Minerals Technologies Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2024

There are 10 speakers on the call.

Operator

Good morning, everyone, and welcome to our Q2 2024 Earnings Conference Call. Today's call will be led by Chairman and Chief Executive Officer, Doug Dichert and Chief Financial Officer, Eric Aldag. Following Doug and Eric's prepared remarks, we'll open it up to questions. As a reminder, some of the statements made during this call may constitute forward looking statements within the meaning of the federal securities laws. Please note the cautionary language about forward looking statements contained in our earnings release and on this slide.

Operator

Our SEC filings disclose certain risks and uncertainties, which may cause our actual results to differ materially from these forward looking statements. Please also note that some of our comments today refer to non GAAP financial measures. A reconciliation to GAAP financial measures can be found in our earnings release and in appendix of this presentation, which are posted on our website. Now I'll open it up to Doug. Doug?

Speaker 1

Thanks, Lydia. Good morning, everyone, and thanks for joining today. Okay, let's go over a quick outline for today's call. I'll begin today's presentation by reviewing some highlights from our Q2. I also want to take a few minutes to highlight the transformation that's been happening at MTI and how this is leading to our higher levels of performance.

Operator

I'll then give you an update on

Speaker 1

what we're currently seeing in our end markets and conditions for the remainder of the year. Eric will then take you through detailed financials and provide an outlook for the 3rd quarter, and I'll finish up with a small advertisement for our 16th sustainability report, which we published earlier this week and mention a few highlights. We'll then open the meeting to questions. With that, let's get started. We delivered another record quarter, and our portfolio of businesses continues to show its strength.

Speaker 1

This quarter was also an example of strong operational execution by our team and how we're leveraging the power of our new organization. Let me take you through some of the specific highlights. Sales this quarter were $541,000,000 the Consumer and Specialty segment grew 3% over last year on an underlying basis, driven by strong growth in both our consumer specialty and specialty additives businesses. Sales in Engineered Solutions were slightly lower than last year as growth in high temperature technologies was more than offset by lower sales in environmental and infrastructure due to the continued weakness we are seeing in the commercial construction market. Operating income was $85,000,000 a record level for the company and up 20% over last year.

Speaker 1

Margins continue to expand reaching 15.7% in the quarter ahead of our interim target for this year. We saw a favorable mix of our higher margin products, captured synergies from the reorganization and our teams continue to execute on our pricing strategies and capture input cost savings. Each business is performing well operationally, focusing on safety, variable cost control and productivity improvements. Earnings per share were $1.65 a 26% increase over last year. Operating cash flow also remained strong increasing 10% over last year.

Speaker 1

I also want to give you an update on our status with the BMI bankruptcy. As you likely saw in our press release, we agreed to establish a $30,000,000 credit facility for BMI in order to support continued progress with the bankruptcy and mediation process. We see this as a constructive step to keep the process moving forward as expeditiously as possible to a fair and final resolution for all parties. Eric will go into more details on this in his update in a few minutes. So, overall, I'm pleased with the quarter, the track the company is on, and our performance so far this year.

Speaker 1

We're delivering solid results quarter after quarter despite facing a few market challenges. We have momentum across our businesses and across the organization and we see even higher levels of performance to demonstrate going forward. I want to take a few minutes to review the progress we're making against our strategic objectives and use our first half results as a backdrop to highlight the strength of our business model and of the portfolio of the businesses we've built. Let me begin by saying that our strategy to position ourselves in higher growth and more profitable markets and to invest in new technologies is truly transforming MTI. We've built a resilient portfolio of businesses across both consumer and industrial sectors that provide stable growth platforms to balance instances of industrial market volatility like we are seeing today.

Speaker 1

We've outlined that our long term potential is supported by our leading positions in these markets and geographies by our core technologies and by our unique mineral reserves. Our first half financial performance is a good example of the type of results this transformation can drive. I want to highlight for you some of the significant changes we've made in each business, the new positions we've created and why we are confident we can not only sustain strengthen our performance going forward. Let's start with the consumer side of the company. We've invested in and assembled a portfolio of consumer based products designed to deliver stable long term growth.

Speaker 1

It includes a leading pet litter business with a vertically integrated global footprint. We continue to leverage the value of this footprint to expand in North America and Europe and in Asia to satisfy demand from growing pet ownership trends. This private label business is positioned to grow steadily and outpace the broader market rate. We've made tremendous progress integrating the acquired parts and optimizing it into a global business platform and over the next couple of months we will be launching a new global brand for this business to reflect this integration and provide a unified reference for our customers. We have expanded our consumer specialty businesses into higher margin growth markets like animal health, personal care and oil purification and invested in new natural ingredient technologies that are aligned with macro consumer trends.

Speaker 1

In Specialty Additives, our new recycling technologies like NewYield for the paper and packaging industry are gaining significant traction and have become the standard and leading value generator for industry customers who require sustainable solutions. On the industrial side of the company, we positioned our high temperature technologies business as the leader in growing foundry markets around the world and we are transitioning our refractories business with new advanced formulations and through automated equipment and data collection systems like our MinScan LSC. We're expanding our environmental and infrastructure portfolio to help solve global challenges with technologies like Fluoro Sorb for PFOS remediation and drilling products for geothermal heating and cooling systems. These leading positions and innovative solutions generate higher value for our customers and are generating higher margins for us. Our first half operating margin is just over 15% and we generated $162,000,000 in operating income, up 21% over last year and EPS of $3.15 which is up 28%.

Speaker 1

This profitability is driven by this newer mix of products and also by our culture of operational excellence, which continues to drive efficiencies, remove waste and processes and helps us leverage our growth over a disciplined overhead spending. I also think it's important to note that throughout this transformation, we've maintained our historically strong cash generation profile and our balanced approach to capital allocation. This year, we generated $106,000,000 in cash from operations, a 34% increase over last year and are generating free cash flow at our target level of approximately 7% of sales. We returned $22,000,000 to shareholders last year and expect to return approximately $75,000,000 this year. And at the same time, we strengthened our balance sheet leverage to 1.7 times EBITDA.

Speaker 1

This financial strength, the capability of our aligned and focused organization and our strong operating culture is a solid foundation to continue to build upon. We understood when we established our 5 year growth and financial objectives that the journey would not take a linear path, but our results thus far demonstrate that we put ourselves on a solid trajectory to achieving them. Now let's review what's happening in our end markets and the trends for the remainder of the year.

Speaker 2

I'll start with Household

Speaker 1

and Personal Care. We're seeing strong demand for our consumer oriented products and continue to have a positive outlook for this product line. The summer months are the seasonally low demand point for our pet litter business, however, the market begins to enter its strong season late in Q3. And for our other consumer specialty products, we expect similar demand levels into the Q3 and sales for these products to remain on their strong growth path. Specialty Additives, we expect generally stable market conditions in paper and packaging and in food and pharma to remain through the second half.

Speaker 1

Residential construction in the U. S. Is also relatively stable for us yet remain below the levels we saw over the past 2 years. In addition, we're ramping up 3 satellites in the second half of the year, which will add to volumes in 2025. And we continue to have a strong pipeline of paper and packaging opportunities, driven by demand for new yield and for other products targeting the packaging market.

Speaker 1

High Temperature Technologies, we see similar market conditions in the first half in all regions except for a weaker agricultural equipment market in the U. S, which will have a small impact on our second half metal casting volumes. We're also keeping our eye on lower steel prices in the U. S, which could impact steel production levels. We're benefiting from the Minscan installations we've completed over the past year and have several more scheduled in the second half.

Speaker 1

And overall, we're expecting another strong profit performance from this product line. Environmental and Infrastructure is where we see continued softer market conditions and the one product line with lower sales compared to last year. We expected to see some improvements in the commercial construction market in the Q2 but given the interest rate sensitivity of this market, our order delivery dates began to slip from the Q2 to later in the year. Our current expectation is that any meaningful market inflection will likely be late this year or early next. Despite this, other parts of this product line like wastewater remediation solutions and drilling products remain solid.

Speaker 1

I like to note that in this product line, our Fluoro Sorb product continues to gain traction. We've completed a municipal water installation in Q2 and currently have over 100 pilot projects in various stages. We remain closely engaged with the U. S. Environmental Protection Agency and are gaining similar recognition and engagement with agencies in Europe.

Speaker 1

To sum up, we see a relatively positive market landscape ahead for us, albeit one with a few additional pockets of industrial market weakness. The second half demand picture for some of our industrial markets looks to be a bit less certain than it was in the first half, but it's one we feel we can navigate successfully to deliver another record year. Now I'll turn it over to Eric to review the financial details, segment highlights and our financial outlook for the Q2. Eric?

Speaker 3

Thanks, Doug, and good morning, everyone. I'll begin by providing an overview of our Q2 results, followed by some details on the performance of our segments, and I'll wrap up with our outlook for the Q3. Following my review, I'll turn the call back over to Doug for some highlights from our latest sustainability report. Now let's review our Q2 results. We delivered another strong quarter with records for operating income, EBITDA and EPS excluding special items.

Speaker 3

Sales in the 2nd quarter were $541,000,000 up 1% on an underlying basis versus last year. Operating income increased 20% over last year to $85,000,000 a record for the company and operating margin expanded 2 90 basis points to 15.7%. For the first half, our operating margin was 0.1%, well above the 14% interim margin target we set for 2024. You can see in the operating income bridge that volume and mix increased income by $3,000,000 which is net of the impact of the deconsolidation of BMI last year. The Consumer and Specialties segment contributed most of the favorable volume impact.

Speaker 3

We delivered another strong quarter with records for operating income, EBITDA and EPS excluding special items. Sales in the 2nd quarter were $541,000,000 up 1% on an underlying basis versus last year. Operating income increased 20% over last year to $85,000,000 a record for the company. And operating margin extended 290 basis points to 15.7%. For the first half, our operating margin was 15.1%, well above the 14% interim margin target we set for 2024.

Speaker 3

You can see in the operating income bridge that volume and mix increased income by $3,000,000 which is net of the impact from the deconsolidation of BMI last year. The Consumer and Specialty segment contributed most of the favorable volume impact, while the favorable product mix came mostly from Engineered Solutions, driven by higher sales of our newest automated refractory equipment within high temperature technologies. Together, volume and mix contributed 80 basis points of margin improvement. Higher selling prices drove an additional $3,000,000 of income contributing 40 basis points to the improvement in operating margin. The remaining $8,000,000 of income and 170 basis points of margin growth came from an improvement in our overall cost position.

Speaker 3

We are realizing the benefits of productivity and variable conversion cost savings, a generally stable input cost environment and the full run rate impact of our $10,000,000 cost savings program. We also benefited from favorable energy costs relative to our expectations heading into the quarter as our supply chain team did a nice job taking advantage of lower rates. EBITDA was $108,000,000 in the quarter and EBITDA margin was 19.9%, up 3 10 basis points over the last year. Earnings per share was $1.65 excluding special items, up 26% from prior year. And cash flow remains strong with cash from operations of $50,000,000 10% higher than last year.

Speaker 3

Before we move on to our segments, let me take a minute to outline the special items in the Q2. We recorded special charges of $34,000,000 primarily related to a $30,000,000 provision for credit loss relating to the company's committed line of credit to BMI OldCo, which is the entity formerly known as BMI. MTI provided this line of credit to facilitate progress in BMI OldCo's bankruptcy proceeding and ongoing mediation process. Thus far, MTI has loaned $5,000,000 of this $30,000,000 commitment. However, a provision for the full amount was necessary since the funds will likely be consumed in the process and or credited toward the ultimate creation of a 524 gs trust.

Speaker 3

Now let's review the segments beginning with Consumer Specialties. 2nd quarter sales were $284,000,000 3% higher on an underlying basis. Sales in the household and personal care product line were 1% higher year over year. Cat litter sales were temporarily lower this quarter due to the timing of product changeovers at a few retailers in the U. S.

Speaker 3

Meanwhile, we saw higher sales in several high margin consumer applications such as personal care, fabric care and animal health. In specialty additives, sales were 4% higher on an underlying basis. We had solid volume growth in paper and packaging, driven by improved market conditions in North America and Europe and the ramp up of our newest satellites in Asia. In addition, we've seen relatively stable demand for our products serving the residential construction market. Segment operating income was $44,000,000 in the 2nd quarter, 29% higher than last year, driven by higher volume, improved product mix, favorable input costs and higher pricing.

Speaker 3

And our operations teams delivered a strong productivity performance. In short, the business is performing well. And as a result, operating margin has improved significantly, up 3 70 basis points from prior year to 15.4 percent of sales. Looking ahead to the 3rd quarter, we expect year over year growth for Household and Personal Care in the mid single digit range. In Specialty Additives, we expect underlying underlying sales growth to remain similar to what we saw in the Q2.

Speaker 3

Overall for the segment, we expect underlying sales growth versus last year in the low to mid single digit range and operating margin remains strong around 15%. Now let's turn to the Engineered Solutions segment. 2nd quarter sales were $257,000,000 2% below last year. In the high temperature technologies product line, sales grew 1%. In North America, foundry and steel markets have been stable with the exception of softening ag equipment demand for some of our foundry customers.

Speaker 3

In Europe, steel markets have remained sluggish through the first half. Meanwhile, we saw continued growth in foundry volumes in Asia, driven by market penetration of our differentiated greensand bond systems and technical services. The environmental and infrastructure product line, sales were lower by 8%, driven by weakness in commercial construction and large environmental projects. When we talked to you last quarter, we expected more projects to move forward in the Q2. However, we've seen a continued shift in the timing of projects for this business.

Speaker 3

Segment operating income was $45,000,000 up 16% over last year, driven by higher volumes and a favorable product mix in high temperature technologies, as well as disciplined pricing and cost control. Operating margin was 17.4% of sales, up 2 70 basis points from prior year. Looking ahead to the Q3, we expect market conditions to remain similar with sales for the segment slightly lower than last year, and that's driven primarily by the market conditions in environmental and infrastructure as well as softer conditions in the North American ag equipment market. And we expect operating margin of approximately 16%, in line with our target level for this segment, although lower than the Q2 due to a more normalized product mix. Now let's turn to our balance sheet and cash flow highlights.

Speaker 3

Our cash flow performance has been strong. Cash from operations for the 1st 6 months of the year totaled $106,000,000 up 34%. And we delivered free cash flow of $69,000,000 more than double the first half of last year. For the full year, we expect free cash flow in the $150,000,000 range. We deployed $37,000,000 toward CapEx in the first half and we expect between $90,000,000 $100,000,000 of CapEx for the full year.

Speaker 3

The rate of capital spend will increase in the second half as we invest in several new paper and packaging satellites, including those equipped with our new yield recycling technology and as we complete several units of our high-tech refractory equipment for delivery and installation at customer sites. In the Q2, we also repaid $10,000,000 in debt and returned $23,000,000 to shareholders through share repurchases and dividends. To date, we have repurchased $49,000,000 of shares under our 1 year $75,000,000 authorization. Our balance sheet remains very strong with over $500,000,000 of liquidity and net leverage at 1.7 times EBITDA. Now I'll summarize our outlook for the Q3.

Speaker 3

We expect a similar level of sales a solid operating performance in the Q3. In consumer and specialties, we expect underlying sales growth in the low to mid single digit range versus last year, driven by higher sales of cat litter and other consumer oriented products. In Engineering Solutions, we expect sales to be slightly lower than last year, similar to what we saw in the Q2. In summary for MTI, we expect sales between $535,000,000 $545,000,000 continuing the same underlying sales growth trend we saw in the first 2 quarters. With a more normalized product mix as well as some seasonally higher energy costs, we're expecting operating income between $77,000,000 $80,000,000 and operating margin remaining strong at close to 15%.

Speaker 3

And we expect EPS between $1.50 $1.55 Where we land in this range depends on how demand plays out, especially in the few industrial markets where we've noted some softness. Regardless, delivering this guidance would represent a record profit level for our Q3 and would position us well to deliver a record performance for 2024. With that, I'll turn the call back over to Doug to share some highlights from our latest sustainability report.

Speaker 1

Thanks, Eric. Hopefully, you can hear me this time. Let me finish up here and then I'll make some comments on making sure that our replay and the transcript is very clear for you. But before we go to questions, I just want to finish up by highlighting our latest sustainability report. It's the 16th that we've published.

Speaker 1

For the past decade and a half, we've outlined in these reports health safety, environmental stewardship, financial strength, employee engagement, customer satisfaction, community relations and shareholder engagement have always been part of our values, cornerstones of how we run the company and key facets of our strategy. This year's report is a broad one that reflects all the company has done and continues to do in each area and a few highlights from this year's report. You'll see that we continue to make significant progress toward achieving our 2025 environmental goals. And in fact, to date, we've already significantly exceeded 10 of our 12 targets. We've initiated a science based target initiative that we'll use to frame our new long term environmental goals and we've published the first draft of our Scope 3 emissions.

Speaker 1

Please take some time to read through the report as it highlights our culture and the passion our employees have for our company. It's a true testament to our team's actions to help MTI make a positive impact in each part of the world in which we operate. I want to thank

Speaker 4

you for your attention today.

Speaker 1

It was brought to my attention that a lot of you probably couldn't hear or there was an echo in terms of some of my remarks. We had a bit of a fire drill in here making sure that that was corrected, but we'll make sure that there's a clean audio replay for you to listen to for my 10 minute remarks and also a very clean transcript for you to read at your leisure. Anyway, operator, let's now move it to questions.

Speaker 5

Thank We will take our first question from Daniel Moore with CJS Securities.

Speaker 6

Thank you. Good morning, Doug. Good morning, Eric. Hopefully, you can hear me. I heard you loud and clear.

Speaker 1

We can hear you. Well, did you hear anything I said, Dan?

Speaker 6

That heard us all. So hopefully others did as well.

Speaker 7

Maybe start with consumer.

Speaker 6

A lot of consumer more discretionary businesses had a tougher time in Q2. Your consumer businesses held up really well. Feeling any sort of tension at all in those businesses just from maybe a tougher environment? That's 1. And 2, in the pet care side, maybe just a little bit more detail regarding the product changeover, when you expect volumes to return and ultimately could that lead to greater revenue opportunity?

Speaker 1

Yes. Thanks, Dan. Actually, we saw strong continued strong demand across the consumer oriented products in household and personal care. A lot of these products are not they're more consumer non discretionary, they're cat litter, they're pharmaceutical driven, they are into beverages, things that folks are buying regardless, they're not your typical consumer spending downturn type item. So we saw some strong demand.

Speaker 1

The changeover, again, I'll pass it to DJ to give you some more color. It's part of that business in the pet care business. It happens regularly. We just called this one out this time just to give you some comparisons year over year, but nothing abnormal. D.

Speaker 1

J, you want to go into more color on what that was about and kind of how it plays to some of the strengths of what we're doing in pet cat?

Speaker 4

Sure. Thanks for the question, Dan. Just to echo part of what Doug said, basically what shifts that we're seeing in the consumer market are favorable to us or continues to be private label, especially in the cat litter is growing at a higher rate than the rest of the market. We are able to take advantage of that, but we also got great positions with our branded customers. As far as this changeover goes, it's part of our strategy to work with our partners and their private label strategies.

Speaker 4

And that will on occasion just as we reset and reintroduce new products and upgrade those products, we'll see this from time to time. But in general, things are going according to our strategy, good looking second half, fast approaching. And just to give you some broader dimension of some of the things that we'll do during these upgrades, it could be as simple as an ergonomic shift on packaging or just a change in packaging type or maybe a change in fragrance, but then it also gets more complex to change the look and flow of the product to promote greater hygiene at the home. So it's a couple of different changes going on with some of our good retailers, but overall, it's helping further grow this category and also improve our margins as we upgrade the products.

Speaker 6

Perfect. Maybe switching gears to refractories, in the high temperature tech

Operator

part of the business.

Speaker 6

I think we've installed about a

Operator

dozen or so automated systems over the

Speaker 6

last 2 years. There's, I think, 60 or

Speaker 8

so in electric arc furnaces.

Speaker 6

What are your expectations for growth going forward? Has the level of hanging fruit been fit? Or is there really steady, let's say, slope of upgrades still ahead of us?

Operator

Yes, I'll take that and then I'll pass

Speaker 1

it over to Brett. No, there's a long road ahead of us here. There's we're just this is an electric arc furnace application. I think we've installed 15 of them over the past 2 years. We have another 5, I think, to install this year.

Speaker 1

There's more than that in the United States and I think we're now just introducing it in Europe. But Brett, you want to give us some kind of how this is playing out and how far we've been?

Speaker 9

Sure. Thanks, Dan. Look, as we've talked about before, the market has shifted from a BOF or integrated steel more towards the non integrated steel or electric arc furnaces. We've installed this new equipment, of course, for safety reasons, for more efficient refractory applications for our customers And it utilizes a combination of our laser technology, our cameras to so that we can move people off of the shop floor so that they can see inside the furnace and see what they're applying our product to and then the robotic system that's PLC controlled that applies the product to the right spots of the furnace to make it very efficient. As Doug mentioned, we have signed 15 agreements, including the refractory supply, probably around $150,000,000 over that period through 2025.

Speaker 9

And we're working really hard to further penetrate the U. S. Market. But we're also now we have a nice footprint, nice pipeline in Europe and also in Japan. So we have 3 more agreements signed for 2025.

Speaker 9

As Doug mentioned, we have 5 or 6 board installed this year. So actually it's 9 total units in 2024 and we're developing that pipeline for Europe and Japan. So we feel good about expanding because the European market is also moving in the same direction. They're moving from the integrated to the non integrated and so we want to be there to help them and we're well aligned to meet their needs.

Speaker 1

And Dan, as you know, these are set up as Rick mentioned kind of 5 year contracts to provide not only the equipment either as a capital sale or a lease, but then the refractory through it. And we've changed our refractory formulations for the electric arc market. That's what I referred to some higher tech formulations, this equipment and some of the data gathering that we're working on to bring some more intelligence to that process. So it's kind of a different business than it was 4 or 5 years ago in terms of just per ton gunning. Now it's a different model that we're going out and I think we still have some room to expand that globally.

Speaker 6

Excellent. Maybe switching gears, one more and I'll jump back in queue. But just how should we think about the $30,000,000 commitment to BMI? Is that for legal expense or will a good portion of that likely go to fund the eventual settlement? And does this anyway reflect kind of expectations around timing of when we might finally put it direct?

Speaker 1

Yes, it's going to fund the process largely that those are legal expenses to continue to fund the process. That's we're in mediation right now. Look, I think it's a supportive and constructive step to keep the process going. It's a very structured process as you can imagine through bankruptcy. I can't give you right now a date as to how it will play out or when it will play out, but I can say that being in mediation is still a good process, right.

Speaker 1

So we're we feel like this $30,000,000 should fund it through largely toward the end of the year. And we think that's a good runway to keep that process going. So constructive step, we wanted to keep it going. And like Eric said, either it will be consumed or it will probably be contributed into the fund if mediation solves itself sooner. But either way, that's why we took the charge to account for it this way.

Speaker 5

We will take our next question from Mike Harrison with Seacort Research Partners.

Speaker 7

Hi, good morning. Just another clarification on the $30,000,000 Is that something that you could be to at some point? I think you kind of classified it as a credit line that which implies that it might be repaid at some point. Is that the expectation?

Speaker 1

Our expectation right now, which is why we took the full charge for the $30,000,000 is that it will either be consumed over the next several months to fund the process going forward or if that mediation ends for some reason, it will be a contribution into the trust. So either way, I think it's going to be accounted for as fully consumed one way or the other into the process, into the bankruptcy, Mike, if that helps.

Speaker 7

Okay, understood. On the Engineered Solutions business, just the guidance that you're providing for Q3 and the 16% operating margin level, which is a lot lower than what you just reported here in Q2, You referenced that the mix is going to be normalizing. Can you give a little bit more color as to what was unusual about the mix in Q2 that would have such a dramatic impact sequentially on the margin performance?

Speaker 3

Yes, Mike. Thanks. This is Eric. So it was the several equipment sales that we mentioned. That was the main contributor of the more favorable mix in the Q2 relative to what we're expecting in the 3rd.

Speaker 3

Part of that's driven by I mean Doug alluded to the fact that some of these are outright sales and some of these are leases. So the ones in the Q2 happened to be outright sales and that gave a boost to the margins in the Q2. We have I think 5 to go or 5 planned equipment sales through the rest of the year, but most of those are structured as leases. So a little bit different of an impact on margin. Although I will say they're all including our refractory products.

Speaker 3

So they do provide a nice long term recurring revenue stream for us in that way. But mostly, I would say it was the high margin equipment sales in the Q2 and then a little bit of energy as well in terms of Q2 to Q3, we're seeing a little bit higher energy costs, but those are the main margin differences.

Speaker 7

All right. And then I had a couple of questions on the pet Care business. Did this product changeover timing, did that pull volume forward into Q1? Or is it going to push volume out into Q3? Or am I confused on the whole mechanism and I shouldn't be thinking about it as different timing of volume hitting your P and L?

Speaker 1

Yes. So we certainly don't want to make a bigger deal of it than it is. This is so we had probably a few customers change over this quarter. The dynamics are different with each one. You're changing box types, artwork, pails, technology, etcetera.

Speaker 1

And in this case, it was with a larger customer that as DJ, I think mentioned, we're moving to a different technology. So we forecast that that would happen. Sometimes the timing of them and the duration of them are different. So it really wasn't anything out of the normal. We didn't pull anything in to fill up the stocks.

Speaker 1

And I will say though that after the changeover occurs and that's why I think Eric is mentioning pet care volumes growing,

Speaker 7

2 things are

Speaker 1

going to be happening in the back half of the year. 1, that changeover 1 or 2 of those changeovers should be complete, plus we start to hit the high season for pet litter. The colder months are usually higher pools, there's usually promotions that are going on late in the fall. And so I think those once that change couple of changeovers have moved through and we'll likely have another one in the fall, but either way that with the higher seasonal volumes will pull through, Mike. It's nothing out of the ordinary.

Speaker 1

It was just to highlight a comparison to last year.

Speaker 7

Got it. And then there was also a comment, Doug, in your remarks that you guys were launching a new global brand. Can you share some more details there?

Speaker 1

Yes. We've let's see how many brands we have 4 brands in this company right now. So if you know how the business has been put together,

Speaker 2

it

Speaker 1

started as a $70,000,000 business operating under really not even a brand under the American Colloid ACC brand name, part of the Amcol acquisition. We bought in 2018 a company in Europe called Sivomatic. We purchased in 2021 another company called North America. And then in 2022 or 3, if my memory serves me, we bought a 3rd company in Slovakia called Concept Pet. So, we have 4 different companies and we've now integrated them into 1 global company that we use and we're expanding now into Asia.

Speaker 1

So we've invested in infrastructure, we've invested in automation, we've invested in to make sure that these are the lowest cost plants, they're all vertically integrated. We're starting to use those reserves globally to support customers, large customers that operate globally. And so now that that integration is done, we think it's time to have that business, which is $400,000,000 and our targets are to grow it to over $500,000,000 in the next 2, 3 years, have its own identity and one that our customers can refer to whether they're in Asia, Europe, North America, anywhere. And so we're kind of excited about that. We're working on it and so stay tuned.

Speaker 1

I just wanted to give another brief advertisement on that brand name coming out. It should be coming out in the next couple of months.

Speaker 5

We will now take our next question from Kyle May with Sidoti.

Speaker 2

Good morning. This is

Speaker 5

Steve Fergussani on for Kyle.

Speaker 2

Appreciate the detail on the call this morning. I wanted to ask a little bit more on the strength in margin in the quarter. Obviously, you pointed out the product sales on the refractory side. But when I look at your bridge, it looks like the mix was a smaller piece, so

Speaker 6

a lot of it came

Speaker 2

on the cost side. Can you highlight a little bit more of those efforts? And to get that kind of margin improvement in a relatively flat market is impressive. Is there more to go on the cost side?

Speaker 1

Thanks, Steve. Thanks for the question. So, yes, margins were strong and we are ahead of our targets for the year. We had highlighted that we'd be at 14% kind of for the year this year and our target was 15% for next year.

Speaker 8

And I think

Speaker 1

we're probably going to be right around a year early on that target. But what's behind it is a couple of things. It's yes, you saw that it's partially cost. And I think as we've seen that inflation stabilize over the past year, We've done a great job in terms of stabilizing that cost base. But I think that was a true reflection of what the company from a cost base really is in terms of profitability.

Speaker 1

We've my comments were this is a little bit different. We've invested in kind of higher margin markets. We've invested in technologies that are addressing more challenging issues, providing those solutions, which generate higher margins for us with the value we provide. And so that mix story and that volume, so volume is coming from positions we're putting ourselves in in growing markets. That's adding we're leveraging that volume and that price over specialties, it's coming from animal health, it's coming from these personal care products, it's coming from bleaching or these are higher margin products that we've invested in over the past few years.

Speaker 1

The pet litter business is becoming as we've integrated and invested in cost reduction, a higher margin business as well, which is now steadily growing. So I think what you're seeing is the cost base, yes, we are gathering we are generating some benefits from cost, but it's more stable cost base from where it was last year. And what you're seeing now is this mix and this volume really being leveraged and putting ourselves in higher margin products and that leads me to tell you, yes, there is more to go. So as these products as these products these higher margin products continue to grow, they're growing at a faster pace, they will accrue to our margins and we're going to be disciplined about that overhead spending as you know us and leverage all those new sales over that fixed cost base, so there's more to go.

Speaker 2

Excellent. Thanks for that. On the free cash flow target of $150,000,000 sounds like you have more CapEx to go in the second half. So 2 piece question, where is the CapEx going in second half? And any risk to that $150,000,000 target?

Speaker 3

I think we feel thanks, Steve. This is Eric. I think we feel pretty good about that cash flow target, the cash from ops target. The company is generating strong levels of cash flow and working capital is in good shape. The efficiencies are in good shape.

Speaker 3

In terms of the ramp up in CapEx, I referenced a couple of the areas, but it's basically we've got 4 paper and packaging satellites being constructed and ramping up in the Q4 and into the Q1 of next year. And we've got MinScan. Those are the refractory equipment. We've got completion of several of those units in the second half of the year. And then I would say it's a handful of smaller kind of debottlenecking and automation projects that we're also working on.

Speaker 3

But we do expect it to ramp the CapEx to ramp up from the first half into the second half.

Speaker 5

Thanks, Doug. Thanks, Mark.

Speaker 1

Thank you.

Speaker 5

We will take our next question from David Silber with GL King.

Speaker 8

Yes, thank you. Good morning.

Speaker 1

Hi, David.

Speaker 8

Maybe just to start, hey, thank you. Maybe just to start, I'd like to get a little clarification on the most recent question about free cash flow for the year. But the $150,000,000 target as you're looking at it right now, is that inclusive of the $30,000,000 line of credit for BMI or is that exclusive of that? In other words, that's kind of a new element since the beginning of the year. Is it going to be $150,000,000 even after allocating the $30,000,000 which I think you indicated was likely to be consumed by the end of this year?

Speaker 3

Thanks, Dave. Just as a matter of geography on the cash flow statement, that's going to go into cash from investing, the $30,000,000 as a loan.

Speaker 6

But it's going to be

Operator

cash outflow for the company.

Speaker 8

Okay. Thank you for that clarification. Sticking with Eric, I was parsing some of the language in the press release and some of the things here today. And I'd like you maybe to comment on price cost from a company wide perspective. But there is an element of price in your performance this quarter year over year, let's say.

Speaker 8

And there's also an element of cost reduction. So historically, we have been a little bit trying to catch up on price in an inflationary environment, and you've done a good job about that. But is there an element in the results this quarter where actually you were increasing prices at the same time you were reducing costs like, let's say, for selected product lines or were the cost reductions elsewhere maybe at the SG and A level? But just to comment on price cost and how that played into your results this quarter?

Speaker 3

Yes. So I mean, I'll just break it down. In terms of the cost favorability that we saw, it was split roughly. So we showed $8,000,000 of favorability over last year in the bridge, split roughly evenly between energy, raw materials and then productivity kind of variable conversion cost, fixed cost savings. Pricing, we price on value.

Speaker 3

So the pricing opportunities that we have, we're pricing the products based on the value that we're providing to customers. But just to take a step back, I guess, when we laid out our margin improvement targets, the 15% target, we assumed 150 basis points was coming from price cost, 100 basis points was coming from fixed cost leverage and 50 basis points was coming from growth in high margin products, the improved mix of the portfolio. And so I think in terms of what you're seeing in our margins so far, a lot of the margin improvement you've seen has come from the price cost and come from the improved mix benefit. That's just to say there's still a lot of room to go on the fixed cost leverage piece as we move forward on the piece that's about leveraging our efficient fixed cost base with incremental volume as we grow.

Speaker 1

And David, I think to also answer part of your question is, yes, it's both. While we're seeing costs normalize or even capturing some cost declines, we're able to continue to price with strength. And so as you saw, we had some favorable costs and I think net price was up $3,000,000 So there are pockets where in our base products, we are increasing price because we're producing more value. The mix is coming from products that are higher priced, but they're also higher value, higher margin and then the cost pieces that Eric just mentioned. So I think we're putting that chart up, Eric's first chart to show you that where the margin is coming from is exactly where we told you it would come from a year and a half ago in our targets.

Speaker 1

And it's coming in that kind of ratio as well. And as we mentioned, we think there's more to go as these higher margin products continue to grow.

Speaker 8

Okay, very good. Thanks for the color there. I did want to ask you a little bit more if I could, about Fluorozorb. Earlier this year, the EPA did set content limits and timelines, which I consider very important milestones. And in your prepared remarks, you did touch on activity levels.

Speaker 8

But I am kind of curious about what has happened or is there an inflection point in interactions and activity since the EPA has finalized the limits and the set of timeline? In other words, is a certain subset of your potential end market moving more quickly to try to take advantage of improved technologies or has the level of engagement, in other words, is there an inflection point since the finalization of the EPA rules? Or is it more just a steady increase just related to overall interactions? So any inflection point from the customer side, customer engagement side since the finalization of the EPA rules?

Speaker 1

Sure. Let me I'm going to pass it over to Brad. I guess, David, we've seen certainly seen a higher level of interest in activity. I want to call it, I know you're looking for the inflection point that says when does

Speaker 3

this thing

Speaker 1

become really huge. I think we're on that path. That path is going to take some time, but yes, we have seen some increased interest, increased activity. Let me have a Brett take you through some of that color. Sure.

Speaker 9

Hi, David. Thanks for the question. David, as you know, this regulation is a 5 year process. So that takes us out to 2029. But absolutely, we are generating an increased level of inquiries.

Speaker 9

We've had over I think we've mentioned last quarter, we've had over 100 pilot programs running. We are seeing acceleration with local, state and federal agencies. In fact, we've been invited by the U. S. EPA and we're currently negotiating with them on a collective research and development agreement and hope to finalize that shortly.

Speaker 9

We're actively working with them, the EPA on 5 utility pilots that are being supported under the bipartisan infrastructure law and EPA technical support group. And there's utilities that are participating in this program, which will evaluate PFOS removal from various medias, of course, GAC ion exchange and our Fluoro Sorb. In addition, we have 4 active full scale drinking water systems running and 4 additional full scale drinking water systems that are pending this year. Internationally, we've also seen an uptick in active piloting of Fluoro Sorb in various European countries to remove PFOS from drinking water. And so based on our actual performance in piloting feedback, we're really confident in the Fluorazorb and we expect this to continue to move forward.

Speaker 9

The inflection point, not sure when that will happen. We're seeing it in a slower process, prove out the product and then over time we should see revenue start to climb.

Speaker 8

And then just a brief follow-up on that, Brett, but you did touch on international interest in your prepared remarks or in Doug's prepared remarks. Is it your expectation that the content limits will be as stringent as the U. S, more stringent, less stringent? What is your sense to how Europe might proceed relative to how or Europe or other geographies, how they might proceed relative to what the U. S.

Speaker 8

EPA has done?

Speaker 9

Yes, sure, sure. David, I'm not sure where it will end up, but I suspect it will be fairly similar to the U. S. We're seeing it in some responses in various countries. But as far as the where it ends up, my guess at this point is similar.

Speaker 1

Yes, the U. S. EPA guidelines are kind of the lowest detectable limit in parts per trillion. So we'd expect that to be probably similar around the world. But nonetheless our Fluoro Sorb on its own is capable of removing PFOS to those levels.

Speaker 1

And so regardless of what the guidelines are or the regulation is, we've got a great product to be able to take it down to non detect or lowest detectable levels.

Speaker 8

Okay, fine. Thank you for that. And last question I have for DJ and it would be maybe to just pick apart the Specialty Additives performance just a little bit. So I think this is the last quarter of kind of apples to oranges with the BMI revenues included in the prior year, etcetera. But if I strip it out, there's still kind of 2 consecutive quarters of maybe mid single digit revenue growth.

Speaker 8

And I've kind of scratched my head and I'm wondering, is that growth, is that volume related from either start ups or ramp ups of new satellites? Is it pass through of higher costs? Or is it actually pass through of lower costs and the volume growth is higher? So just how would I'm thinking of the relationship between revenue growth on an underlying basis and profitability from PCC in the current environment or satellites in the current environment? Thanks.

Speaker 4

Yes. So thanks for the question, David. Just a minor setting of the baseline BMI. There's another quarter where BMI was in our results. So the Q4 is when it was removed.

Speaker 4

But to the real meat behind your question, I would say that there's 2 things driving that. The first is the paper and packaging satellites that have come online. So this year, we brought on one in China that was on top of a couple of others that came in last year. And then as Doug had mentioned in his prepared remarks, we've got another 3 that are in construction and so all of those are contributing to this. There's also one of the items that's also under construction that we announced earlier is a conversion to new yield and while that would not show you any more volume or revenue per se, would show an increase in margin as we convert to these more value added products.

Speaker 4

So that's also helping in those regard and I'd give that as an example. There are several other examples that would contribute to that. The other gem and performance that we've got David is our West Coast operation has had terrific volume. And so there's it's mostly through the construction industry, but it's also just in general great performance by that plant and some product modifications that we've made that meet the market needs. So that's also contributing to the volume growth as well.

Speaker 4

So one more quarter for the comparisons of BMI, steady growth coming from the paper and packaging satellites. Lucerne Valley continues to perform quite well. And the pipeline for the paper business is extremely strong. So I'm hoping that I'll be saying these same sorts of things as we talk in the quarters to come. I would say the pipeline has got a couple of dozen opportunities in it, mix of packaging and paper, probably 30 plus percent of those opportunities are packaging.

Speaker 4

Quite a few of them are new yield opportunities. And so the long term looks pretty strong as well.

Speaker 5

We will take our next question from Mike Harrison with Seaport Research Partners.

Speaker 7

Just one more quick one for me, kind of following up on David's question on the paper PCC business. I'm just curious there, you have some contractual pricing mechanisms within that business. And there were several quarters, if we go back to a couple of years ago, where costs were going up a lot faster than pricing, your margins were being negatively impacted by that. At this point, have you recaptured those higher costs and you've got margins back at a normal level? Or are you at a point right now where costs are actually moving lower while prices are stable or still moving higher such that you're getting some unusual strength in the margin performance of that paper PCC business?

Speaker 3

Yes, Mike, this is Eric. So no, I would say we're back to kind of normal pass through cadence. And in fact, our pricing with European energy rates coming down, our PCC or our paper and packaging pricing came down a bit in the quarter, in the $1,000,000 range. So absent that our overall pricing would have been a little higher. But it's now more of a normal kind of cadence for the price pass through mechanisms for that business.

Speaker 1

Yes, a couple of dynamics Mike that have happened. Historically, just reiterated that these prices and some of our older contracts are set on an annual basis or semiannual basis. As they've renewed over the past several years, we've changed that to a tighter alignment with those costs, whether it's a quarter and sometimes a month. So we saw some of that delay on the way up and we've had some of that lag on the way down. But as Eric mentioned, we're largely through that.

Speaker 1

I think now there's maybe some regional ups and downs that are happening, but that's it's a normal cadence right now. And I think you're seeing what's really reflecting the normal margins of this business. That said, we have some new products coming up like New Yield. We've got some packaging and those can tend to generate higher margins. So we have some upside there in the future.

Speaker 5

At this time, we do not have any further questions. I would like to turn the call back to Mr. Dietrich for any closing remarks.

Speaker 1

Everyone, thank you very much for joining the call today. We apologize for any technical issues that caused for some of you. It sounds like what we will do is make sure that there's a very clear replay for you posted on our website and make sure that the transcript reflects that clarity. Thank you very much for joining today, and we'll talk to you again in 3 months.

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Earnings Conference Call
Minerals Technologies Q2 2024
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