Q2 2023 Minerals Technologies Inc Earnings Call
Good day, everyone and welcome to the second quarter 2023 minerals technologies earnings call. Today's call is being recorded at this time I would like to turn the call.
On the 11th fall Investor Relations for minerals technologies.
Please go ahead Ms. <unk> Johnson. Thank you Rachel good morning, everyone and welcome to the second quarter 2023.
Today's call will be led by Chairman and Chief Executive Officer, Doug Dietrich and Chief Financial Officer, Eric I'll Duck, following Doug and as a reminder, some of the statements made during this call may constitute forward looking statements within the meaning of the federal Securities law.
Note the cautionary language about forward looking statements contained in our earnings release and on this slide our SEC filings disclosed certain risks and uncertainties, which may cause our actual results to differ materially from these forward looking statements.
Please also know that some of our comments today refer to non-GAAP financial measures and reconciliation to GAAP financial measures can be found in our earnings really which is posted on our website.
Now I'll turn it over to Doug Doug Thanks, Lee and good morning, everyone. Thanks for joining.
Let me give you a quick outline for today's call I'll.
I'll begin with the highlights that drove our results for the second quarter.
And provide some comments in context around our recent announcement on the <unk> business.
And details on the $10 million cost savings program, we just initiated.
And then I'll take you through our view of general business conditions, the trends that we're seeing across our end markets and the positive outlook, we have for the second half of the year.
Eric will then take you through the financial details for the quarter and our outlook for the third.
We published our latest sustainability report this past Monday.
We're extremely proud of this year's report and the progress that it shows we're making on all fronts.
Let me cover some highlights for you later in our presentation.
Let's go through a quick summary of the second quarter.
We had a solid performance and delivered on what we committed to in terms of operating income earnings per share and cash flow.
Our teams remain focused on margin improvement and we expanded margins sequentially in both segments.
Let's start with our sales.
And the consumer and specialty segment sales grew 3% over last year.
Despite facing some mixed market conditions.
Our household and personal care product line led the way with pet care sales up 15%.
Edible oil and renewable oil filtration up 13%.
In animal health with 29% growth.
The paper and packaging market in Asia was healthier this year at our PCC volumes, there were up 24% driven.
Driven by strong pull from our newest satellites.
These positive sales areas were offset by lower sales in North American paper, and packaging, which were down 18% due to paper customer destocking actions.
Slower residential construction markets and lower demand for specialty food additives impacted sales in specialty PCC, which was down 10%.
On the engineered solutions side sales were slightly down compared to last year.
We benefited from strong metal casting and refractory sales in North America.
As well as higher metal casting volumes in China.
We also saw significant growth in our remediation and wastewater business with sales up 86% driven by the continuation of two large sediment capping projects.
These areas of strength were offset by continued slow conditions in commercial construction and the European steel market.
Sequential operating income grew by 12% and operating margin improved by 120 basis points driven by favorable price cost dynamics.
The pricing actions that we've put in place are beginning to meaningfully offset the raw material inflation, we experienced for the past six quarters.
Additionally, cash from operations doubled compared to last year.
The higher working capital level, we experienced due to inflation is beginning to release and convert to cash flow.
As mentioned in previous presentations and at our recent Investor Day, we completed the business re segmentation.
To focus MTI is energy and capital on our core markets product lines and technologies.
An outcome of this realignment as an opportunity to streamline our organizational structure and reduced overhead costs.
We expected to save $10 million from this program, which will be implemented over the next three to four months.
And Eric will discuss the details in his financial section.
We also made an announcement that our subsidiary <unk> minerals, Inc. Is exiting the <unk> business.
As was outlined in the release, we took a very careful look at all the circumstances concerning the Barrett subsidiary.
And made the decision to exit the pellet market.
The relatively small size of the business with an MTI needed to be balanced against the outside costs and distraction from the escalating litigation environment.
That primarily involves other large companies.
But is nonetheless impacted merits.
I want to reiterate that our telco safe and we're proud of <unk> track record of meeting its customer needs with the highest quality products and service.
However, we're taking the steps to divest itself business and are now working to determine the transaction structure that best provides value to all stakeholders.
Part of this process includes taking the prudent steps required to ensure that any liabilities associated with telco dealt with both effectively and efficiently.
As you can imagine a number of activities are ongoing while we move this process forward.
Our intent is to move quickly so that all our energy can be focused on achieving our core long term strategic objectives.
We will certainly provide further updates as the process moves forward.
So overall for the quarter I am pleased with our performance and the progress, we're making with margin expansion and cash flow improvement.
I'm also pleased with how our consumer oriented businesses continue to perform well through mixed economic conditions, providing the balance that we expected to our portfolio.
Now that you're more familiar with our new segments and product lines I'd like to share how we see the markets playing out for them over the balance of the year.
Overall, we have a positive view of our positions market conditions and momentum going into the second half.
Let's start with the consumer and specialty segment.
In household and personal care, we expect demand to remain strong across the majority of our consumer oriented product portfolio.
Our pet care business is experiencing significant growth across all regions and for the remainder of the year, we see this demand continuing.
And other consumer businesses like animal health and bleaching Earth for edible oil and renewable fuel purification, our customers are expanding production capacity and have new facilities coming online.
This is creating new supply opportunities for us and as a result, we're projecting to remain on our current strong growth trajectory.
Our personal care business has been experiencing lower volumes for most of the first half of the year due to customer Destocking actions.
Indications are that this will continue through the third quarter, but that will begin to see an increase in order volume in the fourth.
The specialty additives product line, we expect North America, the North American paper market to improve from a rather lackluster first half as our paper customer Destocking activity concludes.
And for the European paper market to remain stable for the balance of the year.
We started up one new paper PCC satellite in India earlier this year.
We will start up three additional satellites, one in India and two in China over the next three to four months, which will support continued volume growth in Asia.
Additionally, we just announced a new agreement with one of our customers in Brazil for our new new yield low product.
This technology Leverages, our Crystal engineering platform to recycle a paper mill waste stream.
And offer our customers a more sustainable filler particle for manufacturing paper.
We expect this facility to be operational by this time next year.
Elsewhere in specialty additives markets are mixed.
In North America, we see strong pull for pharmaceutical and automotive sealant additives for the remainder of the year.
So the demand for our specialty food additives is expected to remain soft through the third quarter, but pick up in the fourth.
Let's talk about the market trends in engineered solutions.
And high temperature technologies, we expect the North America and European steel markets to remain at similar levels for the second half.
Refractory sales will improve in the second half versus last year as we begin to benefit from the new Scantron laser and application systems, we've been deploying.
Speaking of which this quarter, we signed another contract for this technology worth $10 million over five years.
This was our 11th contract like this demonstrating that this technology is truly unique and valuable to the electric steel furnace market.
So North America foundry market was strong for the first half driven by relatively robust auto heavy truck and agricultural equipment demand.
We expect these conditions to remain through the second half and translate into continued strong metal casting volumes for the remainder of the year.
In China, our metal casting volumes have steadily improved each month this year, albeit at a slower pace than what we expected at the beginning of the year.
In the second quarter volumes grew 10% over last year, despite the slower rebound.
This is largely due to the growth and penetration of our latest blended technologies.
Current sales from our foundry customers in China are that volumes will continue to increase through the remainder of this year.
Okay.
And environmental and infrastructure our outlook is mixed.
We see stable demand for wastewater and water remediation as well as for our drilling products throughout the balance of the year.
Project activity for both our environmental lining in commercial construction waterproofing systems is expected to remain soft.
Before we move on I'd like to make a couple of comments on the China market.
There's been a lot of commentary recently on China.
And how they are potential transition to a lower growth economic phase will impact companies, who do business there.
I've already made a few comments on our second half outlook in China for specific product lines, but I thought I'd give you a longer term perspective on our business position.
China represents about 8% of our overall global sales.
We primarily participate in three markets in China foundry paper and packaging and pet litter.
Changes in economic growth rates, there, we will have an impact on our metal casting and PCC sales.
But growth in these two product lines is driven more by the introduction and penetration of our new technologies and the substitution of existing products in the market.
For pet litter the market is in the early stages of development and given its current size compared to the more mature pet litter markets in the U S and Europe , we see a long growth path ahead of us.
China is still relatively small region for us, but given our current market positions, we see being able to continue to grow sales at our historic rates, despite potentially slower economic growth conditions, there moving forward.
To sum up our market outlook I have a positive outlook for the second half of the year and I'm pleased with the momentum we have going into it.
We're making a great deal of progress leveraging our core technologies and expertise to enhance our positions in key areas.
We see continued margin and cash flow growth in the second half.
And feel we are well positioned to deliver on the targets. We recently laid out for you.
Now I'll hand, it over to Eric to provide more financial details Eric.
Thanks, Doug and good morning, everyone.
I'll review, our second quarter results and also provide our outlook for the third quarter.
Following my remarks, I'll turn the call back over to Doug to cover some highlights from our latest sustainability report.
Now, let's review our financial results.
Before I get into the details let me summarize by saying we had a solid quarter in our earnings performance was a reflection of our team's ability to execute.
Despite near term variations in a few end markets.
We remain positive on our end market outlook and we're solidly on track for our target margin expansion.
Now, let's begin with the sequential quarter bridges on the left hand side.
Sales were $552 million in the quarter up 1% from the first quarter, primarily driven by higher pricing.
Volumes were relatively flat sequentially as destocking activity in a few of our end markets offset growth in other areas.
Operating income increased 12% sequentially to $71 million.
And operating margin improved 120 basis points.
Our negotiated and contractual price increases are taking effect as planned which along with stabilizing input costs are helping us recapture margin from the inflationary cost increases we absorbed last year.
Operating margins improved in both segments sequentially as expected.
Turning to the year over year bridges on the right side.
Sales were 1% lower than last year.
Foreign exchange had an $8 million unfavorable impact on sales and on a constant currency basis sales were slightly higher than last year.
As Doug mentioned, we continued to see growth in several of our end products and markets such as pet litter and bleaching Earth and demand remains strong in other key end markets, such as steel and foundry in North America.
However volumes were impacted by weaker conditions in our project based businesses with an environmental and infrastructure.
As well as inventory destocking in the paper market and in some of our consumer end market, such as personal personal care and food additives.
Second quarter operating income was 4% lower than prior year, primarily driven by the impact of lower volumes in the markets I mentioned.
In total we delivered $43 million of price increases compared with $29 million of cost increases.
It's worth noting that this was the largest favorable net impact from price versus cost we've delivered in any quarter since the beginning of this inflationary cycle.
Now before we get into the results for each of our segments I will review, our second quarter EPS and the special items in the quarter.
Reported earnings per share of <unk> 82 in the second quarter included special items of <unk> 49.
Including <unk> 16 of severance related costs associated with our cost savings program.
33 of litigation costs.
As Doug mentioned, we initiated a cost savings program in the second quarter.
Following our reorganization and re segmentation earlier this year, we identified opportunities to further streamline the companys cost structure.
We recorded $6 6 million of severance costs in the second quarter associated with this program.
And we expect to deliver $10 million of annualized savings starting late in the third quarter and ramping up to full run rate by the first half of 2024.
This cost savings program solidifies, our margin improvement trajectory and gives us further confidence that we will remain on track to deliver our target margins.
The litigation costs, we incurred were incurred to defend against claims associated with certain <unk> products from the <unk> Minerals, Inc subsidiary <unk>.
And to restore our reserve back to the level that is appropriate for the existing plan.
Excluding these special items earnings per share was $1 31 in the second quarter.
Now I'll review the performance of our two segments, beginning with consumer and specialty.
Second quarter sales in the consumer and specialty segment were $290 million, an increase of 3% compared with last year.
Sales in the household and personal care product line were 6% above last year.
Our pet litter business remains on its strong growth trend with sales increasing 15% year over year.
We also saw significant growth over last year, and bleaching Earth up 13% and in animal health, which grew 29%.
Partially offsetting this growth was the impact of inventory Destocking, we are seeing in personal care and food additives.
While these markets are currently a small part of the portfolio from a sales perspective, we're highlighting the impact because of the higher margins that carry and because of the companys margins will benefit when the current destocking cycle ends.
Specialty additives sales were flat compared to last year due to several offsetting market dynamics in this product line.
Sales are benefiting from higher prices.
The ramp up of new PCC satellites, and continued solid demands from automotive and pharmaceutical end markets.
Residential construction has been more of a mixed picture with resilient demand for our products going into home improvement, mostly offsetting softness in the products with more exposure to new housing starts.
Meanwhile, we experienced customer inventory destocking in the North American paper market as well as ongoing general market softness in Europe .
Segment operating income improved 1% over the prior year and was 5% higher sequentially.
This segment continued to make progress in recovering the inflationary cost incurred throughout the prior year and operating margin improved 90 basis 90 basis points sequentially as a result.
Looking ahead to the third quarter, we expect to see similar market conditions overall in the household and personal care product line with pet litter and bleaching Earth remaining strong.
And we don't expect a significant pickup in personal care order patterns until the fourth quarter.
In specialty additives, we expect North America paper production to increase in the third quarter to be more in balance with paper consumption.
Demand conditions across other geographies and end markets should be similar sequentially.
Altogether for the segments, we expect to see continued improvement in operating income and margin in the third quarter driven by modest demand improvement additional price increases and stabilizing costs.
Operating income should be approximately 5% higher sequentially on continued margin improvement.
I will note that the consumer and specialty segment is the biggest driver of the company's overall margin improvement toward our target level and is on track to deliver that improvement.
Now, let's review the engineered solutions segment.
Second quarter sales in the engineered solutions segment were 5% lower than last year, but 5% higher sequentially.
And our high temperature technologies product line sales were 2% below last year and 2% higher than the first quarter.
Demand for foundry and refractory products in North America remained strong.
And overall sales were similar to prior year levels.
Market conditions in Europe have remained soft through the first half. However, we are seeing sequential improvement in Asia and foundry volumes in China are now above the levels, we experienced last year.
And our environmental and infrastructure product line growth continued for wastewater and remediation applications as well as for our drilling products.
However, we experienced lower activity level levels in commercial construction and for environmental lining systems.
Overall sales were 10% lower than the prior year, but improved 12% sequentially as the business entered its peak seasonal period.
Operating income for the segment was 8% below the prior year as resilient sales and solid execution and high temperature technologies was offset by slower project activity in the environmental and infrastructure product line.
Operating income grew 9% from the first quarter and operating margin improved 50 basis points to 14, 7% of sales.
In the third quarter, we expect demand for high temperature technologies will remain strong in North America and continued modest improvement in China.
With Europe remaining slower.
And environmental and infrastructure, we expect commercial construction and large scale environmental project activity to remain similar to what we experienced in the second quarter.
In total we expect segment operating income to be similar sequentially.
Now, let's move to our balance sheet and cash flow highlights.
Cash from operations in the first half was $79 million.
More than double the prior year.
Our working capital at the end of the quarter was $20 million higher than the same period last year.
While the inflationary impact on our working capital has moderated significantly it is still having an impact on cash flow and our businesses are still working through higher cost inventory.
We expect working capital levels to normalize further in the second half and we expect significantly higher operating cash flow as a result.
Capital expenditures have totaled $46 million, so far this year, bringing free cash flow to $33 million.
Our Capex. This year includes the construction of new PCC satellites as well as the completion of several new scantron automated refractory maintenance systems.
For the full year, we expect capital spending to be approximately $90 million and free cash flow to be in the range of $100 million to $125 million.
Our balance sheet remains very strong.
Total liquidity at the end of the second quarter was $437 million.
And net leverage was two four times EBITDA.
So far this year, we've used free cash flow to pay down $20 million of debt.
I'll note here that approximately 50% of our debt has a fixed interest rate.
We achieved through our fixed rate notes.
And by fixing a portion of our variable rate debt with a hedge instrument.
And we've had that 50% fixed to variable ratio for the last several years.
In the second quarter, our average interest rate was approximately 6%.
Which was 160 basis points higher than the same period last year.
And this translated to more than $4 million of higher interest expense in the quarter or approximately 10 cents of EPS.
Year to date that figure is $8 5 million or approximately <unk> 20 of EPS.
Our near term priority for capital deployment continues to be debt repayment to move toward our target net leverage of two times EBITDA as.
As well as mitigate the higher cost of interest.
Our fixed floating debt ratio also positions the company well should the interest environment change.
Now I'll summarize our outlook for the third quarter.
Overall for MTI, we expect another solid performance in the third quarter.
We are forecasting market conditions to remain relatively stable from the second quarter.
Demand for pet litter bleaching Earth and animal health products should remain strong and we should see modest sequential improvement in North American paper volume.
We expect residential construction and automotive will be similar sequentially.
And then other consumer end markets will remain mixed with personal care destocking likely to continue until later in the year.
We expect North American steel and foundry markets to remain stable and we are assuming modest sequential improvement in China foundry volume.
However, commercial construction activity and environmental lining systems will likely remain slower.
We have incremental pricing actions, taking effect in the third quarter, which will help to keep us on track for continued margin improvement.
Our cost savings program will support continued margin improvement later in the year.
As well the expected rebound of orders for our personal care and food additive products.
Overall for MTI, we expect operating income for the third quarter to be in the range of $70 million to $73 million.
Or approximately 4% to 9% above last year.
And earnings per share between $1 30.
And $1 35.
The company is on track for continued margin improvement and higher levels of cash flow and we are taking action to ensure we stay on track.
With that I'll pass it back to Doug for a quick preview of our latest sustainability report Doug Thanks, Eric.
Before we conclude I just want to make a brief mention of the publication of our latest sustainability report.
This is the 15th year, we published a report.
Demonstrating the sustainability is not new at MTI.
For us it's always been part of how we do business.
Sustainability has been a central tenant of our values and in the central part of our business strategy innovation pipeline and employee engagement.
Leading with our values our entire organization is passionate about reducing our environmental impact.
<unk> natural resources, ensuring the safety of our employees creating.
Creating an open welcoming and transparent work environment.
Being accountable being humble and always winning with integrity.
Couple of highlights from this year's report Youll.
You'll see that we've already exceeded our 2025 environmental targets and four of six categories.
We've made progress on moving to sustainable energy sources.
Our largest processing site recently converted to 100% renewable diesel for their heavy equipment fleet.
And we've significantly increased the amount of power, we're sourcing from renewable sources.
Our core technologies are being leveraged to provide sustainable products to the market.
And the report outlines how we see further development of more sustainable solutions as a significant growth driver for us.
There are several other highlights shared in a report along with extensive data on our progress.
I want to thank everyone at MTI for their hard work and dedication to these efforts and particularly those who participate in our sustainability lead team.
I encourage you to take a read through the report which is available on our website.
Okay, let's open it up for some questions.
Okay.
Thank you.
I'd like to ask a question. Please thank you.
Thank you.
On your telephone keypad.
You are using a speaker phone. Please make sure your mute function is turned off to allow your six.
Bill Clinton.
Again, Please press star one to ask a question.
Our first question comes from the line of Daniel Moore with CJS Securities.
Yes.
Thanks, Doug Thanks, Eric.
And taking my questions.
And then start with thank you I wanted to start with.
Cost reduction initiatives that you described.
From a high level view would you describe them as kind of being more offensive rather than a reaction to any softness in any particular end markets and how much of those do you expect to fall to the bottom line versus perhaps being reinvested.
Yes.
No I do think it is offensive.
As we went through our restructuring.
We highlighted at the Investor day, a couple of areas, where we thought there'd be some efficiencies and <unk>.
So I didn't highlight a lot of cost efficiencies once we got into it we started to see that the organization is operating in different ways. There is a lot of focus that was put around our four new product lines. The technologies that were in there and more of the support of those and finding that some of the silos that perhaps we didn't see were broken down and there are some areas of efficiency.
<unk>. So I think it's as we do all the time in the company, we're constantly looking for ways of being more efficient.
And so I think this is a little bit more offensive I do think though that it is prudent that we make sure that our cost structures.
In solid shape and as efficient as possible.
Given the forward look is been a little bit murky.
At least going through the beginning of the year. So we think it's prudent to do so but I think it's coming more from an offensive standpoint, Dan.
We think the majority of it will fall to the bottom line, we are projecting $10 million of cost savings run rate by the beginning of the year.
Next year and there'll be implemented over the next three to four months.
So youll see some savings in the fourth.
Very helpful. And then just kind of a cadence question, Doug you'd describe a few markets, where you could see orders picking up in Q4, plus you start to get a little bit of the benefit of the cost reductions on a margin perspective.
On the margins.
Having said that Q.
Or is Q3 is typically a fair a bit stronger than Q4 seasonally so just how do we think about putting that altogether from a seasonal perspective do you still expect Q3 to be kind of the peak quarter from a profitability perspective.
Yeah, Hey, Dan This is Eric I can take that so yeah. That's true in terms of seasonality that we typically see a little bit of a drop off in our sales mainly around resident mainly around construction in the fourth quarter, but I will say that we're still on track.
From a margin perspective in terms of what we.
Said last quarter and at the Investor Day, we plan to be at 13, 5% on a full year run rate basis by the end of the year moving to 14% next year and 15% by 2025.
I would point out.
Paul on the bridges for the second quarter volumes have been unfavorable and thats been impacting.
That impacted margins in the second quarter, but we have a lot of act.
Activities going on to offset that I would say the price versus cost catch up alone.
Is enough to get us to where we would expect to be by the end of the year.
And.
The pricing actions are still.
Resulting in favorable.
Our pricing impact to our revenue on a year over year basis.
So thats going to continue.
We should also benefit from some of the higher margin products coming back in the fourth quarter.
On top of all that we've got the cost savings to kind of bolster that improvement. So yes, we're still confident in getting to the 13, 5% run rate on a full year basis.
<unk> should be at or above where we are in the second quarter in the third quarter.
And looking to hold that into the fourth.
Despite some of the normal seasonality that we have.
Yes, Dan I'll, just I'll add to that my comments were.
A positive second half of the year and the reason we have that view.
Is because going into the third quarter, we see a lot of the destocking actions that we saw in the first and second ending right. So we see a positive third quarter and then even further out some of the areas like in personal care and some of the other areas that that are very profitable and have the company. We see those order books or expect to see those order books.
Turning turning north so we've got a number of positive <unk>.
Items coming at us in the second half and that's what gives us the confidence to kind of make the statements we did.
Very helpful. It sounds like if there is a little bit of a seasonal dip it will be lighter than what we've seen previously given those.
All of those factors that you just described.
Maybe the last question for me would be from a.
Capital allocation perspective.
Laid out at the Investor day was the EBITDA above $500 million free cash flow conversion of 7% of revenue.
By our estimates that could be 700 $750 million plus.
Cash flow over the planning period.
Talk about I.
I guess near term as a focus.
Yes, maybe pay down a little bit of that.
But how far would you want to push your leverage down before maybe thinking about being more aggressive you'd be it M&A or.
Wrapping up on buybacks. Thanks.
Yeah.
Yes, I think in the near term given what we see savings in terms of interest in making sure our balance sheets in good shape around that two times leverage that's where our focus is going to be like Eric said, we think just with the cash flow generation in the back half of the year, we should be able to hit that target.
As we go forward, we'll look at the environment.
We'll look at where interest rates are.
But we're always looking for growth.
And potential acquisitions that fit the company.
And short of those we'll allocate that capital to shareholders and we usually do that through share repurchases. Although we're looking at all different ways to make sure that our allocation to shareholders as appropriate so.
Right now I think for the rest of the year, we are going to be looking at debt paydown getting the balance sheet to our target levels.
How things Pan out next year with acquisitions, if not extra excess cash flow that we that you've noted that we'll be generating will be steering that to shareholders.
Do tend to keep some on the balance sheet Opportunistically. So, we'll do that but usually at least 50% of our excess free cash flow goes to shareholders, 50% of the balance sheet. So that we make sure that we have some money for small acquisitions here and there that may pop up.
Perfect I appreciate it I'll jump back with any follow ups. Thanks.
Our next question comes from the line of Mike Harrison with Seaport Research partners.
Hi, good morning.
Hi.
Looking at the PUC in each.
Hub segment up 6% year on year number I believe you said that pet care was up 15% it would kind of imply that the other piece I believe <unk>, 75% of that business or so so it would imply that the other non pet care piece was down by 20%.
And it sounded like edible oil was up animal health.
Maybe you could just help me understand kind of how pronounced that destocking impact was.
As you look at some of those other pieces of consumer, particularly the personal care piece.
Yes, it's largely that personal care piece I think our I think personal care smaller piece of that segment I think it was down 40% to 42%.
In the quarter, so it's pretty pronounced and.
As Eric mentioned Thats some high margin.
Products for Us and we think that's probably going to continue through the third mic, but then like I mentioned, we think some of the order book will uptick in the fourth.
<unk> seen that in the marketplace with kind of consumer products have been going through a destocking phase of this portion of that product line face that as well.
But we do have a number of good trials going on for our new retinal delivery device retinal delivery systems with some major health care provider. So we think that that bodes well probably for the fourth and into next year.
Got it and then I guess, maybe just a couple more on pet care in terms of that 15% year on year number.
Curious how much of that was pricing I think you guys were still trying to catch up.
On pricing there and also curious if youre seeing a pickup in the private label side of that business.
I would assume that there is some trading down that is happening in this inflationary environment. So are you seeing some faster growth on the private label portion of your pet care business.
So first question I would say about 15%, probably 50% pricing 50% volume.
I'm going to say, it's pretty balanced around the world I'd say North America has seen some good strength in the order book.
And all of that is private label.
So.
I think the private label in general as we highlighted has been growing probably the fastest of the category and I think we are participating in that.
So I'd say, probably more of that was North America, but we also saw some good demand pickup in Europe as well.
China.
High growth small portion of the business, so I won't call that out, but what I would say first question $50 50 price volume.
<unk>.
Sure.
Private label to the majority of that was in North America.
Perfect and then on the.
The PCC business.
I'm just kind of curious if you can talk about price cost dynamics.
Whether you saw sequential increases in pricing for PCC.
Contractual pass throughs are kind of catching up there and what does that mean for the pace of margin recovery in the second half in that PCC business.
Yes. This is what I have been highlighting for several quarters last year when when inflation was coming through the way. These contracts are set up is with the delay mechanism. We have to absorb a lot of this cost I remember last last year. A couple of quarters. We are absorbing 2 million to $5 million worth of costs before we could pass that through.
<unk>.
Well now we're at that point where inflation.
Inflation starts to taper it hasn't gone back down where we're catching up on all that all of that pricing is being pushed through in some areas. We're starting to see some of the energy. So the input costs deflate and that is what's driving some of that expansion expanded margin. So it's really a function of those those contracts and how they they protect us.
In that business and so yes, we are seeing some of that.
As long as energy prices.
Continue to decline in certain areas, we will see that margin continue to expand through the back half of the year.
All right last one for me is on the free cash flow guidance.
I think I missed that did you say 100 to 125 or $1 25 to 150.
100 to 125, Mike.
Okay. Historically, you guys have been kind of closer to that 150 to $1 75 range is that kind of.
Where you could potentially get to as we think about next year and beyond.
Yeah, absolutely I would say, we're sticking to that 7% of sales kind of ratio. This year. The biggest impact has been in the first half we still had significant year over year inflation to contend with and so that continued to kind of push out the normal working capital cycle, but the second half should be very strong, we're expecting $115 million to $135 million.
Cash from ops in the second half.
$70 million to $90 million of free cash flow in the second half so that's.
That's turning around.
In the short term here.
Okay.
Excellent thanks very much for your help.
Thanks, Mike.
Our next question comes from the line of David Silver with C.
Please go ahead.
Yeah.
Yes, hi, good morning.
Okay.
So a few topics and this will be a little scattered.
The first topic I wanted to ask you about.
Maybe it would be your outlook or your take your perception of.
The Chinese market, maybe Asia in general, but really China in particular so.
About halfway through my earning season.
Every company that has exposure there has called that out as kind of a negative comparison year over year. However, I think your company. If anything you were a little more positive than I think it was a positive factor you called out on PCC and maybe one other area.
So from your perspective as someone producing in country could you give us a sense of how their reopening or their economic recovery has gone year to date.
And then secondly, maybe just.
Of overall demand.
For their products I guess, the export based products or things that move out are made in region, but move outs just your sense of the activity levels in Asia.
Were you in Asia in General and China in particular please.
Sure. So yes, I'll go back to the comments I just made in my remarks.
We operate.
Every company is a little bit different in China, right and it depends on what Youre doing there I guess, we are largely look we're largely localized in what I say about those.
We kind of source produce and sell in the region. So we're not a large exports were not reliant on exporting or importing into the region. It's largely localized thats first <unk> second piece is still a relatively small region for us is about 8% of our revenues and I'm speaking about China and other Asia.
The dynamics for us are a little bit different they always have been yes demand levels do affect us.
Cannot make activity, whether it's 6%, 8% or 2% will have an effect on that 8% of our sales, but our growth and how we've been growing in that market over the past 10, 15 20 years now.
Is driven more by substitution and technology, New technology introduction.
So give you example.
In the metal casting business.
Ben Tonight as always consumed as a base in the binding systems that every foundry users.
But.
The technology that we deploy which creates a custom blend.
He is still bentonite based.
It is a higher.
It is a more efficient way of making a cast product.
It saves the foundry money in terms of throughput productivity scrap rates quality et cetera.
And so we are able to and that's also we sell it at a higher price point than our base ton event Tonight. So we're able to through this technology.
Increase our sales.
Within a given amount of economic activity. The foundry is still producing the same amount of brake rotors or agricultural equipment or housing yet we're able to help them with yields. So our revenue can continue to go up higher because were selling a more sophisticated product.
Under a certain baseload of economic demand right now that demand affect it but we can continue the growth rates. The same the same as for paper and packaging.
We're substituting other.
Pigments for used as filler or coding and paper with higher value ones with.
Higher quality pigments are higher performing pigments where recycling.
Waste streams right. So we have low input costs, and we're able to give generate revenue from taking recycled waste streams. So we have different revenue streams, but again on the same load of paper, because we're displacing an existing product thats being consumed.
The pet litter business as the third main.
The market is small it's developing its developing around bentonite, we're driving that development.
Relative to mature markets that we just talked about earlier in North America and Europe .
We see that it's going to continue to grow.
Despite some of the economic slowdown that could occur potentially transition to a lower growth economy. So for us.
I'd rather.
Our company has different positions in China, whether they are exporting or what what.
What their positions are but for us we see that regardless of it moving to maybe a lower growth economy, we have new technologies products and our positioning in markets, where we can continue our high growth rate.
Going forward and that's what I was trying to portray are described in my comments hopefully that helps.
Yes.
Yes, no I think it was maybe just.
In my view, just kind of understanding maybe near term non not discounting the long term potential with just how it played into your most recent quarter or two of results. So thank gotcha that my.
My view my view on I got.
I, probably Didnt answer your question My view on China, It's just.
Like everybody else, we thought it would rebound much quicker than it did.
But I will tell you that it has continued to improve so at least in our markets and I would say the foundry market is probably the best.
Bellwether for how economic activity, because it's based industrial activity like automotive heavy equipment.
Very slow first quarter, we saw improvements in the second and indications from our customers that it is going to continue to improve in the third and into the fourth and were seeing that order book go that way so slower than we all expected going into the year, but absolutely I am seeing it improve at least in our business.
The metal casting business grew I think is probably a good gauge for economic activity.
Okay, Great I wanted to switch over to the new yield project announcements in Brazil.
And in particular I'm, just curious about how the economics and the capacity change surrounding the implementation of new yield works. So I reread. The release, a few times and I just wanted to clarify that it seems like this is not a.
Fundamental capacity increase but it's maybe.
The case, where what normally would go to a waste disposal unit is now going to be effectively recycled in the existing.
Hardware, let's say so is it the case that when you implement new yield there is not necessarily any appreciable increase in plant output.
Without further investment and if Thats the case, how do the economics of that.
Installation and whatnot, how does that work in practice, how do you get.
Our return on your investment if if the new yield product effectively displaces some virgin PCC material.
Sure about DJ one incident.
Sure.
So David let me try and put this in context we.
We've got several satellites coming online in the second half.
Doug and Eric referred to them during the presentation.
One of those is in India that is a new yield <unk> satellite.
So an element of new yield.
That youre going to see is that it's going to contribute to our geographic growth projections that we discussed on the analyst call. So so new yield supplements our ability to do further penetration, especially in those emerging markets that would be one application. When we were together for the Investor Day I had also indicated.
One of the things that we're excited about in this application of our Crystal engineering.
Yet we have an opportunity to retrofit our existing PCC plants when applicable. This case in Brazil is the first example of that and use now.
<unk> in terms of the economics is that we're able to take a pay material that would typically be a waste material and require some landfill and so the customer benefits by.
Eliminating or reducing a disposal cost and we benefit by having a much lower input costs. So in those applications. If you see an upgrade you can assume that it would be neutral to volumes, but it would be part of that.
Margin improvement program.
Eric is referring to it'll be it'll be contributing to the margin improvement of that business, but on other announcements you will see it being part of our geographic expansion because it supplements that whole portfolio. The last part as it relates to the new yield platform.
We've got several.
Packaging.
<unk>.
Producers that are talking to us about how new yield can apply into into that.
Face and so it would be part of the offering that provides us an opportunity to penetrate the packaging market. So that particular announcement, which picked up on was right, but the broader impact of the platform is supplementing the growth and improving our operating income margin.
Okay. Thank you for that one last one and I think this would also be for D. J.
I would really like your opinion about the trajectory I think of paper and especially packaging growth I think from a secular perspective so.
Pre pandemic, sorry pre pandemic.
Everyone was talking about reducing packaging.
No.
And all manner of.
Ways of accomplishing that and if you <unk>.
Read a consultant's report as I did I mean, everyone would point to maybe a negative demand trend in pay per use.
In particular.
But since the pandemic and I see this every week when I take out my paper and cardboard for recycling.
It's just been a real turnaround and in the way people view.
View that particular waste stream and usage.
So from your perspective as you think out maybe three to five years I mean is this the case where.
Apart from your technologies.
That you see like a growing.
Demand for packaging will the pandemic era boost and delivered goods and the packaging that accompanies that is that going to be sustained in your opinion.
Sure.
Is.
Is that somewhat negative.
Annual rate of consumption decline I guess is that going to reassert itself. What is what is your view from from maybe a three to five year perspective start starting now.
So David on <unk>.
<unk>.
And figure out the best way to answer it and it's let me try to distill it down if I look at the printing and writing grades.
We still see some of the secular decline, but what we're seeing in that short term and it probably continues in that three year look.
We saw a spike in north.
Erica.
Recently, we just saw the Destocking that went on but in North America. Some capacity has just recently come out of the market and in North America that industry goes back to probably 85% plus operating rates, which seems pretty sustainable for the next three plus years or so.
For sure, but but that's what it looks like you.
Europe , we see that being.
That has been on a decline, but it has not been in the grades in which we participate so Europe seems to be going through a rationalization period that is.
Augmented or offset by continued growth in Asia, particularly China, where where although the growth has has slowed down over recent years, it's still a growing region.
India as well, so so on balance and that look printing and writing grades still come down a little bit but.
But but not a lot it seems to be a.
A gradual decline on the packaging, we've seen a shift that's going on as people have converted some of that old capacity into making some packaging. So the packaging overall consumption. It it kind of depends on the type of packaging. The way we look at it is there is these high end boxes.
That holds the iPhone or create up a box of golf balls that seem to be pretty steady or growing.
At a slight rate.
The recent shift has been brown boxes have come down slightly since the pandemic era and theres people, taking a pause and seeing how that goes but long term that will probably grow at a gd.
Plus sort of rate.
And then what's been supplementing that are growing at a greater rate than that as this this kind of in between box. It's a white top box, that's where we've had recent applications both.
In Europe , and North America, where we're that Amazon box that Youre getting is no longer just a brown box hits its well printed.
So that will be growing as well so it's overall packaging still growing.
The the overall printing and writing probably flat, but that flat is deterioration, especially in Europe growth in Asia is that.
Balance out that.
The thought.
I ask you an impossible question to answer so I really appreciate you.
Handling that on the fly.
That's all for me thanks very much.
Thanks, Dan.
Yes.
Our next question comes from the line of Steve Sharon.
Hey.
Go ahead.
Thanks, Good morning, Doug you are about to be afternoon.
I wanted to ask about the <unk>.
Updated free cash flow target anecdotally, we're certainly hearing cases, where I know traditionally your second half to benefit from from from receivables conversion, but we're hearing anecdotally that maybe those conversion cycles are stretching out a bit everyone's trying to hang on to cash a little bit longer is that are you seeing.
Is that playing at all into your cash flow guidance.
Yes, Thanks, Steve the answer is no we're not seeing that I mean, we look at our receivables balances very closely and are.
Our DSO is there they are staying around $60 61 days and thats been consistent over the last.
Several years, so we're not seeing those stretch out.
Okay perfect.
And then in terms of your margin targets.
For at least for end of year.
What are the variables that may affect that it sounds like you've gotten the pricing in pet care certainly we've heard that.
It's getting harder to get more pricing on the consumer side.
And I know you have some contractual resets, what's the variables that could affect <unk>.
Exceeding or missing.
At year end targets at this point for the most likely variables.
Well I would say.
In terms of the things that are with are within our control we feel confident.
Got everything in place to get there I would say that.
Then if you look at our bridges for the second quarter.
The volume impact the variations, we saw and some of the end market volumes in the second quarter.
Do the math on that that's a 190 basis points of margin.
And that we offset in the second quarter. So.
Once those end markets that we spoke about start to come back that's the biggest upside I would say to our margin getting that volume leverage back on some of the softness that we saw in the second quarter.
Yeah, I'd say some of that like our assumptions around the fourth quarter.
Of our higher margin products.
Destocking does not end.
And then I think I do think that we're on track to hit those targets Steve It's.
Little hard to predict what will happen if the if the economy does fall off or something happens that could be a challenge, but right now we think we've got it in place.
Got a cost savings program and so we've got some levers that we've pulled to make sure we get there.
Yes.
Perfect. Thanks, and then just last one on terms of your expectations on timing on paying down the revolver. Obviously this quarter you can see the year over year impact from interest expense. We had another rate hike how quickly do you want to get that revolver down you've got interest expense lower.
As quickly as possible, Steve the higher free cash flow in the second half is certainly going to help.
Okay perfect.
Thanks, Eric Thanks, Doug.
Thank you.
Yeah.
Our next question.
Thank you.
Alright research.
Hi.
One more for me I didn't want to let you off the hook on that.
<unk>.
Alan Smith.
Just curious it looks like as of the end of last quarter.
We had 460 <unk> cases.
The new number will be in the Q when it comes out.
Where is that number today.
And I guess as you think about.
Youre looking at divestiture I believe your press release also use the term structural alternatives.
Is it your intention to accede or dispose of that business in such a way that you do not.
And dealt with.
Legal liabilities or any exposure to further litigation related to that business.
Yes, that's correct, Mike So I'll give you a number right now.
The number youll see in the Q as 501 cases.
And I think that is.
That reflects kind of what we're talking about in terms of the increase kind of litigation environment that we're facing so.
But yes, we're looking at a comprehensive solution for both assets and ensuring that the liabilities are dealt with efficiently and effectively.
So right now we started that process. We've made the announcement we've looked at this.
The business again is relatively small under 3% of the company sales, we are weighing that against kind of.
The ongoing cost to defend ourselves against what we see are meritless claims the ongoing.
The litigation environment.
We made the decision to exit the business.
Putting the business up for sale, we're looking at various alternatives, but yes. It will be dealt with we're looking at structural solutions to deal with both assets and the liabilities of the.
The business so more to come on that and we're certainly give you an update.
As the program develops.
Yeah.
Alright, Thank you very much.
Yes, Thank you Mike.
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Okay.