Q2 2022 Minerals Technologies Inc Earnings Call
Good day, everyone and welcome to the second quarter 2022 minerals technologies earnings call. Today's call is being recorded at this time I'd like to turn the call over to Eric <unk> head of Investor Relations for minerals technologies. Please go ahead, Mr. All day.
Thanks, Jennifer and good morning, everyone and welcome to our second 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.
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.
Now I'll turn the call over to Doug Doug, Thanks, Eric and good morning, everyone.
And thanks for joining the call today.
Got quite a bit to go over.
So let's get started.
I'll walk you through the highlights of our results and what contributed to this record quarter.
Then Matt will give you details on our financial results and share our outlook for the third quarter.
To conclude I will provide some highlights from our 14th annual corporate responsibility and sustainability report, which was published Wednesday.
Let's just start with a recap of the quarter.
It was a remarkable quarter for MTI with record sales of $557 million.
<unk> second quarter operating income of $74 million.
And record earnings per share of $1 50.
This performance is a result of our team's execution over the past several years on some key fronts.
Delivering on our strategic growth initiatives driving continuous operating improvements and.
And disciplined capital deployment.
To begin MTI sales were up 22% versus the prior year and up 27% on a constant currency basis.
Every product line grew and contributed to double digit growth in all three of our segments.
We saw growth in every region.
In North and South America, and EMEA and in Asia, Despite lower sales in China due to the Covid situation there.
This performance was the result of our broad based approach over the past several years to grow the company both organically and Inorganically.
It's also the result of our pricing actions and value selling efforts to offset the significant inflation, we've experienced over the past 12 months.
Our operations performed well and our <unk>.
Team coordinated seamlessly to overcome persistent challenges and.
Meet market demands address consumer needs as well as identify and create efficiencies to drive profitability.
Supply chain and labor challenges persisted. However, our teams navigated these issues and continued to demonstrate their agility and dealing with the evolving market landscape.
We saw higher than expected inflationary cost pressures in the quarter of $43 million compared to last year.
And our pricing actions accounted to $47 million.
I'd like to note that we absorbed $4 million of this cost inflation without pricing adjustments because we couldn't begin to pass through this cost contractually until July 1st.
Our culture of disciplined cost control and continuous process improvement was on full display this quarter.
Maintaining efficient overhead spending and integrating two acquisitions.
Driving our SG&A as a percentage of sales down 160 basis points.
The result was operating income of $74 million a record for the quarter and despite the significant cost pressures our margins ticked slightly higher.
From an investment standpoint, we maintained our disciplined and balanced with capital deployment.
We acquired concept pet.
We returned $26 million to shareholders through share repurchases and dividends.
And invested $21 million in capital expenditures to support our facilities and organic growth.
All in all we had a very productive quarter, we're executing well on numerous fronts and we're well positioned to sustain our strong performance.
Now I'll take you deeper into some of the underlying drivers of our record performance this quarter.
As I alluded to earlier our growth strategy is multifaceted.
It consists of positioning ourselves in faster growing markets and geographies and accelerating the development of new products and technology.
It also includes the disciplined acquisition of companies that help accelerate these efforts.
Further balance our portfolio and expand our technologies and capabilities.
For the past several years, we've been executing on each of these fronts.
And the second quarter is in part a representation of the results.
This quarter, our sales increased 27% over last year, a robust figure that was broad based and driven by four areas.
7% our.
Revenue growth.
Base revenue growth, 2% from new product sales eight.
<unk>, 8% from acquisitions and the remainder from price increases implemented across our product lines.
Let me take you through each of these components in more detail starting with the base organic growth.
For the past several years, we've been positioning ourselves in faster growing markets and geographies.
Expanded into consumer oriented markets, which are characterized by favorable secular trends.
These trends such as growing pet ownership.
Consumer preference for over the counter functional cosmetics and increased demand for high purity edible oils are driving higher levels of sustained revenue growth.
Demand for these products is also more resilient and will lessen the impact of cyclicality on our total sales.
On the industrial side of our business.
Yeah.
We've been benefiting from these macro trends and market positions.
Our household and personal care product line.
This includes many of our consumer oriented products.
It's grown at a 17% compound rate over the past five years.
Excluding acquisitions in this product line, it's grown organically at 6% at a 6% compound rate illustrating the stability and growth potential of these products.
In addition, we continue to penetrate growing regions with our high value products.
Our sales of pre blended greensand bond products in the two largest foundry markets, China and India.
Have grown at nine and 20% annually over the past five years.
For many years, we've been penetrating growing regions with our latest P. C. C technologies and this month, we signed an agreement to construct a 43000 ton PCC satellite plants in India.
Which will feature our first deployment of MTI sustainable new yield L. O P. C C technology.
This technology is a combination of our traditional P. C C technologies.
While at the same time Repurposing, a paper mill waste stream saving the customers money and alleviating a waste disposal challenge.
The acceleration of product development and commercialization to meet new customer demands and the transition of our portfolio to more sustainable solutions is having a noticeable impact on the top line.
Sales of new products are on track to increased 38% over last year and as I mentioned, our newest products drove 2% of the overall organic growth that we saw this quarter.
Some examples of these new solutions are our latest edible oil purification products, which grew 29% versus last year.
These products create higher purity longer shelf life edible oils, and we're developing new products targeted at the rapidly evolving market for biodiesel.
In Petcare, we commercialized new fragrance and dust control formulations for customers in our North American market and.
And introduced new product offerings tailored for Asian markets, where sales grew 15% over last year.
Personal care or health and beauty solutions business has been supporting several new active skincare products over the past few years.
With our delayed release retinol technology.
Our capabilities to support customer formulations and provide them packaging solutions has driven continued growth in this product line and sales this quarter grew 13% versus last year.
We're also benefiting from the general market appetite for sustainable product and process solutions.
We've invested in R&D to expand our portfolio of sustainable solutions and as a result, the majority of our new products in development, 65% in fact feature aspects that benefit our customer sustainability goals.
Okay.
We're also moving into higher tech value added solutions for our industrial customers.
For example, our refractories business is offering a higher tech solution to improve the safety and productivity as steelmaking.
Our solution uses laser guided systems to measure and collect data on steel furnaces.
And automates the application of the refractory material.
These systems yield more accurate measurements of furnace ware and lining degradation than conventional methods.
While also collecting data to enable predictive maintenance through analytics.
Not only is this valuable information, but it keeps furnaces running longer without the need for remedial repairs saving our customers money.
Most importantly, it removes people from Brexit from proximity to a high temperature environment.
A P. C. C business is also developing new technologies to scale into the growing packaging market.
Last year, we signed a contract with Asia symbol in China to deploy G. C C technology and the whiteboard packaging market.
And we have new technologies currently in trial with our customers that target additional white and brown packaging applications.
We also bolstered our growth in the second quarter by 8% from acquisitions, including the America concept pet and the specialty PCC facility in the Midwest.
These acquisitions accelerated our movement into growing markets and geographies.
They are progressing well and through them, we see avenues for additional growth and value creation.
We have an active pipeline of other M&A opportunities that will support our growth objectives, and importantly, we have the balance sheet strength to execute on it.
Okay.
The ability to adjust prices given the inflationary environment has been a key topic for many companies lately.
And as you can see a significant portion of our sales growth this quarter came from our pricing actions.
We price our products on the value they provide and we are uniquely positioned in the marketplace.
Through a combination of our technologies, our applications expertise and our global mineral reserves to provide supply stability and continued value to our customers.
We have deep long term relationships with our customers and we engage and partner with them to ensure we deliver the solutions they need.
In summary, this quarter represents many aspects of the execution of our growth strategy.
But it still doesn't show our company's full potential.
We are a higher growth more resilient company with more opportunity ahead.
This combined with our demonstrated ability to navigate challenges gives us conviction that will continue on this strong trajectory.
With that I'll hand, it over to Matt to discuss the financial results and our outlook for the third quarter Matt.
Thanks, Doug.
I'll review the second quarter results the performance of our segments and our outlook for the third quarter. Following my remarks, I'll turn the call back over to Doug to provide some highlights from our recently released sustainability report and.
Now lets review the second quarter results.
Total sales in the second quarter grew by 22% year over year to $557 million.
And excluding $21 million of unfavorable foreign exchange impact sales growth was 27% above the prior year.
Sales increased by double digits across all three segments and as Doug detailed the increases in sales were balanced across contributions from our acquisitions improved volume and mix and higher selling prices.
Second quarter operating income, excluding special items improved by 15% compared to the prior year to $73 $5 million.
The year over year operating income bridge on the lower left side of the slide shows that we continue to implement selling price actions to offset the impact of inflation.
In total we.
We delivered $46 $6 million of selling price increases compared with $43 $1 million of inflationary cost impacts.
The inflation consisted of approximately 60% raw materials, 30% energy and 10% logistics.
Contributions from our acquisitions continued strength in our refractory segment.
Higher activity in our project oriented businesses drove a favorable volume and mix impact of $9 $6 million.
Now shifting to the right side of the slide the sequential sales bridge shows net sales improved by 7%.
Were 8% higher when excluding the impact of foreign exchange.
Yeah.
The sequential operating income bridge shows an improvement of 8% driven by stronger volume and mix.
We experienced higher than expected inflation, primarily due to energy and logistics costs.
Which resulted in a temporary lag between price and cost on a sequential basis.
We expect to fully make up this gap in the third quarter with pricing actions and contractual adjustments that began on July 1st.
Reported earnings per share were $1.36.
We incurred special items of $4 $3 million after tax consisting of acquisition related transaction and integration costs.
Noncash pension settlement charge.
And litigation costs.
Excluding special items earnings per share for the company were $1.50 in the second quarter.
A record EPS performance amidst a significant inflationary environment that underscores the team's agility and the earnings power of the company.
Now, let's review the segments in more detail beginning with performance materials.
Second quarter sales for the performance materials segment were $300 million or 26% increase compared to the prior year and 10% higher sequentially.
Sales and household personal care and specialty products increased by 37% year over year.
Driven by our pet care acquisitions, and continued strong performance from our portfolio of consumer oriented products.
Our fabric care personal care and edible oil purification businesses, each delivered double digit growth versus last year.
Increased project activity helped to grow sales in environmental products and building materials by 36% and 6% respectively compared to last year and.
In metal casting sales were 10% higher than the prior year and were 11% higher sequentially.
Our North America Greensand bonds business experienced strong demand in the second quarter.
More than offsetting lower sales in China, where we saw reduced volumes amid local COVID-19 restrictions.
Segment operating income increased by 12%, both sequentially and versus prior year $38 $9 million.
And operating margin improved by 20 basis points sequentially to 13% of sales.
As we look ahead to the third quarter, we anticipate demand for household personal care and specialty products to remain strong.
With typical seasonality in our pet care business.
In metal casting we expect seasonal foundry outages in North America to be offset by recovering volumes in China.
We see a similar strong performance from our project oriented businesses.
Strong order book for environmental products should offset slowing activity levels in Europe for our building materials business.
In addition, we.
We expect to continue to adjust our selling prices to offset the impact of inflationary costs.
Altogether.
We see a similar level of operating income sequentially for the segment.
Now, let's move to specialty minerals.
Specialty minerals sales were $164 million in the second quarter and.
An increase of 15% year over year and 1% sequentially.
Global PCC sales increased by 15% versus last year, driven by higher selling prices as well as volume growth in our specialty PCC business.
Processed minerals sales increased by 16% year over year and were 5% higher sequentially on higher selling prices as well as continued strong demand in the construction and consumer markets.
Operating income for the segment improved by 10% sequentially to $22 million.
Operating margin improved by 100 basis points as the impacts from our selling price actions offset the impact from inflationary cost increases.
Recall that this segment has been the most impacted by energy inflation.
As a result of rising European energy costs.
This segment also has the largest proportion of price lag. So we will see recovery of these costs in the third quarter, given contractual timing adjustments.
As we look to other third quarter factors.
We expect a moderate recovery in China that will offset seasonal maintenance outages and P. C suite.
In addition demand in specialty PCC and processed minerals is expected to remain strong.
Total we expect a similar level of operating income sequentially.
And now let's continue on to the Refractories segment.
Refractory segment continue to perform well in the second quarter.
Sales were $93 million, an increase of 25% year over year, and 11% sequentially driven by higher volumes and selling price increases.
Operating income was $16 $2 million is the sequential benefit from higher volumes was offset by energy and raw material related cost increases most notably in Europe and Turkey.
And operating margin remained strong at 17, 4% of sales.
As we look to the third quarter.
We see another strong overall performance for the segment. However, we anticipate some moderation in steel market conditions in Europe , and we expect raw material and energy inflation to continue.
As a result, we.
<unk> operating income will be lower sequentially by approximately $2 million.
Now, let's take a look at our cash flow and liquidity.
Okay.
Second quarter cash from operations was $33 million and free cash flow totaled $12 million.
Cash flow was higher compared to the first quarter. However, it was lower than last year due to increases in working capital.
In the first half of 2022, our working capital has increased $92 million due to the significant growth we are realizing as well as the inflationary impact on our inventories and accounts receivable.
As we've discussed previously we also have some strategic inventory positions, which we put in place this year and we expect to draw down these inventories by the end of the year.
Our strong growth and the persistence of the inflationary environment is resulting in a longer working capital build.
Which means a portion of our expected 2022 cash flow will likely move into the next calendar year.
As a result, we now expect free cash flow this year to be in the range of $100 million to $125 million.
Importantly.
Our working capital efficiency measured in days of working capital has remained the same as last year and the company's cash flow generation capability remains strong.
Capital expenditures during the second quarter were $21 $2 million and we purchased an additional $24 million of shares under our 75 million dollar repurchase authorization.
Bringing the program to date total to $52 $5 million.
At the end of the second quarter total liquidity was approximately $426 million and our net leverage ratio was two three times EBITDA.
We continue to maintain a strong balance sheet for society and ourselves with the flexibility to continue to invest in high value growth opportunities.
Organically and through M&A.
Now, let me summarize our outlook for the third quarter.
On balance we see similar conditions to the second quarter with order books strong consumer oriented demand continuing solid and.
And higher sales in China compared to the prior quarter.
However, we are monitoring a few risk to this outlook.
First the China recovery may take longer than expected.
Second.
The inflationary environment may continue at a higher rate than expected.
Third.
General demand in Europe may be impacted by higher costs for energy and raw materials.
Overall.
And depending on how these factors play out we expect operating income in the third quarter to be $2 million to $3 million lower sequentially.
And earnings per share in the range of $1 40 to $1 45.
We remain confident in the team's ability to remain agile in the face of challenges and we continue to see full year earnings per share in the range of $5 65.
$5 70.
I'll now turn the call back over to Doug to review some of the highlights from our 2021 systems Sustainability report Doug Thanks, Matt.
Before we end the call today I'd like to take a moment to highlight the publication of our 14th annual corporate responsibility.
Sustainability report.
This report provides a comprehensive overview of our wide ranging ESG efforts for all stakeholders.
Equally as important it describes who we are as a company our values and how sustainability is embedded into our strategy, our thinking our product development and our people.
One highlight you'll see in the in the report.
Is that we've not only met but exceeded five of the 620 25 environmental goals, we set for ourselves back in 2018.
Because we have surpassed those initial goals for years early we've reset them to more aggressive reduction targets.
I encourage you to read the report to understand our safety first culture.
The acceleration of our sustainable product portfolio and our numerous initiatives around employee engagement diversity inclusion as well as community outreach.
I'm extremely proud of all of our employees and their commitment to these efforts.
Their contributions and teamwork has driven the progress we've made advancing these objectives.
Again I encourage you to review the report which is available for download on our website.
Now, let's open the call to questions.
Okay.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask a question.
And we'll hear first from Daniel Moore with CJS Securities.
Thank you Doug Thank you, Matt taking the questions.
Let me start with metal casting drilling in a little bit just contrast, what you're seeing in Asia and China, specifically in terms of the pace of the recovery there.
As North America.
Whether you're seeing.
Any signs of.
Softer demand in real time.
And your kind of.
Outlook beyond the next quarter in general that would be really helpful. Thanks.
Sure.
Lots of strong demand so far in North America Asia, obviously slow in the second quarter, but rebuilding Jon Hastings, you want to take us through what you're seeing more detail sure Dan I'll.
Yeah, good morning by the way.
I'll start with North America, and then get to the heart of your question over in China, North America as Doug said, you know, we've got really strong demand.
We're seeing a rebound in auto we also know that inventories are very low across most of the segments, we see having truck.
<unk> and municipal markets, all continuing to execute extremely well and we see that continuing into Q3 and Q4 as well so as we talked with our foundries, we don't see anything on the horizon that really should impact that.
As we moved into the quarter in China of course, you saw the Covid shutdowns.
And that impacted demand.
Meanwhile, what we've been doing is we've been working with our customer portfolio, we've been working with the preeminent.
Foundries, they have been testing new products and at the same time, we've continued to expand our market share. We have seen the start of a rebound, especially in the past couple of weeks that took a little bit longer than I was expecting based on the lifting of some of the COVID-19 outages, however, as you've seen.
They've continued to roll through different parts of their economy.
So we've seen that start to rebound and we expect over the course of the next a couple a couple of months, we will see the ramp up and are in demand.
And certainly.
By end of year I know global estimates of auto production. For example will continue to be 6% a year on year and that's a combination of what we see in North America and also in Asia as well. So so anyway. So rebounding in China very strong in North America, we saw other southeast Asia, India and markets are running very.
Strong.
So if we if we can see the rebound in demand will be in really good stead versus 'twenty, 'twenty, one and going into the future.
Hope that helps Dan.
Very much so.
Maybe switching over to environmental products in construction technologies.
<unk>, obviously seen nice recovery there demand had been building any pause to that or are things still picking up nicely. Despite some of the kind of inflationary and global macro dislocations. Thanks.
Yes, Dan.
You've hit it right on the head we we've seen strong demand our order books for Q3 for example in and environmental in North America are above 100%. So full order books that are is expected to continue we see that with our municipal landfills, we see you with some.
Coal ash products mining projects are we've got the waterproofing for building and infrastructure projects continuing in our role as well.
In Europe .
Because of the economic pressures, we have seen some projects starting to slide.
That may be a you know the willingness to spend in the economic environment that they're in right now that has mostly affected our building products markets. However, if you would go further around the World Australia for example, very strong with our building products.
So we've kind of got a mix when you look at it E. P. M P M, but overall.
Strong North American markets are seem to be offsetting what we're seeing elsewhere.
Especially in Europe et cetera. So so that's kind of the status of the P. P. M. Right now of course, we're taking the time to invest in our technologies, we're working with the customers.
Like I said the order book is is good so.
We built our business over the past couple of years, we've been trying to lay in the foundations of of new technologies, New a new manufacturing processes and that seems to be shaping up real well as demand continues.
Excellent last for me and I'll jump back.
Just in general inflation, that's been remarkable and your ability to restart two it's been pretty remarkable but is there any areas, where youre seeing it taper a bit or even.
Signs, where you could see a little bit of favorability in all those pricing actions turned to maybe higher bargains.
A couple of quarters.
It's still early it's early to tell but any signs of relief. Thanks.
Yeah. Thanks, Dan No inflation has continued.
Yeah, Matt outlined it a lot of inflation, we're seeing as energy related or a derivative of energy and we don't see that abating right now.
There are a couple of areas, but I'm not sure that they're permanent areas that we buy in China. Some of our raw materials there have have planed over.
That may have been more due to supply demand issues through the second quarter. So we'll see how that continues in the third.
But for right now we've seen continued increases at least through the third quarter.
As we sat here in the beginning of.
The second quarter, we had an assumption for the second and I think our our costs were $10 million higher than that we're sitting here today with.
Some long positions on things are something that we can't get long positions on it it may be even higher than that.
But some areas that might plane over but to your point when they do and as we catch up is as Matt mentioned in our specialty minerals on our pricing, which is contractual that will play it over and and we will catch up on that pricing and those margins will expand.
The price we go into right now has our margins you know targeted margins and recapture of that margins, but it is as this bubble of cost keeps coming in it's a delay to pass that through and when that plains over those targeted margins will come back.
We also have Oh, yeah, there's more to go with some of our acquisitions, we have margin that are kind.
Kind of alluded to this in my comments that we're still integrating.
We have some cost catch up or some price catch up through some costs that we've seen over this year I think we mentioned this last quarter, where are those synergies from North America, or a quarter or so delayed because we've been catching up on price. There. That's largely finished and we see that value dropping through in the back half of the year as well so.
I think you're going to start to see the margins expand again like I said, if we continue to take on $10 million every quarter and have to wait to pass it through.
That's going to be that quarter delay, but youll see that up and down.
Okay.
Got it thank you I'll jump back with any follow ups. Thanks.
Thanks, Dan.
And our next question comes from Mike Harrison with Seaport Research partners.
Hi, good morning, congratulations on a nice quarter and I. Appreciate this this breakout.
You provided the base volumes and the pricing of the acquisitions and all of that I think it does a great job.
Illustrate where you guys are doing.
Wanted to ask about more specifically about the household in pet care business. The 37% growth that you saw there I'm assuming that the vast majority of that was from acquisitions, but can you help break that down between organic volume price and acquisition I also assume there was some.
FX.
In there as well so any details on that HBC business.
Yes, I think I think the majority of that two thirds of that growth was our acquisitions again, you're you're seeing still no America that we didn't have in the second quarter of last year and then we've added the concept that acquisition and so two thirds of that is as the acquisitions, but.
And yes, there has been some negative foreign exchange and that business is part of it is the concept patents somatic or in in Europe .
That said I tried to allude to a longer term kind of trajectory of this business in the household and personal care and like I said, even with the acquisitions, we've done over the past three years, it's grown compounded at 17%.
But if you strip that out.
And I Didnt adjust my numbers for foreign exchange it has grown at 6%, but that 6% through a couple of different cycles right. It's it's averaging that 6% and we think that that with our new positions and growth in Asia that that 6%. So I'm just going to go north so on our base rate, we think through a cycle growth rate of high single digits mid to high single digits in this bill.
And we think there's other opportunities and that we can bolt on some positions to accelerate that but yes, I tried to give you a flavor for you know our strategy to move into growing markets with with secular trends favorable secular trends like pet ownership more stable growth.
Growing pet ownership in Asia, moving into that direction our growth there was 15%. This year. So ours. This quarter. So these are the parts of our strategy that we've been executing on that will continue to deliver that kind of stable growth through the cycle going forward.
I know you didn't ask about it but I'm going to jump into a bleaching earth and specialty products and household and for our R. R.
In beauty systems. It's the same thesis it's been moving into these markets that have higher stable growth rates higher demand levels due to secular consumer preference and we've been positioning ourselves there and I think that's.
Like I said this this this quarter it didn't just happen.
We've manufactured this kind of growth rate that you are seeing and we wanted to break that out for you. So anyway, a little more than you asked for but wanted to take the time to lay that out for you.
No. That's all fair because I think it's easy to think of that segment as being pet care, but theres a lot of other exciting applications for bentonite glaze in there that you guys are expanding so I appreciate that.
Was hoping that you could give us some sense in Europe , there's a lot of talk.
Concerned about energy rationing.
Do you think about some of your key facilities in Europe , whether its production facilities mine PCC satellites can you walk through your exposure to natural gas or two countries that are dependent on natural gas for electricity and maybe talk about what kind of contingency plans.
Youre considering.
That situation gets worse as we head towards the winter in Europe .
Yeah, certainly a challenging situation that could unfold in Europe , Let me, let me just kind of dimension our sales in the market you know Europe's about 23, 25% of our total sales as a company.
I'll break down a third of that little less than a third like 27% of that paper about the same amount of maybe a third is petcare.
Third refractories and I know, that's 100%, but theres other things like animal health in there. So I put the three majority of the three big ones are paper pet care in refractories.
Our paper business I would say.
Our our energy is provided by the host mill.
So we're going to flex and operate as that host mill does so large paper mills, if there if they take extended outages due to curtailments, we're going to go along with that.
So that's the one area that we don't necessarily control, but that it will cycle with those plants if they do that.
Our pet care business, you know, we do have some energy consumption largely in Turkey and in the Netherlands.
We'll probably we'll be able to campaign that business through cycle through through energy cycles, if we need to the same with our construction technologies business and the same with our refractories business a lot of our our consumption of energy sits in two areas. So it's in in Poland, and then in Turkey and right now those have been relatively.
<unk> stable.
From a supply standpoint, not from a price standpoint, I will tell you that but from a supply standpoint, they have been but if we do have curtailments will be able to navigate through kind of campaigning those plans to adjust to those downtime. So that's how we're looking at it right now the piece of paper is one that we're not going to be able to control level will be dependent on what the wholesale does.
Alright, Thanks, very much and then the last question I had is just on the litigation costs special item.
It says in your press release this is related to a number of cases seeking damages for exposures related to your health products and operations.
What is the number of cases and can you characterize a little bit better what kind of exposures and what kind of damages.
Plaintiffs are seeking.
And I guess is this something that you've already recorded as a reserve liability or I guess, how should we think about the potential liability here.
Yeah.
Yeah. So let me take you through what the charge was related to charges related to two things. One is you mentioned some higher.
Litigation costs associated with the increased number of cases that we're seeing but it's also due to kind of a one time cost of preparing for a potential trial, but also setting us up for a more efficient way to deal with the cases from an information standpoint. So we did some things to set ourselves up from being able to deal with the case look a little bit of history.
We've always had a small number of <unk> cases in the company over the past decades.
We've we've.
Never had any settlements or verdicts against us or or payments and so most of them have been meritless, they've been meritless claims and I think what's happening now is with what's gone on with the telco industry with Johnson, <unk> Johnson and others.
Never supply of Johnson <unk> Johnson, we're not part of that however, I think telecom companies have.
It's been a high life's been shined on them and so we're seeing an increased number of cases.
These are all our talc business is relatively small it's up to $50 million business. It's it's isolated in a sub called berets minerals.
But we're going to expect some ongoing litigation right now we look at them all as meritless, we don't see any liability associated with them as we sit today, but we are going to have some increased costs as we deal with them and that's that's a function of.
Being on a list of.
Being a tell producer a number of cases right now we have about 420.
But that's you know that.
That compares to what others have seen over 33000 cases, so very small number of we don't see the liability as we sit today as anything.
Meaningful or financially material to the company.
Alright, thanks very much.
Yes.
And as a reminder, if you'd like to ask a question you may signal by pressing star one.
We'll hear next from Steve <unk> with Sidoti.
Good morning, everyone. Thanks for taking my questions I, just wanted to ask a little bit about working capital and cash conversion and just.
So obviously inventories are growing that's dollar higher dollar value inflationary pressures.
Volume is growing so you're building that up but I'm trying to think of.
When are we expecting a drawdown on inventory of supply chain issues ease youre expecting stronger cash conversion, which is the back half of the year.
Yes, Steve I think you got the inventory component right and the drivers around that higher volumes, requiring a higher level of inventory to see those volumes also the inflationary factors that we've been talking about and some of the costs have been going into inventory obviously.
Second component of that is the strong pricing that we've been talking about and the higher volume also driving the accounts receivable dollars up.
Again, our efficiencies very very consistent over the last several quarters exactly where they were here in the second quarter to where they were last year.
So feel good about that the cash conversion component of that though like I said.
Really just gets pushed out a little bit we do have a normal seasonal build in working capital that happens in the first half.
Second half of the year, we do see some release of that is we have some seasonality in those project oriented businesses come off and so there is typically a working capital release, and then a third and fourth quarters.
This year any year really we come into it expecting about $150 million that working capital that we've absorbed just pushing out a bit of that in terms of timing. So as you see inflationary factors start to clean over as we talked about earlier, that's going to release some of that working capital the strategic.
Inventories, we talked about we should be releasing those as we move further through the year.
And then also from the strong growth that Youre seeing on the top line that is driving that AAR side as you see some of that moderation take place.
Versus a year over year consistency that will also released some of that inventory. So that's why we're saying pushed out to the next calendar year.
So that means that that kind of 30 plus million dollars of free cash flow that we would expect here this year.
All things being equal would you expect that next year.
Steve if I can add I think if you look back in the history of our cash flow kind of cycle and generation I think you've seen that you've seen this a couple of times before where the cycle is a little bit off from the earnings.
In 2018, we had a kind of went through a high growth period and.
Cash flow that you was $120 million. The following year that released through $180 million and I think when you thought through that.
2020 downturn, we released quite a bit of cash up to almost $175 million. So we go through these periods. We don't think theres anything changed for the cash conversion rate of the company cash capability of the company, but like Matt said that cash.
Again with inflation planning over that cash is going to set us up for a probably larger than average 2023.
Makes sense, so when I think about that and obviously the cash in your balance sheet is still quite significant.
When you expect to build next year.
Does that this is a timing of that affect your capital allocation priorities and how you think about spends in the different buckets.
No. It doesn't I mean, we look at I'll give you one piece, where we do look at it but it's not because of the cash conversion we have confidence in the cash conversion cash too.
The generation of the company.
Right now we're under our $75 million share repurchase program I believe we have about $20 million to $23 million left you know likely we will we will finish that program.
As we look at capital expenditures.
Of the $80 million $35 million of that on average every year goes into maintenance capital.
Maintaining our facilities et cetera safety, we'll continue with that the piece that we always look at is our growth is our capex that goes into growth and as we look ahead, we may adjust some of those assumptions.
Many of them are based on markets and growth in what we can do with it and how quickly we can fill up that expansion or as an example, and yeah. We'll take we always take a look at that but some of that deployment might change going forward, but it's a balanced approach in terms of just to share repurchases, we will finish that to mergers and acquisitions, if we see them become actionable we haven't.
Nice portfolio of opportunities and then into investing in ourselves we're going to continue that.
And we see that cash conversion of the company are stable and.
Being able to support all three.
Great. Thanks, so much everyone.
Thanks, Steve Thanks for joining today.
And once again it is star one if you'd like to ask a question.
And we'll pause for just a moment to allow everyone an opportunity to signal.
And there are no further questions at this time I would like to turn the call back to Mr. Dietrich for any additional or closing remarks.
Thanks, Jennifer I appreciate that.
Listen thanks, everyone for joining today again, I encourage you to check out our website and take a look at our sustainability report it really is a comprehensive.
Our view of all that we do as a company.
And a testament to our employee base and all that they're doing to help with our sustainability efforts. So please check it out happy to answer any questions you have after year of yet.
Thanks, a lot I appreciate the time today.
And this concludes today's conference. Thank you all for your participation you may now disconnect.
Okay.
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