Construction Products increased 8%. The sales improvement was balanced across all geographic regions. Sales in advanced and emerging regions each increased 8% year-over-year before the impact of currency translation and rare earth surcharges. We saw significant currency impacts during the quarter especially in Materials Technology and Construction Products. These currency impacts reduced reported emerging region sales by 6%. As we disclosed in March, extreme cold weather in North America took a bite out of our sales and earnings. Overall, we estimate that weather impacted earnings by $9 million with two-thirds from higher operating costs and one-third from lost sales. Our Curtis Bay plant located in the Baltimore Harbor was closed for part of 13 days. Curtis Bay is one of the largest plants and is a shared production site for Catalysts and Materials Technologies. In addition to lost manufacturing time, we also incurred higher utility and logistics cost. Lost sales were primarily in Construction Products, where construction activity was slow or delayed.

Let’s take a look at our first quarter highlights and we’ll start with Catalyst Technologies. We continue to be very pleased with the UNIPOL polypropylene licensing and Catalyst acquisition. In addition to $28 million of top-line contribution in the quarter, the acquisition contributed about $3 million to segment operating income after acquisition related costs of about $7 million. The business is on track to deliver our plan of about $30 million in operating income this year including synergies of about $10 million, slightly favorable to our acquisition model. The integration tests have been completed, two months ahead of schedule and the majority of transition service agreements will conclude at the end of this month. In addition to the UNIPOL growth we expect growth of about 5% in our legacy polyolefin catalyst business this year, driven by growth in plastics and used demand and new business wins.

In Q1, sales volumes in this part of our business were down due to a scheduled conclusion of a toll manufacturing agreement last year and an inventory adjustment at one of our larger customers. In our FCC business, volumes increased year-over-year, but pricing was down largely due to the rare earth surcharge and some base pricing as well. The commercialization of our new FCC Catalyst Technologies is on track. Looking at FCC market conditions, we continue to project a solid overall picture for refining Catalyst demand. Global FCC demand is projected to be up 4% this year with global demand for gasoline up 2%, largely in emerging regions and demand for propylene and new FCC unit start-up adding another two points. U.S. refineries are seeing strong utilization rates approaching 90%, and our cost advantage with shale oil feedstocks. However, utilization rates from European refineries have dropped below 80%, due to lower domestic demand and competition from imported fuels. We saw weak demand in Europe in Q1 and expect some weakness to continue through the year. This is putting some pressure on refining catalyst sales volumes and margins.

Materials Technologies had a solid quarter. In addition to better top-line growth, gross margin was steady at 35% and operating margins is closing in on 21%. The engineered materials product line saw a strong year-on-year growth at 7% with especially strong growth in Western Europe. This is an encouraging trend, given this product line’s correlation to industrial production. Packaging Technologies had a tougher quarter with slowing end market growth and volatile currencies in the emerging regions. Despite these top-line pressures, margins are at the planned levels. At our Investor Day in March, we highlighted our Discovery Science product line, which is focused on developing silica-based products for the pharmaceutical industry. Last month at conference in U.S. and Europe, we launched our ProVance products, a portfolio of novel technologies for cost effective purification of biologic drugs. ProVance is a great example of our ability to leverage our expertise in silica chemistry and manufacturing, to grow sales and improve margins at high value in faster growing market segments. Our materials technology segment is a strong franchise with a rich pipeline of silica based products and technologies currently under development.

In our Construction Product segment, we saw good growth in the quarter for both Specialty Construction Chemicals and Specialty Building Materials, despite weather related impacts on U.S. sales. We estimate the adverse weather result in at least $4 million of loss sales at above average margins. Contractor capacity and labor constraints needling our abilities to recover these sales, which will reduce full year growth rate in the U.S. by about one point. In Western Europe, we saw good year-over-year growth driven by favorable weather and strong project starts. We may be coming up the bottom in Europe and now expect some growth in Western Europe this year. In the U.S. we are encouraged with signs of continued recovery in commercial construction spending. One example, in February, Grace products were part of a record breaking concrete pool in Los Angeles, the 21,000 cubic yard pool, more than 2,000 truckloads was the foundation for the $1 billion new Wilshire Grand, the hotel office and convention center complex, with 73 storey and five levels of underground parking, this will be the tallest building west of the Mississippi.

In closing, our view of the remainder of the year is balanced. Despite some first half headwinds, we’ve identified our path to achieve our target results for the year. I’m confident that our track record of performance will continue as we strive to meet our goals for growth, margins, cash flow and returns on investor capital.

With that I’ll turn the call over to Hudson for more specifics on the quarter.

Hudson La Force

Thank you, Fred. Please turn to pages four and five and we’ll start with a quick review of Grace’s overall results for the quarter. Sales were $745 million, an increase of 5% from last year. Sales volumes increased 7% including an increase of about 4% from acquisitions. Higher base pricing of less than 1% was more than offset by lower rare earth surcharge pricing of about 1%. We stopped to the surcharge pricing mechanism in early Q2, 2013 when rare earth costs stabilized. Segment gross margin was 36.3%, a decline of 90 basis points compared with last year, primarily due to cost associated with the adverse weather in the U.S. and higher costs in our construction product segment, associated with our concrete chemical process control technology. Adjusted EBIT was $111 million, down 5% from last year and including $9 million of weather related costs, $7 million of acquisition related costs and $5 million in unfavorable currency, which more than offset the benefits of higher sales volumes. Excluding the weather and acquisition related impacts adjusted EBIT would have been flat with last year. Adjusted EBIT margin decreased 160 basis points to 14.9% and adjusted EBITDA margin decreased 130 basis points to 19.5%. The weather and acquisition related costs reduced to adjusted EBIT and EBITDA margins by more than 200 basis points. Adjusted free cash flow was $65 million for the quarter, in line with the year ago and in line with our operating plans. Adjusted EBIT ROIC was approximately 27% and adjusted EPS was $0.77 on diluted shares of $78.1 million.

Let’s turn to Catalyst Technologies on page six. First quarter sales for Catalyst Technologies were $285 million, up 7% from last year. Sales volumes increased 10%. FCC catalyst sales volume increased 2% and polypropylene Catalyst acquisition contributed 10%. As Fred mentioned, specialty Catalyst sales volumes were lower, primarily due to the conclusion of a multi-year toll manufacturing contract for polyolefin Catalyst customer last year. We will lap this contract loss in Q2. Currency translation was 1% favorable to sales, while pricing declined 4% mostly due to rare earth surcharge pricing. Catalyst Technologies gross margin was 39% for the year, down from 40.3% from the prior year quarter. Weather related costs reduced gross margin by almost 200 basis points. Segment operating income was $71 million, down from $77 million last year. The UNIPOL Polypropylene acquisition was positive to operating income in the quarter, contributing $3 million to segment operating income after acquisition related costs of $7 million.

Segment operating margin was 25% compared with 29% in the prior year quarter reflecting the lower gross margin, acquisition related costs and lower ART earnings. We are making good progress in returning to our historical refinery catalyst market position through the introduction of new FCC Catalyst Technologies. These products are on track to represent about 10% of our FCC Catalyst sales for the year with about half representing new business and half replacement business. Although the U.S., Middle East and South Asian refinery markets are strong, we do see weaker refinery operating environments in Europe and China. Grace is the largest FCC Catalyst supplier in Europe and refining market challenges in that region may impact us over the course of the year. In China, we’ve seen a shift in refining utilization toward the state earned in a way from the independent refiners that are our natural customer base.

Our share of ART’s net income was $3.7 million, down about $1 million from last year due to unfavorable product mix and higher manufacturing cost. Market dynamics for HPC Catalyst remain strong. However, we’ve seen a shift in our ART business over the last few months. We’re seeing a less favorable sales mix, higher manufacturing costs and higher market development cost. We’ll be able to offset some but not all of these headwinds with productivity initiatives and cost reduction programs this year. For Q2, we now expect our share of ART net income to be about flat to Q1, down from $9 million in the 2013 second quarter, ART’s strongest quarter of that year. Looking forward, we continue to expect strong sequential improvement in our Catalyst results, with Q2 earnings growing double digits from Q1. However, Q2 Catalyst segment earnings are likely to be down year-over-year, due to the weaker European catalyst demand and the shift in ART earnings. For the full year, we expect low double digit growth for segment sales and earnings compared with 2013. Full year operating margin should be in line with the 2013 operating margin.

Let’s move to Materials Technologies on page seven. First quarter sales for Materials Technologies were $220 million, an increase of 2% from last year. Higher sales volumes of 2% and improved pricing of approximately 1% partially were offset by 1% on favorable currency translations. Sales of engineering materials increased 7% year-over-year due to a 5% increase in sales volumes and 1% improvement in pricing. Sales in advanced regions grew approximately 10% and sales in emerging regions increased 2%. We saw very strong growth in Western Europe which represented approximately 40% of product line sales. Coatings and industrial applications are driving the growth in engineering materials sales volume. Sales of Packaging Products declined as unfavorable currency translation of 3% and lower sales volumes of 1% more than offset than 1% improvement in price. Materials Technologies gross margin was 34.9%, down 20 basis points, due to unfavorable currency and weather related operating costs. Segment operating income increased approximately 3% to $45.5 million, primarily due to higher sales and improved operating leverage. Segment operating margin was 27.7%, up 10 basis points from the prior year quarter.

Material Technologies has operated in Venezuela for decades with sales in that country of about 2% of segment sales in 2013. In Q1, we began seeing a significant impact to our sales and earnings in Venezuela. Over the last few months, it has become increasingly difficult for us and our customers to operate normally in the country. If we or our customers are unable to resume normal operations, we will experience further reductions to our sales and earnings. We have about $2 million to $4 million of earnings at risk for the balance of the year. We’ll keep you updated as the year continues. Please turn to page eight for Construction Products.

First quarter sales for Construction Products increased 5% year-over-year to $240 million on strong volume growth of 8% and improved pricing of 2% which offset 5% and favorable currency translation. Adverse weather in the U.S. had a significant impact on sales in the quarter. We estimate that extreme cold weather lowered sales by at least $4 million. Due to time and contract of capacity constraints, only a portion of these sales may be recoverable in subsequent quarters. Sales of Specialty Construction Chemicals increased 5% year-over-year, led by 13% growth in Western Europe and 9% growth in emerging regions. Sales in the U.S. declined 3%. The strong growth in Western Europe was attributable to favorable weather and increased project starts. With another consecutive quarter of positive results for the Europe, market conditions appear to be bottoming. Sales of Specialty Building Materials increased 5% and sales growth of 17% in Western Europe more than offset sales declines of 4% in both the U.S. and the emerging regions.

Segment gross margins declined 110 basis points to 34.4% primarily due to higher operating costs associated with our verified construction chemical process control technology. Segment operating income increased 11% to $25 million due to higher sales volumes, improved pricing and lower operating expenses more than offset higher raw material and manufacturing costs and unfavorable currency. Segment operating margin improved 60 basis points year-over-year to 10.6%. Like Materials Technologies Construction Products has operated in Venezuela for many years and is facing similar operating challenges in that country. Sales in Venezuela were about 2% of segment sales in 2013. For our construction segment as a whole, we see a relatively favorable environment for the balance of the year. We expect North America to grow in the 5% to 6% range although it is a bit early to fully assess the strength of North American construction spending this year, improved cement and concrete prices and good demand in April are positive leading indicators. In Europe, we could see growth for the balance of the year driven by activity in Germany, UK and Turkey. Excluding currency effects, we expect high single digit to low double digit growth in Latin America and developing Asia. Let me touch on a few corporate items and then we’ll take your questions.

Our full year earnings outlook is unchanged. As we’ve highlighted in our remarks this morning, we see pluses and minuses as we assess the full year. Today, we are operating below the midpoint of our range due to the Q1 weather impacts, demand uncertainty and FCC Catalyst in Europe and weaker ART earnings, but we’re also looking hard at productivity opportunities across the company. Based on this, our earnings pattern for the year will be a bit more back half loaded than we thought in February. Adjusted free cash flow was $65 million for Q1 in line with the prior year quarter and our operating plan. CapEx was approximately $40 million also in line with our plan. We continue to target at least $400 million in adjusted free cash flow for the year. Cash on the balance sheet at March 31st was $420 million with net debt of approximately $1.7 billion. Assuming the midpoint of our outlook, net debt to adjusted EBITDA is approximately 2.2 times. We spent about $60 million on share repurchasing in Q1 and yesterday we have spent about $110 million to repurchase about $1.1 million shares. We continue to view our business fundamentals is solid. We have great business franchise with strong growth opportunities exceptional margins high cash flow and higher returns on capital. We’re managing for the long term and creating value to our customers and you every day.

With that, we’ll open the call for your questions.

Question-and-Answer Session

Operator

Thank you very much. Ladies and gentlemen your question-and-answer session will now begin. [Operator Instructions]. Our first one today comes from the line of Brian Maguire from Goldman Sachs. Please go ahead.

Brian Maguire – Goldman Sachs

Thank you. Good morning, everyone.

Alfred Festa

Good morning.

Brian Maguire – Goldman Sachs

Hudson, you mentioned you’re currently running a little bit below the midpoint of the guidance range due to some of the weather issues and little bit weaker European refining. Little bit intrigued by the productivity issues you’re talking about, are these things that you can implement quick enough to actually make up for some of the first half challenges such that that you could still get above the midpoint of the guidance range or is this sort of a soft part of the guidance number for the year?

Hudson La Force

These are things I think that we can do fairly quickly Brian, although I think that means Q3 and Q4. And that’s as we look at our first half, second half balance we’re little couple percentage points shifting from the first half to second half relative to what we thought in February.

Brian Maguire – Goldman Sachs

Okay. Just within catalyst just looking at the base pricing, it looks like that was down a little bit similar to may be what we saw in the fourth quarter. Just wondering if that’s just a mix impact again between FCC and the specialty business? Are you seeing base pricing growing in one business or the other or kind of both they are equally down at this point?

Alfred Festa

Brian, this is Fred. In the specialty side, we’re actually seeing prices go up and we’ve got some visibility on that some of the new products come on as well as some of the new contracts. On the FCC side, it’s a combination of mix of business from a shift to different regions, plus as we introduce some of our trial volumes and so on those are at trial take placing.

Brian Maguire – Goldman Sachs

And one of your competitors on the trialing come and mentioned that they were seeing a little bit of increased trialing their competitors some of that is yours. They does sound a little bit confident but they were going to get some of that back curious with the FCC volumes at 2% in the quarter, how confident you are in that thinking? And maybe even accelerating as the year goes on versus just may be just benefiting from trialing that may roll off in the second quarter?

Alfred Festa

Yeah I characterize it as if I look at our first half of ‘14, we’re feeling some of the impact of the European refineries. We have the biggest positions there and we’re feeling that piece of it. We’re fairly confident that our second half FCC volumes will be up high single digits over our first half based on the adoption of our new products that we had as well as some new units that we’re seeing as well as demands. So I hope that answers it.

Brian Maguire – Goldman Sachs

Yes. Thanks very much.

Operator

Thank you for your question. Our next question is from the line of Mike Ritzenthaler with Piper Jaffray. Please go ahead.

Michael Ritzenthaler – Piper Jaffray

Yes good morning. Wondering about the piece of earnings I guess as a follow up to Brian’s question some Catalyst historically you’ve seen quarters one and four stronger metrically, but it sounds like it might be a bit of U shaped this year kind of like have been in the past is that fair to say?

Alfred Festa

Yeah I mean I don’t know about U-shaped, but our visibility says in the third and the fourth quarter will be stronger than definitely the second.

Michael Ritzenthaler – Piper Jaffray

Could you remind us what the – I can’t remember whether you’ve broken this out in the past, but your top line exposure to European refining within that segment?

Alfred Festa

Across FCC it’s our second largest and I don’t know about 30%

Hudson La Force

25% or 30% I’d say. 25% to 30%, Mike.

Michael Ritzenthaler – Piper Jaffray

Okay. That helps. And then about the strength geographically emerging markets but things like with macro data points emerging market exposure kind of comes in and out of the street at least. And I was just curious about what if anything you’re having your local managers doing with the weather, volatility and end markets and I guess specifically excluding Venezuela that’s bit of a new position, but I’m looking at Latin America and China I guess?

Alfred Festa

Latin America other than Venezuela we’re seeing some underlying inflation in the raw material so our local guy is getting ahead of that in our pricing and for us primarily and construction as well as materials technologies we have done a nice job on that side of it. In emerging regions around Asia it’s a little bit of a different balance in construction. We want to get in these projects get effect in and so on so our people working really hard on what are the top projects that will go and try to resource it. From a productivity standpoint in those plants in the emerging regions we’re working the actions to maintain our cost down and looking at our cost to quality or looking at our operational efficiencies to make sure that we’ve got the right cost structure.

Hudson La Force

Mike one thing I’d add to Fred’s comments we’re small enough company that those local leaders aren’t that far away from us in terms of communication lines and responsiveness and if they need help from regional or central leadership they get that pretty darn quick.

Michael Ritzenthaler – Piper Jaffray

That makes sense. Thanks guys. Very much.

Operator

Thank you for your question. Next question is from the line of Robert Walker from Jefferies. Please go ahead.

Robert Walker – Jefferies

Hey good morning. I guess after the new product volume, 10% of volume is going to be new customers and your base business is probably growing 4% is it fair to say, you’re expecting about 9% FCC volume growth this year?

Hudson La Force

That sounds a little Rob. The base business is still a competitive business and if accounts do move back and forth on the base business as well. We give that statistic just to give you our sense the progress we’re making with those specific technologies, not specifically for the overall FCC Catalyst business.

Robert Walker – Jefferies

And could you talk a bit more about what has changed at ART and whether you expect profits to grow in ‘14?

Alfred Festa

Yeah I mean I would chalk it up if you look at it, half of it as a reduction half as we look at half of its reduction some higher operating costs. We’ve had some operating issues during the first quarter across couple of our plants, it has forced us to go outside and pull some products at some of our joint venture partners, that higher input as well as cost moving back and forth. In addition, we have not got the commercial success for the new product that we launched last year and we have had some development cost around that. So we’ve got a mix of things happening across the ART segment including some of the product mix being if we’re selling a product in China versus selling a product in the Middle East or so on. Lot of dynamics working group is looking at it the team is looking at it together with our venture partners how can we optimize this and go on and move this business forward. I mean we like let me make sure I’m clear the fundamental demand the fundamental market demand in the hydroprocessing business is good market conditions is good the industry is good. We like the alliance that we’ve done on the hydrofracking side that has been paying good benefits as well.

Robert Walker – Jefferies

Great. Thank you.

Operator

Thank you for our question. Our next one today is from the line of Ben Kallo from Robert Baird. Please go ahead.

Ben Kallo – Robert W. Baird

Hi guys. Thanks for taking my question. We saw the ABI index soften in March, can you just kind of walk us through that’s part of your business just walk us through what you guys are actually seeing in the marketplace and how’s if there is a disconnect there?

Alfred Festa

One data point on moderately volatile data series we’re not going to be able to correlate what we’re seeing day to day with that. But I will say Ben, by the end of March last week or two of March the first I guess we got about three weeks of April now we’ve seen pretty good demand in North America. So when we look back over going back to January, we’re pretty clear in our minds we had a big weather impact but coming on the back of that it looks like we’re back on track for the growth rate we thought we’d get in North America.

Ben Kallo – Robert W. Baird

Okay great. Thank you very much.

Operator

Thank you for your question. Our next one today is from the line of Dmitry Silversteyn from Longbow Research. Please go ahead.

Dmitry Silversteyn – Longbow Research

Good morning guys. I’d just like to follow up on a couple of questions. Number one, in FCC you mentioned in Europe not just sort of the lower utilization rates by the European refineries, but you also talked about import pressures. Can you give us a little bit more color on them where that pressure is coming from the new entrance is it an existing entrance getting more competitive in the search of market share sort of can you talk about the dynamic of European import situation?

Alfred Festa

Yeah I mean I think it’s coming from a combination. I think it’s coming from the wonderful position in the U.S. from the shale oil position that’s there as well as something from the Middle East. What it’s doing at the end of it will be a as it’s forcing the refineries in Europe to look at from a cost competitor how can it be as competitive as they possibly can. And as I said, I think in the end it’s a good thing. Is it putting some pressure on us today? Yes it is.

Dmitry Silversteyn – Longbow Research

Okay. So the imports are more on the actual petrochemical side on the oil side not in the FCC Catalyst side?

Alfred Festa

Okay yes I’m sorry. Okay I understand. No, it’s an unfinished product coming in.

Hudson La Force

Sorry we weren’t clear. It’s not catalyst it’s our customers. Sorry Dmitry.

Dmitry Silversteyn – Longbow Research

All right. Thank you. Secondly just I want to make sure I understand what you said about the mix shift in ART. It sounds like it’s more sort of geographic and where the growth is coming from currently rather than individual products for example affecting your mix. Is that correct?

Alfred Festa

Yeah that’s a larger percentage of when we look at where these products are being sold at what regions what that customer demand and what that customer profile requires.

Dmitry Silversteyn – Longbow Research

Okay. So is this a situation where given that most new refineries and increasing the stringent initial regulations are happening in Asia and to lesser extent Latin America that that growth is going to exceed the growth of established markets for a while so this mix shift and mix in that can be something that stays with you for more than couple of quarters to just be a sort of two to three year run?

Alfred Festa

We don’t think it’s a two to three year trend. We think it of couple of quarters look at the demand profile out there what’s been put in for clean fuels and so on and as we look out I mean it’s going to require catalyst capacity when is the question. Is it 16 or is it 18 is the question right now we’re getting but that demand looks good that are being sold on the clean fuel side of it and the builds that are happening

Dmitry Silversteyn – Longbow Research

Okay, okay. Just a follow up on the packaging weakness that you saw in your materials business, was that something specifically due to weather or particular region or sort of what’s driving? I’m looking at some of the can companies and some of the other companies related into the packaging business and they actually had a fairly decent first quarter.

Alfred Festa

Yeah I’ll be perfectly candid with you we’re not sure because we’ve had a pick up that came back in the April timeframe. So is it our customer specifics on the can side of it is it traffic mix we’re not sure. As I said we’ve seen the big pick up come back on the side so we’re just cautiously watching it.

Dmitry Silversteyn – Longbow Research

Got it. Okay. Thank you very much.

Operator

Thank you for your question. Our next one today is from the line of Jim Barrett with C.L King & Associates. Please go ahead.

James Barrett – CL King & Associates, Inc.

Good morning everyone.

Alfred Festa

Hey, Jim.

James Barrett – CL King & Associates, Inc.

Fred one question for you and one for Hudson. Fred, the capacity of the roofing contract for given this is variable wintered, are you seeing or do you anticipate above average demand for your roofing products in ‘14 and beyond?

Alfred Festa

Yeah, I mean we do, we do. I mean winter, every time this happens there is generally a delay, delayed from when the winter is generally six months and what also as you know you’ve been around this business long enough, what complicates it is can they have enough roofing contractors to get it in but when the season gets bad again in the fall and how rarely that happens. But, fundamentally it’s just a matter of time. We feel very good about that position and we feel very good about that commercial building material side.

James Barrett – CL King & Associates, Inc.

And is that a product line where you’re in a position now to take pricing up in ‘14 because of that?

Alfred Festa

We’ll test the market as we always do and we have introduced a nice new product in that building material called the Preprufe Plus line that is a very good adoption specially in the commercial, well it is in the commercial side only.

Hudson La Force

We’ll get a good mix benefit even if we don’t raise underlying prices because of the strength of this Preprufe Plus.

James Barrett – CL King & Associates, Inc.

I see. And then Hudson I think this is a question for you. The UNIPOL acquisition 28 million of sales, 3 million of adjusted EBIT plus 7 million of integration expense, when the integration expense is do peter out, is the quarterly sales rate and the adjusted operating results is that a reasonable going forward sales number, quarterly sales number and quarterly operating profit number?

Hudson La Force

The answer is yes, Jim. This business does have a little lumpiness because of the licensing, the timing of the licenses and things like that. But I think in broad strokes, the answer is yes.

James Barrett – CL King & Associates, Inc.

Okay. Well, thank you both.

Hudson La Force

Thank you, Jim.

Operator

Thank you for this question. We have one more question in the queue. It’s from the line of John McNulty from Credit Suisse. Please go ahead.

Ernie Ortiz – Credit Suisse

Hi, it’s actually Ernie Ortiz filling in for John. Just on back of that question, so you have had the UNIPOL assets for almost half a year now. Are they performing well with your expectations and are the financial targets are same in terms of capital avoidance etcetera as when you urgently laid them out?

Alfred Festa

Yes, is the answer. We’ve had it operating it for fourth months and the synergies that were forecasted basically been implemented both on the existing business as well as the UNIPOL side. So yes we feel very good about it, and the complementary nature with the rest of the polypropylene business is very good.

Ernie Ortiz – Credit Suisse

That’s helpful. And I guess as a follow up, you called higher raw materials in the construction segment during the quarter. Can you just give us a sense as to how raw has trended throughout the quarter and across the business and just your sense on how to get trends for the remainder of the year?

Hudson La Force

Just for construction?

Ernie Ortiz – Credit Suisse

I guess for the business as a whole.

Hudson La Force

Yes, let me do the construction piece and I will give you the grades overall. Raw are up a lot of these raw material pricing increases we saw in the second half of last year that are now kind of flowing through on a year-over-year basis. As we look from Q1 through the end of this year, we see a little of additional inflation but not much sequentially as we go from Q1 to Q2 to Q3 to Q4 . Now actually -- have said that for construction I think that pattern actually holds for the whole company as well. Little bit of inflation in Q1 but most of that follow through from last year and as we look forward in aggregate, not much. We were a little nervous about (inaudible) pricing a few months ago, that market hasn’t this cost haven’t increased the way we thought. Natural gas has moved around on us a little bit but it’s about but it’s consistent with what we thought it would be at this point.

Ernie Ortiz – Credit Suisse

Okay great. Thanks for the color.

Operator

Thank you for your question. We’ve got couple more in the queue now. The next one is from the line of Chris Shaw from Monness. Please go ahead.

Christopher Shaw – Monness, Crespi, Hardt & Co., Inc.

I just have a quick one on the construction products. You called out the lower gross margin as a somewhat a product of the higher operating costs to verify. Will that be a product launch that’s going on there? Is it sort of one-time or is that sort of continuing higher cost for that product?

Alfred Festa

No, this is a new product development, this is the onboard on the truck chemical dispensing unit and we’ve been investing in it. We’ve been investing in it probably for the last two years now and as we look at that investment trended up in the first quarter.

Christopher Shaw – Monness, Crespi, Hardt & Co., Inc.

You’ll continue for the rest of the year for those kinds of levels or is it?

Alfred Festa

We’re looking at it, we’re assessing it. We’re looking at the commercial, how many commercial units we have and so on. We’ll give more color on that in the second quarter.

Christopher Shaw – Monness, Crespi, Hardt & Co., Inc.

Okay. Thanks. That’s it.

Operator

Thank you for your question. Our next question is from the line of Mike Sison from KeyBanc. Please go ahead.

Michael Sison – KeyBanc Capital Markets

Hey guys nice quarter.

Alfred Festa

Thank you, Mike.

Michael Sison – KeyBanc Capital Markets

In terms of acquisitions, UNIPOL is going well but there is another nice careless asset out there that’s up for sale and other opportunities out there that you can leverage your balance sheet is that an area that you’re focused on?

Hudson La Force

Yes Mike, as we look out over the next few years I’ll say, we continue to think of bolt-on acquisitions as a core part of our growth strategy. Sometimes, people ask did the UNIPOL acquisition squeeze out other opportunities either financially or for management bandwidth reasons and the answer is no. And doubly so now with the integration essentially completed at this point but the thing that’s going to drive our decision making about acquisitions, our activity in that regard is going to be strategic fit and returns. We’re not going to invest in an acquisition that won’t produce the return requirements that we have and those will be the two things that guide us going forward.

Alfred Festa

Mike let me add on. I mean we are very inquisitive. We keep looking at a lot of assets. As I said in March, I think the advance coming out of chapter 11 but it’s clearer now than it was when we were in chapter 11 is our ability to partner a joint venture with someone. And those opportunities are also present so we’ll keep working on that. As Hudson said it’s financial we don’t feel constrained financially.

Michael Sison – KeyBanc Capital Markets

Okay, great. And then in FCC, it was good to see volumes up during the first quarter. Can you may be talk about the competitive environment, has it stabilized a bit over the year and do you feel good about the industry sort of moving in the right direction?

Alfred Festa

Yes I do. It’s clear that our customers are looking for what’s that next product catalyst product that we’ll [wound] to get those next best yields. And I think across the industry as suppliers, we are all working very hard to provide that solution to those problems that our customers face. I think from a customer standpoint, as our customers some of these refineries get a little bit more challenged in Europe and so on, that’s putting some pressure on. But from an industry dynamic and the suppliers of catalyst, I think everyone is focused on providing the solutions that our customers need.

Michael Sison – KeyBanc Capital Markets

Great. And then, could you update us on when you look to expand your capacity some competitors have talked about debottlenecking you’ve got the only sort of big expansion some time in ‘15. Do you still feel good about that? Is demand there to absorb that potentially longer term?

Alfred Festa

From a longer term perspective, we strongly believe FCC capacity will be needed to supply the demand and the fundamental underlying demand of gasoline as well as propylene. It’s still an effective method to get propylene whether it’s the timing of it may be in question. What we’re doing is we’re starting this year the infrastructure in that Middle East unit they have that infrastructure ready and as we’ve said, we will time those planed operations with the regional demand.

Michael Sison – KeyBanc Capital Markets

Great. Thank you.

Operator

Thank you very much for your question. We have no further questions at this time. So I would like to turn the call back to Mark Sutherland for closing remarks.

J. Mark Sutherland

Thank you, Chris and thank you all for joining us this morning. If there are any questions that require further clarification or direct follow up, please feel free to call me directly at 410-531-4590. And again thanks for your time and attention this morning. Good bye.

Operator

Thank you very much. Ladies and gentlemen, that does now conclude your conference call for today. And you may now disconnect your lines. Have a great day. Thank you very much for joining.

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