Q4 2022 Minerals Technologies Inc Earnings Call
Speaker 2: Good day everyone and welcome to the fourth quarter 2022 Minerals Technologies earnings call. Today's call is being recorded. At this time I would like to turn the call over to Lydia Popilova, Head of Investor Relations for Minerals Technologies. Please go ahead and ask Popilova.
Speaker 3: Thank you Anna. Good morning everyone and welcome to our fourth quarter 2022 earnings conference call. Today's call will be led by Chairman and Chief Executive Officer Doug Dietrich and Chief Financial Officer Eric Aldug. Following Doug and Harris prepared remarks, we'll open it up to questions.
Speaker 4: As a reminder, some of the statements made during this call may constitute forward-looking statements within the meaning of the federal securities law. Please note the cautionary language about forward-looking statements contained in our earnings release and on this slide. Our ACC filings disclose certain risks and uncertainties which may cause our actual results to differ materially from this forward-looking statement.
Speaker 5: Please also note that some of our comments today refer to non-GAAP financial measures. A reconciliation of GAAP financial measures can be found in our earnings release, which is posted on the website. Now I'll turn it over to Doug. Thanks, Lydia. Good morning, everyone. Thanks for joining the call. We just heard a lot from friends and family, they opported to $7. <expletive> off from G penis.
Speaker 6: First off, I'd like to welcome and congratulate both Lydia Koppelov and Eric Aldag on their new roles. Lydia is Vice President of Investor Relations.
Speaker 7: Eric is Senior Vice President Finance and our Chief Financial Officer.
Speaker 8: If you've met Eric over the past few years and I know Lydia looks forward to meeting our investors and coverage analysts in the coming months.
Speaker 9: Okay, got quite a bit to go over today, so let's get started.
Speaker 10: A quick outline for today's call. I'll begin by giving you some context on the fourth quarter and then review the highlights of our full year.
Speaker 11: Eric will take you through the details of our financial results by segment and give you a look into the first quarter.
Speaker 12: As you saw from our press release, we'll be reporting on new segments and product lines starting in the first quarter.
Speaker 13: I'd like to take you through this change and how this structure better defines the minerals technologies of today.
Speaker 14: After that, I will give you some perspectives on the year ahead and open it up for questions.
Speaker 15: Let's start with the quarter.
Speaker 16: As you saw in our press release, this was a challenging one.
Speaker 17: with several acute factors that impacted our results.
Speaker 18: On the positive side, sales levels remained healthy in most of our end markets, and compared to last year, sales increased 13% on a constant currency basis.
Speaker 19: We saw continued strong sales in metal casting and PCC driven primarily by strengths in North America foundry and paper markets.
Speaker 20: We also saw continued growth across our consumer oriented product areas.
Speaker 21: These areas of strong demand were offset by a few markets that slowed through the quarter.
Speaker 22: As you recall, we saw signs of weakness at the end of the third quarter in our construction and steel end markets, plus generally slow economic conditions in China and Europe .
Speaker 23: The slowing trend continued through the fourth quarter and in the case of China deteriorated further in December .
Speaker 24: As the quarter progressed we also began to see orders and a few other businesses begin pushing into January .
Speaker 25: Our customers inventory levels are healthier now than they were last year, which gives them more flexibility to manage the timing of their orders to us. We believe they exercised some of this flexibility in December .
Speaker 26: In addition to these market changes and the dynamics taking place in our order book, the most significant impact on our quarter came from three other areas.
Speaker 27: First
Speaker 28: The cold weather experienced in the U.S. in December impacted our mining and processing plant operations and shipments leading to increased costs and delayed sales.
Speaker 29: Our operations manage through these issues and have since recovered, so we still have some catching up to do on mining.
Speaker 30: bottleneck of rail transportation that was created is now beginning to return to normal.
Speaker 31: Second, was the rapid increase in COVID infections in China in December ?
Speaker 32: COVID swept through our facilities and our customers operations which slowed demand and created significant operating and shipment challenges.
Thankfully, our employees in China have all recovered, persevering through a challenging few weeks.
At this point, we've not yet seen volumes recovery in China, and our outlook is for market conditions to remain weak for most of Q1 and to see more meaningful recovery to begin late in March.
or early in the second quarter.
Third, we experienced a significant increase in energy and sea freight costs in Europe .
The level of these increases was higher than expected. We absorbed them in the quarter and are adjusting pricing to recapture them.
Despite these challenges, our teams around the world did an amazing job, swiftly navigating these issues to keep our plants operating safely and our customer supplied.
This quarter was an unusual one for MTI as we faced some unique challenges.
Except for the continued slow conditions in China, these issues were isolated in the quarter.
We've made the necessary adjustments and demand remains relatively healthy across most of our markets.
As a result, we see a significantly improved first quarter, which Eric will take you through in a moment.
Outside of the fourth quarter, 2022 was an otherwise strong year for MTI.
We posted three record quarters and our teams around the world demonstrated their agility, perseverance and focus on our priorities through 2022.
We continue to execute on our growth strategy, positioning our businesses in faster growing markets and geographies.
accelerating the development of new products and technologies.
acquiring companies that fit our core markets and which position us in higher growth markets.
It's your with some of the tail of two halves.
The first half started with extremely robust demand across each of our businesses.
customer orders hitting record levels.
In the second half of the year, demand began to moderate in a few of our end markets and inflation pressures became a bigger weight.
The robust sale of your MTI would grow to 14%.
It was 20% on a constant currency basis.
We saw continued organic growth in our consumer-driven product lines like cat litter, edible oil purification and health and beauty products.
expanded our core positions and growing geographies, featuring two satellite contracts in China.
One is a traditional PCC filler satellite and the other for a GCC packaging application.
Yeah.
Metal casting business continue to grow in India. We've established ourselves as the green sand bond technology leader there.
Refractories business secured $100 million in sales over the next five years to deploy our new scan trawl refractory application technology.
Our environmental products business continued to grow through several large sediment capping projects.
and the continued trial and commercialization of our Fluorazorb, our unique PFAS water remediation technology.
New product development continues to have a larger impact on our sales growth.
We commercialized 63 new products this year.
and sales of new products commercialized over the past five years increased 42% to over $300 million.
We completed the integration of Normerica, establishing ourselves as the largest private label cat litter manufacturer in North America.
We acquired concept pets establishing ourselves as a leader in Europe .
As I mentioned, inflation will be the major factor this year, and it will continue to be through the first half of 2023.
We absorb $190 million of inflationary increases in 2022.
work diligently to offset them with $210 million of price increases.
Margins were impacted as a result, but higher margins will return as inflation flattens and lagging contractual price adjustments kick in.
Our ability to change prices reflects the value that we deliver to our customers every day.
and is a testament to having the right technologies and applications to enhance our customers' products and help them generate higher value in their markets.
In addition, as we always do, we continue to focus on maintaining the highest level of productivity and on diligent cost and expense control.
As an organization, we gained a lot of speed and agility this past year.
Our teams overcame several challenges and reacted decisively.
to maintain strong momentum. This momentum will serve us well as we go into 2023.
And with that, I'll pass it to Eric to review the financials in more detail. Eric?
Thanks, Doug, and good morning, everyone. I'll review our financial results for the fourth quarter and full year 2022, and I'll also provide an outlook for the first quarter.
Following my remarks, I'll hand the call back over to Doug to discuss our newly announced reorganization and give some additional perspective on how we're viewing the year ahead.
Now let's turn to our financial results.
As Doug mentioned, we had a challenging finish to an otherwise strong year.
Fourth quarter sales were $508 million, 6% above last year and 13% higher on a constant currency basis.
primarily driven by $63 million of higher pricing.
Our sales volumes were relatively flat overall as strength across our consumer-oriented end markets was offset by weakness in Europe and China as well as production and shipping limitations from severe cold weather in the western US.
We also experienced some late-quarter inventory destocking by our specialty PCC and processed minerals customers in the U.S.
Fourth quarter operating income was lower than our expectation going into the quarter, primarily due to the sales volume pressures I noted, as well as higher freight, energy, and production costs.
The operating income bridge on the bottom left shows we absorbed $60 million of inflation in the quarter, which was the highest level we experienced all year.
While we offset the entire inflationary cost increase with $63 million of higher pricing, we expected a more favorable price versus cost benefit this quarter.
We have further pricing actions to recover the additional costs that we absorbed in the quarter and we expect our price versus cost benefit to expand over the coming quarters.
The unfavorable other cost in the bridge is associated with higher mining and production costs due to the severe weather in the U.S. as well as COVID-related production shutdowns in China.
As you'll see in the full year operating income bridge, these fourth quarter events had a significant impact on our full year other cost category as well.
Continuing on the right side of the slide, full year sales were $2.1 billion, a record level for MTI. Five years ago to dude American based business.
Despite $100 million of foreign exchange headwind, total sales grew 14 percent, driven by continued execution on our strategic growth initiatives and pricing actions totaling $210 million.
The total year operating income grew 5% to $253 million.
Our pricing actions exceeded inflationary costs by $20 million for the full year.
Recall that in 2021, our pricing was approximately $20 million behind the inflation that we absorbed that year.
So while our pricing actions caught up on a dollar margin basis in 2022, this two-year pass-through of higher costs into our revenue line has resulted in a percentage margin dilution of 150 basis points.
We have sufficient pricing actions in place for the first half of the year to catch up on a percentage margin basis by the second half, and that timeline could accelerate depending on the pace of inflation.
From an earnings per share perspective, our full year operating income growth was worth approximately 28 cents of EPS improvement.
However, full-year EPS ended up at $4.88 compared to 502 in the prior year due to 42 cents of unfavorable below-the-line items, primarily driven by foreign exchange and higher interest expense.
Now, let's review the segments in more detail, beginning with performance materials.
Fourth quarter sales were $266 million, 4% above prior year.
Sales in household personal care and specialty products grew 8% driven by the acquisition of concept PET and growth in personal care and edible oil purification.
Metal casting fails were 5% lower.
We continue to experience strong demand in North America where sales in our green sand bonds business grew 13% compared to last year.
This growth was more than offset by lower sales in China, where volumes were impacted by COVID-related restrictions and shutdowns.
The operating income for the segment was $19 million, which was significantly below last year and our expectations for a few discrete reasons.
First, severe weather in the Western U.S. forced us to pause mining activities for several weeks and implement cold weather safety protocols at our processing facilities.
which reduced production and shipping volumes.
The weather also resulted in congestion on the rails, and we incurred significant costs shipping our products via truck instead of rail.
Heading into the quarter, we had also expected a slight rebound in China.
However, our volumes ended up lower on a sequential basis due to COVID-related restrictions and shutdowns at our facilities as well as some of our customers.
Finally, volatile energy costs in Turkey and bulk sea freight on the Black Sea resulted in significantly higher landed raw material costs for our European pet care business.
We are increasing prices to cover these higher costs. However, pricing changes in this business typically have a 90-day contractual leg.
The good news is that shipping rates on the Black Sea have moderated.
and we have sold through most of this higher cost inventory.
Therefore, we do not expect the same magnitude of cost in the first quarter and margins will further benefit when our pricing actions take effect in the second quarter.
Moving to the full year, segment sales grew 16% to $1.1 billion.
Household, personal care, and specialty product sales were 22% higher, driven by acquisitions, higher selling prices, and continued strong demand for consumer-oriented products.
Metal casting sales increased 5% as strong demand in North America and higher selling prices offset slow volumes in China.
and sales in our environmental products business rose 28% on higher levels of project activity.
Operating income for the full year was $131 million, 4% higher than the prior year.
It's worth noting that this segment offset $84 million of inflationary cost impacts with pricing actions during the year.
Looking ahead to the first quarter, we expect significant improvement given the isolated impacts we experienced in the fourth quarter.
We expect similar market conditions overall with improvement for our China metal casting business beginning later in the first quarter.
And our mining and processing facilities have now returned to normal operations.
Meanwhile, new pricing actions will take effect through the first quarter and into the second, and we are seeing moderation in the inflationary cost elements that impacted us in the fourth.
Overall, we expect operating income for this segment to increase by $8 million sequentially, approximately 40% higher than the fourth quarter.
Next, I'll review the specialty minerals segment.
Fourth quarter sales for specialty minerals increased 10% versus the prior year to 155 million.
PCC sales grew 13% on the ramp up of new satellites and higher selling prices.
Operating income grew 17% versus the prior year to $16.9 million.
as contractual price adjustments in this business are starting to catch up with inflationary cost increases.
Turning to the full year, sales increased 12% to $648 million.
Primarily driven by new satellites, higher selling prices across all product lines, and continued strong demands for our specialty mineral additives across a wide range of consumer and industrial markets in North America.
Full year operating income of $72 million was 2 percent lower than the prior year as this segment incurred significant raw material and energy inflation throughout the year.
This is also the segment with most of our contractual price mechanisms, which will further catch up and improve margins as the pace of inflation slows.
Looking to the first quarter, we expect demand in Europe and China, as well as residential construction activity in the U.S., to continue at relatively lower levels.
Despite similar market conditions, we expect operating income will improve due to price adjustments that went into effect in January .
And while there is potential for energy volatility in the winter month,
This segment could be additional margin recovery in the first part of the year if natural gas and electricity rates stay around the levels they are today in Europe and the US.
Overall, we expect operating income for this segment to increase by $3 million sequentially, approximately 20% higher than the fourth quarter.
Now let's turn to the refractory segment.
Fourth quarter sales increased 10% over the prior year to $87 million, driven by higher selling prices and higher laser equipment sales.
Top rating income was up 1 percent, reflecting solid execution amidst softer steel market conditions and higher raw material and energy costs.
Full year sales were 349 million, 15% higher than 2021.
The oil market conditions in the first half of the year were strong, with utilization rates in North America around 80%.
Although market conditions softened in the second half with utilization rates closer to 70 percent... Section defined as a
This business delivered a strong performance driven by execution on new contracts, higher selling prices, and increased laser equipment sales.
All the above resulted in operating income increasing 17% to $58 million, a record level for this business.
Turning to the first quarter, we have additional laser equipment sales as well as pricing adjustments that should improve operating income sequentially.
and we expect market conditions to remain similar.
Overall, we expect operating income for this segment to increase by $2 million sequentially.
Now I'll review our balance sheet and capital deployment highlights.
We finished the year with total liquidity of $432 million and net leverage of 2.4 times EBITDA.
In 2022, our capital deployment priorities were balanced across sustaining our operations
investing in high return growth and cost savings initiatives.
and returning cash to shareholders.
Looking to 2023, we expect higher cash from operations.
as the inflationary impact on our working capital begins to release.
Our first and best use of cash flow will continue to be investing in ourselves to maintain and sustain our high performance operations.
We will also use a portion of cash flow to strengthen our balance sheet and return to our target net leverage of around 2 times EBITDA.
And we will continue to invest in high return opportunities, both organic and inorganic.
We always stress test our market assumptions for growth capital across multiple economic scenarios.
And in times of increased economic uncertainty, this stress testing provides a key governor to ensure prudent deployment of capital.
Overall, for the full year 2023, we expect free cash flow to return to a more normalized level of approximately $150 million, assuming capital expenditures in the 80 to $90 million range.
Now let me summarize our outlook for the first quarter.
Overall, for MTI, we see a much improved performance in the first quarter as we move beyond some acute issues.
Specifically, our mining and processing operations in the U.S. are back to normal operating conditions.
and they are catching up on production.
And the logistics disruptions on the rails have mostly unwound.
We've had several pricing actions and contractual pricing adjustments take effect through January and we have more to come through the first half of the year.
And while we expect inflationary cost pressures to persist, the most severe inflationary costs from the fourth quarter have eased, namely sea freight and energy rates in Europe .
In addition, we expect modest improvement from our China business late in the first quarter.
We are entering 2023 facing softer market conditions than we experienced at the beginning of last year.
and we expect construction and steel markets to remain soft through the first quarter at least.
Nevertheless, our more balanced portfolio is proving its resilience and strength as demand for our consumer-oriented products and specialty additives is holding up well.
We see most of our end markets remaining strong through the first quarter, with a few areas of uncertainty.
As a result, we expect first-quarter operating income to increase significantly.
to a range between $55 and $60 million.
which would be up 25 to 35 percent from the fourth quarter.
Now I'll pass it back over to Doug to share how our reorganization provides a better view of who we are today and enables higher levels of performance going lower. Doug? Thanks Eric.
over the last 18 months.
You've heard me speak about how we've transformed MTI's portfolio of businesses.
I've been highlighting how we've built a larger portion of our portfolio directed toward consumer-oriented products.
and how we've been developing new technologies for more specialized, higher margin, and sustainable products.
As a result, MCI is much different now.
We're a more balanced, faster growing, technology advanced company and our organization and reporting structure should better reflect who we are today.
With that in mind, we felt that this was the time to present ourselves differently.
Beginning of the first quarter, we'll be reporting in two new segments.
one named Consumer and Specialties, and the other engineered solutions.
The consumer and specialty segment, which generates 53% of our sales, combines all of our businesses that directly serve consumer-driven end markets.
and our mineral-based solutions and technologies that become a functional part of our customers' products.
The two product lines that we will report on within this segment are household and personal care, are mineral to shelf products.
and specialty additives, the products which become a functional additive in a variety of consumer and industrial goods.
This business group is being led by DJ Monagle.
The engineered solution segment, 47% of our sales, combines all of our engineered systems.
mineral blends and technologies that do not become part of our customers products, but rather are engineered to aid in their manufacturer.
The two product lines that we will report on within this segment are high temperature
combining all of our mineral-based blends, technologies, and systems, serving the foundry, steel, glass, aluminum, and other high-temperature processing industries.
and Environmental and Infrastructure, which contains all of our environmental and remediation solutions such as geosynthetic clay lining systems, water remediation technologies, as well as our drilling, commercial building, and infrastructure related products.
This business group is being led by Brett Argerakis.
This new organization moves us away from our past legacy-oriented structure into one where we are organized around common technologies and applications expertise.
as well as common market and customer characteristics.
It will streamline our reporting structure.
Feed up decision making and the organization.
and enable stronger collaboration.
It also enables us to drive synergies through the alignment of our technologies with customer needs.
accelerate innovation, and further drive operational efficiency.
Our first quarter of 2023 results will be reported along these new segments and product lines.
And we'll be sharing further details over the next couple of months.
Following our earnings call in April , we plan to hold an investor day where we can provide an in-depth view of each of these product lines for associated technologies, strategies, and resulting synergies.
Please stay tuned for more details on that as well.
Before we close the presentation, let's talk about our focus areas for 2023 and what we are seeing in our end markets as we start the year.
In general, demand in the US remains relatively healthy.
Cat litter, metal casting, paper, automotive, and environmental products remain strong.
for residential construction, as well as the steel market are slower than last year and similar to the fourth quarter levels.
In the US, Europe demand remains strong in cat litter and specialty consumer products, but relatively slow in our industrial markets.
We expect China to remain slow for the majority of the first quarter, but indications from our customers are that activity and demand will likely pick up in the second.
Further out, the second half of the year is harder to see right now.
Our order books typically strengthen in March and April and are more seasonal, construction and environmental markets. We are watching automotive build rates.
Early spring will be a telling period for these businesses on the strength of market demand going into the second half of the year.
For our consumer-oriented businesses, we expect demand to remain resilient and for them to continue on their growth trends throughout the year.
Internally, we have a clear set of priorities for 2023 focused on three pillars.
financial performance, organization and people, and continued execution of our growth strategy.
Our focus is on recapturing margins through both cost improvements and pricing actions.
The fractural pricing will catch up and margins will further improve as we make other necessary adjustments and take advantage of lower input costs.
We'll maintain a strong balance sheet and improve cash flows.
As inflation planes over, we see the release of the working capital that is built over more than a year.
We will continue our balanced approach to capital deployment, funding high return internal projects with a priority this year on debt repayment.
We have a very global organization which is now better aligned with our customers and markets through common technologies and applications know-how.
The reorganization of our businesses and segments improves alignment and creates more speed.
We'll continue to drive growth, expanding our positions in our core markets and geographies, focusing on the development of sustainable solutions for the markets we serve, investing in product development, and evaluating inorganic growth opportunities.
These initiatives have transformed MTI.
We see more opportunities ahead.
MTI is a less cyclical and more resilient company than in the past.
Regardless of what the markets bring us this year, our balanced and higher growth portfolio of businesses enables us to deliver more stable sales and earnings growth.
I'd be remiss if I didn't tile this together and mention the foundation that supports everything we do.
our dedicated employees, and the MTI culture built on operational excellence and an unwavering adherence to our values.
It's a foundation that's at MTI part from others.
2022 marked our 30th year as a public company.
2023 will be a pivotal year as we move into a new era.
Looking back, we note the dedication and commitment of all MTI employees from the past 30 years who helped form who we are today.
As we now turn and look forward to the next 30, we see many more exciting chapters to write for our company.
Now let's go to questions.
If you are using a speaker phone, please make sure your remote function is turned off to allow your signal to reach our equipment.
Once again, that is star one if you would like to ask a question.
And we'll pause for just a moment to allow everyone an opportunity to signal.
And we'll now take our first question from Daniel Moore with CJS Securities.
Thank you. Good morning, Doug. Good morning, Eric. Thanks for taking the questions.
Hi Dan.
We gave a lot of color, which is greatly appreciated on the various challenges that impacted margins and the results in Q4. Is the order in which you sort of presented those three challenges, whether first, COVID, and China, second, energy inflation?
So.
I mean, as you know, heading into the quarter, we said we'd do around 60 million of operating income. And so we missed that by about $16 million. And so I can put that into some buckets for you. About a third of that impact was associated with lower volumes. So sales related to sales. So about five or six million dollars.
And that was really from three areas, the China COVID situation impact that our volumes.
the production and logistics challenges that we were facing in North America impacted volumes. And we did see some softness in the steel and residential construction markets that we mentioned.
I'll note.
We've moved through those production issues in North America. From a China perspective, we do expect improvement there. The timing of that improvement is still a little bit of a question mark, but we expect that to improve. The cost of a century of competition and thefan side is money, lemonade.
The one aspect we don't see changing, at least in the near term, is the softness in the steel and construction market. The one aspect we don't see changing, at least in the near term, is the softness in the steel and construction market.
So that is the sales side of things.
The larger piece of the impact was on the cost side, so both manufacturing costs and inflation costs. So let me give you a little color on the inflation that we experienced, that was more than we were expecting heading into the quarter.
So most of this was specific to our European pet care business, as we mentioned.
And first of all, so the bentonite that we use in that business comes from Turkey and we've got mining and processing facilities there. And as an example, energy rates in Turkey have been very volatile. In September we got hit with a 50% increase on natural gas. Energy rates have been up over 200%.
And then C- freight also on the Black Sea has been very volatile. So we've had to deal with price spikes up to 90 euros per ton when we're used to dealing with C- freight costs from the 25 to 50 euro range.
So this all contributed to this wave of inflation that we've described absorbing in the fourth quarter. Now we've adjusted prices, we adjusted pricing in the fourth quarter to pass this through and as I mentioned this business has a 90 day lag in terms of pricing adjustments typically.
And we're going to be adjusting prices again in the first quarter.
The good thing is that these costs have moderated.
since these spikes in the fourth quarter. And that's going to help our margins going forward as well.
Just one note on the higher manufacturing costs.
These are related to the challenges we had in December , mainly related to the weather, the severe cold weather out west, and much of that was around the lower fixed cost absorption at our plant.
The production challenges in China also had a cost element to them there, but that was the manufacturing side of things.
Sorry, excuse me, just jump, that's helpful. Based on the pricing actions you've taken so far in 22 or you took in 22 as well as expected for Q1 and 23, what would the incremental revenue look like for full year 23 if volumes were flat in Europe ?
in 2023, but we do expect it at a much lower rate than we.
experienced last year, probably half.
of the inflation. We're expecting around half of the inflation that we experienced in 2022.
And a lot of that's going to be front and loaded. Did?
Some of the things that we've seen moderating are energy.
and energy derivative raw materials like packaging.
We do see inflation, the types of things we see continuing are around labor, transportation, particularly around rail and certain of our raw material purchases, but it should be at a much lower rate than we experienced in 22. We have pricing in place. I mentioned the 150 basis points.
of margin dilution that all of this inflation and pass-through of cost has impacted us by over the last two years.
We plan to get that back at least in 2023 and we have line of sight to more than that as well.
That just leads to my next question, which is making sure we're working off the right base. You mentioned 150 bps of margin impact over the last two years. Are we looking at, you know, 50 bps of margin impact over the last two years?
2021 in terms of margins is getting back to those levels. Is that the way to think about it?
Yeah, so I would just say, you know...
For the full year 2022, we did just under 12% operating income.
we did just under 12% operating income margin.
And so...
The pricing that we have in place and what we see today from an inflation perspective
should get us 150 basis points on that in 2023.
So we're looking at 13.5 to 14% margins.
by the second half on a run rate basis for this company.
Perfect. That's exactly the... I just wanted to make sure we were working off the same page. I will jump back and give you a few follow-ups. Thank you very much.
We'll now take our next question from Mike Harrison with Seaport Research Partners.
Hi, good morning.
Bye-bye.
And I want to pass along my congratulations to Eric and Lydia. In terms of the European sea freight issues, I'm just trying to understand and maybe throw the natural gas in there as well. I'm just trying to understand a little bit more about the timing of when you saw that.
I just did on calls. So I'm just trying to understand, why that caught you guys by surprise and maybe a little bit more about the timing of when those became a much bigger issue relative to your expectations.
Yeah, let me take that one. I think there's a piece of that was absolutely known. It's been volatile all year, energy in Europe and Turkey in particular. It's gone up almost to 200% over what we experienced at the beginning of the year. And about three different government mandated jumps.
That latest one happened kind of late in September . We did have that in our forecast and we had some pricing adjustments to cover it. I would say the bigger surprise was some of the freight, the shipping costs that were more spot based for us that kind of increased significantly as a result of that as well. I'm not gonna say though that
I'd look back and hindsight 2020, we probably could have been a lot faster with our pricing increases, at least in that business.
we probably could have been more aggressive. And so I think when we look back on this saying, what did we see, what didn't we see? I think part of it was known and we made some pricing adjustments. Part of it was a surprise to us. We probably should have been quicker and more aggressive on our pricing adjustments in the fourth quarter. Those adjustments have been made. We're moving through the first quarter. We have some catch up to do.
But again, as Eric mentioned, we have 90-day kind of notification periods, and so being very aggressive and very timely with our going forward pricing is where we are now.
I'd say that's the hindsight 2020 kind of look. We probably could have been a little bit faster on that pricing.
All right, and I guess just given the significance of the shortfall, you know, relative to the Integrated
you know, the dollar 20 in EPS that you guys were guiding in the quarter. Did you consider making a pre-announcement to call out these unexpected headwinds that you were seeing, or I guess, help us understand the thought process there.
Yeah, I guess, you know, look, we –
As we evaluated
A lot of these things continue through December .
We don't see anything really structural changing in our markets. There's the business fundamentals that we have, the operations, our cost positions. There's not a lot of real market, other than I guess China, but that's kind of well-known. Market positions are relatively stable in what we saw in the third quarter.
December was a very challenging time for the company in terms of the things we were dealing with in our plants in the United States and in China. And so, you know, and a lot of them happened kind of late in the month.
I guess we felt that these acute issues that we don't see repeating were in the quarter and isolated that quarter and not something that was of a structural nature or a significant change to our go-forward forecast from a market perspective or kind of our operations perspective. I think that was our thought process, Mike.
All right, and then a couple quick ones on the PCC business. First of all, in terms of the new Asia satellite ramp-ups, it's good to see that flowing in. Can you give us maybe an update on how much additional volume?
has come on as of the end of the year, and maybe how much additional volume is still to come.
Sure, let me pass it to DJ, he can take you through that. Hi Mike, so right as we close the quarter, we brought two new satellites on that are roughly 70,000 tons of PCC business and then going into through the course of next year.
We've got mostly in the second half several satellites coming on. Two of those are PCC satellites, a little over 100,000 tons there. And then we had announced some time ago and Doug had highlighted it, the penetration in the GCC. And that is a couple hundred thousand tons as well.
All right, and then in terms of the pricing in the PCC business, obviously you've called out that most of that is contractual pass-through. Maybe help us understand what you've seen going on with Lyme and other raw material costs. Are they stabilizing? Are they starting to come lower? Maybe just help us understand kind of where we are.
and our pricing is catching up on that. So we'll see some incremental increases as we go into next year, but they're not nearly the rate that we saw in the prior periods.
So I would say that our contractual mechanisms seem to be holding through this process, and it's something that still provides a very collaborative relationship with our customers as we work through these things together. Further, I would say that the value equation of our PCC and these...
And these markets stand strong as our customers are experiencing energy increases. For instance, part of the value contribution we bring is reduced energy consumption in their paper making process.
It's getting better, contracts are working, and we seem to be holding up our value pretty well.
I think my only thing I'd add to that is just kind of energy. We do, we're supplied a lot of electricity from our customers on our, as we reside on their facility. So major inputs this year have been, you know, line costs, which is kind of a derivative of energy and the energy that goes into making it.
and then also the direct electricity and energy from our customers. As that energy is planed over, as you've seen through the first half of the year, we have that lag. And as that planes over, you'll see us catch up pretty quickly. I think that's what you saw happen in SMI in the fourth quarter. That margin expansion is starting to happen. Again,
You know, we have to see energy continue to plane over and if it starts to decline, you'll see that margin improvement accelerate.
All right, very helpful. Thanks very much.
All right, very helpful. Thanks very much. Yep.
We'll now take our next question from Steve Ferrozani with Sedoti.
Hi, morning, Doug, Eric. I just wanted to follow up some of the other questions. In terms of the way you're laying out 2023 and then your guidance for Q1, it sounds like.
China certainly knowing what we know now China gets a lot better as 2023 goes along inflationary pressures ease I'm just looking at your market conditions for guidance inflationary pressures ease you get more of the lagging price effect all things considered would you knowing what you know now say that Q1 would mark the significant low point
So I see of the next three Q1 probably being the lowest. And as you see us continue to catch up on price, as Eric mentioned, driving those margins toward 13 to 14% at a run rate basis.
We have a number of new satellites and PCC coming online later in the year, which you're going to add. And in our consumer businesses, as they continue to grow in their upper, mid-up or single-digit kind of range, we see a top-line growth going through the year. Again, a little caution on how these...
construction and steel markets and what happens in the back half of the year. But we see half the business continuing on its growth trend.
The other half looks very strong for at least the first half, and we'll see on the back half of the year what happens with the US economy.
But as we see inflation, if it planes over and our pricing actions catch up and what we already have implemented, we see that margin improvement. So that top line growth and that margin improvement goes for a pretty strong year. Now, I've given you a lot that says a lot's got to have to happen to deliver that, right, with inflation and there's some uncertainty in terms of demand in the economies.
But as we see, at least in the first half of the year, I think we have at least a strong look in the first quarter being the lowest. I'm going a little on a limb there, but I think you're about right there, Steve.
Okay, thanks Doug. Just help me out on that because I'm looking at the household and personal care results for 4Q versus even 3Q. And some of this is tough to sort of pick through. I know you lap the Normerica acquisition by the end of 2Q. When I look at the growth 4Q versus 3Q annually.
It looks slower on both both a percentage and dollar terms if you can help me through that
I think some of that was some of the shipment challenges we had in North America. And, you know, so we had a couple of our facilities in pet care or in Canada with the cold weather, we had a very challenging month in December in terms of shipments out of those plants. So I think some of that has just been delayed. Those
moved into the first quarter. We haven't lost those orders so you'll see those pick up.
The only other thing I would add is that
know it's kind of opposite seasonal you know it's a there's a higher seasonal demand sometimes in the fourth quarter in the first than it is in the summer and so you you might see some of that impact as well but I think more of this quarter was much more so the shipment delays we saw in North America and late late in December
Since your feeling as we go into 2023 and a slowing economy a lot of your
bigger acquisitions in that area were just generally not that cyclical. Your expectation is demand is there and with new products you still can get reasonable growth even in this environment.
Yeah, we do. I think you're not right.
Yes, and so we're going to highlight that to you in that consumer and specialty segment.
I guess I go back to the last semi or small cycle we had in 2020. You know, that pet care business, which was a little bit smaller at that point, grew at almost 8%. I guess I go back to the last semi or small cycle we had in 2020.
Now the dynamics of going through the pandemic were a little bit different, but I will tell you in terms of cat litter products, fabric care, edible oil purification, these products are consumer driven.
There are a little less discretionary in some aspects, right? You know, folks are going to continue to purchase them through economic times and were the largest private label of cat litter manufacturer globally. And so therefore, you know, that positions us well in and down, turn to be the more economical choice.
And so I think the exact level of demands can be hard to predict, but the fundamentals of this business that we've built should withstand and be really resilient and continue to grow as we've seen with our GDP plus, cat litter and pet ownership around the world.
Other things that are working on, we've got some online channels that we're now selling through and some new business developments in Asia as we've started to build out our presence in that region. So, you know, pretty bullish on that consumer business and its growth. And as we see margins expand, we think it becomes a really big...
Yeah, hi, good morning.
Several questions. I think I'll start with this one. So Doug, you talked about a lot of things regarding the fourth quarter. There was one thing I didn't really hear that I have heard from every other industrial company that's reported to date, and that would be, you know,
inventory destocking on the customer side. So in some of your slides, I could see that the volume change year over year for Q versus for Q was roughly flat. And I could kind of point to some of the pluses and the minuses within the individual product lines. But just broadly speaking, I
I think Eric mentioned it in his comments, largely in the processed minerals business.
Some in mind, I recall last year where inventory levels for customers were quite low and orders were just continuing to move through our plants even in low seasonal periods like December and January . This year a little bit different.
Because our customers we see especially in that construction market, higher levels of inventory, we did see some orders removed out of December and placed into January . So we think some of that destocking or at least managing inventories happened, similar impact in our steel businesses. And so...
We did see some of that de-stocking, but we saw those orders move over into January , and we're going to see that pick up.
That was part of, Eric tried to mention about a third of our impact in the quarter was some de-stocking and processed minerals, and it was the impact on sales both in transportation, logistics, and China was about $6 million in the quarter. So yes, some de-stocking. And we talked about the simple difference.
Okay, my apologies for missing that. I wanted to follow up with DJ, you know, you laid out the new satellite plant start-up timeline very well.
I was wondering if you could also just maybe reflect on the new project or the new opportunity funnel that you see.
And in the past you've been very good about not just the number of projects, but maybe which innovation or which technology they're relying on. So in the last couple of years, packaging grades have been introduced to the Deenking.
Technologies and I guess the PCC, GCC project, but if you could just talk about the outlook for the new project funnel as you see it here. And in particular, is there a particular new or expanding innovation that seems to be gaining more traction?
with potential customers. Thank you.
Clearly, David, thank you for the question.
So I mentioned the ones that are starting online and coming online in 2023, but the commercial activity remains very robust and it's spread around the world, but most of the opportunities remain in Asia. On top of that...
Standard PCC still continues to be a pull for us, but as I'm looking at the pipeline now, where before we would be, say, 90% pursuit of growth in printing and writing grades, now we're closer to 50-50 printing and writing versus packaging.
Of note, in the fourth quarter, we made some considerable progress with full-scale trials of two new products in brown grains.
One of those was with a major brown box manufacturer in the United States. The other one, and that is our new product that I've alluded to that's targeting brown. The other product that we are excited about is we began experimenting with it some time ago, and said we thought it was...
It was New Yield, which is that product that repurposes a papermaking waste stream.
We had designed it for printing and writing grades and we were optimistic that we could modify it for packaging grades and we've run some good trials in packaging grades in Asia. So both of those hold promise for us for what I would say some near term activities. So we're.
We're pretty excited about that and then on top of that, there's a great poll for the standard PCC products if anyone is considering an upgrade for their quality of their paper and if anyone is considering putting in a new machine, we are one of the first calls they make because of the strength of the brand.
So that's how I would summarize things, David.
Great, thank you for the color there. Appreciate it. Last question. I did want to ask about the CapEx budget. So, I think it was bracketed at 80 to 90 million as we start the year. And I would ask Eric if he could just focus on the discretionary portion.
Yeah, thanks Dave. So I'd say that every year 30 to 40 million of our CapEx spend is on sustaining our operations.
improving our facilities.
And that's the amount that is less or non-disgressionary. So we will likely spend that $30 to $40 million in 2023 on sustaining and maintaining.
is less or non-discretionary. So we will likely spend that 30 to $40 million in 2023 on sustaining and maintaining our operations.
The rest of that that we typically budget for is growth, its cost savings projects.
But as I mentioned, we're going to be taking a really close look at market assumptions that we're using for justifying those projects. And as far as if there's a discretionary bucket, that's it. If economic conditions change, that's where we'll flex.
Okay, thanks. I'm going to get back in the queue. Appreciate it.
I'm going to get back in the queue. Appreciate it. Thank you.
And once again, that is star one. If you would like to ask a question, we'll now take a follow-up from Daniel Moore with CJS Securities.
Thank you again. Just thinking about revenue for the next quarter or two, obviously pricing a bit of a tailwind, but FX continues to be a significant top line, you know, headwind. You expect a similar impact in Q1 or based on today's kind of exchange rates, how does that taper off over the next couple of quarters?
Yes, so Dan, I would say, you know, in 2022 FX was a significant headwind for us. We set $100 million on revenue for the full year.
If you look at sort of current rates now versus what we had in 2022, it's still, I would say, certainly unfavorable on a full year basis.
23 versus 22, but not to the extent that we experienced in the last year.
So we see our effects is probably going to be a similar impact, negative impact on us in the first quarter.
So we still see both.
Yeah, but though we still see there's that pricing lift that will happen and we see volumes improving from the fourth quarter. So in total we see our revenue up in the first quarter and we think that growth at least in our consumer-oriented businesses continues through the year. Industrial pieces, a little bit early to tell how that's going to play out in the back half. But...
we see a pretty strong first half of the year, nonetheless. That is helpful. Thank you.
We'll now take a follow-up from David Silver with CL King.
Yeah, hi, thank you. So I have kind of a question that was not covered directly in the comments today, but in doing some reading in related industries, you know, I came across a whole series and I'm sorry the topic here.
accelerate or to implement new restrictions on
PFAS, I mean one in particular, I think the state of California is moving to remove all PFAS from personal care products within a few years. There was another one at the federal level, I think amping up penalties and whatnot for amping up the responsibilities for the producers of PFAS.
in your remediation strategies has qualitatively or meaningfully improved in recent months in response to summer or any of the new legislative and regulatory proposals I've been reading about. Is anything, you know, especially relevant to...
to your particular remediation strategies and targets. Thank you.
Sure. Well, let me take that in pieces. I guess PFAS is only one...
part of our remediation capabilities. So we have an industrial waste water and flora wall clean up, groundwater clean up systems. We have contaminant removals from in the oil and gas industry as well. So we have a wide range of water remediation technologies and systems.
PFAS, our florazorb is one of the medias that we have developed, targeted at, obviously, PFAS removal.
Look, first I think it's good to see that the regulations have stemmed the use of it, but I will also say that the amount of it that exists and the fact that it is forever around is going to create a number of opportunities for us that have only just started.
I think we have spent some really good trials. We've continued to commercialize it over this year. You know, gaining more traction in terms of efficacy and proof of ours versus other media. Our being very economical workhorse.
to remove significant amounts of PFAS from water. The real catalyst though is not on stemming the flow of PFAS, it will be in the regulation of cleanup and cleanup levels. I think there's a lot of opportunity out there in terms of,
clean up of water, groundwater, drinking water systems, but I think until there's a level of clean up kind of regulation to what level needs to be cleaned up, I think that will be the real catalyst. Once people know where they have to go, they'll know the system they want to employ, and I think that's going to develop a significant amount of opportunity for us.
In the meantime, there are acute areas around the United States and in the world that we're seeing and that we're being pulled into project related cleanups. But I think long term, with the amount of the chemical that's there and with it being there forever.
Our technology being able to bind it forever is going to be a real good system once people start to use it more, I guess, from a regulations standpoint.
So hopefully that helps you. It's one piece of it David, but it's not everything with water remediation for us.
Okay, so no landmark legislative or regulatory development in the last few months.
No, that's great. Thank you for the film. Yeah, and not that's going to change the opportunity for us. Regulation on cleanup levels will accelerate the opportunity for us. Thank you.
Thank you for this help. Not that it's going to change the opportunity for us. Regulation on cleanup levels will accelerate the opportunity for us. Got it. Thanks very much.
I'll now take a follow-up from Mike Harrison with Seaport Research Partners.
Hi, uh, Hello,
Just a couple more for me. Can you hear me okay?
Can you hear me okay? Yes.
Thanks, sorry about that. Was looking for an update on the TALC litigation. I know there will be something in your filing, but presumably that won't be out for a little while. Any updates on the number of cases relative to the last time you reported?
And do you expect to have to add to the reserve at any point during 2023? I noticed there was not a special charge related to the litigation in the fourth quarter.
No, Steve, there hasn't been, I'm sorry, Mike, there hasn't been any change. The level of cases stable. There's been no change in terms of the litigation and the reserve that we took continues to be adequate to cover what we saw.
back in the third quarter as a liability for that caseload. So no change.
All right, and then just a quick one on the refractory business. You mentioned that kind of the second half utilization rates were lower and things were stronger in the first half, but as I look at kind of the...
the year-on-year change, I know this is sales, not volume, but the revenue number at least looks pretty consistent, first half and second half. So maybe just help us understand, is there something that's changed that your refractories business is maybe less sensitive to utilization rates than it had been in the past? I think in the past we used to think of...
80% utilization as a number where your business would really be performing well. And if it was lower than that, that would be a headwind, but it doesn't seem like that has been the case more recently.
Thanks for that question.
You know, this business is very different than it used to be. And so you reference having to be at 80% for this to be a profitable business and, you know, we're generating higher profits at even 70%. So, you know, directly the market is down from where it was last year. But this business is able to generate income due to a number of different things. I'm going to turn it over to Brett to let you know, but the technology that it's been developed is.
my 36 year career. We have changed and started the change going back to 2009 when that big market dropped and it really hurt us. We resized the business, we reorganized the business and every so many years we just took a look at it and.
did that even further. It's a combination of our steel mill service groups that are embedded into our steel plants, our customers, but those people, although they've been there for many, many years, we're increasing that technology of what we do and increasing their ability to operate more higher tech equipment.
We've also moved into different product lines where we're driving similar costs or in some cases could be lower costs where we can work with our customers on pricing, but it's all about value. And our value is driving the lowest cost opportunity on an installed basis for our customers.
about 13 new automated application units. A couple of those are in Europe and the majority right now are in North America. We're really happy about that, excited. Those are all going to be rolling out. The other thing is, you know, you see the utilization rates going down.
to a much different higher tech business than it has been looking back in the past. So we're really proud of that.
All right, thank you for the additional color there.
All right, thank you for the additional color there. Thanks Mike.
And it appears there are no further telephone questions. I'd like to turn the conference back over to Mr. Dietrich for any additional or closing comments.
Thanks everybody for joining the call today. Again, please look out for some more information on our new segments that we'll be reporting on and we look forward to reporting under our first quarter and then further to an investor day, probably scheduled in May. So stay tuned for that as well. Thanks for joining today. And once again, that does conclude today's conference. We thank you all for your participation. Thank you.