Q3 2019 Earnings Call
Today's call is being recorded.
I would like to turn the call over to Cindy Walter head of Investor Relations for minerals technologies. Please go ahead mr.
Thanks, Brad Good morning, everyone and welcome to our third quarter 2019 earnings Conference call today's call will be led by Chief Executive Officer, Dusty Chair and Chief.
Actual officer Mac car.
Doug and maps prepared remarks, well open it up the question.
I would like to remind you that beginning on page 14 over 2018 10-K, we left the various risk factor in condition that may affect or future results. I'd also point out the safe Harbor disclaimer on the fly statements related to.
Future performance by members of our teams are subject to these limitations cautionary remarks and conditions.
Now I'll turn the call over to Dot dot. Thanks, Cindy good morning, everyone.
Welcome to our third quarter earnings call.
[laughter] I'll begin today by providing high level commentary on our third quarter results, both positive areas as well.
The challenges we faced.
Well then go through the dynamics in our key end markets focusing on some of the areas that have changed since we last spoke.
Also like to give a brief update on the progress we're making on several strategic growth from.
Following that Matt will review our financials in more detail.
Take you through off.
Fourth quarter out.
Heading into the third quarter, we're prepared to navigate through weaker demand conditions in key end markets and geographies.
Our results reflect these persistent challenges, but they also underscore how we've managed through them by remaining disciplined and focused on strong execution.
By taking decisive measures with our restructuring program to adapt to the changing market demand.
Weve adjusted our operations to align to lower overall volumes by aggressively managing our variable and fixed costs and driving efficiencies across our processing and mining activities.
Our solid execution extended beyond our operational activities as we advance several strategic initiatives that support our long term growth I'll discuss these highlights more detail later in my remarks.
From a financial perspective.
Total sales in the quarter were $450 million, we generated $59 million.
Operating income.
Margins remained at second quarter levels.
Despite lower sales and a weaker product mix, a reflection of our operational adjustments and pricing actions to overcome cost pressures.
Our restructuring activities are progressing well and we're on track to achieve the full run rate savings.
Things of $12 million.
First quarter 2020.
Importantly through all of this for employees have remained focused on safety operational excellence and delivering the high level of quality and service that our customers expect [noise].
Continuing the trend from the second quarter.
Our third quarter sales were impacted by weaker conditions in a few markets most notably the global foundry market.
European Refractories and North American paper PCC.
The largest decrease came in our metal casting business, which was affected by softening demand from our global foundry customers serving the automotive.
Heavy trucks.
Agricultural equipment and off highway sectors.
Paper PCC sales were lower due to the port Hudson paper mill closure earlier this year.
Well, we mitigated some of this in fact through the ramp up of our new satellite plant in Indonesia, which helped to increase sales in Asia by 11%.
Additionally, our refractories business was affected by the weaker European steel market conditions that we've been experiencing for much of this year.
Offsetting these market driven sales declines we delivered encouraging sales growth across several other product lines.
Increased volumes through capacity expansions and capitalize.
Based on customer interest in our innovative technologies.
In pet care or sales momentum continues to be supported by attractive private label market fundamentals as well as customer pool for our newest products, including fragrance boosters.
Environmental products had another strong quarter most.
All of which was operating income and margins more than doubled over last year.
This demonstrates the success, we're having with our strategy to drive margin expansion through sales of our newest high value environmental products.
Specialty PCC had a solid quarter driven by demand for our latest rheology modifying ceiling.
Products supported by capacity expansions in the U.S. and the UK.
And our energy services segment remained on its positive trajectory with sales and operating income up significantly driven by sizable projects completed in the Gulf of Mexico.
Over the past several years, we've been expanding our.
Portfolio of technologies, and PCC to pursue growth in packaging applications.
Hi, like this quarter was a 40000 tonne agreement with the European customer to support their growth in a premium packaging applications.
It is one of many different opportunities, where we can apply our value added technology to the attractive packaging market.
Cash flow generation in the quarter was strong with $60 million of operating cash flow and $44 million of free cash flow.
We deployed this cash to both debt repayments and share repurchases.
Year to date cash from operations and free cash flow are up 20% and 40% respectively.
In addition last week, we announced a new 75 million dollar one your share repurchase program, continuing with our balanced approach and our commitment to returning capital to our shareholders.
We speak of operational Excellence office.
Our culture of continuous improvement is deeply embedded in our company.
Any and provides a strong operational foundation to ensure we are agile nimble and always looking to do things in the least waste way.
Underpinning this culture of tools, such as Kaizens standard work and our suggestion systems as well as the use of potion contrary to ensure clear.
All alignment with our strategies.
It was highly structured business system that enable it has this highly structured business system that enables us to continue to execute during challenging market conditions.
While at the same time staying focused on driving growth.
[noise] [noise] last quarter, we provided.
Our perspective on the dynamics and outlook for the markets we serve.
I thought it'd be helpful to go through this again and give you an update on what we're currently seeing.
On the whole market conditions, we experienced during the third quarter, where as we expected. When we spoke spoke last spoke with you. Although we're seeing a few areas where market demand has changed.
<unk>.
I'll start with performance materials, which is our bentonite based business.
Oh, and personal care and specialty products, which serves consumer oriented markets has remained strong.
As much of our growth coming from our pet care business.
In addition, the markets for our environmental products are robust.
The strong.
Line of upcoming projects as well as customer interest in our newer newest lining and remediation technologies.
One area that's changed in this segment is our metal casting business, where orders from our foundry customers in the U.S.
Primarily serving the automotive and heavy truck sectors. We can further during the third quarter.
Several of our customers reduced production shifts in the quarter to account for the lower demand they are seeing for cast parts.
We expect this lower demand will continue in the fourth quarter.
The positive side, our overall trying to foundry sales rebounded in September driven by penetration of our blended greensand bond products.
Turning to P. paper, PCC, well overall, North America, and European paper market operating rates remain relatively stable.
We experienced softer demand conditions in both markets during the quarter and see these dynamics lasting through the remainder of 2019.
However, with three new satellites and two expansions under.
Structure, and we expect to add over 260000 tons of additional capacity next year in Asia and Europe .
And in specialty PCC market conditions for our newest high performing products remain positive.
Moving to our refractories business steel market in North America is relatively strong.
Anticipate several furnace reliance on the fourth quarter, which will temporarily impact volumes.
Europe , However weeks steel market conditions have persisted all year and these conditions conditions will continue into the fourth quarter.
And then energy services the market for our offshore deepwater services are stable heading into the fourth quarter.
And we have improved and have improved considerably compared to last year.
We're well positioned in each offshore basin to capitalize on steady demand for our deepwater surfaces.
[noise] last quarter I laid out the broad range of opportunities in which we're investing for organic growth.
And this quarter we.
Made tangible progress advancing several of those opportunities.
I'd like to take you through some of those highlights and give you more color on the projects that will contribute to incremental sales growth next year.
We've outlined several times, how our metal casting business is a significant growth area for MTS.
Sales and large foundry markets in Asia, such as China, and India remain attractive for the penetration of our blended greensand bond formulations.
Our tailored blended products provide the quality and value foundries required to help them capitalize on the growing demand for more technical gray and ductile iron cast products.
This past quarter, we further extended our penetration in the China foundry market as volumes of our blended products were up 13% over last year.
Clear signal of the value they provide the foundry customers.
[noise] shifting to PCC.
We offer the world's premier technology portfolio with products that help our.
Mers increase a based philly levels and paper address environmental and recycling needs and provide technologies for their premium packaging applications.
And then specialty PCC, we offer the highest performing rheology additives for automotive and construction sealants.
This quarter, we made progress.
Against each of these four areas.
First we deployed our newest variation of fulfill called fulfill plus which is the most cost effective technology to increase filler levels and paper by up to 5%.
Second we ramped up our environmental deployment for a PCC customer, which addresses the important sustainability.
The challenge of paper recycling and de Inking.
Third we signed a contract for a premium packaging application in Europe .
Expanding the application of our technology into the growing packaging market.
Fourth our specialty PCC expansion has ramped up in the UK.
We plan to can complete the pack.
The expansion at our U.S. facility in the fourth quarter.
He's expansions of supported robust customer demand for construction and automotive sealants, leading to a 30% increase in sales for our newest rheology modifying products in the third quarter.
[noise] Asia continues to be an Underpenetrated region.
For paper PCC.
With areas of significant demand growth and we're capitalizing on those fundamentals by building new satellites and deploying our latest technologies.
We recently secured the permits to begin construction on our newest satellites in China, which will be our largest PCC plants when fully operational and 2020.
And in India, where our volumes are up 12% year to date, we're constructing two new satellites and finalizing an expansion, which will add 80000 tons of new capacity.
When these three plants and one expansion or operational Asia will represent our largest production region for paper PCC and it will also.
Be the region utilizing the broadest range of our technology portfolio.
I've visited several of our large paper customers in India during the past month.
That's very encouraging conversations regarding their interest in our latest technologies, including exploring opportunities to further deploy our innovative portfolio of high filler and.
Environmental solutions.
As I mentioned in the quarter recap our strategy to shift our environmental products business from base Geosynthetic clay liners to a portfolio of higher value solutions is delivering results.
And we're addressing more complex remediation project projects.
Highlighting this point sales of our higher margin advanced products, such as Resistex are up 40% year to date.
We have a strong pipeline of sizable projects contracted for the fourth quarter as well as the first quarter 2020.
Floors or.
Our newest product, which addresses PFS remediation.
Again, selling commercially in the third quarter and to date, we've conducted several positive trials with interested customers at a variety of remediation sites across the U.S. [noise].
And our household and personal care and specialty product line, our strategy is to grow and consumer oriented markets through investments in higher value solutions.
You speak often about the growth of our global pet care business.
We also have a broad portfolio of other high growth high margin specialty applications that serve consumer oriented markets, such as bleaching Earth for edible oil clarification and products for both the personal care and animal health markets.
We've invested in.
Oh, Gee manufacturing and sales capabilities in these areas over the past few years.
As an example sales from our new bleaching Earth facility in Turkey has increased 38% over last year.
These are attractive markets for the application of Bend Tonight, and we will continue to focus on accelerating the growth of these specialty products.
To wrap up my remarks, I'll end by saying that this past quarter was defined by strong execution on multiple fronts.
Not only do we take several actions to address our adjust our operations and costs to the current market environment, but we also made tangible progress on a wide range of strategic growth opportunities.
With that I'll hand, it over to Matt to review, our financials for the fourth quarter and the outlook. Thanks.
Thanks, Doug and Hello, everyone.
I'll review, our third quarter results the performance of our four segments and also provide you with our outlook for the fourth quarter.
[noise] third quarter sales were 3% lower than the prior.
Here.
The bridge at the top left shows the sales change by major driver.
Foreign exchange impacted sales by $3.8 million or one percentage point.
We drove price increases of $5.8 million in the quarter.
However, these increases were partially offset by $3.8 million lower.
Market based pricing, especially sands and resulted in a net price improvement of $2 million.
The biggest driver of the decrease in overall sales versus last year was unfavorable volume and mix primarily due to the continued market weakness in metal casting.
The European Refractories and north.
American paper PCC that Doug mentioned earlier.
Moving to the sales bridge by segment.
Woman's material sales were $12.2 million lower than last year.
Primarily due to the metal casting product bond.
Specialty minerals was $3.2 million lower on the previously announced paper machine shutdowns.
Sounds.
And lower processed minerals sales into the automotive and construction markets.
The factory sales were $5.7 million lower on continued weak steel market conditions in Europe , and some softening in the U.S.
And energy services sales grew $6.3 million.
On increasing filtration and well test activity levels in the Gulf of Mexico and internationally.
Operating income bridge shows that the primary driver of the change in operating income was $7.4 million, an unfavorable volume and mix.
Sales growth and environmental products take care.
Fair and energy services, partially offset reductions in metal casting and specialty minerals.
However, note that the growth in environmental products pet care and energy services is that a lower relative margin generating the unfavorable mix in the quarter.
Raw material costs increased two point.
$8 million in the quarter due to higher ore costs, primarily at our western U.S. mines.
Between mostly offset with pricing actions.
In addition, we experienced other cost increases of $1.5 million, primarily related to mark to market changes.
Operating margin was 13 point.
2% of sales same margin as a second quarter compared to 14.8% in the prior year.
Sequentially, we were able to maintain margins despite the weaker market conditions.
And on a year over year basis volume and mix at the largest impact combining for a 120 basis.
Didn't change.
Pricing actions to recover inflationary cost increases contributed 20 basis points of margin dilution.
Earnings per share excluding special items was one dollar and six cents and our reported earnings were one dollar an eight cents per share.
Special items in the quarter included a one time tax.
Tax benefit and legal expenses associated with ongoing litigation due to the 2016 bankruptcy of Novinda.
Our affect our effective tax rate was 19.3% and for the full year, you're expecting our LTR to be around 19%.
Now, let's review the segments in more detail starting.
Performance materials.
[noise] material sales were 6% lower than the prior year.
Primarily driven by market softness in metal casting due to weaker demand in automotive heavy truck and agricultural equipment, and the U.S. and parts of Asia.
There are two parts to our metal casting business.
Yes, Greensand bond and specialty sense.
Most of the decline and the metal casting product line was due to lower market based pricing and volume of specialty sense.
[noise] metal casting penetration continued in China, where green sand bond sales grew 6% and in Thailand, where sales grew.
9%.
Household personal care and specialty products decreased 3% as growth in our pet litter products was offset by lower sales and fabric care personal care and specialty products.
Note that as of this quarter, we're including basic minerals within our household personal care and specialty product line.
To better correlate with our product line management.
And our earnings release, we provided historical sales by product line for 2018, and 29 team based on this new structure.
Environmental product sales increased 3% driven by higher volumes of our Geosynthetic clay liners and specialty liners.
Leading our higher value resistex products.
Building material sales decreased 5%, primarily due to the lower north American construction activity.
Segment operating income was $26.9 million.
The reduction from the prior year was largely driven by $3.7 million of unfavorable volume.
And product mix.
Note that operating margin was up slightly from the second quarter, despite lower sales volumes and weaker mix driven by our operational adjustments in the period and continued pricing actions.
I look into the fourth quarter, you see a very similar market condition to that of the third quarter and we will experience.
The typical seasonal decline of 10% to 15% on operating income.
In addition.
We are facing some uncertainty and metal casting volumes regarding the extent of our foundry customers downtime during the fourth quarter holidays.
Let's move on to specialty minerals.
[noise].
[noise] sales for this segment were 2% lower than the prior year.
Paper PCC sales in Asia grew 11%.
Driven by the ramp up with a new satellite and capacity additions.
The growth in Asia was offset by 8% lower sales in North America, and 2% lower sales in Europe on a constant currency basis.
Specialty PCC products increased 5% due to volumes from our demand driven expansions.
Segment operating income was $21.7 million.
$2 million of the year over year change was driven by lower volume, including the paper mill shutdowns in North America, and lower paper PCC volumes.
In Europe .
The balance of the reduction was due to higher mining and operating costs, primarily in processed minerals.
Looking to the fourth quarter, we expect continued growth in Asia from our PCC expansion as well as continued growth in S.P.C.C.
You asked paper PCC volumes will be lower due to Don <unk>.
Cars recently announced the paper machine shutdowns and asked them.
This will impact our PCC volume by 30000 tons annually beginning in the fourth quarter.
The process minerals, we expect similar conditions sequentially apart from the impacts typical seasonality of 10% to 15% on.
Operating income.
And the shut Ashdown volumes.
Now, let's go to be factory second.
[noise] factories segment sales decreased 7%.
Primarily due to continued soft steel market conditions in Europe fewer laser equipment sales.
And lower U.S. volumes due to several.
Oxygen furnace reminds during the quarter.
Looking to the fourth quarter, we expect similar market conditions continued softness in Europe .
<unk> refractory sales in North America due to the blast oxygen furnace remind that will temporal are temporarily impact our volumes.
Overall for the segment.
Expect operating income to be similar to the third quarter.
Turning to energy services.
[noise] any direct energy services had another strong quarter.
Sales up 33%, an operating income up 43%.
Sales growth was driven by higher well testing.
And filtration activity in the Gulf of Mexico.
As well as increased demand for our services internationally.
We secured a large number projects in the quarter as our orchid led produced water strategy is gaining traction.
We are accelerating produced water opportunities in China and Brazil.
We expect this.
Strong performance to continue into the fourth quarter with operating income similar to the third quarter.
Now, let's take a look at our cash flow and liquidity in the quarter.
We generated $60 million of cash from operations in the quarter, bringing the year to date total to $159 million.
We have deployed $52 million of capital expenditures this year, resulting in free cash flow of $107 million up 39% from the prior year.
We used our free cash flow to repaid $32 million, a debt repurchase $11 million of shares in the quarter.
No for the last four quarters.
As we repaid over $100 million of debt.
Our total liquidity is strong with cash and equivalents of $215 million at the end of the third quarter and $200 million available on our revolving credit facility.
We will continue our balanced approach to capital deployment continue repaying debt to move toward our.
Targeting I love net leverage ratio of two times EBITDA.
So now let me summarize what we're seeing for the fourth quarter.
[laughter].
In the fourth quarter.
The majority of our product lines are tracking similar to the third quarter with continued growth in global pet care and ramp ups and PCC.
And S.P.C.C.
Who also experienced typical seasonality and building materials environmental products and processed minerals.
There are two exceptions to note.
First.
We will have lower U.S. paper PCC volumes due to Ashdown and second the uncertainty we have.
Turning to the extent of foundry customer holiday closures, which is hard to predict at this point.
From an EPS perspective, we expect fourth quarter EPS to be around 90 cents per share primarily reflecting the typical seasonality of our business.
We anticipate another quarter of strong cash flow generation.
The next.
Expects to deliver our target of around $150 million of free cash flow for the full year.
Now, let's turn it over to Cubana.
Thank you.
[laughter] question, placing all by pressing star one on your telephone keypad [noise].
We're using a speaker phone please make sure your mute function has turned off.
So a lot of your signal to reach our equipment.
And again press star wife to ask a question [noise].
We'll pause for just a moment, so I'll call it all parties and opportunity to signal for questions.
[laughter].
And our first question comes from Daniel Moore with CJS Securities.
Good morning, Doug Good morning, Matt Thanks for taking questions [noise].
Yeah.
Well just start with metal casting I'm, obviously lot of moving parts between the geographies, but.
The what's the current breakdown mix in terms of revenue between Asia, U.S. and rest of the world.
And I know, it's a crystal ball ish type question, but you know given that makes in the various moving parts, whom do you expect to get back to overall growth in that business.
Yeah, well I kicked it off and then I'll, let Jon Hastings talk little bit thought. It then our metal casting business right now is almost with the growth we've seen over.
Over the past five years in China, almost a 50 50, <unk> North America, and a and Asia.
You know our north American volumes are been impacted this year that they're down this year I think it's probably about 10%.
In total, but in Asia, our Greensand bond volumes as I mentioned are up 13% in the quarter. So I guess your question is when do you returned to growth.
I think we've been consistently growing and try and albeit at a slower rates than in the past, but the bigger volume and income impact because 100% of what we sell in North America's Greensand bond.
The blend of blended products and play in China, So, there's a different profitability mix and in China and Asia.
Asia, but right now, it's a little bit hard to call when North America will return to growth what we see at least as far as we can see right now in the fourth quarter things look similar to the third from market conditions and the automotive and have you strip heavy truck, though were bit cautious as Matt mentioned that we might see some extended outages around the end of the year and that's why I think we're giving you a.
Little bit of a variation at least as far as we can see in the fourth quarter going into next year can be really hard to call in terms of what automotive is gonna do heavy truck I think we'll give you an update on that on our next call, but I give you some feel John anything you want to add to that.
Dan appreciate the question and Doug I can elaborate a little bit if you'd like.
First of all as you know Dan earlier in the year North America was quite robust China demand it slowed around the the Chinese new year Southeast Asia was picking up some of the demand from China, but since then what we've seen as some changes in those markets and you know several the industrial.
Sectors have softened as the non dug in Iowa and.
And we've seen a predominantly in automotive, but we've seen some of the other sectors. Some you know come off a bit as well.
Automotive of course is affecting many of our primary markets U.S., China, Japan, India.
Most of those markets worldwide.
We highlighted the especially since you know we've been caught encountered a couple new competitors because the pricing went pretty high in previous years on that's caused unfortunately, an oversupply in that market and you know caused some of the declining prices and that's what kinda came off and especially since.
Against that back.
Drop a we continue to you know to work with our customers I'm as Doug mentioned in China in Thailand, you know our customers continued to demand a high end products that we that we're providing so or or conversion strategy to the blended products continues to to work.
And we.
We continue to stay in touch with all other foundries worldwide all of our customers and so there's a lot of uncertainty.
Some customers are saying, we're in a down market for you know the next month or two or three others are saying, it's relatively flat and so it's hard to read and like I say you know the major were right now that we're using is it.
It's highly uncertain, we'll see how the whole these play out and what demand comes in as far as a fourth quarter <unk> and into the first.
Hope that helps hope that gives you some coal.
That's great color I I, just couldn't pull on that string a little bit more in terms of North America specialty fans.
Can you give us a sense for whether it was more price versus volume.
And in your experience when demand comes back just pricing tend to snap back relatively quickly.
[noise], Yeah, North America, and also trying to the mass the vast majority of the especially sands, we softness was in China, We do sell into North America, We do have some specially sands and yes, you're right.
Its proof predominantly a pricing, but we've also seen volume come off you know based on the demand.
Pricing does it is pretty voltyre. It can go up fairly quickly and it can go down very quickly on the right now, it's it's pretty low as the market tightens up in the industry comes back.
We expect that digital modulate some how fast a it's hard to predict.
Very helpful. Another <unk> Yeah go ahead I'm sorry.
No sorry that I was just gonna say I'd want to confuse things, but as Matt mentioned in his comments that and metal casting has two pieces that greensand bond piece, which we talk often about terms of penetration to that blended product.
In the specialty sands, which goes into stainless steel casting and John mentioned, primarily China. The biggest piece I think our greensand bond volumes in the quarter off about 1.5%. It was north America offset by that 13% growth in China. So it's it's it's kind of hanging in there that growth in China is offsetting so if you take that he's relatively stable and growing.
Continuing to grow in China. The biggest impact this quarter was the specialty sense piece and that was in China, largely due to pricing at the outsize impact on the sales declined.
Very helpful. And then switching to PCC continue to win new satellites, you've got nice volumes coming in next year.
The hole in the bucket in North America continues.
If when we kind of feel like we're at [noise].
Hi levels of capacity utilization overall volumes keep coming down with the gotten tar announcement. So I guess, what does your crystal ball tell you for 2020 and post as Dom Tarred, we feel like we're at a new sort of base level in North America in terms.
The capacity I know, it's hard to say, but it does have implications for overall growth given all that new volume coming up.
Yeah, I can well it is it's to the challenge that we've been in this business for many years. So we're we're used to it we overtime or sometimes as you know, it's hard to predict which.
Mill will close but with a with the decline of paper to 3% kind of on average over the past 10 years in North American Europe , we tend to see a mill come out.
We usually try to predict which one that might be but we're not always successful. We did not expect that port Hudson mill and in the earlier in the year to come out that said Oh, we.
We have been a very successful in securing new contracts in areas, where we see that opportunity to be and that is the underpenetration filler in paper in Asia, primarily China and India. So the net net of all this we lost about 100000 tons. This year, but we're adding about 100000 tons.
In Indonesia this year.
Next year, we don't really see we'll still see kind of the annualization of what's happening about 30000 tons of domtar, we're going to see on an annual basis, starting this quarter.
But we have a two new satellites in India ramping up in the first quarter to offset that 30000 tons.
Later in the year we've.
Got to two new satellites coming on a one in China, which I mentioned, we just secured the permits so were built beginning that construction should be ready in the beginning in the fourth quarter next year and another one with century paper in India for another 40000 tons. The net net of that is 200000 tons coming on next year. So give you a bunch of numbers.
Well, we see right now given all of those downs Unops is about a three 3% to 4% volume growth in PCC next year. That's what it currently looks like highly dependent on if we see any other closures and if those things come up on time, which they should but right now that's the crystal ball, we have Dan is about 3% to 4% volume growth with.
All that we're bringing on next year and the Annualization of what we just heard dumped.
Very good lastly from me keep obviously continue to manage costs, a very let's see acutely.
The annualized cost savings how much of that do you expect to to generating Q.
For before we hit to sort of that full.
12 million annualized run rate in Q1, thank you.
Yeah, Dan so from an overall restructuring perspective that we took earlier this year remember we told you that we would achieve about a $12 million run rate beginning in 2020, we've now so that that's going to be in.
First quarter of 2020, and if you remember there's there's really two components to that there's the headcount adjustments that are now largely complete those are part of the ramp up of those savings that are taking place now getting to that higher annualized rate and the fixed cost reduction that was part of that program, which was already complete so right now.
If you look at the annualized rate that we hadn't <unk> third quarter that was about $7 million translates to about a million and a half plus here in the third quarter on a year over year basis, So you're going to see a nice ramp up going through the fourth quarter into the first.
Very good thank you [noise].
Thank you.
Next question comes from Jeff.
Oh Skus with JP Morgan.
Hi, Good morning, it's okay, Jeff how are Ya.
Hi sort of asphalt.
I Wonder if you like investigating P. question when my time.
Could you quantify how much of the to start up in that beginning of the.
Yeah.
<unk>, yeah, we'd be in terms of like five [noise].
Sure.
So we have a new small satellite X. I don't think we announced this one silica.
It's about 15000 tonne satellite with the paper maker in India coming online probably at the end of the first.
First quarter.
We've got an expansion.
With the current customer in India that should come online early in the first quarter for about 25000 tons. So that's between those two in India in the first quarter about 40000 tons.
Okay.
Later in the year, we have two satellites another.
One in India.
And a large one in China.
Oh, the one in India is another 40000 tons, that's about Q3 should or should start up.
And the one in China for 160000 tons, probably the beginning of Q4 again, we just secured the permits it'll probably take us year to build it.
And that's 160, so about 200000 tons coming online around Q4 next year 40000 tons in Q1, that's the but that's the 200000 tons. The last one that I mentioned is the new contract or with a papermaker a customer sorry in Europe .
Around Oh, our packaging application right now that's looking.
Like probably part of that will come online in the third quarter and right now it's looking like 30 of those thousand tons will be the end of the fourth quarter right. Now it's really early on we just signed the contract. So that's probably a fourth quarter and to your type or type of ramp up.
There's about 240000.
Tons next year.
Okay.
And so tucked away. So I guess is that if you really have lot of volume quality <unk> all calm in the second half of the because to me Tom talked closure headwind will it be set us up offset the plants coming on in India, and then if everything starts off on time and.
Maybe you have like a volume.
And then maybe you have like a really think foursquare next year that the weighted it sounds like the right way [laughter].
Yeah from a capacity standpoint, that's when it's coming online in those those should be the volumes that said, we've seen some solid demand growth I'm trying to so far has been about flat.
In volumes in North American Europe , again continued to be lower but in India. We saw a 12% volume growth. So there is some base volume growth.
In our in our system. So you'll have to add some of that too. It right now Ah Ah you know India was I think we've got seven disappear seventh satellite in India.
A in the past seven satellites in India in the past 10 years.
Just looking at DJ saying, our first contract a.
Coming to renewal, which is hard to believe how fast time flies, but we've really built up a nice position in India.
That's helpful and.
Pricing in the offshore reaching [laughter], yet if you offset.
If you were able to I've said, all the lost U.S. PON.
Oh, Yeah in Asia, [laughter] seeing incremental sales gross or was the Noah cost.
You have like no price component in there that's close to <unk> snow white in a three to four buckets that you anticipate.
The way way we.
Like to look at it is the EBITDA margins on each of those tons. The percentage EBITDA is the same.
Yes.
The amount of EBITDA up because they're lower capital cost in Asia, and lower price points because of kind of the conversion of our raw materials are lower so it does take more tons in Asia to offset a ton in your.
Yup or a ton and.
North America.
That is the case, however, I want it also highlight though that it's not just about tons and paper and filler in paper, yes, we have the best technology, we feel in terms of filling paper, but we also have well where they're on 60 different satellites.
We have opportunities I don't want you to forget about increasing ours, our margins in revenues with things like our new high filler technologies, which we've just launched to fill plus where deploying into we have opportunities in packaging, which can be higher margin opportunities and also some of our environmental like a environmental.
In new yield and those are also a number of opportunity. So as we not only just in paper in paper tons in and out. It's also these new technologies that were executing on that should help the growth in that segment also the profitability in that segment.
That's helpful. But my second question is on its on yeah.
Thank you Dan decline so [noise].
[laughter] T cells like 3%, Noah yoga, yeah, and yesterday costs caused us to talk off.
Year over year, why why is that what you know when we had where do we see the cost savings coming through.
Well, a if you break it down so can remember the cost savings are gonna be across all components of the piano right. So you have some in the call time, you have something yesterday line, but what we've told you is our restructuring was largely focused at redundancies on on some of our.
Shared service organization as well as throughout operations. We at the time told you as well that we were keeping the salesforce in place as well as our R&D capability in place when you book on a year over year basis, you're actually seeing a few things take place.
One the mark to market impacts this quarter.
Quarter versus what you've seen previously year around compensation equity compensation deferred equity compensation I should say I was fairly significant and that's the main driver on that line here sequentially and on a year over year basis. The normal SG now that you're gonna see from us in that 50 51 range.
[noise].
So can I add just a little bit to that one sequentially expenses are down so you're starting to see the you'll see the restructuring save that mark to market that matches pension so you're starting to see those savings come through and yes. Some of those savings are in the Cogs line the R&D.
R&D is generally flat we've I think this.
After we had some more spending on trials and those trials were primarily in paper PCC. So you will see from time to time, some spikes in that R&D as we go through different trials with so with our environmental products business as I mentioned in paper PCC that will you know kind of spike it in any given quarter, but on gen. In general we are.
R&D is kind of flat so I think what you're looking at as a some trial activity in R&D, a and some mark to market, but it's not a structural thing I think you're seeing you'll start to see those costs come out of that assist you in a lot.
And.
Lastly, I was wondering whether you can I'm just give me that DNA number on a distant quite happy with Mike.
[noise] DNA and the third quarter was $24.7 million.
Mm.
Oh and good run rate.
No I was about the say, it's probably a good run rate I mean, if if you think about itself or the way that capex has been layered in through this year.
You know remember we told you it was gonna be in that $70 million to $80 million range right.
Now did 52 threw out a the first three quarters, you just bifurcate that across the three quarters, probably books similar in the in the fourth quarter. The big difference between that mid Sixtys in the 70 to 80 that we had been talking about is really the the a the delay the federal in that 10 main project, which is now going to start to be spent on.
So continuing to lay out a capital for good projects, both a sustaining and growth and really just a a bit of a change here in terms of timing around <unk>.
Thank you well take our next question from Rosemarie Morbelli with GE research.
Good morning, everyone and thank you I apologize I got on the call later late so I apologize if you already discussed it [laughter] [noise] when you look I'd.
The environment are you seeing.
Any sign sway that it is that while it may not being the NIM, but said that Keith anecdotally.
Showing that there maybe some pickup in some of your end markets you don't mind going to you know the company as though I mean, he sees something company.
Yeah, I think there are some very you know I tried to highlight those and Mike.
Comments Rosemary Yeah. So tell me if they have tonnage I Oh, that's like I, sorry, a there's no doubt looking dust industrial activity and our and our markets again, North America, Europe and Asia.
Has been lower we do have a lot of number of product lines that serve the.
Motive kind of off highway heavy truck markets and so as we've seen a you know build rates declined about two and a have 3% North America, we've seen a 12% decline in automotive in China, and we've seen even a much steeper declines in India to a lesser extent on us impact on us those.
Really impacted across across some of the board some of our tell products that go into plastics.
Or some of our base sealing products, although the new ones are are growing and certainly in our foundry market. However on the other side of the ledger would be a we see very good markets and many of our consumer oriented products like pet care.
Scares continued to grow at <unk> at a good consumer oriented pace around 4% a quarter over quarter, a very steady pace, we're starting to see some of our newer kinda near tangential projects of products like our fragrance boosters seeing really good take rates that our customers off the shelf on those so.
We've got some really nice products and it really good fundamentals in that pet care market and I tried to highlight that environmental products business as well, we've been moving that business through R&D and trial activity to two higher value solutions real solutions for different remediation products a.
<unk> other than based landfills municipal landfills and we've been successful with that and we've we've increased those kind of a those higher margin products by almost 40% this quarter and we see the trajectory of those continuing through the fourth and into next year, So our environmental products business, our pet care.
Business, though it may not you know we talk a lot about paper, we're really bullish on our paper markets as well with a you know a net 250000 tons coming on next year and the signing of contracts associated with our newest technologies. We've been working on these for years, but packaging and environmental products, our new fulfill products and.
Satellites were pretty positive on the growth in that business as well, yes, we do have our challenges in North America in Europe with paper consumption, we've always say stuff.
We've been focusing on broadening our portfolio and I think we're trying to show you that were successful there. So we will make you know work through the kind of the industrial I guess.
Planning out that we're currently seeing a it's hard to see whether it's going to continue to go a little lower in automotive Europe is a it's been a challenge for us as well as others are primarily for us in steel.
But we feel that with our energy services business pet care environmental products and even construction has been.
Relatively positive there's some good good areas of growth for us.
In the business. So we're going to maintain our focus on you know keeping costs in control for that industrial Park, but we're gonna continued also focus on making sure we capture the growth available and those growing markets.
Thank you Dan can some companies have.
Okay, and seeing some slight teakamp in China at least.
So, let's say decline are you seeing it at all.
[noise], we're not not seeing a large pick up I will say that are greensand bonds, our metal casting business in September .
Picked up.
Albeit from a pretty pretty low point throughout the ended the second beginning of the third so we've seen some signs of pick up I think that's largely due to some increase <unk> build rates and automotive in China I'm not going to go too far to say that that's a trend as of yet, but we did see some pickup and in.
In the automotive in our foundry business.
Okay, and then personal care if that affected most t. buys that okay issue Oh the out of that.
Other lesions that slowed down I was just stuff nothing that that you cannot be it's nice.
No no the personal care as a bentonite based Ben.
Tonight, it's in our performance materials business [noise]. These are additives are small business, but they're additives for realogy modifying for Sun creams. They bentonite base, so that have a delayed release action and kind of over the counter type type products.
Small business and I think probably the decline in personal care was due to some timing of some projects.
Nothing structural but that's a kind of one of our bentonite based business and just from a because you mentioned talk there I don't make sure you know we didn't we didn't we don't we don't we don't have personal care products and that cars house or cells. So you're not really looking at.
Those two things like Doug said personal care for US is on on the Black Knight's out.
Okay. So the fact that some especially those that is being found the itself can contain it I mean town container would not affect yeah Yorktown calculations.
No so good where.
We do not yeah, we did not sell into or just to Johnson and Johnson and end up.
Body powder has been a very small piece of our business historically, so no that doesn't affect us.
Okay, Thanks, and looking at PTC, you'll have a love teach volume coming up and.
Di di properly.
He said, yeah, I cant volume up 3% to 2020, that's just 29 team what is the pricing on that I noted that it will take more you know that usually call because they dollar amount you because of your lowest cost.
Are you maintaining pricing on all of those on all of those Ah.
Yes.
[noise], yeah, the the absolute price points, a little bit lower for those newer tons.
Because the the cost of points input cost to our customers are lower a we can buy lime less expensive Lee in Asia, then weekend in Europe , so to speak and so the relative.
Points are a little bit lower but from a return profile us Oh, Rosemary as we invest capital into a satellite the return profile of that project in China is the same as that return profile from a cash standpoint is one in North America, or Europe or Latin America.
So yes from that aspect we are.
Okay, and then looking.
At the recent <unk> mail shut down in the in the U.S. yet is it a permanent shutdown is they don't need temporary can you tell all 80 protection going to be moved into another now.
Now, let me DJ so yeah Rosemary itself.
Tom car announced that they would be.
Changing the grades at that machine makes from uncoated freesheet paper to a fluff pulp. So we would view that machine being down permanently and it'll be a a permanent reduction of the uncoated freesheet made in North America.
And you can move signs the satellite.
I think we plan to into one up so you satellites you have anything behind that.
So rosemarie. This particular this particular shutdown is affecting one machine there still other machines that operate and so we'll continue to keep that particular satellite open service that customer.
I'm that satellite it does create an opportunity to pick up some small volumes a that on the periphery of that satellite, but but no. We look this particular satellite we will not be removing or shutting down it'll it'll continue due to supply the customer at that location.
Okay. Thank you.
One thing we have seen a dynamic this year I know when we announced the port Hudson closure, we thought that that would set that paper would be moved through the North America.
For making system well, we actually saw this year is that that production was consumed by imports no mostly from Europe , which is where we have satellites I'll tell you that.
And we'll probably expect the same thing to happen to this this paper from dumped art.
Hi, Thank you very much.
Thank you we'll take our next question from David Silver with the C.L. King.
Yeah, Hi, Thank you [noise].
I have.
Three three points I'd like to touch on.
First one maybe a clarification, but the news specialty PCC unit.
In Europe that you discussed that several points here.
Am I correct in assuming that that's not a satellite plan.
And when [noise].
If you just provide is tiny bit more color on the benefits or the qualities that the PTC is gonna be used for another words is it replacing fiber is replacing pigment fill or some combination as it is a net new do improve the care.
Doctors six at the end product just a little more color on that specialty PVC large specialty PCC project. Thank you.
It would be my pleasure to do that so.
First off this up.
This PCC and this this new agreement that we have is actually.
Going to end up being an expansion of an existing satellite so it's an existing customer.
That we have a the arrangement with therefore our.
In terms conditions in general pricing is very consistent with what we have in Europe . They the application is new and a.
Somewhat a unique stayed the grade that it's going into that the industry will recognize as somebody called White top line or I'd say, it's a premium grade in the linerboard a industry and end the best way to imagine that is a brown a on the a box. It is brown on the inside and white on the outside.
My kids recognize it mostly as a pizza box. So that's that's the application that its n.. We what we do is PCC is well positioned to bring.
Unique value into that application by providing better coverage. So so think of sprinkling not that white fiber on.
On top of that Brown fiber the opacity, the brightness that PCC delivers allows them to use less of that expensive fiber to still get a premium product. So so that's the application to it I would say that.
It's not how the only place where where we're trying this out we've got some.
What I would call advanced trials are in with other locations, making similar grades and then Doug was also mentioning it in general about our pursuit into packaging. That's that's we're not just targeting that that Oh that premium grade, we've got a trials going on and various.
Stages around the world a that include applying our or New York technology into packaging grades and then we also had some coating PCC that are going on very high and packaging grades. So so this particular announcement a is in Europe think of it as an extension.
Mention off a critical customer by the way that is a new machine going in there. So its net growth to the industry and then we've got a several more opportunities in the pipeline.
Hey, David can I ask you a quick question, where you were you there's two things going on in Europe . You you said specialty PCC and then you talked about a contracts I just want to be clear.
Theres two things going on in Europe , one is a contract packaging application that TJ just went through.
The specialty PCC in the UK is an expansion of our facility that facility is when we say specialty PCC, it's everything that's not a per.
Goes into construction.
Yes, it goes into calcium fortification it goes into automotive sealants number of different applications. Its usually sub micron size like call. It nano size P.C.C. that is a very very specific application I talk about reality, but that's an expansion in the UK for the ceiling.
At market automotive seal Mark that L.
Oh no. Thank you for that I'm Gonna have to review you know your comment just the I. It's a lot of static on my lines I may have mix. There's two upside was mostly targeting the 40000 on expansion that's got to leave was not.
To rise doesn't sound like Oh.
Okay.
Thank you for that.
Yeah. So the second question would maybe be for Matt.
And.
No I noted this quarter very good cash generation and a lot of the a free cash was directed toward you know.
Debt reduction.
What someone directed towards share buyback and I was just curious because.
I think a long term goal of yours has been to get your net debt to EBITDA. The a two to 2.0.
And I I don't know you know my models not.
Not nearly as precise as yours, but I thought that the $11 million differing the $11 million on share buybacks, probably made the difference between you hitting that 2.0 metric. This quarter, you know versus maybe not hitting its next quarter and I don't know to me that's a big round numbers.
Maybe the rating agencies or somebody on the board is tracking so could you maybe just just comment the comment on you know whether you did hit the 2.0, a metric already and now you've got incremental financial flexibility made maybe just if you could just discuss that the issue.
Sure and David the let's talk about it from a what we've been communicating over the past.
Couple of years and beyond that is that we have a very balanced approach to how we deploy capital.
Obviously, the first priority is to fund a good growth opportunities within the company and when we look at free.
Cash flow, we look at a balance of debt Paydown returns to shareholders and then a acquisitions and so over the past couple of years, you've seen us deploy a in a fairly balanced away across those three physicals, if I put it into the perspective of what happened in the third quarter just.
Just like you said, we paid down $32 million, if that we repurchased $11 million in shares.
As you are thinking about what that means for a go forward perspective, we are very opportunistic when we see a attractive valuations in our share price.
And that's what we have been seen and that's obviously driving the share repurchases and that will continue as we can find ways to deploy our cash opportunistically into those share repurchases from a net leverage perspective.
We're sitting at 2.2 times, a that would tell you.
That we are in the area of about $60 million to $70 million from that two times that leverage target. We will continue to deploy capital on a balanced way or debt repayment share repurchases are finding a acquisition acquisition opportunities on our way to getting down to that two times net leverage.
Okay.
Okay interesting alright, and then last point and I'll preface my remarks by saying I know I'm going to ask you something that you're probably not going to be able to answer directly but.
One of your major competitors has recently hit a.
The major speed bump.
And there's been management changes, there's signals of <unk> of a ratings downgrade access to credit ratings downgrade et cetera.
And you know from your perspective, maybe with this company and maybe in your prior post things with Alcoa or Arconic.
What I'd be incorrect or what I'd be correct in assuming that some of the your competitors customers may come knocking at your door looking to diversify their sources of supply.
And if so if that is the case I mean do you have to spare capacity.
Do you have the I don't know capability to surge, let's say in response to win new business opportunity in the areas, where you you overlap with that competitor.
Okay. Let me I will first I'm Gonna say I'm, you're right I'm not going to answer part of your question I'm not gonna.
Dress I'm not going to dress you know issues that are customers. There are competitors et cetera, or what are what I will give you David is that we see.
No regardless of that we compete the same way.
We do overlap I think I know you're talking about we do overlap in some of those and same end markets.
The number of different competitors, but we're in different regions and you know when there if somebody's hitting a speed bump I don't think that that necessarily creates or takes away the opportunities for us we compete for the customers based on the value. We have based on what we deal deal. We feel we can deliver to that customer in terms of.
Have a product and so you know we look at that opportunities out in the market with customers and the ones. We overlapping the ones. We don't the same way. So you know we see opportunities around the world for our products were pretty razor laser focused on what those are and we're going after him I'm not going to necessarily comment on.
Issues that are other competitors might have set helps.
Okay. So it just the in.
And just to wrap up I didn't mean in your opinion.
The competitive dynamic in the global industry in a particular areas where you might.
Overlap with that that other competitor has not significantly changed in the last month or so.
Hi look like I said I think you know we operate in similar markets to a number of our competitors I think our positioning is different from them. We we're we're in North America.
So the dynamics that might be occurring elsewhere in the world, where they have larger positions than where we do in North America. The dynamics are not one to one we're competing for similar customers and we're going to continue to compete to for those customers like we normally do so I'll get it.
Okay. Thanks very much appreciate it.
Thank you and at this time I'd like to turn the conference back to Miss Buck Walter for any closing remarks.
Thanks, Brad Thanks, everyone for joining us today.
And again very thin okay.
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