GCP Applied Technologies Inc (GCP) 2016 Q4 法說會逐字稿

Good day, and welcome to the GCP Applied Technologies fourth-quarter 2016 earnings call.

(Operator Instructions)

Please note that this event is being recorded. I would now like to turn the conference over to Joe DeCristofaro, Vice President, Investor Relations. Please go ahead.

Thank you. Hello, everyone, and thank you for joining us on today's call. With us on the call are Greg Poling, President and Chief Executive Officer; and Dean Freeman, Vice President and Chief Financial Officer. Our earnings release and corresponding presentation slides are available on our website, as are the press release and corresponding slides for the proposed sale of Darex to Henkel. To download copies, please go to gcpat.com and click on the Investors tab.

Some of our comments today will be forward-looking statements under US Federal Securities laws. Actual results may differ materially from those projected or implied due to a variety of factors. We will discuss certain non-GAAP financial measures, which are described in more detail in this morning's earnings release and on our website. Our comments on forward-looking statements and non-GAAP financial measures apply both to the prepared remarks and to the Q&A. References to EBIT refer to adjusted EBIT, and references to margin refer to adjusted gross margin or adjusted EBIT margin, as defined in our press release.

Greg will start us out today with a business update and insights into 2017. Dean's commentary will include highlights of our fourth-quarter financial results and 2017 guidance. We are discussing these results excluding the impact of Venezuela, and we have provided a reconciliation of the financial information in our press release. All revenue and associated growth rates in this discussion are stated on a comparable constant-currency basis, which adjusts for the impact of foreign currency. With that, I'll turn the call over to Greg.

Thank you, Joe. Good morning, everyone, and thanks for joining us for our fourth-quarter earnings call. Let me start by saying I'm pleased with what we've accomplished in our first year as a public company. We successfully launched the new Company, built a talented team, and created a strong financial and strategic platform.

In 2016, we grew our revenues 2%, adjusted EBIT 7%, and expanded margins by about 110 basis points. We delivered cash flow of $114 million and adjusted EPS at $1.41. We've completed two bolt-on acquisitions, Halex and SensoCrete. And we are developing a strong pipeline of potential M&A prospects. We're positioning the Company for long-term growth, and remain focused on our customers and innovation.

This morning, we are excited to announce we've received a binding offer from Henkel to acquire our Darex Packaging Technologies business for $1.05 billion. Given the proposed purchase price, this transaction creates an opportunity to monetize the Darex business at an attractive multiple, the proceeds of which we can reinvest in our GCP construction businesses. The proposed transaction with Henkel will provide an efficient tax structure, with after-tax proceeds in the $800 million range before deal and other one-time costs.

We are participating in the consultation process with the relevant works councils and unions, and once we've completed this process, we expect to enter into a definitive purchase and sale agreement. The proposed transaction will be subject to the customary closing conditions. That includes regulatory approvals. But we are expected to close in the middle of 2017.

The Darex business will be a complementary fit with Henkel's adhesive and technologies portfolio. And GCP will become a focused construction products and technologies company. We'll have a strong balance sheet for internal investments and bolt-on acquisitions. Our pipeline for bolt-on acquisitions is healthy. We will remain disciplined in executing on acquisitions, and focus on companies that have attractive margins, synergy potential, and low-capital intensity, in businesses that we understand.

Now looking forward 2017, the construction markets are generally healthy. North America's construction market remains strong, and Europe is recovering. The Asia-Pacific region is mixed, depending on the country and project timing. And Latin America, especially Brazil, is stabilizing. We are seeing raw material inflation across the supply chain, and are implementing price actions across our product lines to offset this inflation.

In 2017, our capital expenditures will include capacity expansion for our pre-approved product line, to build out a verified performance center in Cambridge, Massachusetts, and an upgrade of our technical service facilities in Singapore. Dean will walk you through the details of how we're looking at our worldwide markets in just a minute, as well as our 2017 guidance.

I'd like to comment on a number of our growth programs. In our specialty concrete and cement business, Verifi in-transit Concrete Management System continues to gain traction. We're securing new customers, and existing customers are expanding the number of trucks on which they install the Verifi system. This demonstrates the product is providing value to the customers who have used it over the past year.

We've had good success winning new projects for our TYTRO Shotcrete System, as well as acceptance of our air track for precast and prestressed concrete. Next week at the CONEXPO show in Las Vegas, which is one of the world's largest concrete industry shows, we're launching two new high-value [prime victor] products. [CONSERA] is an admixture which enables the production of highly flowable concrete, using conventional mix designs. This is new to the industry, and the product will reduce placement time and labor.

We're also launching CLARENA, a new product that mitigates the negative effects of poor-quality aggregates on concrete. This product should provide reduced cost to a number of aggregate users in the ready-mix chain. We remain focused on expanding margins in the concrete admixture business, both through pricing, productivity, and some commercial rationalization, to design to improve the profitability of the business.

In Specialty Building Materials, we're focused on continued penetration of our pre-approved products in the pre-applied waterproofing market, and are making an investment to expand capacity in this segment. We are excited about the global launch of our Silcor liquid waterproofing, and some new Perm-A-Barrier weather-barrier products.

We're seeing growth in the Halex business around the flooring underlayment product line, and it offers new construction and repair and renovation opportunities to the Company. We are working through our integration process. It is on schedule, and we expect that process to improve margins in the Halex business in the second half of the year.

We're excited about the number of products and technologies we're introducing to the market and working on in our laboratories, as well as their ability to impact our financial performance going forward. I'd now like to turn the call over to Dean for a few more details on the discussion of our results and 2017 guidance.

Thank you, Greg, and good morning, everybody. Today's discussion excludes Venezuela for 2016. Just as a reminder, we have included a schedule showing the results in the appendix of our press release and earnings slides.

GCP's consolidated revenues were flat at $331 million in the fourth quarter. Construction revenues were up slightly, as strong growth in North America was partially offset by lower sales in the European region and persistent economic weakness in Brazil. Our Darex Packaging business was essentially flat, down less than 1% in the quarter.

Looking at the regional sales for the construction businesses in the fourth quarter, North America construction revenues were up approximately 8%. The region benefited from 6% growth in our building envelope business, continued growth in our residential business, and the addition of Halex. SCC's concrete admixture business grew modestly in North America in the fourth quarter. And as expected, we did continue to see weakness in EMEA, which was down about 8% in the quarter, for our construction businesses, due primarily to the geopolitical events in Turkey and the UK. In Latin America, revenue for our businesses declined 2%, with growth in Mexico offset by declines in Brazil.

Asia Pacific declined 5% in the fourth quarter. The Asia-Pacific performance was impacted by project timing in the SBM business -- Specialty Building Materials business. Our Specialty Construction Chemicals business declined 3% as strength in China and Vietnam was offset by lower sales in Malaysia and Thailand.

In the fourth quarter, GCP's consolidated adjusted EBIT declined 7.6%, primarily due to a $2.5 million gain on the land sale in the fourth quarter of 2015. The decline was also due to an increase in selling expenses in our Specialty Building Materials business designed to support commercial initiatives that will positively impact growth in 2017.

A little bit more color on our segments. SCC grew adjusted EBIT by 4% in the fourth quarter. SCC produced adjusted gross margin expansion of 280 basis points, to 36.6%, due largely to price, raw material deflation, and productivity. The adjusted EBIT margins expanded 80 basis points, to 11.1%, largely on the improvement in gross margins.

SBM segment operating income declined 4.6% in the fourth quarter, as gross margins declined 100 basis points, to 45.1%, largely due to lower-margin mix and the dilutive impact of Halex, which we expected. As we complete the integration process, Halex margins will improve, as Greg talked about. Segment operating margin for SBM was 24.1%, or 210 basis points lower, as a result of the lower-margin mix in sales and marketing expense investments that we made in the business.

For Darex, adjusted EBIT declined 27%, largely due to an increase in allocated expenses and the gain on the sale of land in the fourth quarter of 2015. If you exclude the impact of that land sale, the adjusted EBIT would have been down about 5%. Adjusted gross margins increased 50 basis points, to 34.6%, during the fourth quarter, as favorable raw material deflation was partially offset by lower pricing and volumes.

So rounding out the consolidated results for GCP in the year, we had interest expense totaling $64.6 million; tax rate was 30%; adjusted EPS was $1.41 on a share count of 71.7 million; and we delivered $114 million of adjusted free cash flow in the year. We invested $45 million of CapEx, consistent with our plan of less than 4% of sales for the year.

So let me turn to 2017 outlook. As we've lapped the devaluation of Venezuela, we will include these results in our guidance, as well as in our quarterly updates. There's a slide in the deal presentation posted on our website that shows our guidance for 2017, with and without Darex. And, I just ask, please be mindful, as is customary, we will report discontinued operations and restructuring line items in future results when the proposed deal closes.

Let me just talk about our regional expectations first. In the construction markets in North America, we expect slightly better growth in 2017 than in 2016. Any increases in infrastructure spending in North America are likely to impact 2018 in future years.

In Latin America, we should see growth accelerating in the second half, as we lap the year-over-year declines in 2016. In Europe, we expect improved yet still moderate growth rates, as core Europe recovers, despite continued challenges in Turkey and the UK. The Middle East will be dependent on continued infrastructure spending. And we expect modest growth in 2017 in Asia Pacific, particularly in China. And as we saw in 2016, growth will depend on specific country performance in emerging parts of Asia.

Based on these expectations in 2017, we anticipate consolidated constant-currency revenue growth of 4% to 6%. This includes Darex. In our construction businesses, we expect growth of 5% to 8%. We expect continued improvement in our EBIT margin, particularly in Specialty Construction Chemicals. And to offset inflation, we're taking price actions and executing on productivity initiatives across our supply chain.

We expect adjusted EBIT growth of 5% to 9% consolidated, including Darex. And our construction businesses on a stand-alone basis, including about $25 million of legacy Darex administrative costs, expect to deliver EBIT of 8% to 14% in 2017.

We're working on the effective tax rate impact on ongoing earnings, and we expect consolidated CapEx to be around 4% of revenue -- again, on the consolidated revenue, including Darex. And without Darex, it would be about 5% of total construction revenue. We're forecasting 5% to 11% consolidated adjusted EPS growth, and 10% to 15% growth for the construction businesses, again, on a standalone basis, and includes the impact to the legacy Darex administrative costs.

Adjusted free cash flow on a consolidated basis will be about $100 million. Currently, we're estimating that, on a stand-alone basis, the construction businesses will generate approximately $40 million to $50 million of adjusted free cash. Post-transaction, we intend to initiate cost reductions of approximately $10 million to $15 million over an 18-month period, and we'll have further updates on subsequent earnings calls.

Looking at how we see the distribution of adjusted EBIT on a quarterly basis, 2017 quarterly earnings seasonality will more closely resemble the historical seasonality of 2014 and 2015, as opposed to what we saw in 2016. This is largely a result of lapping abnormally mild winter weather in 2016, large-project timing in our SBM business shifting from the first half of the year to the second half, and the full run-rate effect of higher incremental corporate costs associated with standing up the Company.

So, including Darex, we expect about 13% to 15% of our 2017 consolidated adjusted EBIT in the first quarter. The construction business's standalone will generate about 8% to 10% of the total year adjusted EBIT in the first quarter. Last year, for some of the reasons that I mentioned, our construction businesses generated about 20% of its annual adjusted EBIT in the first quarter. The balance of the quarters will follow more historical seasonal trends, with the second quarter expected to be the strongest, followed by the third quarter, and the fourth quarter seasonally weaker. Slide 11 of our earnings presentation shows more detail of the quarterly distribution of our adjusted EBIT for 2014 through 2016.

Lastly, just making a comment on our capital deployment priorities, our financial strategy is based on three core principles: deploy capital for growth in high-performance businesses with attractive returns, to grow shareholder value; operate with moderate leverage that preserves flexibility through construction cycles; and return capital to shareholders over time. And with that, I'll turn it back over to Greg.

Thank you, Dean. I would just like to wrap up before we take your questions. We're confident we are positioning the business for growth and value creation. We have a high-performance team that's focused on launching new technologies for our customers, and we're poised to continue to execute on M&A opportunities that advance our strategic agenda. We remain focused on the process necessary to complete the proposed transaction around the Darex business. We thank you for joining the call, and we would be happy to take your questions.

Thank you.

(Operator Instructions)

Our first question comes from Jim Barrett with C.L. King & Associates.

Hello, can you hear me?

Yes, there you are.

Okay. Good morning, and congratulations on the transaction.

Thank you.

Dean, I think this is a question for you. You indicated after-tax gains of $800 million by selling Darex. If the corporate tax rate in the US were to decline from 35% to 15% retroactively to January 1, would that change the math at all?

I certainly don't want to speculate on how the tax rate may or may not change as a result of certain policies. I think what you're seeing there, the net result is a transaction that, combined with Henkel, was structured very efficiently, and obviously with legal entities in mind. And our foreign exchange funds flow distribution achieved a level of proceeds that we think is strong. But other than that, I wouldn't speculate on any forward-looking changes that might happen.

Okay. And Dean, given the prospects of calling in your debt that's callable in early 2019, how do you view expending the cash from that deal in the interim? Would you envision maintaining a cash stockpile to call in that debt?

Well, I think as Greg pointed out and as we alluded to, I think we're going to be focused on our priorities. First is closing the transaction, and getting through the final regulatory matters to execute on the deal. And then our priorities are going to be on high-growth return, both organically and inorganic opportunities. I think our framework obviously includes looking at our debt covenants, and being thoughtful about shareholder returns as well. But I think at this stage of the process, our priorities are on growth and on closing the transaction.

And my last question is, you mentioned a cut in expenses of $10 million to $15 million. Should we view that as largely coming from corporate overhead and the elimination of Darex? Or do you also envision further cost reductions in the two construction divisions?

Jim, let me answer that. This is Greg. I think you should think about that relative to the infrastructure that is around the world to support the Darex business as we go forward. It's going to be 12- to 18-month process. We'll work through that. And frankly, we're in discussions and consultations today with our employees around the world. So going any further on that at this time. But it's associated with the Darex.

Okay, well, thank you again.

Great.

Our next question comes from Michael Harrison with Seaport Global Securities.

Good morning. This is Jacob on for Mike.

Hi, Jacob.

Just in terms of the acquisition, I know you guys put on your slides that you want to focus on the high-performance projects, organic growth and new products and technologies. But is there any specific part of the business that you're targeting with your pipeline?

I think from an M&A pipeline, you should think about us as looking at businesses and construction additives that are similar to types of businesses we're in. Especially building materials, is a large segment. We think we're competing in about a $10 billion to $15 billion market. Repair and innovation is an area we -- as you know, with Halex, we picked up some repair and renovation specialty products that we think have the opportunity to create new categories. Those are the types of things we want to invest in -- businesses we understand, complementary, have synergies.

And there's also a bucket for us of enabling technologies, as we did last year with the little SensoCrete deal. We stepped up our technology position around Verifi. If we can find opportunities on the technology side, we will also do that. But it's going to be companies that are in businesses that we understand, that are complementary and keep the profile of our Company intact.

Okay. And then on a different note, we've been hearing a lot about labor cost inflation recently. You guys have the product lines that reduce labor requirements. I know you talked about that new one that you're introducing that reduces placement time and labor. Is that value proposition starting to gain more traction with customers these days?

Yes, it's a great question. Look, as we see not only -- some places in the world, you've seen a little bit of labor inflation. It hasn't stepped up at the pace that it might. And we're also seeing raw material inflation. When you're selling products that have productivity opportunities, as inflation kicks in, that value becomes more pronounced.

If you think about our Verifi system, where we're selling quality, we're selling productivity and positioning on the business, as their cost goes up, those productivity gains increase. It would be true on admixtures and any place where we're able to take labor out of the construction placement. If those costs go up, it's a better advantage, that's true.

All right. Thank you for answering my questions.

Great. Thank you.

Our next question comes from Laurence Alexander with Jefferies.

Good morning, guys. It's Dan Rizzo on for Lawrence.

Hi, Dan.

Did you give -- I apologize if I missed this. Did you give what the cost basis for Darex was, and how the hedging costs will be allocated between Darex and GCP?

No, we didn't.

Are you going to?

No, I think that what we've said is that we expect after-tax proceeds, ex any deal costs or one-time items, to be in the range of $800 million. And I think that's where we'll leave that conversation.

Okay. And then just outside of the deal -- and you mentioned in your comments that Europe was still kind of sluggish. Are things getting better at all? Or just any color on Europe in terms of which way it's trending as we look forward?

Last year, there were a number of events, especially in some markets where we have a nice position. We have a nice position in the UK, we have a nice position in Turkey, and there were some geopolitical events that took place there. We're seeing some of the core European markets starting to show some recovery. And we think that's a good sign.

And frankly, the Middle East, which, with the decline that we saw in the oil price, we were a little hesitant on the Middle East. But we see them continuing to build some infrastructure there. There's some timing on projects that will impact us through the year. But we're seeing some good infrastructure projects in the Middle East.

And if you look out at the IHS data for core Europe, you're talking a 1.5%, 2% type of growth rate. But given where construction has been in that part of the world, we'll take it.

Okay. And then finally, do you envision any time in the future where you'll quantify what Verifi is doing in terms of adding to revenue and/or operating income?

I think you'll start to see the Verifi business, as we go through the year, impacting -- frankly, for an awful lot of reasons. Many of which are competitive -- we're not giving out our sub-product line data. But we're seeing good double-digit, high double-digit growth last year. And as I said in my script, what's very encouraging is, we have new customers and some good excitement, and there will be a lot of talk about Verifi out at the Con Expo show.

But our existing customers are picking up the number of trucks on their fleets where they're putting the system. So that means, if you've had it on and you're running it, you're seeing value, if you're adding to your fleet. We're encouraged with Verifi. I continue to say, this is a process that is an industry change. It takes time to implement and go out, but we like what we're seeing.

Thank you very much.

You're welcome.

Our next question comes from Connor Cloetingh with KeyBanc Capital Markets.

Good morning, guys.

Good morning.

I was hoping if you could comment on the competitive dynamics that you're seeing in North America? We've noticed that there's been a large competitor that's been fairly aggressive in trying to penetrate and gain share here. I was wondering if you have noticed this, and if so, what are you doing to combat these --?

Rather than get into any specifics around what other companies are doing, let me tell you how we think about the competitive landscape. We have nice markets positioned, especially in North America, in both the cement concrete and the SBM products. Our view of the world is, if we add value from a product and technology standpoint, continue to invest as we've done this year, in technical service and our selling capabilities, that we're going to win in the marketplace based on that value.

We're very focused on continuing to step up and accelerate the value opportunities you see. In the SCC business, we've made some decisions that are allowing us to improve the margins in that business. We're going to continue to work in the segment of -- especially the concrete admixture business -- that has margins that, frankly, support the value we're bringing to the customers.

We're focused on the higher end, we're focused on strong margins, and we want to deliver that value to our customers. It's a competitive marketplace, it always has been. And we think technology and service is the way to win here.

Okay, great, thanks for that. To follow up on that, are you expecting much in the area of price increases for both SCC and SBM in 2017? Or will the price mix more be coming from a shift to selling more of these higher-value products?

We'll continue to drive the shift on the higher-value products as they roll through the system. So that's a continued focus for us, strategically. And as you know, we came out, we reconfigured some of our R&D, made some moves. It takes a while for some of those products to start to come out of the pipeline, and we're focused on that. We talked about a couple today. But we are seeing inflation move through the global supply chain. And in all of our businesses, when we see inflation, we expect to go capture that. And we are seeing some pricing. And in fact, it's an area we're focused on this year that, frankly, historically, the last year or two, haven't seen a lot of that. So yes, we'll see some price this year.

All right, thanks for answering my questions.

You're welcome.

Our next question comes from Chris Shaw with Monness Crespi.

Good morning, everyone. Well done on the Darex deal.

Thanks, Chris. We're still working through a process.

First, a question to clarify. In the release, the guidance you give for the top line is 4% to 6%, based on constant currency. But in the Darex presentation, you also have the 4% to 6% growth, but the note says it's using the January 2017 FX rates. Is that just saying that there's not that much of an impact year over year?

Yes, we're using January FX rates. So you would expect that our outlook represents those, which is about the rates we expect to achieve at the end of the year.

So year over year, there's no big impact from currency then on the top line? Because one, you're using constant currency; and one, you're using January rates.

Yes, the guidance is at the constant currency rates we used in January.

Okay, sorry. Then the question -- post-deal, how much does your geographical exposure change at all, if at all?

Yes, good question. I think it probably shifts a little bit to North America, because the SBM business has a strong position in the North America. And the Darex business was very geographically balanced. So the exit of -- if the Darex business exits, you'll see a little bit more exposure in the North America market. Our concrete [mark] business has got pretty good geographic balance, but some of the product lines in SBM are residential, are fit for use in this segment.

Frankly, the acquisition of Halex will globalize that product line. But it was primarily a US- or North American-based product line. So it will shift it some. And we had a good position in Darex, have a good position across Asia Pacific, and a very nice position in Latin America with Darex. So it does shift.

With that said then, and notwithstanding anything the new Administration does, do you expect your tax rate then to go up?

I would tell you that we're working through the forward-looking tax rates on the Company. And give us a little time -- we've been working on this deal. I think our focus has been on the tax efficiency on the transaction. But given today's tax rates, we have to work through the whole balance of it. There's a lot in flux on tax right now going forward.

Then just also on the guidance -- without Darex onto the EBIT line, is there any of the $10 million to $15 million in the corporate costs that you talked about, in that guidance? Or is that all for like, 2018, 2019?

I think, primarily, we're seeing that those cost-outs going to take a little time here, given the timing of the transaction, and it's going to be more of a 2018 event. We're going to work through the expense side in a diligent manner. But frankly, to support the transaction and what might take place in terms of exits, we're looking at this without a lot of support from cost reductions.

Okay, great. Thanks a lot.

Our next question comes from Chris Kapsch with Aegis Capital.

Yes, good morning, guys. Following up on this slide that you referred to with your 2017 growth framework and guidance -- and I'm focused on the without-Darex column, where you point to organic or top-line growth of 5% to 8%. I'm just trying to connect that to the qualitative comments about growth prospects by region. So I'm just wondering if you could parse out maybe by business or region, what -- it looks like to get to that growth rate, it's North America that's going to do the heavy lifting there, especially with your SBM disproportion exposure to North America.

But I'm just wondering if you could parse out what needs to happen, either by business or by region, ex-Darex, to get to, say, the high end of that range? And then what might happen -- surprise you negatively, to bring you towards the lower end of that range? That would be helpful.

On the negative side, what I'd tell you is, this year we had some impacts on some unexpected geopolitical events in markets in which we were in, and some that we're expect. I mean, Brazil has been going through a transitional period. We've got a nice position in Brazil, and as that works out, we expect to lap that. And we'd like to have that stabilize, and we're projecting that. Turkey and the UK are another couple of markets that impact us.

So what could bring us to the lower end of the range is those types of events in markets in which we have a nice position. You're correct, the US market, both from an overall perspective, is relatively healthy. And we think if there's spending on additional infrastructure, it extends that recovery going out. Halex had some growth, we expect on the 5% to 8% range. Some of what's in there is some pricing, as you start to see the inflation come through, and fundamental market growth.

And then we have to be successful with these new product introductions. And I've talked through a number of those in my comments. But we like what's going on with the acceptance on Verifi. We think we've got a very nice liquid waterproofing product that, last year, had mid-teens growth, and we're rolling that out around the world, some [air bear] products. So new products, both in terms of ones that we have in the market and our introduction is what brings us to the higher end of that range.

Okay. And then just on that same side, just to follow up on the flow through to the EBIT growth of 8% to 14%, I think you referred to some of the -- I don't know if stranded costs is the right term, for some of the Darex-related support costs. But that 8% to 14% EBIT growth expectation, are you giving yourself credit on a pro forma basis for the elimination of certain costs? And if that's the case, would it be the 5 to 15 that you talked about, or the 25 that you referred to?

In terms of the projected -- as I've said, we're working through, now that we have a buying offer, those cost structures. We expect that takes some time. We have to go through the process to have the deal approved and closed, and then we have to support the transition. So we're not contemplating a lot of cost savings in 2017 impacting our EBIT numbers. I think that's the best way for me to answer that.

There are some legacy costs that we're going to maintain in the Company in order to implement our growth programs, from both an internal and external basis. And that's the difference between those two numbers. We're going to have some legacy costs that we continue to have in the Company, to allow us to grow around the world the way we expect to do so.

Okay. So the 8% to 14% ex-Darex EBIT growth doesn't contemplate much, if any, elimination of legacy costs associated with post that transaction, it sounds like. So then therefore, it must be a combination of mix and pricing that helps you exceed the top-line growth. I'm just wondering if you could help us understand what really helps the implied margin expansion there? Is it more about mix or more about pricing, or really, a little bit about everything?

I would tell you that we have had some success in the second half of the year, as we said we would work on the construction chemical side of the business to improve our margins. And so we picked up that improvement going into. You have to remember, for us, first and fourth quarters are lower quarters, and may not be the most indicative of the margins.

But we like the improvement we're seeing in the SCC business. That's price, that's productivity. There's some rationalization going on, to the earlier caller, and the new products. And then we also have some pick-up, as we talked about.

We have Halex in the growth numbers, but when we bought that, we said it would take us into the second half of next year to pick up some of the integration opportunities. We're on track, but we won't see the impact of that until later in the year. So you've got some integration work on our last acquisition that starts to show up as well.

And then the third thing I would say is that the mix on the new products -- Dean tried to give a little bit of this in his color. In SBM, our project timing has shifted, and we see some good project work in the second and the third quarter. Those tend to be the pre-approves, the high-end margins on the larger infrastructure and big projects.

That helps our margin. We'll probably see it in the second and third versus the first. But we've got pretty good visibility to the pipelines on those products, and those are being sold on a value sale. And I think, frankly, the industry is seeing inflation. So there will be some price.

Okay, that's helpful. And just finally -- and let's say we fast forward, I don't know, six, nine months. And presumably, it sounds like priority one is closing this Darex deal. The Company does have a new profile without what you had referred to as -- Darex was combined with GCP when spun from Grace, partly because of the steady and healthy cash flow characteristics.

So on a go-forward basis, what's the right capital structure in terms of leverage for the new co, in your view? And then how much capacity therefore do you think you have for additional bolt-ons once you get beyond closing the Henkel deal?

We'll give some further guidance on the leverage structure going forward. But right now, we think we have the capacity to add to the growth in the construction business. We think that the transaction was conducted in terms of allowing us to have that cash available. We liked -- always have liked the cash flow and margins of the Darex business.

But given the multiple here, we think this positions us not only to have a modest leverage going forward, but be able to execute and improve on our construction businesses. We've got a nice pipeline there, and I think this gives us the flexibility to do that. I think one of the callers, or Dean, implied, a year or two out here, we can rework our debt structure, and that will also be helpful. So we think this gives us a lot of flexibility.

Okay, thank you.

Our next question comes from Roger Spitz with Bank of America Merrill Lynch.

Hi, this is Chris Ryan on for Roger. Thanks for taking my question. Are we correct that you can use the Darex proceeds to repay bank debt, CapEx, or purchase assets, but with the excess proceeds you only have to make a par offer for the bonds, and there's nothing else ever to require you to take out the bonds?

Yes, in the language of the covenants, there's language that suggests over 360 days, plus 180 days to reinvest, we would required to pay down the term loan. I think it's another 460 days on the high-yield bonds at par. But there's also language in the covenants that gives us some, I'll call it relief, if we have to repatriate cash offshore in order to do that.

So we'll evaluate that. Obviously we're giving ourselves latitude to deploy the capital in accordance with how we talked about our strategy. But that's, in fact, right. The high-yield bonds would have to be redeemed at par.

Okay, thank you. That's my question.

Yes.

(Operator Instructions)

Our next question comes from Jim Barrett with C.L. King & Associates.

Greg, how would you characterize your two new concrete admixture products? Are they evolutionary in nature? Or would you view them as more proprietary and more impactful than a typical line extension?

It's a good question, Jim. I think on both of them, the flowable concrete product is going to take a little bit of learning, like a number of these products, from the customers, to learn how to extract the value. Essentially, we're going to be able to place concrete as if it was very high flowable concrete, but have it go where they want it to go. And that's a labor savings you have to push through the process.

I don't think I would call it a revolutionary, in terms of change-the-industry-type of product. But I think it gives our customers an edge in terms of creating some value, especially when linking up with the placement contractors on the concrete side. And it's about labor productivity and time, and we think it's a nice product.

Look, it's new. We've done quite a bit of testing. We're going to put it out at the market next week, out at Con Expo. And the real proof will be in our customers' acceptance of it. But we think it's a good one.

On the aggregate management, that really drives. There's an issue with specific aggregates, where clay and heat allows you to have problems in terms of managing your concrete and using those aggregates. If you can use a wider range of aggregates, it's a lower cost play. We think that one is going to be good.

Again, it takes us some time to get them in to the market, people to accept them, to create the value. But we think they're both good additions, and we will continue to -- what we want to be doing in admixtures, putting products out there that our customers look at and say we're providing them value across their whole system.

Good. And then secondly, I saw the Halex display at surfaces on January 19. Is the flooring industry, and flooring distributors specifically, are they a source of further bolt-on acquisitions for the Company?

We've identified especially building materials in general. And I would tell you that if we could find a company that has the type of product -- as we said when we bought it, there's a specific underlayment product with that Halex business that's going in and replacing traditional epoxy undercoatings. And we think that's a category creator, and we're seeing some very good traction with that.

And as we run it around our global organization, train our organization, get them up to speed, we really like that flooring activity. The people we've picked up with the Halex acquisitions are experts at it. So if we can find something to fit in there, we'd like it.

Good. Thanks again.

You're welcome.

As it appears we have no further questions, I would now like to close out the question-and-answer session, which will in turn, end today's conference call. Thank you for attending the presentation. You may now disconnect.