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W R Grace & Co  (GRA)
Q1Â 2019 Earnings Call
April 25, 2019, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, ladies and gentlemen, and welcome to the Q1 2019 W. R. Grace 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 will follow at that time. (Operator Instructions)
I would now like to turn the conference over to your host, Jeremy Rohen, Vice President of Corporate Development and Investor Relations.
Jeremy Rohen -- Vice President, Corporate Development and Investor Relations
Thank you, Bella. Hello, everyone, and thank you for joining us today for Grace's First Quarter 2019 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 business 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 first quarter business performance and key developments with our strategic priorities. I will then cover our financial results and provide an update on the second quarter and full year outlooks.
So with that please turn to Slide four 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, everyone. Our team delivered another strong quarter of solid sales and earnings growth. We made significant progress with our strategic growth investments in our commercial and operating excellence initiatives. For the quarter, sales were up 9% with both Specialty Catalysts and Materials Technologies delivering high single-digit organic sales growth on a constant currency basis.
Overall, we continue to see solid demand in our end markets and experienced good volume growth in North America, EMEA and Asia during the quarter. Our focus on value selling continues to benefit our results. In the first quarter, we achieved over 200 basis points of improved pricing with gains in every business. Adjusted EBIT was up 9% and adjusted EPS increased 13%, driven by the polyolefin catalyst acquisition and our organic growth, which more than offset the headwinds from inflation and currency.
For the quarter, our adjusted EPS was slightly above our outlook range, largely due to order timing within the first half of the year. I am confident in our growth, earnings and cash flow expectations for the year and we are reaffirming our full-year outlook. We are focused on capturing and monetizing the growth opportunities we have in managing inventory and spending to ensure we remain well-balanced.
Please turn to Slide five. Grace's future is anchored in the strong fundamentals of our businesses and the long-term enduring growth drivers underlying the markets and customers we serve. Our growth has long been driven by increased demand for high-performance plastics, cleaner transportation fuels and stricter environmental regulations. As the importance of sustainability continues to increase, our opportunities to create value will continue to grow. Many of our fastest growing products help our customers improve the efficiency of their processes, reduce energy or water use or cut harmful emissions. Other products help our customers address rising consumer and regulatory expectations for safe food, clean water and human health and safety. Simply put, our technologies help our customers achieve their sustainability goals.
Last quarter, I highlighted how one of our silica products help the customer reduce water usage and waste in their operations. This is a product that we expect will grow double-digits given the value it creates for customers. On a much larger scale, our entire Hydroprocessing Catalysts business is growing high single-digits on the demand for cleaner fuels. Our catalyst significantly reduce the amount of sulfur and other contaminants in transportation fuels helping minimize their environmental impact. We recently highlighted our initiatives to reactivate and recycle spend HPC Catalysts, expanding on existing catalysts recycling efforts to improve the sustainability of our products. Sustainability is important to us as a company and we remain committed to doing our part.
Shifting to investments in operations. In February, we announced we were building a new manufacturing plant in Europe to support the growing global demand for our LUDOX Colloidal Silica Technology. LUDOX is in high demand for use in emissions control catalysts, to address tighter regulatory requirements and in specialty coatings for applications like corrosion resistance in any abrasion. This capacity investment is timed and sized to meet identified customer demand. As we commented last quarter over 90% of our current growth capital investments are tied to specific customers, contracts or licenses.
Operating excellence and the Grace manufacturing system continue to improve operations through increased production rates, improved reliability and lower costs. In 2018 GMS produced a 50 basis point benefit to gross margin, some of which dropped to the bottom line and some of which we reinvested to support future growth. For the next several years we expect similar annual benefits.
I'll give you an example of a typical GMS implementation. Last year, we began a GMS implementation at one of our sold-out units. During the project, the manufacturing team upgraded a challenging manufacturing process step and strengthen their maintenance strategy. The project took about six months and was completed in Q4. In the first quarter, the changes resulted in an 8.5% increase in production rates versus the prior year. Like most of our GMS investments this investment will pay back in less than one year.
Now let's turn to Slide six and look at our first quarter business performance. Catalyst Technology sales were, up 11% driven by solid demand for our leading technologies and improved pricing, partially offset by currency headwinds. In Specialty Catalysts, organic sales were, up 8% and total sales were, up 27% including the polyolefin catalyst acquisition. We continue to see strong demand for our catalyst products as customers add capacity to support long-term demand for polyolefins and seek to maximize the value of the resins they produce.
We are encouraged by the robust pipeline for our UNIPOL Process Technology, driven by the growing global demand for polypropylene resins. We've passed the first anniversary of the polyolefin catalyst acquisition and I'm very pleased with the results of this investment. In the first 12 months, the acquisition generated over $110 million in sales at margins in line with our catalyst segment. Today, the business is fully integrated into Specialty Catalysts and is delivering the capital and cost synergies we expected. The synergies will be fully realized by the end of 2019 and will result in a post-synergy purchase price multiple, more than three times below the announced multiple.
Long-term, the combined commercial and R&D platforms will further strengthen our customer relationships and innovation capabilities and enable Specialty Catalysts to continue to grow at high single-digits.
In Refining Technologies, sales were, down $1.6 million due to weaker MTO catalyst sales and unfavorable currency. FCC Catalyst sales volumes were, up low single-digits and FCC Catalysts pricing improved more than 200 basis points on a trailing 12-month basis. Our pricing expectations remain 1% to 2% per year over the long-term. ART continues to see strong demand for HPC Catalysts and we expect this to continue as the demand for cleaner fuels increases and IMO 2020 is implemented. Last, I'm pleased to report that the Middle East FCC customer restarted operations in the first quarter. We have now resumed normal supply to them.
Let's turn to Materials Technologies on Slide seven. We continue to experience solid demand for our products, led by the consumer pharma and chemical process and markets. Higher volumes and improved pricing contributed over 8% to sales growth. This more than offset a 5% impact from currency in the expected weakness in the China coatings market we discussed last quarter. The China coatings market has started to stabilize for us. Importantly, this market is less than 4% of MT sales.
We expect the strong demand we've experienced in materials to continue, driven by consumer pharma and chemical process segments in North America and EMEA. The Materials Technology team continues to execute on its strategy to optimize its portfolio by focusing on faster growing more strategic markets. We expect these attractive end markets to contribute nearly two-thirds of the business's sales growth in 2019. We have strong businesses with enduring growth drivers, a clear growth strategy and customers that value our technologies. Our value creation model and strong culture make Grace a great place to work.
In a competitive labor market, we've been successful retaining the great talent we have in attracting a significant amount of new talent to Grace. While the CFO search has taken longer than I wanted, I'm comfortable with where we are in our search. We have a strong existing team that serves me, our business leaders and investors well.
I'll now turn the call over to Jeremy, who will discuss our financial results and outlook in more detail.
Jeremy Rohen -- Vice President, Corporate Development and Investor Relations
Thanks, Hudson. Turning to Slide nine, Grace had another solid quarter with sales of $479 million, up 9% and up 11% on constant currency. Organic growth was driven by higher sales volumes and improved pricing in both Catalysts Technologies and Materials Technologies. This more than offset the 2.5% impact from unfavorable currency, which was largely driven by the strength of the US dollar versus the euro. As we've said before, approximately 95% of our sales are linked to the US dollar or the euro.
Adjusted gross margin for the quarter expanded 80 basis points through our focus on value selling and broader commercial and operating excellence initiatives, which more than offset 120 basis points of inflation. Sequentially, adjusted gross margin was, up 260 basis points returning to normal levels following our decision in the fourth quarter to proactively reduce production rates and accelerate certain product trials. As we discussed at that time, the actions did not impact the first quarter.
Adjusted EBIT was, up 9% and adjusted EBIT margin of 22.2% was flat year-over-year. Adjusted EPS for the quarter was $0.93 per share, up 13% and slightly above our outlook primarily, due to order timing in the first half of the year.
Now let's turn to Slide 10. We continue to deploy our capital to fund our strategic growth investments, pursue bolt-on acquisitions and return capital to shareholders. We are confident our focus on disciplined capital allocation won't deliver profitable growth and create shareholder value. For the quarter, we invested $50 million of capital in our plants and are on track to invest $200 million to $210 million of capital in our operations this year. We returned $23 million of cash to shareholders through our dividend and share buyback, and we reduced our net leverage to 3.1 times with the expectation to be back below 3 by the end of 2019.
Moving to slide 11. Let's take a quick look at our second quarter and full-year outlooks, and we'll then open the call for questions. For Q2, we expect adjusted EPS to be up 6.5% to 7.5% year-over-year. Our adjusted EPS outlook for the first half of 2019 remains tightly aligned to our internal expectations from February. Adjusted gross margin should be in line with the first quarter of 2019, but down year-over-year as the second quarter of 2018 was our strongest margin quarter of the year.
For the full-year, we remain encouraged about our business outlook and our position to deliver another solid year of growth and margin expansion. We are reaffirming our 2019 outlook; including 6% to 7% top line growth. At the segment level, we continue to expect sales growth in line with our prior views, including high single-digit growth in Specialty Catalyst, mid single-digit growth in Materials Technologies and low single-digit growth in Refining Technologies. We expect 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 $4.62 per share, an increase of 10% to 12% year-over-year.
The key assumptions behind our outlook remain unchanged and are included on Slide 11. In terms of global macroeconomic risks, we continue to expect full-year inflation in the range of 100 basis points to 150 basis points and moderate FX headwinds continuing in the second quarter. As a reminder, we have very limited exposure to tariffs, emerging market currencies and interest rates. We closely monitor global market conditions and we'll take any actions necessary to adjust if conditions change.
With that, let's open the line for questions.
Questions and Answers:
Operator
(Operator Instructions) Your first question comes from the line of John Roberts from UBS. Your line is open.
John Roberts -- UBS -- Analyst
Thank you. Nice quarter.
Hudson La Force -- President and Chief Executive Officer
Thank you, John.
John Roberts -- UBS -- Analyst
I know consultants have forecast about how refiners may operate differently, as we approach IMO 2020. But do you have any visibility into your order book on how they might react as the year progresses?
Hudson La Force -- President and Chief Executive Officer
John this is a conversation that we're having with our customers every day right now. And at this stage of the year, it's still little early for them to make final decisions about what they -- how they want to run as they approach the end of the year. We're working on giving them options, and I expect they'll start making decisions in Q3 and we would start to see changes in the catalyst preferences in that timeframe.
Overall, my expectation is that refiners will choose to run hard through the end of this year and into next year to create enough blendstock to achieve the lower sulfur content, the 0.5% content. They will try to shift their yield away from gas toward diesel, but they're not going to be able to do enough mix shift to create enough blendstock without running hard, that's what it looks like to us right now.
John Roberts -- UBS -- Analyst
And then secondly, in the Materials Technology segment. Can you give us a little more color around the 20% plus growth in the consumer and pharma applications?
Hudson La Force -- President and Chief Executive Officer
Sure, this is one of our focused growth segments. I think we've commented over the last year or so about our efforts to shift mix away from some lower value segments into the higher value segments, and in Consumer/Pharma broadly and in some of the individual segments within that business are attractive to us, both from a growth rate perspective and a margin perspective. And we've been shifting R&D dollars in that direction, we've been shifting commercial resources into that direction.
John Roberts -- UBS -- Analyst
Will the anniversary some step up and obviously, I don't think you're going to maintain this kind of high growth rate for a long period or maybe
you're early stage ramp?
Hudson La Force -- President and Chief Executive Officer
No. This is -- if you think about -- thank you, that's a good clarifying question, John. If you think about the sales growth guidance we've given for MT, we've said mid single-digits, some segments will grow faster, some will grow slower. Overtime, I would expect the Consumer/Pharma business to grow high single-digits overtime in any one quarter that might be higher or lower. Jeremy made the comment in his remarks about order timing between Q1 and Q2. One of the reasons why the Q1 growth was so high in that segment was one of these order timing points, an order that we thought would come in Q2 came in Q1 instead, and it was in that segment.
John Roberts -- UBS -- Analyst
Great, thank you.
Operator
Your next question comes from the line of Kevin McCarthy with Vertical Research. Your line is open.
Kevin McCarthy -- Vertical Research Partners -- Analyst
Yes. Good morning.
Hudson La Force -- President and Chief Executive Officer
Hi, Kevin.
Kevin McCarthy -- Vertical Research Partners -- Analyst
I was wondering, if you could comment on your FCC business, it looks like the price realizations continue to flow through nicely. What are you seeing with regard to mix there, and I'm asking because we've observed propylene prices come down, I don't know 40% or so over the last six months. Are you seeing any change in behavior among your customers in terms of grades or mix of premium products there?
Hudson La Force -- President and Chief Executive Officer
We haven't, Kevin. And if anything, we've seen the demand for propylene max products continue to grow. The one thing I'll add, thinking about the point you raised about propylene pricing, the customers that really -- most of our customers that really want to maximize propylene are doing it for strategic reasons, not just opportunistic reasons, they're looking to maximize propylene for a downstream petrochemical operations, and so they're not going to be sensitive to changes in propylene values.
Kevin McCarthy -- Vertical Research Partners -- Analyst
Okay, that's great color. And then second one to ask about the ART joint venture. The equity earnings here, it dipped a little bit. I know that business can be lumpy from time-to-time. What is your outlook for the second quarter and beyond in terms of HPC volume and order books?
Hudson La Force -- President and Chief Executive Officer
Yeah, great question, Kevin. I always think about the ART business on an annual basis, because it is very, very lumpy, and the timing of the lumps seems to be different every year. When we look at the whole year, we're looking at strong high single-digit volume growth and high single-digits earnings growth as well.
Kevin McCarthy -- Vertical Research Partners -- Analyst
Okay, thanks very much.
Operator
Your next question comes from the line of Christopher Parkinson with Credit Suisse. Your line is open.
Christopher Parkinson -- Credit Suisse -- Analyst
Thank you. I understand your 1% to 2% long-term guidance range for catalyst pricing. But can you just dig a little bit more into your price or value strategy? How that's going? Competitive environment by region. And just whether or not you believe there are any large intermediate term opportunities to attain above average price mix uplift, particularly as a result of new products? Thank you.
Hudson La Force -- President and Chief Executive Officer
Thanks, Chris. When we look at the long-term, and when we say that we are thinking the five-year term of our financial framework, that 2016-2021 financial framework that we have. We do expect 1% to 2% pricing throughout that time period, it's going to be higher some years maybe lower other years. For the last three, I'm looking at Jeremy, three maybe four quarters now we've reported better than 200 basis points pricing in FCC catalysts, and I expect that to continue certainly as we look into the rest of this year, that reflects some product mix to the second part of your question. The propylene max catalysts are high-value catalyst for our customers, and that's part of what we're benefiting from as we shift our product mix in that direction, and we see a stronger demand growth for those types of products.
The relative demand growth for propylene max catalysts versus regular catalysts is probably 3x within our business.
Christopher Parkinson -- Credit Suisse -- Analyst
Yes. And just a quick follow-up, just given the reduction in leverage toward, at least, the high-end of your target. Can you just comment on your appetite for M&A, large and small. And whether or not there are any licensing of assets still out there? Thank you.
Hudson La Force -- President and Chief Executive Officer
Okay. Yes, Chris. No, I -- we still remain very active, thinking about M&A opportunities, the appetite that we have for strategic bolt-ons like the ones we've seen -- we've been able to do over the last few years remains good, we're doing work in Catalysts and in Materials Technologies. And while we have said we want to get our leverage back below 3 times this year, that objective would not stand in the way of us doing a smart strategic bolt-on.
Christopher Parkinson -- Credit Suisse -- Analyst
Thank you.
Operator
Your next question comes from the line of Robert Koort with Goldman Sachs. Your line is open.
Chris Evans -- Goldman Sachs -- Analyst
Yes. Good morning, everyone. This is Chris Evans on for Bob. Just regarding your second quarter guidance. You're pointing toward the lowest EPS growth rate in sometime now, and realizing that you're lapping the Albemarle acquisition and flagged timing, but surprised the expectation is a little bit better given the trend in FCC pricing and potential mix benefits from -- to Korea coming up. Is there anything else we're missing in there?
Hudson La Force -- President and Chief Executive Officer
Q2 is the toughest inflation and currency quarter for us. And when we look at the full year, we feel good about our 10% to 12% guidance -- EPS growth guidance, but as you look across the four quarters and Q2 will be the weaker year-over-year growth quarter for us. The biggest issue is -- it is the peak quarter for us on year-over-year inflation and on currency.
Chris Evans -- Goldman Sachs -- Analyst
Great. And then our HPC plant, I believe is coming up in the fourth quarter, and I think previously you've said it should be pretty well sold out to start. How should we think about the potential financial impact of Grace? And if you can't give specific financial guidance around that, could you contextualize it maybe in broader terms like, you know, how much tonnage of catalyst from that versus your current (inaudible)?
Hudson La Force -- President and Chief Executive Officer
Yes. The first point I think is, we expect this to start up late in the year with really no financial benefit to 2019, all of the benefit will come in 2020. We'll be more specific when we give our 2020 expectations later this year. But this is -- it's a significant increase in capacity, I think, I've said once before, it's big, but not huge or something like that. It's designed to supply a couple years of growth and provide enough tonnage for us to supply a couple of years of growth.
Chris Evans -- Goldman Sachs -- Analyst
Is there a way you can give percentage increase in your tonnage for ART?
Hudson La Force -- President and Chief Executive Officer
We'll give that to you when we get to 2020, when we get to give in our 2020 numbers. I don't want to get ahead of myself.
Chris Evans -- Goldman Sachs -- Analyst
Okay. Thank you.
Operator
Your next question comes from the line of Mike Harrison with Seaport Global Securities. Your line is open.
Mike Harrison -- Seaport Global Securities -- Analyst
Hi, good morning.
Hudson La Force -- President and Chief Executive Officer
Hi, Mike.
Mike Harrison -- Seaport Global Securities -- Analyst
Hudson, was wondering if you could comment a little bit on the MTO weakness that you mentioned. Just wondering, if China is still committed to this realm for olefin supply? Or are they seeing alternatives that are getting more attractive versus the MTO realm?
Hudson La Force -- President and Chief Executive Officer
Well, I -- from a broad market perspective, there's a lot of capacity in place in China. For the most part those units are running and they are trying to use this technology as a way to better meet their olefins requirements internally. The country has an objective of being more self sufficient in olefins and polyolefins. For us, our goal in all of our businesses is to make sure we're achieving the right balance between growth and profitability. And that's true in China as it is any place else. We haven't gotten the -- historically we haven't gotten the margins that we wanted to get in this business. We don't want to get growth just for the sake of growth. And so we're working to find the right balance between growth and profitability in this market.
Mike Harrison -- Seaport Global Securities -- Analyst
Interesting. Alright, and then was also wondering, just in terms of the outlook for FCC with the large Middle Eastern customer coming back on stream? How should we think about that affecting volume and mix? And can you also comment on whether there are some additional costs, any kind of unusual costs associated with restarting the deliveries there?
Hudson La Force -- President and Chief Executive Officer
Mike, our strategic intent is to monetize the restart of this operation through mix. You'll see it in mix rather than in volume. And that benefit will start to materialize in Q2.
Mike Harrison -- Seaport Global Securities -- Analyst
All right. Thanks very much.
Hudson La Force -- President and Chief Executive Officer
You bet.
Operator
Your next question comes from the line of Laurence Alexander with Jefferies. Your line is open.
Daniel Rizzo -- Jefferies -- Analyst
Hi everyone, this is Dan Rizzo on for Laurence. You mentioned inflation kind of peaking in Q2. I was wondering, if you could provide color on exactly what, what where the inflation is coming from? And the outlook as the year progresses?
Hudson La Force -- President and Chief Executive Officer
We're seeing it in metals, we're seeing it in caustic. Remember, this is a year-over-year comparison. On a sequential basis, we do expect that cost to start to improve in the second half.
Daniel Rizzo -- Jefferies -- Analyst
Okay. And then I think you said before that in Materials Technologies that you're seen strengthen in Europe. I was just wondering, like because I mean, macro conditions as reported by others, is showing some blackluster to this weak in that region. I was just wondering why you guys are or how you guys are outperforming if it's just not something you're seeing, and it's just given the product mix or what -- what's happening there?
Hudson La Force -- President and Chief Executive Officer
Yes, it's, we've had others ask us the same question. And, I don't -- there is not any one end market or segment that I would point to. I think it is a relative concept. We had pretty modest expectations for Europe. And they did outperform. We've invested a lot in commercial excellence. We're much more effective at managing our sales pipelines. We're much more focused on driving commercial performance, and I think some of it is just that, but it's not a big difference. It's enough to note, but some of it is against weak expectations for Europe.
Daniel Rizzo -- Jefferies -- Analyst
Okay. Thank you very much.
Operator
(Operator instructions) Your next question comes to the line of Mike Sison with KeyBanc. Your line is open.
Michael Sison -- KeyBanc -- Analyst
Hey, guys, nice start to the year.
Hudson La Force -- President and Chief Executive Officer
Thanks, Mike.
Michael Sison -- KeyBanc -- Analyst
Hudson, thinking about FCC, in terms of your operating rates. Are you pretty full loud and what's the opportunity to start maybe shaving some of the lower margin business and looking at bigger projects or higher margin projects going forward?
Hudson La Force -- President and Chief Executive Officer
Mike, just to clarify, you said FCC, Fluid Catalytic Cracking?
Michael Sison -- KeyBanc -- Analyst
Yes.
Hudson La Force -- President and Chief Executive Officer
Yeah. Okay, good. I just want to make sure I understood. No, I -- we're running hard. Our intent in this business, our strategic intent in this business is to grow with the market. And the market grows low single-digit, we have the capacity we need to grow in line with that market growth rate. We are actively working to shift mix within that portfolio, and we work customer mix, we work product mix, one of the earlier questions was on the advantage of maximizing propylene catalysts versus other catalysts. And as we move through the course of this year, we'll continue to do that. The big customer that restarted in Q1, as I commented on a moment ago. We'll monetize that through mix rather than through big volume growth.
Michael Sison -- KeyBanc -- Analyst
Great. And then could you maybe spend a little bit time on Specialty Catalyst it's the organic growth rate, high single-digits, not a lot of businesses are doing that? Could you maybe break down each of the pieces of that business, and where you see the growth this year and potentially longer-term?
Hudson La Force -- President and Chief Executive Officer
Sure. I appreciate the question, Mike. So, we do see high single-digit growth in this business. It's coming from the polyethylene side, it's coming from the polypropylene side, it's coming from licensing. And it reflects a couple of different things I think, there's a strong underlying growth rate in this business, plastics are still growing 4% to 5%, at least polyolefin plastics are still growing at that rate. We get a growth benefit on top of that, because of licensing, not just the licensing revenue itself. But I think the licensing capability gives us an advantage, even when we're selling catalyst, it just it changes the relationship with our customers in a positive way. And I think it gives us an advantage in catalysts.
The other important part of the higher growth rate is the breadth of our portfolio, with the acquisitions that we've made over well, I guess it's closer to 6 years now 5.5 years, three big acquisitions. We've built out a very complete, very comprehensive catalyst portfolio on both polyethylene and polypropylene.
It makes us a more valued -- a more valuable innovation partner to our customers. And we've learned a lot about Catalyst Technology and Innovation by adopting the best practices of the businesses we've acquired, with the early ones, the UNIPOL acquisition and the BASF acquisition, we're far along in terms of those acquisitions benefiting our R&D pipeline and so forth. With the acquisition we made last year, we're really just getting started on capitalizing on the R&D synergies and the commercial synergies.
Michael Sison -- KeyBanc -- Analyst
Got it, thank you.
Hudson La Force -- President and Chief Executive Officer
I'm very high on this business and it's a good strategic business, it's in a good strategic spot with good growth opportunities.
Michael Sison -- KeyBanc -- Analyst
Great. Thanks, Hudson.
Operator
(Operator instructions) We have a follow-up question from Mike Harrison from Seaport Global Securities. Your line is now open.
Mike Harrison -- Seaport Global Securities -- Analyst
Hi, just one quick additional question you announced the collaboration with TechnipFMC on FCC technology in that max propylene segment. I was just wondering, if you could help us understand how this DCC Technology fits in with your existing max propylene catalyst and how that helps to enhance your position within FCC?
Hudson La Force -- President and Chief Executive Officer
It really is what you just said Mike, it's a way to enhance our technical capability in the max propylene segment. The DCC process technology is a max propylene technology, the idea is for us with catalyst expertise and Techninp with process expertise to collaborate instead of us innovating on process and catalyst separately to innovate together and understand the interrelationship between the process and the mechanics on the one hand and the catalyst on the other it's something that were obviously just getting started with, but we find it very, very interesting.
Mike Harrison -- Seaport Global Securities -- Analyst
All right, thanks very much.
Operator
Your next question comes from the line of Chris Kapsch from Loop Capital. Your line is now open.
Christopher Kapsch -- Loop Capital Markets -- Analyst
Yeah. Good morning. I had a follow-up question on Hudson your comments about your discussions with customers refining customers around how they -- their configurations going into and ahead of IMO 2020. I think we all understand that there is going to be more HPC processing. I think you said though they expect to maybe ship the yield slate a little bit from gas toward diesel to build some blend stock. Can you just talk about, if that's the way plays out, what do you think the implications are for the FCC unit at the refiners and therefore implications for either FCC demand or FCC mix, over the balance of 2019 and then into 2020. Thank you.
Hudson La Force -- President and Chief Executive Officer
Yeah, Chris, thanks for the question. The -- we think they're going to run their FCC units hard this year, to create enough -- basically to create enough blend stock and that's obviously good for us. There will be some catalyst reformulation, there is not a big profitability difference between gasoline-oriented catalyst or diesel-oriented catalyst. So, we don't expect in the fact that way, but we do expect refiners to run hard in general, and we expect them to run their FCC units hard.
Christopher Kapsch -- Loop Capital Markets -- Analyst
Thank you.
Operator
Your next question comes from the line of John McNulty from BMO Capitals. Your line is open.
John McNulty -- BMO Capital Markets -- Analyst
Yeah, thanks for taking my question. With regard to the Materials Tech business you showed some solid volumes and some pricing in it, it really didn't flow through in the margins, and I guess, you've articulated there was certainly some investment there, I guess. Can you speak to the level of investment that you're putting in there and when we might be able to see an inflection point in terms of how the margins progress higher going forward?
Hudson La Force -- President and Chief Executive Officer
Yeah, John, thanks for the question, we're investing in the manufacturing plants to make sure that we create the capacity we need to sustain this growth rates that not just new capacity, but debottlenecking and GMS type projects and so forth and so on. So some of that investment is in the gross margin line and some of it is at the OpEx level as we've added a sales and marketing resources, I think, we called it commercial excellence in the script to make sure that we've got the commercial organization we need to continue to drive that growth. We are still in a net investment mode at this point. I think by the second half of this year, that'll start to turn around.
John McNulty -- BMO Capital Markets -- Analyst
Got it. Thanks very much. And then I guess, I was a little -- I was a little curious and you indicated the raw material headwinds, we're going to be at least year-over-year, the fiercest this quarter. Is that just because of the timing of when some of the hedges you have in place kind of roll-through and maybe, you know, we're kind of seeing some of the heavier costs from last year still kind of in there, because it does seem a little bit odd, given a lot of the raws that you're tied to seem like they're actually lower at this point. So, I guess how should we think about that?
Hudson La Force -- President and Chief Executive Officer
Well, it's -- what has happened is on a cash basis to be fully transparent. On a cash basis, the cash costs probably peaked in Q1. But a lot of that cost gives inventory, then it'll come through in Q2.
John McNulty -- BMO Capital Markets -- Analyst
Got it. Okay. That makes perfect sense. Thanks very much for the color.
Hudson La Force -- President and Chief Executive Officer
Thanks, John.
Operator
And we have a follow-up question from Robert Koort with Goldman Sachs. Your line is open.
Chris Evans -- Goldman Sachs -- Analyst
Yeah. Thanks. Just wanted to follow-up in MT. Could you give a little color on, I guess the little bit of a step down you saw in sales of the coatings customers, I think you flagged that China in a release, and you read on the second quarter or beyond?
Hudson La Force -- President and Chief Executive Officer
We -- so, on a year-over-year basis, the China coatings market was weak for us in Q4 and in Q1. We see it as stabilizing right now. And so, when we look sequentially from Q1 to Q2, we see if least post Chinese New Year, we see a more stabilized market. But on a year-over-year basis, we did definitely see a headwind in Q4 and Q1.
Chris Evans -- Goldman Sachs -- Analyst
And then in your Refining Tech business flagged in the MTO declines offsetting favorable price and volumes for FCC, which my understanding is a much larger business than MTO. So, in that context, I guess, could you contextualize how big of decline you actually saw in MTO to partially offset the favorable business you saw in FCC?
Hudson La Force -- President and Chief Executive Officer
Yes. I -- Jeremy, have we quantified MTO before?
Jeremy Rohen -- Vice President, Corporate Development and Investor Relations
No.
Hudson La Force -- President and Chief Executive Officer
Chris your intuition is right. It is a smaller business, significantly smaller business in FCC Catalyst. And your intuition is right, it's a fairly large percentage change on a smaller business to show up at the total level.
Chris Evans -- Goldman Sachs -- Analyst
Great. Thank you.
Operator
I'm showing no further questions at this time. I would now like to turn the conference back to Jeremy Rohen.
Jeremy Rohen -- Vice President, Corporate Development and Investor Relations
Thank you, Bella. Thank you, everyone for your time today and your interesting in Grace. We look forward to seeing many of you at upcoming conferences, including Goldman Sachs and Key Bank in May, and Deutsche Bank and Vertical in June. Thank you.
Operator
Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.
Duration: 45 minutes
Call participants:
Jeremy Rohen -- Vice President, Corporate Development and Investor Relations
Hudson La Force -- President and Chief Executive Officer
John Roberts -- UBS -- Analyst
Kevin McCarthy -- Vertical Research Partners -- Analyst
Christopher Parkinson -- Credit Suisse -- Analyst
Chris Evans -- Goldman Sachs -- Analyst
Mike Harrison -- Seaport Global Securities -- Analyst
Daniel Rizzo -- Jefferies -- Analyst
Michael Sison -- KeyBanc -- Analyst
Christopher Kapsch -- Loop Capital Markets -- Analyst
John McNulty -- BMO Capital Markets -- Analyst
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