Q3 2022 Minerals Technologies Inc Earnings Call
Good day, everyone and welcome to the third quarter 2022 minerals technologies earnings call. Today's call is being recorded at this time I would like to turn the call over to Eric.
Head of Investor Relations for minerals technologies. Please go ahead Sir.
Thank you Jenny good morning, everyone and welcome to our third 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, well open it up to questions.
Yes.
I'd like to remind you that beginning on page 15 of our 2020. One 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 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 and thank you for joining our call got quite a bit to go over today, So let's get started.
First I want to quickly mention that MTI celebrated its 30th anniversary this week.
We debuted as a public company in 1992 with revenue of $400 million.
Over the past 30 years, the company has grown and transformed into a global specialty minerals leader.
With operations in 38 countries and revenues of over $2 billion.
I want to congratulate all the employees of MTI past and current for their dedication and contributions to this journey.
No quick outline for today's call.
I'll begin by walking you through our financial results for the third quarter and provide some context to put our results into perspective.
I also want to walk you through the execution of our growth strategy and give some examples of how we're positioned to continue to drive higher levels of growth and performance.
Finally, I'll share some perspective on what's happening around our end markets and our near term outlook.
And Matt will share details of our financial results and our outlook for the fourth quarter.
Let's start with a recap of the quarter.
Our track record of growth continued in the third quarter with sales up 22% on a constant currency basis to $542 million.
Each of our segments realized double digit sales growth reflective of our efforts to position the company on a higher growth trajectory.
In General this is one of the more challenging quarters from a market and cost perspective.
The risks to our guidance that we highlighted during our second quarter call came to pass.
We saw a softer than expected demand in Europe .
Higher energy costs.
Plugging rebound in China.
Foreign exchange rates were also a more significant drag on sales and earnings.
Going into the quarter, we expected some moderate moderation of inflationary pressures.
We ended up experiencing the highest inflationary period of the year.
Despite these challenges the majority of our product lines performed well.
Our pricing actions more than offset the higher inflation.
Our acquisitions delivered all of which offset the market weakness, we experienced and resulted in operating income of $67 million, 6% higher than last year.
Yeah.
I'll also note that we recorded special items in the quarter. One was a reserve established to cover ongoing related litigation.
Given the current environment of talc product litigation, we felt it was prudent at this point to reserve for potential additional costs.
Matt will outline this in the other charges in more detail later.
Excluding these special chart. These items earnings per share were $1 35.
Continuing our trend of year over year earnings growth.
We also moved quickly in the quarter and took steps to strengthen and enhance the flexibility of our balance sheet by.
Refinancing our debt extending maturities out through 2020 seven.
Overall this was a strong quarter for MTI, although it played out a bit differently than we expected when we last spoke to you.
The team continues to take advantage of the opportunities presented to us as well as navigate the challenges we face around the globe.
Focus discipline and agility are the characteristics that describe our team.
Same characteristics are what make MTI well positioned to continue on our strong track.
So what are the next slide where I'll take you through the sources the broad based growth we realized in the third quarter.
Sometimes growth strategy focuses on three key areas.
Positioning our businesses in faster growing markets and geographies.
Accelerating the development of new products and technologies.
And the acquisition of companies that help advance these efforts.
Through the execution of this strategy over the past several years, we've built a portfolio of businesses, which is more resilient.
The greater mix of sales to non cyclical and growing markets.
It is positioned for continued growth.
Once again in this quarter, we saw the impact of this strategy.
Sales increased 22% over last year with broad based growth driven by the three pillars of this strategy.
Thank you through each in more detail.
Our success and market positioning is highlighted by the build out of our consumer oriented product lines.
And the positioning of our more industrial businesses in faster growing regions.
Sales from base volumes and mix improved by 6% this quarter.
Or less cyclical consumer oriented markets led the way with our household and personal care product line growing 16% over last year.
Driven by growth in pet care in our edible oil purification business.
Yeah.
We continue to position, our industrial product lines and faster growing geographies and utilize our applications expertise to drive the penetration of our core technologies in these markets.
We've steadily grown sales in the Asia foundry and paper and packaging markets.
Sales there this quarter, excluding China incur.
<unk> increased by 7% driven by a 13% growth in India.
Or there are P. C C in metal casting business continued to strengthened positions in their respective markets.
We maintain our focus on offsetting the inflation we're experiencing.
Pricing actions added 13% to our overall sales this quarter.
Our ability to price is derived from the value we provide to customers every day.
Our base technologies.
Locations expertise and pricing structure work in tandem to ensure we continue to deliver sustainable value for our customers.
Okay.
The second pillar of our strategy, which is delivering results is accelerating the development of new products and technologies.
No.
Innovation is alive and well at MTI.
Creating new solutions for our customers.
Solutions that save them money.
Hence the performance of their products <unk>.
Reduce their environmental footprint and.
And eliminate or recycle waste streams.
Our newest products continue to contribute more meaningfully to our top line adding.
Adding three percentage points to our organic growth in the third quarter.
<unk> sales of new products are up 48% year to date versus last year and now make up 14% of Mti's total sales from.
From 11% last year.
Our newest innovations address a variety of needs in markets that touch millions of lives every day.
A few examples include in fabric care, our newest chewing particle additive is the application of a technology that makes whites wider and colors brighter.
Dry laundry detergent.
Our pet care business has developed new low Dustin cat litter, which keeps households cleaner.
And we recently introduced new cat litter box fragrance boosters.
Specialties product line is commercialized more efficient bleaching earth products that further extend the shelf life of edible oils.
We also have several new innovations for our industrial markets.
In metal casting we've secured new sales for our low emission greensand bond lengths, which reduce emissions in the casting process.
We've deployed new high durability refractory materials in Europe .
And are currently commissioning our first scan troll automated refractory application and laser measurement system here in the United States.
We commercialized two new coated ultrafine specialty P. C CS which are specialty additives that provide critical viscosity control to our customers products.
These are just a few examples of the breadth of new product development occurring across the company.
Yeah.
The third pillar of our strategy is acquisitions.
The addition of mineral based companies with value added technologies has been a key contributor to our success.
Over the last four years, we've acquired four companies that support our strategy represent representing nearly $300 million in sales.
Three of them were aimed at building out our pet care business, which as a result is now the largest product line in the company.
We maintain a pipeline of attractive consumer and industrial based opportunities that we feel fit our strategy and we have the financial strength to execute on them if they become actionable.
Before I move on I want to point out the bottom of this slide what is graphically and literally our foundation.
The ability to innovate develop leading technology platforms.
The expertise and know how to apply our technologies and our customers products and processes.
The strength and longevity of our vertically integrated and unique mineral reserve positions around the world.
And the engagement and support of our employees.
Support our values and culture of operational excellence.
We build on this foundation every day to drive value for our customers and shareholders.
Now I'll take you through some dynamics that are playing out across our end markets.
As I mentioned earlier the economic.
Environment continues to evolve and we saw several market shifts in the third quarter.
Let's take a few minutes to share our current view of our end markets and the near term outlook for our major product lines.
Like most our company is not immune to macro economic factors.
The decisions we've made over the past several years have placed our company in a stronger position than its ever been to weather economic challenges and continued to deliver consistent growth and performance.
This slide shows our market outlook by product line.
Noted a couple of additional items on the slide.
The Blue section in each circle represents the amount of each segment sales that are consumer oriented and more directly driven by consumer behaviors.
Also next to each product line, we've listed the percentage of MTI sales that each product line represents.
Let's start with our performance materials segment.
This is our largest segment and you can see that approximately half of its sales are consumer oriented.
Starting from the top household and personal care, our largest product line has a solidly positive market outlook.
It continues to benefit from favorable consumer trends and strong sales from our newest products.
This product line includes pet care fabric care health and beauty and our oil purification products along with other nonindustrial specialties.
In General this product line serves end markets that are more closely tied to consumer staples, enabling it to better sustain sales levels through economic cycles.
Furthermore, we're strongly positioned on the private label side of both the pet care and personal care markets.
Private label brands are growing category across the consumer package goods and.
And they also tend to perform well when customers are looking for ways to save at the store shelf and make more economical choices.
Demand for household items like pet litter.
Over the counter active skin care products fabric care additives and edible oils are poised to grow over the longer term driven by increases in population and the general rising global incomes.
Next is metal casting.
This business also has a solid market outlook through the fourth quarter and is benefiting from strong automotive heavy equipment and infrastructure casting demand in North America.
The China foundry market has been much slower this year.
However, we saw an increased demand late in the third quarter and expect this improvement to continue.
Further out are well positioned to continue to penetrate foundry markets around the world with our leading technologies and see ample runway to continue our growth trajectory.
Our environmental products business, which has historically been driven by industrial landfill lining systems.
Grown has a growing focus on consumer drinking water and municipal cleanup efforts.
We have a balanced view of this business into the fourth quarter.
See strong markets for our water remediation products, like Florida, or which targets P fast contamination in ground and drinking water.
And continued solid demand for our offshore water filtration and well testing.
The other factor, giving a more balance to our outlook is that we will experience. The typical seasonal reduction in the number of landfill lining projects as we move into colder months.
Our building materials product line, primarily serves commercial construction and infrastructure end markets.
Cautious outlook here, where we have seen a general slowdown in the European construction market that will likely extend into next year.
Project pipeline for North America, However remains relatively strong at least through the fourth quarter.
Now, let's move to specialty minerals.
We have a balanced outlook for our paper PCC business.
Volumes will continue to grow in India from our latest satellites in North America volumes will remain strong driven by high paper machine utilization rates.
We also see a modest near term recovery in China, which will likely extend into next year.
Offsetting this we see continued softer conditions in Europe , due to generally weaker economic conditions and higher energy prices.
Our specialty PCC and process minerals product line serves construction auto and consumer markets.
We see continued favorable trends in the consumer segment.
Solid demand for antacid in food and beverage food and beverage calcium fortification applications.
Additionally, both specialty PCC and process minerals products continue to benefit from strengthening auto production.
Which should keep demand relatively solid through the fourth quarter and into next year.
This however is balanced against a less favorable outlook for sales into residential construction materials.
In refractories, we have a balanced, but perhaps cautious outlook going into the fourth quarter.
We did see some softening in this business in the third quarter with North American steel utilization rates moving from 79% to around 76%.
This is where we expect them to remain through the fourth quarter.
European steel market also slowed through the third quarter and we could see further softening into the fourth.
We secured several contracts for our new scanner all devices, our latest innovation that is delivering higher value for our customers, which will add incremental sales and profits next year.
These devices are representative of the innovation happening in this business that has fundamentally transformed it for higher levels of profitability.
In summary, the business environment has certainly changed from where we began the year.
Shifting economic and market conditions for.
Persistent inflation.
In this environment.
Despite all of this we have a positive or balanced outlook for 80% of the company's markets through the fourth quarter and we remain on track for another record year of earnings.
We do recognize that the environment can change rapidly, but our focus discipline and agility are characteristics of our team that enable us to continue to successfully navigate what lies ahead.
Our portfolio of businesses is much different today.
More balanced it's structured to deliver consistent solid relative growth and performance through economic cycles.
With that I'll pass it over to Matt to review the financials in more detail Matt.
Thanks, Doug and Hello, everyone.
I will take you through the third quarter results the performance of our segments and also share our outlook for the fourth quarter and then finally in my remarks, we will turn the call over for questions and now let's review the third quarter results.
Third quarter sales were $542 million, 15% above the prior year and 22% higher on a constant currency basis.
Starting with the sales railroad bridge on the left top left you can see that foreign exchange impacted growth unfavorably by seven percentage points for $33 million.
Acquisitions contributed 3% to the overall growth in sales driven by concept pet our new S. P. C C assets and approximately one month of incremental sales from North America.
Our continued selling price actions drove sales higher by 13% over last year and improved volume and mix added 6% of sales driven by higher metal casting volumes continued growth from new contract wins in refractories higher levels of activity in our project oriented businesses as well as an increase in sales from new products.
Operating income in the third quarter, excluding special items increased by $4 million over the prior year to $67 $2 million.
We continue to implement selling price increases during the quarter amid the persistent inflationary environment as Doug mentioned.
$51 million of inflationary cost increases was the highest level, we have experienced in any quarter. This year.
Can see in the operating income bridge on the lower left hand side that are selling price actions exceeded the inflationary cost increases by $8 million.
Offsetting this was $2 6 million of unfavorable foreign exchange and another $2 $6 million of other costs, including SG&A wage inflation and other operational costs.
Now turning to the right side of the slide the sequential sales bridge shows net sales were lower by 1% on a constant currency basis.
Continued selling price actions were offset by slower demand in Europe softer steel market conditions, and typical seasonal foundry maintenance outages.
Adjusted operating income was lower by 9% sequentially, driven by volume and unfavorable foreign exchange of $2 million we.
We experienced inflation of approximately $4 million higher than we expected at the start of the quarter due to significant energy cost increases in Europe and as you can see we were able to fully offset the additional inflation with price adjustments.
Relative to the guidance, we provided at the start of the quarter. Our operating income was impacted by softer demands unexpected in Europe , and China and unfavorable foreign exchange.
Now, let me share a reconciliation of reported EPS to adjusted EPS.
Third quarter reported earnings per share were <unk> 41 cents during the quarter. The company recorded special items of $38 $7 million, primarily consisting of $31 1 million for litigation costs, and $6 9 million for debt extinguishment costs related to the refinancing.
So litigation costs were incurred to defend against Opportunistically settle and establish a reserve for claims associated with certain <unk> products from the Barents Minerals, Inc subsidiary the.
The company's position is that all talc products sold by Berets minerals are safe in these claims are without merit.
We have a relatively limited number of cases, but they do require legal preparation and the proper response, hence our decision to prudently set aside a legal reserve to resolve them.
And now let's review the segments in more detail starting with performance materials.
Sales for the performance materials segment were $290 million in the third quarter, an increase of 16% versus the prior year and 24% higher on a constant currency basis.
This sales growth was driven by strong demand for consumer oriented products continued selling price actions as well as strength in metal casting, particularly in North America.
Sales and household personal care and specialty products increased by 16% compared to prior year and were.
1% higher sequentially.
Take care acquisitions, and higher sales in our personal care and edible oil purification businesses drove the growth compared to prior year.
Sales in our metal casting business were 17% higher than Europe year over year as a result of strong volumes in North America.
Sales were 4% lower sequentially on the previously mentioned maintenance outages at our North American foundry customers.
We did see a modest improvement in China volumes, However, the improvement lagged our expectations and volumes remained below prior year levels.
Environmental product sales grew 20% versus the prior year on strength in remediation wastewater and filtration activities, but were 12% lower sequentially due to the timing of projects.
And building materials sales were slightly lower year over year and sequentially as higher levels of product project activity in North America were more than offset by slower activity levels in Europe .
Operating income excluding special items was $38 2 million and represented 13, 2% of sales.
Basis points above the prior year and sequential quarter as pricing actions offset inflationary cost pressures.
Segment, largely met our expectations for operating income in the quarter as strength in the household and personal care product line and North American metal casting offset the slower than expected rebound in metal casting demand in China.
Looking ahead to the fourth quarter.
We are entering a seasonally stronger period for pet care in both North America, and Europe and.
Metal casting we see continued strong demand in North America and improvement in China with the rest of the Asia region remaining strong.
Meanwhile, we are entering a seasonally slower period for our environmental commercial construction and drilling products businesses given.
Given the typical seasonality, we expect segment operating income to be lower by approximately $4 million sequentially.
<unk> there continues to be uncertainty in Europe , and we could see continued slowing in industrial markets and additional inflationary cost increases.
And now let's take a look at specialty minerals.
Third quarter sales in the specialty minerals segment were $166 million, an increase of 13% compared to prior year and 18% higher on a constant currency basis.
Global PCC sales were higher by 14% versus last year with paper PCC up 9% driven primarily by contractual selling price increases.
Sales in Asia were lower than prior year on soft conditions in China and weaker than expected demand in Europe due to increasing economic challenges in the region related to energy costs.
Specialty PCC sales were 40% higher year over year, driven by continued strong demand in North America higher pricing and the asset acquisition in the fourth quarter of last year.
Processed minerals sales also grew year over year rising by 9%.
Operating income in this segment, excluding special items was $16 9 million and represented 10, 2% of sales.
Softer demand in Europe , higher energy costs, and higher operational costs impacted results by $3 million against our expectations.
In addition, the segment absorbed $21 million of raw material and energy inflation in the quarter and we had been passing this costs through to our customers in price adjustments.
As you are aware some of these costs are a pass through on a contractual basis and there was a lag as to when these adjustments will take effect and improve margin.
Now looking to the fourth quarter and process minerals and S. PCC, we are entering a seasonally lower period for our construction end markets, but we are seeing volumes. So the automotive market remaining strong.
We also expect our paper PCC business to have a similar quarter sequentially and overall for the segment.
We expect operating income to be similar to the third quarter.
And now let's move to refractories.
Refractory sales increased 13% versus the prior year and sales grew 20% on a constant currency basis on the continued ramp up of new business volumes and higher pricing to cover inflationary cost increases.
There were 8% lower sequentially due to softer global steel market conditions, and resulting lower utilization rates.
Operating income was $12 $4 million, roughly $1 million lower than anticipated and margin remained strong at 14, 5% of sales.
Performance was impacted by higher energy costs in our manufacturing location in Turkey unfavorable foreign exchange and softer than expected steel market conditions.
Now looking ahead, we expect a strong fourth quarter for laser equipment sales.
We see North America steel market conditions remaining at similar levels to the third quarter.
However, we anticipate some softening in Europe .
In addition, we see continued higher energy costs for our Turkish operations.
The net effect of this will result in operating income approximately $1 million to $2 million lower sequentially.
Now, let's take a look at our debt and liquidity.
We completed a refinancing of our revolving credit facility and term loan b during the quarter.
Which extended maturities from 2023 and 2024 out to 2027.
As a result of the refinancing our overall interest rate was reduced by 50 basis points and our fixed to floating ratio remained roughly 50%.
Cash from operations for the quarter was $30 million and we deployed $19 million of capital expenditures.
We expect a strong fourth quarter free cash flow of around $70 million inflationary factors have increased our working capital.
As the inflationary pressures abate, we see working capital releasing and a return to more normal levels of cash flow.
Overall, our liquidity remains very strong at over $400 million.
And now let me summarize our outlook for the fourth quarter.
Demand remains strong and our consumer oriented product lines and solid across most of our end markets in North America. Although note that we do see the typical seasonality in our construction end markets.
In Asia, we see continued modest improvement in China with stable conditions elsewhere in the region, which should benefit our metal casting and PCC businesses.
In Europe , we expect industrial market conditions to remain soft and we could see higher energy and related input costs as we move into the winter months.
Overall, we expect operating income to be around $60 million, which would be 10% above last year and EPS of $1 20.
From where we sit today.
The fourth quarter reflects continued year over year growth driven by ongoing execution of our strategic growth initiatives and solid operating performance.
This guidance equates to full year EPS of around $5 40.
This is 8% growth versus 2021, and a testament to the resilience of our portfolio and the perseverance of our team with that let's move to Q&A.
Hum.
Thank you if you would like to ask a question. Please signal.
Your telephone keypad.
Using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach your equipment again. Please press star one to ask a question and our first question comes from Daniel Moore from CJS.
Yes.
Okay.
Thank you Doug Matt Thanks for taking the questions.
Hey, Dan.
Good morning, let me start with performance materials.
Just maybe talking about volume versus pricing or.
Both household personal pet care and this kind of same question for metal casting.
What you saw in Q3.
Sure, Matt you want to take that or yeah, absolutely. So I think Dan when you take a look.
The team did a really good job in continuing to drive price.
We break it down for the segment were still net kind of $5 million ahead of the inflationary factors that they had saw but you are seeing very good year over year volume growth across metal casting the pet care business that is helping to drive that and also other components of HTC and that specialty business.
Where the team has been making advances might be good John if you want to give some color on some of those components.
Sure you wanted to highlight especially Matt sure.
Hi, Dan.
Especially we've got a nice balance of of unique product positions.
Certainly we've got our personal care, which we talk about embedded in that business. We also have talked at length about edible oil both of those are growing.
We look for opportunities to continue debottlenecking, our plants to push more capacity through so as demand continues to grow we have the ability to serve we've got other specialty segments as well.
So we're in human health were in AG, we're in.
We have a segment called advanced performance additives were also in drilling products for both oil and gas and water water well drilling.
So it's a wide variety and certainly we've got growth.
Across the entire portfolio. This is predicated on our strategy. Our strategy is very consistent across the company, but it's really playing out in specialties. Its geographic growth its growth through innovation, we have about 50% of our new products in this segment.
Going through that specialty business. So a lot of factors are all coming together with with great demand and well positioned.
With high value products and one other thing Dan as far as metal casting goes.
If you take a look what we talked about was on a regional basis really good performance in North America again, John has talked about the mix of end markets that we serve there with automotive continuing to trend well, but those other markets performing very well amongst our customers and then China. We've talked about is yes. It wasn't as strong as we.
Acted but we did see a nice uptick in the third month of the quarter. So in September with really nice demand coming back into place. So that helped to really set some of the trajectory that we were looking at for the fourth quarter of continued improvement in metal casting and.
And if I could add to that Matt.
We do see we track our daily sales and while we've seen enough in metal casting daily sales in Asia ever since May every month has increased so we had a nice increase.
Highlighted in September going into Q4, again, we see that demand.
Continuing to increase a little slower than what we expected, but still very well positioned and we're not we're not sleeping there.
As the markets have been slow that that team and we've got a great leader a great team and their positioning with customers and we've won some new customers. So our share positions are continuing to increase with our blended products in our positions with those customers.
You kind of read my mind I was going to just dig into metal casting given the strength of the outlook that you described maybe get try to get a sense of how much is.
Increased penetration or set assembly with share gains versus.
Positive market outlook.
Okay.
Yes, so we're seeing Dan this is Doug.
Matt and Jon kind of mentioned volumes are still remaining very strong in North America, we see.
Automotive demand heavy equipment.
Is it going to continue to drive volumes through the fourth quarter and we see into next year.
I think China is the weakest part of the year. So far however, the uptick that we saw in September .
We think continue.
Moderate pace, it's not going to rebound, we don't see that drastically, but it's going to continue to grow through the fourth quarter and into next year a lot of that is coming from our.
Our positioning and you mentioned price before our ability to price is coming some from our ability and our applications of these greensand bond products, our blended products in China.
And as they become.
Much more of a staple to more modern casting processes.
Our ability to drive more value and therefore continue to drive more price is behind that so.
We're positive on that both the pet care in the metal casting as we showed from that slide going into the fourth and into next year.
Perfect, maybe one more just digging down into the edible and purification oils.
Any sense for.
Kind of what run rate revenue, where we're at and.
Just who your primary customers is larger CPG is smaller niche companies, where youre gaining the most traction and is it mostly in North America are pretty well balanced in North America and Europe .
Since we're hearing more about that quarter in quarter out. Thank you.
Yes. These are so our business is largely in Europe right now our production and sales are in the Europe region for edible oils.
It's grown from zero a couple of years ago as we've entered into this market we're growing.
I'll, probably disclose we're probably in the $20 million to $25 million range growing very quickly as I mentioned this quarter.
Customers are large AG.
Oil producers were talking the <unk> others of the world like that so big AG customers that are into soybean and oil production.
So we've seen our business grow along with them as I mentioned, we've developed some new products.
Hi efficient.
Purification products.
Which helps them in their processes process speed their capacity utilization and therefore also in and I guess I'll call. It clarify are cleaning up the oil to levels that extends shelf life. So you know real value for them and.
Inefficiency value for them.
And a nice premium product for us we continue to look to expand that business John mentioned Debottlenecking.
We've done a number of investments to continue to maximize the asset utilization for what we've invested in and we're also looking to continue to invest in that business. So that we can grow at this pace along with our customers.
Alright helpful. Doug I will yeah. It does I will jump back within it maybe one or two follow ups. Thank you.
Thanks, Dan.
Okay.
And our next question comes from Mike Harrison Seaport Research.
Partners.
Hi, good morning.
Hi, Mike.
I was hoping we could dig in a little bit on the margin performance, particularly in specialty minerals and refractories I guess first of all on specialty minerals.
It seems like you've kind of taken a step back in terms of that price cost recovery trajectory maybe just.
Flush out a little bit more detail what you guys were seeing in terms of costs.
And maybe how we should see margin track over the next couple of quarters as those higher costs are pass through.
In some cases contractually.
Yeah, absolutely yeah, I'm going to start off and then I'll give it to Matt to give you. Some more details. This is definitely it has been all year. This segment and the product lines that have been impacted the most from currency from energy inflation raw material inflation.
Number one number two it's you know as we talk about all the time this business has.
The most contractual nature to its sales and in that in those contracts.
The timing of our ability to pass through pricing. So what you saw you've seen this year as we've seen persistent inflation persistent energy we absorbed that in our income statement until we can pass that through and that lag can be three months six months and so.
Years past that happened, both up and down and we would absorb.
Hundreds of thousands of dollars of kind of range, what youre seeing this quarter is.
In the millions.
Matt will describe those types, but but I want you to know that they do get pass through contractually. So there is this delay it weighs on our current quarter, we see that in our margins, but then in about three months probably January a lot of this gets moved through.
Into our customers now those margins will rebound and they will rebound when the inflation starts to plane over our pricing catches up contractually and youll see those margins rebound significantly.
Details of the and Thats exactly what we spoke to I mean take for instance, again, we talked about it.
In the prepared remarks, we saw about $21 million of inflation in that segment alone none of which I said was probably $2 million to $3 million that will come.
With a lag on it so we will capture that and if all else stays equal Mike that goes back to sort of recovering in establishing the margin I think the broader point and I know you talked about refractories as well, but let's just step back for a minute and talk about the company's journey over the past two years, so coming out of 2020, we absorbed $75 million of inflation in 2010.
One so far in 2022, we've absorbed about $135 million and inflation. So that's $210 million inflation in two years and although we've captured most of that in pricing that in itself is dilutive to margin by about 200 basis points. So the company generating about 14 five per.
Sent back in that early 2020 timeframe now this quarter around 12, 5% 12, 4% 200 basis points of that difference is the dilution in the margin from passing through these inflationary costs. So that speaks to one great work by the team to capture those cost pass them through to if youll recall.
We came into this year expecting about $40 million of pricing that $40 million was to catch up on inflationary costs from 'twenty, one, but also a $20 million to reestablish our margin will continue to work on that as we go forward again, capturing those inflationary costs, yes, but then reestablishing our margin based on all the things that you heard Doug talk about.
The great position of our products the great position and technical capability, we have with our customers and also introducing new products. So that's what gives us the confidence that as those inflationary factors start to plane over about 35% of the company has contractual lags in that pricing that will come and the teams are working on the other 65.
5% to reestablish that margin as we move forward.
Alright, and then over on the Refractories segment, you mentioned a couple of times the higher cost that youre seeing in Turkey, maybe give a little bit more color on what youre seeing there and then also curious.
The mgo market in terms of the raw materials that you're using in refractories.
I believe that you stocked up on some of that material before we saw big price you've run ups and I'm, just curious kind of where youre seeing.
You're seeing the cost structure for.
For Refractories raw materials play out as we get into 2023.
Sure. So the cost increases that you saw in refractories. This quarter was as you mentioned in Turkey. So it's energy related.
So we do produce our own magnesium oxide we buy.
Magnesite or in center, it ourselves in Turkey, and it supplies roughly.
35% to 50% at times of our or our base raw material production for Europe refractory production in Europe .
And so that cost came in energy as we center and we're moving that through in pricing to customers, but that was.
A large increase that we saw through the quarter.
Magnesium oxide prices in general we do source from around the world.
We source.
From China, we source from other regions.
Last year, you're right we did.
Take advantages some dislocations in anticipation, but some lower pricing in the market and we stocked up and that was done for two reasons one.
We found some some good opportunities for pricing and also we wanted to buy ahead of if you remember the Olympics that were in China to make sure that we loaded everything out of the country before that potential disruption, we've largely used through that but again, we're in a position now where.
Given the conditions in China, we're starting to see some some good.
Pricing, taking advantage of things not just in magnesium oxide, but in other raw.
Raw materials and so therefore.
We're looking at making some opportunistic purchases this year.
To extend us into next year, So you know.
There are some areas that we are seeing some planning over of inflation, we're taking advantage of them that I think the vast majority of what we saw in the quarter and what we think we're going to probably see in the fourth quarter is energy related and.
In energy related here in the United States and in Europe .
Does that help Mike.
Yes very helpful. Thank you.
Last question.
The talc litigation.
I'm curious.
If you can let us know how many cases were settled in how many cases are still pending.
And I'm also curious of the 31 million dollar charge how much of that is.
The cash impact and how much of that is a reserve.
That is a noncash expense for now.
Yes, So let me take your first two the charge so clarify that as Matt mentioned, there's three components to that it is both defense costs.
In the quarter some settlement costs and then a reserve to establish my.
Outline a little bit for you in telco.
I think I mentioned on the last call that <unk>, it's about a $50 million business for us and the cases that we have against the talc business right now are against our legacy cosmetic talc and cosmetic talc has been.
$2 million to $3 million, a tiny piece of that business very small piece of the company. We discontinue those products in 2016, and so because of that we have a relatively limited number of cases, but we have been defending ourselves.
Over the past several years actually.
I mentioned that on the last call that we've been incurring more litigation costs and as we went into the quarter. We made the decision to settle several of them.
But also looking at the litigation environment in General we said well look we have about 450 remaining cases against the company. We wanted to take a look at that.
And make sure that we assess any potential future liability that that holds given our litigation strategy and so we felt it was prudent to <unk>.
Take the reserve this quarter. So it is a portion of that 31 now.
Want to breakout for you the components.
I want a.
A portion of that 31 is that reserve for these potential future liabilities, but I don't want to give you that that's the part of our litigation strategy.
As far as cash flows.
Portion of the cash flows in the third quarter within our cash flows will be a bit more in the fourth quarter.
But the bulk of it is non cash that will be set aside for resolving these cases is going forward as Matt mentioned.
Does that help dimension it for you.
That's very helpful. Thank you very much.
And our next question comes from David Silver.
King.
Yes, hi.
Thank you.
I think I would just if you wouldn't mind I'd like to just go back to the Tao.
Question for just a moment, but.
Okay.
Maybe just to clarify but of the <unk>.
The cases at issue here are the parties all.
Focused on I guess, the cosmetic use of talc or.
Is there some litigation that might be related to.
Industrial.
Non.
Non cosmetic use of the product just what is the range of.
The parties.
Who are you.
No.
Filing the suits with just what parts of the business are at issue.
I'll stop there thanks.
These are these are cosmetic.
Talc applications as I mentioned.
Small very small portion of the <unk> business and not the industrial applications and they are all associated with lung.
Along issues.
Yeah.
And that's where I'll stop there.
Okay great.
Okay. Thank you for that.
So.
Next question I think.
Like to ask is about the PCC Bill.
Businesses.
So they showed a very nice revenue gain sequentially and whatnot and year over year double digit and.
I was just wondering if you could characterize a little little more detail the source of the increase in <unk>.
In particular I'm wondering if there are some new project or a new satellite plant startups in there or if it's just higher utilization from your existing network in other words, what what.
It seems like there is a lagging price effect. So maybe if you could just talk about the source of the double digit.
Year over year increase thank you.
Yes, sure I'll start and then I'll pass the D. J to give you some more details.
Look we've seen.
No.
<unk> built a number of PCC satellites.
In India, we've got a new one ramping up in China over the past several years and what we saw in the quarter is really just the stronger volumes from those those new satellites.
You'll also see strong demand in Europe , I would tell you utilization rates.
Paper machine utilization rates are very high in the United States. We are selling just about every ton of PCC, we can make here in the United States that's behind that.
A little bit slower in China.
And but we still see a really strong pipeline of opportunities I'll, let D. J kind of highlight more of those in some of the business development activity glad to Doug.
So David a couple of things regarding new satellites.
Nothing really significant yet, but youre going to start seeing.
In this quarter and really ramping up in the.
In the early part of 2023 is the new satellite that we had previously mentioned by units about a 50000 ton satellite.
In January we're going to have another satellite turn on in India and then just a reminder, we had announced last year.
A major.
New product for us in packaging white packaging and that is a.
A GCC satellite in China and that is still on track to kick in on the second half of next year. So those are all things and building and commissioning things to come.
On top of that I look at that.
The pipeline is pretty significant pipeline that's still underway.
Got.
It's reasonable for you to think it's about 15 to 20.
Sort of discussions that are going on split between Asia and and.
And Americas, and Europe pretty evenly in Asia, It's a traditional PCC plus some penetration in the packaging and in the Americas and Europe . It tends to be these newer products. These environmentally focused products.
And packaging, so that's that's kind of where.
The pipeline is evolving too, but but in terms of what youre seeing now.
The big part of it as Matt mentioned as price with we're still more to come to recover on that energy and then the volumes on those projects will start kicking in really early part of next year.
I hope that gives you the color.
And yes, no. Thank you for that and if I could just follow up quickly, but from your experience D. J D.
Does the prospect of like the slowing global economy, let's say.
Impact the capture rate for these new new project opportunities how to customers typically.
Respond.
To a slowing economy when they're considering.
Our new satellite project or packaging conversion.
So in general it creates more opportunity for us certainly the urgency of the conversations cranks up during these periods. There's two things driving that the first first thing is most of the customers look at it as a chance to reposition.
And and upgrade on their quality, the second thing, especially when you're dealing with these energy prices, we've had big price increases but it's.
It's against the increases that they're seeing in their pulp it's against the entry cases that they are seeing and in driving their paper and our products to help with both of those parts of the value equation. So I would say that that what I've been experiencing most recently as an increase in interest.
On the traditional products and our our newer products. So that's what's still holding out now.
Okay, Great and then I did have one more question on within performance materials on environmental products in particular so.
Second quarter and third quarter together.
Over $100 million of revenue.
From that that product line and I mean, that's historically, that's a very strong trend. So just a couple of questions about that but first.
Could you just kind of talk speak to let's say the backlog or the order book for <unk>.
New environmental products based project work and then secondly, if you could just give us an update on Fluoro sorb sales.
Beta testing and development like that.
That would be helpful. Thank you.
Yes, So let me start and then I'll give it to John .
We have seen some really good growth in this business as I mentioned you know.
Several years of first several years. This is our environmental products business has been.
Based on lining system, so geo synthetic clay liners for municipal and industrial landfill use.
Over the past couple of years, we've spent.
A lot of time and innovation.
In more water applications remediation applications.
And our.
Our <unk> product our floors are products is one of those outcomes and so we are moving this business and we've seen a tremendous amount of growth in the on the water side of things and even more so looking at <unk>.
Drinking water applications and so a lot of our newest technologies are on that remediation. We think that's a it's obviously a growing market.
There is a number of factors there one obviously the consumer side of it in terms of protection of drinking water, but also the municipal side of it which though there isn't a regulation necessarily to a level of remediation clean up.
The government there is municipal interest in local interest and cleanup efforts and we've been taking part in that so so a real shift toward more of the water side of things and remediation side of things and John I don't want to give more detail on some of the Florida Zorba and the projects we have in the backlog sure I appreciate the question.
I guess, if you think about the magnitude of what we're doing and who we're working with first.
Put it in terms of pilots we've had.
About 100 successful pilots demonstrating.
The activity of the product and the success of the product.
And that certainly sets the stage for commercialization, we've been talking about that for quite some time.
We have started to see the ramp up of commercialization. So so it's broken into a couple of different segments.
If you think about <unk> soil stabilization. This is what we've been doing with some of the defense Department.
And we've got <unk>.
The major installation with our with the Dod side, we've had two industrial sites. We've got two mobile filtration units that were moving around all generating sales and revenue.
The second segment is drinking water like Doug described.
This has the potential to just be continuous business as they use the media and we replenish the media.
And right now we've got two orders for full scale, while water purification systems.
That will be reached.
We suspect a great entre into the utility segment.
Once we demonstrate full scale commercial success, we believe others will be watching that and we have the potential to continue to grow that and then the last segment is landfills in during <unk>.
During the quarter, we had two systems go in we've got another order for.
Go for another system, we've had one in place for over a year now so again, that's kind of our bread and butter as well so three segments. All all have significant would.
We believe that whats really going to drive this as regulation and once regulations get in place.
With the technology being fully demonstrated we will have the ability to grow that exponential.
I hope that provides some color.
Okay.
I like the word exponential okay.
Thank you very much I appreciate all the all the color.
Hey, David I almost had to hold John back on.
On the exponential number, but yes, no good growth.
Okay.
Yeah.
Once again, if you'd like to ask a question. Please press star one and we will take our next question from Daniel Moore.
C J F.
Yes.
Yes.
Hi, Danny there.
Operator, do we lose them.
Now we still have been connected.
Your line is open would you like to go ahead and ask a question.
Well, maybe we did lose him.
The next question, possibly have Dan requeue.
That would be fine.
Okay. Our next question comes from David Silver at CL King.
Yes.
I'm not going to say I had anything to do with that but yeah.
[laughter] anyway.
Yes.
You know when I have to get a follow up then.
Go to go to any any extreme anyway, sorry about that.
I just wanted to touch base real quickly.
Thanks for laughing Thats, all I could come up with on short notice.
That's good.
Okay, So our cash flow and in particular working capital.
So I would just say over the last several quarters.
There has been a pretty significant buildup in the use of working capital and certainly theres been some buffer inventories in some accommodations to supply chain issues and whatnot.
But I'm just wondering if I look over the last four to six quarters I mean, the net increase in working capital build has been pretty substantial and Im just wondering if you could two things I mean could you cite maybe the strategic rationale behind that and then secondly, how do you how do you and.
Dissipate that.
Level of working capital progressing, let's say over the next quarter or two thank you sure yeah. Thanks, David.
A few things one we.
We look at it on a multitude of factors and like you said as we've moved through the course of the period you just laid out we did have strategic inventories that we put in place.
We've managed through some of the higher revenue periods in the second and third quarters.
And then we have strategic inventories that go back in place ahead of the winter months.
On the mining businesses, but in all of that you need to take a look at the efficiencies and from a days on hand perspective, we're essentially flat year over year and so what does that tell you. It tells you that we are <unk>.
Inventory.
As we need for the revenues that we're generating now the inflationary inputs that we've been experiencing have been driving that yes, both on the revenue side and on the inventory side, but the net efficiency. So the actual units of what we're holding are pretty much in mind with where they are.
We needed to be and where they've been over the past.
Several quarters, so as those inflationary factors, that's what we said in the prepared remarks, and what we've said over the past couple of quarters is as those inflationary factors abate.
That working capital release, and I remember, we kind of have sort of 60 to 70 day terms.
So you would see that take place and that type of time lag and so too.
Two factors there for you to consider one inflationary impact has been in that $70 million to $90 million range, depending on if you're growing year over year or six quarters back.
And then that will work itself out.
60 day basis once you start to see those inflationary factors stabilized.
And then I will just add we don't see there's no. There's no change to the characteristics of the company in terms of its cash flow generation potential as a matter of fact as we can.
Continue to add product lines that.
That we feel less cyclical higher margin, we should enhance that going forward I think it looks like youre, saying and I think many companies youre seeing this inflation being parked on the balance sheet and as it starts to play over if we will revert to normal.
Kind of cash flow yield type characteristics. So.
It is as I mentioned, we thought that that would probably be a little bit more in the second half of this year, but as we continue to experience inflation and we continue to buy our high higher raws and put them in that balance sheet, that's going to take a little bit time to look for another quarter or two to release, but that's the dynamic there is I don't think I don't see there is anything.
The characteristics of the company and our historical cash generation Thats changed at all.
That's kind of where I was.
That's kind of what I was wondering so thank you very much I appreciate again I appreciate the detail.
Thanks, Dave.
Okay.
Yes.
It appears Theres no further questions at this time.
I'd like to turn the conference back over to Doug.
For additional or closing remarks.
Thanks, Jamie and thanks, everyone for joining the call. We do appreciate the questions and the attention today, we will talk to you in another three months.
Okay.
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