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W R Grace & Co (New)  (NYSE:GRA)
Q4 2018 Earnings Conference Call
Feb. 07, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2018, W. R. Grace & Company Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions on how to participate will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Jeremy Rohen, Vice President of Investor Relations and Corporate Development. Sir, you may begin.

Jeremy Rohen -- Vice President, Investor Relations and Corporate Development

Thank you, Jamie. Hello, everyone, and thank you for joining us today for Grace's fourth quarter and full year 2018 earnings call. With me this morning are Hudson La Force, Grace's President and Chief Executive Officer; and Bill Dockman, Vice President and Interim Chief Financial Officer.

Our earnings release and presentation are posted on our website under the Investors section at grace.com. Please note that some of our comments today will contain forward-looking statements based on our current view of our businesses and actual future results may differ materially. Please see our recent SEC filings which identify the principal risks and uncertainties that could affect future performance.

We will discuss certain non-GAAP financial measures, which are described in more detail in this morning's earnings materials. Reconciliations of non-GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website.

This morning Hudson will address our 2018 business performance, touch on our 2019 outlook and discuss our progress around our key strategic initiatives. I will then cover our financial results for the quarter and provide additional color on our full year 2019 outlook.

So, with that please turn to slide 4, in our earnings presentation and I'll turn the call over to Hudson.

Hudson La Force -- President and Chief Executive Officer

Thank you, Jeremy. Good morning. I hope everyone is well. I have a cough this morning, so please bear with me if I cough. I'm pleased with our strong performance in 2018. We beat our targets and delivered double-digit sales and earnings growth, strengthened customer relationships in every business and region and significantly improved our ability to consistently deliver profitable growth.

Sales grew 13% for both the fourth quarter and the year. Adjusted EBIT grew 3% for the quarter and 10% for the year. And adjusted EPS grew 22% for the year including 13% growth from operations and 9% from lower ETR. We invested over $600 million in faster growth through R&D, capital spending and the acquisition and returned $145 million to shareholders during the year. Our strong cash flow allowed us to make all of those investments and reduce our net leverage to 3.2 turns.

As we indicated at the time of the acquisition, we expect to be back below 3 turns by the end of this year. With the Grace value model as our framework, we are investing in innovation, value selling and manufacturing excellence to ensure we are delivering value for our customers and shareholders. These investments are producing results that I see in our improved growth rates and earnings.

Please turn to page 5, and I'll discuss our 2019 outlook. We expect 2019 to be another solid growth year with strong demand for our high-value technologies, improved gross margins, double-digit Adjusted EPS growth and strong cash flow. Specifically, we expect 6% to 7% sales growth and 7% to 9% adjusted EBIT growth in line with our five-year financial framework. This outlook includes solid demand for our Catalyst and Materials technologies.

While we are clearly planning for growth, we are maintaining a balanced footing in the event demand flows in the future. We watch inventory headcount and cost levels very carefully to ensure we don't get ahead of our growth. Staying agile in response to changing market conditions is important to us. For example, during Q4, when market concerns increased about the pace of 2019 global growth, we proactively reduced production rates as a derisking measure, even though we didn't see any significant demand weakness in our performance data. We took advantage of this opportunity to run product trials in some of our specialty catalysts plants. These actions temporarily reduced margins and earnings growth, but were clearly the right thing to do to ensure we remain well positioned for growth in 2019. I want to emphasize that we took these actions to reduce risk, not in response to any change in demand.

Turning to page 6. It has been almost a year since our Investor Day, when we presented our growth strategy and introduced the Grace Value Model to investors. I want to give you an update on the progress we made in 2018 against our key strategic initiatives. First, we've successfully accelerated our investments in high return growth projects. These investments are primarily in Specialty Catalysts and Materials Technologies, where we have the strongest growth drivers. Importantly, these capacity and productivity investments are timed and sized to meet identified customer demand. Over 90% of our current growth capital is linked to specific customer investments, contracts or licenses.

Second, we continue to see clear benefits from the Grace Manufacturing System, which is improving our manufacturing operations through increased production, reliability and efficiency. Our GMS implementation is currently focused on five plants with the greatest opportunity. The most significant investments in GMS have already been made, and we are confident we will see a payback of less than two years. GMS delivered a 50 basis point benefit to gross margins in 2018. For example, at one plant, we did a GMS implementation focused on improved reliability. In less than one year reliability increased by over 6 percentage points. The result in higher volumes and lower costs added millions to 2018 earnings.

Shifting gears, the single site polyolefin catalysts acquisition is delivering on our key business objectives of strengthening our technology position, enhancing our technical and manufacturing capabilities and broadening our relationships with our customers. The business is well integrated into Grace at this point and is on track for the sales, earnings and synergies we expected. Our scientists and business development teams are seeing some exciting opportunities as they work with our customers to leverage the combined technologies of Grace and the acquired business. From a financial perspective, the acquisition contributed 7% growth to the Catalyst segment this year.

Overall, I'm pleased with the progress we're making at the Company. I'm excited about the strong commitment and engagement of our employees and the great work they're doing with our customers. I'm confident we have the levers we need to achieve the commitments in our 2016 to 2021 financial framework.

Please turn to page 7, to discuss Catalysts. Catalysts Technologies delivered another strong year with sales up 15%. We saw 5% higher Catalyst sales volumes and continued strength in UNIPOL process licensing technology. Last year we announced four new polypropylene process licenses totaling over 1,500 KTA of new capacity. In January, we announced another 400 KTA license and we are encouraged by the robust pipeline of future opportunities.

Q4 sales were up 18% driven by 8% volume growth, 210 basis points improved pricing and an 8% contribution from the acquisition. Specialty Catalyst sales were up 11% organically, plus $28 million from the acquisition in the quarter. Refining Technologies sales also were up about 11%, including strong volume and improved pricing. FCC catalysts pricing improved by more than 200 basis points last year and we expect pricing to improve, more than 200 basis points in 2019 as well.

We made significant progress in 2018, shifting our portfolio to those customers that value our high technology products and problem solving capabilities. We are working closely with these customers to help them optimize their margins in a dynamic world. Our ART joint venture continues to experience solid demand for its hydroprocessing catalysts. We are working closely with our customers to help them meet market demand for increased diesel production as the IMO 2020 deadline approaches.

ART's industry-leading technologies position the business well to capitalize on this clean fuels opportunity. As a reminder, growth in our Catalyst business is driven by the global demand for plastics, petrochemical feedstocks and cleaner transportation fuels. Volatility in crude prices create opportunities for us, as customers use our technologies to optimize their margins in a changing environment.

Let's turn to Materials Technologies, on page 8. Our Materials business delivered a solid year in 2018, with sales up 7% on higher volumes and improved pricing. In Q4, volumes and prices were up about 3% but fully offset given the dollar strength against other currencies. MT delivered more than 200 basis points of improved pricing through value selling and a commitment to customer driven innovation.

MT demand remains solid globally, that we did see some slower growth in the China coatings end market in Q4. This is a relatively small end market for us at about 5% of segment sales. One of the strengths of the MT model is our ability to shift focus from one end market to another as market conditions change. We've already shifted more than 10% of our sales in the faster growing, more profitable end markets. We're seeing strong demand for our high-value specialty silica technologies, and the benefits of investments and customer driven innovation.

As an example, our team recently developed a new silica technology to help one of our customers achieve a key sustainability commitment to reduce water usage in their manufacturing process. This customer driven innovation created a compelling value proposition for our customer and attractive growth and margin opportunity for us. As a reminder, growth in our Materials business is driven by growing global middle class incomes, stricter environmental standards and increased focus on health and wellness, in addition to general economic growth.

I'll now turn the call to Jeremy, who will discuss our financial results and outlook in more detail.

Jeremy Rohen -- Vice President, Investor Relations and Corporate Development

Thanks, Hudson. Let me begin on slide 10 with our fourth quarter results. Q4 sales were $520 million, up 13%. Sales were up more than 8% organically on higher sales volumes and improved pricing in both segments. Adjusted gross margin for the quarter was 38.3%, down 250 basis points, largely driven by the impact of our proactive decision to reduce production rates in Q4. As Hudson said this was done to reduce risk not in response to any change in customer demand.

Adjusted EBIT was up 3% on strong organic growth. Adjusted EBIT margin was 22.8% down 220 basis points on lower gross margin. Adjusted EPS was $1.14 per share, up 16% including the benefit from a lower effective tax rate. For the year, our adjusted free cash flow was $235 million including higher capital spending as part of our multiyear investment plan to accelerate growth. Adjusted EBIT ROIC was 20.9% down year-over-year as the result of our acquisition in Q2, but up 30 basis points from last quarter.

Now let's turn to slide 11, to cover capital allocation. In 2018, we continued to execute our disciplined capital allocation strategy. We made significant investments in our business while continuing to return cash to shareholders. First, we invested $216 million of capital in our plants with more than 60% of the investment dollars directed toward high return strategic investments. In Q2, we acquired the leading single site catalyst business for $418 million to strengthen our technology and manufacturing positions in this high growth segment of the polyethylene industry. We're on track to deliver our synergy commitments which will result in a post synergy purchase price multiple more than 3 turns below the announced multiple.

For the year, we returned a $145 million of cash to our shareholders, including $65 million in dividends and $80 million in share buybacks. We ended 2018 at 3.2 times net leverage and expect to be back in our target range of 2 to 3 times by the end of 2019.

Moving to slide 12, let's take a more detailed look at our 2019 outlook. We remain upbeat about the fundamentals of our businesses and underlying markets. We are positioned to deliver another solid year of growth to expand our margins and execute our capital investments. For the full year, we expect revenue growth of 6% to 7%, including organic growth of 5% to 6%, with solid demand and improved pricing in both Catalysts and Materials.

Looking at our business segments, the organic growth rates we provided at our Investor Day continue to reflect our views of the businesses today. We expect high single-digit growth from Specialty Catalysts, mid single-digit growth for Materials and low single-digit growth in Refining Technologies, benefiting from a continued shift toward faster growing crude to chemicals applications.

We expect 2019 adjusted EBIT in the range of $490 million to $500 million, up 7% to 9%; and adjusted EPS in the range of $4.53 to $4.63 per share, which is up 10% to 12%. Earnings growth and margin expansion will be driven by our solid top line growth and benefits of our commercial and operating excellence initiatives. We do expect some continued headwinds from inflation this year and moderate headwind from FX in the first half of 2019. Our adjusted free cash flow is expected to be between $235 million and $250 million.

Finally, looking at Q1, we expect year-over-year adjusted EPS growth of 7% to 9% driven by strong business performance, including solid organic growth. This is slightly below our full-year growth rate of 10% to 12%, because of approximately $10 million to $12 million of headwinds from inflation and FX in the first quarter.

With that, let's open the line for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from John McNulty with BMO Capital Markets. Your line is now open.

Hudson La Force -- President and Chief Executive Officer

John, we can't hear you.

John McNulty -- BMO Capital Markets -- Analyst

Can you hear me now, sorry about that.

Hudson La Force -- President and Chief Executive Officer

Yes. You're loud and clear now, John.

John McNulty -- BMO Capital Markets -- Analyst

All right. Apologies. So with regard to the Catalyst business, we look and when it comes to your guide, it looks like you're looking for low-single digits from the FCC side, it sounds like a lot of that's coming from the pricing side. I guess, I believe you're at the point now where you're somewhat capacity constraint. Can you give us an update on the new capacity that you were looking to ramp up in the Middle East and how that might unlock future growth going forward?

Hudson La Force -- President and Chief Executive Officer

Sure, John. Your analysis is right. As we look into next year, we are expecting low single-digit growth from Catalysts. We do see low single-digit volume growth plus the benefit of improved pricing. The demand driver there is really the increasing demand for petrochemical feedstocks as our customers run more and more for propylene. The -- but to your -- the longer term part of your question, we do -- we've done the engineering for that project. We are waiting to start that project to make sure that it's timed with demand in the region. We don't want to do anything that upsets the balance of supply and demand globally. And when we see that demand at present we will proceed with construction.

John McNulty -- BMO Capital Markets -- Analyst

Great. And then maybe just a follow-up with regard to your Specialty Catalyst volume growth, were you looking for It looks like high single-digit which -- or at least high single-digit sales growth, how much of that is dependent on the macro verse either new facilities coming up and or things that you've locked up, whether it's tied to the type of some of the licensing business, et cetera. How should we think about the sensitivity of that business as we look through 2019 given the macro headwinds or tailwinds?

Hudson La Force -- President and Chief Executive Officer

It's a combination of those things John, as you might imagine. Over time, the macro environment is going to drive the demand for plastics and plastics has grown at a premium to global GDP for a long, long time, and we expect that trend to continue. In the shorter term, it is affected by start-up of new investments, for example, or a new product win that we might have with an individual customer. But I will tell you that an individual plant starting up or an individual win with the customer in the quarter, maybe that makes the growth rate a little higher. But over the course of the year, and certainly over the course of multiple years, it's really driven by the long-term demand for plastics.

John McNulty -- BMO Capital Markets -- Analyst

Great. Thanks very much for the color.

Operator

Thank you. Our next question comes from Christopher Parkinson with Credit Suisse. Your line is now open.

Kiran -- Credit Suisse -- Analyst

Good morning, this is Kiran (ph) on for Chris. I was wondering if you can talk a little bit more about your forward outlook for margins. And give any color on how you expect gross margins to evolve throughout the course of the year, especially considering the actions that you took throughout this quarter? Thank you.

Hudson La Force -- President and Chief Executive Officer

We do expect margins to expand, 2018 into 2019. In 2018 gross margins expanded about 60 basis points and that's a typical margin expansion for us over time. I don't see anything that's going to change that general rate as we look into the future.

Kiran -- Credit Suisse -- Analyst

Great. And I guess in looking at Materials Tech, it seems like you're still seeing good pricing but volumes seemed to have slowed a bit this quarter. Pharma consumers still saw a little bit of growth, but Chemicals and Coatings seemed to have stagnated. Can you discuss your outlook for '19 maybe by region? And then maybe any levers you can pull to accelerate that demand or win market share going forward? Thank you.

Hudson La Force -- President and Chief Executive Officer

Sure. So, what we saw at the end of last year in Q4, Coatings growth wasn't as strong as it had been earlier in the year. We did see some slowdown in China, as we commented earlier. On the chemical process side, we had a very strong chemical process quarter Q4 of '17, and so we had a tough compare there. But is -- if I look generally at MTs growth momentum, I feel very good about MTs growth momentum, and as we look into next year, Jeremy's guide and I think it's right is mid single-digits growth in that business. And we'll see growth in Coatings, we'll see growth in consumer pharma and we'll see growth in chemical process.

Kiran -- Credit Suisse -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Kevin McCarthy with Vertical Research Partners. Your line is now open.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Good morning. Hudson did the volatility in the crude oil markets have any appreciable impact either positively or negatively on your businesses?

Hudson La Force -- President and Chief Executive Officer

Kevin, good morning. There is always volatility. So it's hard to say whether Q4 volatility had any different impact than Q3, Q2 or Q1. Volatility, really, it creates opportunity for us at the end of the day, and it's not always an opportunity that we capture in the current quarter. But when our customers see changes in their operating environment, whether it's crude prices or something else, new regulations whatever it may be, it leads them to think about how they reoptimize their refinery operations, and they -- and the Catalyst is a very important lever to them in that problem solving as you know. And so, the way I think about it is volatility really creates opportunity for us with our customers. But as I said, it doesn't always pay off in the current quarter.

Kevin McCarthy -- Vertical Research Partners -- Analyst

And then as a follow-up, a fair amount has been written in the popular press about US Oil production like sweet crude in particular, and that's had a pronounced impact on light-heavy spreads. As I look at your financials, it would seem that ART's posted a very strong equity earnings quarter. And so can you talk about I guess trends at that joint venture in the context of what's going on in the energy markets? And also what's going on head of IMO 2020?

Hudson La Force -- President and Chief Executive Officer

Sure. So if I think broadly about the ART joint venture, the growth -- the growth driver for the business is really two things. It's customers processing heavier feeds and customers trying to produce a cleaner fuels or low sulfur fuel. Those are the two fundamental drivers. And while in North America, the crude slate has been getting lighter with Shale production, as you noted.

On a global basis, feed is been trending toward heavier harder to process crudes. And that's driven our customers to invest in hydroprocessing units and ultimately creating demand for our hydroprocessing catalysts. Clean fuels regulations have been a growth driver in this business for many, many years and IMO 2020 is really just the latest chapter in a longer book about clean fuels regulations. And a year -- I guess it's actually been two years now, when those regs were firmed up for a 2020 effective day. We saw customers that had hydroprocessing investments already planned. In some cases they were timed to start up with IMO 2020. In other cases, they were not originally timed there, but customers were able to do some acceleration.

Some customers that had been thinking about it firmed up plans to proceed. And so we see that regulation really -- what's the right way to say it, bolstering our customers' investment decisions in hydroprocessing capability, which in turn bolsters our opportunity. And this business has grown 6% to 7% a year for a while. We think that growth rate continues this year, but beyond 2020 as well as customers continue to make these investments.

Kevin McCarthy -- Vertical Research Partners -- Analyst

That's helpful. Thank you so much.

Operator

Thank you. Our next question is from John Roberts with UBS. Your line is now open.

John Roberts -- UBS -- Analyst

Thank you. You said you ran more trials in the quarter in anticipation of weakness at customers, that's not normally something that you call out. And I thought the weakness at the customers' was pretty late in the quarter. So maybe you could elaborate a little bit more on was that just right at the very end of the quarter that you were doing some of that activity?

Hudson La Force -- President and Chief Executive Officer

I want to be very clear. We've seen no weakness in demand from customers. And I want to -- I can't be too clear on this. And then John, I'm not just speaking to you, but everybody. We took a derisking action in Q4, because of the concern -- heightened concern about growth in 2019. That was a market concern. We wanted to be proactive and derisk, but we've seen no slowdown in demand from our customers.

John Roberts -- UBS -- Analyst

Could you tell us a little, go ahead.

Hudson La Force -- President and Chief Executive Officer

Our Specialty Catalysts plants ran pretty hard this year. And we didn't have as much trial time in those units as we would like to have. And when we made the decision to slowdown some of the plants, it was a great opportunity to accelerate some of the work that we've been doing on products. And that's what we're trying to communicate. This was a derisking action, but not in any way in response to lower customer demand.

John Roberts -- UBS -- Analyst

Could you tell us a little bit about some of the new products that you are trialing because obviously you were doing more activity than normal on new products?

Hudson La Force -- President and Chief Executive Officer

Yes. I mean this is in both polypropylene and polyethylene end-use applications. These are customer driven trials where we're doing joint development with our customers. Ultimately, designed to help them produce the resin characteristics that they're seeking to produce for their customers. I'm not going to be more specific than that, John. It's too early and we're still working very closely with our customers on these development projects.

John Roberts -- UBS -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from Robert Koort with Goldman Sachs. Your line is now open.

Christopher Evans -- Goldman Sachs & Company, Inc. -- Analyst

Thanks, Chris Evans on for Bob. I just wanted to maybe go on that point a little bit more. I mean you referenced the possibility for softening market conditions that been materializing. But maybe could you just contextualize for your business your Catalysts business as a whole, how much of volatility is even possible in Catalyst sales, given the strong visibility your customers like to provide for start-ups or turnarounds, given you probably have a pretty good read on the first half at the very least. Just could you give any context to what's going on there?

And then just on the fourth quarter, real quick. Your Refining Catalyst volume stepped up pretty massively up 11% and for the year you're guiding the low single-digits in '19, and I'll think at one point in '18 to reach those low levels. Just wondering if you could kind of describe the cadence of what's going on there too?

Hudson La Force -- President and Chief Executive Officer

Sure. So on your first question, Chris, I appreciate the question. The demand for Catalyst is actually pretty resilient. And if we go back to the '08-'09 time period, and I don't think anybody is predicting that that period repeat itself, but it's a data point that we have. We saw a decline in Catalyst demand that was low single-digits, literally a few percentage points even in that environment. And so we believe that demand for Catalyst is pretty resilient in any downturn, mostly because the demand for transportation fuels is pretty resilient, the demand for plastics is pretty resilient and remember all of these are global businesses. So our exposure to any one market is relatively small.

The other thing that's important to note is Catalyst inventories are never that significant. In RT or in -- sorry in Refining Technologies or in Specialty Catalysts, there's not a lot of inventory that we have, and there's not a lot of inventory that our customers carry. So we don't see that that inventory bullwhip effect when demand changes.

On the second part of your question about RT growth rates. We did have a strong quarter in Q4. We had a good growth year in 2018. We do believe that we will have a low single-digit growth rate as we head into the future. That's our multiyear view on growth in this business. And we think it aligns well with the underlying drivers around transportation fuel and propylene production.

Christopher Evans -- Goldman Sachs & Company, Inc. -- Analyst

Thanks. And then in the Catalyst segment you reported 2.1% pricing and noted FCC was greater than 200 bps, but FCC is not 100% of the segments. So just curious, are you seeing pricing or mix support elsewhere in the portfolio to maintain that 2% plus pricing for the segment? And then, just curious in your '19 guidance, does FCC and MT pricing more than offset the inflation you guys are expecting?

Hudson La Force -- President and Chief Executive Officer

In -- your question about Catalysts pricing, SC does get some pricing. I will tell you that RT pricing was greater than SC pricing. And then yes, we do expect pricing in 2019 to offset -- more than offset inflation.

Christopher Evans -- Goldman Sachs & Company, Inc. -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Mike Sison with KeyBanc. Your line is now open.

Michael Sison -- KeyBanc Capital Markets, Inc. -- Analyst

Hey, guys. In terms of the first quarter, lot of (inaudible) are struggling a little bit in your outlook seems pretty good. So when you think about the 7% to 9% EPS growth, can you maybe talk about the underlying sales growth, EBIT growth and is that $10 million headwinds, is that the largest for the year in terms of how big that is?

Hudson La Force -- President and Chief Executive Officer

Mike, we're not going to give more specific color on Q1 but as Jeremy said in his prepared remarks, we do see good business performance in Q1, but we do have these headwinds and the FX headwinds are really for the first half, the inflation headwinds are for the first half, more than the second half. Q1 might be a little more than Q2, but you should think of it as a first half headwind and we were just a little more specific on Q1.

Michael Sison -- KeyBanc Capital Markets, Inc. -- Analyst

Okay. And then, again, the fourth quarter, pretty solid routes to others, and oil price you said historically doesn't really dictate demand to some degree, but you did see it fall quite a bit. Were there any benefits from that in terms -- or major negatives from the oil price. Did customers think about maxing propylene little bit more? And what are your thoughts here at current levels, does it affect the business at all going forward?

Hudson La Force -- President and Chief Executive Officer

Well, so let me, deal with the Q4 part first. I think John asked a similar question. In the short-term, changes in crude prices create conversations between us and our customers. But those are conversations that usually take months to -- a handful of months to play out. Some of our customers are more nimble, but in general, as our customers see changing market conditions, it takes them some time to respond. Refineries are big complex operations as you can imagine. And so they don't tend to respond to changes that they see as temporary or pure volatility, but when things are trending, they do want to respond to that. So that they continue to maximize their margins.

Over time, a lower crude price should ultimately translate into lower transportation fuel costs and lower plastic feedstock costs that supports demand for transportation fuels and supports demand for plastics. And -- but it's a balance. You don't want crude prices too low. Customers won't invest. You don't want them too high, you run the risk of a demand destruction, but I think that's a very broad range 40 to 100 or 30 to 100 or something like that before you see significant long-term changes in behavior.

Michael Sison -- KeyBanc Capital Markets, Inc. -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Chris Kapsch with Loop Capital Markets. Your line is now open.

Christopher Kapsch -- Loop Capital Markets -- Analyst

Good morning. Hey. Hudson just wanted to follow-up on the conversation around the derisking action that you took. Just want to make sure I understand that was focused exclusively on the polymers and specialty businesses and did not related at all to any manufacturing facilities on the refining tech side?

Hudson La Force -- President and Chief Executive Officer

No. This was in Catalysts, where we, -- the Catalyst segment, where we did this, where we took advantage to do the product trials within Specialty Catalysts.

Christopher Kapsch -- Loop Capital Markets -- Analyst

Got it. Okay. And then, so just to follow-up on, I get the macro and obviously a global sort of destocking in the polymer supply chain. So maybe that contributed to the impetus for the derisk action, but there was a disconnect then with what you saw, if anything, it seems like your sales maybe, the demand was even stronger than expected. So I'm just wondering where do you think was the source of that disconnect and is there still the potential that you see a belated slowdown from your customers' henceforth?

Hudson La Force -- President and Chief Executive Officer

I'm going to try one more time to be as clear as I can possibly be on this. We have seen no change in customer demand. What we did in the fourth quarter was not in response to any change in customer demand. What went through our mind was market participants were getting increasingly concerned about the pace of 2019 growth, and we said to ourselves, maybe there is something out there that we're not seeing in our demand data, let's be prudent and derisk a little bit.

As we stand here on February 7th, we haven't seen any change in customer demand. But I'm glad we took the derisking decision. It was the right thing to do at the time, given the level of uncertainty that we're starting to manifest in the market. But we did not, and have not seen any change in customer demand.

Christopher Kapsch -- Loop Capital Markets -- Analyst

And Hudson the cost accounting hit associated with this action to gross margins, when does that normalize, does it spill over into the first quarter?

Hudson La Force -- President and Chief Executive Officer

No. It's a great question, Chris. This is Q4, it's done.

Christopher Kapsch -- Loop Capital Markets -- Analyst

Okay. And then if I could, just to follow-up on the FCC pricing outlook more than 200 bps. Is that a function mostly of a customer mix and upgrading to the higher-end technologies? Or is there also some like-for-like, year-over-year price increases tied to maybe customers that where you've seen the supply agreements roll over -- the multiyear supply agreements roll over?

Hudson La Force -- President and Chief Executive Officer

It's all of the above, Chris.

Christopher Kapsch -- Loop Capital Markets -- Analyst

Okay. Thank you.

Hudson La Force -- President and Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from Laurence Alexander with Jefferies. Your line is now open.

Daniel Rizzo -- Jefferies -- Analyst

Good morning, guys this is Dan Rizzo on for Laurence. How are you?

Hudson La Force -- President and Chief Executive Officer

Hi, Dan.

Daniel Rizzo -- Jefferies -- Analyst

Hi. You mentioned shifting I think 10% of sales to faster growing end markets. I was wondering if you could just elaborate on what you were shifting toward and prompt --

Hudson La Force -- President and Chief Executive Officer

Sure. It's a great question. I appreciate it. So when we look at our -- this is the Materials Technologies question for everybody. When we look at our Materials Technologies business, we look at it in a handful of sub-segments. You see the three groups: coatings, consumer pharma and chemical process. We look at it at another level of detail, and those end markets, different ones are growing at different growth rates. Our best growth rates right now are in consumer pharma sub-segments, and within chemical process, there is some environmental end use applications for our silica technologies where we are seeing better than segment average growth rates and opportunities in the future.

In coatings, it's more niche than that. They're very specific coatings end-use applications where we've brought a specific technology to a specific niche, and we're investing more in that type of technology, but broadly speaking, it's consumer pharma in the environmental, a couple of different environmental end-use applications within chemical process.

Daniel Rizzo -- Jefferies -- Analyst

Okay. That's helpful. And then one of the question, you mentioned also inflation headwinds that are going to be a thing in Q1. Again, I was just wondering what specifically you're referring to. I don't think it's oil related, but where is the inflation coming from?

Hudson La Force -- President and Chief Executive Officer

This is mostly organic materials, metals. Sorry, I said, organic -- inorganic materials, metals, energy. This is where we are saying the inflation, 100 to 150 basis points is our estimate for the full year. A little heavier in the first half, just on a year-over-year basis. We have almost no exposure to organic or crude derived raw materials.

Daniel Rizzo -- Jefferies -- Analyst

Would that be labor? I mean would labor be a part of that as well, labor inflation?

Hudson La Force -- President and Chief Executive Officer

Yes. I mean labor is certainly in our cost base. We do see labor cost inflation, but nothing that's out of the ordinary or noteworthy.

Daniel Rizzo -- Jefferies -- Analyst

Okay. Thank you very much.

Operator

Thank you. Our next question comes from Mike Harrison with Seaport Global Securities. Your line is now open.

Michael Harrison -- Seaport Global Securities -- Analyst

Hi, good morning.

Hudson La Force -- President and Chief Executive Officer

Hi.

Michael Harrison -- Seaport Global Securities -- Analyst

Just maybe to follow-up on the question regarding raw material inflation. Was just wondering if you could talk a little bit about what you're seeing in aluminum markets? And could that possibly be a source of some raw material relief at some point later in the year?

Hudson La Force -- President and Chief Executive Officer

We do, we do buy a lot of aluminum and aluminum compounds. The concerns that developed last year about the aluminum market have significantly dissipated as you probably know. And while we are seeing some inflation, it's certainly not the level of inflation that we saw last year.

Michael Harrison -- Seaport Global Securities -- Analyst

Okay. And then I was also -- I hate to be the one to ask about this, but can we just get an update on your major Middle Eastern customer and plans for commercial sales during 2019? Thanks.

Hudson La Force -- President and Chief Executive Officer

You bet. I appreciate the question. Our expectations haven't changed. We expect that unit to start up this quarter meaning Q1. And we expect to resume commercial supply in Q2. And the -- our intention in terms of how we monetize that opportunity is really through mix shift. There may be small amount of volume improvement, but we're really going to use this as an opportunity to upgrade our portfolio and drive positive mix and margin.

Michael Harrison -- Seaport Global Securities -- Analyst

All right. Thanks very much.

Hudson La Force -- President and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from Ben Kallo with Baird. Your line is now open.

Benjamin Kallo -- Robert W. Baird & Co. Inc. -- Analyst

Hi, good morning, Hudson.

Hudson La Force -- President and Chief Executive Officer

Hi Ben.

Benjamin Kallo -- Robert W. Baird & Co. Inc. -- Analyst

Can you talk a little bit about your CapEx plans, growth CapEx for the year, specifically where they go by segments. And then just can you talk about your leverage ratio and how you think about your target ratio and if we should expect this growth going forward for this year at least to be organic or are you still out in the market looking for opportunities?

Hudson La Force -- President and Chief Executive Officer

Thanks, Ben. So on the capital side, we are investing in growth opportunities in all of our businesses. But the biggest investments are in Specialty Catalysts and Materials Technologies. Specialty Catalyst a little more than Materials Technologies. This is a program that we began last year. It will continue this year, and some of these investments won't start up until '20 -- next year 2020. We want to make sure that we've got the right capacity in the right places. And it's important, I hope, everybody took note of one of the comments we had in our prepared remarks. About 90% of this growth capital is connected to specific customer investments, customer contracts or licenses. So we feel quite confident making these investments at this time.

From a leverage perspective, our long-term leverage target is between 2 and 3 turns, and we've been above that often on in the last couple of years as we've made these acquisitions, and then we've come back below that target after each of the acquisitions. And in 2018, of course we bumped up with the acquisition in the polyolefin catalyst business, and we expect to be back below 3 turns during the course of 2019. Long-term, we think that's the right place for us. But when there's a strategic opportunity for us, we're quite comfortable going above 3 turns in the right situation.

In terms of M&A generally, it is part of our long-term growth plan. It's a big part of our history as a company. I think it's part of our future. We are spending time in all of our businesses, looking at opportunities. We spent more time in Materials Technologies in the last year than in any other segment, not counting the one acquisition, we actually did and SC. But MT has a lot of promise for us. And it's an area where we've spent a lot of time and we want to spend even more time in the future.

Benjamin Kallo -- Robert W. Baird & Co. Inc. -- Analyst

Thank you.

Operator

Thank you. And I'm showing no further questions in the queue at this time. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your program and you may all disconnect. Everyone have a great day.

Duration: 47 minutes

Call participants:

Jeremy Rohen -- Vice President, Investor Relations and Corporate Development

Hudson La Force -- President and Chief Executive Officer

John McNulty -- BMO Capital Markets -- Analyst

Kiran -- Credit Suisse -- Analyst

Kevin McCarthy -- Vertical Research Partners -- Analyst

John Roberts -- UBS -- Analyst

Christopher Evans -- Goldman Sachs & Company, Inc. -- Analyst

Michael Sison -- KeyBanc Capital Markets, Inc. -- Analyst

Christopher Kapsch -- Loop Capital Markets -- Analyst

Daniel Rizzo -- Jefferies -- Analyst

Michael Harrison -- Seaport Global Securities -- Analyst

Benjamin Kallo -- Robert W. Baird & Co. Inc. -- Analyst

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