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W R Grace & Co (New) (NYSE:GRA)
Q3 2020 Earnings Call
Oct 28, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 W.R. Grace & Co. Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Jeremy Rohen, Vice President, Investor Relations. Thank you. Please go ahead, sir.

Jeremy Rohen -- Vice President, Investor Relations

Thank you, [Indecipherable]. Good morning and thank you for joining us today for Grace's Third Quarter 2020 Earnings Call. With me this morning is Hudson La Force, our President and Chief Executive Officer and Bill Dockman, our Senior Vice President and 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 discuss our focus on value creation, highlights from the third quarter, key end market trends, and sustainability. Bill will provide an overview of our financial results and key planning assumptions. We will then open the call for questions. So with that please turn to Slide 4 in our earnings presentation and I will turn the call over to Hudson.

Hudson La Force -- President and Chief Executive Officer

Thank you, Jeremy. Good morning, everyone. I hope you and your families are all safe and healthy. We delivered solid financial results in the third quarter, including strong sequential growth in gross margin and earnings and strong cash flow. We are encouraged by improving demand trends in many of our end markets and believe the worst of the recession is behind us.

Before we discuss our third quarter results in detail, I want to address Kathy Reiland's recent resignation from our Board, which followed a difference of opinion about our strategic direction. While I won't discuss the details, I think it is important to underscore that there was no disagreement about Grace's business unit strategy or operations. We have a portfolio of high-value specialty businesses. Over the years, we've often pursued opportunities to drive the most value from them. This open-minded approach to creating value led to the spin off of GCP and the successful acquisitions that built our leading specialty catalyst business.

Today, our business is significantly impacted by the pandemic. Our Board, working with management and our financial advisors is carefully evaluating and thoroughly discussing our value creation opportunities consistent with our long-standing practices and commitment to all shareholders. At the same, time we're focused on executing our growth plan and advancing our investments to accelerate growth, improve our competitive advantages, and strengthen our portfolio. I'm confident our growth strategy and capital allocation discipline will create significant long-term value for shareholders.

Now let's turn to our third quarter highlights on Slide 5. Third quarter sales were down 11% year-over-year, in line with our Q3 planning assumptions. We are encouraged by the improving demand trends in each business and believe Q2 was the trough of the recession. Materials Technologies sales grew 4% year-over-year on strong pharma consumer demand and solid coatings demand. Improved demand and higher production rates drove sequential adjusted gross margin improvement of 410 basis points. Adjusted EBIT was up 9% sequentially. Adjusted EBIT would have been up more than 30% sequentially without the financial impacts of Hurricane Laura. We delivered another quarter of strong cash flow, driven by our aggressive actions to lower capital spending, improve working capital, and reduce operating costs to improve cash flow by $125 million in 2020.

We've captured the full-year benefit of the capital spending and working capital actions and are on track to deliver the operating cost reductions. Year-to-date, operating cash flow was $259 million and adjusted free cash flow was $170 million. Year-over-year, adjusted free cash flow was up 4% even though adjusted EBIT was 37% lower.

I'd like to thank Grace's 4000 employees around the world for their continued focus on health and safety during the pandemic. Their discipline has ensured that we have consistently met our customer commitments throughout the year. In addition, I want to recognize the extraordinary efforts of our employees in Lake Charles and throughout the Company who worked tirelessly to maintain supply to our customers and to safely restart our Lake Charles manufacturing operations after Hurricane Laura and again after Hurricane Delta. Their commitment to our customers at a time of significant personal hardship is truly exceptional.

Please turn to Slide 6. In Specialty Catalysts, Polyolefin catalyst demand improving in all regions and segments. Non-durable end markets continue to show strength, particularly in hygiene and packaging applications. Durable end market applications show signs of recovery, but certain segments will likely remain below 2019 demand levels next year. We expect Specialty Catalysts sales to continue to improve. We've recently introduced 15 new products and are seeing a strong increase in customer trial activity after significant delays due to the pandemic. These trials are important steps in accelerating sales growth next year.

This week, we announced our fifth license of 2020 and have a robust pipeline for Q4 and 2021. Our licensing business provides a consistent and visible revenue stream and positions us well for significant future catalyst sales. Our lifetime plant performance service offering helps our customers maximize the profitability of their polypropylene production operations.

Please turn to Slide 7. In Refining Technologies, demand for transportation fuels has stabilized and we have seen recovery from a deep bottom in the second quarter. Still transportation fuel demand and refinery utilization remain about 10% below normal levels. The effects of the pandemic will continue to be a headwind until global transportation fuels demand more fully recovers next year. We remain strongly focused on selling the value of our technology to our customers as they optimize their refinery operations in a difficult environment. Some customers have switched to lower performing catalysts to minimize their operating costs until demand recovers. But the vast majority of our customers continue to use the high performing catalysts they used before the pandemic. This has the effect of lowering our average sales price and we now expect average FCC prices to be flat to slightly up this year.

Given the weak conditions in this end market, we proactively reduced 2020 operating costs by about $20 million as part of our overall cost savings effort. We're driving additional productivity in our manufacturing plants and managing capital spending to ensure our costs and capacity are in line with current market demand.

Please turn to Slide 8. Materials Technologies has performed well during the pandemic, outperforming many of its end markets in Q2 and Q3. Q3 sales grew 4% year-over-year due to better demand in pharma consumer and coatings. Strong pharma performance has been led by Grace's product technologies used in the fight against COVID-19. We expect pharma consumer markets to continue to perform well, and we are encouraged by the rapid recovery in our coatings segment. In chemical process markets, demand continues to improve but the recovery has been slower in markets tied to the hard hit automotive and aerospace sectors. Our commercial excellence in customer driven innovation continue to position MT for higher growth and improved profitability going forward.

Please turn to Slide 9. For more than 20 years, Grace has been focused on achieving the highest levels of EHS performance. But today customers, investors, employees. and other stakeholders expect more. They want to know what else we can do to improve sustainability for everyone. We're doing a lot already. Last year, 44% of our sales directly contributed to our customers' sustainability objectives. Our technologies help reduce plastics content in consumer packaging, water use in manufacturing processes, and harmful materials in consumer products. Our technologies also help improve fuel economy, reduce energy use, and reduce refinery emissions. For example, our technology is used by customers to reduce SOx emissions in their operations. With Grace technology, our customers eliminate more than 20,000 metric tons of SOx emissions each year. This is two orders of magnitude greater than the SOx emissions from our own manufacturing operations.

We're not satisfied with these contributions and know we can do more in the future. Today 65% of our R&D projects are tied to at least one customer sustainability driver and we expect our positive sustainability impact to increase as these technologies commercialize.

Please turn to Slide 10. We see two additional opportunities to link sustained trends in our customer driven approach to innovation to create growth opportunities for Grace. These are game-changing technologies in the areas of advanced plastics recycling and renewable fuels. Though these are very small markets today, they have the potential to become significant in the long term.

Most exciting for me is our opportunity in advanced plastics recycling. Our catalyst technologies and know-how can contribute significantly to the long-term technical and economic viability of this solution for recycling plastics and reducing plastics waste. Mixed plastic waste streams are hard to recycle today and this challenge needs to be addressed before plastics can be recycled economically at scale.

For us this looks a lot like problems our FCC team works on every day. How to turn a challenging complex carbon feedstock into useful, valuable products. Our scientists are working to develop the technologies and business models to make advanced plastics recycling scalable and economic. Significant sales are still years away, but the long-term opportunity is compelling. Similarly renewable fuels is an opportunity -- is an important sustainability opportunity where our existing technologies and applications know-how help our customers at multiple points in the value chain. This is a small business for us today, but one with high growth potential as our customers invest more in this application.

With that, I'll turn the call over to Bill.

William C. Dockman -- Senior Vice President and Chief Financial Officer

Thanks, Hudson. And good morning. Please turn to Slide 12. As Hudson noted, we are very pleased with our solid results for the quarter, which reflect strong execution in our businesses by what is still a challenging operating environment, though we are seeing positive demand trends in most of our end markets.

Looking back to Q1, when highlighted the potential impacts of the pandemic, we took early actions to reduce inventory levels, production rates, and operating costs to generate cash and maintain our strong financial position. As a result, the mitigation actions have positioned us well to exit the recession a stronger Company and fully prepared to capture the recovery.

Now turning to the third quarter results. Sales were down 11% year-over-year primarily due to the effects of the pandemic on global transportation fuels demand and refinery operating rates. On a sequential basis, sales were up slightly from Q2. Adjusted gross margin was up 410 basis points from Q2. The strong sequential improvement was driven by improved demand and higher operating leverage. Sequentially, adjusted EBIT was up 9% and adjusted EPS was up 14%, which included $12 million or $0.13 per share of hurricane related costs in the quarter. While this is an insured event, the total costs do not exceed our deductible. So we do not expect any insurance recoveries.

Regarding cash flow, our year-to-date adjusted free cash flow was up 4% over the prior year, reflecting our team's strong execution and focus on reducing working capital and capital spending. In addition, we received a $10 million dividend from our ART joint venture and are expecting additional dividend from ART in Q4. As you may recall, in mid 2017 ART stopped paying a dividend to the parents in order to self-fund the Hydroprocessing catalysts plant in Lake Charles. Now that the plant is complete, we expect ART will return to paying annual dividends.

We have made excellent progress on our mitigation actions and are confident we will deliver our full year target of $125 million in cash flow improvements. At this point, we have achieved our targets from improved working capital by $45 million to $50 million and a lower capital spending by $40 million. And we are on track to deliver our targeted operating cost reductions of $35 million to $40 million.

As a reminder, most of these cost reductions are temporary and will return as demand recovers. While the $125 million of cash flow actions will benefit 2020, these actions will not limit our ability to generate strong cash flow in 2021.

Now let's turn to Slide 13 and look at the segment results. Catalyst Technology sales were down 1% sequentially versus Q2. Specialty catalyst sales were down 2% versus the prior quarter primarily due to order timing. Refining technology sales were essentially flat sequentially over the prior quarter as the decline in transportation fuels demand stabilized but remains well below normal operating levels as the ongoing effects of the pandemic continue to impact global demand, global operating refining rates, and miles driven.

For the trailing 12 months, FCC catalysts pricing improved approximately 150 basis points. Third quad -- quarter segment gross margin improved 260 points sequentially, reflecting significant inventory reductions in Q2 not repeating. Operating income was down 7% versus the prior quarter, which included $12 million of costs related to Hurricane Laura. Income from our ART joint venture in the quarter was down sequentially $2 million. While some refinery turnarounds have shifted from the second half of 2020 into 2021, we expect ART's fourth-quarter sales to be up significantly as compared to Q3.

Now let's turn to Materials Technology on Slide 14. Third quarter sales were up 4% on both the year-over-year and sequential basis versus the prior quarter. Coatings and chemical process applications saw improved end market demand and were both up sequentially from Q2 to Q3. Demand in pharma and consumer end markets remained strong in Q3. Though below the Q2 levels, they benefited from strong demand for materials used in customers COVID-19 diagnostic kits.

Gross margin for the quarter was up 880 basis points over Q2 as a result of higher sales and higher production volumes as well as significant Q2 inventory reductions that did not repeat in Q3. Operating income for MT was up over 90% versus the prior quarter on improved demand and strong sick -- sequential gross margin improvement.

Now let's turn to Slide 15. As I mentioned a moment ago, we had strong cash flow performance driven by our actions to maximize cash flow since the pandemic began. The results speak of the strength and resiliency of our businesses. At the end of the quarter, our total liquidity was over $700 million including $269 million of cash on hand. From a debt perspective, we have not drawn on our revolver and have no significant debt maturities until 2024. Our net leverage was 3.8 times at the end of Q3 and outside of our target range of 2 times to 3 times, reflecting the temporary impact the pandemic has had on adjusted EBITDA. But we have a strong record of de-leveraging quickly and expect our balance sheet to delever as markets recover.

Now let's turn to Slide 16. We remain committed to our long-term capital deployment framework but as we've discussed, we have temporarily shifted our near-term priorities to focus on cash flow and liquidity and funding targeted growth and productivity investments. Importantly, our investment decisions were made with a focus on maximizing near-term organic growth opportunities and accelerating our technology and innovation to support customer driven innovation. These decisions will not impact our ability to grow in 2020 or beyond.

Regarding shareholder returns, we expect to resume share repurchases in 2021 while continuing to prioritize investment in our businesses and reducing net leverage.

Finally, let's turn to Slide 17. For the fourth quarter, we excel -- expect sales to be up 10% to 13% versus Q3 led by a solid recovery in Refining Technologies sales as well as solid growth in both Specialty Catalysts and Materials Technologies. Especially catalysts we expect sequential sales growth in Q4 as end markets are showing signs of improvement and we expect lower impact from customer inventory drawdowns.

Demand for transportation fuels and refinery utilization are both expected to continue to improve sequentially in Q4, which will drive an increase in demand for FCC catalyst in Q4. In Materials Technologies, we are expecting sequential sales growth from Q3 to Q4, driven by the continued strength of our pharma business and recovery in consumer and coatings, offsetting weaker demand in certain industrial end markets, particularly automotive. We expect continued sequential improvement in gross margin of approximately 100 basis points from Q3 to Q4. Our gross margin will also continue to improve beyond this year and we are confident it will return to pre-pandemic levels of 40% to 42% as demand more fully recovers from the pandemic.

We expect adjusted EPS for the quarter to be in the range of $0.84 to $0.88 per share, reflecting an increase of 50% to 57% from -- versus Q3. And as a reminder, this range includes the impact of the remaining hurricane related costs of $68 million or approximately $0.08 per share.

Now I will turn the call back to Hudson.

Hudson La Force -- President and Chief Executive Officer

Thank you, Bill. Please turn to page 19. We delivered solid financial results in the quarter and we're really encouraged by better demand trends. Our team is executing well in a challenging environment. Throughout the pandemic, we've remained focused on executing our growth strategy. The investments we've made in growth, commercial excellence, and operating excellence are showing results and we will pay back and we'll -- excuse me, are showing results and will pay back strongly as demand fully recovers. I'm confident our growth strategy will create significant value for our shareholders.

Let's open the call for your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Chris Parkinson of Credit Suisse. Your line is open.

Kieran de Brun -- Credit Suisse Securities -- Analyst

Hi, good morning, this is Kieran on for Chris. I was just wondering if you can give me a little bit more color in terms of what you saw in pricing this quarter, specifically how many customers -- well not how many customers, but the patterns you've seen in terms of I guess thrifting down to a lower quality catalyst or different catalyst and how you expect that to recover into 4Q or 2021 as demand recovers. Thank you.

Hudson La Force -- President and Chief Executive Officer

Hi, Kieran. This is Hudson. Thanks for the question. The -- what we're seeing is customers making a decision to use a lower performing catalyst is a way to save operating costs at a time where their profitability is challenged. This is something that we work on closely with our customers. We help them determine an alternative catalyst and oftentimes we're reformulating a catalyst for them to make sure it meets their needs in the current economic environment.

Now, this is a small number of customers that have made this decision. The vast majority of our customers are still using the same high performing catalysts they were using before the pandemic began. But when a customer wants to make a change with -- like this, obviously we'll work closely with them to help them make that change. We do believe this is temporary. We think it will continue into next year for the customers that have made this choice. And as their operating rates begin to improve next year, we think they'll switch back to the high performing catalysts that they were using before.

Kieran de Brun -- Credit Suisse Securities -- Analyst

Great. And then just a quick one on Specialty Catalysts. I mean it's clearly there has been a little bit of customer destocking that's continued into 3Q. Can you just give us a high sense of what amount of destocking you expect is still remaining into 4Q and as demand comes back for most of these chemical end markets, how you view I guess Specialty Catalysts demand trending into 4Q. And then any preliminary thoughts on 2021?

Hudson La Force -- President and Chief Executive Officer

Sure. So we saw the greatest amount of customer destocking in the second quarter. As you may recall from that discussion, we had customers that had made a decision to reduce their safety stock of catalysts. These were decisions that they made for their own cash flow management reasons. Most of that destocking occurred in Q2. Some did occur in Q3 as well, as you noted. We think that we're close to the end of the destocking on a sequential basis and we expect Specialty Catalysts sales to improve from Q3 to Q4 in part because that destocking will be coming to an end.

On a year-over-year basis, we do still expect Specialty Catalysts to show negative year-over-year growth in the fourth quarter because of the comparison to last year's fourth quarter where customers were still building safety stock inventories. And so we think that will be a headwind on a year-over-year basis. Ws we head into 2021, Kieran, I feel pretty good about the growth opportunities that our Specialty Catalysts business has. As we highlighted in some of our prepared materials this morning, the team has done an exceptional job over the last couple of months, getting new products into the hands of our customers and working through the trialing activity that's necessary for our customers to test these products and ultimately introduce them into their regular commercial operations. This is a routine part of this business. It's an important element of driving growth long-term for this business, but it had gotten disrupted because of the pandemic. Trial activity dropped to close to zero during the first six months of the pandemic and now it's really starting to pick back up and that's very encouraging for us as we look into next year.

Kieran de Brun -- Credit Suisse Securities -- Analyst

Thank you very much.

Operator

Your next question comes from John McNulty of BMO Capital Markets. Your line is open.

John McNulty -- BMO Capital Markets -- Analyst

Yeah, thanks for taking my question. I guess maybe first a high level one. You highlighted at the beginning of the presentation around how you look to create value for shareholders and kind of the strategic methodology around driving the portfolio for growth. I guess, and look admittedly, you've done a good job with that especially with some of the Specialty Catalysts ads, but I guess looking forward it looks like some of the evolutionary changes that have been happening in refinery maybe even hitting more of a revolutionary period where you've got big oil companies saying peak of oil consumption is going to be the end of this decade, you've got refineries closing. So I guess can you speak to how all of that may be changing, how you and the Board are thinking about the opportunities for growth and maybe the directions that you're move in growth?

Hudson La Force -- President and Chief Executive Officer

John, this is a great question and I appreciate you asking it. Let me address it in two parts. I'll -- let me talk about how we're thinking about our refining businesses today and then I'll touch on the second part of your question about what this means for our strategic discussions as a company. As we look at the refining markets over the long term, it's clear that there will be a peak demand for transportation fuels. When we first looked at this data a few years ago, we thought the peak would be in the 2035 to 2040 area. With the pandemic and the advance in some technologies, that peak may come sooner, it may be as early as 2030 or 2035 as you indicated. But I don't think that corresponds with the peak in demand for FCC catalysts. The FCC unit is a very important part of refinery operations. It is the -- it's a very important part of producing gasoline for the gasoline pool and maybe more importantly, it's one of the most economic ways to make gasoline, but by itself only accounts for about 40% of the gasoline pool. FCC units are also used to make petrochemical feedstocks, primarily propylene which will remain in high demand even after transportation fuel demand reaches its peak and so the role of the FCC unit in the refinery remains important beyond just its role in producing transportation fuels.

The other part of this is the technology in our Hydroprocessing catalysts joint venture. Hydroprocessing catalysts are used primarily to make cleaner transportation fuels, to take sulfur out of fuels and other benefits and that demand will remain strong in the years to come. We're seeing customers make significant investments in their operations in Hydroprocessing capabilities to meet the increasingly stringent fuel standards. And so that -- we expect that business to continue to grow in near term.

That said, this is a slow growth business and at some point growth will reach its peak as I've commented. But we're looking at other ways to continue to make sure that Grace achieves its growth objectives. Part of that is investing in our Specialty Catalyst business, part of that is investing in our Materials Technologies business. Both businesses have good long-term demand growth prospects. Grace throws off a lot of cash flow as a company, and there are opportunities for us to reinvest that cash flow in our existing businesses and to add smart bolt-on acquisitions like we've done historically. Those acquisitions built our Specialty Catalysts business and investor -- and as investors have heard us describe this year, we've looked at opportunities to add on to our Materials Technologies business. And when we find the right opportunities with the right financial profiles and the right returns, we would want to continue to pursue those opportunities.

John McNulty -- BMO Capital Markets -- Analyst

Got it. That's helpful and thanks for all the color on that. I guess maybe one other question, just a -- maybe a smaller nuance question but when you look at the ART business, I know you were excited about the potential for growth obviously before the pandemic came in and things got pushed out a bit. That said, they can only push these things out for just so long, I assume so. I mean, are we looking at a 2021 year where we could see almost a doubling of that business just based on how much it's come off in 2020 and also how much pent-up demand or maybe pushed out demand maybe as we look out. Is that the right way to think about it or is that maybe a little bit on the aggressive side?

Hudson La Force -- President and Chief Executive Officer

Well, let me -- I'm going to address that in two parts, John. the catalyst supply to existing operations has been delayed because of the pandemic. Customers that had turnarounds planned in the fourth quarter primarily have made decisions to push those turnarounds out into 2021 and they can do that because their operations, they've not run as hard as they normally would have. And so the catalyst effectiveness is still high and they can delay the turnaround to change out that catalyst in a fixed bed application. But by the same time, the turnaround that was planned in Q1 might get pushed to Q2, the one planned in Q2 might get pushed to Q3 for the same reason, just the life of the catalyst bed has been lengthened because our customers haven't been running as hard.

That said, I fully expect 2021 to be a stronger demand year for 20 -- than 2020 was in our ART business and that's partly because of the second growth driver which is new start-ups -- new unit start-ups. We've got very good visibility to our customers' plans to start up new units and we expect those to start up in 2021, 2022, and 2023. There are a number of new investments that customers have made that will come online in the next three years.

John McNulty -- BMO Capital Markets -- Analyst

Great, thanks very much for the color, guys.

Operator

Your next question comes from the line of Kevin McCarthy of Vertical Research. Your line is open.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Good morning. Hudson, how would you characterize the magnitude and the timing of the opportunity related to advanced plastics recycling technology for Grace?

Hudson La Force -- President and Chief Executive Officer

This is something that's in really just the developmental stages at this point, Kevin. There are a lot of experiments happening by Grace and by other industry participants with technology and with business models. There are technical challenges to be addressed. There are also business model challenges to be addressed in terms of capital requirements, feedstock availability, and things like that. And so I think this will take some time to sort out. There are some knowns, the pyrolysis processes is a well understood process. But there are some unknowns around feedstock availability in the pace of capital investment. And so I do think this will take some time, Kevin.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Okay. And secondly, if I may, in your press release you called out an increase in your projected liability for the environmental work that's proceeding in Montana. Can you talk about what the aggregate spend is likely to be and how you would expect that to flow through the financials in coming years?

William C. Dockman -- Senior Vice President and Chief Financial Officer

Yeah, Kevin. Hey, it's Bill. Yeah. The adjustment we took this quarter was related to the spillway at the Libby mine dam and we did increase that estimate now to $95 million, which will get spent over the next four years. But as we kind of alluded to in the release, this is an important part of our strategy at Libby. Getting this project done and getting it done right reduces the overall potential risk of the mine site remediation being a higher costs. You might recall, we had a separate charge for that of $70 million a couple of years ago and whereas we still work through that -- finalizing that solution with the EPA, the work we're doing around the dam and the spillway will help to ensure that we can keep the cost within the ranges that we've estimated. So it's a long-term process and we're making progress here. I think we're also well aligned with the town of Libby in the Lincoln County where it's located. They support the approach that we're taking as well. So still a lot of work to be done to finalize all this, it will not have any dramatic cash flow implication in any single year. I say this $95 million be over four years. The other $70 million that we accrued will be over even a longer period of time and not starting for a couple of years from now.

Kevin McCarthy -- Vertical Research Partners -- Analyst

I see. That's helpful. Thank you very much.

William C. Dockman -- Senior Vice President and Chief Financial Officer

Sure.

Operator

Your next question comes from Mike Harrison of Seaport Global Securities. Your line is open.

Michael Harrison -- Seaport Global Securities -- Analyst

Hi, good morning. Was just wondering with regard to the Hurricane Laura and Hurricane Delta impact, did the timing of that impact differ from your initial thoughts and at this point, do you have pretty good visibility on when the grid is going to be back up and running and you guys stop incurring costs or are there still some question marks there?

William C. Dockman -- Senior Vice President and Chief Financial Officer

Yeah. At this point the -- Mike the grid is back up. We're back on the utility, we're getting our energy from Entergy, the local utility. So the plant is back up and running. We're still finishing some of the cleanup on the site, but the site is back up and running. The plants are running, the energy's being supplied locally and so I think we've got a -- we're well on our way to wrapping up the cleanup efforts.

Michael Harrison -- Seaport Global Securities -- Analyst

All right. And then in terms of the refining catalyst business as you look at refinery operating rates around the world, can you give some color on what you're seeing from a regional perspective, are there regions where you were doing quite a bit better than that 24% decline that you posted overall and regions that were maybe a little bit worse than that?

Hudson La Force -- President and Chief Executive Officer

Mike its Hudson, we do see some regional variations operating rates in the Asia region have been higher than they have been in other parts of the world, just given the conditions in those markets around the pandemic and so forth. If we look at this over time, what we've seen is back in Q2 we saw a real trough, everybody is aware of that. Rates came back sequentially better throughout Q3, July, August, September and then in September, they stopped improving at the same rate and October has been roughly flat against September. And so we're watching this develop closely as the second wave of illnesses has started to effect North America and Europe. We haven't seen any significant change in demand, but we haven't seen real progress in demand improvement.

Michael Harrison -- Seaport Global Securities -- Analyst

All right, thanks very much.

Operator

Your next question comes from Mike Sison of Wells Fargo. Your line is open.

Mike Sison -- Wells Fargo -- Analyst

Hey, guys. The Specialty Catalysts business, I think you almost doubled that business over the last several years. And so when you think about strategically going forward, are there opportunities in different parts of the chemical industry that you could maneuver the business into that, maybe kind of correlates with your current technology. And can you do that organically or do you have to do some acquisitions to sort of maybe broaden that part of the portfolio which has grown nicely over the last several years?

Hudson La Force -- President and Chief Executive Officer

Mike, it's Hudson. On the Specialty Catalysts business the acquisitions that we've made have given us all of the technologies that we needed to have. We've got a broad technology footprint right now, we're able to supply the needs of our customers across polyethylene and polypropylene. And so there is nothing that we would have to do in that business. If there was an opportunity to add an additional technology or maybe some additional manufacturing footprint, we'd certainly look at it, but it's not -- it's nothing that we would have to do at this point.

Outside of the Polyolefin catalyst market, we've commented over the years about our interest in investing in chemical catalysts. There are attractive chemical catalyst businesses that we think would be nice complements strategically and financially to our current catalyst portfolio and that is something that we remain interested in. It's not likely that we would make significant organic investments in those markets. These tend to be niche markets and not a lot of room for a new entrant, but if an asset became available to us, we would certainly be interested.

Mike Sison -- Wells Fargo -- Analyst

Got it. And then as a quick follow-up. I think you noted in the slides and prepared comments that post pandemic you can get back to a 40% to 42% gross margin and when I look at your global refinery crude run charts and look at the blue line, it looks like no the -- you sort of get to those post pandemic levels in the second half of '21 versus the first half. So is it challenging to get there in the first half of '21. I know it's maybe little bit early be a guidance given that forecast and does it maybe imply to second half of '21 assuming that forecast unfolds the doable sort of number?

Hudson La Force -- President and Chief Executive Officer

Well, Mike, we're not going to comment that specifically on 2021 this morning. We'll certainly share our views when we give our full year '21 thinking in February. But I think your analysis makes some sense and the driver for gross margin is a combination of things. There is productivity that we do in our plants on a day-to-day basis. We've made a lot of effort to improve productivity of our operations. That obviously improves our cost position and improves our margins, but there are other factors as well including operating leverage. And that's why we've tied getting all the way back to our historical levels to getting back to historical -- sorry, that's why we've tied getting all the way back to historical gross margin levels to getting back to historical volume levels, because of the importance of volume leverage to our margins. That said, it's something that we work on every day to make sure we're as productive as possible, that we're manning -- managing raw material costs and other inflationary items to try to do as well as we can.

Mike Sison -- Wells Fargo -- Analyst

Great. Thank you.

Operator

Your next question comes from John Roberts of UBS. Your line is open.

John Roberts -- UBS -- Analyst

Thank you. The big increase in the pharma sales within Materials Technology, was that new wins that will be sustainable or is that a -- just a cyclical increase from the pandemic that then cycles back down?

Hudson La Force -- President and Chief Executive Officer

John, it's Hudson. Thanks for your question. It's a combination of both. There is an important part of this that is driven by the pandemic. We're supplying specialty silica technologies that are used in pandemic, I shouldn't say pandemic, COVID-19 test kits and we're also providing specialty silica technologies that are used in therapy and treatment of COVID-19 patients. And so that demand has increased significantly, it's remained strong which is good for us financially, but it's unfortunate in the sense that the pandemic has continued. But underneath that is also a strong improvement in the underlying pharmaceutical business. The team has done a nice job developing new business with new customers -- new business with existing customers and I remain optimistic about our pharma business into next year.

John Roberts -- UBS -- Analyst

And then secondly, assuming refinery runs get back to pre-COVID levels in the back half of 2021, will you have replaced the loss share from PES by then or do you still have some work to do on that?

Hudson La Force -- President and Chief Executive Officer

Yes, John. We believe we've replaced the share already, not on a volume basis but on a percent of the market basis. And so as refinery rates improve, we obviously expect our volumes to improve, but our intent is to maintain our market share. That's been our strategic intent in this business for a couple of years and we're focused on that. We want to maintain our market share and drive profitability growth in this business by focusing on value, selling our technology to our customers. That's our basic strategy and it really hasn't changed.

John Roberts -- UBS -- Analyst

Great. Thank you.

Operator

Your next question comes from Laurence Alexander of Jefferies. Your line is open.

Laurence Alexander -- Jefferies -- Analyst

Good morning. I guess first of all on Material Technologies, how is your segment mix shifting this year, I mean as you -- or as you think about exiting this year going into next year, where is pharma consumer as a percentage of the total compared to where it was in 2018 and 2019. And then the other question I had was just about the new platforms. Can you give a sense whether on the renewable fuel side the revenue per gallon or per ton is significantly different for Grace than a comparable traditional diesel or gasoline. And similarly for the catalyst opportunity in recycled plastics, is there a technical reason why the catalyst sale per ton of plastic produced would be materially different than the current catalyst sale going into a steam cracker.

Hudson La Force -- President and Chief Executive Officer

Thank you, Laurence for those questions. Let me start with the MT question and then I'll shift to the future -- to the other questions. On MT our segment mix if you went back a year ago, we were roughly a third, a third, a third between pharma consumer, coatings, and industrial or process chemicals. That mix shift has been changing as we've been focused on the faster growing and more profitable parts of our portfolio. And even setting the pandemic aside, we expected to see consumer -- pharma consumer -- the pharma consumer segment to grow faster than the other segments, although we did expect good growth in the chemicals -- the chemical process segment. That's where a lot of our new colloidal demand is classified.

And so over time what we were doing was driving mix shift among those three segments and within those three segments toward the faster growing more profitable end markets and we had seen a lot of progress. At the sub-segment level, we had seen about 10 points of mix shift over the last two or three years. Now with the pandemic, it's accelerated that mix shift in favor of consumer pharma. That will continue as we move forward. The mix shift may not be quite as strong next year as the COVID -- as the pandemic hopefully winds down, but in the long term we absolutely expect to continue to drive that mix shift.

On your question about the sustainability growth opportunities, let me touch on advanced plastics recycling for a moment. There are two catalysts -- actually there are three catalyst opportunities for us in this end market. The first is in the pyrolysis process itself. This is where the plastic waste stream is converted into an oil. That can be a process that's done with heat and pressure. It can also be a process that's catalyzed. It's a lot like an FCC catalyst. It's very similar application, very similar technical challenges. That is one commercial opportunity for us as this technology evolves.

The second opportunity is in FCC unit. If the product of the pyrolysis process, this oil is fed into an FCC unit to be co-processed with crude oil, that's going to require a different type of catalyst, still an FCC catalyst but a reformulated catalyst. That creates an opportunity for us. And then in terms of the polyolefin catalyst itself, it -- to your specific question, it doesn't matter on a unit basis whether the feedstock is from a cracker, a PDH unit, or this pyrolysis process. You need the same amount of catalysts to convert a unit of propylene into a unit of polypropylene.

Laurence Alexander -- Jefferies -- Analyst

And then just -- lastly just touching on the renewable fuels. Is there a significant difference in the revenue opportunities compared to traditional fuels on a per gallon or per ton process basis?

Hudson La Force -- President and Chief Executive Officer

This -- the renewables uses a similar technology to what we're selling into our Hydroprocessing end markets today and the economics are in line with our existing economics.

Laurence Alexander -- Jefferies -- Analyst

Okay, fantastic. Okay, thank you.

Operator

Your next question comes from Chris Kapsch of Loop Capital Markets. Your line is open.

Chris Kapsch -- Loop Capital Markets -- Analyst

Yeah, good morning. Hopefully you can hear me. So curious about -- I gleaned a little bit of this from some conversations with Jeremy but Hudson, I was wondering if you could address your decision to cancel effectively your project in your FCC capacity in the UAE. At one point this was deemed strategic given the pipeline of refinery builds in the broader Middle East and the Southeast region -- Southeast Asian regions and presumably your visibility in getting specked into those designs and processes. So a little bit of a pivot, but I'm just wondering if this is a function of a revised view of the markets, longer term potential or if you could just elaborate that'd be helpful, thanks.

Hudson La Force -- President and Chief Executive Officer

Sure, Chris. Happy to do. This project was conceptualized in 2012 as an opportunity for us to add new capacity in an important region in the world and at that time we had a view on long-term demand for FCC catalysts. We also had a view on how our technology would evolve over time. And in the intervening years, two things have developed. The long-term outlook for refining catalysts demand has moderated. The growth opportunity today is not what we thought it would be back in 2012. And so we had to factor that into our decision-making. But the bigger issue, quite honestly, Chris was around how our technology has evolved. Our -- the pace of technology advance in the FCC catalyst business has been pretty fast over the last few years.

We've invested in that business, our customers are demanding more and more sophisticated catalysts from us, particularly is the demand for petrochemical feedstocks in refinery units has increased over the last few years. And what -- that's led us to is a decision that it's better to keep our refining -- our manufacturing capability in our big plants. We've got three big plants, one in Europe, two in the United States that have a lot of capability and a lot of flexibility. And because of that flexibility, we're able to efficiently manufacture new technologies as they're commercialized without a lot of new capital investment. And that's the better manufacturing strategy for us, and it ensures that we are able to continuously provide our best technology to our customers from an efficient global footprint wherever those customers are based.

Chris Kapsch -- Loop Capital Markets -- Analyst

Okay, fair enough. And that answered the second part, sort of dovetails into a follow-up I had on this trade down dynamic in your FCC catalyst business and having that flexibility in your bigger plants probably help in the situation where these customers -- these refinery customers are thrifting and we've certainly seen this in prior cycles when their profitability is under pressure. What I'm curious about is when fracking became a thing, you were able to innovate and develop some FCC catalysts that could get the iron out of that light tight feedstocks for the refinery, and in this instance with the refineries, that their demand -- the yield slate -- their demand picture has changed dramatically and in some areas more pronounced, now that diesel is probably holding up, like gasoline is down obviously, the worst is probably kerosene. So I'm just wondering, other than just providing a lower cost catalyst for -- and again this is in -- I understand that this is not all your customer base, just some. But other than just sort of providing lower cost operations, is there an opportunity to help them change the yield slate to better address this disparate end market demand of these refined products or is -- or are they just trying to get through this and hope for the recovery. Any color on that would be helpful.

Hudson La Force -- President and Chief Executive Officer

No, it's a thoughtful analysis, Chris and you're spot on. The vast majority of our customers are using the high performing technology and a lot of that is because they want to be able to maximize the value of what they're producing at their refinery. Our technical teams have spent an enormous amount of time with our customers since the pandemic began, working with them to identify how do they optimize their profitability, how do they optimize their refinery margins in an environment where demand is changing dramatically, relative demand is changing, and the value of their products have been changing. And so this is what our teams do best. They are superb at working with our customers to identify strategies for maximizing our customer's profitability and then turning that into a catalyst formulation. And the vast majority of our customers are still pursuing that exact techno -- that exact strategy.

Chris Kapsch -- Loop Capital Markets -- Analyst

All right. Thanks, Hudson. I appreciate the color.

Operator

Your next question comes from David Silver of CL King. Your line is open.

David Silver -- CL King -- Analyst

Yeah, hi, good morning. I was hoping to just follow-up and get a little bit of background on the revenue dynamics, earnings dynamics when you are awarded UNIPOL polypropylene license. So I guess there is multiple ways to pay for a technology award maybe all upfront or over a period of time or related to production. And I noted you made a comment when you touched on that particular award that it would create a longer-term revenue stream. So if you wouldn't mind, can you just walk me through kind of the revenue flows. In other words, is there an upfront payment? Is it a longer term payment tied to either the lapse of time or level of production or is it the case where you maybe get an upfront payment for the technology. But the longer-term revenue stream you referenced is really with the accompanying sale of catalyst. And then finally, I mean, is there -- in the quarter, was there a payment received for the technology award? Or if not, when might that payment for that award show up in your results? Thank you.

William C. Dockman -- Senior Vice President and Chief Financial Officer

David, hi, it's Bill. Yeah, regarding the UNIPOL business, the way the typical arrangement works is we'll sign a contract with the licensee and from the time we sign the contract until the unit is up and running might be anywhere from three, four, five years depending on the project and what happens as we get a number of milestone payments during that time. So there'll be cash when they sign a license and other cash at different milestones.

And then -- but from a revenue recognition standpoint, we straight line the revenue. So at the time we sign the contract, we estimate the value of the contract and we straight line it over the period from signing the license until the unit is up and running. So this provides a steady fairly predictable revenue stream for us at any point in time for signing four or five, six licenses a year and they're taken three to five years, so you can do the math. There's 10, 20 plus licenses in various stages of revenue recognition and you've got milestone payments coming in throughout the year on a number of open licenses at any given time as well. So that provides steady stream of revenue, cash flow throughout the period of the construction.

And then beyond that, then we have the catalysts sales, which then provide the longer term sales opportunity beyond that, and we do generally have a long-term catalyst supply arrangement with our licensees. We've also continued to provide technical service. As I think Hudson mentioned during his remarks as well, provide service to continue to help the units run most effectively from start-up and for years to come beyond that. So these are very long-term relationships and once we sign a license, it provides us long-term opportunity.

David Silver -- CL King -- Analyst

Okay, thanks very much. That's it for me. I appreciate it.

Jeremy Rohen -- Vice President, Investor Relations

I think we have time for one final question.

Operator

Okay. And your last question comes from Chris Shaw of Monness Crespi. Your line is open.

Chris Shaw -- Monness Crespi -- Analyst

Hey, good morning everyone. Thanks for accepting [Phonetic] me in. Just curious on the 4Q guide for sequential gross margin improvement of 100 basis points. Given that -- I think you're also forecasting a 10% or little bit above that sequential growth in sales, I thought the gross margin benefit was less than I would expect it. Is there some sort of seasonality or mix going on that you expect for 4Q?

William C. Dockman -- Senior Vice President and Chief Financial Officer

No, it's -- Chris, it's really driven by the recovery rate. We're still not back to our historical rates, volumes both on sales and production. And so we'll continue to see this incremental improvement. We saw it from Q2 to Q3, we'll see it three to four. And assuming continued recovery into 2021, we'll continue to see the margins improve there. So it's really -- it's not a seasonality issue, it's really tied to our overall operating leverage.

Chris Shaw -- Monness Crespi -- Analyst

But a 10% sequential sales increase doesn't generate a higher gross margin improvement. That's just the -- that's the math.

William C. Dockman -- Senior Vice President and Chief Financial Officer

That's the math and you've got to factor the mix of the businesses and so forth as well, but that's the math and we feel pretty confident. That's where we'll land for Q4.

Chris Shaw -- Monness Crespi -- Analyst

Got it. And then, I know part of the growth strategy in the past has been -- in the refinery catalysts has been in other geographies, see where the growth is in actual new refineries and you've done that. I was curious, a new refinery, is a world-scale refinery in the Middle East relative to PES one that closed recently. Is there -- does one use more catalysts than the other or are they basically the same? I mean, is a newer, more efficient one use less or do they use more because, I'm not sure. I mean, what -- is there any sort of change in that besides just the volume?

Hudson La Force -- President and Chief Executive Officer

Chris, it's Hudson. The biggest difference is really in the value of the catalyst that they're using. The new refineries that are being built in the Middle East and Asia, Africa, they are focused on petrochemical feedstocks in addition to transportation fuels. And to achieve their output objectives around maximizing propylene, they need a very high performing catalyst and that's the biggest difference.

Chris Shaw -- Monness Crespi -- Analyst

Got it. Thanks. That's all I had.

Operator

I will turn the call back over to the presenters for closing remarks.

Jeremy Rohen -- Vice President, Investor Relations

Thank you, everyone for your time today and your interest in Grace. We look forward to engaging with you over the coming months. Thank you.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Jeremy Rohen -- Vice President, Investor Relations

Hudson La Force -- President and Chief Executive Officer

William C. Dockman -- Senior Vice President and Chief Financial Officer

Kieran de Brun -- Credit Suisse Securities -- Analyst

John McNulty -- BMO Capital Markets -- Analyst

Kevin McCarthy -- Vertical Research Partners -- Analyst

Michael Harrison -- Seaport Global Securities -- Analyst

Mike Sison -- Wells Fargo -- Analyst

John Roberts -- UBS -- Analyst

Laurence Alexander -- Jefferies -- Analyst

Chris Kapsch -- Loop Capital Markets -- Analyst

David Silver -- CL King -- Analyst

Chris Shaw -- Monness Crespi -- Analyst

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