W. R. Grace & Co.-Conn. Q3 FY2026 earnings call

• Core Overall Performance

  • Q3 2026 delivered total revenue of $32.3 million (6% year-over-year increase, nearly 40% sequential increase from Q1 2026), adjusted gross margin of 22.9% (50 basis points year-over-year increase), and adjusted EBITDA of $1.2 million. Adjusted for a $550,000 one-time grant benefit in the prior year, adjusted EBITDA is $350,000 higher year-over-year. All metrics show sequential improvement from Q2 2026, with Q1 2026 confirmed as the business trough.
  • Ended Q3 with $24.4 million in cash and equivalents, $16.8 million in total debt, and total liquidity of $34.4 million. Operating cash flow was negative $3.5 million, driven by working capital increases for higher sales and supplier payments for tooling projects; investing cash flow was negative $3.2 million from capital expenditures.
  • Management expects a tariff refund of $500,000 to $700,000 in coming months related to the U.S. Supreme Court's IEPA tariff ruling, for tariffs paid on imported equipment installed in Statesville, North Carolina.

• Operational Execution

  • The new dry graphene manufacturing process was completed and powered on by the committed early April timeline, with disciplined scale-up underway. Commercial material qualification is expected in Q4, to enable order fulfillment from this new platform in fiscal 2027.
  • Graphene enhanced SMC and composite materials expansion equipment is already operational in Statesville, North Carolina, and is in the final scaling stage at the Beaus, Quebec facility. Full installation and operational completion is expected by the end of fiscal 2026, to support new revenue streams in 2027.
  • The $15 million first phase of the contracted Club Car solutions business was launched on time and on plan in Statesville; the remaining $35 million in contracted solutions revenue will ramp over the next 18 months per customer timelines.

• New Product and Market Expansion

  • Launched the new XGMP D500 HP graphene product, purpose-built for the $3+ billion global conductive carbon additives market. D500 HP offers 99.8% purity, matches incumbent product conductivity, is price-competitive with carbon black, and delivers double the flexural strength and stiffness, eliminating the traditional tradeoff between strength and conductivity for customers.
  • The Tribograph lubricant partnership with Chevron Phillips Chemical continues to advance, with the product moving successfully from lab testing to end-user field trials. Tribograph reduces drilling friction and cuts drilling time by up to 20%, creating significant value for customers in hard-drilling environments.

• Shareholder Alignment

  • Leadership and the board of directors have made meaningful insider share purchases in recent months, aligning management with shareholder outcomes. Management believes the market has not yet fully priced in the value of the company's new products and contracted revenue pipeline.

For the third quarter of fiscal 2026:

• Advanced materials, plastics, and composite product segment: Adjusted EBITDA of $1.25 million, a $80,000 decrease year-over-year. This segment makes up the majority of the company's current revenue, driven by the new Club Car contracted program and CP Chem Tribograph sales.
• Battery cells and materials segment: Posted an adjusted EBITDA loss of $60,000, a $160,000 decrease year-over-year. The company discontinued the CSPG anode materials initiative earlier in the fiscal year, focused on other core expansion projects.

• Full fiscal year 2026 revenue guidance is maintained at $115 million to $120 million.
• CAPEX spending for Q3 2026 came in at $3.2 million, below the previously expected range of $4 million to $5 million due to timing of expense recognition, with remaining expenditures shifted to Q4. Q4 CAPEX is expected to be $2 million to $3 million to complete the dry graphene and graphene enhanced materials expansion projects.
• After the two ongoing expansion projects are completed, quarterly CAPEX is expected to drop to less than $1 million per quarter, excluding any new strategic initiatives.
• Adjusted gross margins are expected to increase by approximately 50 basis points sequentially in Q4 2026, with continued progressive margin expansion through the first half of fiscal 2027 as new high-margin revenue ramps and operational overhead efficiencies are realized.

• All forward-looking statements, including guidance and revenue ramp timelines, are based on current assumptions that may not materialize, and actual results could differ materially from projections due to unforeseen risks and uncertainties.
• Demand recovery for the company's two largest customers, while improving, has been slower than expected, with year-over-year volumes still down in Q3 2026, creating near-term top-line pressure.
• Gross margin expansion in Q3 was limited by the higher mix of lower-margin tooling revenues and temporary operational inefficiencies from ramping new facilities, which could continue to suppress margins in the near term as new projects launch.
• Tribograph revenue ramp is dependent on successful conversion of field trial customers to large-scale commercial contracts, which may not occur on the expected timeline or at the projected volumes. Demand for Tribograph is tied to upstream oil and gas drilling activity, which is subject to industry volatility.

Q: RBC Capital Markets analyst James McGarigal asked to quantify the expected volume uplift from Volvo and Parker into Q4, and to explain how sensitive full-year guidance is to a slowdown in heavy truck production. He also asked for context on softer-than-expected gross margins, and what normalized margin runrate should be expected for Q4 and fiscal 2027. / A: Management confirmed that demand for these customers has been progressively increasing since the Q1 trough, and the upward trend will continue through the end of the calendar year, benefiting Q4 volumes. For margins, the sequential softness was attributed to temporary inefficiencies from ramping new operations and rehiring staff. Management expects 50 basis points of sequential margin expansion in Q4, with continued progressive margin increases through the first half of fiscal 2027, as new incremental revenues from contracted projects come online with limited additional overhead.

Q: Raymond James analyst Michael Glenn asked for more detail on the Chevron Phillips Chemical Tribograph partnership, including the most effective application areas and regions, whether the product is off-the-shelf or customized, and what revenue contribution will look like quarterly. / A: Management explained Tribograph delivers the most value for horizontal drilling in hard, tough terrain, with ongoing trials active in North Dakota, the Colorado Rockies, western Canada, South America, and Australia. The product is fully formulated, off-the-shelf, and a drop-in replacement for competing lubricants. The revenue ramp is expected to be lumpy and stepwise rather than smooth: large conversions of major customers will create step jumps in revenue, followed by periods of stable contribution. The company is ready to scale immediately via four established blenders across North America, with commercial launches of high-volume applications expected in late 2026 and calendar 2027.

Q: Glenn confirmed whether the 50 basis points of expected Q4 margin expansion is sequential to Q3 2026, and asked if higher Tribograph volumes will contribute to gross margin expansion. / A: Management confirmed the 50 basis points increase is sequential to Q3. Tribograph has high gross margins, so even though it will make up a relatively small share of total revenue initially, it will contribute disproportionately to EBITDA growth as volumes increase.