W.R. Grace's CEO Discusses Q2 2012 Results - Earnings Call Transcript

W.R. Grace & Co. (GRA)

Q2 2012 Earnings Call

July 25, 2012 11:00 AM ET

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

Presentation

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.

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