Minerals Technologies Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2023

There are 10 speakers on the call.

Operator

Day, everyone, and welcome to the Second Quarter 2023 Minerals Technologies Earnings Call. Today's call is being recorded. At this time, I would like to to turn the call over to Linda

Speaker 1

Kupilova.

Operator

Please go ahead, Ms. Kupilova.

Speaker 1

To turn the call over to Ms.

Speaker 2

Jones. Thank you, Rachel. Good morning, everyone, and welcome to the Q2 2023 earnings conference call.

Speaker 1

To turn the call over to Mr. Chairman and Chief Executive

Speaker 2

Officer, Doug Ditryuk and Chief Financial Officer, Eric Aldag. Following Doug and Eric's prepared remarks, we'll open it up to questions. To as a reminder, some of the statements made during this call may constitute forward looking statements within the meaning of the federal securities laws. To 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, to discuss

Speaker 3

the financial results, which

Speaker 1

may cause our actual results to differ materially

Speaker 2

from these forward looking statements. Please also note that some of our comments today refer to non GAAP financial measures. To turn the call over to Doug. Doug?

Speaker 3

Thanks, Lydia. Good morning, everyone. To Thanks for joining. Let me give you a quick outline for today's call. I'll begin with the highlights that drove our results for the Q2 to provide some comments and context around our recent announcement on the Telk business and details on the $10,000,000 cost savings program we just initiated.

Speaker 3

To then take you through our view of general business conditions, the trends that we're seeing across our end markets and the positive outlook we have for the second half of the year. Eric will then take you through the financial details for the quarter and our outlook for the 3rd. We published our latest sustainability report this past Monday to And we're extremely proud of this year's report and the progress that it shows we're making on all fronts. I'm going to cover some highlights for you later in our presentation. To let's go through a quick summary of the Q2.

Speaker 3

We had a solid performance and delivered on what we committed to in terms of operating income, to turn the

Speaker 1

call over to our operator.

Speaker 3

Our teams remain focused on margin improvement and we expanded margins sequentially in both segments. To start with our sales. In the Consumer and Specialty segment, sales grew 3% over last year, to Despite facing some mixed market conditions, our Household and Personal Care product line led the way with Pet Care sales up 15%, to provide an update on our financial results. Edible oil and renewable oil filtration up 13% and animal health with 29% growth. The paper and packaging market in Asia was healthier this year and our PCC volumes there were up 24%,

Speaker 1

to turn the call over to Chris. Driven by strong pull from our newest satellites.

Speaker 3

These positive sales areas were offset by lower sales in North America paper to turn the call over to the operator and packaging, which were down 18% due to paper customer destocking actions. Slower residential construction markets to turn the call over to Steve. And lower demand for specialty food additives impacted sales in specialty PCC, which was down 10%. To turn the call over

Speaker 1

to Mark.

Speaker 3

On the Engineered Solutions side, sales were slightly down compared to last year. We benefited from strong Metalcasting and refractory sales in North America, as well as higher Metalcasting volumes in China. We also saw significant growth in our remediation and wastewater business to with sales up 86%, driven by the continuation of 2 large sediment capping projects. To These areas of strength were offset by continued slow conditions in commercial construction and the European steel market. To Sequential operating income grew by 12% and operating margin improved by 120 basis points driven by favorable price cost dynamics.

Speaker 3

The pricing actions that we have put in place are beginning to meaningfully offset the raw material inflation we experienced for the past 6 quarters. Additionally, cash from operations doubled compared to last year. The higher working capital level we experienced due to inflation is to begin the release and convert to cash flow. As mentioned in previous presentations and at our recent Investor Day, We completed the business re segmentation to focus MTI's energy and capital on our core markets, product lines and technologies. An outcome of this realignment is an opportunity to streamline our organizational structure and reduce overhead costs.

Speaker 3

We expected to save $10,000,000 from this program, which will be implemented over the next 3 to 4 months, and Eric will discuss the details in his financial section. We also made an announcement that our subsidiary, Barrett's Minerals Inc. Is exiting the Telet business. To as was outlined in the release, we took a very careful look at all the circumstances concerning the Barrett subsidiary to make the decision to exit the telk market. The relatively small size of the business within MTI needed to be balanced against the outside costs to take a look at the financial results and the financial results and the financial results and the financial results.

Speaker 3

To reiterate that our talc is safe and we're proud of Baritz's track record of meeting its customer needs with the highest quality products and service. However, we're taking the step to divest the talc business and are now working to determine the transaction structure that best provides value to all stakeholders.

Speaker 1

To take a moment to discuss the progress

Speaker 3

of this process. This process includes taking the prudent steps required to ensure that any liabilities associated with talc are dealt with both effectively and efficiently. As you can imagine, a number of activities are ongoing while we move this process forward. Our intent is to move quickly to note that all our energy can be focused on achieving our core long term strategic objectives. We'll certainly provide further updates as the process moves forward.

Speaker 3

To So overall for the quarter, I'm pleased with our performance and the progress we're making with margin expansion and cash flow improvement. I'm also pleased with how our consumer oriented businesses continue to perform well through mixed economic conditions, providing the balance that we expected to turn the

Speaker 1

call over to our portfolio.

Speaker 3

Now that you're more familiar with our new segments and product lines, I'd like to to share how we see the markets playing out for them over the balance of the year. Overall, we have a positive view of our positions, market conditions and momentum going into the second half. To Let's start with the Consumer and Specialty segment. In Household and Personal Care, we expect demand to remain strong across the majority of our to turn the call over to our consumer oriented product portfolio. Our Pet Care business is experiencing significant growth across all regions to And for the remainder of the year, we see this demand continuing.

Speaker 3

In other consumer businesses like Animal Health and Bleaching Earth for edible oil to turn the call over to Steve. Our customers are expanding production capacity and have new facilities coming online. This is creating new supply opportunities for us and as a result, we're projecting to remain on our current strong growth trajectory. To Our Personal Care business has been experiencing lower volumes for most of the first half of the year due to customer destocking actions. To indications are that this will continue through the Q3, but they will begin to see an increase in order volume in the 4th.

Speaker 3

Specialty Additives product line, we expect North America the North American paper market to improve from a rather lackluster first half to as our paper customer destocking activity concludes and for the European paper market to remain stable for the balance of the year. We started up one new paper PCC satellite in India earlier this year and we'll start up 3 additional satellites,

Speaker 1

to discuss the Q1 of 2019.

Speaker 3

We will now begin the Q1 of 2019. We will now begin the Q1 of 2019. Additionally, we just announced a new agreement with one of our customers in Brazil for our new NewYield LO product. To This technology leverages our crystal engineering platform to recycle a paper mill waste stream and offer our customers a more sustainable filler to take a look at the next few quarters. We expect this facility to be operational by this time next year.

Speaker 3

Elsewhere in Specialty Additives, markets are mixed. In North America, we see a strong pull for pharmaceutical and automotive sealant additives to take a look at the Q3, though demand for our specialty food additives is expected to remain soft through the Q3, but pick up in the 4th. To let's talk about the market trends in Engineered Solutions. In High Temperature Technologies, we expect the North America and European Steel markets to remain at similar levels for the second half. Refractory sales will improve in the second half versus last year as we begin to benefit to take a look at the next question from the new SCANTROL laser and application systems we've been deploying.

Speaker 3

Speaking of which, this quarter, we signed another contract for this technology worth to extend the call to the operator for questions. This is our 11th contract like this, demonstrating that this technology is truly unique to turn the call over to the electric steel furnace market. The North America foundry market was strong for the first half, driven by relatively robust auto, to Heavy truck and agricultural equipment demand. We expect these conditions to remain through the second half and translate into continued to turn the call over to the operator for the remainder of the year. In China, our Metalcasting volumes have steadily improved each month this year, to

Speaker 1

turn the call over to Paul to discuss the financial results, albeit at

Speaker 3

a slower pace than what we expected at the beginning of the year. In the Q2, volumes grew 10% over last year despite this slower rebound. To note that volumes will continue to increase through the remainder of this year. To In Environmental and Infrastructure, our outlook is mixed. We see stable demand for wastewater and water remediation to as well as for our drilling products throughout the balance of the year.

Speaker 3

Project activity for both our environmental lining and commercial construction waterproofing systems is to turn the call over to Tom. Before we move on, I'd like to make a couple of comments on the China market. There's been a lot of commentary recently on China and how their potential transition to a lower growth economic phase to discuss the financial results. I've already made a few comments on our second half outlook in China for specific product lines, But I thought I'd give you a longer term perspective on our business position. China represents about 8% of our overall global sales.

Speaker 3

To We primarily participate in 3 markets in China, the foundry, paper and packaging and pet litter. Changes in economic growth rates there will have an impact on our Metalcasting and PCC sales. To The growth in these two product lines is driven more by the introduction and penetration of our new technologies and the substitution of existing products in the market. For pet litter, the market is in the early stages of development and given its current size compared to the more mature pet litter markets in the U. S.

Speaker 3

And Europe, to We see a long growth path ahead of us. China is still relatively small region for us, but given our current market positions, to continue to grow sales at our historic rates despite potentially slower economic growth conditions there moving forward. To sum up our market outlook, I have a positive outlook for the second half of the year and I'm pleased with the momentum we have going into it. To We're making a great deal of progress leveraging our core technologies and expertise to enhance our positions in key areas. We see continued margin and cash flow growth in the second half and feel we're well positioned to deliver on the targets we recently laid out for you.

Speaker 3

To now hand it over to Eric to provide more financial details. Eric?

Speaker 4

Thanks, Doug, and good morning, everyone. I'll review our 2nd quarter results to provide our outlook for the Q3. Following my remarks, I'll turn the call back over to Doug to cover some highlights from our latest sustainability report. To now review our financial results. Before I get into the details, let me summarize by saying we had a solid quarter to And our earnings performance was a reflection of our team's ability to execute despite near term variations in a few end markets.

Speaker 4

To We remain positive on our end market outlook and we're solidly on track for our target margin expansion. Now let's begin with the sequential quarter bridges on the left hand side. Sales were $552,000,000 in the quarter, up 1% from the Q1, primarily driven by higher pricing. To Volumes were relatively flat sequentially as destocking activity in a few of our end markets offset growth in other areas. To Operating income increased 12% sequentially to $71,000,000 and operating margin improved 120 basis points.

Speaker 4

To Our negotiated and contractual price increases are taking effect as planned, which along with stabilizing input costs to are helping us recapture margin from the inflationary cost increases we absorbed last year. Operating margins improved in both segments sequentially as expected. To turn to the year over year bridges on the right side, sales were 1% lower than last year. To turn the

Speaker 1

call over to the operator. Foreign exchange had an $8,000,000

Speaker 4

unfavorable impact on sales and on a constant currency basis, sales were slightly higher than last year. To As Doug mentioned, we continue to see growth in several of our end products end markets such as pet litter and bleaching earth to And demand remains strong in other key end markets such as steel and foundry in North America. However, volumes were impacted by weaker to turn the call over to consumer end markets, such as personal care and food additives. 2nd quarter operating income was 4% lower than prior year, to Compared with $29,000,000 of cost increases. It's worth noting that this was the largest favorable net impact from price versus cost to note that we've delivered in any quarter since the beginning of this inflationary cycle.

Speaker 4

Now before we get into the results for each of our segments, to review our Q2 EPS and the special items in the quarter. Reported earnings per share of $0.82 in the 2nd quarter to include special items of $0.49 including $0.16 of severance related costs associated with our cost savings program to review the financial results and the financial results. As Doug mentioned, we initiated a cost savings program in the 2nd quarter. Following our reorganization and resegmentation earlier this year, we identified opportunities to further streamline the company's cost structure. To We recorded $6,600,000 of severance costs in the 2nd quarter associated with this program and we expect to deliver $10,000,000 of annualized savings to start late in the Q3 and ramping up to full run rate by the first half of twenty twenty four.

Speaker 4

This cost savings program solidifies our margin improvement to turn the call over to Steve to discuss our financial results. To note that the litigation costs we incurred were incurred to defend against claims associated with certain talc products from the Verus Minerals Inc. Subsidiary to and to restore our reserve back to the level that is appropriate for the existing claim. Excluding these special items, to Earnings per share was $1.31 in the 2nd quarter. Now I'll review the performance of our 2 segments, beginning with Consumer and Specialties.

Speaker 4

To begin. 2nd quarter sales in the Consumer and Specialties segment were $290,000,000 an increase of 3% compared with last year. Sales in the household and personal care product line were 6% above last year. Our pet litter business remained on to provide

Speaker 1

a strong growth trend

Speaker 4

with sales increasing 15% year over year. We also saw significant growth over last year in Bleaching Earth, to be up 13% and in animal health, which grew 29%. Partially offsetting this growth was the impact of inventory destocking we are seeing to turn

Speaker 1

the call over to Mr. President and CEO of the Company. Thank you, and good morning everyone.

Speaker 4

While these markets are currently a small part of the portfolio from a sales perspective, to we're highlighting the impacts because of the higher margins they carry and because the company's margins will benefit when the current destocking cycle ends. To discuss specialty additive sales were flat compared to last year due to several offsetting market dynamics in this product line. To Sales are benefiting from higher prices, the ramp up of new PCC satellites and continued solid demands from automotive and pharmaceutical end markets. To Residential construction has been more of a mixed picture, with resilient demand for our products going into home improvement, to note that we are not seeing any significant changes in the to note that the company's operating income improved 1% over the prior year And was 5% higher sequentially. This segment continued to make progress in recovering the inflationary costs incurred throughout the prior year And operating margin improved to 90 basis points sequentially as a result.

Speaker 4

To Looking ahead to the Q3, we expect to see similar market conditions overall in the household and personal care product line with pet litter and bleaching earth remaining strong. To And we don't expect a significant pickup in Personal Care order patterns until the Q4. To In specialty additives, we expect North America paper production to increase in the 3rd quarter to be more in balance with paper consumption. To discuss the demand conditions across other geographies and end markets should be similar sequentially. To All together for the segment, we expect to see continued improvement in operating income and margin in the 3rd quarter, driven by modest demand improvement, additional price increases and stabilizing costs.

Speaker 4

Operating income should be approximately 5% higher sequentially on continued margin improvement. To I'll note that the Consumer and Specialties segment is the biggest driver of the company's overall margin improvement toward our target level And is on track to deliver that improvement. Now let's review the Engineered Solutions segment. To 2nd quarter sales in the Engineered Solutions segment were 5% lower than last year, but 5% higher sequentially. To turn the call over to Chris.

Speaker 4

In our high temperature technologies product line, sales were 2% below last year and 2% higher than the Q1. To demand for foundry and refractory products in North America remained strong and overall sales were similar to prior year levels. To note that market conditions in Europe have remained soft through the first half. However, we are seeing sequential improvement in Asia to and foundry volumes in China are now above the levels we experienced last year. In our environmental and infrastructure product line, to Growth continued for wastewater and remediation applications as well as for our drilling products.

Speaker 4

However, we experienced to lower activity levels in commercial construction and for environmental lining systems. Overall, sales were 10% lower than the prior year, to but improved 12% sequentially as the business entered its peak seasonal period. To Operating income for the segment was 8% below the prior year as resilient sales and solid execution in High Temperature Technologies Was offset by slower project activity in the environmental and infrastructure product line. Operating income grew 9% from the 1st quarter to And operating margin improved 50 basis points to 14.7 percent of sales. In the 3rd quarter, we expect demand to turn the call over to Mr.

Speaker 4

President. Thank you, to with Europe remaining slower. In environmental and infrastructure, we expect commercial construction and large scale environmental project activity to remain similar to what we experienced in the Q2. In total, we expect segment operating income to be similar sequentially. To now let's move to our balance sheet and cash flow highlights.

Speaker 4

Cash from operations in the first half was $79,000,000 to more than double the prior year. Our working capital at the end of the quarter was $20,000,000 higher than the same period last year. While the inflationary impact on our working capital has moderated significantly, it is still having an impact on cash flow, to And our businesses are still working through higher cost inventory. We expect working capital levels to normalize further in the second half, to And we expect significantly higher operating cash flow as a result. Capital expenditures have totaled $46,000,000 so far this year, to bring free cash flow to $33,000,000 Our CapEx this year includes the construction of new PCC satellites to expect capital spending to be approximately $90,000,000 and free cash flow to be in the range of $100,000,000 to $125,000,000 our balance sheet remains very strong.

Speaker 4

Total liquidity at the end of the second quarter was $437,000,000 And net leverage was 2.4 times EBITDA. So far this year, we've used free cash flow to pay down $20,000,000 of debt. To note here that approximately 50% of our debt has a fixed interest rate, which we achieved through our fixed rate notes to And by fixing a portion of our variable rate debt with a hedge instrument. And we've had that 50% fixed variable ratio for the last several years. To In the Q2, our average interest rate was approximately 6%, which was 160 basis points higher than the same period last year.

Speaker 4

And this translated to more than $4,000,000 of higher interest expense in the quarter or approximately $0.10 of EPS. To Year to date, that figure is $8,500,000 or approximately $0.20 of EPS. To Our near term priority for capital deployment continues to be debt repayments to move toward our target net leverage of 2 times EBITDA to as well as mitigate the higher cost of interest. Our fixed floating debt ratio also positions the company well should the interest environment change. To now summarize our outlook for the Q3.

Speaker 4

Overall for MTI, we expect another solid performance in the Q3. To We are forecasting market conditions to remain relatively stable from the Q2. Demand for pet litter, bleaching earth and animal health products should remain strong and to We expect residential construction and automotive will be similar sequentially to and that other consumer end markets will remain mixed, with personal care destocking likely to continue until later in the year. To note that we expect North American steel and foundry markets to remain stable and we are assuming modest sequential improvement in China foundry volumes. To note that, however, commercial construction activity and environmental lining systems will likely remain slower.

Speaker 4

To We have incremental pricing actions taking effect in the Q3, which will help to keep us on track for continued margin improvement. To discuss our cost savings program will support continued margin improvement later in the year as well the expected rebound of orders for our personal care and food additive products. To Overall for MTI, we expect operating income for the Q3 to be in the range of $70,000,000 to $73,000,000 to or approximately 4% to 9% above last year and earnings per share between $1.30 $1.35 the company is on track for continued margin improvement and higher levels of cash flow, and we are taking action to ensure we stay on track. To turn the call over to Doug for a quick preview of our latest sustainability report. Doug?

Speaker 3

Thanks, Eric. Before we conclude, I to Just want to make a brief mention of the publication of our latest sustainability report. This is the 15th year we published the report demonstrating that sustainability is not new at MTI. For us, it's always been part of how we do business. To Sustainability has been a central tenet of our values and an essential part of our business strategy, innovation pipeline and employee engagement.

Speaker 3

To Leading with our values, our entire organization is passionate about reducing our environmental impact, protecting natural resources, ensuring the safety of our employees, creating an open, welcoming and transparent work environment, Being accountable, being humble and always winning with integrity. A couple of highlights from this year's report. You'll see that we've already exceeded our 2025 environmental targets in 4 of 6 categories. To we've made progress on moving to sustainable energy sources. Our largest processing site recently converted to 100% renewable diesel to thank our employees for

Speaker 1

their heavy equipment fleet and we've significantly

Speaker 3

increased the amount of power we're sourcing from renewable sources. Our core technologies are being leveraged to provide sustainable products to the market and the report outlines how we see further development of more sustainable solutions to thank everyone at MTI for their hard work and dedication to these efforts. I want to thank everyone at MTI for their hard work and dedication to these efforts and particularly those who participate in our sustainability lead team. To encourage you to take a read through the report, which is available on our website. Okay.

Speaker 3

Let's open it up for some questions.

Operator

To Our first question comes from the line of Daniel Moore with CJS Securities.

Speaker 5

To Thanks, Doug. Thanks, Eric, for taking the questions. Hi, Dan. Let's start with to Thank you. Let me start with the cost reduction initiatives that you described.

Speaker 5

Just from a high level view, would you describe them as to kind of be more offensive rather than a reaction to any softness in any particular end markets. And how much of those do you expect to fall to the bottom line versus Perhaps being reinvested.

Speaker 3

No, I do think it's offensive. Look, as we went through our restructuring, We highlighted at the Investor Day a couple of areas where we thought there'd be some efficiencies. And I didn't highlight a lot of cost efficiencies. To see once we got into it, we started to see that the organization was operating in different ways. There's a lot of focus that was put around our 4 new product lines, the to take the questions.

Speaker 3

Technologies that were

Speaker 5

in there and more of the support of

Speaker 3

those and finding that some of the silos that perhaps we didn't see were broken down and And there's some areas of efficiency. So I think it's as we do all the time in the company, we're constantly looking for ways of being more efficient. And so I think this is a little bit more offensive. I do think though that it's prudent that we make sure that our cost structure is in solid shape and as efficient as possible. Given the forward look has been a little bit murky, at least going through the beginning of the year.

Speaker 3

So we think it's prudent to do so. But I think it's coming more from an offensive standpoint, Dan. We think the majority of it will fall to the bottom line. We're projecting $10,000,000 of cost savings run rate by the beginning of the year, next to share and they'll be implemented over the next 3 to 4 months. So you'll see some savings in the 4th.

Speaker 5

Very helpful. And then just kind of a cadence question. Doug, you described a few markets where you could see orders picking up in Q4, plus you to get a little bit of the benefit of the cost reductions on a margin perspective on margins. Having said that, to Q3 is typically a fair bit stronger than Q4 seasonally. So just how do we think about putting that all together from a seasonal perspective?

Speaker 5

Do you still expect Q3 to be kind of the peak quarter from a profitability perspective.

Speaker 4

Yes. Hi, Dan. This is Eric. I can take that. So That's true in terms of seasonality that we typically see a little bit of a drop off in our sales, mainly around construction in the 4th quarter.

Speaker 4

But I will say that we're still on track from a margin perspective in terms of what we to conclude that last quarter and at the Investor Day, we plan to be at 13.5% on a full year run rate basis by the end of the year, moving to 14% next year and 15% by 2025. I would point out, you saw in the bridges For the Q2, volumes have been unfavorable and that's been impacting that impacted margins in the 2nd quarter, to We have a lot of activities going on to offset that. I would say the price versus cost catch up alone Is enough to get us to where we would expect to be by the end

Speaker 1

of the

Speaker 4

year. And we the pricing actions are still Resulting in favorable pricing impact to our revenue on a year over year basis. So that's going to continue. We should also benefit from some of the higher margin products coming back in the 4th quarter. On top of all that, we've got the cost savings to kind of bolster that improvement.

Speaker 4

So yes, we're still confident in getting to the 13.5% run rate on a full year basis. To Margins should be at or above where we are in the 2nd quarter and the 3rd quarter, and looking to hold that into the 4th to Despite some of the normal seasonality that we have.

Speaker 3

Yes, Dan, I'll just I'll add to that. My comments were to a positive second half to the year. And the reason we have that view is because going into the 3rd quarter, We see a lot of the destocking actions that we saw in the first and second ending, right? So we see a positive third quarter. And then even further out, some of the areas like in personal care and some of the other areas that are very profitable for the company, we see those order books or We expect to see those order books turning north.

Speaker 3

So we've got a number of positive items coming at us in the second half and that's what gives us the confidence to to make the statements we did.

Speaker 5

Very helpful. It sounds like if there is a little bit of a seasonal dip, it will be lighter than what we've seen previously given to All those factors that you just described. Maybe the last question for me would be from a capital allocation perspective, to What you laid out at the Investor Day was EBITDA above $500,000,000 free cash flow conversion of 7% of revenue. By our estimates, that could be $700,000,000 $750,000,000 plus cash flow over the kind of planning period. To talk about, I guess, near term is the focus to maybe pay down a little bit of debt.

Speaker 5

But how far would you want to push your leverage down before maybe thinking about being more aggressive, be it M and A or even ramping up on buybacks? Thanks.

Speaker 3

Yes. I think in the near term, given what we see as savings in terms of interest and making sure our balance sheet is in good shape around that two to leverage that's where our focus is going to be. And like Eric said, we think just with the cash flow generation in the back half of the year, we should be able to hit that target. As we go forward, we'll look at the environment. We'll look at where interest rates are.

Speaker 3

But we're always looking for growth and potential acquisitions that fit the company. And short of those, we'll allocate that capital shareholders and we usually do that through share repurchases, although we're looking at all different ways to make sure that our allocation to shareholders is appropriate. Right now, I think for the rest of the year, we're going to be looking at debt pay down, getting the balance sheet to our target levels, see how things pan out next year with acquisitions, if not to That excess cash flow that we that you've noted that we'll be generating, we'll be steering that to shareholders. We do tend to keep some on the balance sheet to So we'll do that. But usually at least 50% of our excess free cash flow goes to shareholders, 50% of the balance sheet, so that we make sure that we have Some money for small acquisitions here and there that may pop up.

Speaker 5

Perfect. Appreciate it. I'll jump back with any follow ups. Thanks.

Operator

Our next question comes from the line of Mike Harrison with Seaport Research Partners.

Speaker 6

Hi, good morning.

Speaker 3

Hi, Mike.

Speaker 6

Looking at the PC and H to take a look at the subsegments and that up 6% year on year number. I believe you said that pet care was up 15%. It would kind of imply that the other piece, I believe pet care is 75% of that business or so. So it would imply that the other to take a look at the non pet care piece was down like 20%. And it sounded like edible oil was up, animal health was up.

Speaker 6

So maybe just help me understand kind of how pronounced that destocking impact was As you look at some of those other pieces of consumer, particularly the personal care piece.

Speaker 3

Yes. It's largely that Personal Care piece, I think, Eric. I think Personal Care is a smaller piece of that segment, but I think it was down 40%, 42% In the quarter, so it's pretty pronounced. And as Eric mentioned, that's some high margin products for us. And we think that's to continue through the 3rd, Mike, but then we like I mentioned, we think some of the order book will uptick in the 4th.

Speaker 3

I think you've seen that in the marketplace to with kind of consumer products have been going through a destocking phase. This portion of that product line faced that as well. But we do have a number of good trials going on for our new retinal delivery device retinal delivery systems with some major health care providers. So We think that that bodes well probably for the 4th and into next year.

Speaker 6

Got it. And then, I guess maybe just a couple more on Pet Care. In terms of that 15% year on year number, I'm curious how much of that was pricing. I think you guys were still trying to catch up on pricing there. To And also curious if you're seeing a pickup in the private label side of that business, I would assume that there's some trading down that is happening in this

Speaker 1

to take a look at the inflationary environment.

Speaker 6

So are you seeing some faster growth on the private label portion of your pet care business?

Speaker 3

So first question, I'd say of that 15% is probably 50% pricing, 50% volume. I'm going to say it's pretty balanced around the world. I'd say North America has seen some good strength in the order book And all of that is private label. So I think the private label in general, as we highlighted, has been growing Probably the fastest of the category and I think we're participating in that. So I'd say probably more of that was North America, but we also saw some good demand pickup in Europe as well.

Speaker 3

China, high growth, small portion of the business, so we'll call that out. But I'd say first question fifty-fifty price volume, Strong private label, I'd say the majority of that was in North America.

Speaker 6

Perfect. And then on the PCC business, I'm just kind of curious if you can talk about to take a look at price cost dynamics and whether you saw sequential increases in pricing for PCC to As your contractual pass throughs are kind of catching up there and what does that mean for the pace of margin recovery in the second half In that PCC business.

Speaker 3

Yes. This is what I've been highlighting for I guess several quarters. And last year when to the way these contracts are set up is with the delay mechanism that we have to absorb a lot of this cost. I remember last year a couple of quarters we were to absorbing $2,000,000 $2,500,000 worth of costs before we could pass that through. Well, now we're at that point where as inflation starts to take our guidance and we're catching up on all that.

Speaker 3

All of that pricing is being pushed through. In some areas, we're starting to see some of the energies of the input costs deflate And that is what's driving some of that expansion expanded margin. So it's really a function of those contracts and how they protect us In that business. And so yes, we are seeing some of that. As long as energy prices to continue to decline in certain areas, we will see that margin continue to expand through the back half of the year.

Speaker 6

All right. Last one for me is on the free cash flow guidance. I think I missed that. Did you say 100 to 125 or 1 to 25 to 150.

Speaker 4

100 to 125, Mike.

Speaker 6

Okay. Historically, you guys have been Kind of closer to that $150,000,000 to $175,000,000 range. Is that kind of where you could potentially get to as we think about next year and beyond?

Speaker 4

Yes, absolutely. I'd say we're sticking to that 7% of sales kind of ratio. This year, the biggest impact has been in the first half, we still had significant year over year inflation to contend with. And so that continued to kind of push out the normal working capital cycle. But the second half should be very strong.

Speaker 4

We're expecting $115,000,000 to $135,000,000 of cash from ops in the second half, to $70,000,000 to $90,000,000 free cash flow in the second half. So that's turning around in the short term here.

Speaker 6

Excellent. Thanks very much for your help.

Speaker 3

Thanks, Mike.

Operator

Our next question comes from the line of David Silver with C. L. King. Please go ahead.

Speaker 7

L. King:] Yes. Hi, good morning.

Speaker 1

Good morning. L.

Speaker 7

King:] Hey. To So a few topics and this will be a little scattered. The first topic I wanted to ask you about, Doug, to Maybe would be your outlook or your take, your perception of the Chinese market, maybe Asia in general, but really China in to So I'm about halfway through my earnings season and every company that has exposure there has to call that out as kind of a negative comparison year over year. However, I think your company, if anything, You were a little more positive and I think it was a positive factor you called out on PCC and maybe one other area. So from your perspective as someone producing in country, could you give us a sense of how their Reopening or their economic recovery has gone year to date.

Speaker 7

And then secondly, maybe just to provide a sense of overall demand for their products, I guess, the export based to take your questions. Your sense of the activity levels in Asia For you in Asia in general and China in particular, please.

Speaker 3

Sure. So, yes, I'll go back to the to comment I just made in my remarks. We operate I think every company is a little bit different in China, right? And it depends on What you're doing there, I guess we are largely localized. And what I say about that is we kind of source, produce and sell in the region.

Speaker 3

So we're not to a large export. We're not reliant on exporting or importing into the region. It's largely localized. That's the first piece. 2nd piece, That's still a relatively small region for us, it's about 8% of our revenues.

Speaker 3

I'm speaking about China, not Asia. The dynamics for us are a little bit different. They always have been. Yes, demand levels do affect us. Economic activity, whether it's 6%, 8% or 2% will have an effect on that 8% of our sales.

Speaker 3

But our growth and how we've been growing in that market over the past 10, 15, actually 20 years now, is Driven more by substitution and technology, new technology introduction. So to give you an example. In the Metalcasting business, bentonite is always consumed as a base in the binding systems that every foundry uses. But the technology that we deploy, which creates a custom blend, It's still bentonite based, but it is a higher it is a more to efficient way of making a cast product. It saves the foundry money in terms of throughput, productivity, scrap rates, to Quality, etcetera.

Speaker 3

And so we are able and that's also we sell it at a higher price point than a base ton of bentonite. So we're able to to Through this technology, increase our sales within a given amount of economic activity. To foundry is still producing the same amount of brake rotors or agricultural equipment or housing, to Yes, we're able to help them with yield. So our revenue can continue to go up higher because we're selling a more sophisticated product to Under a certain base load of economic demand. Right.

Speaker 3

Now that demand affected, but we can continue the growth rate. The same is for our paper and packaging. We're substituting other pigments for use as filler or coating in paper with higher value ones with Higher quality pigments or higher performing pigments. We're recycling waste to Right. So we have low input costs and we're able to give generate revenue from taking recycled waste streams.

Speaker 3

So we have different revenue streams, but again on the same load of paper because we're displacing an existing product that's being consumed. The pet litter business is the 3rd main The market is small. It's developing. It's developing around bentonite. We're driving that development relative to mature markets that we just talked about earlier in North America and Europe.

Speaker 3

We see that it's going to continue to grow, and despite some of the economic slowdown that could occur potentially transition to a lower to So for us, I know every other company has different positions in China and whether they're exporting or what their positions are. But for us, We see that regardless of it moving to maybe a lower growth economy, we have new technologies, products And our positioning in markets where we can continue our high growth rate going forward. And that's what I was trying to portray or describe in my comments. Hopefully that

Speaker 7

helps. Yes. No, I think it was maybe just to In my view, just kind of understanding maybe near term, not discounting the long term potential, but just How it played into your most recent quarter or 2 of results. So thank you for that.

Speaker 8

Got you.

Speaker 3

My view on I got you. I probably didn't answer your question. My view on China, it's just like everybody else, we thought it would rebound much quicker than it did. But I will tell you that it has continued to improve. So at least in our markets and I'd say the foundry market is probably the best to bellwether for how economic activity, because it's base industrial activity like automotive heavy equipment.

Speaker 3

Very slow first quarter. We saw improvements in the second and indications from our customers that it's going to continue to improve in the third and into the 4th and we're seeing that order book go that way. So Slower than we all expected going into the year, but absolutely I'm seeing it improve at least in our business, the Metalcasting business, which I think is probably a good to engage for economic activity.

Speaker 7

Okay, great. I wanted to switch over to the new yield project to take a question and answer session. And in particular, I'm just curious about how the economics and the capacity change surrounding to take the implementation and new yield work. So I reread the release a few times and I just wanted to clarify that It seems like this is not a fundamental capacity increase, but it's maybe to take a case where what normally would go to a waste disposal unit is now going to be effectively recycled to In the existing hardware, let's say. So is it the case that when you implement new yield, there is Not necessarily any appreciable increase in plant output, I guess without further investment.

Speaker 7

And if that's the case, how do the economics of that installation and whatnot, how does that work in practice? How do you get to take a return on your investment if the new yield product effectively displaces to

Speaker 3

Sure. How about DJ, do you want to answer that?

Speaker 8

Sure. So David, let me try and to put this in context. We've got several satellites coming online in the second half. To Doug and Eric had referred to them during the presentation. One of those is in India that is a NewYield LO to So an element of new yield that you're going to see is that it's going to contribute to our geographic growth to take a look at the projections that we discussed during the analyst call.

Speaker 8

So new yield supplements our ability to do further penetration, especially in those to emerging markets. That would be one application. When we were together for the Investor Day, I'd also indicated that one of the things that we're excited about to in this application of our Cristal Engineering is that we have an opportunity to retrofit our existing PCC plants When applicable. This case in Brazil is the first example of that in use. Now, what happens in terms of the economics We're able to take a material that would typically be a waste material and require some landfill.

Speaker 8

And so the customer benefits by eliminating or reducing a disposal cost And we benefit by having a much lower input cost. So in those applications, if you see an upgrade, you can assume That it would be neutral to volumes, but it would be part of that margin improvement program That Eric is referring to. It will be contributing to the margin improvement of that business. But on other to make sure that you have the right to make sure that you have the right to make sure that you have the right to make sure that you have the right to make

Speaker 3

sure that you have the right

Speaker 8

to make sure that you have the right to make sure that you have

Speaker 3

the right to make sure that you

Speaker 8

have the right to make sure that you have the right to make sure that you

Speaker 3

have the right to make sure that

Speaker 1

you have the right to make sure that

Speaker 8

you have the right to to As it relates to the NewYield platform is that we've got several packaging Producers that are talking to us about how NewYield can apply into that space. And so to It would be part of the offering that provides us an opportunity to penetrate the packaging market. So the particular announcement, which you picked up on was right, But the broader impact of the platform is supplementing the growth and improving our operating income margin.

Speaker 7

Okay. Thank you for that. One last one and I think this would also be for DJ. But I would really like your opinion about the trajectory, I think, of paper and especially packaging Growth, I think from a secular perspective. So pre pandemic, sorry, pre pandemic, Everyone was talking about reducing packaging in all manner of to have ways of accomplishing that.

Speaker 7

And if you read a consultant's report as I did, I mean, everyone would point to maybe a negative to take a look at the demand trend in paper use in particular. But since the pandemic And I see this every week when I take out my paper and cardboard for recycling. I mean, it's just been a real turnaround And in the way people view that particular waste stream and usage. So from your perspective, as you think out maybe 3 to 5 years, I mean, is this the case where Apart from your technologies, I mean, that you see like a growing demand for packaging, will The pandemic era boost in delivered goods and the packaging that accompanies that. Is that going to be sustained in your opinion?

Speaker 7

To take a question from the line of to discuss the consumption decline, I guess, is that going to reassert itself? What is your view from maybe a 3 to 5 year perspective to start starting now. Thanks.

Speaker 8

So David, I'm processing and figuring out the best way to answer it and it's to Let me try to distill it down. If I look at the printing and writing grades, We still see some of the secular decline, but what we're seeing in that short term and it probably continues in that 3 year look We saw a spike in North America like that recently. We just saw this destocking that went on. To But in North America, some capacity has just recently come out of the market. And in North America, that industry Goes back to probably 85% plus operating rates, which seems pretty sustainable for the next 3 plus years or so.

Speaker 8

Hard to to for sure, but that's what it looks like. Europe, we see that being that has been on a decline, but it has not been in the grades to in which we participate. So Europe seems to be going through a rationalization period that is augmented or offset to by continued growth in Asia, particularly China, where although their growth has to slow down over recent years. It's still a growing region, India as well. So on balance In that look, printing and writing grades still come down a little bit, but not a lot.

Speaker 8

It seems to be to A gradual decline. On the packaging, we've seen a shift that's going on as people have converted some of that old capacity to make some packaging. So the packaging overall consumption, it kind of depends on the type of packaging. The way we look at it Is there these high end boxes that hold the iPhone or crate up a box of golf balls. That seems to be pretty steady or growing at a slight rate.

Speaker 8

The recent to shift has been brown boxes have come down slightly since the pandemic era and there's people taking a pause and seeing how that goes. But long term that'll to probably grow at a GDP plus sort of rate. And then what's been supplementing that or growing at a greater rate than that is to This kind of in between box. It's a white top box. That's where we've had recent applications both in Europe and North America where that to Amazon box that you're getting is no longer just a brown box.

Speaker 8

It's well printed. So that will be growing as well. So it's Overall, packaging is still growing. The overall printing and writing, probably flat, But that flat is deterioration, especially in Europe and growth in Asia. Does that balance out to

Speaker 7

ask you an impossible question to answer. So I really appreciate you handling that on the fly. That's all for me. Thanks very much.

Speaker 4

Thanks, Nick.

Operator

Our next question comes from the line of Steve Farazani with Sidoti. Go ahead.

Speaker 9

Thanks. Good morning, Doug, Eric or about to be afternoon. To I wanted to

Speaker 3

ask about

Speaker 9

the updated free cash flow target. Anecdotally, we're certainly hearing cases where I know traditionally your second half, you benefit from receivables conversion, but we're hearing anecdotally that maybe those conversion cycles are to Stretching out a bit. Everyone's trying to hang out to cash a little bit longer. Is that are you seeing that and is that playing at all into your cash flow guidance?

Speaker 4

Yes. Thanks, Steve. The answer is no, we're not seeing that. I mean, we look at our receivables balances very closely in Our DSOs, they're staying around 60, 61 days and that's been consistent over the last several years. So we are not seeing those stretch out.

Speaker 9

Okay, perfect. Thank you. And then in terms of your margin targets, for at least for end of year, to What are the variables that may affect that? It sounds like you've gotten the pricing in pet care. Certainly, we've heard that It's getting harder to get more pricing on the consumer side.

Speaker 9

And I know you have some contractual resets. What's the variables that will Could affect you get exceeding or missing the year end targets at this point for the most likely variables?

Speaker 4

Well, I would say, in terms of the things that are within our control, we feel confident we've got everything in place to get there. To I would say that, again, if you look at our bridges for the Q2, the volume impact, to The variations we saw on some of the end market volumes in the Q2, if you just do the math on that, that's 190 basis points of margin That we offset in the Q2. So once those end markets that we spoke about start to come back, That's the biggest upside, I would say, to our margins, getting that volume leverage back on some of the softness that we saw in the 2nd quarter.

Speaker 3

Yes, I'd say some of that like our assumptions around the Q4, some of our higher margin products, that destocking does not end. But even then, I think I do think that we're on track to hit those targets, Steve. It's a little hard to predict what will happen if to If the economy does fall off or something happens that could be a challenge. But right now we think we've got it in place. We've got a cost savings program and so to We've got some levers that we've pulled to make sure we get there.

Speaker 9

Perfect. Thanks. And just last one in terms of to Your expectations on timing on paying down the revolver, obviously, this quarter, you could see the year over year impact from interest expense. We had another rate hike. How quickly do you want to get that revolver down to get interest expense lower?

Speaker 4

As quickly as possible, Steve. The higher free cash flow in the second half is certainly going to help.

Speaker 9

Okay, perfect. Thanks, Eric. Thanks, Doug.

Speaker 3

Thank you.

Operator

Our next question comes from the line of Mike Harrison with Seaport Research Partners.

Speaker 6

Hi. Just one more for me. I didn't want to let you off the hook on the talc announcement. Just curious, it looks like as of the end of last quarter, you had 460 open cases. I know the new number will be in the queue when it comes out, but where is that number today?

Speaker 6

And I guess as you think about to You're looking at divestiture, but I believe your press release also used the term structural alternatives. So is it your intention to exit or dispose of that business in such a way that you do not end up with legal liabilities or any exposure to further litigation related to that business?

Speaker 3

Yes, that's correct, Mike. So I'll give you the number. Right now, the number you'll see in the queue is 501 cases. And I think That reflects kind of what we're talking about in terms of the increased kind of litigation environment that we're facing. So But yes, we're looking at a comprehensive solution for both assets and ensuring that the liabilities are dealt with efficiently and effectively.

Speaker 3

So right now, we started that process. We've made the announcement. We've looked at this. The business again is relatively small, under 3% of the company's sales. We're weighing that against kind of the ongoing cost to defend ourselves against what we see are meritless claims, to the ongoing litigation environment and have made the decision to exit the business.

Speaker 3

Putting the business up for sale, we're looking at various alternatives. But yes, it will be dealt with we're looking at Structural Solutions to deal with both assets and the liabilities of the business. So more to come on that and we'll certainly give you an update to as the program develops.

Speaker 6

All right. Thanks very much.

Speaker 3

Yes. Thank you,

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Key Takeaways

  • Solid Q2 performance: MTI delivered a 12% sequential increase in operating income to $71 million, expanded margins by 120 bps, and doubled cash from operations, despite mixed market demand.
  • Consumer & Specialty growth offset by destocking: Sales in the segment rose 3% y/y, led by pet care (+15%), bleaching earth (+13%), and animal health (+29%), but high-margin personal care volumes fell ~40% due to customer destocking.
  • Engineered Solutions mixed trends: Segment sales were 5% lower y/y but up 5% sequentially, driven by strong North America metalcasting & refractory demand and China foundry growth, offset by weak commercial construction and environmental lining projects.
  • $10 million cost savings program: MTI identified $10 million in annualized savings from organizational streamlining post-resegmentation, with $6.6 million of severance booked in Q2 and full run-rate savings by H1 2024.
  • Talc business exit: Barrett’s Minerals will divest its talc unit (0.2% of group EBITDA); ~501 talc claims exist, and MTI is pursuing a transaction structure addressing both assets and liabilities.
AI Generated. May Contain Errors.
Earnings Conference Call
Minerals Technologies Q2 2023
00:00 / 00:00