Q3 2020 Minerals Technologies Inc Earnings Call
Kits and highlighting new business that will contribute to our volume growth next year.
First I want to comment on the 8-K, we filed this week related to a ransomware attack, we recently experienced.
Which impacted access to some of our Companys IP funk systems.
We have procedures and protocols in place for situations like this.
And immediately after detecting the incident, we implemented our comprehensive cyber security response plan include.
Including taking steps to isolate then carefully restore our network to resume normal operations as quickly as possible.
We've notified law enforcement and have been working with industry, leading cyber security experts to conduct a thorough investigation.
Throughout this situation, we operated our facilities safely and met our customer commitments.
Before going.
Through the third quarter review I'd like to note that I'm very pleased with how our global team and businesses have performed in what continues to be a complex and challenging environment.
We remain focused on managing our company with an unwavering commitment to keeping our employees safe.
Operating our plants efficiently and serving our customers with value added products.
Dedication engagement and resilience of our employees has been nothing sort of exemplary during these times and I want to thank them for their perseverance, they've shown over the past several months.
Let me take you through how our third quarter unfolded.
As we previewed in July we anticipated demand conditions in our end markets would improve with the second quarter, having the most acute impacts from Cove at 19.
And that's largely how the quarter played out as we were prepared to respond to the volume recovery, which led to sequential sales growth in nearly all of our product lines.
Overall, we had a solid quarter from an operational and commercial standpoint.
These results reflect our team's disciplined execution related to cost control pricing and productivity, which resulted in higher sequential and year over year operating margins.
They also demonstrate how our strong product portfolio and end market mix has enabled us to capture opportunities with existing and new customers.
From a financial perspective total sales in the quarter were $388 million.
An increase of about 9% sequentially, but still at lower levels compared to last year.
As we indicated on our last call.
Our July sales were trending upwards and demand conditions in several markets continued to strengthen throughout the rest of the quarter.
We generated $52 million of operating income and earnings per share were 92 cents.
In addition, we delivered $54 million in cash from operations, continuing our solid cash generation profile.
After experiencing volatile conditions in our businesses that serve industrial related end markets through the second quarter.
We saw considerable demand improvements in the third quarter, along with continued strength in our consumer oriented product lines.
Let me touch on some of the highlights.
Metal casting business continued to rebound as our foundry customers in North America ramped up production to meet the demand increase in the automotive sector.
By the end of the third quarter, our metal casting facilities were operating at about 95% of last year's levels noticeable improvement from the reduced levels seen earlier.
In addition penetration of our pre blended products remains on a strong growth trajectory in China as sales increased 20% over last year and this momentum should continue moving forward.
Sales in our portfolio of consumer products, which includes pet care personal care and edible oil purification remained resilient.
Led by an 11% year over year growth in pet care.
Continued to strengthen our robust private label pet care portfolio in North America, and Europe and have expanded our presence through partnerships with several new customers.
Another area to highlight as our global PCC business, which benefited from satellite restarts in India, and North America combined with an improved demand environment from the low levels in the second quarter.
As we indicated on our last call July volumes were trending approximately 15% higher compared to June and these dynamics continued through the third quarter.
Of note paper PCC sales in China continued to deliver a solid performance with 18% growth over last year.
In addition, specialty PCC sales increased sequentially as automotive and construction demand strengthened through the quarter and food and pharmaceutical applications remained at strong levels.
Other pockets of strength came in our talc and GCC business as demand improved for our products used in residential and commercial construction as well as automotive applications.
And in our refractories business, where steel utilization rates increased in the us from a low of 50% in the second quarter to 65% at the end of September.
While many of our businesses return to a positive trajectory. We've had some challenges in our project oriented businesses, such as environmental products building materials and energy services, which are still experiencing volatility in order patterns and timing delays.
Energy services was further impacted by several hurricanes that occurred in the Gulf of Mexico during the quarter.
As our volumes began to trend upward through the quarter, we were able to leverage these sales into income, resulting in overall operating and EBITDA margin improvement on both the sequential and year over year basis.
We've maintained our focus on operational efficiency, including variable cost adjustments and structural overhead savings as.
As well as on continued pricing increases cap.
Capturing favorable raw material costs, and increasing sales of higher value products.
As markets continue to recover we are well positioned to expand margins further on increased volumes.
Our focus on strengthening our financial position also remains a priority with an emphasis on tightly controlling our cash generation cycle increase.
And creating more flexibility around our capital structure.
We delivered another quarter of strong cash flow generation, the majority of which was used to pay down debt.
While navigating through the current environment, we remain focused on advancing our growth initiatives and made further progress this quarter on several fronts.
Let me go through some of these highlights in more detail.
The commissioning of two new PCC satellites scheduled for the fourth quarter continued to move ahead.
Currently ramping up production at our 45000 ton facility in India.
The 150000 ton satellite in China should be operational by December.
We will also be resuming production in November at our previously closed satellite and Wickliffe, Kentucky to support Phoenix papers restart of that mill.
During the quarter, we made a small acquisition of a hauling and mining company to further strengthen our vertically integrated position at our bentonite mines in Wyoming.
This transaction improves our cost position and enhances our flexibility with our mining and or transportation in the region.
And our refractories business, we signed two new five year contracts to supply, our refractory and metallurgical wire products in the U.S.
Contracts total approximately $50 million or about $10 million of incremental revenue on an annual basis.
Our new product development efforts are progressing well as we look to accelerate the pace of commercialization and drive new revenue opportunities.
We've commercialized 36 value added products so far in 2020.
The contributions from each of our businesses 12.
12 of these products were introduced in the third quarter.
We kept at a similar pace to last year, while conducting many of these product development activities virtual.
All in all there are a number of positives about our performance in the quarter specialty how weve executed as a company while navigating through difficult conditions.
There are still some challenges ahead weve.
We have strong momentum across many of our businesses and with an enhanced cost profile, we expect to continue to deliver improved profitability as volumes recover.
With that I'll turn it over to Matt to discuss our results in more detail Matt. Thanks.
Thanks, Doug.
I'll now review, our third quarter results the performance of our four segments as well as our cash flow and liquidity positions.
I will then turn the call back over to Doug for some additional perspective on our current operating environment and the visibility we have going forward.
Now, let's get into the review of the third quarter results.
Third quarter sales were $388.3 million, 9% higher sequentially and 14% below the prior year gross margin EBITDA margin and operating margin all improved sequentially and versus the prior year driven by our continued pricing and productivity actions.
As gene expense was flat with the second quarter and also contributed to the margin expansion.
Earnings per share excluding special items was 92 cents and we incurred special charges of $3.2 million after tax in the third quarter or nine cents per share.
Our effective tax rate for the quarter was 19.8% versus 19.1% in the prior year and 16% in the prior quarter.
Going forward, we expect our effective tax rate to be approximately 20%.
Now, let's review the changes in sales and operating income in more detail.
On this slide we are presenting the year over year comparisons of sales and operating income on the left side and the sequential quarter comparisons on the right side.
Third quarter sales were 13% lower than the prior year on a constant currency basis.
The slowdown in economic activity brought on by the COVID-19 pandemic continued to impact our volumes on a year over year basis in the quarter.
The operating income bridge on the bottom left shows we were able to significantly offset the impact of lower sales versus the prior year favorable pricing and cost performance driven by the actions we have taken over the last year.
These actions resulted in higher operating margin versus the prior year, despite the lower volume.
On a sequential basis, we saw significant improvement in demand with sales up 7% adjusting for currency and up 9% overall.
Conditions improved across most of our end markets.
We maintain pricing levels across the company.
On our last call. We told you that sales rates in July were trending approximately 5% higher than June.
And this trend accelerated through the rest of the third quarter.
Daily sales rates in August were 6% higher than July and September was 7% higher than August.
Operating income increased 18% sequentially on a constant currency basis, primarily due to the improvement in our end markets and continued cost control.
Operating margin was 13.33% in the quarter versus 13.2% in the prior year and 11.8% in the second quarter.
Now, let's take a closer look at the operating margins and how they have improved on the next slide.
On this slide we are showing year over year and sequential operating margin bridges for the third quarter.
Starting with the prior year comparison, our pricing and cost actions contributed 190 basis points of improvement, which more than offset the unfavorable volume impact.
On a sequential basis, we leveraged additional volume into 60 basis points of margin improvement.
Our continued cost control contributed another 70 basis points of favorability.
The actions, we have taken on pricing productivity cost control and new product development have positioned us well to leverage incremental volumes into improved margins going forward.
Another margin related highlight for the third quarter was that EBITDA margin improved by 70 basis points versus both the prior year and the prior quarter.
Now, let's turn to the segment review starting with performance materials.
Performance materials sales increased 10% sequentially and were 8% lower than the prior year.
Metal casting sales will improved 26% sequentially as foundry production improved in North America and demand remains strong in China.
The improvement in North America was primarily driven by the ramp up of automotive production.
China metal casting sales grew 11% sequentially and 20% versus the prior year on continued strong demand from our customers and continued penetration of our specialty formulated blended products.
Household personal care and specialty product sales remained resilient up 7% sequentially and flat with the prior year on continued strong demand for consumer oriented products.
Meanwhile, environmental products and building materials continued to experience COVID-19 related project delays and sales remained below prior year levels.
Operating income for the segment was $28.2 million up 34% sequentially and up 5% versus the prior year.
Operating margin was 14.8% of sales up 270 basis points from.
The second quarter and up 100 basis point, an 80 basis points from the prior year.
Continued pricing actions strong cost control and expense reductions more than offset the operating income impact of lower sales versus the prior year.
The chart on the bottom right shows daily sales rates by month this year compared to the prior year.
The segment experienced a clear rebound in demand and sales increased steadily throughout the third quarter.
And we would normally expect a seasonal decrease in sales for this segment between the third and fourth quarters, driven by our construction and environmental end markets.
However, this year, we expect to offset the typical seasonality with continued positive momentum in our other markets.
Overall, we expect fourth quarter sales to be similar to the third quarter. Despite the typical seasonal effects.
I'd also like to note that we experience higher mining and energy costs, while operating in colder months.
And this will temporarily impact segment margins in the fourth quarter.
Now, let's move to specialty minerals.
Specialty minerals sales were $125.1 million in the third quarter up 14% sequentially and 13% below the prior year.
TCC sales increased 14% sequentially as paper mill capacity came back online in the us and India.
Following temporary COVID-19 related shutdowns.
Paper PCC sales in China grew 11% sequentially and 18% over the prior year on continued penetration and strong customer demand.
Specialty PCC sales increased 16% sequentially as automotive and construction demand improved through the quarter and consumer oriented products remains strong.
Processed minerals sales increased 13%.
As end markets steadily improved through the quarter.
Operating income excluding special items was $18 million up.
Up 18% sequentially and 17% below the prior year.
And represented 14.4% of sales, which compared to 13.9% in the second quarter and 15.2% in the prior year.
The impact of lower volume versus the prior year was partially offset by continued pricing actions and cost control.
Daily sales rates charged for this segment also shows improving conditions through the third quarter and.
We expect this trend to continue into the fourth quarter as paper production in the US Europe and India continues to ramp up.
In addition.
We're bringing online new capacity in the next several months and most of this capacity will come online late in the fourth quarter.
The sequential improvement in paper PCC will offset the typical seasonality we experience in the residential construction markets served by the other product lines.
Overall for the segment we.
We expect fourth quarter sales to be similar to the third quarter.
Now, let's turn to be factors.
Factory segment sales were $59.3 million in the third quarter up 6% sequentially as steel mill utilization rates gradually improved from second quarter levels in both North America and Europe.
Segment operating income was $7.3 million up 24% from the prior quarter and represented 12.3% of sales.
Again.
You can see improvement in the daily sales rates through the third quarter.
We expect continued improvement in the fourth quarter as steel utilization rates improve and laser equipment sales pick up.
Overall for the segment, we expect a modest sequential improvement in sales in the fourth quarter versus the third quarter.
Now, let's turn to energy services.
Energy services segment experienced significant customer project delays in the third quarter.
These delays were related to cope with 19 restrictions as well as several weather related shutdowns in the Gulf of Mexico, and what has been a very active storm season.
As a result sales.
Sales were 13.3 million and operating income was breakeven for the third quarter.
Now the daily sales rates chart shows the solid start to the year followed by sales levels that have remained low relative to the prior year.
Continued to see a strong pipeline of activity and we expect sequential improvement for this business in the fourth quarter.
Now, let's turn to our cash flow and liquidity highlights.
As Doug noted third quarter cash from operations totaled $54 million and.
And free cash flow was $40 million.
We continued our balanced approach in deploying cash flow paying down $30 million or debt and we resumed our share repurchases acquiring $3 million of shares in the quarter.
We continued to repurchase shares in October and completed the expiring program with $50 million of shares under the $75 million authorization.
As noted earlier.
The board of Directors has approved a new one year $75 million repurchase program.
Our net leverage ratio is 2.1 times, EBITDA, and we have $682 million of liquidity, including over $375 million of cash on hand.
Before I hand, it back over to Doug for the market outlook.
Like to summarize my comments on what we were expecting for the fourth quarter in each of our segments.
And our minerals businesses, we expect continued improvement and many of our markets offset the typical seasonality.
And we expect sales to be similar to the third quarter.
Margins will remain strong on a year over year basis, though sequentially.
Margins will be impacted by seasonally higher mining and energy costs.
And our services business, we expect continued gradual improvement in refractories as utilization rates improve.
And we expect sequential improvement in energy services has delayed projects resumed and activity levels pick up.
Overall, we expect MTR sales in the fourth quarter to be similar to the third quarter.
With that let me turn it back over to Doug to discuss our current end market conditions and outlook in more detail Doug.
Thanks, Matt.
Before beginning the Q and a portion of the call I wanted to take some time to provide more insight into the conditions across each of our businesses and where we see opportunities to drive incremental growth.
The improving market trends experienced across most of our businesses will likely extend through the rest of the year, while our project oriented businesses may continue to face persistent challenges with uncertain customer order pattern patterns.
In addition, as we build on the momentum from the third quarter were also executing on a wide wide range of attractive growth projects, which will accrue to revenue in 2021.
Let me now take you through whats happening by business segment, starting with the performance materials, our largest and most diverse segment.
Our household and personal care product line will continue on its strong sales trajectory as demand for these products assays high and we leveraged our expanded channels and presence with new customers.
Specifically, we are growing our portfolio of premium pet care products in both North America and Europe.
With the expansion of new online retail channels with larger customers and the introduction of new products, such as our 100% carbon neutral eco care product in Europe.
Example of how we're satisfying customer preferences, while also contributing to our sustainability efforts.
Addition.
Sales of our edible oil purification products have more than doubled since last year as we grow this business through an expanded global customer base.
Our metal casting business.
Expect to continue to benefit from the automotive demand rebound in North America.
Noted earlier, we expanded our customer base in China through the continued penetration of our higher value blended products, which led to sales growth of 20% over last year.
Our solid growth trend there will continue for the rest of the year and into 2021.
I'll touch on environmental products and building materials together as they are both experiencing similar dynamics.
While each maintains a robust and active pipeline and continues to introduce more specialized products businesses have been impacted by timing delays around when customers will commence larger remediation and waterproofing projects.
Switching to the specialty minerals segment, where I'll begin with paper PCC.
Paper demand in North America, and Europe gradually improving.
We expect sequential volume growth in all regions in the fourth quarter.
Asia, and China, more specifically will continue its solid growth trajectory.
We'll also benefit from the ramp up of our satellite in India, and our new satellite in China should be operational in December.
On the horizon, we have two new facilities coming online in the first half of 2021.
One for a packaging application in Europe.
And another for a standard PCC facility in India.
Overall, we're bringing online 285000 tons of new PCC capacity over the next three quarters.
We also maintain a very active business development pipeline across our broad portfolio of PCC technologies incur.
Including high filler packaging and recycling.
Each of these opportunities could add to our overall volume total next year.
In our specialty PCC, GCC and talc businesses.
Sales for our pharmaceutical and consumer products, including food applications will remain strong.
Man for our high performance ceilings and plastic products that are used for automotive applications should strengthen as build rates continue to improve in North America and Europe.
AD sales for products used in residential and commercial construction applications should stay steady.
For the Refractories segment current steel utilization rates in North America, and Europe are around 70% and 65% respectively and.
We expect these rates to gradually improve in the upcoming quarters.
In addition, our order book for laser measurement equipment remained strong in the fourth quarter.
As I mentioned earlier, we've recently signed two five year contracts totaling $50 million to supply our broad portfolio of refractory and metallurgical wire products, which will start to accrue to revenue growth in 2021.
Finishing up the discussion with energy services, where we maintain an active pipeline of offshore services.
Well COVID-19, and adverse weather conditions have led to some early demobilisation or postponements from our larger offshore projects.
Some of these projects have been risk rescheduled to resume in the fourth quarter.
In addition, Weve recently been awarded new large projects in the Gulf of Mexico, which we expect to commence over the next few quarters.
We're focused on navigating through a highly dynamic environment and our culture of continuous improvement can positions us to do so.
Over the past six months, we have been successfully implementing virtual tools to help improve productivity efficiency and connectivity with our employees and customers.
And I've been impressed with how quickly we've adapted to the changing environment.
These tools have enabled us to run our business smoothly as we connect seamlessly with our operating facilities for meetings and site visits conduct problem solving kaizen events and collaborate and communicate efficiently with our global customer base.
Many of these new ways that we're operating.
On a daily basis will become permanent and will balance them within perm in person activities.
As we look ahead into 2021 I'm confident in the direction, we are heading and the solid foundation, we have in place to leverage improved market conditions and the growth projects, we have in hand.
Well covered related uncertainties still persist our end market conditions continued to show signs of improvement.
The operational actions, we've taken we are well positioned to drive improved profitability.
In addition.
The strength and flexibility of our balance sheet provide solid resources to support both organic and inorganic growth opportunities.
Before taking your questions.
I want to say to our team at Mt. Todd how proud I am of the way Theyve executed and performed and what has been an incredibly complex and dynamic environment and thank them again for their dedication and engagement.
With that let's open the call to questions.
All right. If you would like to ask a question you may signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure your mute function is turned off.
Let your signal can reach our equipment again that is star one to ask a question.
And we'll pause for just a moment to allow everyone an opportunity.
[noise] right. The first question is from Daniel Moore with CJS Securities.
Doug Mac good morning, Thanks for taking questions.
Hi, good morning.
I wanted to start.
We at PTC.
PCC can you just refresh us a break down the revenue by geography in Q3, where we are today as a baseline and where do you see that by the end of 21, given all the new schedule capacity coming on line.
I will let me start then I'll give you kind of the bridge to the the new capacity and volumes that we see for 2021 and.
And then maybe you can agree with that so the revenue by geography.
As I mentioned, we're bringing on about 285000 tons of capacity 200 of that will be here in the fourth quarter.
Ramping up kind of this quarter and into the first and then another 85000 tons in the first half of next year and Thats two facility the packaging and another facility in India.
This year, we experienced shutdowns if you remember last call verso paper.
And.
Now on to our mill in Ashdown, Arkansas totaling about 100000 tons of volume came out this year. So net net.
We're up about 185000 tons next year by the by the Middle of next year, we'll have installed about 185000 tons of incremental given the timing of when they come on and as they ramp up we see probably a 125000 150000 tons of new volume in 2021.
Kind of on an annualized basis. So when you get to the second half of next year, you should be on an annualized run rate of about 150000 tons of additional volumes.
Very helpful. Given all the puts and takes we have had over the last couple of quarters and then just trying to get a sense for what the new baseline looks like as Europe, and as far as as Asia, China continue to grow Andy as well, while north Americas had been on a bit of a different trajectory.
Okay any update there.
Yeah. So I think it's let me go back and pick the right baseline. So if you look at our 2019 volumes before going into 2020 with all the puts and takes I. Just gave you are about 2.9 million tons of PCC.
You know we've had to eat so this chart the big dip in volumes through the second quarter and the gradual improvement through the third and we think into the fourth.
With this additional volume we should probably by the end of next year be back to that level right and then what.
With the additional volume accruing into the next year. So again no look we have set that there is a lot of demand conditions that has to continue continue through the fourth quarter and into the first and and seeing where we are with kind of covered related uncertainties, but but if you take an like out of 19 base.
With the puts and takes from this year.
We should be able to get back to that level on a run rate basis by the end of next year.
Okay I'll do some of the math offline on geography Cod sorry.
No no and Dan I was going to give you actually that that rough breakdown rate on a geographic basis and let's do it on a on a revenue basis as you asked for roughly 40% North America region, you're going to have a the rest fairly split between Europe and Asia. There's.
Theres, a small bit in their call it 5% that exist and in Latin America.
But that's the way I would break it down.
Perfect that's helpful. Okay.
Ill add to that then okay.
Now lets go ahead to that that that's what we have in hand, so if things kind of stopped today. That's that's how that's going to shake out. There are you know we always talk about we have a pipeline of opportunities that we continue to work on that.
They are in different stages of technologies in terms of our high filler.
Our new yield products for recycling and those many of those are in.
Advanced stages of discussion, which also should accrue to could accrue to volume next year as well.
That was my follow up was you know some of the new net it seems like the dam is breaking a little bit for for new contracts are you seeing increased momentum there and.
Sounds like you are at least with some of the new technologies.
Yeah, Let me give you a DJ you they want to give a little color about a.
Some of our new technologies and some of the trials are running.
Yes, sure glad to and Dan just a further.
Further the conversation on regional breakdown for the standard Pccs I would say that.
You know all of the contracts were chasing on standard PCC into putting in writing grades.
Most of that is India, and China, and the rest of southeast Asia. So that shift will continue to happen and then when we look at the new technologies.
It's kind of a balance on.
The new yield technology that Weve got where we launch.
That's a pretty successful machine trials and were into a commercial discussions.
That's that's out a little bit more in Europe, and the Americas kind of balance between those two if I look at the new products and packaging.
The most momentum we have right now for the White Gray the White board packaging would be.
North American packaging and then we've got a couple of products and and brown grades.
That.
New newer technology, one being new yield others being a new product design for Brown paper those would be in the Americas team. So standard PCC clear path for growth and and a good poll in Asia, and then the new products seem to be getting more momentum in the Americas and a little bit in Europe.
Perfect. That's helpful lot of really good work done on the cost side and a lot of discussion on the on the in the prepared remarks about.
You know the opportunity for margins to move higher just remind us either across the businesses are consolidated what incremental margins typically would look like and whether we see upside to those kind of historical typical incremental margins over the next 12 plus months given some of those cost reduction.
Initiatives as volumes to recover.
Yeah, Dan and what we've typically told you and if you remember in the beginning of the year as revenues are tracking down you talked about the decremental margins being in that 30% range and that's been proved out as you looked at the second quarter, what's come back on the incremental margins has also been in that 30% range now, it's a little bit north of there and we would expect.
Back to the cost control that we've been seeing and that the effort on our fixed costs expenses that we would be able to move that incremental margin as as the volumes are coming back. So I'd use those two numbers around 30% either decremental or incremental no for now and I will prove it out as a it's expanding over the next coming quarters.
Yeah.
And David and Sarah effect, you're not sure in your initial question, there's absolutely room for margins to move North Yeah. If you take a look at the margin chart terms the volume impact, we've absorbed and offset that volume at those incremental margins you know really accrue to you know income, but also those margins as well.
We're always looking at opportunities to become more efficient with our culture in terms of Productivities and looking for ways to do things better.
We've captured a lot of that over the summer and any guidance, but that's part of our DNA, we do that a constantly and so we're always looking for ways to continue to hold costs or reduce costs. So that those new products those higher margin products and that volume as of our markets continue to recover I'll drop right to the bottom line and help those might that margins.
Story.
So you know I think you know, we always talk about 15%, where if you take that volume from the first quarter or even just from last year, we'd be north of that right now.
Perfect last from me and I'll hand, it over you get very good color on Q4, and then some some color on some of the margins for the individual.
The individual segments overall, if we put all those together of margins.
Margins flat or slightly down from Q3 sequentially based on how we see the world today is that the right take away or.
Yeah, there are better our conclusion.
You know what we told you we basically laid out to the the trajectory for revenues to be essentially the same now that the mix of revenues is going to change. The one item. We also called out for you Dan was that a higher mining and energy costs. It could also be some other incremental costs. It will be in there and those are going to be in that $2 million to $3 million range.
So you are going to see the margin impact taking place just based on sort of those seasonal temporary effects of the mining and energy costs.
While revenues are staying relatively flat.
Perfect. Thank you I'll jump back into the <unk>, yeah, but but Dan just to just to be clear those margins continue that trend of being above the prior year. So strengthen the margin story.
But even sequentially because of those seasonal effects will be down.
Understood that's really helpful. Thank you.
Yes.
Oh right. Once again, if you would like to ask a question. Please press star one.
If you like to remove yourself from the queue by pressing star Q.
Give me. The next question is from so okay cool with JP Morgan.
Hi, good morning, how are you.
That's okay how are you.
Well.
Have any view on no audio bell.
Last quarter, you had your customers check on anything about where they'll be shutdown.
Shutdowns in the afternoon.
Oh, yeah, yeah won't be what sounds like that trajectory looks like I get looks like.
Yes, yes, it up like some color.
Oh, but shutdowns coming in you are.
<unk> often seasonal shutdown happy may actually Giambra Asian market generally strong and so I was wondering like what you hear.
Right.
Sure Let me start it off and then you know I think we'll talk more about the automotive is the impacts just to remind everyone that impacts and automotive have just primarily in North America and Asia for our metal casting business.
We supply more of the automotive industry in our in our minerals businesses and in our specialty PCC, a little bit more of North America and Europe focus. So just give you the breakdown of those impacts.
Jon Hastings, you want to talk a little bit about metal casting.
What we're hearing from customers or going into the fourth quarter.
Sure Doug Hi, John how are you.
Good.
No. Let me let me touch based on North America, I'll talk about China, and then also southeast Asia, but what we're seeing in North America is everybody is running pretty well pretty strong as you know auto production went when it sounds in Q2 rebounded in Q3.
Inventories are remaining low and everybody's looking to restock the pipeline in auto sales remained pretty strong all of our customers are telling us that they're running fairly strong throughout the year.
Vendor of the year.
Again, we'll see what happens around the end of year holiday season would shut downs, but we don't expect any major impact we see it's your own strong.
China, you know about 40% of our businesses and auto and heavy truck in China and <unk>, we've seen a very very strong year the build rates.
Customers are ER has come back extraordinarily strong in Q3, we expect that to continue into Q school, what we see is not only domestic production and consumption. But then also the exports exports of parts and also loans vehicles going into both U.S. in Europe those continue to rebound.
As a result, the demand has been very strong.
Last a region in the world, it's rebounding in Southeast Asia, and what we're seeing is that they're currently running at about you know our business is about 80% year on year.
And that's a relatively small piece of all metal casting business worldwide like we do see that increasing on a sequential basis and that's because the auto production in Taiwan, and Korea, Indonesia, they're they're they're on the rebound coming off the cobot shutdowns.
So that's the last region and overall feel were we continue to look pretty strong going through Q4.
So the only thing I'd add to that is look I think in our visibility in the middle of the third quarter was probably a little bit stronger going into looking into the fourth.
Well you know dressing I think where your question is coming from with the shutdowns recent news and in Europe, and what we're seeing around the world, Yes, it's a bit of cautious but right now what we can see through the fourth quarter. It's kinda continued demand levels as John and that is that that includes the automotive supply that we have through our north American Europe in our specialty PCC business for now.
We continue to watch it and we're prepared to react accordingly.
And.
Second thing.
Yes. Thank you.
Yeah, cashed falling like you know getting sounds like California.
Well its again back when you do all the cash you think you kind of Yep Yep.
We have begun to buyback you know she has some meaningful that what do you.
Well, what what are your capital allocation.
Yeah. There are capital allocation has remained a similar to what it was we talked about that on the last call. Yes look I think going into into April you know ensuring that our balance sheet was in solid shape was it was a priority.
And and and making sure that liquidity was there and our debt maturities were you know proper for the environment. We took advantage of the markets capital markets or in June and we did just that we pushed out maturities EUR $400 million unsecured okay eight years.
We left some cash on the balance sheet and you know right now where we stand we think that's a great position to have to make sure that regardless of what happens this company's liquidity position is solid.
We do have a solid cash flow year, which is good as we've made some adjustments in working capital and and and.
And so we continue to put that cash on the balance sheet I think right now our priority is making sure our debt positions, we paid $30 million in the third quarter I think we'll continue to steer our capital more to that direction, but as you know we have a 75 million dollar authorization or that we intend to execute on.
And we have some cash on the balance sheet for you know opportunities we're going to support these growth projects that I mentioned today.
And and and do things like you know small we have our small hauling business that we acquired.
We have a nice portfolio and profile of potential companies, we think worked for us and.
And so I think our balance sheet is in a good position for all that repaid.
Repay debt.
Executing our share repurchase program and ensure that we have resources to support our growth initiatives.
And so let me just add to that the free cash flow dimension to that you know Doug talked about the strength of the story and you saw here in the third quarter generating another $40 million of free cash flow. If you listen to the call from last quarter. We told you that we were going to generate about $100 million to $120 million or free cash flow in the quarter sorry in the year.
You know based on what we're seeing now through the rest of the year or were in the $140 million to $150 million range of free cash flow generation in 2020 for the company and that includes continuing to invest in the company from a sustaining DHS and growth perspective, I know that capex level is going to be a in this.
$60 million to $70 million range, and so feeling good about as Doug said, a very balanced approach towards the use of our cash flow generation.
It seems like you'd like plenty of cash to buyback $70 million stock.
Thanks, Good investment.
Yeah, we think it is a good investment silica so but that's not to say that you know, we've always talked about our approach and making sure that our debt levels are down at target levels first investing in ourselves and our growth opportunities, where we see the returns are and that fit our strategy.
And and then yes, we will balance or returning cash to shareholders and also as acquisitions potentially are there.
As those change we can charitable steer more toward share repurchases.
And as those opportunities, we'd steer more toward our inorganic opportunities. So we'll continue that approach but.
But I think the point is that making sure that we are in solid footing regardless.
Regardless of what economy were in I think we have that position and.
And being able to take advantage of opportunities be it a in the market for returns to shareholders or.
In the market for things that we think fit our core capabilities from an era inorganic standpoint.
Okay. Thank you very much.
Gives us a lot of options.
Okay.
Oh right and the next question is from Rosemarie Morbelli with GE research.
Thank you good morning, everyone.
Hi, Rosemarie.
So oh, just finishing up on the cost side.
Oh I'm not sure I'm, sorry first of all do you all have a dollar amount intend. So how much do you have been eliminating in terms of cost.
And then how much of that do you think is there a need temporary and come back.
Yes, Okay. If you take I'm, sorry, [laughter] Rosemarie, who.
Okay.
Okay.
Yeah. Thank you very much guys right. If you take a look at what we just showed you on a year over year basis or with the the effort of costs that we have taken out in terms of expenses fixed costs, starting with the restructuring that took place in the middle of last year, where we told you that would be it.
$12 million since that time, we've also seen expenses and related to TNT and also other costs, meaning a other head count costs coming out in that we haven't been back filling and that we've been finding a way to be more efficient.
Overall in our system, so that we would not need to backfill those heads.
When we talk about whats permanent and what's not permanent we say that about two thirds of the overall cost benefit that we've been experiencing on a year over year basis is going to stay in place.
And so we showed you here in the third quarter that that was about 180 basis points worth of.
Favorability and a and so you could expect that to continue on a about a two thirds basis going forward.
Thank you that's helpful.
And then still on the <unk> you had a quick question stacked up some.
And just.
Yes last year, she was $75 million off a affiliation you only bought back out $15 million last stuff stock do you think that P.T. and you could get closer to that a full stabilization.
Yeah. So I I think Rosemary we were on track to.
To do the full 75 million dollar authorization, we suspended that ER in March after the first quarter, given the conditions and so youre pesos to and our intent is to fully fulfill that that authorization. So we took a pause over the summer of making sure we preserved cash making sure that we're in the right.
And as I mentioned earlier in our balance sheet and then when we saw as the cash flow and our balance sheet resumed at with with the remaining time that we had so we ended up with 50 million due to a bit of a pause.
It was.
We have the cash on hand to be able to do that $75 million and I think we'd intend to do that going forward.
Yeah.
Right, So Q and still on the on the cash no two Oh, I thought God <unk> debt level I feel like it is right now or you had kind of supposed to a debt.
Late payment, which.
I suppose I, what's wrong, how you feel and if I had probably you are still planning in our lead you sell your dad show what is he a net live weights. So I guess then.
We've maintained a kind of a target level of two times Rosemary weve been around that 2.1 times for a while I think but I think as we as we went through the second and the third quarter as we viewed kind of the economy and what was happening we felt prudent as they said to make sure that we had a very strong balance sheet and the.
He was that and so we put most of the free cash flow the $40 million in the third quarter to debt repayment, but to shareholders, we're comfortable with where our debt position is we could make some additional debt payments going forward, but again that balance sheets that we have gives us a lot of options to make sure that our debts in the right position, we can steer our.
Cash to shareholders, but also on making sure we have resources for growth opportunity. So we had a lot of options here, we might see a little bit more toward debt given where we are in the economy, but we take that balanced approach and we're going to continue to do so.
Okay. Thanks, and I know you're looking at you are a consumer driven or markets.
Revenues entered from small pockets of a low on our 25% and you are targeting that levels to grow to 30, 35% to 40% if my memory sets and you're right.
And that's leading to faster.
Doubling going from 200 million to 400 million. So can you talk about the timing and.
And where the most oh, that's close she's going to come from internal growth. So all way that M&A is actually the biggest chunk of getting you to your goal.
Yes, I think you're referring to a question maybe or from the last call. I think we answered you know how big could are consumer oriented businesses be.
Look I think it it could grow to that size I think were certainly our strategy around creating.
Creating balance in the company from an industrial and consumer standpoint, as you mentioned, we're currently about 25% consumer oriented and you know we look to grow some of our core position. So I think we're vertically integrated in our pet care business and a couple of years ago, we added to that with an acquisition conceive emetic, which doubled that pet care.
Our business I think you know you saw that the organic growth of that business is at 11%.
And so we think that a large portion of that those businesses are edible oil purification, our animal health business, our pet care business, our fabric care businesses. Those will continue to grow and we continue to develop new products and ensure that we have the right capital base there to have healthy returns.
We will continue to grow those organically and I think there's opportunities out there for us to continue to add to our consumer oriented product base to expand that I think could it get to 30, 35% sure that's going to be both a combination of growing our current core positions organically and adding to them inorganically.
And so over time I think that's a possibility to get to those types of levels, but were certainly focused on on on growing those product lines. These core product lines that we have in those consumer oriented products.
Could you get to that level faster just by a at least shuffling your portfolio of businesses, meaning that divesting some non consumer related up innovation.
On a percentage Grace, yes, that's good that would do it I think you know at the moment I think we're looking.
At the moment, yes that would do it but at the moment, we're looking more toward adding and growing those those businesses.
Organically and potentially inorganically.
Okay. Thanks.
<unk>.
Oh rights and your next question is from Mike Harrison with Seaport Global Securities.
Hi, good morning.
Well I was wondering if we could talk about the the HPC business.
Here was up 11%, but the business was flat overall on a year over year basis. So what's going on outside of pet care or was there some de stocking or maybe declines from surge buying that was happening earlier in the pandemic.
Yeah, the the that.
This is product line is household personal care and specialty and in that specialty segment. There are some.
You know kind of high end additives for drilling products.
So both in construction drilling and oil and gas drilling and that was the one product line that has been off mostly that oil and gas drilling those additives for oil and gas drilling. So I believe every other.
Portion of that product line had grown over last year with the exception of that.
All right and then within the paper PCC business or have you seen your printing and writer writing paper customers getting some benefit from from colleges and schools getting back to something person learning or is that not provided much pick up and until.
We get to fully in person, we don't see that its movements.
I think that some some of what's behind the demand growth resell that serves a DJ I think the majority of our growth from the third to the third quarter was really due to restarts of you know we had a number of shutdowns in the second quarter for you know entire entire month. So you know India.
Government restrictions and shutdowns for almost part of April and in May we.
We had some shutdowns in South Africa, and some of our plants in Europe, and so those restarted in the third quarter, which was really driving through that growth I do think there is some demand improvement I'll, let D.J. monagle talk more to that about our conversations with customers TJ there.
Yeah, I am Doug So so my guess they the way. We're you know it's a generalized statement Doug is spot on that what we've been saying is.
Really just restarting and cutting up coming up and the shutdown. There's a there's a general optimism that that as more and more schools come on line and more businesses get to work that.
Operating rates will improve does this give you a perspective on this you know the operating rates as we.
We went in that 2020 were in the neighborhood of just below 90% so somewhere between 85 and 90% in North America was right at 90, Europe was a little bit lower than that so it has things are coming back up.
Most people feel that North America is going to be back into that you know 80 plus percent operating week.
Europe seems to be a little bit slower.
And the Big question on everyone's mind is they they know that going back to work or they they feel that as people return to the offices and more and more people go into the schools because a lot of schools are working on these hybrid thing that paper consumption will grow what that what the question. Mark is is how did the habits how does.
A long term habits change based on this.
Pandemic and there's a there's a school of thought that says the longer that this lasts the more likely people are are going to be transitioning to more I guess electronic methods of keeping their data are doing their work. So there's a big question, but what we've seen is about getting people back to work.
Work in and having the.
Got it and having to shut down stuff, but but there's still a big question on long term demand, especially in.
North America, and Europe, and then in Asia. The demand picture is the same but for us Oh.
Our growth story is more about penetration and that's that continues our.
And to move forward is that does that help Mike.
Yeah, absolutely very helpful. And then last question I have is refractories.
I'd seems like utilization rates are starting to approach that 70% level I feel like 80% is more but the magic number where are these these bills feel like they can run.
Run efficiently and profitably.
Do you guys see a 80% or 70% or any specific utilization rate and the magic number in terms of a pick up in your refractory sales.
So let me start that nonetheless, Brett Argerich is to comment you know historically in this business. It you know we thought that like an 85% rate was necessary for this business to be you know really strong in terms of operating income we've changed to this business tremendously over the past couple years from a margin contribution margin.
Technology, it's a portfolio of products.
And so you know I think you saw last year in the mid Seventys up late late in the first quarter mid Seventys. This business is still very profitable so.
We've changed that kind of the profile of the business over time Brett.
Brad why don't you talk a little bit about what you see in the marketplace and where you think operating rates are going based on what you're from our customers.
Sure sure. Thanks, Mike.
Yeah. It is right now and looking at the market conditions in all regions of course are showing reduced rates from prior year, but those are all showing gradual improvement.
Doug in that book, when they're not automotive is improving really to to pre.
Pretty good levels in NAFTA, or we're seeing steel and scrap prices are in North America and Europe.
Increasing which is definitely beneficial for the steel industry and and right now. The U.S. is continues to show signs of getting back up.
You know she knows she was a better levels right now there it's just under 70%.
For the past couple of years, we've seen 80%, which was very healthy.
At 80% it gives the steelmaker plenty of time to do maintenance, but also at a very healthy rate I would anticipate that these rates will continue to gradually improve but is that pointed out.
Eating would be great to get back to and I think we can we can get there assuming.
Assuming no further setbacks from some covert back but overall, we are positioned pretty well to operate even if we don't hit.
80% rate and continue on there's also steel capacity that's coming on a new plants are these new plants or are starting up between.
Fourth quarter and grew up 2021, which we're very well aligned to continue to expand with them or they both Doug pointed out some of the new business growth.
That will be we're moving well along with them in both refractory and metallurgical wire. So yeah. I think we have a really good chance to get back to some reasonable rates in the 90% were well positioned well hi, Mike.
All right thanks very much.
Oh right.
And we'll take the next question from David Silver with C.L. King.
Yeah, Hi, good morning, Thank you actually I should say good afternoon.
So I had a couple of.
Couple of like targeted questions here.
Early on in your comments, Doug you mentioned regarding the 11% increase in pet care, you know pet care sales this quarter year over year and sequentially.
Glenn just will you made a reference to partnering.
And I have to confess I'd never you know come.
Come across that before and also yeah, sorry come across that before on your commentary and you know the 11% I think it is significant.
Significantly higher than maybe the three to five or 4% to 6% kind of numbers you've been targeting for that.
This for a long time, so maybe just a little bit of color on how are you doing anything differently are these partnerships are a little bit different.
And.
What would be the ultimate potential to increase you know partnering opportunities in terms of growth growing you know that part of your pet care.
Thank you.
Sure. Thanks, David.
I think what I refer to partnering we talk about you know we are a private label pet care, a supplier and so partnering is producing a brands for for others for their shelves and so we're talking about partnering we've been partnering with new customers around the world.
You know, we have a growing business in China.
Our business and see them matter continues to grow.
Solid rates in Europe, and continuing to have come up supply new brands to new partners. There as well I think the other comments were as we move and as you see the consumer buying behavior to be more online. We're also looking at.
ER and have started some online channels for ourselves so.
So there's a number of different partnering things that are going on and that's not just to that and that's around the world those online channels or our global.
In our in our main regions. So when I talk about partnering it's that it's being able to partner by being able to provide brands for those who want to work with us and our vertically integrated position as a supplier.
Okay, sorry, I Didnt associate to partnering with private label. So no. Thank you for clarifying that.
I wanted to maybe shift over to the PCC business in particular and.
In particular, the volume growth that you cited in China, a this this quarter.
I think it was 18% or so but.
I was scratching my head and I I'm trying to kind of relate that that growth this quarter with the upcoming new project for 10, Maine, which I guess is not.
I'll start it up and I was wondering if you could characterize the full group all of the growth in China as related to you know the legacy <unk> a satellite units you have there or might there have been some product produced at other locations, but maybe shipped over to the Chen.
Being location, you know maybe to get things started there.
Head of your full scale startup. So in other words was any what was that all was the growth in China all related to legacy plants or was that you know somehow you know part of it part of the growth related to.
<unk> Chen being I guess, maybe pre productive pre production or pre startup of volumes that are maybe required.
That the the growth year over year growth in China was all from our legacy operating facilities there.
So we saw some strong demand year over year.
From our legacy so that give you. An example that the Chen Ming facility will be about 150000 metric ton facility coming online that has not come online. So none of those volumes came from that facility that should be commissioned in December and ramping up through you know kind of the first quarter of next year.
To give you an idea you know our installed base capacity in China is probably 850000 tons and Chen main will represent another 150000 tons. So that you know, bringing us to close to a million tons of the <unk> tons of capacity in Asia, So well.
In China. So when you see that you know 18% growth and we're adding another almost you know six.
16, 17% to our capacity base, which we think ramps up next year. That's why we're very enthusiastic about our growth in Asia in the paper business because that penetration story and then also in India as were building ramping up one end to another facility next year, so that TJ talked about those opportunities in penetration really driving our growth in this.
Business in Asia, that's where it's coming from so we see those type of growth numbers continuing through next year in Asia.
David It hopefully that helps a little bit.
Yeah, no. Thank you [noise] that for 1 million metric, sorry, 1 million tons installed out of you know something you'll have a little bit over 3 million total that's kind of China's share of your overall installed base I think than.
The million tons installed isn't it it's kind of our Asia base a million tons in Asia.
And then for the majority of that's been in the North Georgia, that's been in China. However, India has been growing very quickly over the past the past five years.
Okay, and then just maybe one one other question this time on the foundry.
Business.
But you know for many quarters now you've been highlighting the growth in China related to the custom blends that you offer there.
And.
Again, just probably a gap in my understanding but should I assume that that the types of products. The custom blends that the use satellite in China are similar to the ones that are are marketed regularly to let's say North America or western Europe or you know is it.
The case, where.
Customers.
Other regions, maybe like to blend that around in other words, you know it is the value proposition.
The same in China as it is in North America, and Europe for you know either due to cost or a the types of products you're selling it is it is it the.
Qualitatively or quantitatively different as you go region to region.
But it's not it's it very much so very much the same in terms of concept and so I guess you know they're not exactly the same formulas and the reason behind that is because we are tailoring a formula to you know that customers are equipment, what they're trying to make the quality requirements and dimensions of that.
That for that that cast product and so but being able to you know developed a system.
And a blend in an additive blend that that meets the requirements to help them, whether its through their scrap or reduce their scrap rates to very low levels to improve the throughput through those are those casting machines, we were able to tailor that Ah. So you know the blends may not be exactly the same but that is our value proposition to being able to from a technical standpoint go.
And really deeply understand and help that foundry you know improve many aspects reduce cost improve quality and then be able to deliver that blend kind of real time, I mean in North America, where we're delivering trucks on an hourly basis to our customers our foundry customers, it's that and if they have an issue.
They can pick up the phone and talk to us our technical experts will go through and make sure we understand what the chain. We can make it what the issue is we can make a change to our blend and delivered on the next truck it to that level of capability and it's exactly that.
The type of value proposition, the technical capability and the know how that words about developing around the world and China, that's what's driving a kind of a lot of our growth in China.
Okay, great. Thank you very much.
Uh huh.
[noise] [noise] and once again that is star one to ask a question.
Oh right. It appears there are no further questions at this time I'd now like to turn the conference back to Mr. de check for any closing remarks.
Oh, Thank you very much I do appreciate everybody joining the call today and I hope everyone and your families remain safe. Thank you again.
This concludes today's call. Thank you for your participation you may now disconnect.