Q3 2021 Minerals Technologies Inc Earnings Call
Please standby we're about to begin.
Good day, everyone and welcome to the third quarter 'twenty to 'twenty, one minerals technologies earnings Conference call today's call is being recorded.
At this time I'd like to turn the call over to Eric I'll take head of Investor Relations for minerals technologies. Please go ahead Mr. Holliday.
Thanks, Cody and good morning, everyone and welcome to our third quarter 2021 earnings Conference call.
Today's call will be led by Chairman and Chief Executive Officer, Doug Dietrich and Chief Financial Officer, Matt Garth.
Following Doug and Matt's prepared remarks, well open it up to questions.
I'd like to remind you that beginning on page 15 of our 2020 10-K, we list the various risk factors and conditions that may affect our future results.
Also point out the safe Harbor disclaimer on this slide state.
Statements related to future performance by members of our team are subject to these limitations cautionary remarks and conditions.
I'll turn the call over to Doug Doug.
Thanks, Eric Good morning, everyone.
I appreciate you joining today's call.
Well go through our third quarter results at a high level.
Leading our sales performance and how we manage through a variety of challenging dynamics.
Well then take some time to describe the progress, we're making with our growth initiatives.
And our team's solid execution on several fronts.
Well, then turn it over to Matt to discuss our financial results in more detail and expectations for the fourth quarter.
And then we'll open the call to questions.
Yeah.
You start with a recap of the quarter.
First and foremost market demand has remained robust across all of our product lines and geographies.
We delivered a strong results marked by another record quarter of earnings per share of $1 30.
Performance was achieved while managing through a challenging operating landscape.
The supply chain and inflationary pressures across our businesses.
Sales for the quarter were $473 million were 17% higher on an organic basis.
And up 22%, including sales from the recent nor America acquisition.
We saw sales increases in every segment and across every geography.
For more perspective on our organic growth.
<unk>, we've initiated and I've discussed with you over the past year.
Contributed approximately 5% to our organic growth in the quarter.
Said another way.
5% of our growth was delivered from new projects and technologies initiated over the past year.
12% from market growth and 5% from the acquisition of North America.
Yeah.
Strength of our operating capabilities as reflected in how we successfully managed through the external conditions, we faced this quarter.
Which enabled us to generate $63 million of operating income.
23% increase over last year.
Performance was achieved within the context of a myriad of external issues, including rising costs truck rail and shipping logistics challenges.
At Caltex, finding talented people to support expanding production.
Significant energy cost increases that became more pronounced during the quarter.
And continued challenges presented from the Covid pandemic.
Despite these issues, we kept our inventory and supply positions for key raw materials and commodities in good shape.
We acted quickly to solidify our pricing leadership.
Across our product portfolio.
To address the inflationary cost pressures that accelerated over the past few months.
And we tightly controlled expenses and continued to drive productivity improvements.
Not to be forgotten.
Navigate it everything while also seamlessly integrating nor America into our company.
Cash flow remains strong and through the first nine months of the year cash from operations is up 10% compared to 2020.
Completed our share repurchase authorization.
Last week, we initiated a new one year $75 million program.
From a cash flow and solid balance sheet gives us the flexibility to continue to allocate capital to shareholders.
While also investing in attractive organic and inorganic growth opportunities.
Overall, we had a very strong quarter in terms of financial and operational performance.
Needless to say there was a high level of activity this quarter.
Execution speaks to the capabilities of our team.
You did a great job operating the company safely and efficiently while remaining focused on delivering for our customers.
Now let me take you through some of the year to date sales highlights.
The contribution from our recent growth projects and describe the initiatives that will further advance our sales trajectory.
We've discussed with you the initiatives we've executed over the last year, which are which have been key contributors to our growth in 2020 one.
But we've also advanced several new projects this quarter that will support further sales growth going forward.
Very encouraged with our continued progress on our growth strategy, which is focused on geographic expansion, new product development and acquisitions.
Van trends are favorable across our markets.
Sales growth demonstrated in our businesses has been further bolstered by our new projects aimed toward higher growth markets.
Also from investments, we've made to strengthen our portfolio of value added products.
Let me provide some perspective on what we've realized through the third quarter from these projects.
And then detail our new initiatives, new technologies, and recent acquisitions that will accelerate growth.
I'll start with our household and personal care and specialty product lines.
Our broad portfolio of consumer oriented businesses continues to perform very well.
<unk> inorganic sales growth of 13% year to date and 20%, including the recent addition of North America.
This growth is a result of our leading position in structurally growing and stable markets.
But it's been enhanced through our investments in new products capacity expansions and by extending the geographical reach of each of these businesses.
Our global Pet care business as an example of this with its portfolio of premium products.
New online sales channels and broad global presence, which has led to above market growth rates.
We're also realizing significant sales increases in other consumer specialty applications.
As edible oil purification and personal care.
These are businesses, where we've made targeted investments to enhance our technology portfolio and.
And expand our manufacturing capabilities to reach a broader customer base in Europe and Asia.
Our global metal casting business remains on its consistent growth track with sales up 30% year to date.
Driven by strong demand from both North America, and Asia, foundries, serving a diverse customer base and automotive heavy truck and agricultural markets.
Specifically.
Penetration of our blended products continues to expand in Asia.
Sales increased 30% compared to last year with 29% growth in China alone.
While much of our growth is driven by our penetration in China.
We continue to demonstrate our value proposition in other countries with attractive long term growth fundamentals.
In India, which is the second largest gray and ductile iron casting market globally.
Sales of our blended products are up 50% over 'twenty 'twenty.
Our PCC business has been delivering a strong performance this year.
Sales were up 17% year to date is uncoated free sheet paper demand continues to improve in all regions.
We've also benefited from the ramp up of 200000 tons of new capacity.
We've brought online over the past year.
Which includes a 150000 ton facility in China.
And another 50000 ton satellite in India.
Production at our 40000 ton expansion for our packaging application in Europe was also just commissioned in the third quarter.
For perspective.
Sales realized from these latest satellites were responsible for 5% of the 17% PCC growth so far this year.
Our fourth quarter PCC volumes are currently projected to be above where they were in 2019 more than absorbing the volume loss from our four paper machine shutdowns that occurred since then.
Yeah.
Moving forward, we have several other new satellite projects under construction that set this business up for continued sales growth next year.
In addition to the capacity that I just mentioned.
Another 40000 ton satellite in India will start up this quarter.
But begun building another 50000 ton satellite in China, which should be operational in the first half of next year.
Also just reached an agreement and expect to sign a contract over the next couple of weeks with a new customer in India for another 22000 ton satellite.
It will be our ninth satellite in India after entering the market with our PCC technology 10 years ago.
In total with the satellites, just commissioned and ramping up <unk>.
Find with these three new satellites, we see the 5% growth rate from new satellites continuing through next year.
Pipeline of new satellite projects remains robust and.
We're expanding our addressable market opportunities with new products and technologies for the packaging market, which I'll describe in a moment.
I'll finish up the year to date growth highlights with our refractory segment.
It's been a very impressive year for this segment with growth of 22%.
Marked by steel utilization rates, notably noticeably improving over last year.
Growth also reflects this team's success in capturing new business.
Over the past six months, we've secured seven contracts worth $100 million over the next five years.
Two of its two of which were signed during the third quarter.
We've been able to secure these new contracts and the electric arc furnace market.
Through the deployment of our new portfolio of differentiated refractory products and high performance laser laser measurement solutions, which reduce costs and improve furnace safety for our customers.
Yeah.
I've discussed how we're investing in several new technologies.
And I want to share with you how they how they are beginning to pay off.
Specifically, a few areas, where we broadened our product offering to enter adjacent growing markets.
Slight two significant areas.
First our paper PCC business has been developing new technologies processes and products to accelerate our growth beyond high value filler for uncoated freesheet paper and into the adjacent packaging market.
We've made significant progress over the past two years deploying PCC into white top liner board.
More recently, we've been developing new products for other packaging applications, including ground calcium carbonate for White Carton Board.
Alternate mineral products for Brown packaging.
These are attractive and growing packaging markets and we're developing a more comprehensive product portfolio to reach this broader customer base.
Currently we're working to finalize the long term contract with a premier White Carton board customer in China.
That would represent a significant step for us into this adjacent market.
Also recently concluded customer trials with our alternative mineral alternative mineral products for brown packaging here in the U S.
With an expanding product portfolio and our pipeline of potential customers. We believe the packaging market represents a real avenue for new long term growth.
Yeah.
Excuse me a second.
Uh huh.
Thank you.
The other project in our technology pipeline that we're very encouraged with is Florida.
Which addresses P fast contamination and groundwater.
Last call I shared with you details about our first major commercialization for a large scale project at a north American Department of defense location.
As project went well.
And its success has helped to advance our other opportunities.
In fact were currently working to secure several other large projects in the drinking water and soil stabilization markets.
As this sector continues to develop and regulatory bodies focus on implementing changes, we're well positioned to capture new opportunities with our patented technology.
Finish up the discussion on our growth for the future I will take you through how we strengthen our business through recent acquisitions.
First we completed the numeric acquisition during the quarter and the integration is progressing well.
The team has been.
And then in place working on a variety of activities with our new colleagues to integrate all facets of the business and deploy our culture of safety and operational excellence.
Everyone has done a tremendous job, making this a seamless transition.
We're still in the early stages.
But the knowledge we've gained over the past three months has only further validated our thesis when we acquired North America.
We've identified significant opportunities in the North American cat litter market for our broader portfolio of private label products.
We see a clear pathway to drive higher growth rates and profits and our pet care business.
In addition, yesterday, we acquired the specialty PCC assets from Mississippi Lime company.
As bolt on transaction helps expand our manufacturing reach into the Midwest United States and.
It gives us a strategic logistics footprint at a key point, along the Mississippi River.
Strategy is to leverage our latest technologies, such as rheology modifiers for sealing applications throughout our specialty PCC plant system in the U S.
Let me leave you with a few takeaways.
We continue to build MTI into a stronger company on all fronts.
Take actions to balance our portfolio to generate higher more sustainable growth.
Sales mix has evolved over the past few years with 30% of our revenue now coming from stable and growing consumer oriented markets.
Projects I described to you demonstrate how we're leveraging our newest technologies to drive growth in our current markets and enter attractive adjacent markets.
They also underscore how we continue to drive penetration of our core product lines in growing geographies.
Our recent acquisitions further supplement this momentum.
All taken together, we have meaningfully shifted our sales trajectory going forward.
Specifically for next year, we see our sales growth moving north of 10%.
This sales trajectory along with our strong operating capabilities provides a powerful combination for significant long term value generation.
With that let's turn it over to Matt to go through our quarter performance in more detail Matt.
Thanks, Doug.
I'll review, our third quarter results the performance of our segments.
As well as our outlook for the fourth quarter.
Now, let's review the third quarter results.
Sales in the third quarter were 22% higher than the prior year and 4% higher sequentially.
<unk> growth for the company was 17% versus the prior year and the acquisition of Numerica contributed the remainder of the growth in the quarter.
Operating income excluding special items was $63 $2 million up 23% versus the prior year.
Relatively flat versus the second quarter.
Operating margin was 13, 4%.
It's worth noting that excluding North America operating margin was 13, 8% for the quarter.
As we have stated previously.
The North America acquisition will become income accretive beginning in the fourth quarter as integration activities progress.
Year over year operating income bridge on the top right of this slide shows volume and mix contributed $14 $9 million.
Driven by our strategic growth initiatives and the broad based volume growth, we've seen across our end markets.
You can also see the significant inflationary cost, we experienced $18 $4 million in the third quarter alone driven.
Driven by energy freight and raw materials, such as Lyme and packaging.
To give you some perspective, we saw energy pricing go up but by anywhere from 50% to 400% depending on the location and power source.
The most dramatic increases in the U K and Europe.
We offset $10.7 million of these inflationary costs with continued price increases, including contractual pass through mechanisms in paper PCC.
Negotiated price actions in the rest of the business.
The sequential bridge on the bottom right shows how inflation accelerated from the second quarter to the third quarter by $10 million.
More than half the total year over year impact.
However.
This bridge also shows how quickly reacted to implement pricing.
Offsetting nearly 70% of the sequential increase.
In fact.
We've implemented a variety of pricing mechanisms and several of our businesses to recoup the higher costs that we had to absorb in the third quarter due to the rapid nature of the increases particularly on energy.
Price adjustments, we are making in the fourth quarter will help us to fully catch up on the costs. We is absorbed by the first quarter of 2022.
Meanwhile.
We continued to control overhead expenses with SG&A as a percentage of sales at 10, 6%.
150 basis points below the prior year.
70 basis points lower sequentially.
Earnings per share excluding special items was $1 30 the.
A second consecutive record quarter for the company.
And represented 41% growth versus the prior year.
Now, let's review the segments in more detail starting with performance materials.
Third quarter sales for performance materials were $254 million, 23% higher than the prior year and 5% higher sequentially.
The acquisition of North America contributed 10% growth versus the prior year and organic sales contributed an additional 13%.
Household personal care and specialty product sales were 30% above the prior year, driven by North America and continued strong demand for consumer oriented products.
Sales were 19% higher sequentially.
Merrily driven by the acquisition.
Metal casting sales were 10% higher than the prior year.
By stronger demand globally, and continued penetration of Greensand bond technologies in Asia.
The impact of lower automotive production has been limited on our sales.
As foundry customer demand has remained strong across a broad set of other industrial markets.
Sales were 9% lower sequentially, primarily due to typical seasonal foundry maintenance outages.
Environmental product sales grew 32% versus the prior year on improved demand for environmental lining systems remediation and wastewater treatment.
Building materials sales grew 18% versus the prior year and 3% sequentially on higher levels of project activity.
Operating income for the segment was $32 $6 million and operating margin was 13% of sales.
Margin was temporarily impacted by unfavorable product mix, the timing of pricing actions relative to cost increases as.
As well as the incremental sales from North America.
Operating margin, excluding North America was 13, 9%.
We're in the early stages of the integration process with North America.
And I am pleased to report that the back office and financial process integration is progressing well.
Now looking to the fourth quarter we.
We see continued strong demand for household and personal care and we expect metal casting volumes to improve sequentially as foundry demand remained strong in both North America and Asia.
I'd like to remind you that we typically experience higher mining and energy costs in the colder months and this could have a temporary impact on our margins.
In addition.
Acceleration of input costs that we saw in the third quarter.
Resulting in a lack of inflation versus pricing that we expect to continue in the fourth quarter.
As I mentioned, we have pricing actions in place to catch up on these increases in the first quarter of 2022.
Overall, we expect operating income for this segment to be slightly lower sequentially as higher operating costs will temporarily offset continued strength across our end markets.
So also some uncertainty with respect to power outages in China.
Which could also temporarily impact our volumes in the fourth quarter.
And now let's move to specialty minerals.
Specialty minerals sales were $146 $9 million in the third quarter seventh.
17% higher than the prior year and 3% higher sequentially.
D C. C C sales grew 17% versus the prior year and 3% sequentially on recovering paper PCC demand the.
The continued ramp up with three new satellite plants and higher S. PCC demand from automotive construction and consumer end markets.
As mineral sales grew 18% versus the prior year and 2% sequentially on continued strength in residential construction and consumer end markets.
As minerals sales as I just spoke about did grow 18% and segment operating income was $18 $4 million and operating margin was 12, 5% of sales.
Origin was temporarily impacted by the timing of contractual and negotiated price increases relative to cost increases.
This segment has seen the most acute impact from energy and raw material cost increases with inflationary cost increases of $9 million, partially offset by $5 million pricing in the third quarter alone.
We have implemented price adjustments to cover these cost increases.
We should be caught up in the first quarter.
And as we have demonstrated.
We will continue to adjust pricing as necessary to keep pace with additional cost increases.
Now moving to the fourth quarter.
We expect modestly higher PCC volume sequentially.
The ramp up of our new satellite in India will be partially offset by the paper machine shutdown in Jackson, Alabama.
We see continued strength in specialty PCC and process minerals in what is typically a seasonally weaker period for our residential construction end markets in.
In addition.
We will have a timing lag after a price adjustment catch up to the cost increases we have absorbed.
You see margins rebounding to more normal levels as pricing actions take hold.
And overall for the segment.
We expect fourth quarter operating income to be similar to the third quarter.
Now, let's turn to the review of the refractory segment.
Okay.
Refractories segment sales were $75 $9 million in the third quarter, 28% higher than the prior year and 2% higher sequentially.
Demand remains strong for refractory and metallurgical products.
We also had modestly higher laser measurement equipment sales in the quarter. However.
However, we continue to experience delays in being able to perform on site installations and maintenance in this product line.
Segment operating income was $13 $2 million a quarterly record.
81% higher than the prior year and 13% higher sequentially.
Operating margin was strong at 17, 4% of sales and was also a record performance.
Looking to the fourth quarter.
We expect another strong performance from this segment.
However, we expect slightly lower sales and operating income to be down approximately $2 million.
Now, let's take a look at our cash flow and liquidity highlights.
Cash flow from operations was $163 $1 million, a year to date compared to $148 $4 million in the prior year.
Up 10%.
Capital expenditures were $63 million year to date versus $45 $8 million in the prior year as we continued to invest in high return projects.
The company used a portion of free cash flow to repurchase $63 million of shares for you to date and the share repurchase authorization from the prior year was completed in October.
The board of directors authorized a new $75 million one year share repurchase program on October 20th 2021.
Yeah.
As of the end of the third quarter total liquidity was over $500 million and our net leverage ratio was two two times EBITDA.
Our balance sheet is in a very strong position.
Abides us with the flexibility we need to continue to invest in high value high return growth opportunities.
We expect strong cash flow generation to continue in the fourth quarter.
Free cash flow and $150 million range for the full year.
Now, let me summarize our outlook for the fourth quarter.
Yeah.
Overall.
We see robust end market demand across our segments with typical construction end market seasonality.
We expect demand for our growing portfolio of consumer oriented products to remain strong.
Inflationary cost pressures have persisted into the fourth quarter and we have pricing actions in place to mitigate these increases in the quarter and fully catch up by the first quarter of 2022.
While it's still early in the integration process for America is progressing well.
And we will begin to realize accretion from this acquisition in the fourth quarter.
And overall for the company we.
We expect another strong performance with operating income around $60 million.
As we have demonstrated throughout the year, we have navigated uncertainty and a number of obstacles to deliver a strong financial performance.
And we expect to continue to execute execute well as we close out 2021.
We have solid growth momentum across our segments and.
With the growth initiatives outlined earlier in the call we're set up well for a strong 2022.
With that let's turn to Q&A.
Thank you if you'd like to ask a question. Please see them by pressing star one on your telephone keypad, if you're using a speaker phone. Please do make sure that you would be a function is turned off till that your signal to reach our equipment. Once again that is star one if you'd like to ask a question.
We will take our first question from.
So okay cute with J P. Morgan.
Yeah.
Hi, good morning, how are you.
How are you.
Got it.
A couple of questions.
<unk>.
My first one I was wondering whether you can.
Talk about what you are offshore onshore.
Alright offshore and domestic let us and.
In paper PCC at the end of the year and how many tons you. Thank you.
So.
This year in total that person as you know next year given that progression of the start up my first question.
Yeah.
So so you're.
Offshore onshore volumes.
Let us like right like in tonnage terms like how much you sell onshore offshore by the end of at the end what are the total time taken. Thank you I'll tell this yet and how many tons you think your itself next year.
So the split if we look on a in the quarter silica it was about 30% and when you say onshore you're talking about North America. Yeah. So the rest would have been international or offshore.
When you look at it on a year to date basis it would be the same.
As Doug said, we're growing volumes and.
That contributed to the 5% growth that you saw in paper PCC.
And that's coming from mostly international so that that mix is going to grow more internationally as we move forward.
Okay.
That answer.
Yeah.
It does not typically like you have tons of PCC I like somewhere around like that.
Yeah, roughly 3 million tons I thought I was wondering what you're targeting for next year.
So as you saw it I mean, you can see the the volumes here in Q3 were about 700000 tons.
With that ramp up that's taking place.
As we've told you before will be closer to the 3 million ton Mark here for the full year.
And then I don't know if you want to talk any further about anything thats, taking place into 2022 but Doug outlined for you that you're going to see another 5% in paper PCC into.
Into next year.
So good it's D J and so just to augment that.
Doug had mentioned the two satellites that are just coming online. So those are all but one in Europe.
We will continue to grow that's in the packaging sector and then another one in India that will continue to ramp up China will continue to ramp up over time and then those that capacity is coming online is up another 50000 tons in China, and then Doug mentioned we.
<unk> got very strong.
The level of.
Confidence it will also be growing India further with another 20, some thousand tons. So majority of that will be a growing offshore and then we did.
We have mentioned that will there's a restart that'll be happening in the U S at <unk>, which will be changing that paper excellence over time, but that restart has is in the neighborhood of 30000 tons. So still majority is going to be going offshore I would tell you also that as I look at the business development pipeline.
That is ahead of us I would say 70% of those opportunities are offshore opportunities. So that's the split that we're seeing.
Okay. That's helpful. Thank you.
And then you mentioned that you signed several contracts in the refractory side and I was wondering whether you could also quantify what you think the contribution from Dallas will be yeah.
Next to you or maybe it has to be looked at over a longer period of time and I was just wondering whether you can quantify that in any way and.
And the second question the Refractories business as I was wondering whether you got affected in any way purchasing that Brian Macneal yeah.
And I can tell hard to tell what the supply demand issue and I was just wondering how you are saturated.
Sure.
Let me start and then I'll hand, it over to Brett to give you more are Drake is to give you more detail on the contracts. So the contracts that we've signed that I mentioned are about $100 million over the next five years and theyre pretty equally spaced I think some of them will start to accrue to us early in the year. So if you can think about it silica. This is kind of a $20 million per year.
Over the next five year kind of pace.
Our business is about $300 million right now so it's a significant kind of built in growth right there.
The contracts are in are more towards the electric arc furnace and they.
They didn't really promoting our new technologies and so before.
Before I answer the M. G O question or maybe Brett can do it let me pass it over and I'll give you a little bit more detail on these contracts and kind of how we've approached them with with these new these new technologies Brett Yeah.
Thanks.
Thanks Silke.
<unk> business.
We continue to transform.
This business into a safer more high Tech company.
Company, we've we've focused our efforts in developing.
The automated refractory and wire injection equipment.
To be to be safer and move people away from really high temperature heat.
As Doug mentioned, we did sign seven contracts this year over 100 $100 million over the next five years.
The new equipment that we utilize has our laser technology tied to it. So we're able to measure the electric furnaces or or steel ladles underlining thickness. It feeds the information to our robots robotic scantron equipment and and then it applies.
Our our refractory products to the appropriate areas.
The application of the <unk>.
Key to this is is being.
Being able to do it remotely are keeping all the operators out of harm's way away from very high temperatures.
In addition, the R&D team has done a great job in expanding our product portfolio. So we're now able to apply product in all areas of the furnace, a rather than specific areas prior to two the new.
New developments and then then really lastly is the continuation of our steel Mill service group.
Our customers really have a lot of confidence in these guys.
And they're able to to support their refractory programs.
Maintain our equipment.
As these programs continue to develop.
From a from an mgo standpoint.
We are we are in a pretty good position, we prepared ourselves we buy mgo from.
From both China, and Turkey, So we've positioned ourselves well.
And really preparing ahead of ahead of schedule for the the China China Olympics. So we're we're we're in pretty good shape there.
That helped soak up so yeah.
Yeah, we're good spot from our inventory positions and I'd I'd take that from certainly from the refractories business and how we've diversified our supply base.
They ensure that those inventories are in good shape to support the customers, but I'd say that also across across the company.
In other businesses.
Mhm.
Okay.
Yeah.
Was wondering if you can talk.
Talk about where that where the pricing benefits.
Well, it's like for like and all of this is like 5 million specialty minerals, but I think overall, you got like $11 million well what did the rest of the pricing come in.
Well, it's across the business I'd say.
Give you a quick example of the dynamics that's gone on this year.
A typical year.
I think our specialty minerals business.
Two pieces, the paper PCC and kind of the performance processed minerals piece.
Paper PCC side scheduled price increases right. So every six months once a year prices move up and those are contractual and that continues and we have those protections in those contracts so that'll be taken care of and its normal timing.
In the processed minerals side, you see once a year setting the pricing up I will tell you. This year, we've changed our prices four times.
We're on our fifth increase we're using different mechanisms to make sure that we're covered so it's been a very dynamic a pricing year and I think you're probably hearing about that a lot out there in the market.
So the majority of that the the inflation that we talked about it was coming into this business a lot of that in the third quarter was energy.
It very quickly to get our pricing and mechanisms in place to have all of that covered.
There is about a month lag between some of that absorption in the pricing change just because it takes some time to move some things through and that's why fully through the fourth quarter and into the it'll take you know a month into the first quarter you have that covered well.
However, we expect that pricing or costs are going to continue to change and so we'll continue to make those adjustments as necessary to make sure that we keep keep.
Keep ourselves covered so I'd say the majority of that pricing to your question is going into the semi business, but that's not to say that we have another 50% of it or 40% of it is probably in the processed minerals.
Performance materials segment.
Okay. That's helpful and thank you very much I'll get back into queue.
Excellent.
Thank you we'll take our next question from Daniel Moore with CJS Securities. Please go ahead.
Thank you good morning, thanks for taking the questions.
Doug you got my my ears burn in are in those prepared remarks, you said next year sales trajectory north of it goes north of 10%.
I was typing a really fast so is that across the board and walk us through that maybe by segment product end market kind of you know where the seats seat the biggest drivers there.
Yeah. That's that's a that's a number that we're looking for for MTI in total.
I think we'll give you more details on how that breaks down by segment as we go forward then, but you know what at a high level, what's behind that is a couple of things I think in the beginning of my comments I tried to break out for you.
The organic growth that's occurring today you know in this quarter you know, 5%. So we grew organically 17% this quarter.
But if you take away the market aspects right that was 12% of our growth 5% came alone from the organic projects right. So 5% new satellites, new technologies are the market positioning and the growth in those geographies moving into these adjacencies the growth of our consumer oriented products, which as you know I think it grew.
Through 13% the consumer growth was 13% year over year. So you have a if 30% of the company growing at that kind of 11 12, 13% range, you've got the new satellites in the paper PCC business growing at 5%.
So all told at the ins and outs, we grew just in the third quarter organically without market 5%.
You, then take nor America acquisition, which would be another 5%.
And that says the market planes over next year, let's say it just stays flat, we think that 10% of the delivered both organically and Inorganically next year and honestly I think we can add to that with some projects that we might pull in between now and the next six months right. So we've got a level of confidence that says we can deliver that next year and then further out.
My remarks were trying to show you the things that we're investing in and how we're positioning ourselves.
Even as we plan over from nor America next third quarter. The projects that we have in hand, and the momentum we have in our businesses. We think we can keep that going now.
I've always said this business can grow in mid single digits, if not higher supplemented by acquisitions and I think next year, you're going to see that thesis come out.
Alright, very helpful Nor America, I guess, it should turn accretive by Q4.
When does that it's accretive to operating income margins or neutral.
When do we kind of see that flipping.
Potential synergies.
So.
I will tell you that North America right now is not a crazy. We showed you that chart in performance materials as it sits today, it's not accretive to those performance materials.
<unk> that was part of <unk>.
Where we saw value in the business being able to operate it differently.
Capture synergies through.
Through that business and its combination and.
And the vertical integration with our with our with the.
Our minds.
And so it'll take a little bit of time I think we said last last quarter will probably by the second and third quarter of next year. We feel will have that fully integrated and then we feel those margins will be up there at that average if not maybe higher in total for the company. So it will be accretive.
But its not currently and we need to make sure. We move through you know methodically moved through the continued integration and capture those savings that we saw when we went into it that's what I mentioned I think it's not only.
Our thesis when we bought it.
Our.
Is intact.
But also that will come from leveraging that position that we have in the packaged packaged cat litter business.
And we see those sales opportunities out there. So we're working on making sure we get the operation straight safe integrate employees bring them into our culture and then we think we've got a really nice platform to grow to grow from them. So we will get there then it's not going to be in the next quarter to them.
No that's perfect I'm shifting gears, obviously, you know you've done it.
Oh really.
Better than a remarkable job in terms of pricing in a very dynamic environment that said, if we just focus on sort of you know logistics transportation input costs, what's the cadence spend over the past few months a direction of that inflation.
Hi chain challenges in logistics challenges, it's starting to plateau or ease a bit in certain areas. You know what can you say about that.
But we need to continue to play catch up to some questions.
Yeah, and Dan when you took a book as we move from the second quarter to the third quarter. What we showed you on a quarter over quarter basis was about $10 million and inflationary factors moving higher.
The biggest component of that Delta change was the change in energy. So you had that repetitive move take place.
<unk> raw materials, we've seen a steady uptrend in and what we talked about was the fact that that was going to continue into the fourth quarter and so you're now looking at our fourth quarter.
From a a cost inflation perspective.
A lot like your third quarter that being said.
Pricing component, we are narrowing on and the mechanisms that we have in place we're catching up on so that we have by the first quarter as Doug said, we're moving to be net neutral against those inflationary costs. So you are seeing that take place raw materials have been about two thirds of what we're going to see this year in terms.
The higher cost energy is going to make up the largest component of the rest so call it 60% raw materials, 30% energy, 10% logistics with that logistics condition, improving slightly some of those raw material components, improving slightly but continuing like I said to have a fourth quarter that looks.
Just on an inflationary cost year over year, a lot like your third quarter.
Yeah.
It really helps Matt metal casting.
To grow despite the well documented auto and <unk>.
<unk> shortages of supply chain shortages.
Looking out to next year is that the expectation even if Saar you know kind of stays down you see that opportunity to continue to grow at the levels that you described.
Yeah, we do we see Oh I'll pass to John give you more color but.
The foundry markets that we serve are not just automotive focused and I think youre seeing that and I think there probably has been there's been some impact from auto on those foundry customers. That's been far outpaced by the growth of both geographically, where we're positioning ourselves and in the other markets that those foundries serve.
Agriculture.
Outside of automotive heavy heavy equipment so those.
Those have done very well.
And I think we're going to continue to see that penetration rate and especially as I tried to mention as I mentioned today.
We're starting to see smaller markets that we've been seeding in developing like India or smaller markets smaller markets for us a very large market opportunity to start to grow in those growth rates are starting to get to the point, where they're making a difference and we think that's going to further supplement the growth going into next year. John you want to talk a little bit about what we're seeing and what we're hearing in the marketplace.
Around the foundry.
Certainly hi, Dan.
A couple a couple of things to point out first of all some of the.
Companies that we serve the foundries, who supply the auto industry are relaying to us that the automakers are sending them signals that starting Q1 Q2, they're going to be producing in excess of what they had produced in 2019, So very strong positive outlook starting in Q1.
Next year is done.
You had said you know, we're pretty well diversified we're positioned extremely well across the globe.
We participate in the markets that have really good strong cast in growth rates think about North America, China, India.
Our penetration strategy continues to work extremely well.
We're working with customers, who are demanding qualities that are equivalent to western technologies, especially in India, and China and as a result, they're looking for you know a high high value blended products and so that's one of the key our key initiatives and key drivers of our growth.
Doug mentioned that we are positioning ourselves, we took advantages of COVID-19 downturn and also some of the outages wood chips and the labor shortages that have occurred, but we're positioning ourselves with new customers.
So we're growing our share and our positions in each of these regions.
We're we're introducing the technologies of the high value technologies.
We're supplying those new customers and we're positioning ourselves so that when the markets.
Our fully functioning.
We're gonna be very well positioned for future growth and we'll see that in 2022.
Super Lastly, real quick.
On the capital allocation side, the new share repurchase authorization given that's it's got kind of one year on it is your expectation that you would execute the full amount in that time frame and then and secondly does that have any implication for the M&A pipeline or simply that your balance sheet and free cash flow give you the flexibility to kind of pursue both avenues. Thanks again.
I think you hit it right on the head there Dan I think yes, we fully intend to execute within the timeline.
As we did this past one.
But I also think yes, it it speaks to the.
The flexibility that the.
The strong cash flow generation and the expectations, that's going to continue the balance sheet and being able to both the options of being able to both return to shareholders and pursue bolt.
Bolt on acquisitions, we also have a leveraged position that if something other larger we think we can we can handle that as well. So I think it speaks to both.
That.
The flexibility that we have with our cash flow and balance sheet to be able to do both.
And as we look out Dan just to add a one component to that just remember we did have about $100 million that we took on our revolver for the acquisition of America began paying that down in the fourth quarter and should have that over the next 12 months.
Taken care of.
Yes.
Very good I appreciate the color.
Thanks, Dan.
We'll hear next from David Silver with C. L King.
Okay.
Yeah, Hi.
Yeah.
Good morning.
Yeah.
A lot of good questions before that that puts me in a bind.
Just kidding.
I would like to ask maybe a bigger picture question about kind of your the energy cost environment that you're operating in and I mean, we are.
There was just some good commentary on the foundry side.
I'm thinking with paper and steel I mean, those are both very energy intensive industries that you're serving and.
The.
Price of crude oil is certainly rising but.
The regional price for let's say natural gas has escalated pretty sharply and theres been headlines about you know some some production cutbacks here and there. So I was just wondering maybe we could just hone in on.
Your PCC business and maybe the <unk>.
Steel, making side of things I mean, what is what is from your perspective, what is the risk.
That may be elevated.
Energy costs or some difficulty and availability maybe.
In China or elsewhere energy availability kind of will negatively impact you know your.
Operating plans over the next couple of quarters. Thank you.
Hum.
David I think over the next couple of quarters.
The risks are in that inflationary.
Environment, So and then I'll try to address the longer term I guess question, you're asking in terms of the energy intensity of these things.
Which I also think will be dealt with with an inflationary environment and that's a different set of challenges countries and industries will have over the long term, but in the short term and how we're looking at it.
We have absolutely seen a rapidly changing energy market I think you're probably hearing that around.
Starting in the third quarter.
Different by geography.
In North America, and in the West Coast, it's been a little bit more electricity driven.
In terms of cost increases some natural gas given the changes of our pricing here in United States I'd say in Europe much more acute.
In terms of natural gas pricing.
Matt gave you a number that said we saw.
Some areas in Europe of 400% increase kind of instantaneously through the third quarter.
Right, having to deal with volatility like that and staying on top of it and making sure that we have our energy, it's not about necessarily in our regions.
The availability of the amount, it's what it's the changing rapidly changing pricing to.
Get quoted.
In China, a little bit different we're starting to see we curtailments, we saw some of them in the third quarter, we werent impacted significantly Matt mentioned that is an uncertainty going into the fourth quarter that we could see further curtailments, but we have seen some easing of coal prices in China and electricity has been a little bit more.
A little bit more stable. So I think we've we've put all of that into what we're giving you in our forecast in the fourth quarter, we've got our pricing mechanisms and our inventory is in a position are in good position.
So we are covered in the short term and we have mechanisms in place that is as those energy costs change over the next year will be in a position to make sure that we were on top of that longer.
Longer term, though.
Energy is going to be an issue and I don't know if we want to get into this call in terms of our conversion from fossil fuels to more.
Greener sources, but that will be something as a company, we're dealing with that as we move to greener energy sources.
You know we are sourcing 40% of our electricity from Green sources out in our Wyoming facilities, and we just change to that so we're taking steps as a company to convert our business from coal to natural gas to cleaner sources to electricity and electricity were purchasing from greener sources already today.
See what we've been doing over the past year and our sustainability report, but I don't know that so hopefully that answers some of what the company's doing over the longer term and how we're dealing with it in the short term.
Yes, very very helpful.
I'd like to ask one more question maybe to go back to the M&A and balance sheet.
Question. So you know you have concluded a couple of the.
Transactions in just the past few months.
Including I think your largest acquisitions since AMCOL.
In terms of the purchase price.
And I was just wondering if you could maybe comment on a couple of aspects I mean first regarding the the Emma.
M&A funnel or project pipeline.
Doug how would you characterize following these two deals I mean, how would you characterize your.
Project pipeline.
Shall target pipeline.
Right now, let's say relative to a year or two ago.
And then secondly Navy Matt if you could just remind me, but you know you have shown interest in projects of various sizes.
Including some larger ones and you know it.
Is there a way for us to think what how high.
The company might go lets say you know above today's I think it's two one times net debt to trailing 12 month EBITDA I mean, how high might the company be willing to go for the right acquisition and.
How important is maintained.
Maintaining your current credit ratings in the event that are unusually attractive, but larger target was to present itself. Thank you.
Okay, Let me start with the first one David in terms of the pipeline I guess I could answer it quickly that its.
Two projects smaller than it was couple of months ago, but that's sort of a joke.
Joe.
We have a a good pipeline of projects that fit along those growth strategies that we have.
To support our businesses globally.
And as you've seen a move we have some opportunities to grow our consumer oriented product lines.
Although we have executed on two of those that were in our pipeline. Just recently I do think that there's other opportunities that have moved in and things become more actionable. So we've maintained a similar sized pipeline.
Uh huh.
Things that were attracted to if they became actionable than we were you know earlier in the year a year ago. So about the same.
That said in that pipeline. There are things that are you know smaller and as we've always said in the tens of millions of dollars of revenue type numbers and there are some that are bigger in the hundreds of millions of dollars of revenue type pipeline, how far would we go to to get some of the bigger ones.
I think I've always answered the question that says it really depends on that target.
And it really depends on as we've looked at it over time, what we'd be willing to do.
What we feel we can do with it.
So if we feel from a risk standpoint, and an understanding and fit with the culture of the company that the technologies that we have in the markets and how comfortable we are we see some things that fit very well with our company in there and if we know what we can get from a synergy standpoint, we always look at things going in and on a post synergy basis.
And we look at that and make sure that they are going to be accretive to the value of the company. After we know we're going to do with it we took a lot of time to think about that how high does that take us well at AMCOL that took us up to about four four times.
Charlie say that's.
I'm not going to say, there's any limit to anything but that's at the higher end of the ranch right I don't think the things that we have in our pipeline requires to go there.
But if we find the right thing and we feel comfortable with it we're willing to make sure that.
We pay the right amount for it okay, Yeah, and David just to you heard Doug talk about how and it was demonstrated I think in these last two acquisitions, how we're managing the small and medium type bolt on acquisitions, managing that with cash on hand, using the revolver paying that down quickly based on the strong <unk>.
Cash flow that we have and that we will continue to generate and that is the flexibility that we talk about and have demonstrated over the past couple of years. So that's the way we think about that transformational. It Doug just gave you. Some space there are conversations with credit rating agencies is very robust I think we have a very good metric.
The result in terms of our a rating.
And when you read their reports they reflect that they also reflect that there is optionality in our portfolio and that's why they rate us like I do except us.
US like they do so there would be some some of that deal structure built into their current rating.
I'd just say we're very.
It's very disciplined with that capital I think you know.
There's not a lot that you see sometimes they're not public but I'd say, we'd we will walk away from there is more than we've walked away from.
Because we're just not willing to pay that we don't see the value of it. So we keep to our knitting, we make sure. We look at things very robustly and will really disciplined about how we're going to put that capital to acquisitions.
Thanks, very much I appreciate it.
Yeah.
Thank you.
Thank you we'll take our next question from Richard Hernandez with Sidoti Company.
Okay.
Thank you and then.
Good morning, everybody.
Marissa.
So question on your commentary about him.
Implementing price increases in the fourth quarter.
L. I allow you to catch up with cost inflation.
End of the year, what does that mean exactly.
How do you think about it in terms of thought percentage margin, where would you like to be.
At.
Perhaps relative to you know.
Prior quarters at the beginning of 2021.
Just want to make sure I understand the question in terms of.
The margin we're targeting.
Let me see if I can answer it and you tell me if this is addressing it the right way.
So.
We will absorb costs. There are many instances, where we will absorb costs and then there's a timing aspect to some of our business in terms contractually when we get to pass that through so there is some lag on when costs are going up theres, a lag putting the pricing up but then was cost retreat theres a lag between where we take that price down and that's largely in our.
Paper and there's some other contract businesses we have.
There was also a practical speed at which you can put prices up for your customers and so we will absorb costs and the communication the changes the the announcements and and we've been very quick to make those changes in the instance of our specialty minerals business where prices, especially at <unk>.
Quarter and energy went up very quickly.
There is maybe a month lag in terms of us ability to push that price.
Change those prices and move that through and so therefore.
You know as I will give you. An example November 1st so the third quarter costs were absorbed in November 1st prices change that'll be the end of January before that tranche has been absorbed now we'll continue to make those changes. So it's a dynamic type environment, but that's why we said will be kept we've got it in place to be able to capture those increases that said that brings our.
As Matt mentioned in that business going back to that historical kind of average of where they've been so we look at that.
Again with higher cost and higher pricing you also have to recover your margins in that pricing and so we target that as well. So it's both on an absolute basis Marissa and on a margin basis to make sure we're protecting that but there's a timing aspect of that change and just just one clarification. There what we said not by the end of the year, but in.
In the first quarter of 2022 is when we're going to see us catch up with the costs.
That we've absorbed so far this year in 'twenty one.
Got it okay. So.
You talk also about costs.
Cost inflation persisting into the fourth quarter.
Curious as to what the pace has been lately have you seen any slowdown or pickup off inflation in generally speaking and specifically in some pockets.
So when you when we came into the second quarter. What we told you was that we had inflationary factors that weren't about that $7 million range that accelerated to about $18 million on a year over year basis in the third quarter and what Ive said previously was that you were looking at a fourth quarter that on a year over year basis is going to be in that <unk>.
$17 million to $18 million looks a lot like what we had seen in the third quarter. The buckets of inflation started out in the second and third quarter really starting with energy. That's now moved into raw materials logistics has been a steady March as we've gone through that inflationary period.
That is so so your bucket of raw materials on a full year basis has grown and that's good and that's what I said before was about 60% of what we're anticipating for inflationary factors for the full year.
That being said we also showed you was that pricing was also accelerating and for the fourth quarter Youre going to see that gap narrow significantly again on that $17 million to $18 million, we have pricing in place that's going to bring us closer to fully capturing that and so when you look now into the first quarter. That's why we have a.
Our viewpoint that we can catch up on what we've absorbed so far this year.
That's very helpful. Thank you and finally on the sales growth for 2022 north of 10%.
Does that require additional acquisitions in 2022 are not necessarily.
No not necessarily.
So we think that that's with current acquisitions from the back half of this year plus our growth rates in the projects that we haven't had that we're executing on as they ramp up and the new technologies.
That number is derived.
Thank you very much.
Yeah.
Thank you and we'll now take our final question from Mike Harrison with Seaport Research partners.
Hi, good morning.
I'm wondering if you could give us some details around the specialty PCC assets.
What kind of revenue or EBITDA contribution would you expect to see and I guess, maybe give a little bit more detail on what made those assets attractive to minerals technologies.
Sure.
Let me start and then ill ask.
D J, but look at this as a small bolt on acquisition. That's a you know we're not.
We are highlighting it because it's it's significant in terms of our system of a platform of specialty PCC production here in the United States.
It helps us from a logistics standpoint, and at the moment relatively underutilized asset that we're going to upgrade to put in some technology. So you know what we're not disclosing the revenue size of it and what we paid for it but it will it's a small bolt on acquisition of D. G. I want to give us a little more color or what we're going to do with it.
Sure Mike So a good way of thinking about it is is as if it's a.
PCC plants.
That we've been deploying so that's a good way of just thinking about the level of revenue contribution that it would do $10 million in the neighborhood of $10 million. What we're excited about the most is is that.
Capacity that it gives us an end to what Doug was.
Referring to that that allows us to work with our team that's in Adams, Massachusetts with this asset now in Missouri, a weekend introduced the new products. We can seek some growth that we think we've got a unique access access to versus the previous owner.
And then we also feel that we can it gives us great flexibility to work with product mix and really better serve the market. So we're very excited about about that opportunity. Its a nice augmentation to what we've built in Adams, Massachusetts, and it complements our position in both the construction and.
And transportation markets, that's probably 75% or so of where those current tons go and then a little bit of it goes into the publication grades so theres a little bit of paper business Thats in there and some business that goes into inks, but up but we're excited mostly about the overlap in construction and transportation.
Mall small bolt on again not trying to sell the small base of revenue today around $10 million, it's what we're going to do with it going forward given its capacity, we're going to put in new technology, Debottlenecking, and then really leverage it in conjunction with our Adams facility and we think that from a future growth standpoint, it could be.
Bigger than that so.
More to come as we as we know this.
Yesterday, so more to come as we integrated I want to welcome our new employees.
And we'll keep you up to date on how we how we develop that over the next year.
Understood appreciate the color there and then Oh.
They ask about the packaging opportunity you talked about that as being kind of a key technology for your PCC business.
Maybe just take a step back and help us understand how PCC that goes into packaging applications is different from PCC used as a filler in uncoated.
Freesheet.
And maybe help us understand I guess for a similar sized mill is it is it the same amount of PCC in terms of volume per.
Per amount of paper.
And what are the margins look like compared to a.
Traditional PCC application.
Yeah, Let me start and then DJ can fill it in.
So it's not all PCC there is PCC in packaging.
He says he's used in white top liner board as we mentioned some of our current packaging applications. There is PCC used as a high end coding and some packaging applications.
But these are different mineral types, I mentioned ground calcium carbonate and other mineral types that are going to white and brown box.
The reason, we highlight that today as we've been working on this for a while and we've had some really good results in some now some pretty far along discussions in those packaging markets that put ourselves at our technologies.
We like the base paper market, but this puts us into other markets that are technology applies to that are growing.
And in the geography, and the geographies, where we currently sit so did you have a more technical aspect of how we use those pigments and package. It sure. So Mike let's start with the stuff that we're doing today and then I'll walk you through that kind of a sequence quite logically of how you'll be seeing these technologies got exposed Doug mentioned this white top.
Liner think of that as pizza box and theirs.
There's new higher end stuff, that's coming out that you'll see a fully printed Amazon box for instance, the value equation for PCC. There is that we provide a better coverage and a better sheet. So we're enabling this upgrade of that capability and and upgraded that product performance and the margins and things that you should see from there.
They are typical with what you see with our car PCC plant.
Doug talked about our penetration in.
White Board basically and Carton board that we've got so.
What you will recognize that in the marketplace on on a high end stuff, which is where our PCC goes.
The high end would be stuff that you buy up a bottle of liquor in her yet get a case of golf balls and well you go lower than that and you've got things like ice cream board and those sorts of things and what we've introduced and what we're commercializing and are working on these contracts on in China is a is a.
GCC now what we've done here is combined our capabilities that we have at Adams and Lucerne Valley, where were very familiar with the mineral GCC combined that with some new processing technology, and our operational excellence and satellite model and so we'll be introducing satellite models in China.
That is what we're doing there.
Much like the PCC business. These are discrete investments that will yield an appropriate return.
Then the last thing that Doug referred to is really towards the brown box.
This is our first machine trial, we're very excited about it it is a not a car.
Carbonate based technologies that alternate mineral.
And first trials were good we will probably have a better feeling for how how quickly we can commercialize that in the first half of next year it'll take up. This first trial, we're analyzing the data for it was successful enough that we already have a second trial lined up.
Well, we'll get the full data and economic impact are understood and that first quarter of next year, and we'll be able to give you some more insight on that but oh.
Really pleased with how that paper group as has pursued this strategic objective.
Okay and you mentioned this is another mineral not a carbonate based product is it bentonite based.
Mike at this time, we're not.
For competitive reasons, we're not giving some details on that and there are actually the one that I. There are two technologies in this space.
One that deals with recycling of minerals and and then one that is.
The one that was just trial it is is.
What I was specifically referring to so we're we're holding back on that for some intellectual property advantages that we feel we have.
Alright fair enough appreciate the color there. Thanks.
Thanks, Mike.
Thank you and that does conclude today's question and answer session I would like to turn the conference back over to management for any additional or closing remarks.
Thank you very much for attending the call today I do appreciate you taking the extra time to stick with us and ask the questions. We will get back in another three months.
Thanks again.
Thank you and that does conclude today's conference. We do thank you for your participation and you may now disconnect.
Hum.
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