Market Overview

Grace Reports Third Quarter 2019 Results

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Third Quarter Highlights (all results based on year-over-year comparison unless otherwise noted)

  • Third quarter results consistent with July 25, 2019 outlook, reflecting the impact of previously disclosed discrete items
  • Net sales down 4.9% (down 3.7% on constant currency) on lower sales volumes, partially offset by improved pricing
  • Diluted EPS of $0.80, up $0.56 or 233.3%
  • Adjusted EPS of $0.98, down $0.13 or 11.7%
  • Full-year 2019 earnings outlook incorporates the impact of the Middle East feedstock disruptions (as disclosed on October 1, 2019). Adjusted EPS expected to be in the range of $4.32 to $4.38 down from $4.35 to $4.43

COLUMBIA, Md., Oct. 24, 2019 (GLOBE NEWSWIRE) -- W. R. Grace & Co. (NYSE:GRA) today announced financial results for the third quarter of 2019, summarized in the table below, and has incorporated the impact of the Middle East feedstock disruptions as disclosed on October 1, 2019 into its full-year 2019 outlook.

"The recent discrete events impacting our second half earnings do not change the fundamental earnings power of our businesses," said Hudson La Force, Grace's President and Chief Executive Officer. "Our earnings in the quarter were better than we expected 90 days ago, reflecting the speed and impact of cost reductions and other actions we took to mitigate these events. We remain confident in our long-term growth goals and expect to deliver our cash commitments even in a dynamic operating environment. For 2020, we expect modest sales growth and an 8% to 11% adjusted earnings increase assuming a slow growth demand environment."

Update on Discrete Items

2Q19 Discrete Items

In our second quarter 2019 earnings announcement we highlighted three discrete items (the "discrete items") expected to impact second half and full-year 2019 results:

  • Refining Technologies: an FCC catalysts customer's bankruptcy following an explosion and fire;
  • Specialty Catalysts: a customer-specific inventory correction in the second half of 2019; and
  • Materials Technologies: an equipment failure in one of our silicas manufacturing lines (operations fully restored by mid-July).

The expected full-year 2019 impact to sales of the discrete items is approximately 2%. The expected impact to pre-tax income is $15.0 to $17.0 million. The impact to 3Q19 was approximately $15.5 million, in-line with our expectations.

3Q19 Middle East Feedstock Disruptions

On October 1, 2019, we commented on the expected 4Q19 and full-year 2019 earnings effect of the temporary feedstock disruption resulting from the September 14, 2019, attacks on oil and gas production facilities in the Middle East. Following the attacks, certain of our petrochemical and refining customers experienced reduced feedstock supply and temporarily reduced their operating rates and catalyst usage. Based on order cancellations and expected order delays, the expected impact to pre-tax income is $7 to $8 million in 4Q19 and full-year 2019. This incident had no impact on our 3Q19 results.

Third Quarter Performance

Summary Financial Results - Total Grace          
(In $ millions, except per share amounts) 3Q19   3Q18   Change
Net sales $ 470.5   $ 494.9   (4.9)%
Net sales, constant currency1         (3.7)%
Net income   53.7     16.1   233.5%
           
Adjusted EBIT1   107.8     122.6   (12.1)%
Adjusted EBIT margin1   22.9%     24.8%   (1.9) pts
           
Diluted EPS $ 0.80   $ 0.24   233.3%
Adjusted EPS1 $ 0.98   $ 1.11   (11.7)%
Dividends per share $ 0.27   $ 0.24   12.5%
           
  YTD 2019   YTD 2018   Change
Net cash provided by operating activities   268.4     234.0   14.7%
Adjusted Free Cash Flow1   163.0     174.2   (6.4)%
           
  TTM 3Q19   TTM 3Q18   Change
Return on Equity   49.5%     (8.7)%   58.2 pts
Adjusted EBIT ROIC1   19.5%     20.6%   (1.1) pts
1 See Analysis of Operations and Notes for information on Non-GAAP financial measures.
  • Third quarter sales of $470.5 million decreased 4.9%, down 3.7% on constant currency. Sales growth was impacted by lower sales volumes (-6.7%), primarily due to the discrete items, and currency headwinds, partially offset by improved pricing (+3.0%).
  • Net income of $53.7 million was up 233.5% and Diluted EPS of $0.80 was up 233.3%, primarily due to a pre-tax charge taken in 3Q18 for estimated costs related to legacy liabilities, partially offset by the discrete items.
  • Adjusted EBIT of $107.8 million was down 12.1% and Adjusted EPS of $0.98 was down 11.7%, primarily due to the net impact of the discrete items.

Delivering on Our Strategic Initiatives

"We stayed focused on our commercial excellence and operating excellence initiatives in the quarter, even while responding to the unforeseen discrete events," La Force continued. "Our investments to accelerate growth and extend our competitive advantages are producing results. Our value selling initiative is evident in improved pricing, favorable mix and success in our UNIPOL® process licensing business. Our Grace Manufacturing System initiative is now adding 75 basis points per year to margins, most of which we're reinvesting in new capacity and future growth."

Grace's strategic framework for profitable growth includes four elements:

  • Invest to accelerate growth and extend our competitive advantages
  • Invest in great people to strengthen our high-performance culture
  • Execute the Grace Value Model to drive operating excellence
  • Acquire to build our technology and manufacturing capabilities for our customers

Third Quarter Segment Performance

Catalysts Technologies

Catalysts Technologies includes catalysts and additives for plastics, refinery, and other chemical process applications, as well as polypropylene process technology licensing.

Summary Financial Results - Catalysts Technologies
(In $ millions) 3Q19   3Q18   Change
Net sales $ 361.4   $ 378.2   (4.4)%
Net sales, constant currency1         (3.6)%
Gross margin   42.0%     43.4%   (1.4) pts
           
Operating income   104.7     119.5   (12.4)%
Operating margin   29.0%     31.6%   (2.6) pts
1 See Analysis of Operations and Notes for information on Non-GAAP financial measures.
  • Third quarter sales of $361.4 million decreased 4.4%, down 3.6% on constant currency. Lower sales volumes (-7.0%) were due to the discrete items and lower demand in certain end markets, partially offset by improved pricing (+3.4%) in both segments. FCC catalysts pricing improved over 200 bps for the trailing 12-month period; we expect over 200 bps of improved pricing for full-year 2019.
  • Gross margin of 42.0% decreased 140 bps, due to lower sales, partially offset by improved price and favorable mix as well as lower raw materials and energy costs (+60 bps).
  • Operating income of $104.7 million was down 12.4%, primarily due to lower gross profit and a $2 million account receivable reserve related to the FCC catalysts customer bankruptcy. Operating margin of 29.0% was down 260 bps.
  • Consistent with our value-selling strategy, we are actively working to replace the lost volume from the customer bankruptcy with other high-value customers. We expect to recognize insurance benefits under our business interruption insurance policy in 4Q19 and into 2020. We did not recognize any insurance benefits related to this incident in the third quarter.

Materials Technologies

Materials Technologies includes specialty materials, including silica-based and silica-alumina-based materials, for consumer/pharma, chemical process and coatings applications.

Summary Financial Results - Materials Technologies
(In $ millions) 3Q19   3Q18   Change
Net sales $ 109.1   $ 116.7   (6.5)%
Net sales, constant currency1         (3.9)%
Gross margin   38.6%     37.6%   1.0 pts
           
Operating income   26.1     26.6   (1.9)%
Operating margin   23.9%     22.8%   1.1 pts
1 See Analysis of Operations and Notes for information on Non-GAAP financial measures.
  • Third quarter sales of $109.1 million decreased 6.5%, down 3.9% on a constant currency basis. Lower sales volumes (-5.5%) were primarily due to timing in Consumer/Pharma and lower demand in Coatings, partially offset by growth in Chemical Process end markets and improved pricing (+1.6%).
  • Gross margin of 38.6% increased 100 bps, driven by improved pricing and favorable mix, partially offset by the impact of the 2Q19 equipment failure.
  • Operating income of $26.1 million was down 1.9%, primarily due to lower gross profit. Operating margin of 23.9% was up 110 bps.

Capital Allocation

  • Capital investments: Year to date, we invested $142.6 million to expand capacity to meet customer demand and support operating excellence investments and other priorities. For 2019, we expect to invest $200-$210 million. Our
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