Minerals Technologies Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2023

Key Takeaways

  • Minerals Technologies delivered record Q3 sales of $548 million and operating income of $77 million, expanded adjusted EBIT margin to 14.1% (+170 bps), and cash from operations rose 30% sequentially, doubling YTD to $138 million.
  • The Board approved a permanent quarterly dividend increase of $0.05 to $0.25 per share and authorized a $75 million share repurchase program.
  • Barris Minerals filed for Chapter 11 protection, resulting in a one-time non-cash impairment charge of $72 million and $13 million in litigation costs, and will be deconsolidated from Q4 results.
  • Consumer & Specialty segment strength continued, with pet care sales up 15% and animal health products growing 38% year-over-year, while ramp-ups of new satellites in Asia boosted Specialty Additives volumes.
  • MTI forecasts Q4 operating income of $65–$70 million, EPS of $1.20–$1.30, full-year operating income growth of ~10%, EPS growth of 5–7%, and its strongest cash flow quarter of the year.
AI Generated. May Contain Errors.
Earnings Conference Call
Minerals Technologies Q3 2023
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good day, everyone, and welcome to the Third Quarter 2023 Minerals Technologies Earnings Call. Today's call is being recorded. At this time, I'd like to turn the call over to Lydia Kaplova, Head of Investor Relations for Minerals Technologies. Please go ahead, Ms. Kapoleva.

Speaker 1

Thank you, Melinda. Good morning, everyone, and welcome to our Q3 2023 earnings conference Today's call will be led by Chairman and Chief Executive Officer, Doug Duchart and Chief Financial Officer, Eric Aldag. Following Doug and Eric's prepared remarks, 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. Our SEC filings disclose certain risks and uncertainties, which may cause our actual results to differ materially from these forward looking statements.

Speaker 1

Please also note that some of our comments today refer to non GAAP financial measures. Reconciliations 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 turn it over to Doug. Doug?

Speaker 2

Thanks, Lydia. Good morning, everyone, and thanks for joining today. Let me start off by giving you a quick outline for today's call. First, I'll take you through the highlights of our Q3. And as part of this, I'll provide some commentary on the dividend increase and share repurchase program we announced last week.

Speaker 2

I also want to give you a quick update on Barris Minerals. And I want to spend a bit of time going a bit deeper into what drove this quarter's strong performance and why I feel it's of how we've positioned ourselves for continued profit improvement. After that, I'll give an update on general business conditions and market trends. Eric will then review the financials and provide an outlook for the Q4, and we'll have plenty of time to take your questions at the end of our comments. I'm sure you've already reviewed our Q3 earnings press release, so let's go through some of the main highlights.

Speaker 2

We had record sales for the 3rd quarter, Delivered record operating income for any quarter, significantly improved margins and increased cash flow. These results are reflective of how we've positioned ourselves strategically and how we're executing from an operating perspective. All of our business segments are performing well. Each continued to face mixed market conditions through the quarter, But despite this, MTI achieved record 3rd quarter sales. Let me give you some of the highlights.

Speaker 2

Within the Consumer and Specialty segment, the Household and Personal Care product line continues to show strength with stable growth across all geographies. The main highlight being Pet Care sales, which increased 15% over last year and our Animal Health products growth of 38% from last year as the natural feed additive market continues to develop. In the Specialty Additives product line, Paper markets in North America and Europe remained slow, although Asia paper markets were stronger and volumes improved due to our newest satellites in the region. We also saw solid performance from our ground calcium carbonates products in North America. In fact, our GCC facility located In the Western U.

Speaker 2

S. Had a very strong quarter, breaking production, sales and income records. In the Engineered Solutions segment, our High Temperature Technologies product line delivered an especially strong performance. North America Steel and Foundry markets remained stable The China foundry market continues to improve each quarter. This business hit on all cylinders gaining market share, maintaining pricing, Capturing input cost savings and delivering a strong operating performance at production facilities.

Speaker 2

In the Environmental Infrastructure product line, wastewater treatment, environmental lining systems and drilling products had a solid quarter. We continue to see weak activity in the commercial construction waterproofing market. Next, EBIT margins expanded to 14.1 percent this quarter, a 170 basis point improvement over last year. Both segments expanded margins significantly. We captured input cost savings, improved productivities in our operations, Held pricing and in many cases continued to improve pricing and leveraged our fixed cost base through disciplined spending Progress with our $10,000,000 expense reduction program.

Speaker 2

Strong sales and expanded margins yielded $77,000,000 of operating income, which is a record for any quarter for MTI. As we expected, cash flow is improving. Cash from operations increased 30% sequentially And year to date, it has more than doubled over last year to $138,000,000 With the stable sales trajectory of our portfolio of businesses And the expansion of profit margins, we're confident in stronger cash flow levels going forward. Our Board shares this confidence, Share repurchase program. Before I move on, I want to give you a brief update on where we are with Barret Minerals.

Speaker 2

As we've discussed on these calls, over the past year cases filed against BMI continued to increase, As well as the cost to defend itself against these claims. We believe these claims to be meritless and we've always stood by the safety of BMI's products. The reality of these soaring legal costs overwhelmed this small business. And as a result, on October 2, BMI announced that it filed for Chapter 11 protection. As a result of this, we recorded a one time non cash impairment charge of the BMI fixed assets as well as a charge for the litigation costs associated with the bankruptcy process.

Speaker 2

In the Q4, we expect to fully remove this business from our financial results. We considered several options and decided that using the bankruptcy process was the best path to protect the business, MTI and all stakeholders. Process will take time to fully resolve and BMI will continue to operate per usual throughout. We'll be sure to update you as it progresses. We see this as a significant step in moving forward and ensuring that our corporate energy is squarely focused on achieving our 5 year growth and performance targets.

Speaker 2

I want to take a few minutes to go a bit deeper into our quarter. Not to highlight the numbers as I just did, but rather to illustrate what's behind them, what's driving them and why we're confident this will continue. Our performance this quarter is a product of several elements that are coming together, driven by our strategy and supported by a strong operating model. It starts with our top line revenue profile made up of our resilient and stable portfolio of businesses, Our ability to deploy our core technologies, combined with our ingrained culture of operational excellence and the advantage we gain Owning unique long term global mineral reserves. We've talked extensively about how we've now positioned ourselves in higher growth Consumer oriented markets like pet care and other consumer specialties, while also establishing strong positions in higher growth geography.

Speaker 2

This quarter, the stable growth from these areas offset the slowness we experienced in other end markets Like North America Commercial Construction and European Steel. These stable growth markets give the company much more balance than it had in the past. And as our other markets recover, sales will accelerate. This is the combination that yields meaningfully higher long term growth. We also outlined for you our margin expansion targets.

Speaker 2

There are 3 main areas that we see driving margins higher going forward: improved price costs, improved mix from the natural growth in higher margin products and our ability and discipline to leverage this growth on our fixed cost base. All three of these elements contributed to the margin expansion this quarter and we see them continuing to contribute to our margin expansion going forward. MTI's long term growth potential combined with expanding margins leads to increased cash flow generation. Our balance sheet is in good shape with net debt around our targeted levels. Combined with this stronger cash generation, we have ample financial resources All of this is consistent with our balanced approach to capital deployment and specifically our commitment and history of returning cash to shareholders.

Speaker 2

Let me wrap up this slide by stating that MTI has a powerful business model, one that combines revenue stability And growth potential with operating discipline, technological capabilities, vertical integration and a strong people centered culture. This quarter is an excellent example of how those elements came together and how they will continue to provide value in the future. This is a strong quarter for us, but it had more potential. We've got a lot more gas in the tank, so to speak, We're well on our way to meeting the financial targets we laid out for you earlier this year. Okay.

Speaker 2

Before I pass it on to Eric, let me take you through Our markets and what we're seeing. Overall, our market outlook remains similar to what we shared last quarter, with the exception that we're entering some seasonal periods for a few of our markets. Let's start with the Consumer and Specialty segment. Overall, we're seeing continued strong market conditions across our Household and Personal Care markets. There are several near term and long term trends that are driving this strength.

Speaker 2

MedCare is entering its seasonally strong period In both North America and Europe over the next two quarters. But more broadly, we continue to see positive demand trends for both private label cat litter in the U. S. As well as premium offerings in Europe, which is where we're positioned in each market. Further, we see continued demand growth in the Asia pet litter market and we're well positioned to capture this with our mining and production locations.

Speaker 2

We also expect other HPC PC markets including Edible Oils, Renewable Diesel, Animal Health and Personal Care to also remain on their stable growth path in the Q4 and through 2024. In Specialty Additives, our market outlook remains positive. Though Q4 is Looking into next year, we will see a boost in volumes from the 3 paper and packaging satellite ramp ups that are taking place in Asia right now. We also have a solid pipeline of new packaging business opportunities. We continue our growth and transition as we continue our growth and transition into this market adjacency.

Speaker 2

As we look at the Engineered Solutions markets, we see more mixed conditions. In High Temperature Technologies, we have a generally positive outlook for both the steel and foundry markets. We see continued stable conditions for our foundry and Steel Products in North America and a continued gradual improvement for the foundry market in China. We've signed several long term contracts for our laser and refractory And as a number of these come online next year, it will help drive volumes and sales higher. Moving to Environmental and Infrastructure, we have a mixed and more cautious view on these end markets.

Speaker 2

The market for our Environmental Mining Systems As well as major remediation projects tend to slow in Q4 and Q1. We also don't expect See any improvement in the commercial construction waterproofing market, which has been slow all year. On the positive side, Structured drilling and environmental wastewater market should remain solid throughout the quarter. Looking further out, our team has been making great strides And gaining attention for our Fluoro Sorb technology for PFAS remediation. The business currently has over 200 active pilots and trials.

Speaker 2

We recently presented our technology and unique capabilities at the Gabelli PFAS Symposium. This presentation is available on our website if you're interested to learn more. In summary, we see relatively strong markets for us as we head into the end of the year. More so, we've built strong momentum across All product lines, which sets us up for another strong year in 2024. Now let me turn it over to Eric to review our financials in more detail.

Speaker 2

Eric?

Speaker 3

Thanks, Doug, and good morning, everyone. I'll start by reviewing our Q3 performance and I'll also provide our outlook for the Q4. Following my remarks, we'll turn the call over for questions. Now let's review our Q3 results. Let me start by saying we had a strong Q3 marked by records for adjusted operating income and EBITDA, significant margin improvement And higher cash flow.

Speaker 3

Overall sales were $548,000,000 similar to both the prior quarter and prior year. You can see in the bridge on the top right that 2 of our product lines grew sales and 2 were lower, reflecting the mixed market conditions we are experiencing this year. This bridge is a good representation of the benefit that our higher growth consumer oriented products are having on the overall portfolio, providing stability and growth when other markets aren't as strong. And we are leveraging our sales into significantly higher earnings across both segments. Operating income excluding special items increased 15% versus last year and improved 9% sequentially to $77,000,000 A record result for MTI.

Speaker 3

And we remain on track to deliver our targeted margin improvement. Operating margin improved to 14.1 sales in the 3rd quarter. This result was 170 basis points above last year and 130 basis points higher sequentially, driven by the combination of price cost recovery, productivity improvements and favorable mix from the growth of higher margin specialty products. Adjusted EBITDA was $102,000,000 in the quarter and represented 18.6 percent of sales. It's worth noting that this was the first time that the company has generated quarterly EBITDA above 100,000,000 Our reported results included 2 special items in the quarter.

Speaker 3

The largest of the 2 was a non cash $72,000,000 impairment of all the fixed assets within Barris Minerals Inc. The second special item was a $13,000,000 charge for litigation costs also related to BMI and its filing for bankruptcy protection. ETF excluding special items was $1.49 To give you some perspective, on the lower left, we've included our 3rd quarter EPS trend over the last 5 years, which shows a 9% compound annual growth rate since 2019. And our 3rd quarter EPS even includes $0.10 of higher interest This EPS growth trend might not be so apparent given the significant dynamics at play over the last several years. Now I'll review the performance of our 2 segments, beginning with Consumer and Specialty.

Speaker 3

Sales in the Consumer and Specialties segment were $291,000,000 2% above last year and similar to the 2nd quarter. Sales in the Household and Personal Care product line were 9% higher than last year and 3% higher sequentially. Growth in Pet Care remains strong with sales up 15%. And sales across the other specialty consumer markets in this product line were 8% higher sequentially. Sales in the specialty additives product line were 2% lower than last year.

Speaker 3

While North American paper production improved from the 2nd quarter, demand remains below prior year levels in both North America and Europe. Meanwhile, volumes in Asia improved year over year, driven in part due to the ramp up of our new satellite facility. In residential construction, market conditions remained mixed with steady demand for our products that are used in remodeling activity helping to offset the impact of fewer new builds. Adjusted operating income for the segments increased 23% year over year to $38,000,000 and operating margin was higher by 2 30 basis points, primarily driven by price cost recovery. Looking to the Q4, we expect continued strength from household and personal care, Driven by strong pet care sales and continued gradual improvement in other specialty consumer products.

Speaker 3

In specialty additives, We expect typical seasonality in construction, partially offset by continued improvement in paper production in North America And additional volume from our new satellites in Asia. In total, we expect operating income for the segment to be around $33,000,000 in the 4th quarter. Note that this guidance reflects the deconsolidation of BMI, which means BMI's revenue and profit will be excluded from MTI's results going forward beginning in the Q4. Now let's turn to the Engineered Solutions segment. 3rd quarter sales in the Engineered Solutions segment were $257,000,000 similar to the prior year.

Speaker 3

In High Temperature Technologies, sales were 1% higher than last year as demand for steel and foundry products in North America remains strong, And we continue to grow foundry volumes in China. In Environmental and Infrastructure, sales were 2% lower than the prior year Commercial construction activity remains slow. Sales for drilling, wastewater and remediation applications continue to grow, Including the completion of another PFAS remediation project using our Fluoro Sorb technology, this one at a U. S. Department of Defense location.

Speaker 3

3rd quarter operating income for the segment was $41,000,000 12% above last year. Price cost recovery and solid execution drove operating margin expansion in the quarter, which was 15.8 percent of sales, an Continued strong demand in North America, and we expect conditions in Europe to remain similar sequentially. In Asia, we anticipate the growth trend in China foundry volumes will continue. In addition, we expect to see a benefit from higher laser measurement And finally, in the Environmental and Infrastructure product line, sales will be lower sequentially as we enter the In total for the segment, we expect operating income will be approximately $35,000,000 In the Q4, our guidance includes some limited impact from the UAW strike, and we are continuing to monitor the situation. Now let's turn to our balance sheet and cash flow highlights.

Speaker 3

Cash flow accelerated in the 3rd quarter as we expected, Bringing year to date cash from operations to $138,000,000 more than double the same period last year. Capital expenditures were $25,000,000 in the quarter, bringing the year to date total to 71,000,000 And year to date free cash flow was $67,000,000 For the full year, we continue to expect free cash flow between 100 $125,000,000 Our balance sheet remains very strong. Total liquidity at the end of the 3rd quarter was 458,000,000 And net leverage improved to 2.2 times EBITDA. With leverage approaching our target of 2 times EBITDA And cash flow continuing to improve, we are well positioned to maintain our balanced approach to capital allocation, which includes returning capital to shareholders through our dividend and repurchase program. Now I'll summarize our outlook for the Q4.

Speaker 3

Overall for MPI, we expect another solid performance in the 4th quarter. In the Consumer and Specialties segment, we expect continued strong demand from the household and personal care product line and in pet care in particular. In Specialty Additives, higher sales into the paper and packaging market driven by our new satellites and gradual improvement in North America production rates Will be offset by seasonally lower construction activity as well as the deconsolidation of BMI from MTI's results. In the Engineered Solutions segment, we expect continued strength in high temperature technologies, driven by higher laser measurement equipment sales And growing Asia Foundry volumes. Meanwhile, Environmental and Infrastructure will experience typical seasonality.

Speaker 3

As we currently sit, we see 4th quarter operating income between $65,000,000 $70,000,000 And earnings per share between $1.20 $1.30 This guidance represents a continuation of the company's earnings growth Trajectory. And despite the mixed markets we've experienced this year, this guidance equates to full year operating income growth of approximately 10% and full year EPS growth of 5% to 7%. In addition, we expect the 4th quarter to be our strongest cash flow quarter of the year. As Doug highlighted earlier, the key elements of MTI's business model were on full display this quarter. And this powerful combination of growth, stability, margin improvement and cash flow generation will continue to drive our performance going forward.

Speaker 3

With that, I'll turn the call over for questions.

Operator

Thank And we take our first question from Daniel Moore with CJS Securities. Please go ahead.

Speaker 4

Thank you. Good morning. Thanks for all the color and congrats on some strong execution and margin improvement. Maybe start with Eric, if you could give us a sense for obviously you've made strong pricing gains, kind of volume versus price Across both consumer and specialties as well as engineered solutions, and how long you expect the pricing to remain a tailwind?

Speaker 3

Sure, Dan. Thanks for the question. So yes, so we had pricing, positive pricing in the quarter and That positive price cost recovery, contributed to a lot of the margin improvements that you saw, particularly this quarter. As a company, we'd absorbed something like 150 basis points of margin from being upside down on price versus inflation. And this year, we set out to recover all of that 150 basis points through pricing.

Speaker 3

And so, that's what gets you to what we've stated previously of kind of a run rate averaging of 13.5% Operating margin by the end of this year, and so we're on track for that. So we're achieving what we said we would do And more so the price cost recovery is coming to a greater extent in the Consumer and Specialties segment. But the overall pricing impact, it's much less than it has been in the first half as we've lapped some of our significant pricing actions from the Q3 last year. So Now we're seeing the pricing in the low single digit kind of range in terms of an impact on our top line.

Speaker 4

Very helpful. And you just talked about getting to that 13.5% adjusted operating margin exceeded 14% this quarter In a relatively tepid demand environment, at least for across some of your businesses, so and I realize this is a seasonally stronger quarter we just exited, but Your longer term goal of 15%, do you see that as being potentially somewhat conservative, if not maybe the Timing then kind of the absolute level of where you see these businesses headed? Yes, maybe I'll jump in

Speaker 2

that one, Dan. This is Doug. Look, I think we've set out a target of 15% by 2025. Yes, you are looking at a stronger seasonally stronger quarter. But I do think it is representative of kind of the potential.

Speaker 2

As we knew that we'd start to capture cost deflation, we'd start to see those playing over and we see that the pricing and the value of our products in the market continues to hold. And I think you'll start to see you're seeing that through our gross margins as well. We've done a great job selling on value. We are a long time stable supplier because we own our unique mineral reserves. I think customers see that and that enables us to make sure that we're getting the value for our products.

Speaker 2

And I think as you see The consumer business continue to improve. We continue to improve in pet care. You're starting to see the growth in those higher margin specialty products, which are also higher growth, that's part of that margin expansion. Yes, I think we can push through that 14%, 15% margin. I think further though, it's going to take that stable growth profile and leveraging our fixed and also getting those new innovative products and those specialty products out on market.

Speaker 2

Those are higher margin products. Those are year, 2 years out. And I think, yes, there's the potential to get past 15%, but we're laser focused on delivering that 15% Like we told you by 2025. So start there. I think there's potential for more.

Speaker 2

It's going to come from higher margin products and leveraging our fixed cost base for that growth.

Speaker 4

Very helpful. Maybe one more or one and a half more and I'll jump out. But clearly the TALF litigation, Despite the announced bankruptcy remains front and center in some investors' minds. So is there anything you can tell us about where we are in the process? What next steps would be and maybe just taking a step back, why taking the route of bankruptcy In your mind, should RingCentral liability and protect MTX when if you look at comparable cases, and I know there's no apples to apples, but Maybe whether it be asbestos or others, it hadn't You know, accomplished that sort of full ring sensing from the parent.

Speaker 4

So any update there would be really helpful. I appreciate it, Doug.

Speaker 2

Yes. Well, as you mentioned, each of these processes are different. They have different dynamics. We looked at different scenarios. We've made sure we really understood what was happening in the landscape.

Speaker 2

As I mentioned in my comments, just the caseload that BMI was being pulled into kind of this tort we feel, just kind of overwhelmed the business. And so we felt that, look, The best way path forward for BMI for MTI and again all stakeholders including shareholders was to seek the bankruptcy Protection and that puts it in a very well defined structured and transparent process. There are a number of dynamics That are going to have to be worked through. So it's really hard to give you at this point in time a timeframe or how that will play out. It's just right at the beginning Avid, I think the next major milestone will be to selling of the assets, the BMI assets And using that to fund the trust.

Speaker 2

And once we're through that, we'll probably have a better idea of kind of how this is going to play out and the timeframe. But, so right now it's a bit premature to give you How it will play out, but, it is designed to make sure that we ring fence and protect the company And take the steps to protect MTI through the process and that's what we've done. All right.

Speaker 4

Lastly, as you mentioned the 2025 the longer term targets A couple of times in the prepared remarks, so is it fair to say that removal of talc doesn't have any impact on those targets in your mind?

Speaker 2

No, I think BMI was a $50,000,000 business. So it will have an impact and we're going to probably have to call out the difference in year over year comparisons to next year with the profit And the sales out, so we'll do that. But no, I don't think that that changes things. I think the growth the potential growth that we have in front of us across the board We'll offset that. And I don't think on the scale of being a target of running at an average of 5% growth over the next 5 years, Kind of a $2,600,000,000 $2,700,000,000 revenue target $50,000,000 is going to make a big difference.

Speaker 2

So we will be giving you some For the next couple of quarters, so you have it bridged right. But no, I don't think that's going to change meaningfully our target growth.

Speaker 4

Fair enough. Thanks for the color again. I'll jump back with any follow

Speaker 2

ups. Yes.

Operator

If you find that your question has been And we go next to the line of Mike Harrison with Seaport Research Partners. Please go ahead.

Speaker 5

Hi, good morning. Congratulations on a strong quarter. I had a question on the household business. One of the main players in that pet care space I had a cyber attack last quarter. It led to some significant product shortages.

Speaker 5

We understand that that dynamic Has led many pet owners to switch to a different brand. Can you talk at all about what impact that event Maybe having on your pet care business? And have you seen any acceleration in consumers switching to private label brands?

Speaker 2

Yes, let me take that. We noted that issue that occurred this past quarter. And we did see a little bit of an uptick in order volume to make up for that. I don't I won't say it's substantial and I think Most likely some temporary, but I think the longer term, you're right. I think we are seeing we're well positioned to supply the private labels In North America, we've built that position through a couple of acquisitions as you know.

Speaker 2

And yes, we're seeing that as the category grows, pet litter grows in North America, the category of private label is growing a bit faster than the average. And so with our locations, with our mining assets and kind of being that private label provider, that's what's driving the growth in North America. And yes, we've benefited a bit from folks looking for private label brands when a branded product had some trouble. So but I think that's temporary.

Speaker 5

Okay. So you don't see you don't envision that there's going to be some permanent Switching, I guess, I think of cat litter is something that consumers try to stick with 1 brand and if Something becomes unavailable that would maybe ignite a switch that could end up being more permanent. You don't see that happening.

Speaker 2

Well, look, I guess I don't want to yes, I agree with you. There is some brand loyalty and I understand that when a brand has a hiccup, you might Yes. In fact, that's loyalty. But, so I guess I'm answering the question as we benefited from a little bit from that this quarter in that volume because it wasn't available on the shelf. It remains to be seen whether that's going to be sticky, but I will tell you that in general, outside of just one instance like that, in general, I think the demand for private label is outgrowing the demand for other.

Speaker 2

And I think that is a long term trend regardless of the one Unfortunate incident that happened to a company. I think that's a long term trend that's going to benefit our base growth rate going forward. Can I answer it that way?

Speaker 5

Yes. No, that's fine. And then just quickly, where do you guys think we are in terms of realizing The $10,000,000 worth of cost actions, are we still pretty early in that process? Or do you have kind of a run rate of where we were as of the

Speaker 2

end of the third quarter?

Speaker 3

Yes, Mike, this is Eric. We're about 2 thirds of the way through from a savings perspective through the 3rd quarter on a run rate basis.

Speaker 2

All right. Mike, we said we can get a full run rate by the beginning of First half next year. So we're well on track with that with those savings.

Speaker 5

Perfect. Okay. And then a couple of questions for me on capital allocation. With the increase in your dividend, just curious, is that expected to just be the new rate going forward, the $0.10 a quarter? Or is the Board considering future increases maybe in line with earnings growth?

Speaker 5

Maybe any comments you could provide On the new approach to dividend policy and other returns to shareholders?

Speaker 2

So yes, that is A permanent $0.05 increase to the quarterly dividend of $0.10 I do think that as we go forward, the Board is going to continue to look at How we allocate that capital? As you know, we've preferred using share repurchases because there's some flexibility that gives us the opportunity to make sure that As M and A comes up, we're able to steer capital to if something is one of the higher what we say a higher value use for that cash. And so I think the Board will continue to look at dividend policy going forward. And but where we are now is that $0.05 increase and that is a permanent increase. So The Board will look at dividend increases going forward, but that's where we are for right now.

Speaker 5

All right. And then in terms of M and A, just kind of curious, you guys did A transformative deal back in 2014 when you acquired AmCall, and you were looking at another major deal a few years ago. Just wondering if you can provide some updated thoughts on your appetite for a larger or more transformative deal. What criteria would it need to meet? And how much would you be willing to lever up the balance sheet versus that 2.0 times net debt to EBITDA target leverage in order to complete a larger transaction?

Speaker 2

Let me start by answering it this way. We have M and A as stated part of our growth strategy. We demonstrated that through kind of 4 bolt on acquisitions over the past 4 probably going on now 5 years. So We see that as an opportunity to pull in valuable pieces and as I said build positions that make sense for the company. And in each of our product lines, I'll also note, the 4 product lines we have both good organic opportunities that we have Capital to fund and each of them have some inorganic opportunities and so it's set up that way.

Speaker 2

And so we're going to look at that going forward and I think there's a nice pipeline in each of for some additional bolt ons to help continue and actually accelerate some of the growth targets that we've given you in the past. As far as a transformative acquisition, there are some of those in our portfolio that we're looking at. And But that those are things that we look at on a number of different elements. And so how much we're willing to lever up Depends on the environment, what we see, how we're the synergies available to it, where we are in a capital markets environment and the risks associated with it as we go forward. I would say where we were with AMCOL, let's say 4.5 times Before, I would think that our leverage targets would probably be lower than that.

Speaker 2

But I will say, when we go into these deals, we In the past, we would look at them from all angles and making sure that both risks are understood, that the cash flow was understood, that the synergies are very well understood, And that the debt pay down happens very rapidly. So and I think we demonstrated that and our ability to delever With the Amcol transaction, I think anything we would do of size would have that same type profile. We would look at it, its risks, 1st and foremost, The benefits of the company, the value created and the rapid debt pay down. That's how we look at these. So I can't answer how high we'd go.

Speaker 2

It really depends on the target and what we see at the time.

Speaker 5

All right. Very helpful. Thanks very much.

Operator

Our next question or comment comes from the line of Steve Farazani with Sidoti and Company. Please go ahead.

Speaker 6

Good morning. This is Alex Hanthman on for Steve. My first question is around the buyback. Given the sizable buyback announcement, is there still room to reduce debt? And generally, how do Tye, share purchases and debt reduction.

Speaker 2

Sure. So our kind of the policy and The way we look at our capital allocation is we take we look at free cash flow, which is typically around $150,000,000 a year, Kind of average and we see that continuing to grow with our growth and profit expansion. Over history, we typically allocate About 50% of that back to shareholders and typically in the form of a share repurchase program. And so at this point in time, A dividend increase plus the $75,000,000 share repurchase program is around half of that kind of free cash flow. But that still gives us half of that free cash flow to be able to delever.

Speaker 2

And again, we usually look at going to look to make sure that we get the balance sheet back down to around 2. Free cash flow then gets steered towards shareholders and usually with share repurchases. So we have the flexibility If an M and A transaction that's sizable comes around. So yes, the answer to your question is we have Sufficient capital and we see sufficient capital going forward for both the dividend increase for the share repurchase, the 1 year share repurchase And reserving capital to both put to debt reduction or on the balance sheet for potential bolt on M and A. I think that's the flexibility that we're trying to describe.

Speaker 2

With our stable sales, with our expanding margins, it generates It's a company that generates we've historically generated 7% cash conversion to sales and that type of capital gives us a lot of options, gives us a lot of flexibility, keep the balance sheet in good shape and return to shareholders.

Speaker 6

Thank you. Appreciate the color there. And speaking of capital allocation, given the sizable opportunities you've laid out previously and PFAS remediation that we've talked about today, Do you expect significant additional investments in the business?

Speaker 2

Investments Yes, organic investments. So we are continuing to invest, if I answer your question, if I understood it properly. We invest in R and D. We've got A sizable pipeline of new products. We've gone back to talk about how we've increased The revenue from new products that we're making investments in, we used to be around 5% of sales.

Speaker 2

We're now approaching 12%, 13%, 14% of sales. We'll get you a number. This year, we've accelerated the new product development. We've cut the time in half to bring them to market and we've doubled the impact. Dollars 300,000,000 of our sales are coming from new products Each year and that was much less than half about 5 years ago.

Speaker 2

So we are investing in new technologies. We're investing in New technologies that yield higher margin products. We're working very closely with customers to build, what we call roadmaps. And so looking out 4, 5 years with them and seeing what their needs are and building new product and technology roadmaps with our customers that guides What goes into our innovation? And then yes, we're investing in our plants to make sure that we have sufficient capacity to make those products.

Speaker 2

So But that all is coming through our normal capital expenditure program. That's about 4% of our sales And yet, we still have as we your previous question have excess capital on free cash flow after that to be able to keep the balance sheet straight And return to shareholders. So yes, we are investing in many ways in ourselves. And we think we find that investing in ourselves is one of the best investments to be honest with you.

Speaker 6

Absolutely. And just one quick clarification on that. I had meant to focus a little bit more on PFAS remediation and some of the additional investments you might have in that line of business?

Speaker 2

Yes. So we are we have and part of that environmental infrastructure is A host of water remediation technologies. They are a host of environmental type technologies. We laid this out, hopefully A chance to look at our Investor Day from groundwater remediation in slurry wall to sediment capping to wastewater remediation and even drinking water remediation. And so we have a number of new technologies and we have plenty of Capacity currently installed to be able to ramp up to satisfy areas like PFOS remediation.

Speaker 2

And we also have targets to be able to invest to make sure in new capacity to make sure we cover that. So look, it's a slow ramp, But we're keeping an eye on it. We understand the capacities at our plant, the capabilities and the technologies, and certainly willing to invest when we see the inflection

Speaker 6

Perfect. Very helpful. Thank you. And last question for me. Just to round it out, we've discussed a growing mix of industrial and consumer technologies for everyday life.

Speaker 6

Can you talk about how you evaluate the existing product portfolio and any opportunities you might see for pruning?

Speaker 2

Well, I think in our we've been building in the consumer business. And so I don't see I think there's continued investment in broadening that portfolio or at least strengthening that portfolio of product lines. We see a lot of growth potential in a number of them like in our filtration business, which goes into edible oil purification Biodiesel and Animal Health, Personal Care, Pet Care. So those I think we're going to continue to build. There are other areas that we'll look at that If they don't have the growth potential or if we don't see that the contribution or the capital allocation to those, We would consider pruning.

Speaker 2

So we do go through the process of looking at our portfolio and making sure that we're steering that capital to the ones that are going to yield the highest value And highest growth and highest profits, and we will consider taking steps for those that don't.

Speaker 6

Appreciate it. Thank you very much.

Operator

We'll take our next question from David Silver with CL King. Please go ahead.

Speaker 7

Yes. Hi, good morning. Thank you. I think my first question, so I'll ask a few questions and they're all going to be somewhat related To the idea that revenues were up a smidgen year over year, But the operating income and the margins had improved Disproportionately. First thing I'd like to ask you about is maybe if you could highlight the trends in Asia And your Asian activities in particular, so I guess foundry and PCC amongst them.

Speaker 7

But is it fair to say that those businesses are still trending, let's say, below year earlier levels, but They probably improved sequentially through this year. And then if that is the case, I mean, how Close would you say they are to, let's say being fully recovered in your mind?

Speaker 2

David, is your question specifically around Asia across the board? Or is it just kind of a question on mix of Ups and downs. Just want to make sure I answered correctly.

Speaker 7

Yes. It's I'm sorry, it wasn't I wasn't very precise. But I'm thinking about trends in China and then The balance of Asia, I guess, including India outside of China, but your longer term growth Programs there have been somewhat disturbed, I guess, or moved The environment has changed over the last couple of years, but just thinking about how the trend has been sequentially and How close are you back to, let's say, where you were a year or 2 ago?

Speaker 2

So let me I'm going to set this up and then I'll probably give it to Brett and D. J. To talk about their specific businesses in The market in China. Where the market is today is different from where we are, right? So the market, I think, in general, In 2 different markets, our major markets in China would be paper and packaging and the foundry market.

Speaker 2

We are at a different place than where that market may be. And I think the market is probably back to where it was pre COVID levels or somewhere in there, but we're well ahead of that in many of them. And that's due In both of those businesses and that's due to the penetration that we see as we've been driving through the market. So even though the demand levels may be back to So we're doing well and even if the market isn't hasn't grown at its normal rates over the past 2 to 3 years. So let me start with D.

Speaker 2

J, maybe get some color on paper and packaging and where we are in China and India versus the market. Certainly. So David, thanks for the question. Look, as we've been saying, our penetration our growth story for Asia on the paper side is penetration and the introduction of new products. So what you're seeing in this quarter's results is Good growth on the sales, good growth on the volumes, good growth and contributing on the overall income.

Speaker 2

On top of that, as we look at the media trajectory, we've been sharing with everyone our growth plans. And just this Last quarter, we did start up one of the new satellites in India. And then next quarter, even as I speak, We're ramping up a couple of the satellites in China. Included in those satellites, one is a Major piece that goes into packaging, it's a new product offering GCC, so that's just coming online now. We had talked last quarter about the fact that one of those satellites, the one in India, was also the NewYield offering.

Speaker 2

And then on top of that, as we go into the next Quarter, we've got, the early part of 2024, we've got Yet another new satellite coming on in China. So the growth you're seeing is all about the penetration that we've Been working up to and there's more growth to come from just that penetration and the introduction of new products. So we're in pretty good spot in Asia. And Brad, do you want to talk about the foundry market?

Speaker 8

Sure, Doug. Hi, David. Look, historically, greensand bonds have been Split about fifty-fifty between Asia and North America. And of course in Asia, China makes up the bulk of that. As the China market continues to recover, our greensand bond business has shown continuous improvement quarter on quarter.

Speaker 8

In fact, we're probably 7% or 8%. We've seen 7% or 8% growth year on year. But it does have a bit more room to go to hit its peak levels from 2021. We do expect the Q4 to remain similar with maybe a little bit more growth. So we definitely have some room And we're also we're working on the 2024 plan now.

Speaker 8

So also expect to see some modest improvement for next year So I think we're in a good position and we definitely have growth potential, especially in China.

Speaker 7

Okay, great. Yes, no, thank you for the color from both of you. I appreciate it. Doug, this is more of a question maybe about pricing. Over the past year or 2, your company has been pushing for price maybe to offset Higher costs and cost inflation in general and some special situations.

Speaker 7

But I'm guessing, but I'm thinking that we're kind of in a slightly different environment right now. And Doug, I'm going to quote you here, but you always talk about pricing for value. And I guess without the tailwind as much of a Tailwind in a cost inflationary environment. I mean, how important would you say Incrementally getting price is to hitting those 2025 targets. And then In particular, what are the prospects for your portfolio or if you want to call out 1 or 2 areas, but what would you say Are the prospects for getting incremental pricing, even on your best valued products, Best value proposition products in, let's say, the current kind of mixed environment?

Speaker 2

Yes, you took my answer off the table. You say we price on value. So no, David, I guess there's still room to go. I think there always has been. I don't I guess I'll go back and say we've always had price increases.

Speaker 2

We've always looked to price our products appropriately To the value that they deliver and that our products get the fair share of that value with our customers. And I think over the long term and with our relations With customers that gets to a really good spot and I think some of the products that we're developing and designing deserve higher margins. They will be higher margins out there in the marketplace. So we've always gotten pricing for our products. It just looked like the only reason we were pricing in the past 2 years is to catch up on inflation.

Speaker 2

So yes, We had to make sure that we were pushing through the cost that we're absorbing to get that price. But I think now we're back into a place where there is that normal type Value driven pricing that will happen. And there's still elements like labor inflation and energy and we'll make sure that we get through and capture that. But we're always going to price our products based on the value they deliver. I think that it's not necessary for us To that incremental pricing isn't the lever that's going to get us to 15%.

Speaker 2

I think there's other structural elements that I've kind of outlined that will help that. Having a company that has more balanced kind of growth profile, so slower in times and markets are weak, but then when they start to line up, that Stable growth of our consumer products mixed with the cycle that goes kind of up and down in some of our other markets will provide a stable level of revenue growth. And that growth comes with higher margin products and our ability, our operating model as a company Be able to hold fixed costs. We've got lots of capacity in our plants. We've got a great operating model and operational excellence To squeeze more productivity and push product through, we're always working at ways to find waste in our systems, Our business systems and in our manufacturing processes, we held 9,000 Kaizen events.

Speaker 2

We're on Almost 10,000 Kaizen events this year, looking for ways to remove waste. So that model provides a really good way to Hold fixed costs to get high asset utilization and hold down necessary expansion CapEx. Those elements, not just pricing alone or incremental pricing, it's those three things that are going to really drive margins higher as we leverage that base, As those higher margin products take hold, yes, some incremental pricing on some other things. But it's a combination of things and I don't think that pricing It's going to be an element, but I don't think it's going to be it's the only driver we need to get to our margins. I think we're well on track with kind of just the way the company is structured to get there on itself.

Speaker 7

Okay. No, thank you for that. And then just one last one maybe for DJ, but I typically focus on PCC, but I heard today in the opening remarks about a record performance in your GCC Unit. And I'm assuming that's not related to the China project that that's separate. But For the what would you cite for the record performance in GCC?

Speaker 7

And of course, just what's the outlook For continued growth in that unit, in that product in 2024.

Speaker 2

So David, that particular unit serves as GCC into non paper applications. Doug was highlighting it on the West Coast. It's More specifically, it's our operation in Lucerne Valley, California. And what we are seeing there is that Compliment of products is well situated for the demand in California right now, which is balanced between The do it yourself sort of improvements a little bit with new startups, not so much that we saw this time, but it's going into things like Roofing, into tile flooring and into glass and those elements. So that's certainly helping on the demand part.

Speaker 2

What we also were just trying to highlight for that team, they've been really extraordinary implementing all those elements That to which Doug was just referring on OE. A lot of engagement from the employees Looking for ways to leverage that those assets, debottleneck at a relatively low cost And become better at serving our customers faster. They've also been on the leading edge of implementing some of our sustainability Improvements like things like changing from diesel into biofuel and just Staying one step ahead of the trends and which has put them in a good position. So A very strong record. You say how does that look for going forward.

Speaker 2

I can't tell you it's going to be a record every quarter, David. I'm just telling that they have Got into a new place and it's a good place to be and we're pretty proud. David, I appreciate you asking the question and I put it in my Because of that reason, I wanted to highlight that in a challenging market like residential construction, We can push through and make great results and that business has been doing this. That one facility is a great example Of our ability to really work as a team, deliver higher levels of productivity throughput and be able to take on higher levels of sales And utilize those assets. And so that's why I've got 3 records from that facility.

Speaker 2

I just want to say congratulations to them.

Speaker 7

Yes. Thank you for that. I did think that that GCC was tied to construction, which made me scratch my head, but I did I thought that was for GCC as a whole and not just a specific facility. Anyway, I'll stop Thank you all. Thank you for all the color.

Speaker 7

Thank you.

Speaker 2

Thanks, David.

Operator

At this time, I'd like to turn the call back to Mr. Trick for any closing remarks.

Speaker 2

Thanks, Melinda. I appreciate that. Thank you to everyone who joined today. I appreciate you listening in. I appreciate the questions.

Speaker 2

Looking forward to a strong Q4 and we'll be back talking to you I think end of January, I think the date is. Thank you very much.

Operator

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.

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