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Executives

Mark Sutherland – VP, IR

Fred Festa – Chairman and CEO

Hudson La Force – SVP and CFO

Analysts

Rob Walker – Jefferies

Mike Sison – KeyBanc

Chris Shaw – Monness Crespi

Dana Walker – Kalmar Investments

Rosemarie Morbelli – Gabelli & Company

Davin Han – PGI

W.R. Grace & Co. (GRA) Q2 2012 Earnings Call July 25, 2012 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2012 WR Grace & Company Conference Call. My name is Reggie and I’ll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

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

Mark Sutherland

Thank you, Reggie. Hello, everyone, and thank you for joining us today, July 25, 2012 for a discussion of Grace’s second quarter 2012 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 Web site. To download copies, go to grace.com and click on Investor Information. The links are available at the upper right hand 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 conditions.

We will also discuss certain non-GAAP financial measures, which are described in more detail in this morning’s release and on our Web site. Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures are contained in our earnings release and on our Web site.

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.

Fred Festa

Good. Thanks Mark, and hello to everyone on the call. Let me start with our – our second quarter results were strong and I’m pleased on how we performed. I’d like to highlight three components of our results. First, we had solid growth in our businesses with base pricing and sales volumes growing more than 7%.

Second, I’m very pleased with our results in the emerging regions. Sales in emerging regions grew more than 13% and now are over 36% of our total sales. More than one-third of our company is growing at double-digit rates due to increased customer adoption and market penetration.

To me, this reinforces the fact that we are properly positioned with the right products, the right customers, and the right regions to grow at the rates necessary to meet our 2014 adjusted EBITDA goal of $850 million.

Third, we had strong margins due to continued focus on items above and below the gross margin line. Gross margin continued at the high end of our target range of 35% to 37%. For the first six months of 2012, our gross margin of 36.8% is 60 basis points better than full year 2011 and 130 basis points better than full year 2010. Adjusted EBITDA margin was 21% for the quarter.

I’m also pleased with the strong margins in the Materials Technologies and Construction Product segments. As you remember, we stumbled a bit in Material Technologies in Q1. In Q2, we improved our performance with targeted sales gains, operational improvements and cost controls. And our operating margin improved 380 basis points sequentially.

Construction Products had higher sales volume, which translated into better operating leverage and higher margins. Gross margins were 35.1% and operating margins were 13%. We achieved these results in an operating environment which is clearly more difficult than we initially projected for 2012.

The most significant change and challenge to our original plan is the uncertainty coming from Europe. We saw this in weaker end market demand and unfavorable currency impacts. We also lost some FCC catalyst sales due to refinery closures in the mature markets. These closures are part of the global shift in refining capacity to the emerging regions where demand for transportation fuels is growing the fastest. We have anticipated this trend and plan to add FCC catalyst capacity in Abu Dhabi and China in response.

As the industry works through this regional shift of capacity, we will see some short-term impact to sales. But we are confident in our ability to maintain our industry leadership position given our strong value proposition and global presence.

Our businesses are managing well in the more challenging environment and we affirm our full year outlook for adjusted EBIT in the range of $510 million to $530 million.

Let me discuss some of the factors driving our confidence in the second half. We see continued sales volume growth in FCC catalyst. Strong sales of polyolefin and chemical catalyst and higher earnings growth in our ART hydroprocessing catalyst joint venture. We expect continued progress in Material Technologies with good earnings growth over full year 2011.

Volume growth in Construction Products should continue, although at a slower rate than in the first half, and we will continue to focus on expense control, balanced for the investments needed to sustain our growth. We like how we are positioned and our business leaders are focused and ready to deliver.

I’d now like to update you on the recent developments in our bankruptcy. In our February call, we advised that we had satisfied the legal requirements of the bankruptcy code by having our joint plan of reorganization approved by both the bankruptcy court and the US district court. Since then, we’ve been waiting to see what appeals will be made to Third Circuit Court before making an emergence decision.

We were delayed by more than four months by a motion for reconsideration that was favorably resolved on June 11, resulting in a final deadline – July 11 for filing appeals to the Third Circuit. As expected, a number of appeals were filed. None of them are new. The arguments already have been considered and rejected by both the bankruptcy court and the district court. We expect three of the appeals will be withdrawn once the Libby settlement agreements are fully effected.

Based on our review of these appeals, Grace has made the decision to seek to emerge from bankruptcy. We believe that the risk of any of these appeals will succeed is remote and we believe that the legal and economic benefits of emerging with these appeals outstanding are greater than the benefits of remaining under Chapter 11 protection. It is due time to put the plan into effect, so the funds can flow to claimants.

However, in order to emerge with the appeals outstanding, we will need approval of our co-proponents and waivers by Sealed Air and Fresenius of certain conditions and the respective settlement agreements. We have begun discussions with our co-proponents and with Sealed Air and Fresenius. To be confident of emerging this year, the parties need to make a go decision by early September.

Thanks. And I’ll now turn it over to Hudson to provide 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. Page four shows the four key measures we use to evaluate our performance and page five shows additional year-over-year and sequential comparisons.

Sales in the quarter were $827 million, unchanged from last year. Organic growth of over 7% was offset by unfavorable currency translation of 4% and lower rare earth surcharges of 3%. Almost five points of the organic growth was due to improved base prices achieved across all three of our businesses. Sales volumes grew about 3%, led by double-digit growth in polyolefin catalysts and high-single digit growth in Construction Products.

Gross profit held steady at $304 million as improved pricing and productivity gains were offset by higher raw material costs and higher manufacturing costs in our catalyst and materials businesses. Gross margin was 36.8%, down 10 basis points year-on-year and up 10 basis points sequentially.

Adjusted EBIT increased 8% to $144 million, driven by higher segment operating income in Construction Products and lower corporate expenses, including lower incentive compensation and the initial benefits of our previously announced restructuring initiatives. Adjusted EBIT margin increased to 17.4% and adjusted EBITDA margin improved to 21%, an increase of 130 basis points year-on-year and 230 basis points sequentially.

Adjusted free cash flow was $147 million for the first six months compared with $60 million last year. The increase in cash flow was due to higher operating earnings and reduced working capital requirements. Adjusted EBIT ROIC was 36% on a trailing four-quarter basis compared with 30% in the prior-year quarter.

Adjusted EPS increased 3% to $1.14 per diluted share. Adjusted EPS growth was reduced by a 5% increase in our book effective tax rate compared with the prior-year quarter and a 1% increase in share count. I will talk more about the tax impact later in my remarks.

So let’s turn to Catalysts Technologies on page six. Catalysts Technologies includes our FCC polyolefin and chemical catalysts. Our share of ART’s earnings are also included in this segment’s earnings. Second quarter sales for Catalysts Technologies were $329 million, down 2% from the prior-year quarter. Base pricing and sales volumes increased 10%, but were more than offset by lower rare earth surcharges and unfavorable currency translation. The increase in base pricing was driven by adoption of our lower rare earth FCC catalysts which are now used by about 85% of our customers.

FCC catalyst sales volumes increased in North America and in the emerging regions, but not enough to offset a decline in Europe. Several refineries have closed during the last 12 months, reducing sales in the second quarter by about $12 million or 4%. For the year, we expect these closures to reduce sales by over $50 million.

We expect to fully offset these lost sales, however, as other customers increase production to meet the global demand for transportation fuels. This process has already begun. Q2 FCC catalyst sales volumes increased 7% from Q1. Our FCC segment share remains well within its historical range.

Sales volumes and pricing for our polyolefin and chemical catalysts increased 17% during the quarter, partly offset by unfavorable currency translations. This growth was driven by strong polyethylene catalyst sales and continued growth in new polypropylene catalyst volume.

Catalysts Technologies gross margin was 40.4% compared with 41.2% last year and 42% in the 2012 first quarter. The decline in gross margin year-over-year and sequentially reflected the effects of two major scheduled maintenance shutdowns in Q2.

We added 23 days of catalyst inventory in advance of the shutdowns, which resulted in favorable overhead absorption in Q1, then liquidated nearly all that inventory by June 30, resulting in unfavorable overhead absorption in Q2. Both turnarounds were completed by quarter-end. We’ll see some additional gross margins impact in Q3 and we expect gross margins to return to normal levels for Q4.

Segment operating income increased – sorry, decreased 1.6% on lower sales and lower gross margins, offset by good expense controls. Segment operating margin was 30.5%, an improvement of 10 basis points compared with last year and a decline of 120 basis points sequentially.

Our share of ART’s net income was $3 million, down $1 million from last year. For the first six months, ART’s net income was up 16% year-on-year. We expect ART earnings growth to be even stronger in the second half.

We continue to expect positive catalyst earnings growth for the year. We expect good base pricing and sales volumes. The total dollar sales growth will be negative due to lower rare earth surcharges, unfavorable currency translation and the refinery closures. These headwinds totaled $270 million for the year to catalyst technologies.

Let’s turn to page seven to discuss the impact of rare earth in more detail. The chart on the left shows the average China export price for rare earths and the chart on the right shows the year-over-year change in rare earth prices. Based on current rare earth prices, we expect the full year sales headwind to be about $175 million compared with the $100 million headwind we expected at the beginning of the year.

The impact in Q2 was $26 million or 8% of sales. The impact in Q3 will be about $85 million or more than 20% of sales. As a result, we will report negative year-on-year sales growth for Catalysts Technologies in Q3, although we expect sales volumes to be as strong as in Q2. The rare earth headwind in Q4 will be about the same as it was in Q3. In Q1, rare earth was a small tailwind to sales.

There is a lot happening in the Catalysts Technologies’ P&L. Let’s step back for a moment. Over the last two years, we’ve made significant improvements in our FCC and polyolefin catalysts businesses, including new products, capital investments, and supply chain and manufacturing improvements. These improvements are producing significant, sustainable results.

When we look at our progress over two years, which helps control for some of the ups and downs in rare earth, we’ve grown sales volumes 10%, improved base pricing 12%, increased gross margin 530 basis points, and increased EBITDA margin 620 basis points. Segment operating income has increased $89 million or 81%.

Let’s move to Materials Technologies on page eight. Second quarter sales for Materials Technologies were $224 million, a decrease of 4% compared with the prior-year quarter. Unfavorable currency translation and lower sales volumes were partially offset by improved pricing.

Among our three segments, Materials Technologies has the highest exposure to Europe and is the most sensitive to de-stocking by our customers due to the short cycle nature of the business and the higher inventory levels our customers carry. Demand from European customers was weak in engineered materials and packaging and we saw an unmistakable de-stocking in May by packaging customers.

Segment gross margin was 33.5% compared with 33.6% in the prior-year quarter and 31.8% in the 2012 first quarter. The sequential increase in gross margin of 170 basis points primarily reflected improvements in operating productivity and pricing. Segment operating margin was 20.7%, an increase of 200 basis points compared with the prior-year quarter and 380 basis points sequentially.

We’re pleased with the progress in this business. We’re executing the improvement plan we discussed during last quarter’s call. Sales volumes were up sequentially including in Asia and margins were up sequentially.

Please turn to page nine for Construction Products. Second quarter sales for Construction Products were $274 million, an increase of 6% compared with last year. The increase was due to higher sales volumes and improved pricing, partially offset by unfavorable currency translation.

Construction Products achieved its seventh consecutive quarter of year-over-year sales growth and this was the segment’s best quarter for operating income since the 2008 third quarter.

Sales in North America at 41% of sales increased 10% year-over-year, led by multifamily residential and infrastructure projects in the Southern US. Sales in the emerging regions at 33% of sales increased 12%, led by strong sales performance in emerging Asia, Latin America and the Middle East.

Western Europe at 15% of sales declined 14%, largely due to market softness in Southern Europe and the UK. Our business in Europe continues to be profitable and has improved due to our restructuring actions, but margins remain dilutive to the segment average.

Segment gross profit increased 9% and gross margin improved 100 basis points to 35.1%. The increase in gross margin was due to higher sales volumes and improved pricing and favorable product mix.

Segment operating income was $36 million compared with $30 million for the prior-year quarter, a 20% increase due to higher sales and improved gross margin. Segment operating margin improved to 13% compared with 11.5% in the prior-year quarter.

Let’s turn to our outlook on page ten. Our businesses are performing well with over 7% organic sales growth year-to-date and very good margin performance. But we are operating in a tougher economic environment than we expected at the beginning of the year.

The global economy is weaker and the dollar is stronger. We affirm our full-year outlook range, although we now expect to be at the lower end of our range. In April, we expected to be at the higher end of our range.

As you know, it is not our policy to update our annual guidance each quarter or to provide quarterly guidance, but we want to be transparent about the pattern we are expecting in our quarterly earnings for the rest of the year.

Last quarter, we noted that our quarterly earnings profile would be different this year than in 2011 and this continues to be our expectation. Q2 finished stronger than we expected, but Q3 is going to be weaker than we expected a quarter ago.

We expect Q3 sales to be less than $800 million. We expect good organic growth with the sales headwinds in Q3 are significant. The total impact from lower rare earth surcharges, the stronger dollar and refinery closures will be about $150 million compared with Q3 last year.

We expect our gross margins to continue to be at the higher end of our 35% to 37% target range and we expect our expense productivity initiatives to continue.

When you add all this up, we expect Q3 adjusted EBIT to be lower than Q3 last year and lower than Q2 and Q4 this year. This is an unusual pattern for us. The biggest driver of this atypical earnings pattern is rare earth and the way it runs through our P&L and balance sheet. We expect earnings to follow a more typical pattern next year as the ups and downs of rare earth will be behind us.

We’ll update and narrow our 2012 outlook range with our Q3 earnings release and then for 2013 we intend to return to our stated practice of providing annual guidance with a single mid-year update.

A few final notes before we open the call for your questions. Corporate costs declined 20% year-on-year and 14% sequentially, reflecting lower incentive compensation accruals and good expense control across the company. As economic uncertainty increased in Q2, we tightened our belt and accelerated our productivity and restructuring initiatives. Corporate costs will be about 5% lower in the second half than they were in the first half.

On taxes, our book ETR for adjusted earnings for the year is estimated to be 33.5%, up 0.5 point from our expectation at the beginning of the year and up 1.5 points from Q2 last year. Although this high book ETR is dilutive to earnings, we continue to prioritize our cash tax rate over our book tax rate. Our cash tax rate was 15% for the first six months and we expect it to be 14% for the full year. We intend to continue our strategy of maximizing the present value of our tax attributes including the NOL we will generate at emergence.

If we emerge from bankruptcy at year-end, we expect our exit financing requirement to be less than $400 million including the effect of the announced acquisitions we have completed or expect to complete in the second half. This estimate does not include any financing required to settle the warrant.

With that, we will open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Laurence Alexander of Jefferies. Please proceed.

Rob Walker – Jefferies

Good morning. This is Rob Walker in for Laurence.

Fred Festa

Hi, Rob. How are you?

Rob Walker – Jefferies

Thanks. Good. I guess, first, Materials Tech was quite stronger this quarter than we expected. What drove the strength? Was it simply improved silica utilization rates, the new facilities in Asia and South America? And then can you talk briefly about your outlook in that segment in Q3 and Q4?

Hudson La Force

Yeah. Rob, it was a combination of all. We stumbled a little bit on the operational manufacturing side of it. We got that behind us in Q2. We improved our volume in Asia in a couple of the segments with some of the new products that we have. And thirdly, it was the result of some pricing actions that we were able to achieve in those markets. When I look at the first half of 2012 versus the second half on the whole Materials side, we will be stronger both on volume as well as profitability.

Rob Walker – Jefferies

Okay, thanks. And then in terms of – I understand the impact that the turnarounds resulted in Catalysts gross margins being down sequentially and that they are an impact year-over-year. But with base prices up about 8% and then a positive mix shift towards polyolefin catalysts, I guess, why would gross margins be down year-over-year?

And then kind of – it’s kind of parsing your outlook from Q3 and Q4, I guess, do you expect Catalysts profit to be up sequentially in Q4 versus Q3? And then, is that just all rare earth or is there anything else going on?

Fred Festa

Rob, it really is the effect of these turnarounds. And I think – maybe the point that – I will add some perspective on this. We turned around both our Worms facility and our Lake Charles facility in Q2. For everybody, these are the two largest manufacturing plants we have in Catalysts and these were extensive turnarounds. We built 23 days of inventory. 23 days of inventory going into the turnarounds. Most of that build was in Q1 and then we liquidated all of that inventory in Q2. So our days of inventory in Catalysts went from 60-some-odd days to 80-some-odd days back down to 60-some-odd days. And it just – it’s driving a pretty big effect.

I think the second part was about Q4 versus Q3, yes, we expect to improve profitability Q4 from Q3.

Operator

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

Mike Sison – KeyBanc

Hey, good morning, guys. Nice quarter.

Fred Festa

Thanks, Mike.

Mike Sison – KeyBanc

Hey, Fred, I just wanted to understand your comments on the bankruptcy. You sort of mentioned that you made the decision to exit. You’ve got to talk to your co-proponents and that maybe early September you can officially make the go decision. So just so I understand, what needs to happen between now and then to give you the comfort to go ahead?

Fred Festa

Well, let me just reaffirm. We believe it is in Grace’s best interest to emerge even with these appeals outstanding from both a legal perspective – it will enhance our legal position. We’ve been debating this, arguing this in court for so many years. And the best way to support your legal position based on our advisors is put the plan in effect and show that the plan is fair and pays out the way it said it’s going to do. So that’s one of the big drivers.

The second driver is, obviously, Sealed Air and Fresenius have to make – are part of the plan and have to make a contribution to the plan. So we need approval not only by our co-proponents, which is the ACC and Futures Representative, but we need Sealed Air to evaluate it – and, again, it’s early in the process – so evaluate it and agree – Sealed Air and Fresenius – and agree to waive their conditions because their conditions are very clear in the settlement agreements.

Mike Sison – KeyBanc

Okay, great. Then in terms of the – the base pricing continues to be impressive for Catalysts Technologies. You talked about rare earth coming down. Has the new technology pretty much stuck firmly within customers in terms of lower rare earth products that you bought out over the last year?

Fred Festa

Yeah, absolutely. Absolutely. I think Hudson said 85% and we feel good about that and we’re in the process of looking at some other new products as well, but the underlying performance has clearly been demonstrated.

Mike Sison – KeyBanc

Great. And then finally, you talked about ART getting better in the second half of the year. Is that more order timing third – second quarter looked a little bit light versus first. Do you have a pretty good backlog there?

Fred Festa

Yeah, we do. We feel very good about the fixed bed and the resid bed or the ebullating bed side of it. Those orders are easily seen. And we are seeing good demand in the hydroprocessing side, the distillate side. And a combination of that will give us – it gives us that confidence for the second half.

Mike Sison – KeyBanc

Great. Thank you.

Operator

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

Chris Shaw – Monness Crespi

Yeah. Good morning, guys. How are you doing?

Fred Festa

Hey Chris.

Chris Shaw – Monness Crespi

I felt some of the comments, maybe early on, you were talking about Construction, that – I guess I just wanted to see what you guys think about the trends there, mostly North America, I guess. Is it something that you think is going to be as strong in the second half? I thought there was some comment that you might – might get a little weaker in the second half. I just wanted to clarify what you guys said there.

Fred Festa

Yeah. We’ve been pleasantly – this is Fred. We’ve been pleasantly surprised with the strength in North America and the Americas, in general, on the Construction side. There is just a lot of economic turmoil bouncing around and there is a lot of cautiousness in the papers and so on.

And as you know, in the construction chemical side, we don’t have as long visibility as we would do in the ART side of it. So we’re just being maybe a little bit cautious that it could be slightly weaker, North America.

Europe, as we’d said in the call, Europe is down 14%, 15% and we don’t see – and we’re not planning any recovery in Europe in the second half. And across Asia, we’ve continued to do well both in the emerging parts of Asia, as well as the more established region of Asia.

Chris Shaw – Monness Crespi

That’s fair. And then I guess, just around Construction, the deal you guys did in – was it Brazil – Rheoset?

Fred Festa

Yes.

Chris Shaw – Monness Crespi

What’s the size there? Is it just – is it small, very small or will be adding...?

Fred Festa

It’s like our typical bolt-ons that we’ve done. It’s small. It’s small. But it’s a nice – it gives us a nice position in that market with what we’ve been able to build over the last couple of years to take advantage of all that building that’s happening with the Olympics and the World Cup. It’s right in Rio, so...

Chris Shaw – Monness Crespi

Right. Then looking at the reaffirmation of the guidance, what’s – I guess as you took down your expectation at least for the second half of the – where currencies were going to be? I guess, euro, in particular, $1.22 is what you are using for the second half. I know – I think initially your guidance had $1.30 number for the euro. What’s sort of making up for that then? Is it the cost cutting or is it underlying volumes a little stronger than you expected at the beginning of the year?

Hudson La Force

Chris, what we are seeing – it’s really all of those things. We’re pulling the levers that we have. Volume performance has been good. Pricing performance has been good. We did tighten our belts in the second quarter around expenses and things like that. So we’re working every part of the P&L to get the best result.

Chris Shaw – Monness Crespi

Okay, great. Sounds good. Thanks.

Operator

Sir, you have no questions at this time. (Operator Instructions) Your next question comes from the line of Dana Walker of Kalmar Investments. Please proceed.

Dana Walker – Kalmar Investments

I’d be happy to proceed. Good morning.

Fred Festa

Hi, Dana.

Dana Walker – Kalmar Investments

Hudson, could you expand upon the role or the way the rare earth ups and downs flow through the balance sheet and the income statement?

Hudson La Force

I will, Dana. I don’t want to do an accounting lesson. But let me hit some of the broad pieces. This has to do with inventory cap and the days on hand of inventory and the days on hand of rare earth that we’re holding. And as we’ve managed through this over the last, what’s it been now, six or seven quarters, I guess, we have seen a high run-up in rare earth. It’s comeback down. At different points in time, we’ve had different days on hand of inventory.

And so you’ve got two or three or four variables that are all moving, being driven by various market costs, as well as manufacturing, inventory, supply chain decisions that we’ve been making. And basically, when you put all of that into the inventory capitalization models, it’s what moves dollars from quarter-to-quarter, things could get capped up and then get released in the next quarter. So it doesn’t always mirror the cash flows that are running through the business according to sales and purchasing decisions.

I don’t know if that makes it clear or less clear, but that’s what’s happening, Dana.

Dana Walker – Kalmar Investments

That is qualitatively helpful. If we were to compare the amount of working capital, net of payables that you had tied up in rare earths at the peak versus where it’s likely to end this year, what change in cash tied-up in the business is that likely to lead to?

Hudson La Force

I don’t have a precise number, but order of magnitude, it’s $100 million or more. It could even be $200 million. It’s a very big number.

Dana Walker – Kalmar Investments

Fred, if you were to comment to the degree that this was possible on a public forum, whether Fresenius and Sealed Air would be of like minds in having you exit at this time, would you do that or is that tough to do?

Fred Festa

No, I wouldn’t do that. It wouldn’t be fair. It wouldn’t be fair to Fresenius and Sealed Air. So they’ve been close to the gates. They’ve been very good supporters of ours. And they’ll review it and come back with a decision and there’ll be dialog around it.

Dana Walker – Kalmar Investments

Final question relates to the refinery closure effect of $50 million. I presume that’s a visible gross detractor. And if there were to be gains which would be harder to pinpoint as volumes would pick up at other locations, that number would lessen that $50 million, and yet knowing what that net number is likely to be is tough.

Hudson La Force

You’re exactly right, Dana. It’s the gross effect of the refineries that have closed. Obviously, we’re working to replace that volume and we have replaced some already. It’s sequentially from Q1 to Q2. FCC catalyst volumes improved about 7%. Some of that was replacing closed – volumes from closed refineries. Some of it was natural growth that we would expect.

The point, I think, is that we have the footprint, so that as our customers shift their refining capacity out of North America and Europe into the Middle East and Asia, we’re working to follow them and it doesn’t happen immediately.

A refinery closes in Europe and it may be a year or more that that replacement capacity comes online in another region, but we’ve got the footprint – commercial and technical footprint and we’re working on having the manufacturing footprint to follow that demand shift.

Dana Walker – Kalmar Investments

Is there – what level of confidence should there be about your ability to capture like share of the refinery closure volumes lost as that reappears elsewhere?

Hudson La Force

We’re highly confident.

Dana Walker – Kalmar Investments

That comes because of product specialization and – or would it just be because of your share of market and your ability to likely sustain share of market where it rematerializes?

Hudson La Force

It’s both of those factors, plus the historical position we have in those regions. These are not new regions for us. We’ve operated in the Middle East and Asia for many, many years and we have a very strong commercial and technology footprint in those regions.

Dana Walker – Kalmar Investments

Good stuff. Thank you.

Hudson La Force

This is – FCC is probably the most globally mature business that we have.

Dana Walker – Kalmar Investments

All right. Keep up the good work. Thank you.

Hudson La Force

Thank you, Dana.

Operator

Your next question comes from the line of Rosemarie Morbelli of Gabelli & Company. Please proceed.

Rosemarie Morbelli – Gabelli & Company

Regarding your emergence from bankruptcy, could you remind us of which conditions needs to be waived by Sealed Air and Fresenius in order for you to do it?

Fred Festa

The conditions are really the conditions that they – that were agreed in the original settlement, and that is that there are no appeals to the – no appeals are left to the plan. So it’s basically a complete and appeal-free plan.

Rosemarie Morbelli – Gabelli & Company

Would that take away more or less – and I’m not too sure how to phrase this – but take away the fact that they cannot be sued by any of the plaintiffs once you are out of bankruptcy and they have agreed to the conditions?

Fred Festa

Yes, that is exactly true. That gives them finality and certainty.

Rosemarie Morbelli – Gabelli & Company

Okay. So they would have to agree to eliminate that certainty, am I correct in understanding what it is?

Fred Festa

I’m not sure I’m following exactly your question. They would have to agree to waive the condition. And again, it depends on what specific conditions, so I’m not exactly sure how to respond to that.

Rosemarie Morbelli – Gabelli & Company

Okay. So that would mean that the door open for them to be sued would remain open?

Fred Festa

No, no, that – no, that’s not the case. What they would waive is the condition, they would fund the plan with the appeals outstanding because they believe – if they believe that it’s in their best interest for this plan to be confirmed.

Rosemarie Morbelli – Gabelli & Company

Okay.

Fred Festa

Go ahead, Hudson.

Hudson La Force

Let me see if I can kind of package it. Our plan and the Sealed Air and Fresenius settlement agreements contemplated a final non-appealable order. We’re not at that point. We’ve made the decision – Grace has made the decision that we improve our legal position and we benefit economically by coming out now, emerging even though some appeals are still outstanding.

Sealed Air and Fresenius, their settlement agreement also said that our plan would be final and non-appealable. We’re not quite to that point yet. They need to make a decision, a legal decision and an economic decision whether they agree or not with our assessment that we improve our position by coming up now. Is that – did I capture it better, Fred?

Fred Festa

We believe that by emerging with the appeals outstanding improves our legal position to get a final plan approved. We believe by putting the plan in practice and operating that plan that it demonstrates and removes the vagaries of the legal appeals that have been thrown or have been up there for a number of years.

Rosemarie Morbelli – Gabelli & Company

Okay. Thank you. That is helpful.

Operator

Your next question comes from the line of David Han of PGI. Please proceed.

Davin Han – PGI

Hi. A very good quarter. Congratulations. Can you comment on FCC versus HPC for the second half?

Fred Festa

Our FCC volumes will be up and the HPC volumes will be up as well. Because of the lumpiness in ART, the second half will be stronger than the first half in HPC.

Davin Han – PGI

Okay. Thank you.

Operator

At this time we have no further questions. I would like to turn the call back over to management for closing remarks.

Fred Festa

Yes. Reggie, thank you very much. And thank you to all who joined us this morning. Before signing off, I’d just like to review my telephone number for direct follow-up. I can be reached at 410-531-4590 for any follow-up or clarification to questions. Thank you very much and have a good day.

Operator

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

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