Q4 2020 Minerals Technologies Inc Earnings Call
The prepared remarks with insight into how we see 2021 is shaping up.
On our key priorities growth initiatives and market trends.
As you saw from the release last night, we finished 2020 with a strong fourth quarter.
Before I go through the quarter. However.
While it takes some time to provide my perspective on the full year, which will put this quarter into context.
Characterize the year managing through this pandemic has challenged us on every front.
And I'm very proud of all of our employees for their unwavering commitment agility and execution focus on.
All key qualities that define our culture and our company.
Our performance reflected the strength of our diverse mix of businesses in high value product portfolio, which enabled us to expand our positions with existing customers and capture opportunities with new ones.
Proactive operational measures to reduce costs and increase pricing led to an improved margin profile.
In addition, we successfully implemented virtual tools.
Evolved our processes to help improve efficiency connectivity with our employees and customers.
Protecting the health and safety of our employees is one of our core values.
Since the onset of the pandemic, we put in place a robust series of protocols to protect our employees while.
While ensuring the safe and efficient operations of our facilities.
While implementing these new work practices, our employees stayed focused on improving our safety performance.
Which resulted in 2020, having the lowest recordable injury rate in MTS history.
The testament to the strength of our people capabilities and processes.
We were able to swiftly adapt retool and embraced the change and drive our safety culture at forward.
Now, let me take you through how the year unfolded from an operational and commercial perspective.
Agility is the word that comes to mind as we manage through significant demand changes in our end markets.
On certain customer order patterns and production curtailments.
The global pandemic, which continues to affect demand in our industrial end markets and the most notable impact in the second and third quarters.
During this time, we focused on making several operational adjustments at our plants.
<unk> maintenance activities and manufacturing process improvements.
And when markets recovered in the last four months of the year, we were well positioned to take advantage of the higher volumes.
Our consumer oriented businesses in both performance materials and specialty minerals remained consistently strong throughout 2020.
Much of this performance was driven by our global pet care business, which grew by 7%.
But also through solid increases in personal care edible oil purification and other food and pharmaceutical applications.
After experiencing large volume drops in our minerals businesses in the second quarter.
Many of our end markets, including automotive residential construction and steel steadily improved throughout the back half of the year.
In contrast, some of our other end markets, such as paper and large environmental and building projects are still a recovery.
On the demand environment was volatile this past year or.
Our team's disciplined execution and aggressive cost control put our company in a good position to leverage improved improving sales into income.
These efforts resulted in higher overall operating and EBITDA margins compared to 2019.
Taken measures to enhance our operational efficiency efficiency, including variable cost adjustments and structural overhead savings.
As well as true through continued price increases productivity improvements and higher sales of new products.
Generating sustained cash flow and creating flexibility around our capital structure have been top priorities.
During 2020, we delivered strong free cash flow of $175 million slightly higher than last year.
We used the cash generated to reduce net debt by $122 million and returned $48 million to our shareholders through share repurchases and dividends.
I speak often about our culture of continuous improvement.
Wanted to describe how this deeply engrained operating model is a key reason why we quickly adapted to a dynamic environment to deliver these results.
Our people and their engagement in the company are what drive this mindset.
The unique recipe for MTI to be agile.
We conducted 8600 problem solving kaizen events and.
We received nearly 65000 suggestions from our employees throughout 2020.
Keeping at a similar pace to last year.
Puts us in context, each day on average nearly 24 kaizen events are being held and were receiving 178 suggestions from our employees across MTI on how to improve our daily processes.
This is a significant level of involvement and our continuous improvement culture.
Especially as many of these activities occurred virtually this past year.
There are countless examples of how we've transformed our processes and capabilities to drive efficiencies improve collaboration and further demonstrate our value proposition to our customers in a virtual existence.
We successfully implemented tools that allow us to remotely commission, a new PCC satellite or that can support trialing and commercializing new products and applications.
We can now performed specialized maintenance assessments remotely without our engineers, having to be physically present at the plant.
And we've developed a webinar series that allows our technical teams virtually engage with a broader group of customers and more quickly provide them with our value added solutions.
These tools are becoming a significant competitive advantage to our company and will remain a permanent part of how we work in the future.
We also advanced our strategic growth initiatives during the year.
We remain the leader in Green sand bond systems for the global foundry market.
There are significant opportunities to leverage our deep technical expertise and value proposition with customers in large foundry markets, such as China and India.
This year, we both expanded our customer base and further extended our penetration into China as sales of our pre blended products increased by 17%.
For the world's largest PCC producer with the most advanced portfolio of technologies, including high filler consumer packaging and paper waste recycling.
Our objective is to increase PCC volumes globally through base filler contracts in Underpenetrated regions.
By capitalizing on growing opportunities in adjacent markets, where we can deploy these latest solutions.
From 2020, we commissioned three new satellites, which total over 200000 tons of new capacity and our growth continued on a strong track in China, our PCC sales increased by 13% over last year.
We've invested in strengthening our capabilities resources and new technologies for our consumer oriented products, which is delivering results as these more resilient products comprised 25% of our total portfolio.
While our pet care business has contributed to much of the strength as we grow our global portfolio of premium products and enter new channels such as E Commerce.
We are also growing other specialty applications, including edible oil purification personal care and fabric care.
On new product development efforts progressed, well in 2020, as we continued to accelerate the pace of commercialization and drive new revenue prospects.
We commercialized 44 value added products and incorporated sustainability indicators as part of the new product development process to ensure we are meeting both our own environmental goals as well as our customers.
The last pillar of our growth strategy is M&A, where we maintain an active pipeline of potential mine to market opportunities.
We made a small acquisition of a hauling and mining company, which further strengthened our vertically integrated position at our bentonite mines in Wyoming.
And we pursued an acquisition of element this who we feel is a strong strategic fit with our company.
Through this process, we demonstrated our commitment to remaining disciplined in our approach to deploying capital for inorganic opportunities.
The results we achieved in 2020 under challenging conditions underscore the power of our operating culture, the resilience of our global market, leading positions and the strength of our financial Foundation.
We finished with momentum across many of our businesses. We are exiting 2020 in a stronger position than when we entered it.
With that backdrop, let me go through the takeaways for the fourth quarter.
As discussed on our last call, we expected that demand trends in many of our major end markets would continue to strengthen through the final months of the year and that's largely how things played out with some of the markets, we serve especially transportation and industrial improving more than we expected.
These dynamics helped drive sales of $432 million on 11%.
Percent sequential improvement.
Financially, we generated $61 million of operating income and earnings per share of $1 eight.
Both sequential and year over year improvements.
Despite the lower year over year sales.
Overall operating margin improved 90 basis points sequentially, and 220 basis points compared to last year.
In addition, our EBITDA margin was up 170 basis points.
Cash flows remained robust through the fourth quarter capping off a strong cash flow year.
Operating cash flow for the quarter was $92 million up 16% compared to last year.
Free cash flow was $72 million up 8%.
We made progress to lower our debt levels by paying down $80 million. We also returned $17 million to shareholders through dividends and repurchases.
I'll take a moment to briefly highlight the progress we made with our growth initiatives in the quarter.
Our metal casting business performed well.
Strong demand from North American foundries, and our growth momentum in China accelerated with sales increasing by 29% over last year.
Demand for our portfolio of consumer products remained strong and sales on our household personal care and specialty product line were up 6% over last year.
Our ground calcium carbonate and talc businesses had a solid quarter supported by significantly improved demand for our applications that go into the automotive and residential construction markets.
On the PTC front.
We ramped up production at our new facility in India.
On our 150000 ton satellite in China came on line at the end of the quarter.
And we resumed production at our satellite and Wickliffe, Kentucky.
Specialty PCC set and specialty PCC sales were up 23% over last year as our new capacity expansions.
The increased demand for our latest sealant products.
In Refractories, we signed three additional five year contracts.
Building on the two contracts from last quarter.
Fly, our refractory and metallurgical wire products in the U S.
Contracts combined represent $14 million on the incremental revenue on an annualized basis.
I'll share some of the specific highlights as they help round out our solid operational financial and strategic quarter for MTI and lay the foundation for growth in 2021.
With that I'll turn it over to Matt to walk you through our financial results in more detail Matt.
Thanks, Doug.
I will review our financial results the performance of our four segments as well as our outlook from the first quarter.
I'll, then turn it back over to Doug for additional perspective on the year ahead and.
And now let's review the fourth quarter results.
Sales in the fourth quarter were 11% higher sequentially and 2% below the prior year.
Gross margin operating margin and EBITDA margin improved versus the prior year as our actions on pricing productivity and cost control have resulted in higher levels of profitability.
Our effective tax rate for the quarter was 18, 6% versus 17, 6% in the prior year and 19, 8% in the third quarter.
And we expect our effective tax rate to be approximately 20% going forward.
Earnings per share excluding special items was $1 eight.
And reported earnings was <unk> 91 per share.
Special charges included acquisition related expenses cost associated with the cyber security incident.
On a noncash pension settlement charge.
Now moving to the bridges on the right side of this slide.
You can see on lower volume and a $12 million impact on sales versus the prior year.
Which was partially offset by favorable pricing.
Operating income was $8 million higher than the prior year.
As the impact from lower volume was entirely offset by pricing and cost actions as well as the favorable mix of earnings.
Operating margin improved by 220 basis points versus the prior year.
Now, let's turn to the full year highlights.
Full year sales were 11% lower than 2019.
We experienced the most profound impacts of the COVID-19 pandemic on our end markets in the second and third quarters of 2020.
Demand improved gradually across several end markets in the third quarter and accelerated in the fourth quarter.
Despite the challenging market environment, we improved our margins versus the prior year through the actions, we took on pricing and cost over the last 18 months.
And the efficiencies, we realized in 2020, including reducing SG&A by $13 million or 6% versus 2019.
Earnings per share excluding special items was $3 99.
And reported earnings was $3 29 per share.
The sales bridge on the top right of this slide shows that we faced nearly $200 million of top line impact from lower volume in 2020.
Which translated to a $51 million operating income impact.
We offset more than half of this impact through favorable pricing and cost actions and operating margin improved by 30 basis points versus the prior year.
Company is positioned very well for profitable growth and further margin improvement as volumes returned with continued end market recovery.
And now let's review the segments in more detail starting with performance materials.
Fourth quarter sales for performance materials were slightly above the prior year and 6% higher sequentially.
Metal casting sales grew 6% versus the prior year and 17% sequentially as foundry production improved in North America and demand remained strong in China.
Household personal care and specialty product sales were also strong up 6% versus the prior year on continued strong demand for consumer oriented products.
Care personal care and edible oil purification, all realized double digit year over year growth in the quarter.
Environmental products and building materials experienced typical seasonal volume reductions in the fourth quarter as well as continued delays for new commercial construction projects, which resulted in lower sales sequentially and versus the prior year.
Operating income for the segment was $33 million up 31% versus the prior year.
Operating margin was 15% of sales versus 14, 8% in the third quarter and 11, 5% in the prior year.
Continued pricing actions variable cost control and expense reductions resulted in significant margin expansion for the segment.
And we expect continued strength for most product lines in this segment through the first quarter.
We expect some leveling off from the acceleration in demand that we saw on the fourth quarter and we also expect the project oriented businesses to remain at lower levels in the first quarter.
So overall, we expect first quarter sales to be similar to the fourth quarter.
And now with smoothed essentially minerals.
Specialty minerals sales were $138 9 million in the fourth quarter, 2% below the prior year and 11% higher sequentially.
Paper PCC sales increased 12% sequentially as paper mill operating rates gradually improved and we've ramped up a new satellite in India.
We also we started on a satellite and Wickliffe, Kentucky, and we brought online our 150000 ton satellite in China, the company's largest PCC satellite to date.
Specialty PCC sales were strong up 23% versus the prior year and up 13% sequentially on robust demand from consumer oriented markets residential construction.
On automotive end markets.
Processed minerals sales increased 10% versus the prior year and 8% sequentially on strong residential construction and automotive demand.
Operating income excluding special items was $21 $9 million.
Up 13% versus the prior year, despite the lower sales.
Operating margin was 15, 8% of sales compared to 14, 3% in the third quarter and 13, 7% in the prior year.
And looking ahead.
We expect continued strength in specialty PCC and process minerals and sequential growth in paper PCC as our new satellites ramp up.
And overall for the segment, we expect first quarter sales to be modestly higher sequentially.
Now, let's review the refractory segment.
Refractories segment sales were $73 $9 million on the fourth quarter up 1% versus the prior year and 25% higher sequentially as steel mill utilization rates continue to gradually improve in North America and Europe.
Operating income increased 7% versus the prior year.
52% sequentially to $11 1 million and represented 15% of sales compared with 12, 3% in the third quarter and 14, 2% in the prior year.
Steel utilization rates are currently hovering around 75% in North America, and 70% in Europe.
Up from a low point of around 50% from the second quarter of 2020.
Further improvement in steel mill utilization will depend upon the strength of demand from construction automotive and infrastructure end markets going forward.
At this point, we expect the first quarter to be similar to the fourth quarter from a market perspective.
Although note that on a laser equipment sales are typically weighted more heavily towards the second half of the year.
Now, let's move to energy services.
The energy services business continued to experience customer project delays in the fourth quarter.
Sales were $16 8 million and operating income was $600000.
Activity increased sequentially with deepwater basins, where we operate however, it remains below prior year levels.
Looking to the first quarter, we expect similar levels of activity for the fourth quarter.
Now, let's move to our cash flow on liquidity highlights.
Fourth quarter cash from operations was $92 million versus $80 million on the prior year and free cash flow was $72 million versus $67 million from the prior year.
We deployed $20 million of capital during the quarter to grow the business develop our mines and improve our operations.
We paid $80 million of term loan debt in the fourth quarter, bringing our net debt to $562 million and our net leverage ratio to one eight times EBITDA.
We also repurchased $15 million of shares in the fourth quarter, bringing the 2020 total to $41 million.
Despite the end market challenges, we experienced in 2020, we.
We generated higher cash flow than prior year, Inc.
Increased liquidity by 221 $9 million.
On reduced net debt by $122 million all of which has further strengthened the company's balance sheet.
This balance sheet strength provides us with significant flexibility for how we deploy capital to the most attractive opportunities.
Now, let me summarize our outlook for the first quarter.
We expect similar market conditions on the first quarter to what we experienced in the fourth quarter.
I'd like to note that we experienced relatively favorable operating conditions in the fourth quarter.
We typically experienced higher mining and energy costs are operating in the colder months, which could lead to temporarily higher costs in the first quarter.
In performance materials, we expect continued strength in consumer oriented markets with some leveling off from the acceleration we saw on the fourth quarter.
We also expect continued strength in metal casting.
In specialty minerals on paper PCC business is positioned for growth with 150000 tons of capacity ramping up in China.
We expect continued solid demand for specialty PCC and process minerals, driven by residential construction and consumer oriented products.
And our services businesses, we expect stable refractories demand to be partially offset by fewer laser equipment sales in the first quarter.
And we expect demand for our deepwater filtration and well testing services to remain at several similar levels.
We expect to see activity increasing in the second quarter.
Overall, we expect first quarter sales at around the same level as the fourth quarter.
With that let me turn it back over to Doug to provide some perspective on the year ahead Doug.
Thanks, Matt.
I will now provide some perspective on our markets and touch on some high level operational and strategic themes for the year.
As we look ahead this will be another dynamic year and with the momentum across many of our businesses 2021 is shaping up to be a solid year for MTI.
We expect our consumer oriented businesses to maintain their strength from last year and continued their solid growth trajectory.
Our metal casting specialty PCC ground calcium carbonate and health businesses.
Merrily serve transportation and residential construction sectors are recovering nicely and in some cases exceeding pre COVID-19 demand levels.
Our refractories business is benefiting from gradually improving steel utilization rates and current indications point to continued strength in steel end markets.
In our paper business base demand in North America, and Europe should improve during the year and Asia will remain on its strong track.
We'll also see a full year of volume growth from the new satellites that started up in late 2020.
And we have two additional satellites totaling approximately 70000 tons that will come online in the middle of this year.
Finally, there will be a slower start to the year for our energy services building materials on environmental products businesses that.
So we anticipate project activity picking up in the second quarter.
Across the portfolio, we have a number of attractive projects in hand that will accrue to volume growth in 2021.
We will be focused on accelerating our geographic expansion in our core product lines.
New product development remains a key priority for us.
We made significant progress to improve the speed of execution increase the number of products, we commercialize and enhance the impact of our latest solutions.
Over the past five years, we've cut the time from development to market and have.
At the same time increased our sales from new products by more than 50%.
These metrics should continue to strengthen in 2021.
Some notable technologies to highlight include water remediation solutions to address <unk>.
PCC for packaging and tissue applications.
<unk> formulations for edible oil purification.
And our 100% carbon neutral had care product.
Many of these new products are helping us penetrate more consumer oriented applications and adjacencies with customers.
Our solid financial footing, we have the resources to execute on the initiatives I just mentioned.
Additionally, our strong balance sheet with debt at targeted levels gives us the flexibility to also deploy capital to shareholders through dividends and share repurchases as well as toward acquisitions.
Continuous improvement at the core of how we operate we will develop new innovative ways to adapt and enhance our virtual tools to drive more value by improving our connections with customers speed.
The speed with which we we solve problems and further enabling internal collaboration.
Lastly, sustainability and ESG leadership, that's been a focus of ours for a long time.
And over the past several years, we've taking meaningful steps to embrace these activities and that I'm, sorry, embed these activities deeper into our company.
A few items to highlight.
We're on track to meet our meet or exceed our environmental reduction targets in six focus areas.
More than half of our new product pipeline is now geared towards sustainable solutions.
We'll continue to advance and strengthen our broad range of ESG initiatives. This year and look forward to publishing our 13th annual report in July.
In closing.
On the thank our global team.
Our company's strengths have been showcase during these times of adversity.
I'm proud of how we've responded with agility and perseverance.
Heading into 2021, our team is engaged focused on operating safely and efficiently and aligned behind our culture.
Positive momentum that we generated at the end of last year, we're well positioned to execute on the attractive opportunities in front of us.
With that let's open the call for questions.
Okay.
Alright, if you'd like to ask a question you may signal by pressing star one on your telephone keypad.
We're using a speaker phone. Please make sure. Your mute function is turned off July your signal to reach our equipment again that is star one to ask a question and we'll pause for just from the line to allow everyone an opportunity zone.
Alright, I will take the first question from Daniel Moore with CJS Securities.
Thank you Doug Matt Good morning, and thanks for taking the questions.
Hi, Dan.
I wanted to start with a little bit of a crystal ball on maybe some of a couple of the businesses that.
Are still being impacted and if we look specifically at performance materials environmental and building materials.
Still at a pretty low base 110, $115 million combined revenue or so in 2020 look out two to three years not looking for the cadence of recovery, but where where do you see those businesses getting back to.
And that sort of post COVID-19 world and what kind of Incrementals should we be thinking about.
Yes, I'm not going to go that far out there, but I think they get back to where they were for sure.
A couple of things to consider it as a mix of influences here.
I'll pass it over to Jon Hastings give a little more color.
There are still some acute kind of.
Impacts from Covid and sites being closed and limited activity going on at current on waterproofing sites around the world.
That's primarily in Europe at the moment.
At the same time like an enhancement in our building products.
Same thing with environmental products, and big landfill remediation and some of our higher end.
Resist ex type.
Industrial landfill complex landfill environment same things happening.
And in energy services, we still have a solid pipeline.
This year our projects we've had a couple of them demobilize in December due to Covid outbreaks.
Being rescheduled, we'd look probably toward the beginning of the second quarter.
So things are still shifting around with for some of those COVID-19 related.
Issues.
The challenges some of that is.
We're not in the.
The building envelope above ground, where on the where the below ground. So when you're digging new holes waterproofing new holes.
And we still have a solid pipeline of those projects, but they haven't broken ground yet we expect them to we're also in our kind of slow period in the winter for these businesses and building construction starts to ramp up in the second.
We see that rates that were at in 2019 coming back.
This year, but it's going to be that rate more in the second and.
In third quarter, and I guess I gave a little bit more detail. John do you have anything to add to that at least on environmental and building.
Hi, Dan This is John.
Thanks, Doug.
A couple of things just to highlight it.
Doug said.
Covid certainly through a curve ball on us.
Induced a lot of delays delays within manpower delays in funding of new projects.
If you think about environmental with all of the landfills, it's dependent on municipal budgets.
We are starting to see that change were getting an increasing number of some minerals in project proposals.
So we are looking at Q2 Q3 is too.
Ramping back up and this is one of the last sectors within performance materials to recover from the Covid induced downturn.
In mind like Doug said deal with building.
We're we're in more than just.
The big.
Building projects that you see with on office buildings and office complexes were also an infrastructure. So we are involved in tunneling projects Metro stations other types of implant business and it's all of that together that we're watching and we see the day uptick.
So yes, we've had some challenges over the past couple of quarters, but we're not straying from our long term strategy environmental we've got products that really do a really good job of preventing.
Groundwater contamination from hazardous waste and we also have great water proofing technologies were recognized as the world's leader, we are efficient in manufacturing them and distribute them to the to the projects when they when they do go we've got a healthy pipeline and so we think this will.
Two to rebound as we as we go into the Q on Q3.
That helps.
No doubt net out.
Yes, just kind of thinking about it from a longer term perspective.
Shifting gears metal casting returned to nice growth from <unk>, clearly seen you've got some easy comps coming up.
From sort of Q4 revenue as the base House humbly incremental revenue is still ahead in terms of recovery and then how do you see the beyond that longer term growth expectations.
Once we fully recovered and just kind of remind us of the day.
The ramp on the opportunity. That's ahead of you in China in particular.
Yes, I think Theres a couple of things, let's start with North America, and I think we're seeing some demand shift I'll tell you we've been keeping really close tabs on our order books.
In North America, and we're seeing strong demand and from indications that we have from our customers.
Their pipelines and day quarters their pipelines are thin and they've got a long list of back orders and so we see that continued strong pool.
Certainly through the first half of this year at a minimum so North America is looking very strong across all automotive truck and.
Industrial casting applications.
We noted that in China.
We grew almost 30%.
Just in the fourth quarter.
And that is driven by and on top of that.
The year, we increased our blended products by 17% over last year.
That's coming from a couple of places thats coming from not only just strong demand based demand.
For auto builds rates heavy truck and industrial applications in China also coming from new customers and so we're starting to expand that addressable market to a broader base.
And moving the kind of core base into that blended system. So the strategy we've had in place for.
First decade.
Is continuing and it's going to continue to accelerate I'll also note.
The difference between keep reminding the difference between the penetration rate of blended product in North America, which is 90% 90% of the foundries use a blended products.
It's still only around 25% maybe in China.
So that market four times bigger than the United States.
With.
The underpenetrated customers that don't use the blended product whether ours are on others.
There's a long way to go in that so we see that continue.
Right now it may not 30% every quarter, but we've average 10% to 12%.
Every year for the past five years.
And that could accelerate a little bit, but we see that continuing for sure through 2020, a little faster.
Very helpful. Okay, maybe one more and shifting back to the more near term.
Overall revenue growth in January was relatively flat in line with your guide and then just trying to on making sure I under Triangulated to commentary for fiscal Q1 were thinking relative revenue relatively flat sequentially.
With maybe slightly lower adjusted EBIT margins given some of those input costs is it the right way to think about it.
Yeah, Dan that's what the guidance would tell you.
Looking very much similar to the fourth quarter overall from a sales perspective, and we did note a few of those cost items that we called out on the.
Really the mining costs on a quarter over quarter basis, given the cold weather factors that may take place.
Got it okay. That's very helpful. Thanks, Matt I'll jump back with any follow ups. Thank you.
Once again that is star one to ask a question as you find your question has been answered you may remove yourself from the queue by pressing star Q.
We'll take the next question from Steve O'hara with Sidoti.
Hi, good morning, Thanks for taking the question.
Thanks, Steve.
Hi.
And at the margins.
Maybe following up on the last question.
Yeah.
Pretty.
I would say very solid performance in the fourth quarter.
Kind of given and then make et cetera.
Yeah.
Yes.
You noted the cost increases in some areas.
Was there anything in their day.
You don't feel sustainable in terms of margin performance.
Where you think you've got a benefit.
Either maybe a competitor wasn't operating.
Or something like that.
Due to the pandemic or.
<unk> increases other than what you noted so far.
Kind of building back towards where you want it.
Yeah.
No. There's nothing to note I think that's I think it's it really is that performance and all of the things that have come together that we've been working on for a while.
It's Ben.
It really securing cost control in all senses both.
Good performance in our productivity is.
We generate a 4% productivity this year over last year.
I'm pretty average to what we do we've done 5% before 6% and some years so with.
With the lower volume that's a pretty good result for the company given what we went through so.
Our normal productivity improvement year from good variable cost control, we've made some changes as Matt mentioned in our overheads that we think are permanent.
We've seen good volume environment in many of our a good mix of that volume as well.
We think will continue forward and.
Strong pricing we've done a lot.
Of making sure that.
Our products pricing reflects the value that we derive and that's not something that just happened in the fourth quarter, we've been working through making sure that our products are priced appropriately and in moving and demonstrating that value proposition and I think we do that.
Done that very effectively over the past.
A couple of years. So I think that's just kind of come together and I think as I mentioned, we took the time in in the second and third quarter.
You know to really hunker down and make some changes.
We we had all of our employees doing really valuable work on the plants to improve processes a lot of those kaizen events I mentioned occurred over the summer months.
To retool some things to perform maintenance in there because we knew the volumes would come back and when they did I think we're in a good position to have it come through so I think this is a sustainable.
At a level I think we're at a different level than we were last year. That's why I mentioned I think we are exiting this year stronger than we went into it that said.
We still have some other product lines that haven't recovered yet and so as we see the growth and not only paper volumes with new volumes coming on in those accruing to US is building, an environmental and those energy services projects come back.
There's more volume to be had on this cost base and so that's why we're confident that.
The mix will move around a little bit as we go through the year that all change and we'll have some short term energy costs, probably in the first quarter, but.
Think we're at a different different level on I think we're focused on continuing to sustain this and maybe move it further.
Okay. Thank you that's helpful.
And maybe just on.
Jumping too.
The <unk>.
Building products and I know this is mainly used in our building materials I guess.
Mainly used in res non res construction.
And I'm just.
May be less familiar with the product market, but I mean is there a opportunity to enter the res market or is it just the cost basis of the products you sell is.
High enough, where it doesn't really make sense on the res side or is there kind of an established market.
<unk>.
It's not kind of the same product mix that you guys are inc.
John you want to take that one.
Okay sure sure Doug.
Talk to you about the diversification of building products.
We like.
And like I said earlier, we're in a variety of different projects.
The large commercial construction activities.
Well as infrastructure, so tunnels and metro stations and things of that nature.
We do look at our waterproofing, we do we.
We do have the capability of supplying small projects.
Most of the residential projects that we see either single family multifamily don't require on.
Large subterranean waterproofing.
But we are working and we continue to look at ways. We can deploy our technologies for example, and in Green roofs for other applications in the building envelope. So there are opportunities for us we do have technologies, we do marketing those spaces, it's not big volume for us.
And but we continue to try to explore and expand the way we go into those technologies as well.
I hope that helps.
Yes, that's very helpful. Thanks, I'll jump back in queue. Thanks in advance.
Alright. The next question is from Rosemarie <unk> Gabelli <unk> with G research.
Oh, Thank you good morning able range.
Mark.
Was wondering if you could talk on the potential impact.
Well the potential benefit from any infrastructure bill that may come up.
Yeah.
No I think we operate obviously in construction steel.
Short answer is we would benefit from that Rosemarie. So infrastructure is going to pull on a lot of building products, it's going to pull on steel.
It's going to pull into as John just mentioned probably of waterproofing projects.
Even some of our environmental solutions, so I think that.
And we've talked about this several years ago, when we anticipated an infrastructure bill.
Yes, I think we would benefit from bad across many parts of our company.
Can you put a dollar amount.
Hmm.
It depends on the infrastructure Bill I think.
But I think the largest no I can't right now put a dollar amount on it for you Rosemarie I would say.
On that.
There are some ins and outs to this I think it would benefit or.
Lot of probably.
All of our refractories business in steel that's for sure our ground calcium carbonate businesses in our talc businesses that go into.
A lot of kind.
Kind of construction applications.
Our building products business are waterproofing, our infrastructure waterproofing would benefit from that.
If it's if it's a very targeted infrastructure program it might be different than abroad in terms of rail.
Help our metal casting business, we do supply foundry into.
On systems into foundry markets that supply into the rail market. So.
I think it depends on how broad it is but in general if you are talking about highways tunnels infrastructure and cities rail.
On.
It's going to be pretty much brought across the company I would say at least 60% of the company could be impacted by the positive positively.
Thank you that is very helpful actually.
And then if I look at the fourth quarter on margins.
They are substantially except for energy and they are substantially above flashed, yes is that something that could be says that over the longer term are you.
You can reach on an annualized basis.
Yes, I think so.
We feel that.
On the changes we've made.
How we've we've improved some businesses that were you know we've been working at improving some of our business that were lower margin over the past couple of years through new technologies.
Sure.
Better pricing.
And mix within some of those product lines, we've been <unk>.
Deliberately growing through those tech true new technologies are consumer oriented businesses, which.
Which have in general accretive to our margins.
So we've taken the time to do short term items that we feel are out of balance like pricing.
And longer term items, where we're focused on technologies and higher margin areas of our business to grow them more quickly and we're doing that and it's also we see that theres some opportunities as we grow these some.
Some of these consumer oriented products globally.
I'll note that in our pet care business.
<unk> grew 7% this past year.
We've improved the margin profile of that business significantly over the past few years and we're also growing it geographically. So can we talk a lot about metal casting and paper PCC growing geographically, but these specialty products.
<unk> care products, the bleaching Earth and also that pet care business is growing in fact.
Our pet care business grew 23% I think it is on that.
One 3% in China this past year so.
We're doing a number of things to change the profile. This year, we took out some cost structural cost we did some of that last year as well so Rosemarie I think.
Given the product portfolio.
The pricing the cost control and changes to our overhead structural costs, yes, I think that this number is a sustainable number I think we can improve upon it.
We are we are looking at.
We've got some short term cost challenges like some transportation, that's getting tight around the world that we're.
We're moving through we've got some energy that comes around in the winter months on some affects.
Effects, our mining costs, but we think there's a short term and we'll we'll manage through them to be able to sustain this type of margin.
So if you look at those consumable product lines.
What would be the Joe Douglas.
Yes, Kevin King.
Yes.
Well, our pet care business right now, let's just start there is largely.
North America, Europe Continental Europe focus however, we've been growing that.
That business over the past year in the U K we.
We've also been growing that business as I, just mentioned in Asia, and China being one of the larger markets.
Our our specialties business in terms of animal health Europe focused but we also see opportunities with our customer base in Asia.
Bleaching or similarly.
Our fabric care business.
As you know really is very global we operate if you recall I think I've mentioned before and a lot of dry laundry detergent.
Both in Softeners, and surfactant granules, and that's largely outside the United States.
It's much more in.
Areas of India, Southeast Asia, China, where dry laundry detergent is still use so we're growing those and those are those are some some rapidly growing markets.
Laundry detergents.
Detergents, and so in that consumer oriented group.
We're growing those areas and that's in performance materials in the specialty minerals group, our PCC our specialty PCC.
Goes into not only automotive sealants, but it also goes into.
On pharmaceuticals, and food applications.
And we've recently expanded.
Our two facilities one in the U S and one in the U K and so we're growing.
And those those kind of consumer applications.
In both areas, but we've had some real.
Notable growth in Europe.
Some of those consumer products to specialty PCC. So it's kind of a round. It's all of our it's all of those product lines and it's it really is kind of.
Around the world, where we see that growth occur.
Thanks, Doug.
Very helpful and just one last question if I may.
Have you given up on element.
I can't comment on that right now Rosemary we what I can tell you is.
That.
You saw through the releases.
The offers that we made.
And we thought I think element to this is a strong strategic fit we felt we've made.
A very strong offer for both their shareholders and our shareholders.
And we'd look to get some engagement unfortunately that didn't happen.
That's where we are now so I'm going to leave it at that.
Okay. Thanks, good luck.
Alright. The next question is from Mike Harrison with Seaport Global Securities.
Hi, good morning.
Maybe just to kind of I don't want to ask specifically about element, but maybe just comment on the M&A pipeline.
Kind of.
Assuming element this is in the past.
Any possibility of some activity in 2021 on the M&A from.
Yeah.
Yes, Hi, Mike.
I will say that we have.
We've got a portfolio of things that we think fit well with the company I will give you if they are they're mine to market.
We think we've got capability in the company as we take.
Unique reserves around the world and turning them into specialized functional additives. That's that's what we do.
When we bought AMCOL, it's very similar when MTI bought AMCOL similar strategy.
We like.
We there's portfolios of similar minerals that we operate in and Theres also new minerals that are in markets that we currently serve and so we've got I think in general we.
Feel we need to know the element the mineral we it has to fit into our capabilities from a technology standpoint, and and there there are other.
Small and larger companies out there on pieces of companies that we have our eyes on and we think that.
You know what.
They can become actionable at some time we're patient.
In many cases and we're also very diligent in what we think they are worth.
And so I think you saw that demonstrated.
What I, just said I think that kind of rounds out how we viewed element to this.
We have small things in our pipeline.
On that fit to help us support our reserves and growth around the world.
You know when we are growing in regions like China and elsewhere.
We look to make sure that we can sustain that growth.
And so that's part of the pipeline.
And we think that there's some other smaller pieces to bolt on to our core markets to not just organically growing those groups. We think we can accelerate that inorganically along that same core product lines. So it's a mix of things both small some larger but they all fit that kind of framework of mine to market that technology that we have in adapting minerals to make them specialty.
Could be our same mineral could be different but it is something that combines into that market those markets that we serve hopefully that helps.
Yes, that's helpful. Thanks, and then wanted to ask.
We're thinking about the margin progression next year.
You mentioned that about two thirds of the cost reduction in 2020 would be permanent.
That suggests that about a third of it comes back at some point and presumably there's some some kind of incentive comp reset, but just how much of a headwind should we think about those factors being on an operating income basis in 2021 versus 'twenty.
Matt you want to take that.
Sure remember Mike So what we said was we had about $13 million reduction included in that $13 million reduction.
Some costs related to the.
The cyber event, so really on a on a year over year basis, you're looking more on like the $15 million range just from an overall expense perspective, so that two thirds ends up being about $9 million to $10 million, which we would think is sustainable now as youre looking at 2021.
That is a combination of some <unk> coming back some positions that we held off on being filled but that will all be dependent on the growth coming back right. So as Doug said, we're very disciplined very prudent with how we spend and we're looking at the growth as it's coming back and we'll assign expense.
Expense levels commensurately with those volumes so.
Two thirds being permanent and that other piece local merit out as sales come back.
Okay.
Alright, and then the last question I had is.
On the raw material from with your mine to market strategy I feel like you have some insulation from a lot of raw material dynamics, but I'm also sure that there are other areas.
Where you're probably going to have to manage through some inflation in 'twenty. One on one of the segments or product lines, where you maybe have some concerns or you're most focused on.
On raw material inflation.
And maybe how much of a price lag headwind should we be thinking about.
For the first half of 'twenty one.
Maybe I'll start with that.
I think you are right. We do have we're vertically integrated in the majority of our minerals businesses.
So those the inflation that would affect those would be much more on the energy side so deep.
Diesel fuels.
On it.
Natural gas et cetera.
You know that we have.
The program in place.
We look to buy that energy, we think there's some short term, but as Matt mentioned in the winter months.
A normal.
Occurrence for us and that's why mining costs tend to go up in some of our drawing costs without mineral go up in the winter.
The things we buy.
We buy as a precursor to our.
P C C around the world. However, all of that is formulaic, if we absorb higher costs, we pass that through in pricing and Theres a lag there is some delay in some of our contracts anywhere from a month to six months and so that automatically gets gets pushed through and I think you saw that in 2018 19.
Happens so that's that's kind of protected in those contracts.
And our and our refractories.
<unk> business, we do buy our magnesium oxide.
And that.
That is over our history moves around in terms of pricing based on demand.
Made a lot of structural changes and some in the past year or two.
To improve our vertical integration in that product and so we maximize the use we have we can make our own centered.
Magnesium oxide, which you take magnesite on an account and you bake it into what we use and on.
Our plants in Turkey, and so we've been maximizing the useful probably at 25% integrated probably 50% of our total European business is vertically integrated.
And we've also built strategic relationships and taken some longer term positions with buying positions with with the supply chain. So we feel through 2021, we're on a very good position.
With the actions we took in 2020 from.
From a cut from a raw material cost positions. So I think the things that give us a little concerned going into this year, maybe a little bit of energy short term transportation.
Is that I think youre seeing kind of around the world is becoming type both in truck and ship and.
We don't move things between countries very often very localized we buy and sell and manufacture in the countries. So we don't import export a lot but.
Truck freight is one of the areas, we're keeping our eye on but.
We generally are very able to pass that through in terms of our pricing and make sure on a delivered basis will cover.
Alright, thanks for the color there.
Yes.
Alright. The next question is from David Silver with CL King.
Yeah, Hi, good afternoon.
I kind of feel like moving back to school. They have one P. C. C oriented question, but it has about 17 parts here.
But I was wondering it's D. J could maybe just to start off if we could just talk a little bit about that.
Large scale project in China that came on.
And in particular, I guess I was hoping you might shed some light on maybe a typical ramp up for that large scale project.
And you know.
I guess I would just say where do you think it is now and over what period of time does it take 12 months to ramp up to the to the nameplate capacity.
Or a different time period, the cadence there and then secondly also on D. C C.
Looking at my New project list and I was just wondering if you could maybe highlight I think I guess two or possibly three.
Projects, one in Europe from one or two in India that are that are scheduled to come on either kind of right about now or later on let's say the first half of 'twenty 'twenty one.
Just so just to highlight on the cadence of.
The addition of new projects and then finally I was just wondering in the fourth quarter there was.
A nice recovery there sequentially, but.
If you could peg.
Kind of a utilization rate on the PCC side.
That would be helpful. Thank you.
Yeah.
Okay DJ on pickup.
Sure.
So let me, let me start with utilization rates.
Kind of prime work back.
Where you began.
So on utilization rates around the world.
Right now were as projected as we thought we would see.
Going into the fourth quarter Europe was probably in the 70% sort of operating rates and it looks like they are a little slow coming up to 75% on.
North America is.
Is back into the mid eighties, and they'll probably be up to 90% by the second half of.
2021, that's how they look.
That's over a lower base with the shutdowns it went on so.
So those markets, where those operating rates influence, our our sales or I've got a pretty solid trajectory going on.
And of course Asia is less driven by.
Operating rates and more by by our penetration rates. So let me try and address kind of the two.
200000 tons that are to which Doug was referring that basically came on.
In India that.
That plant that we have.
It was some 45000 tons and that's probably by the end of the first quarter will be okay.
80%, 90% in terms of.
It's utilization.
That is dependent on the customers.
Pull based on the market, but the PCC plant itself and our process of penetrating into their grades and making a smooth transition should be it should be finished pretty much finished.
In the second quarter.
The China satellite that started up really just in December is really just getting going at.
It's reasonable to think that it's at about a 50% sort of utilization right now that will come up over the second quarter and probably be in the neighborhood of.
60, plus maybe 70% at the end of the second quarter, but that'll be up full full speed by.
Probably the beginning of the fourth quarter is it would be the normal sort of trajectory.
We've got some customers in China that move very fast so it it'll be somewhat dependent on the their customer needs.
And then you.
You mentioned two other satellites there'll be coming on.
2021, one is in India.
And that that will we.
We thought we'd be starting that in Q2, the pandemic has slowed that one down so both that one and the one in Europe will be ramping up more in the third quarter and that European one will be supporting penetration into packaging.
So I would say that by the end of the year.
Based on that those grade mixes that we ought to be seeing.
Running at a rate that's that's pretty close to the design.
I hope that helps.
Okay.
Yeah, no that's great. Thank you very much.
So I'm sorry, the respective sorry.
Sorry, one other perspective I'd give you is just to put all of that kind of a broader.
Time period.
What kind of what we're looking right now given all of that happened in 2020, and what we're bringing what we've some of the shutdowns that we saw on 2020 and all of that we brought on and we will be bringing on as D. J just mentioned a few.
You go back to our full year 2019 volumes, we see 2021, the ins and outs of all that we see 2021 being a higher volume of 19.
So I know, it's the ramp ups and the timings and the signings in the buildings and all of that takes some time, but when you step back and you say from 2019 all of the market changes that have happened in some.
And some of the shutdowns, we experienced last year, plus everything that we're bringing online and we'll be bringing online.
In the first half or by the middle of this year.
We see that being a volume positive over where we left 2019 and in addition, we.
We still see a lot of business development activity happening, we have a nice pipeline of base filler contracts that were continuing to work through.
I think our portfolio of potential.
Packaging opportunities has expanded.
From where we were in the middle of last year, and I mentioned, a couple of new technologies further out that we think move us into other markets.
Then packaging as well as other fiber market since maybe tissue. So.
One wanted to present that to you from a from a broader perspective longer term perspective of the next year or two.
Okay. Thank you for that.
I know we're in.
On the top of the hours and thank you, but just briefly I was hoping you know Doug might be able to add a little strategic context to the to the broad based price increase that was announced a few weeks ago.
So the 3% across the board woods with certain product lines.
Is 10%.
So you know when I see an announcement like that I kind of scratch My head Nice day is this because Douglas just because youre going on offense or is this because you feel that this is.
Necessary for defensive purposes, I guess cost increases or logistics issues that you raised.
Raised earlier.
And then I also had kind of scratching my head and I say well why is Tao meriting, a 10% increase where as you know many of your other.
Bigger are more popular product lines are skewing to the to the lower.
Proposed price increase.
So I guess I would I was wondering if you could put put that in a little perspective.
Oh, sorry.
Sure.
Well I don't want to.
Some weird, but I don't think it's either.
I think it's offensive or defensive I think.
I kind of in my mind, many cases price and cost have nothing to do with each other and we price the products on the value that we feel that they bring in the marketplace and we feel that many cases, our products have tremendous value and then the applications, we're putting them into and then on the other side of it we work to make sure that where the.
The lowest cost most competitive supplier, we can be and so.
So we work every day at <unk>.
Lowering and securing our input costs and productivity and variable cost control to make sure that no matter. What we are the lowest cost provider of the highest value products and so I think I think what that is is as I mentioned, we make sure we look.
At what our products do and how they create value and that they are priced accordingly, now we have to take obviously the market into the market. Another substitution that they may have or other product choices they have into account.
And when we do all of that we feel that these are the appropriate changes to make so I think it's maybe either neither or some of both David I guess is what I guess I would answer your question offensive and defensive.
Yeah, he answers frequently it depends right.
Last question on just real quick for Matt most of the industrial companies that have reported that I track have noted.
Currency tailwind this quarter, you know weaker U S dollar.
And I may have missed it I didn't hear it and I didn't see it in the presentation slides I didn't see it in the.
Yes, released last night.
So was there a meaningful currency tailwind translation or otherwise that is included in the results that may be you could you could tease out or call out for us. Thank you very much sir.
Certainly David.
Not much.
On the bridge and as you can see there.
Not significant that being said the businesses, which have the biggest translation opportunities for us from an economic perspective are the PCC business and also on the ex factory side.
And that's where that's where you've seen it this quarter, but in the fourth quarter there wasn't significant.
Okay. That's it from me I really appreciate it. Thank you very much. Thanks.
Thanks, Dave.
Alright, and the next question is from Silke Kueck with JP Morgan.
On.
Yeah.
Alright.
Just a few questions.
International paper that ethane.
Main tend to spin off that printing paper business and.
On a like a business that consumes some PTC does it matter at all to MTX.
It doesn't.
NASCAR announced.
Yeah, I'll start on getting to D. J I don't think it doesn't change anything currently with our contracts. It doesn't change anything with how we operate with them I do think it it changes things from a conversation on our focus standpoint.
I actually think it could be a good thing.
We're a much bigger piece of that new entity.
<unk>.
And I think the technologies that we have and.
The money that we feel we can save through those technologies and enhance their products would be a very good conversation that we'll be having DJ anything to add to that.
I do Doug so sales guy.
The way I'm looking at it just to build on what Doug said contractually everything is fine and then so the base businesses will remain but but if I look at.
Where international paper the part that is staying as international paper is they focus more on packaging.
And our ability to to come to them with some higher value added products as they as they keep working that strategy is enhanced.
As demonstrated by what we're doing with them on their new products that are launching out of Selma. The flip side on this new company that will be focused on uncoated freesheet no question that that helps us.
Positioned some of the newer products that we have both.
For high filler technologies from some of these environmental issues, where where that.
That group is likely more empowered to to really take advantage of these and we think we can help them pretty substantially in <unk>.
Improving their performance.
Mhm.
Similarly.
Pulp prices have really moved from that Athena, maybe Atlanta on again.
The autonomy September on noga penalty like a thousand dollars a ton to do balance.
Yeah.
Minerals technologies from accelerating PCC usage.
Yeah, it with MTX agnostic to a high up on pricing.
Okay.
If I take that yeah true D J.
So it absolutely helps us on these business development program. So you know from those customers on our existing satellites or our contracts remain in place and they're built to go through the ups and the peaks and valleys of any pulp pricing, but but our business development pipeline is.
It's very robust.
I can't say that we've had increased calls because it.
The phone lines have been pretty busy, but especially our asian customers or potential customers.
Have I would say a heightened sense of interest and a heightened sense of pace and.
And looking at our standard PCC in printing and writing grades and I do think that that's attributed to what they see as the long term prospects for pulp pricing. So it does help our value equation true.
Medically and it does further differentiate us from any other mineral alternatives. So so pulp pricing in general helps us with these new projects.
And if I can ask a last question just about the same subject how long does it take for a new customer.
On to face on the product, but my memory isn't in the old days it used to take.
And you could take several months because you have to pick one line offline and try the product and try to various stages and it doesn't take a year or two on a new customer what can you do it in a couple of months on like you know how how long does the process take.
So two different ways of looking at our technologies for the for the base PCC from the time. It takes when we signed the deal it's reasonable to think that nine months to a year before we we get the plants up and running and then and then.
You know a few months to transition into our product for some of our high filler technologies, where we can promote something to an.
An existing customer.
Getting through those great structures, probably takes six months.
But that's the sort of that's the sort of pace for those two items.
Mhm.
Okay.
And my last question is.
From that.
And in terms of thoughts.
I was wondering if you can share your thoughts about capex for 2021 and E.
Operating cash flow on a free cash flow type of team I want to share.
Yeah, no sure. Thanks, Okay.
As you saw in 2020, you know it was a strong repeat of what we did in 2019 with a free cash flow on that $175 million area with Capex in the mid $60 million area. So as you look at 2021.
We are expecting capex to rise to around $80 million.
We will be investing in additional growth areas for the company.
Sustaining capex will largely remain similar to what you saw on 2020.
So that additional capex that we're spending is coming from return seeking opportunities.
From an overall free cash flow perspective look what we've told you over the past.
Several years of that we expect the company to be able to produce.
Above $150 million of free cash flow.
And as we look at 2021, that's obviously, what the team will be working to do and we will continue to update you on that as we move through the year.
Yeah.
Okay. Thanks very much.
Alright at this time I'd like to turn the call.
Call back to Mr. <unk> for any closing remarks.
Well, thanks, everybody I appreciate you joining the call today and for your patience as we made it through all of the questions I hope everyone stays safe and healthy and we'll speak to you again in a few months. Thanks again.
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