Q2 2020 Minerals Technologies Inc Earnings Call
Please standby were about to begin.
Good day, everyone and welcome to the second quarter 2020 minerals technologies earnings call. Today's call is being recorded I know at this time I'd like to turn the call over to Eric Aldag head of Investor Relations for minerals technologies. Please go ahead.
Thanks April.
Good morning, everyone and welcome to our second quarter 2020 earnings Conference call.
Today's call will be led by Chief Executive Officer, Dr., <unk>, Chief Financial Officer NASCAR.
Following our prepared remarks.
Question.
I'd like to remind you that beginning on page 14 of our 2019 cents.
The various risk factors and condition that may affect our future results.
I'd also point out the safe Harbor disclaimer on this slide.
Statements related to future performance by members of our team are subject to cities limitation cautionary remarks and conditions.
I'll now turn call over to John.
Okay.
Thanks for the introduction, Eric and good morning, everyone.
We appreciate you taking the time to joined our call. This morning, and ER and I Hope that you in your families have remained healthy and safe.
Similar to last quarter's call it will be conducting this one from different locations.
With all of our business leaders on and ready to answer your questions up yet.
Like the starts like thanking our employees for their continued efforts starting very difficult circumstances.
Second quarter results reflect our teams agility.
Quickly adapt to changing work environment and dedication to continue to operate safely.
Both of which underscore the power of our culture and the resiliency of our company.
No one the structure of today's call.
First I'll give an update on the measures we've taken to protect our employees and to safely operate our facilities.
Well, then provide all high level overview of our second quarter performance.
Matt will follow with more detail, what our financial results.
Our July sales trends by business unit.
I'll conclude with commentary on our end market conditions, and how we're positioning MTR to not only navigate through current dynamics.
Also to capitalize on opportunities to make our company even stronger.
Consistent with our core values.
Olson safety, our employees is and continues to be our top priority because we confront the near term challenges presented by Copel 19.
On a previous earnings call I.
Hi, outlines a series of rigorous protocols, we implemented early on all of our global facilities.
These procedures have helped to mitigate the risks associated with the pandemic and ensure safe and stable operations.
We also continued to implement a remote working environment wherever possible and I couldn't be more pleased with our global business services I T and technical service teams, who continue to perform at a very high level.
In addition, we've seen minimal disruptions to our supply chain and ability to serve our customers.
We recognize that the risks related to the virus are still ongoing and present in many of the regions in which we operate.
As of today all of our manufacturing facilities are operational.
As these conditions persist.
Confident that we have the right measures in place to continue to protect our employees safely operate our facilities and meet the needs of our customers.
With that let me take you through our second quarter unfolded.
As we previewed on our call and May 1st.
We faced a significant amount of uncertainty through the core.
You had limited visibility to customer orders and demand levels, which were constantly changing.
We managed through temporary government restrictions and customer shutdowns.
We're quickly making changes and met maneuvering through the issues, we faced during the quarter.
Our results reflect our ability to navigate through these dynamics.
All remaining focused on the safety of our employees and operations.
Specifically, we delivered a solid operating performance characterized by double digit operating margins and strong cash flow generation.
We also took steps to better position M.T.I. as we move forward.
Included in capturing efficiencies in our fixed cost structure.
Strengthening our balance sheet to improve liquidity and support a strategic initiatives and taking advantage of new market opportunities with customers.
From a financial perspective total sales in the quarter were $357 million down about 14% sequentially.
In April sales were down about 10% sequentially. They we can further in bay before we're starting to improve modestly in June as government restrictions eased and customer order pattern strengthened.
We generated $42 million of operating income and earnings per share were 85 cents.
In addition, we delivered $64 million in cash from operations, which was a similar amount to the prior year.
Results from our diverse portfolio of consumer and industrial related businesses mirror the current after macroeconomic environment.
Consumer oriented businesses, including household and personal care.
Pharmacy materials, and food and pharmaceutical applications and specialty minerals remain strong and delivered healthy year over year sales growth.
He saw sharp uptick in demand for many of these products at the end of the first quarter.
Strong sales momentum extended through the second quarter as order books remains full in both North America and Europe.
Our overall consumer oriented portfolio.
This represents approximately 25% of MKS total sales.
Our businesses, which we've been investing and over the past few years. This past quarter demonstrated the benefit of our strategy to grow these less cyclical businesses.
As we anticipated our businesses that serve industrial markets, including transportation steel construction of paper were more impacted by cobot My team related production curtailments and shutdowns.
Customer demand in these markets dropped quickly in the first two months of the quarter.
Then experienced a slight upward trend in order patterns as we move through June.
These customer slowdowns.
Most prominent in our end markets in North America in Europe.
Our strong positions in China enabled us to capitalize on the economic recovery there.
We delivered year over year sales growth of 9% in China.
Led by the continued penetration of our Greensand bond and paper PCC products.
'cause it touched on briefly we mitigated the impact of volume challenges in several businesses with variable cost adjustments can structural overhead savings.
We also maintained but pricing improvements that we've implemented over the past several quarters.
And we're taking advantage of more favorable raw material costs.
These actions helped us to deliver relatively strong margins despite significant sales declines in the core.
The structural in nature of these actions position us to generate strong leverage increased sales as markets recover and will expand margins further.
We made significant progress on our growth and business development activities.
New PCC contracts and the commercialization of several new products.
We signed two satellite PCC contracts in the quarter.
The first was for a 42000 ton plant in India, which will come online in the second quarter of 2021.
And we'll be our eight satellite there.
Yeah, there was an agreement to restart and operate at 35000 ton plant.
Which had previously been idled at our with cliffs, Kentucky location, and we've already begun to supply this customer from an offsite location.
We also continue to focus on improving the pace and impact of our new product development with 24, new products commercialized so far 2020.
Despite the current market environment. This pace is similar to the prior year.
Many of these products such as variations of our Greensand bond formulations for foundry customers.
And new building and construction waterproofing systems are enhancements to existing products that generate more value to customers current applications.
Other solutions, including several personal care formulations and PCC for packaging applications have helped us enter into adjacent sees with customers.
In an economic environments, such as this generating combined continued strong operating cash flow and improving our liquidity profile is a top priority.
Our experienced management team has acted quickly through disciplined execution and tight control of our cash generation cycle.
In addition.
Capitalize on attractive credit market conditions like completing a 400 million dollar offering of senior unsecured notes.
This strengthens our balance sheet by extending our debt maturities and increasing our total available liquidity over six I didn't $75 billion.
Well the economic backdrop backdrop continues to evolve.
The results, we achieved this past quarter under challenging conditions underscore the agility of our team the resiliency of our combined market, leading positions and the strength of our financial Foundation.
Before turning it over the maps to discuss our second quarter results in more detail.
I'd like to highlight the recent publication of our latest sustainability report.
And <unk> as a longstanding commitment to sustainability in the broader sense.
And we've been focused on continuing to embed sustainability practices into our business strategy and goals.
Sustainability is core to who we are how we operate and drives our actions on a daily basis.
This years report detailed our progress toward our 2025 environmental targets along with improvements made around our safety culture.
New product development.
Social impact in employee engagement.
Diversity and inclusion and community outreach.
I encourage you to review the report which is available on our website as it highlights in recognizes the efforts and achievements of our 3600 employees.
Now I'll turn it over to that not.
Thank you Doug.
View, our second quarter results performance of our four segments as well as our liquidity and debt position.
Well, then turn the call back over to Doug's through some additional perspective on our current operating environment and visibility we have going filler.
Now, let's review the second quarter results.
Similar to the French quarter, representing year over year comparisons of sales and operating income on the left side and the sequential quarter comparisons on the right side of the slot.
Given the rapidly changing market conditions, you do need good sequential view highlights the market challenges we faced.
I really do rapidly mobilize to capture improvements.
Second quarter sales were 30, fives started $357.2 million, 21% lower than the prior year on a constant currency basis.
So down an economic activity brought on by the Cobot Nike pandemic impacted their volumes significantly in the quarter.
The year over year operating income bridge on the bottom left shows we were able to offset the impact of lower sales looks favorable pricing and cost performance driven by the actions we got taken over the last year.
Moving to the Rightside inside sales were lower by 13% sequentially on a constant currency basis as we experienced the impact it could've been made p. related customer shutdowns several product lines.
On our last call.
He told you that sales Maple, we're trying to approximately 10% lower than the first <unk>.
As we progressed through the second quarter.
Further deterioration of bombings and may across several of our end markets and geographies with China being the notable exception.
In June.
Get started turnarounds and our overall sales rates reflected an increase from that.
Operating income decreased sequentially, primarily due to the lower volumes.
We are able to maintain our pricing levels and our team acted quickly to effectively manage cost and expenses offset the decline.
Operating margin was 11.8% in the quarter versus 13.2% in the prior year, 14% in the first quarter.
Now, let's take a closer look at the changes in operating margin on the next slot.
On this slide you're showing year over year and sequential operating margin Burgess for the second quarter.
Starting with the prior year comparison.
Lower volumes contributed to a 410 basis point reduction in margin versus prior year.
I want to highlight though.
And our pricing and cost actions have contributed the 280 basis points of favorability, partially offsetting the impact of lower volumes.
On a sequential basis.
We offset 320 basis points from unfavorable volume mix with 110 basis points more ongoing pricing and cost actions.
He bleed these actions that positions us well to take advantage of incremental volumes going slower.
A portion of the lower discretionary spend will come back as activity levels increase from where they are today. We do believe the majority of this improvement is permanent.
Worth, noting that our margin improvement actions have resulted in slightly higher EBITDA margins versus the prior year for both the second quarter and first half of 2020, despite the lower selling levels, we were seeing.
Let's take a look the reconciliation of reported bps to adjusted weakness.
Second quarter earnings per share excluding special items were 85 cents.
We incurred special charges, a $14.6 million after taxes and second quarter were 43 cents per share.
The charges included noncash pension settlement charge and a noncash impairment of assets charge in several and severance related costs for the paper PCC satellite facilities at to U.S. paper machines that were idled indefinitely in June.
In addition, we recorded a litigation settlement at the conclusion of that have been debt appreciation proceedings.
Our effective tax rate for the quarter with 60% versus 17.3% in the prior year.
He could favorable discrete tax items in the quarter.
And we expect our effective tax rate to be approximately 19% in the second half of the.
Lastly, our U.P.S. benefited from lower interest expense and other non operating.
Auctions note that going forward, our interest expense will be slightly higher due to be incremental interest on the notes offering.
Now, let's review the segments in more detail starting in performance materials.
Foams material sales from 19% lower than the prior year and 7% lower sequentially.
About four segments performance materials with the largest and it was the most we believe to market challenges <unk> second quarter.
Within household personal care and specialty products, we sell continued strong performance from our consumer oriented businesses.
Take care fabric care and personal care all grew sales versus the prior year.
Growth in these businesses was offset by weakness in specialty drilling products.
Environmental products and building material sales were lower due to cobot 19 related project delays.
Metal casting sales were impacted primarily by automotive shutdowns in North America and parts of Asia.
A middle Kathleen <unk> versus the prior year grew as economic activity rebounded probably the first quarter shutdowns.
We continue to penetrate that market with our pre budget, we didn't see I'm bomb formulations.
Operating income for the segment was $21 million and represented 12.1% of sales.
The impact of lower sales on operating income was partially mitigated by lower expenses cost control. He continued party connections was shown to be relatively stable margins versus the prior year end sequential quarters.
And the chart on the bottom right, we're showing the daily sales rates for each month of the here as well as comparison to the prior year.
Maybe with a clear blue point over this period, followed by an uptick in June further acceleration in July where we narrowed the gap to prior year sales levels.
We expect this trend to continue through the third quarter.
Now, let's turn to specialty minerals.
Yes.
Sales for this segment were 24% lower versus the prior to year and 20% lower sequentially.
Paper P.C.C. sales were lower than we expected primarily due to extended outages in the United States Europe and India.
[noise] PPC facilities in China continues to run at relatively normal demand levels up 4% versus the prior year and sequentially.
However, our locations in India were shut down for much of April and into <unk>.
And in North America.
Nine about 16 facilities, where either idled, who took extended downtime in the second quarter.
In Europe, three paper machines took extended downtime in the second quarter.
Specialty PCC sales were lowers the man slowed in the first quarter and you made at lower levels through the second quarter, primarily driven by lower demand for automotive and construction applications.
Process minerals sales were also lower due to the slow down in construction and automotive activity.
Segment operating income excluding special items was $15.3 million.
Represented 13.9% of sales.
The impact from the reduction sales versus the prior year, that's partially offset by continued to expense control.
Input cost reductions and continued pricing actions.
And the daily sales wage chart.
You can see May was also a low point for this segment and the gradual improvement in June was filed by continued improvement in July.
North America seven to nine paper mills that were down on the second quarter are coming back online and the third quarter in the three machines that took downtime in Europe or also ramping back up.
We remain on track to bring on line 250000 tons of mute paper PCC capacity this year.
However, the announcement by versus what type of two people throughout the United States reduce our volumes by approximately 75000 tons on an annualized basis, beginning in the third quarter.
In addition, our business development efforts continued during the quarter, we signed two new paper PCC contracts one in the United States, one in India totaling 77000 tons.
Now, let's turn to the refractory setting.
[noise] refractory segment sales decreased 20% versus the prior year and 19% sequentially Steel Mills, you reduced production response to weaker demand from construction and automotive markets.
Segment operating income was $5.9 million and represented 10.6% themselves.
Note that we continued to maintain double digit margins in this business despite significantly lower sales levels.
You have seen a slight improvement in daily sales rates in July.
To give some perspective, we started 2020 with north American utilization rates and lower ratings and after declining to the low fiftys, they're currently running around 60%.
Now, let's turn to energy services.
Energy services sales were 31% lower than prior year, and 30% or sequentially driven by the decrease in activity due to covert 19 related customer project delays.
Okay American mall traffic ticket he remains strong.
This was primarily offset by lower global filtration activity.
Operating income was $1.4 million versus $3.2 million in first quarter represented 7.9% of sales.
Yeah. The sales rates chart show the solid start to the year.
Followed by lower levels of activity due to cope with related delays.
Several projects scheduled for July were delayed to August and September.
And from where we stand today, we are starting to see some improvement in international markets and the pipeline of projects for this business remains very strong.
Now, let's turn to our cash flow liquidity house.
It continued to generate strong cash flow and maintain ample liquidity.
Generated $64 million cash from operations in the second quarter and $49 million or free cash flow.
He's a portion of our free cash to pay down $30 million debt net leverage ratio stands at 2.2 times EBITDA.
We also took action at the ended the quarter to further improve that liquidity position at the company.
On June Thirtyth after the close of the second quarter, we completed at 400 million dollar offering 5% notes due in 2028.
We used the proceeds to repay $148 million, a fixed rate term loans $100 million borrowings under our revolving credit facility and the remainder of for general corporate purposes.
As a result of the offering the company now has more than $675 million available liquidity, including cash on hand, as well as availability under the <unk> revolving credit facility.
And these uncertain times.
Prudent we took advantage of the favorable interest rate environment, and our strong credit position to extend our maturities at a fixed rate.
We extended our weighted average maturity 5.5 years, an increase of 2.5 years.
And this added liquidity provides us with additional flexibility to be opportunistic.
Navigate what lies ahead.
And then turn it back over to Doug to discuss our current market conditions.
Thanks, Matt.
Before opening the call the questions I thought it would be helpful to provide commentary on what we're seeing across our businesses and end markets.
As we move into the third quarter.
Based on sales trends over the past couple of months.
I've organize this discussion similarly to what we presented last quarter for clarity and to give you a broad understanding of the various puts and takes and changing conditions.
I'll start by saying that compared to where we sat at the beginning of May you're more optimistic about the trends in our markets and we feel that the second quarter had the most acute impacts from covered my team.
With this come some caution as our view forward is looking into an environment that continues to be uncertain.
Specifically in our project oriented product lines, we are still experiencing volatility and order patterns and timing.
Well, let me that will take you through what we're seeing by business segment touching on some end market dynamics.
Starting with performance materials, our largest segment, our household and personal care product line, which primarily serves consumer oriented markets has continued to run a strong demand levels with growth rates similar to what we've been delivering in recent quarters.
We see the sales trajectory remaining steady through the third quarter.
Our metal casting business experienced a rebound in demand levels at the end of June which is sustained through July.
Volume improvements for this business.
Tons on the transportation sector in North America, primarily in the automotive and heavy truck sectors, and how foundries will ramp up and reach more normal capacity levels to support that demand.
In July our metal casting facilities in North America operated at about 85% of last years to metals.
Based on the latest indications from our foundry customers in North America.
Expect these rates to improved around 95% by the end of the court.
As noted earlier metal casting sales in China grew 9% over last year during the second quarter and we expect this strong trend to continue through the third.
I'll discuss environmental products and building materials together is there both project related businesses.
Given the nature of these businesses order patterns have been volatile and several worksite shut down so pushed projects into future quarters.
Started to see some of these projects come back towards the end of the second quarter and into July.
But the demand and timing for completing these projects is dependent upon loosening of regional restrictions.
Both of these businesses maintain a robust project pipeline solid customer pool for our latest technologies and we expect to complete these projects once they commence.
Let me start to our specialty minerals segment, starting with paper PCC, we're all provide color by region.
Our PCC facilities in China continue to run at relatively normal demand levels.
And our locations in India had been ramping back up since the government shutdowns in April and back.
In North America, Europe, 10 of the 12 facilities that took extended downtime during the second quarter are projected to resume production in the third quarter.
Total with the restarts in India combined with the demand environment in North America Europe July volumes have been trending at a rate that is approximately 15% higher compared to chip.
On the new capacity front.
The construction of our satellites in India, and China are on track.
A 45000 ton facility in India will come online in September.
And I 150000 tons satellite in China, which will be our largest when completed is scheduled to be operational by December.
And our specialty PCC, GCC and health businesses sales for our pharmaceutical and consumer products have been strong and should remain that way.
Demand for our sealant and plastic products that go into the automotive market will be dependent on build rates improving in North America Europe.
Sales for these products that are used in residential and commercial construction applications has steadily improved since June and this trend should continue in the third quarter.
But the refractory segment current steel utilization rates in North America, Europe around 58, and 62% respectively and these rates have increased from the low fiftys in the second quarter.
Several integrated mills have resumed production in North America, and we expect commensurate volume improvements in line with these restarts.
The strong order books are laser measurement equipment. However, this year most of these sales will be completed in the fourth quarter.
I'll finish up with energy services.
Well covered my team led to some early de mobilizations from our larger offshore projects. These projects are being rescheduled to resume in the third and fourth quarter.
In addition, we have recently been awarded several new projects, which we expect to commence over the next two quarters.
It's notable that our order book in this segment remains intact. However, we're dealing with dealing more with the exact timing of projects as customers reschedule.
As you can see we're managing through a number of evolving market dynamics, including changing customer demand patterns.
Importantly, though activity has modestly picked up across our businesses in July leading to an overall sales trend that is about 5% higher compared to June.
However.
Still only 1% above our full second quarter run rate.
We remain focused on navigating these all evolving dynamics and our teams agility positions us to continue to do so.
Our key priorities remain keeping our employees and their families safe.
Serving our customers with value added products and strengthening our foundation.
We've taken thoughtful decisive actions to adapt to the current market environment and to position our businesses to extend our momentum as market conditions approved.
Looking ahead, we continue to see distinct opportunities that we can capitalize on to further drive our operational and financial performance.
With our improved cost profile, we're well positioned to extend margins as volume strengthened.
A broad product portfolio.
Delivers cost savings and significant value to our customers.
Has enabled us to realize new opportunities with customers in several markets and we expect this trend to drive additional revenue growth.
And are taking steps to strengthen our balance sheet and increased liquidity, we're well situated to navigate through existing conditions as well as pursue a wide range of attractive growth opportunities, both organic and inorganic.
In closing I want to thank everyone for joining todays call.
And recognize our employees for their tremendous efforts during challenging times and their continued commitment to empty out his ongoing success.
With that let's turn the call over to questions.
Thank you if you'd like to ask a question and simply press the star Keith.
Just one on your telephone keypad I'll see if you're using a speaker. Please make sure. Your meal function is turned off to a lighter signal to reach our equipment.
Once again started one at this time and we'll first hear from Daniel Moore of CJS Securities.
Doug Matt Good morning, Thanks for taking questions.
But.
Lot of obviously lot of ground at a lot of moving parts. So forgive me here from jump around but.
June I think I heard you say it again, there was about 1% above full Q2 run rate is that correct and sense for what I started July rather and what June kind of look like on a year over year basis as well as July just trying to get a sense for the trajectory from that perspective.
Ah, yes, well that's correct a July right now we saw about 5% higher than June to sort of give you a kind of perspective the trajectory as we go into the third.
That rate. However, you can see I'd been go back to the chart, but you saw that chart, where aprils, there's still higher than July. So I think what we see is you know we sat and at the end of April May we were looking kind of into that downward trend.
Not too optimistic then but now as we sit name we saw that go buy we see the optimism that says look we what we have from our customers going forward.
So in July.
We see that that trend is much more positive than we were three months ago that said that July rate is still below the average for Q2 is still not up to that that Oh April right.
The year over year matter, though do you have the year over year.
June rates, I think they're down or probably down 10, or 11%, maybe 12%, they're a little bit higher than they.
There are down 10 in April 14 for the quarter.
You you're spot on Doug.
I don't think about it get it done thank you and then specifically and PCC.
Some puts and takes there obviously, you've got a lot of those facilities coming back online and then you've got the two facilities that will have 75000 tons I think you referenced the come offline in.
In the third quarter. So you know as a baseline from where we stand today do we take another step back in Q3 before we start to to rebuild and grow again.
Or just putting it all together just trying to get a sense for how we should think about growth growth from either Q2 or or you know gene levels from a jumping off perspective.
Sure.
Take a shot at this the pets or digital do some more color on what's come and kind of the future.
Yeah. It's unfortunate we saw the verso those two machines those are mechanical grade papers, not uncoated freesheet, they're gonna be shutting down at least the what we understand is indefinitely and slips and said starting in September that said, we started to supply that Ah, Yes, 35000 tonne Oh contract you have it I would put Kentucky.
I just started to supply that front offsite location.
And we'll probably resume onsite oh manufacturing there at that location in November so that will be ramping up as we go through from today. So in addition to.
Our satellite 45000 ton satellite and indeed be coming online in the third quarter. So I think yes, the third quarter is going to be a though much much better than the second quarter, we're already seeing 15% growth and volumes in our paper PCC business.
We're going to see probably a little blip there the ended the quarter before that India satellite comes on line.
But then as you know I'm like the way of 150000 tons coming on line in December.
In China, and we have another 75 to 80000 tons.
I'm sorry, an additional 45000 tons that will be building probably in the first half of next year in India.
The net net of all that is still positive trend I think it might be a little bit negative quarter over quarter and third that's due to some of the demand levels, but the capacity additions versus the 75000 that just came out in North America. The net net of that is still positive by about 50000, <unk> by 150000 stuff.
I've got a 150 Yep. That's America, just finally can confirm that math based on the announcements that we said that that we have as a as of this yet at least.
Let me clarify that that's about 150000 ton positive getting back to normal paper demand levels right. So one of the questions. We have going forward is what is normal and so.
We can talk about that a little bit, but but right now the net net of all of that on the 2000 kind of 19 baseball in that'd be a positive one shifting.
Perfect helpful.
Approximately.
And then I think in the prepared remarks, you've mentioned on the cost reduction front.
280 basis points offset to volume declined spaced on cost reduction.
Efficiencies cost reductions pricing actions and those being permanent did I hear that correctly, just trying to get a sense for.
Even though some of the restructuring actions, you've taken and how that might flow through as volumes return [noise].
Yeah and much of what you saw their damages about $4 million of pricing and $7 million of cost actions.
And as cost actions or you have a the carried over from the restructuring we did last year that we're benefiting from a you have a number of position, but I will not be replaced based on the efficiencies that we've been able to drive as a matter of fact, just speaking today I mean, the amount of work in effort and engagement that it's been done by that.
Team to to establish new ways of working you know again, just reinforces the culture, we have here and that we do talk about each quarter and the strong engagement that we continue to add to this pandemic and that's what's allowing us to say that the majority of that $7 million a would be a permanent. So you know the majority could be two thirds.
I'm, giving you direct guidance, but you don't give us some some play there as as we look at the items I know that really make up to the difference where we could have some coming back it will be in those travel and <unk> expense and a and product testing categories. When those types of volumes a tick up for us to spend.
That's really with that.
Okay and the last for me just metal casting Yeah go ahead to Doug I apologize guys, who is going as a little bit of none of my father was going out a little color that just you know through the quarter.
Yeah, I think you know as we're constantly looking at that equates to do things differently in better continuous improvement and and yeah. We have done that I think we've maintained a quite a sufficient.
So the business systems, even working remotely we're looking at opportunities to continue to move more work around the world. A we've had some retirements and we found ways to capture and do things differently and organize and ER and we've also added some talent, which is in those numbers. So we we squeeze we've been pretty busy on kind of understand.
What we can do differently or making sure that we've added talent to the company or to make sure that were advancing things and and and an improving continuous improvement on the organizational front and then that none of that we feel is like Matt said, you know 60% to 70% of this we think is permanent I will say that were also.
The other opportunities we are continuously looking at things that we're doing differently today and what can be captured be permanent changing the way, we do things and that's why we think that there's margin improvement and kind of how we're running the company today.
We can capture that's that's permanent we think that the majority of that cost improvement as permanent and so when volumes improve we see good leverage Oh, that's a that's only.
Thanks, that's helpful Lastly, metal casting.
You gave some color around North America, as we get into Q3, and if I missed it freight forgive me, but just in China.
All the foundries that customers back up and running a what capacity and what are you hearing in terms of the trajectory of Ah you know growth rates from here going forward.
Sure Jon Hastings, you want to take that one give little more color on specific markets.
Good morning down.
I appreciate the question when you talk about the China first and then on or bridge to to the U.S. So if you if you don't want.
At least regarding China as you know I'm very strong growth.
We have a couple of different sectors that are continue to rebound and in fact, a are doing quite quite well. For example, you know the auto market in China.
In Q twos, 14% greater than prior year.
As a result, Oh, one of the foundries are continuing to operate it surely Heidi Klum I'm, especially the tier one tier two who recognize the value of our value proposition.
We also see strong market, where the heavy equipment and excavators and also the.
So so very steady and those shipments the only weak spot that we see is there's a little bit of uncertainty regarding some exports and mainly around parts that are going into a European some into North America, but overall very strong.
You bet us little bit different story as you know we are heavily concentrated with auto and heavy truck I'm. So the transportation segment, we do sell into the AG municipal markets, but when you talk about auto source.
We basically been you know ourselves and basically fall over the course of the auto industry.
The reductions and closures that we saw quarter and then the rebound in recovery as we've come out of that in fact after the fourth of July holiday, almost all the foundries or running pretty close to fill out. So we're expecting as we look forward for the second house can be very similar to.
Second house at 2019 regarding our automotive sales.
Heavy truck remained strong throughout regionally you saw the Oems can to produce pretty strong and then ER and then.
Apart so he came on board.
So that's been going fairly well and then let me bridged municipal.
Yeah, I think market of course, you know is on.
Tractors and combines and those have been low single digits declined versus last year in the market.
It is a resolved or sales continued to be pretty pretty flat and almost consistent with last year.
And then the bright spot is municipal and that or not remains strong as.
As to the municipal dollars is being spent teams.
In whole Clubbers, and great and things of that nature and <unk> continues to increase you know the low single digits a year on year. So a couple of different segments, there and hopefully that gives you some color on on what we're seeing.
Indeed, thank you I'll jump back in queue, if any follow up thank you.
Thanks for the questions.
Next we'll hear from such an act of JP Morgan.
I'm wondering how are ya.
I feel good how are you.
Hi, I'm well thank you.
If you.
Look at no bid on about like it looks like at the built right for past whether third quarter I'm.
Pretty similar to what was forecast for the first quarter. So.
Do you think in metal casting sounds like I understand it's not all auto but do you think it's too optimistic to think yeah, a metal casting salixs third quarter shutting up somewhat similar to what you saw in first quarter.
Well they could I think right now we're seeing two things I think we're seeing foundries reopen we saw a lot of sporadic kinda onto that offs and we're seeing right now a little bit of restocking, which is very positive.
So the levels that we're seeing and John said Oh.
Finally, starting to run you know kind of full time, which we had didn't see through the second quarter. Some of that restocking should those build rates continue and that restocking continue we could see those type of build rates through the third that said.
There's other you know automotive is Ah I think it's up 50% of our North America kind of exposure foundry Theres also heavy truck, which is probably not as back to what the automotive build rates are and then it should also industrial so some others factors that soak up but at least for half to 60% of the foundries we serve yes.
Possibility they could get back to those type of builder.
And in Europe household and personal care category, which is probably the largest person not funds.
What snowed sequentially, if I'm not furnished to the second quarter conference held sway that no one at the Atlas just wondering what's noted and do you know again do you think sad for household can't product to the third quarter somewhat similar to.
First quarter, given given that going rate you saw in July.
Yeah. The it is our largest segment and ER that does contain more of the consumer oriented products. In this business unit. There. There's a couple of product lines in there.
There are basically tell them.
Our basic mineral products, which are service drilling products and so there are some drilling fluid additives and that was the one that from the first to the second quarter was you know supply some onshore drilling and third party customers I'm sure that that did decline but ended off said you know the strong growth we saw in the.
Fabric care bleaching Earth personal care and pet care business.
In the third quarter, a couple of things happen, probably the largest business in that household and personal care as our pet care business.
And yes, we see that that continuing through its 3% to 4% growth rate I mean, it gives you the kind of the average pet care market that we serve which is primarily north American Europe grows at about 2% to 3% a we grow at three to four sometimes 5%. So we grow above the market. It was we continue to premium the premiumization of the market, especially in Europe.
So we still see those those growth trends continuing through the third.
Albeit in the summer months you know.
To be honest cats are outside a little bit more and so the <unk>, there's a little bit of seasonality in our summer months that are at our pet care business or the higher season comes when things get a little bit colder so, but we do expect strong growth rates in that take her business going into the third and then probably strengthening further in the fourth.
That's helpful and have like to my question does that make.
So when I look at your litigation expenses like I think you've spent like 9 million. This he on no Vinod litigation, maybe spent like 11 million last yes, let me just kind of 20 million on it and what did you recover from that what do you hope to get something done though.
Well the window is something that we so recall when we purchased Ham call. The vendor was a joint venture that was entered into that we inherited through that acquisition.
It was for Mercury sorbent products.
And that business filed for bankruptcy and 2015 I believe 2016.
Pretty nickel exactly right anyway, we were involved in that bankruptcy litigation and defending ourselves and so yes for the past four years refund.
Working.
Through that arbitration or what I will say is that the the.
No amounts reflect to this quarter. Our final arbitration amounts are there might be some legal expenses small a that that will continue as things just finalized but that said that as the the binding arbitration settlement. So that does so not hoping to get.
Anything out of it other than to be done with it and Oh spending cuts concluded to this quarter.
Okay.
And that's the feet or not I was wondering whether I'm. You know you have I got on cash we're talking 20 year, you know either specific one general terms that you wanted to stuff yeah.
Yeah. Thanks, Okay. I think if you look through the first half of this year, it's been a pretty comparable year to what we saw in 2019 from an overall cash flow in and free cash flow perspective, and so as we look at the second half of your we are expecting continued good.
<unk> operating performance to drive to operating cash flow and to ultimately free cash flow with good.
Control over capital expense.
What does that necessarily mean it it is as you look at it there will be some changes in working capital as we move into the third and fourth quarters typically we see a those quarters being our strongest kinda cash flow generated between quarters, that's changed a little bit this year based on the impacts from the the.
They economic it back from have come cobot into the third quarter actually will be a little bit weaker. But then we are expecting fourth quarter to continued to be a pretty good cash flow quarter. So all in all for the year. We're looking at something in the area of 100 $220 million free cash flow embedded in it.
That is capex between 55 and $65 million and out we're going to continue to work hard on on pulling on working capital levers to help us achieved that though.
Thank you can explanation.
Okay.
Let me also had I just got to make a quick correction on on something from Dan I think we're actually looking at the change from from a sequential quarter sales, Dan and that you were looking at the mid June rate or the June rate on a year over year basis was down 25%.
Hi, Scott.
Next we'll hear from Rosemarie Morbelli of GE research.
Thank you good morning, everyone.
Oh It was I was here I was wondering if you could give us a little more details I know you touched on it but intend to us in market opportunity that you office to Inc.
And you know that paid off.
Of when you're likely going to get into those markets and you shouldn't accounts to a screen with what type of revenues can be generated there and that profitability or because it looks that we have different states I need to see if they stay.
Sure well let me.
Let's see if I can frame some of this.
When I was speaking about opportunities I think there was it's kind of across our business I think we've seen a in the short term here opportunities or to gain new business with customers new customers and to further extend our business with existing customers.
Kind of across a cross the.
The segment.
A couple of examples John mentioned, some metal casting in the U.S. in China, where Weve games, a new customers and extended our volumes with existing ones a in China as it's been more of around the Premiumization I guess would call. It the penetration of our of our blended products.
But also you know we've seen some really nice inroads in our bleaching Earth products in Europe.
Our new sealing products in special or new rheology modification or specialty PCC products, Oh for sealants, both automotive and construction. We've also seen some really good traction it had some new business. There. So now we're finding it and then with our existing products, we have a very reliable vertically integrated kind of cost structure.
Sure and our ability to demonstrate you know the value in times like this seems to be heightened so being able to show cost savings.
Where people are folks are the customers made but on the fence you know that's a real premium known so our premium products in our cost savings products have really resonated and we've taken advantage of that activity here in the second quarter, we think that that's going to lead to you know kind of continued.
Revenue growth those will be permanent.
Ads and that's going to help our growth going forward in the near quarter. So.
That said longer term, we are looking to continue to grow.
Are less cyclical kind of consumer into oriented businesses, we have a steered our capital toward a as you know an acquisition and see if a medic we feel that over the next that that business right. Now is a pet care businesses about global pet care as about a 200 million dollar business and.
We think over the next four years or so we could double back.
Both organically and Inorganically and so that's an area, where we think we have unique capability around the world Oh with our bentonite positions.
Mines to serve and so that's one area we also.
There's other consumer oriented businesses that we continue to invest and that will grow we look at our environmental products business, which is not direct to consumer but it's it's it's kind of its activity is based on consumer activity in terms of waste disposal and electricity generation and.
Also into wastewater treatment remediation and we're looking at technologies and developing them ourselves.
To expand that business into very high margin water.
Water treatments and we've talked a lot about our floors or p. Foster and we're getting a lot of traction we've had a number of trials and sales small cells and trials for that P. Foster product. So I think a you know we see quite a bit of opportunity not only just extending our value proposition in markets like we have.
Today.
It also continuing to steer our capital and grow what's currently 25% of the company's revenue a into a larger portion of less cyclical and I think in the past quarter you saw.
As a benefit to the company's more balance for about that brings the company sales a line in times like this.
So.
Yeah that is very helpful. Thank you end up 25 to friends to.
Confusion, so on that front suicide that lucky to think yet but are you aiming it gives it to you know.
Hi, <unk> drilling, although the specifics and investing and then can you had become I didn't know with 20% gets terminal.
In <unk>.
Yeah, I think I've got a refrain from giving exact percentage, but I think that's something that's absolutely possibility I think there's some.
Over the next several years as we see you know taking our positions and that had care business to what I. Just gave you ever we think we cannot be able to double the size of it.
Business, that's $200 million, and then incremental growth and the others as a 300 million dollar increase in our pet care business. Yeah. It will take that business, probably two or almost 35% to 40% of the company. So I think that's possible I'm not going to.
Tell you right now that give you exact timing of that but yes. We are so we're looking at those product lines that we feel so we've got a unique position to serve and to grow and we've got the technologies and the value proposition and we think we can make them a much much more significant and profitable or with the kind of consumer specialties, we can make.
At a much more profitable piece of the company, we think that will help drive our margins Oh, we think its oh, we see good returns on our capital deployment in those areas.
I think we've kind of demonstrated that are with the acquisition to see them out of because the first leg up to two further items that we see those opportunities out there.
Oh things started they carried helpful and.
Since we're talking about she's on my <unk> expectation what are you seeing on the pending a territory.
And <unk>.
In this environment <unk> comedies coming are becoming available on the multiples southern coming down are you getting closer and you'll have obviously increase journey quickly. So I was wondering is there something out there that you I'm ready to close it to be able to announce.
Although I can't tell you is that you know we've always mentioned to Oh, two on calls and we have a nice portfolio of things that we've looked at we've been looking at for some time and.
And we think that that fits squarely in our portfolio and would add value and and advance our strategies that I've kind of laid out.
So I would I will say, though that you know we're still looking at those curves were still down there and the and the kinda trough. We're more optimistic where we are now in terms of looking ahead in terms of what we see from markets.
There's still a bit of uncertainty out there Rosemarie and so you know I want to automate manage the risk of what's out there in the markets and making sure that the company today is well positioned with where we are yes, we have strong liquidity position I think would be well able to navigate that but I also do think it positions us to take advantage of things as we see that kind of.
Market risk and you know see starting to see through that I think the this ppas present, some opportunities do I see multiples coming down honestly I haven't seen very many transactions to tell you that <unk> I think that yes, there's probably some assets out there that could probably you know be willing to transact and more reasonable.
Multiples that I've seen over the past few years, but you know again I think we're going to navigate through and make sure that we're managing the risk that we see today, but I do think we have the balance sheet in really good shape to be able to you know act on both like I said organic and inorganic opportunity a very quickly.
Okay and looking at that that.
Doubling in size or is that something that you can achieve so just organically do you have you guys capacity both in the U.S. and then Jackie.
Steve OLED acquired.
Oh I get your niche to actually acts for minerals in order to be able to have changed to achieve that came with gross.
[noise] I think we have in the certainly in the near term we have the resources available to support that type of business activity. I think we are constantly looking at.
As you know reserved positions around the world.
Those are things that we're looking at as I mentioned in our portfolio to make sure that we have a strong reserve positions out you know 30, 40 50 years.
I think more around the instead of the reserve position support I think we would need to add know the the equipment manufacturing I think we were already with our current growth rates.
And in our pet care business and as they've been picking up a we're going to be looking at some expansions to make sure are over the next couple of years, we can support all that package to processing growth. So we're going to be doing that I think we've got a good reserve position, but certainly we're going to be looking to add to that to make sure that we've got long long term line of sight to support that type of growth.
Thank you and then left to try and make a lot. If you see a large increasing that bad debts are you concerned about somebody okay. So it's not being able to pay.
Oh, I'm, sorry did you say of bad debt.
That winter spring.
Yeah, just to clarify that question most are we seeing.
Changes in our and our customer payment capability and is that increasing our bad debt provisions and the answer is no. We're actually seeing good payment performance from our customers. Our teams are are communicating on a very frequent basis with our customers in terms of and how we turned to collectability how their payments.
Entrails, we're looking I know the overall there they're healthy cash flows need so you haven't seen a changing or not bad debt provision related to customers payment today.
Okay. Thank you very much.
Thanks Rosemary.
And our final question parts, they will come from David Silver I've C.L. King.
Okay.
Thank you and I'll just say this in advance I had to step away a couple of times. So if my questions have been addressed already just just mentioned that know I'll.
Listen to it ought to replay.
So I guess I just wanted to ask a couple of questions on your PCC business.
And the first one would kinda just be a little naive, but you know I look at the revenue number or this quarter and its you know very low much lower than the last several years each quarter.
And one was the last time that that business was running it at that kind of level during the second quarter and then more to the point.
Is there it was there anything.
Especially different or unusual I mean, because it's just the garden variety but.
Severe downturn in paper production or.
In your opinion or the customers are there are the customers, taking in especially cautious tone or is there a shift in the paper, making technology that encourage it encourages the shutdown of a mill as opposed to moderating the operating rates. So just maybe some color on the.
Severity, I guess or the sequential fall off in a.
Piece of paper PCC demand over the last quarter. So thank you.
Sure well, let me let me just kind of parse this up by region again, I think a you know in and in Asia.
We really didnt see a drop off Oh, we continue to operate we saw a slight decline, but we saw drop off in the first quarter and our PCC facilities and trying to continue to run pretty much a normal demand levels. When we saw 4% increase in the in the second quarter, that's kind of continues with our trend.
In India, we saw the closures of but they're now back row abrupt ramping up and so we see that market demand Oh picking up in the third like what you're talking about go.
It is North America, and Europe, but North America much more severe.
To answer your question I can't tell you honestly it has to go back and look when our PCC business ran at this level in North America I don't think it's ever I mean, maybe then early 19 nineties is we're ramping up the satellite model through North America.
But I also don't think the market in North America has seen a 30% decline and paper demand in one month timeframe.
And so what we saw in the second quarter certainly wasn't.
It was completely unique a and certainly.
It was a result of kind of the complete shutdown of office and and school and University are kinda consumption activity, which is starting to ramp back up.
That said you know University is what happens with universities, what happens with going back into the office said and schools elementary schools et cetera, I schools.
<unk> kinda remains to be seen so I don't.
Little bit up unprecedented unprecedented troponin paper production North America.
But we do see that's starting to come back a question is how soon.
And and and when that will happen so that kind of looking at its hard to really predict and really to see right though.
Well that will come back we expect that it will it may not come back to levels, we saw last year.
But we do see that at least in July that activity level has picked up in North America with I mean, we had nine of 16 of our facilities down.
We see seven of those probably ramping back up in North America.
These are you want to give us a little you've you've been part of the business since Oh, you've been in the paper business for most of your career you want to.
Give us a yeah the more color on kind of North America.
As a as best I can so so David I would echo what sounds like I can't give an exact time, where.
Where our volumes, where this slow and certainly not as a percentage of installed capacity.
I've never seen a drop like this in uncoated wood free demand.
But but I guess I would I would tell you this.
All of our customers are comfortable that sequentially things are going to be a getting better and that everyone is trying to see what the long term outlook is for.
For demand and uncoated wood freed up but.
But let me I guess, bringing a couple of other aspects of this you know Doug it highlighted earlier that we're able to bring in.
To a two new contracts for PCC and I would say that even in this that's lack of a better term, let me call to tumbled truss.
Market environment, I still got Oh, let's say 10 to 12 pretty active isn't development programs going on that all the all moves forward and the last couple of months I I can't tell you how many of those bring him for sure, but but most of that growth is relying on.
Displacement, so and it's mostly in Asia, where where we haven't seen nearly a that drop off and the long term outlook for the Asia paper, making environment is stable. So we still feel that there's this unsettling period right now.
But business development is active a lot of that in printing and writing papers and Ada is active and I'm quite optimistic about and then on top of that in North America, So of that 10 or 12.
Active business development opportunities.
There's for three or four or better in the targeted for packaging grades and and we are greatly affected by the demise and putting in writing paper, but but we're trying to grow and packaging and not a fiber based packaging seems to be a sustainable market. So we're we're early.
In that the.
Transition from a international papers.
Printing and writing grade to a packaging grades there will be coming here in the third quarter is something that we're participating in will help them make that premium paper.
Good mentioned other expansions coming online we've got one of our expansions in Europe coming online is in a packaging application and then we've got these other new development items and the pipeline. So so your read on on the dramatic shift in paper consumption is right to me it's unprecedented.
And it should be getting better but or or I.
I think we're going to be able to grow despite that.
Yeah. It was going to add to that I think they've is over the last pieces.
The market in North America, you know a uncoated freesheet in North America isn't you know it used to be the largest piece of the business and everything it relied on today. This is different there's different parallels and tentacles out there in the paper industry and I said weve a into our new yield products or environmental products such as.
As in virus fill that has just started up in Europe, and we see opportunities to extend that further in Europe, but did you mention packaging.
But other technologies that are on there. So yes, we still have a lot of base pigment volume opportunities out there and then that none of that will still be regardless, if the market doesn't come all the way back a growth or in volume for the company over the next 18 months.
Add to that the new yield add to that the of our fill our new filler technologies, our environmental solutions for customers and we French this out into into something different than just paid based uncoated freesheet.
Wow that's a.
Not only did you a pre answer my first follow up you also pre answered my second follow up but I'll I'll kind of phrased it a little differently, but I think last quarter or maybe a quarter before that I think Doug or maybe DJ did highlight.
That depend no less than three months ago that the pandemic was kinda, causing a little bit of problems in terms of getting your technical people on site, where you're doing demonstrations and test drones and things like that.
And you know I'm, just wondering if if those disruptions or those kind of bottlenecks.
Have persisted or you know maybe just a characterization of the development tour. The demonstration capabilities you know within this kind of restricted travel pandemic.
Related environment. Thank you.
And that's also for PCC by the way yeah.
No that look because we've had some really good business development success, albeit somewhat person. Some virtual is easier about some color I mean, you're pregnant thick of these contract negotiations and new product development.
Yeah, I would say David Farr standard PCC offering we we've seen no impact because we've got a market data that is able to support our value equation and what we're offering for these new products. It has impeded our ability to trial, but but as I speak right now we've got.
Trials planned for a week after next and.
And a couple of weeks after that it even assuming this current a pandemic environment. So.
Oh, yes, it has affected US yes, it is slowed us down for the new technologies, but but the teams have been able to work their way through somebody saying gun and developed ways of safely sharing with the customer what though but these technologies can do it's taken us along.
All the to come up with some alternate means and a lot of.
A lot of discussions are happening on video and a lot of translation that's going on as a English speakers speak with folks and other tongues, but but where we're able to do it albeit slower.
That's great color. Thank you again very much.
Okay.
And now at this time I'll turn the call over to Mr. detract for any closing remarks.
Oh. Thanks April appreciate it look again I appreciate everyone, taking the time to join the call today I do hope everyone remain safe and healthy in your families as well I will talk to get in three months. Thanks again for attending.
That does conclude today's conference. Thank you all for your participation you may now disconnect.
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