Q1 2022 Minerals Technologies Inc Earnings Call

Good day, everyone and welcome to the first quarter 2022 minerals technologies earnings call. Today's call is being recorded at this time I'd like to turn the conference over to Eric <unk> head of Investor Relations for minerals technologies. Please go ahead, Mr Al deck.

Thanks, Jennifer and good morning, everyone and welcome to our first quarter 2022 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, we'll open it up to questions.

I'd like to remind you that beginning on page 15 of our 2021 10-K, we list the various risk factors and conditions that may affect our future results.

And I'll also point out the safe Harbor disclaimer on this slide.

Statements related to future performance by members of our team are subject to these limitations cautionary remarks and conditions.

Now I'll turn the call over to Doug Doug Thanks, Eric Good morning, everyone.

Welcome to today's call.

I'll start by walking you through our results for the first quarter and provide an overview of market dynamics as well as some strategic highlights.

I'll also provide some context to put our first quarter results into perspective.

Explain whats driving our strong performance.

Matt will then review our financial results in more detail and will also share our second quarter outlook.

First quarter was a record financial performance for MTI.

And these results reflect the team's successful execution on a number of fronts.

Sales of $519 million were up 15% versus the prior year and up 19% on a constant currency basis.

From a market perspective demand remains robust across our segments.

Our consumer oriented products, which make up approximately 30% of our sales.

Can you to benefit from favorable secular market trends.

We've seen steady growth across pet care personal care edible oil purification food and pharma applications.

We also continue to see strong demand from our industrial product lines with robust sales to the foundry steel and construction customers.

Our results. This quarter are also a function of our strategic growth initiatives.

By multiyear advancements and new product development and geographic penetration.

As well as additional growth from acquisitions.

I'll take you through this in more detail in a few moments.

Operating income of $68 million was 15% higher than last year and a record for a first quarter.

And earnings per share of $1 36 was a record for any quarter.

Yeah.

Performance is also driven by the agility of our team.

Delivering solid execution across operations pricing actions and cost control.

The historic base of inflationary cost increases continued in the first quarter.

Including significant spikes in energy cost across the world and in Europe in particular.

Despite the continued rapid inflation, our pricing actions more than offset the higher costs on a dollar basis in the first quarter.

For the price leader in most of our end markets and our ability to pass through pricing is based on the significant value our products provide our customers everyday.

In addition.

Fly chain team has been incredibly proactive in managing and mitigating our cost increases through this inflationary period.

We expect margins to expand further over the coming quarters as additional pricing actions as well as contractual pricing mechanisms take effect in the second and third quarters.

As always we remain disciplined around cost control and operational efficiency.

Our operational excellence culture.

Countless incremental improvements every day.

Employee suggestions and structured problem solving events.

These improvements increase our productivity.

Reduce our operational costs.

To remove wasteful activities in general had a period when these efficiencies are critical to meet these levels of demand.

All in all it was a very strong quarter.

This performance is a result of the actions we've taken to position the company for this type of profitable growth.

Our strategy is to grow the company through new product development.

Growing in Underpenetrated regions.

Also through acquisitions of mineral based companies with technological differentiation.

These three elements of our strategy have been aimed at repositioning our portfolio of businesses to generate higher and more sustainable growth rates.

Specifically this repositioning has involved the expansion of our consumer oriented businesses business portfolio.

To create more balance with the industrial side of the company.

Our household and personal care product line, which includes many of these consumer oriented businesses grew 30% in the first quarter versus the prior year.

And over the last five years. This product line has grown at a 14% compound annual growth rate.

This has been driven by both organic and inorganic investments, including the acquisitions of <unk> in 2018 and norm Erica in 2021.

And sustained market driven growth across these product lines.

As consumer oriented set of businesses have structurally higher and more stable growth fundamentals.

And combined with our leading industrial positions.

A more stable topline growth profile for the company.

New product development is truly accelerating across the portfolio.

Becoming a much more significant level of growth.

Let me give you some examples of how innovation is driving new product sales.

Also enabling expansion into new and growing markets.

For the past five years, we've commercialized new products twice as fast as we used to.

In the first quarter alone sales from new products increased 25% on an annualized basis over last year.

And many of these new products are advancing sustainability initiatives in partnership with our customers.

Petcare for advancing eco friendly packaging and increase recyclability.

We've commercialized multiple online only products to support our e-commerce growth strategy.

We are also developing new product offerings in Asia, where pet care sales grew 36% in the first quarter versus last year.

Sales of our bleaching Earth products are up 32% in the first quarter.

These products enable customers to achieve higher purity edible oils.

And we're expanding our reach by demonstrating the significant advantage our product has in high growth biodiesel filtration applications.

Sales of our personal care products grew 15% over last year as our health and beauty solutions business has expanded capability and the manufacturing of retinal delivery technologies.

And the private label packaging of skincare formulations.

We also continue to see high growth rates and new opportunities for our clay based rheology modifiers for cosmetic applications.

We're also seeing increased interest in our Fluoro sorb solution for P fast remediation <unk>.

Including the use of floors or.

As a highly effective media in the treatment of industrial and drinking water.

We continue to develop and expand this product line with the introduction of our patented floors or flex, which targets short chain P fast compounds in a unique and innovative way.

Our product development efforts are also contributing to growth in our industrial product lines. Let me give you some examples.

Our latest specialty drilling products are performing well in a number of horizontal directional drilling applications for the installation of underground utility and broadband fiber optic cables.

Our new geothermal growth products are well positioned to take advantage of the trend towards net zero emission buildings.

Use of geothermal heating systems as a growing arrow area is building designers look to partially or fully replace fossil fuel heating systems.

In this application our product not only assist in the drilling process, but also enables more efficient heat conduction from the earth to the recycle recirculating fluid in the heat loop.

In building materials are a integra product our <unk> product has a dual purpose waterproofing and vapor barrier offering.

This product offers our customers a one step dual purpose cost effective application and the below grade waterproofing Mark.

Our growth is also supported by the expansion of our core product lines and growing and Underpenetrated regions.

Global Greensand bond sales have grown at a 5% compound annual growth rate over the past five years.

Our high performance pre blended formulations and technical service capabilities helped foundry customers improve their efficiency, while reducing defects costs and emissions.

For years, we've worked collaboratively with our customers to bring them innovative formulations to improve their foundry systems.

This type of collaboration is also supporting the penetration of our engineered solutions and the Asia foundry market.

Our sales have been growing at a 10% annual rate for the last five years.

As we speak about often our PCC business has been growing in the Underpenetrated Asia region for the last several years.

We secured three new satellites there in the last year, including our first deployment of GCC technology for use in coated whiteboard packaging.

Lastly, our refractory segment is realizing strong growth driven by our complementary portfolio of innovative products.

Paralleled steel mill services and.

In high Tech laser measurement equipment.

It's this combination that has enabled us to grow with our customers and the newest steel installations in the U S.

Our growth has also been supported through acquisitions.

And today I'd like to announce that we closed on another acquisition of a small bolt on pet care company called concept.

This acquisition comes with a complimentary operational footprint to support the expansion of our European Pet care business as.

As well as additional mineral reserves.

The bolt on of this company will add approximately $20 million and incremental sales on an annualized basis through their customer positions in western and central Europe .

We welcome our newest employees from concept pet MTI and we look forward to working with him to grow our European pet care business.

M&A is an important part of our strategy.

We've completed four acquisitions over the past four years.

Totally nearly $300 million in sales.

All while prudently maintaining a strong balance sheet and solid liquidity position.

Yes.

So let me summarize my comments for today.

We're executing on all facets of our strategy to build a higher growth higher profit higher return company.

MTI has a winning combination of unique mineral reserves.

World Class operating capabilities.

<unk> technology platforms and applications expertise.

All of which resulted in leading positions across our end markets.

Reported by our team of 4000 dedicated and engaged employees around the world, we see a strong future for the company.

What it all means for us in 2022.

We're on track to deliver another record year.

With that I'll hand, it over to Matt to discuss the financial results and our outlook for the second quarter Matt.

Thanks, Doug.

View, our first quarter results the performance of our segments as.

As well as our outlook for the second quarter.

Following my remarks, I'll turn the call over for questions now, let's review first quarter results.

First quarter sales were $519 million, reflecting strong sales growth both year over year and sequentially.

Year over year sales bridge on the left of the slide shows that sales grew by 15% compared to the prior year and by 19% when excluding the impact of foreign exchange.

Sales were higher by double digits across all segments.

With organic growth contributing 4% of America acquisition delivering 6%.

And selling price actions, yielding 9%.

Operating income excluding special items was $67 8 million in the first quarter.

And the year over year operating income bridge on the lower left of the slide shows that operating income grew by 15% compared to the prior year.

As we expected.

Our selling price actions surpassed the impact from inflation in the first quarter, despite increasing energy costs, particularly in Europe .

In total we delivered $41 $5 million of selling price increases compared with $39 $1 million of inflationary costs and.

In addition continued strength in our refractory segment further demand recovery in several of our project oriented businesses and lower corporate costs helped to offset the slow start to the quarter stemming from COVID-19 and weather impacts in the United States.

Operating margin in the first quarter was 13, 1% of sales, which is an increase of 10 basis points compared to the prior year. Despite the dilutive effect related to inflation pass through.

Now moving to the right side of the slide.

The sequential sales bridge shows that sales increased by 9% compared to the fourth quarter and were 10% higher on a constant currency basis.

Sequential operating income bridge shows that inflation continue to accelerate into the first quarter, However, pricing actions delivered nearly $26 million to more than offset inflationary costs.

Note that these results include roughly $2 million and additional inflationary costs that will be passed through contractually beginning at the end of the second quarter.

Operating margin improved by 160 basis points compared to the fourth quarter.

Which was driven by actions on selling price to more than offset inflation and continue to expand margins.

And finally.

We continued to control overhead expenses with SG&A as a percentage of sales at 10, 4% 130 basis points below the prior year.

Now, let's review the segments in more detail beginning with performance materials.

First quarter sales for performance materials were $272 million, an 18% increase over the prior year and 6% higher sequentially.

Sales and household personal care and specialty products were 30% higher than the prior year and 13% higher sequentially driven by continued strong demand for consumer oriented products and the numeric acquisition.

Our global Pet care business overcame many of the logistics challenges faced in the fourth quarter to deliver 10% sequential sales growth.

While.

Our edible oil purification and personal care businesses continued their robust growth trend.

Metal casting sales were 2% lower year over year, and 5% lower sequentially due to lower China sales related to the Chinese new year, and Whimper Winter Olympics, and the timing of large shipments in North America.

Note that the latest China Cooper situation began in earnest in the second quarter and we're seeing a slow recovery in sales in the region.

Environmental products grew 38% year over year, driven by increased project activity, while building materials sales were 2% lower versus last year, largely due to wet weather conditions in North America that affected building starts.

Operating income for the segment was $34 7 million and operating margin was 12, 8% of sales.

Operating margin improved sequentially as additional pricing actions overcame the impact of inflation.

Looking ahead to the second quarter.

We expect continued strong demand for our consumer oriented products.

I'll be moving into a seasonally higher period for our project oriented businesses.

Metal casting sales in North America will improve based on strong demand in China sales will continue to be slow during the current COVID-19 situation.

In addition, we expect that the benefit from our selling price actions will continue to more than offset inflation.

As a result, we see operating margin improvement and a sequential increase in operating income of approximately 10% to 15%.

Now, let's move to specialty minerals.

Specialty minerals sales were $163 million in the first quarter, 10% higher than the prior year and 15% higher sequentially.

First quarter global PCC and processed minerals sales grew by 10% and 11% year over year, respectively.

Operating income for the segment improved sequentially to $18 $4 million.

As we implemented significant pricing adjustments in the first quarter.

As you'll recall this has been the segment most significantly impacted by energy inflation, particularly in Europe .

And in this quarter.

Semi absorbed $2 million of additional energy costs that will be contractually pass through beginning at the end of the second quarter.

As we look ahead to the second quarter, we expect a modest seasonal increase in sales selling price actions that offset inflation and an improvement in margins together will increase operating income by approximately 10% to 15%.

Now, let's turn to refractories.

First quarter sales for refractories $84 million and were 14% higher than the prior year, driven by favorable mix from new customer wins and selling price adjustments implemented to cover inflationary cost increases.

Refractory segment delivered another strong operating performance as selling price actions and operational efficiencies more than offset inflationary impacts.

First quarter operating income for the segment was $16 $5 million, an increase of 38% compared to the prior year and operating margin was 19, 7% of sales.

As we look to the second quarter, we are seeing some energy and raw material inflation. However, we expect a similar level of operating income sequentially.

Now, let's turn to our cash flow and liquidity highlights.

First quarter cash from operations was significantly lower than the prior year due to an increase in working capital related to inflationary pricing in accounts receivable and a temporary strategic inventory build ahead of the Winter Olympics.

Despite the $72 million increase in overall working capital our efficiency as measured by days working capital improved by three days year over year.

Note that as the strategic inventory positions release weeks, we expect cash flow to strengthen and another year of strong free cash flow around $150 million.

First quarter capital expenditures were $19 million.

And we repurchased $16 $7 million of shares in the first quarter, bringing the program to date total to $28 $5 million.

At the end of the first quarter total liquidity was approximately $480 million and our net leverage ratio was two two times EBITDA.

Continue to maintain a strong balance sheet, providing ourselves with the flexibility to continue to invest in high value high return growth opportunities.

Organically and through M&A.

Now, let me summarize our outlook for the second quarter.

Overall, we see continued strong demand across our end markets and another quarter of strong sales growth.

We anticipate that the inflationary environment will persist.

Teams are working closely with suppliers and customers on pricing actions to drive margin expansion. In addition.

We expect to see productivity improve sequentially as volumes increase.

We will continue to take a disciplined approach to controlling expenses.

In summary, the second quarter is typically our strongest quarter of the year and we expect another record quarterly performance with operating income increasing by 8% to 10% sequentially, which represents around 15% growth versus last year.

Second quarter earnings per share are anticipated to be around $1 45.

While there are some uncertainties in the macro and economic environment, our outlook for the remainder of the year reflects generally stable market conditions sales growth from acquisitions and further margin.

Expansion that together will generate full year earnings per share around the range of $5 60.

To $5 70.

With that we'll now take your questions.

Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad.

If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Press Star one to ask a question.

Your first question today comes from Daniel Moore with CJS Securities.

Thank you good morning, Matt Good morning, Doug Thanks for taking the questions.

Maybe start with concept pets.

Intrigued there maybe talk about where the reserves are.

I know, it's small, but what kind of synergies and our growth potential you expect and more importantly are there similar sized.

Are there multiple or other similar sized tuck in opportunities out there.

Sure. Thanks, Dan.

Yeah, we're really excited about concept that it's a it's a small bolt ons to continue the growth of our European pet care business.

Yes.

Brian <unk>.

It is complementary in terms of.

It's western Europe , but also brings in some customers in the central Central European Zone. So the.

The reserves are in Slovakia.

With operations there as well.

And so it gives us kind of logistically and position really in throughout Europe geographically through Europe a nice.

A nice footprint.

Reserves helps support that business, but they can also be used for other purposes as well. So it's not going be a lot of of cost synergies here given its size, it's really going to be more around being able to serve.

European Pet care customers.

Better more fully and also grow with them more completely so really excited about it welcome welcome to the 50 new employees to MTI.

Got it really helpful. Matt you gave some good detail, particularly within the segments around pricing actions.

As it relates to this quarter and the guide.

When we think about the Q2 guide how much catch up in terms of pricing do we still have to go that could.

Drive margins.

Further further still into Q3 and beyond a rule would be.

Closer to caught up by the end of Q2.

Yeah.

The way I stack it up Dan is a tally beginning.

Sort of the June timeframe last year, when inflation really starting to pick up if you track. It from that point, we've absorbed about 90 $495 million and inflationary costs and you've seen that on our bridges that we've reported to you over the past couple of quarters.

Offsetting that has been now about $77 million in pricing. So there is still some catch up but youre seeing the gap improve caveat being there we're still seeing some inflation, particularly in energy and that is moving quite spiky.

In Europe , and so youre seeing that like we said we told you about in an SME about $2 million, we absorbed this quarter that will pass through contractually.

Beginning late in the in the second quarter early third quarter. So we will continue to have that dynamic, but we certainly believe you source claw back about $2 million to $3 million of that inflationary gap will expand on that in the second quarter and as we've given you an outlook for the full year, that's going to mean further margin progression and capture.

During that gap and then improving on it as we move into the back half of the year.

Really helpful and then China.

You gave a pretty pretty solid outlook for Q2, despite that what type of impact do we expect on metal casting or maybe I shouldn't say metal casting it's overall in China.

Based on where we sit today in Q2.

Right now so Dennis.

Right now China has was a drag through the first quarter and metal casting volumes.

We see those rebounding through the second quarter I think as we said in April .

It's still.

Moving along sideways it hasn't ramped up yet, but we see our outlook at least through through June and into July as being much more positive the demand there from both automotive and non automotive production is still remained strong we do have some backlogs we've been working to get those backlogs through our plants given some of the transportation.

<unk> restrictions and so we're moving through it but it has been a little bit slow, but what our outlook for the region through the second quarter and further out is pretty positive.

Perfect. Thank you I've got one or two others, but I'll follow up and jump back in queue. Thank you.

Yes, I didn't answer your bolt on question Dan. So if you want to do that later I can answer it now they're.

In terms of pet care, just curious about the opportunity set that would be great.

Sure sure so I didn't answer that earlier.

Yes, there are other opportunities I would say, though in the pet care business.

Through <unk>, nor America now concept pet.

We've put together a really nice portfolio of positions mine resources manufacturing locations next to.

Population density to be able to really effectively serve.

Pet litter customers.

So right now our goal is obviously continued through the integration of America, making sure we finalize that.

Now concept that in Europe , and then really utilize the space to grow that business further out I think there are another geography. Some other positions that may make sense, but but I think right now we've really built a nice global base of operations and mine assets.

To really grow this business. So we're excited about it we put it together when we started this business when we bought AMCOL. The business was about $70 million business is now about $385 million in revenue.

It gives you a size and it's growing at about eight 8% to 10% per year. So that gives you an idea of what we think this is capable of and and bolting on concept that is going to be a real help to continue that growth.

Perfect. Thank you.

Yep.

And our next question comes from Mike Harrison with Seaport Research partners.

Hi, good morning, congratulations on a nice start to the year.

Thanks, Mike.

Had a couple of questions here on the Refractories business first of all you mentioned some additional raw material cost.

Are you, having any problems with with cost or availability of magnesium oxide and can you also comment on whether the Russia Ukraine War.

Maybe leading to some some weakness in Russian steel and creating some opportunities for your refractories business, where you participate outside of Russia.

So yes, let me start with that and then I'll pass it to Brett our Dreyfus, who is leading that business.

No we're not seeing any.

Issues around supply and the supply chain I will say that part of the matts comments around our strategic inventory build was making sure that we secured and put on docs from parts part of that was China and getting some reserves in our raw materials out of the country ahead of time so.

We utilized some really good opportunities to purchase and some timing to build those inventories and that is part of that inventory build that will release throughout the throughout the year.

So no we really did a good job on the supply chain issues as far as far as Russia Ukraine.

This was the business that had some.

Business in Russia, and Ukraine is about $5 million. So it was negatively impacted actually as we ceased those sales into the region.

Probably around $1 million in the first quarter. So it was actually.

A detractor from the results.

Really I think the results that Youre seeing right now are just solid execution really smart cost control good procurement.

And we're talking about the delivery of these technologies in a package form.

These are these newer formulations wrapped around the laser measurement and application technologies that are leading to positions and just delivering higher value to the customers. So anyway, sorry, Brett if I took a little away from you, but too exciting to hold back. So why don't you give us more color, particularly in the U S around.

What youre delivering in terms of new sales from this.

Okay. Thanks, Doug.

Just a little bit more color so.

As far as Russia, as Doug pointed out.

Our overall sales.

Maybe $5 million between Russia, and Ukraine, So it's not a big big part of our business.

But where we may see some indirect.

Support would be the <unk>.

Cranium steel.

Some of that is moving to Turkey, where we have a have a very good business.

So we may see some from added steel production.

Some more demand on our refractory products. So so.

We're hopeful that that helps us out.

Overall, when you look at Russian steel they produce about 75 million tons of steel United States is about 85. So they do have a very good market, but as I said, where we're not very deeply penetrated in that market, mainly refractory and some laser.

But going back to what Doug said, you know our business really.

It has been focused on our growth new business initiatives.

Our outlook looks pretty strong.

The business is healthy we have eight new contracts, we're starting up in 2022.

And they'll all utilized either refractory wire and laser technology or a combination.

So we're really excited about that.

The laser business the paired from laser business is doing doing.

Very well now we have we have a strong order book and that's Covid loosened up we're able to commission those lasers and <unk> and also the new refractory formulations continue to show very positive results.

And that that also is starting to grow and allow us to two.

Penetrate the markets globally.

And lastly, really we've signed over now we're up to about $120 million of new sales over the next five years.

And that puts us in a really good position to to continue to grow and keep our.

Margin strong.

Hope that answers your question.

Yes, I am.

Appreciate all the all the additional color there maybe shifting over to the household pet care and specialty business, but the.

Revenue number I think was a record there that low $140 billion.

<unk> I know that there is some seasonality to that business.

With the pricing efforts you have in place with the growth initiatives.

We need to bake in.

The cards are pet acquisition as well.

Is this kind of a good revenue run rate for the rest of the year going forward or should we think that Q1, maybe mark.

Tori restocking after you had some of the issues.

And in Q4 with supply chain.

No I think its I don't think theres anything significant in the first quarter Interestingly Youre right.

The lower seasons in some of our businesses are the colder months and the lower seasons in the pet care business or in the warmer months as cats are more outdoors, but I don't think thats. The material I think what youre seeing what youre seeing in with the concept that acquisition is youre going to see this continued run rate of growth.

As I mentioned in my comments. This segment has grown 14% compound over the past five years and so we see that continuing.

The pet care business alone has grown I think around 8% compound.

In that segment.

I think it's a good run rate for a mic I think with these new positions and some of the new products and with our some of our e-commerce strategy, taking off especially that growth in Asia is starting to become.

Forming.

I think this is a good sustainable growth rate for it.

Alright, and then I wanted to make sure to hit a couple of questions here.

Project driven businesses kidney.

Can you give us a little more color on the strength that you're seeing in environmental products.

How sustainable that could be into the rest of the year.

And then in building materials.

You noted some delays related to supply chain issues and we're hearing this about raw material availability for those issues run their course or do you still see that some customers are going to be struggling to get there.

The materials they need as we get into the busier building season.

And I think we've seen any real supply chain disruption. So the business has been doing well from the manufacturing the operation side why don't let Jon Hastings on just give us a little color on environmental buildup sure Mike Hi, Good morning.

Couple of a couple of things.

You you keyed into it our pipeline has strengthened significantly.

As you know the markets have opened up projects are progressing through funding.

We're seeing this in most of our sectors, we see it in the municipal landfills coal Ash pond projects that are supporting the coal fired power plants were seeing waterproofing projects infrastructure projects.

All expanding so so the outlook has grown considerably stronger as we moved from 'twenty one into 'twenty two.

Give you a couple highlights by region for example in North America, We did see the demand pick up in Q1, just as we expected and now we're fully booked through Q2 and beyond.

We even saw within building materials, we had a little bit of a blip in the Pacific northwest with the Teamsters strike.

That effect some project starts but our order book has continued to be strong and we're working through that and that seems to have been resolved.

In Europe , our second biggest market bidding activity continues very strong southern Europe , they're executing awards and construction of large scale projects at a much higher clip than what they've done in the past two to three years. So we suspect that some of this is also some pent up demand, but it also is just an expansion of.

Both the building materials and also environmental products.

Internally, what we're focused on is strategically introducing our innovative new technologies, we're focused on sales of our high value high margin specialty products.

And as you would expect from US we continue to ensure efficient and cost effective operations too.

To effectively serve all of our markets. So so yes. There are some there's a little bit of volatility on logistics and raw materials periodically, but we're really well positioned to.

To continue to offset that with pricing and instituting the best practices business practice that we've put in place our order book remains full and we're executing on all cylinders.

Hope that hope that helps Mike.

Very helpful. Thanks last question for me is on the guidance.

Kind of looks as if youre expecting.

The second half to be maybe just slightly better than the first half I think a lot of us have been watching the price cost dynamics and assuming that.

What would be a headwind in the first half should actually turn into some additional margin tailwind in the second half. So I guess, maybe just help us understand if you're trying to be conservative with that $5 60 to $5 70 or up there are some other.

I guess components of margin headwind that we need to keep in mind.

I think a few things to note Mike.

Recall that for the first time, we've given annual guidance in quite a bit of time.

And as we've given you know second quarter and the full year you are seeing the benefit of a few things like we detail.

Improvement in our end markets like was just detailed bye bye John you heard that from Brett and we've talked about it demonstrating some of that being able to price Doug talked to you about the pricing construct that we have we've been able to change our contracts, we'd be able to work with our customers we price on the value that we contribute so that.

Speaks to the margin.

Potential that we have in pricing beyond just recovering inflationary factors and so yes, you'll you'll continue to see that as we move through the year. If you remember last quarter, Doug talked about our flight path.

In our margin as we move through the year and that that's what we are looking at and that that flight path moves towards that 14% level as you move into the later months in the year and that's coming from continued volume growth based on stable market conditions expanding.

Expanding those margins getting pricing into place that value that we believe appropriately values our products, our technologies and our partnership with our customers and pulling that altogether.

We deliver what we think is a strong year and in that $5 60 to $5 70 range around.

Around that range, you know that that gives you a sense of some confidence as you look into the second half of the year around those factors being able to control what we can in the face of some uncertain market conditions that are going to be.

Obviously, making some headlines whether that's an economic factor or specific markets that you may see providing some level of of a contract that we need to manage through but overall looking at a very good year in total and progression through the year.

Alright, Mike I'll also add very much so.

Sorry, Michael all of sudden now that you may have mentioned it that we still have some room to go on on the integration of these acquisitions. So in the back half of the year, we're not done with the integration and so theres still some systems integration going with our <unk> acquisition.

And still some margin expansion there and also a concept that so yes. There is some things in the back half of the year that we think.

Markets in the delivery of revenue from acquisitions that are going to.

Strengthen things for us so.

But I think as Matt said being able to go out that far right now is projecting the confidence that we have in this business and being able to deliver it.

Sounds good thank you.

Okay.

And as a reminder, if you'd like to ask a question you may signal by pressing star one at this time.

And we'll hear next from Silke Kueck with JP Morgan.

Hi, good morning.

Hi, Phil.

In Europe .

In your earnings guidance for the second quarter and for the full year.

What pricing is embedded in that outlook your prices were 9% higher than the first quarter like what do you think year over year, what do you think it might be in the second quarter and what do you what's baked into your guidance for the full year.

Yes, I think if you remember the way that we detailed our full year outlook last quarter was that we were going to experience about 15% topline growth that was going to be 5% through organic <unk>.

5% through the norm Erika acquisition and 5% through pricing.

Then what you saw this quarter was about 4% organic in that that's volume and mix. Despite what we've alluded to was a challenging January and February so a very good organic growth component that 5% looks good as we move through the year.

North America, contributing about 5% to 6% acquisitions as Doug said that will trickle through the rest of the year with concept pet so still seeing about that 5% topline growth pricing to your point.

Came in stronger than what.

What we had anticipated and Theres a few factors surrounding that.

One youre continuing to see inflation and we are continuing to drive pricing as inflation moves so that speaks to our value proposition with our customers. The partnership we have and being able to recover that pricing and then Furthermore, recovery in our margin, which was embedded in that 5%.

As we came into the year so as.

As youre looking at it silica youll continue to see a higher level of pricing as we go through the year just based on the higher level of inflationary factors that we had.

But again that that 15% that we guided to feels good.

Okay. So you think pricing should be something more like double digits going forward for the second quarter.

Yes, I think I think we are in that but I'm not saying that 15% is we still holding to that five 5% and five right. So 5% organic volume growth, 5% from acquisitions at least through the fourth quarter. We will lap that acquisition number is nor America kind of annualize it.

And we think that given what we currently see with the inflation forward, we still have some pricing to pass through contractually that's going to come through in July August through the third quarter and those are largely in our paper PCC contracts and some in refractory. So I think youre going to see through the third quarter at least that nine in the first quarter, you'll probably see another five in the second and probably that.

Five into the third and pricing now.

Now it depends on where inflation goes so we will keep that spread and we will continue to expand margins to like Matt said to that 14% plus over.

Kind of run rate in the fourth quarter.

If inflation continues to go at this pace, we're going to continue to do this I think when that plains over.

That pricing may come off a bit but for now we think that at least through the third quarter youre going to see that kind of 5% average number over prior year.

Okay.

And deep.

In terms of your electricity Andrea energy costs that could Siemsen paper you have contractual pass through do you have that.

Given like the unusual spikes in Europe do you have that ability of pass through in all of your businesses, where you already have.

That in paper.

Yeah.

In paper its contractual it's actually literally written into that and we do get we receive our utilities in many cases from from our from our customers. So in paper, where our satellite facilities sit on site of the paper mill, we received those utilities they pass on a pricing increase.

And and then we'll pass that through contractually with the delay with other factors. There's other our other raw material input costs and other factors that go into a pricing formula which has a delay to it.

And most of our contracts in North America, that's pretty tight I mean, we've moved those two sometimes instantaneous one month three months, but in Europe . Those there are some contracts that still legacy contracts that are out there six to nine months.

When you see times like this.

In past times, you've seen inflationary costs of a couple of $100000, which will carry for six months and then pass through.

Contractually.

As Matt mentioned, we saw $2 million worth of energy cost increases alone in these businesses primarily.

Primarily in paper in Europe , given what's going on that we're going to carry through carried through the first four carrying through the second and then we'll pass it on the third so the good thing about our contracts as they protect us the challenging.

The challenging piece of our contracts is there is a delay to them and it's exacerbated in some of these really high inflationary periods. However.

The products our products are priced.

A paper our products are priced on value.

We're able to make sure that we get the value that they provide and and so yes. We are working with our customers very transparently around some of these increases and not just energy and.

They understand it they are in many cases in the same position with our customers. So.

It's always challenging conversation, but it's not one that's not understood because of the value of our products will provide our customers. So hopefully that helps a little long winded.

Okay. Thank you for that and if I can ask like one or two more.

Adding the Nomura acquisition my memory is that that the 40.

$40 million business when you acquired it something like 35 million in sales per quarter, maybe that's like some seasonality, but within America business volume terms grow this quarter with contracted I thought the acquisition benefit was unusually low.

Doug or thereabout that at that pace.

They're at that pace silica so they have not contracted.

Hum.

We're running at that rate, we I was just looking to John we have some you know some new business opportunities that are taking hold.

That we're putting in place so I think what you will see some growth.

And revenue and then our American business again, it's going to be in that pet care business, and so I, probably won't call out exactly how much is norm Erika our legacy business or our Europe .

But I think all of that in the new business and the acquisitions are going to contribute to that continued kind of 8% to 10% growth rate in that business. So.

For the quarter I think they were relatively flat with the fourth.

Add on from a from a transaction perspective, the integration continues on pace as Doug said, we have some systems integration that are going to take that it is going to take place later in the year.

We will continue to put effort there.

But overall no.

Erika remains very much on track.

Okay.

Hmm.

Sure.

Yes.

Okay.

It's just a question I wanted to ask about your exposure to.

The Asian markets and.

Some of the Covid related shutdowns in China.

Where does that touch you most in which business and what you sort of like what do you.

Expect for the second quarter.

Yes, I think it's most impacting our foundry business our metal casting business.

Uh huh.

John how about you tell us where we are with customers in our facilities.

Yes, okay.

Like Doug said, it mainly affects our metal casting business greensand bonds and what we've seen just in the past couple of weeks and months is that there has been an increase in.

A difficulty in the ability to actually ship out of our plants. However, that's been resolved.

Through a lot of hard work working with the government working with the trucking et cetera, and so we built up a little bit of a backlog with our customers.

We have now been supplying we've worked off that backlog and going forward again.

It's volatile, but we're going to continue watching this.

But so far there havent been any real significant disruptions and we will continue to to generate the dollar volumes for our customers that are needed.

So again no no real significant impact so far right and in the guidance we gave you.

As you go through it Youll see what we basically said is that that China Covid situation is going to continue sales are pretty slow in China metal casting and that looks like it's going to continue into the second quarter predicated on what's going on with the Covid condition. There so guidance.

Embedded that viewpoint and so we'll work from there, but as John outlined you know very good performance from the team working with customers and moving forward exactly okay. I just want to jump in here, we have 500 employees in China.

And we have two offices, one in Shanghai and Beijing.

And those that team those teams are at home and they're continuing to work they're doing a fantastic job. So a quick call out to them for all they are doing maintaining that business and as John said they are working really closely with customers and those volumes are getting shipped were keeping them running so anyway, I want to put that out there to them.

That's helpful and I have a very last question on just on cash flows.

Wondering what your Capex target is for the year and with.

With the share repurchase target for the year.

Thank you Sylvia.

So cash flow as I said free cash flow, we're expecting to generate about $150 million. So another strong year of free cash flow I think can talk we talked through the dynamic of how working capital is going to release as we move through the year, particularly those strategic inventory positions cap.

Capex embedded in that assumption is about $80 million to $90 million. If I remember last year, we did about $85 million coming into this year. We said we'd have a similar experience really good opportunities for investment inside the company, we're going to take care of those and also sustaining capex continuing to be in that $40 million range.

As you look at our use of cash yes, Youre right. We are currently operating under a $75 million repurchase authorization, we anticipate that we'll complete that by October .

No purchases will continue there.

Other opportunities for our free cash flow, we've talked to you about our balanced approach using some of that cash we just acquired concept pet with cash on hand.

We will continue to also look at opportunities to pay down debt and Youll see that as we move through the year with with free cash flow as it is generated so really using that cash flow on all three are pegged to the stool are delivering to shareholders.

Finding opportunities to deploy it to growth and then also maintaining a very strong balance sheet.

Okay. Thanks very much.

Thanks, Doug.

And our next question comes from David Silver with CL King.

Yeah, Hi, good morning.

I think the first question the first topic I'd like to ask you about is the PCC business.

And I'll just apologize this is going to be one of my famous kitchen sink question styles, but.

I would like to focus maybe on the sequential growth in that area, both the paper and the specialty side.

It was pretty striking compared to typical for Q1 Q.

And I'm just wondering if you could maybe break break down that well into double digits growth that.

Was there sequentially and in particular.

Were there a few startups I think by Yoon on my list as a schedule for first half of this year there may have been a restart.

In the U S. But what are what are the elements that led to that very strong sequential.

Performance in your PCC business this quarter.

And will that carry through to the second quarter or sometimes I believe theres a seasonal dip there. So just the trend the last quarter.

Next quarter kind of trend in that business would be helpful. Thank you.

Sure.

General David It was.

Really do some seasonality, but also I think in the fourth quarter that I think youre, referring to about a 14% sequential growth rate in that business. So we did see some stronger performance we are moving from.

Period in December , which was really challenging from both COVID-19 logistics around the world.

<unk> was a really tough one through into January but then I think as you see as you get into.

The March timeframe, a lot of different things start to kick in some construction automotive builds have been higher the paper. Some paper mills that have taken some outages and and were down due to COVID-19 have.

I have come back and so I think what youre seeing in that sequential growth is a lot of just kind of factors that were in late in the fourth quarter that March is a totally different totally different scenario in terms of where we are in the market, but I do think if you take that March and you look through the second quarter.

That's the kind of pace that we're on going going into this next one so.

I think we saw some strong growth due to some things that in December but I think if you take the March performance and you take that off the second half of the second quarter. That's the construction the automotive the paper you know the seasonal activity youre going to see and I think youre going to continue to see some growth into the second so that's at least the dynamic that's happening D. J you want to give more specifics about what what's behind a couple of things David on on the spec.

<unk> side.

We're really taking advantage of those expansions that we had put into place and the the pull from the.

From both the automotive and the construction industry remains very strong and the AR and the outlook is very strong and we've also been very effective in with with pricing in that area. So and we see that continuing and that's part of what's built into match guidance on the paper side Youre seeing.

North America remained extremely strong in terms of its.

Run rates in the industry.

And we've got some upside in.

In China in India as Covid settles.

Settles down and then as both Matt and Doug talked about earlier, you're going to see that.

Contractual price increases kick in towards that second half of the year and then finally just to remind you on one.

On some of the expansions that you mentioned.

Highlighted by <unk>, that's correct that'll be coming in towards the end of that second quarter than we have.

The India contract with SBB that starts kicking in probably late in the third sometime in the fourth.

And then the other GCC opportunity that we add will be in 2023. So the trajectory is good.

Based on the current builds that I would give you just a little further insight I'd say the pipeline is as robust as well.

And just just to follow up briefly DJ but.

If I just take the simple.

Revenue numbers for the first quarter 121 million total for your.

Paper PCC plus the specialty so you are over 120, and if I go back in my records.

I mean, it's been I think 2015 2016 was the last time, we had that kind of revenue rate and of course I'm not <unk>.

Inflation adjusting there but.

Maybe if you just had a moment I mean, just reflect on kind of how you see the business situated now.

Early 2022, and with the diversification into packaging grades relative to how the business look P&L.

Five years ago, I'm thinking the Theres, just a lot more end market diversification and new applications relative to the last time the business was generating this type of revenue. Thank you.

Thank you.

A couple of things if we if we concentrate on that on that paper business.

The team is doing a really good job of shifting that portfolio.

Both two to advanced products in the printing and writing grades that allow for more consumption per tonne of paper, that's made but also into that packaging and I'll refer to that pipeline that.

David if I looked at that pipeline five years ago, maybe I would've had a packaging opportunity and they're probably not now if you look at a dozen active engagements with customers probably 30% of those are packaging.

Some of them PCC some of them like the GCC opportunity that we look to earlier and then some of them also non PCC related technologies. So so those last two statements I made are two different platforms that help us position in that market and then the other one on the specialty PCC.

Side, there's a couple of items of significance. The first one is these advanced products that we were making on rheology control. They continue to get a good traction in strong markets, we did make the.

Small acquisition, but an important acquisition for us in North America with our assets in Missouri.

And then we've also been penetrating further in food and pharma applications of of specialty PCC. So so both from a PCC standpoint, both portfolios are well positioned for the future.

And David the only thing I'd add is I guess, it's a good it's a good I appreciate you, bringing the look back it's a different business.

Not quite there yet we've transformed it from <unk>.

99% base copy paper.

Into one that we mentioned it was across the portfolio of companies. One that is a much more higher tech products theyre positioned in markets that are structurally growing and in geographies that are growing. So I think it's it follows along the thesis of what we've been doing over the past years to create more stability and.

And position the business into higher growth products and regions and I think.

Both in specialty and in paper PCC, that's that's what you're saying.

And as D. J mentioned throughout this year and into next there's still there's some secured contracts that don't show up in the topline yet that will.

I think you'll see that continue.

Yes, no. Thank you for that I mean, I I considered the development of that business just the very good microcosm tug of.

How you talk about a mineral base, but with different.

Differentiation or a technological edge to it so that's why I kind of brought it up okay.

Thanks, Doug I appreciate you mentioning the.

New product development early in earlier in your comments I was wondering if you could just give us a quick update on Fluoro Sorb in particular, and then you did mention rheology.

To fires and I haven't heard you talk about that in a while I may have missed it but I mean to me that's very very high ground.

Area within performance materials.

Just wondering for you calling it out today was there has there been some movement or some development in your business in that area that you considered noteworthy. Thank you.

Thanks, David.

Yeah.

Let me give you just some.

Just frame up the innovation pipeline in the company mentioned a number of comments in.

The number of stats.

I think if you looked at the total value of the portfolio.

Upwards of $800 million worth of ideas through different stages.

In that portfolio and so if you think of like.

We've got a much bigger funnel of thinking.

That funnel is focused on some very specific areas right and I'll give you a couple of those threats.

One of them as is.

We've always been in rheology modification I mean, it's just about everything we do in specialty PCC and in some of our clay based products, our rheology modifiers, what does that what it does is it in parts.

That kind of a boy I'm going to get out of my element here, even in engineering in parts.

And ability for our formulation to flow or a physical property of flow I'll give you. An example, and construction automotive sealants.

Being able to.

Have a robot put out a line of sealant and then have it set and not sag. So it has to come out really quickly, but it can't go anywhere from that and you can't have a tail of a string once the once the gun is pulled away. So.

What makes it do that is our specialty PCC and so being able to engineer the particle and engineer how it goes into that process. It's it helps that flow under that pressure.

Which is what rheology is and so.

But we have that capability across the company and we apply it with our different minerals.

Some of these are in cosmetic applications.

And we use <unk> to do the same things.

And so.

It's been a part of the technology of the company for a long time, we're finding opportunities in markets to be able to apply it more broadly.

John was just mentioning right now it's in drilling our drilling mud are basically a rheology modification being able to lubricate the drill as it goes through and then set up to hold the whole <unk> in place.

So I think I think it's nothing it's nothing new.

It's a base technology, we have in the company, we're just being able to apply it.

With our growth in these other markets and many of them consumer.

More broadly and so its really nothing thats based technology, but.

Sustainability is another threat and that innovation pipeline, 60% of the products in our innovation pipeline.

Are either something that helps us make our product more sustainable or helps our customers with a sustainability issues. They face and that has grown from almost 40% just a year ago, so year and a half ago about 60% of the portfolio of $800 million of products or something to do with our sustainability initiatives right.

We're generating about $270 million of revenue from new products on an annualized basis. This year over products that we've commercialized last five years that was that's up from $210 million last year. So if you think of a credit we're turning the crank a lot faster. It's a lot more focused and we have a lot more kind of focused projects that are in that funnel.

<unk>.

That are coming out to deliver these type of results and we think that's going to continue to accelerate as far as P. Fast John you want to give us an update on the sure sure glad to.

You mentioned, Florida urban Paphos.

Again, if we're getting a lot of attention from potential customers and strong strong performance is being witnessed in all of our pilot applications. We've got 90 successful demonstrations.

Just to give you a couple of concrete things since last year's Canadian D O D in situ project.

We've got floors orb thats been impregnated into our reactive mats and they've been installed in the U S. D. O D side, we've we've got mobile filtration systems that have been placed the two other.

Sites, we've got one in America, North American landfill, that's in the in situ space in the in the drinking water space.

We're pleased that in the next month or two so in Q2, we're going into two new municipal drinking water systems and as you know other utilities and regulators are watching that really closely the performance that we see with floors or is he is substantially better.

Then other comparative technologies. So so we're pretty excited about having those.

Drinking water systems.

Commercial and installations coming up in the next couple of months.

So looking looking at the roadmap going forward as you know EPA continues to set their set the stage.

And we're we're poised to take advantage of the demand once it once it manifests itself in the marketplace. So a lot of excitement a lot of trials some commercial applications and certainly poised to satisfy the demand once it comes from the regulatory environment.

Yeah.

That's great. Thank you very much I really appreciate all the color.

Thanks, Dave.

And our next question comes from Daniel Moore with CJS Securities.

Thank you again.

One more I'll I'll ask it as quick as they can but.

Youre seeing obviously faster topline growth to now faster bottom line growth leverage based on your implied 22 guide is comfortably below two times and you're going to generate a lot of cash in the back half of the year. So.

I guess, you know stocks still trading where it is in the 10 or 11 times forward EPS range are there things you are considering to try and shine a brighter light on the consumer business, which is now a third of your business and less cyclical.

Re segmentation another analyst day, just any anything you gave great color just wondering if there's anything higher level, that's number one and number two.

Maybe why not buy back stock even more aggressively.

Just given where the leverage is.

All of those metrics I decided thank you again for the thoughts.

Yes, let me take the last one first.

I appreciate that the cash flow generation, where the balance sheet is would support higher levels of share repurchase I think where we are.

And we're just kind of been as you know the $75 million is 50% of free cash flow that average free cash flow number that can certainly go higher but at the moment. We think that's a comfortable place for a balanced use of that cash to make sure that we also see opportunities on the acquisition front. So.

We'll continue to make sure our debt stays in our balance sheet stays in that two times positions you might see some debt repayments this year.

But we want to we see those opportunities out there through acquisitions and we'd like to balance the use of that cash to make sure we have opportunities to do that as they wane, we can update share repurchase and as they get closer.

We might back off that share repurchase if we see that use of that cash for that strategic acquisition. So we like where that is we think it's a good balance that we recognized with our balance sheet and cash flow could go higher.

Acquisitions Wayne on the other side of things I think that's a great question, Dan I think.

We're doing.

We spent a lot of time as much time as we can with investors and talking about this strategy hopefully the comments today you found were.

A little bit more clarifying in terms of where we've been and where we are directed.

I do think that coming out going out with an analyst day is something that we want to do we're trying to actually it's interesting you said that because we've been talking about the timing of that and exactly when we can do it we're thinking about possibly this fall so more to come on that but yes, I think that would be very helpful to you.

And the rest are on this call, but also to our investors to really see where this is going and what we see further out than just 2022, so stay tuned I.

I think it's a great idea, it's something we're going to do we're going to try to plan that.

More than likely we'll do it so I'm.

Trying to get that out and have a real robust day around.

Where we're headed.

I appreciate the thoughts as always we'll talk soon.

Thanks for the question.

And there are no further questions at this time I'd like to turn the call back over to Mr. Dietrich for any additional or closing remarks.

Thank you very much Jennifer thanks, everyone for joining the call today I appreciate the questions.

And we will talk to you in three more months. Thanks.

Yeah.

And this concludes today's conference. Thank you all for your participation you may now disconnect.

Yeah.

Yeah.

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