W.R. Grace & Co. (



Q3 2011 Earnings Call

October 25, 2011 1:00 p.m. ET


Mark Sutherland – VP Investor Relations

Alfred Festa - Chairman of the Board, Chief Executive Officer and President

Hudson La Force - Chief Financial Officer, Principal Accounting Officer and Senior Vice President


Rob Walker - Jefferies & Company, Inc.

Michael Sison - KeyBanc Capital Markets Inc.

James Barrett - CL King & Associates, Inc.

Patrick Duff - Glider

Patrick Murray - Credit Suisse



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My name is Lacy, and I will be your coordinator for today. At this time, all participants are in listen-only mode. Later we will facilitate a question-and-answer session, towards the end of the presentation. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Mr. Mark Sutherland Vice President of Investor Relations. Please proceed.

Mark Sutherland

Thank you, Lacy, and hello, everyone, and thank you for joining us today, October 25, 2011 for a discussion of Grace’s third quarter results released this morning. Joining me on today's call are Fred Festa, Grace’s Chairman, President, 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 as of today. Any redistribution, retransmission, or reproduction of this call without company consent is prohibited.

With that, I will turn the call over to Fred.

Alfred Festa

Thanks, Mark. Hello, everyone, and thank you for joining us for our third quarter earnings call. Q3 was a very good quarter for Grace. We grew sales 27% with a solid contribution from both businesses. Gross profit dollars rose 29% and gross margin increased to 36.5%.

Our adjusted EBIT increased 55% and adjusted EBIT margin increased 300 basis points to 16.4%. Finally, our adjusted EBIT return on invested capital increased to 34.2%. These results reflect the high value of our product and the success of our business teams in responding to changing customer requirements and changes in our operating environment.

We have a balanced portfolio of businesses, and a diversified geographic footprint with great positions in the industries we serve. This coupled with a very disciplined playbook allows us to continue to deliver exceptional performance.

Grace Davison had a strong quarter, and is on track to deliver its third consecutive year of double-digit earnings growth. The team has consistently demonstrated their ability to effectively address marketplace challenges. They responded quickly and effectively to the severe downturn that began in fourth quarter 2008, and expanded gross margins during 2009.

They also responded quickly and effectively to the jump in Rare Earth cost last year, launched a series of very successful new products, and further expanded gross margins this year. Their consistent customer focus, agility, and disciplined execution give me confidence they will continue to perform well, even in an uncertain economic environment.

Grave Davison delivered good year-over-year price and earnings growth this quarter. Sales volumes declined about 3% from the strong third quarter of 2010. About half of this decline was segment share loss, and about half was related to slowing demand.

We have focused strongly on margins this year to ensure we are covering the cost of higher raw materials and we have lost some business as a result. Our teams will use our high-value products to recover the lost sales volume while maintaining our higher gross margin.

Our recent new product introductions and capital investments, including last year’s Specialty Catalyst acquisition, give us the products and capacity; we need to replace loss sales volumes at better margins.

Grace Construction Products also performed very well this quarter, despite the continuing challenges in many of its markets. Overall sales increased 22%, and sales in emerging regions grew 25% in the quarter. The team also expanded gross margins for the third consecutive quarter, and now it’s catching up to the 10% increase in raw materials we have seen since Q3 2010.

The GCP team continues to work very hard to improve profitability. In addition to improving gross margins, GCP is working to improve productivity across the business. Sales per employee increased 8.5% versus the prior year quarter, reflecting sales volume growth, especially in our new plants, and strong cost control in the mature markets.

Strategically, GCP has solidified its position in North and South America, and is showing sustained progress in building its business in Asia.

Europe remains challenging, especially Southern Europe. And we are not achieving our target levels of returns there. Hudson will comment further on the actions to improve GCPs profitability in his section.

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