Good day, everyone, and welcome to the Second Quarter 2020 Minerals Technologies Earnings Call. Today's call is being recorded. And now at this time, I'd like to turn the call over to Erik Aldag, Head of Investor Relations for Minerals Technologies. Please go ahead.

Thanks, April. Good morning, everyone, and welcome to our second quarter 2020 earnings conference call. Today's call will be led by Chief Executive Officer, Doug Dietrich; and Chief Financial Officer, Matt Garth. Following our prepared remarks, we will open it up to questions. I'd like to remind you that beginning on Page 14 of our 2019 10-K, we list the various risk factors and conditions that may affect our future results. And I'll also point out the safe harbor disclaimer on this slide. Statements related to future performance by members of our team are subject to these limitations, cautionary remarks and conditions. I'll now turn the call over to Doug.

Thanks for the introduction, Erik, and good morning, everyone. We appreciate you taking the time to join our call this morning, and I hope that you and your families have remained healthy and safe. Similar to last quarter's call, we'll be conducting this one from different locations, and we have all of our business leaders on and ready to answer your questions at the end. I'd like to start by thanking our employees for their continued efforts during very difficult circumstances. Our second quarter results reflect our team's agility to quickly adapt to a changing work environment and dedication to continue to operate safely, both of which underscore the power of our culture and the resiliency of our company. Let me outline the structure of today's call. First, I'll give an update on the measures we've taken to protect our employees and to safely operate our facilities. I'll then provide a high-level overview of our second quarter performance. Matt will follow with more detail on our financial results, and our July sales trends by business unit. I'll conclude with commentary on our end market conditions and how we're positioning MTI to not only navigate through current dynamics but also to capitalize on opportunities to make our company even stronger. Consistent with our core values, health and safety of our employees is and continues to be our top priority as we confront the near-term challenges presented by COVID-19. On our previous earnings call, I outlined a series of rigorous protocols we implemented early on at all of our global facilities. These procedures have helped to mitigate the risks associated with the pandemic and ensure safe and stable operations. We also continue to implement a remote working environment wherever possible, and I couldn't be more pleased with our global business services, IT and technical service teams who continue to perform at a very high level. In addition, we've seen minimal disruptions to our supply chain and ability to serve our customers. We recognize that the risks related to the virus are still ongoing and present in many of the regions in which we operate. As of today, all of our manufacturing facilities are operational. As these conditions persist, I'm confident that we have the right measures in place to continue to protect our employees, safely operate our facilities and meet the needs of our customers. With that, let me take you through how our second quarter unfolded. As we previewed on our call on May 1, we faced a significant amount of uncertainty through the quarter. We had limited visibility to customer orders and demand levels, which were constantly changing. We managed through temporary government restrictions and customer shutdowns, and we are quickly making changes and maneuvering through the issues we faced during the quarter. Our results reflect our ability to navigate through these dynamics, while remaining focused on the safety of our employees and operations. Specifically, we delivered a solid operating performance characterized by double-digit operating margins and strong cash flow generation. We also took steps to better position MTI as we move forward, included in capturing efficiencies in our fixed cost structure, strengthening our balance sheet to improve liquidity and support our strategic initiatives and taking advantage of new market opportunities with customers. From a financial perspective, total sales in the quarter were $357 million, down about 14% sequentially. In April, sales were down about 10% sequentially, and they weakened further in May before restarting to improve modestly in June as government restrictions eased and customer order patterns strengthened. We generated $42 million of operating income and earnings per share were $0.85. In addition, we delivered $64 million in cash from operations, which was a similar amount to the prior year. Results from our diverse portfolio of consumer and industrial-related businesses mirrored the current macroeconomic environment. Our consumer-oriented businesses, including Household and Personal Care and Performance Materials and food and pharmaceutical applications in Specialty Minerals remained strong and delivered healthy year-over-year sales growth. We saw a sharp uptick in demand for many of these products at the end of the first quarter, and our strong sales momentum extended through the second quarter as order books remained full in both North America and Europe. Our overall consumer-oriented portfolio, which represents approximately 25% of MTI's total sales, are businesses in which we've been investing in over the past few years. And this past quarter demonstrated the benefit of our strategy to grow these less cyclical business. As we anticipated, our businesses that serve industrial markets, including transportation, steel, construction and paper were more impacted by COVID-19-related production curtailments and shutdowns. Customer demand in these markets dropped quickly in the first 2 months of the quarter. We then experienced a slight upward trend in order patterns as we moved through June. These customer slowdowns were most prominent in our end markets in North America and Europe. Our strong positions in China enabled us to capitalize on the economic recovery there. We delivered year-over-year sales growth of 9% in China, led by the continued penetration of our greensand bond and Paper PCC products. As I touched on briefly, we mitigated the impact of volume challenges in several businesses with variable cost adjustments and structural overhead savings. We also maintained the pricing improvements that we've implemented over the past several quarters, and we're taking advantage of more favorable raw material costs. These actions helped us to deliver relatively strong margins despite significant sales declines in the quarter. The structural nature of these actions positions us to generate strong leverage on increased sales as markets recover and will expand margins further. We made significant progress on our growth and business development activities with new PCC contracts and the commercialization of several new products. We signed 2 satellite PCC contracts in the quarter. The first was for a 42,000-ton plant in India, which will come online in the second quarter of 2021, and will be our eighth satellite there. The other was an agreement to restart and operate a 35,000-ton plant, which had previously been idled at our Wickliffe, Kentucky location, and we've already begun to supply this customer from an off-site location. We also continue to focus on improving the pace and impact of our new product development with 24 new products commercialized so far in 2020. Despite the current market environment, this pace is similar to the prior year. Many of these products, such as variations of our greensand bond formulations for foundry customers and new building and construction and waterproofing systems are enhancements to existing products that generate more value to customers' current applications. Other solutions, including several personal care formulations and PCC for packaging applications have helped us enter into adjacencies with customers. In an economic environment such as this, generating continued strong operating cash flow and improving our liquidity profile is a top priority. Our experienced management team has acted quickly through disciplined execution and tight control of our cash generation cycle. In addition, we capitalized on attractive credit market conditions by completing a $400 million offering of senior unsecured notes. This strengthened our balance sheet by extending our debt maturities and increasing our total available liquidity to over $675 million. While the economic backdrop continues to evolve, the results we achieved this past quarter under challenging conditions underscore the agility of our team, the resiliency of our combined market-leading positions and the strength of our financial foundation. Before I turn it over to Matt to discuss our second quarter results in more detail, I'd like to highlight the recent publication of our latest sustainability report. MTI has a long-standing commitment to sustainability in the broadest sense, and we've been focused on continuing to embed sustainability practices into our business strategy and goals. Sustainability is core to who we are, how we operate and drives our actions on a daily basis. This year's report details our progress toward our 2025 environmental targets, along with improvements made around our safety culture, new product development, social impact and employee engagement, diversity and inclusion and community outreach. I encourage you to review the report, which is available on our website as it highlights and recognizes the efforts and achievements of our 3,600 employees. Now I'll turn it over to Matt.

Thank you, Doug. I'll review our second quarter results, the performance of our 4 segments as well as our liquidity and debt position. I'll then turn the call back over to Doug for some additional perspective on our current operating environment and the visibility we have going forward. Now let's review the second quarter results. Similar to the first quarter, we are presenting year-over-year comparisons of sales and operating income on the left side and the sequential quarter comparisons on the right side of this slide. Given the rapidly changing market conditions, we believe the sequential view highlights the market challenges we faced and our ability to rapidly mobilize to capture improvements. Second quarter sales were $357.2 million, 21% lower than the prior year on a constant currency basis. The slowdown in economic activity brought on by the COVID-19 pandemic impacted our volume significantly in the quarter. The year-over-year operating income bridge on the bottom left shows we were able to offset the impact of lower sales with favorable pricing and cost performance, driven by the actions we have taken over the last year. Moving to the right side of the slide, sales were lower by 13% sequentially on a constant currency basis as we experienced the impact of COVID-19-related customer shutdowns in several product lines. On our last call, we told you that sales in April returned approximately 10% lower than the first quarter. As we progressed through the second quarter, we saw further deterioration of volumes in May across several of our end markets and geographies, with China being the notable exception. In June, our market started to turn around, and our overall sales rates reflected an increase from May. Operating income decreased sequentially, primarily due to the lower volumes. We were able to maintain our pricing levels, and our team acted quickly to effectively manage cost and expenses to offset the decline. Operating margin was 11.8% in the quarter versus 13.2% in the prior year and 14% in the first quarter. So now let's take a closer look at the changes in operating margin on the next slide. On this slide, we are showing year-over-year and sequential operating margin bridges for the second quarter. Starting with the prior year comparison, the lower volumes contributed to a 410 basis point reduction in margin versus the prior year. I want to highlight, though, that our pricing and cost actions have contributed to 280 basis points of favorability, partially offsetting the impact of lower volumes. On a sequential basis, we offset 320 basis points from unfavorable volume mix with 110 basis points from our ongoing pricing and cost actions. We believe these actions have positioned us well to take advantage of incremental volumes going forward. While a portion of the lower discretionary spend will come back as activity levels increase from where they are today, we do believe the majority of this improvement is permanent. Worth noting that our margin improvement actions have resulted in slightly higher EBITDA margins versus the prior year for both the second quarter and the first half of 2020 despite the lower sales levels we are seeing. Now let's take a look at the reconciliation of reported EPS to adjusted EPS. Second quarter earnings per share, excluding special items, were $0.85. We incurred special charges of $14.6 million after tax in the second quarter or $0.43 per share. The charges included a noncash pension settlement charge and a noncash impairment of assets charge in several cases, in severance-related costs for the Paper PCC satellite facilities at 2 U.S. paper mills that were idled indefinitely in June. In addition, we recorded a litigation settlement at the conclusion of the Novinda arbitration proceedings. Our effective tax rate for the quarter was 16% versus 17.3% in the prior year due to favorable discrete tax items in the quarter. And we expect our effective tax rate to be approximately 19% in the second half of the year. Lastly, our EPS benefited from lower interest expense and other nonoperating deductions. Note that going forward, our interest expense will be slightly higher due to the incremental interest on the notes offering. Now let's review the segments in more detail, starting with Performance Materials. Performance Materials sales were 19% lower than the prior year and 7% lower sequentially. Of our 4 segments, Performance Materials is the largest, and it was the most resilient to market challenges in the second quarter. Within Household, Personal Care & Specialty Products, we saw continued strong performance from our consumer-oriented businesses. Pet Care, Fabric Care and Personal Care all grew sales versus the prior year. The growth in these businesses was offset by weakness in specialty drilling products. Environmental Products and Building Materials sales were both lower due to COVID-19-related project delays. Metalcasting sales were impacted primarily by automotive shutdowns in North America and parts of Asia. Our Metalcasting sales in China versus the prior year grew as economic activity rebounded following the first quarter shutdowns, and we continue to penetrate the market with our pre-blended greensand bond formulations. Operating income for the segment was $21 million and represented 12.1% of sales. The impact of lower sales on operating income was partially mitigated by lower expenses, cost control and continued pricing actions, as shown through the relatively stable margins versus the prior year and sequential quarters. In the chart on the bottom right, we are showing the daily sales rates for each month of the year as well as comparison to the prior year. May was a clear low point over this period, followed by an uptick in June and further acceleration in July, where we narrowed the gap to prior year sales levels. We expect this trend to continue through the third quarter. And now let's turn to Specialty Minerals. Sales for this segment were 24% lower versus the prior year and 20% lower sequentially. Paper PCC sales were lower than we expected, primarily due to extended outages in the United States, Europe and India. Our PCC facilities in China continue to run at relatively normal demand levels, up 4% versus the prior year and sequential. However, our locations in India were shut down for much of April and into May. And in North America, 9 of our 16 facilities were either idled or took extended downtime in the second quarter. And in Europe, 3 paper machines took extended downtime in the second quarter. Specialty PCC sales were lower as demand slowed in the first quarter and remained at lower levels through the second quarter, primarily driven by lower demand for automotive and construction applications. Process Minerals sales were also lower due to the slowdown in construction and automotive activity. Segment operating income, excluding special items, was $15.3 million and represented 13.9% of sales. The impact from the reduction in sales versus the prior year was partially offset by continued expense control input cost reductions and continued pricing actions. In the daily sales rates chart, you can see May was also a low point for this segment and the gradual improvement in June was followed by continued improvement in July. In North America, 7 out of 9 paper mills that were down in the second quarter are coming back online in the third quarter, and the 3 machines that took downtime are also ramping back up. We remain on track to bring online 250,000 tons of new Paper PCC capacity this year. However, the announcement by Verso to idle 2 paper mills in the United States, will reduce our volumes by approximately 75,000 tons on an annualized basis beginning in the third quarter. In addition, our business development efforts continued during the quarter, and we signed 2 new paper PCC contracts, 1 in the United States and 1 in India, totaling 77,000 tons. Now let's turn to the Refractories segment. Refractories segment sales decreased 28% versus the prior year and 19% sequentially as steel mills reduced production in response to weaker demands in construction and automotive markets. Segment operating income was $5.9 million and represented 10.6% of sales. Note that we continue to maintain double-digit margins in this business despite significantly lower sales levels. We have seen a slight improvement in daily sales rates in July. To give some perspective, we started 2020 with North American utilization rates in the low 80s, and after declining to the low 50s, they're currently running around 60%. And now let's turn to Energy Services. Energy Services sales were 31% lower than the prior year and 30% lower sequentially, driven by the decrease in activity due to COVID-19-related customer project delays. North American well testing activity remained strong. However, this was primarily offset by lower global filtration activity. Operating income was $1.4 million versus $3.2 million in the first quarter and represented 7.9% of sales. The daily sales rates chart shows the solid start to the year, followed by lower levels of activity due to COVID-related delays. Several projects scheduled for July were delayed to August and September. And from where we stand today, we are starting to see some improvement in international markets, and the pipeline of projects for this business remains very strong. Now let's turn to our cash flow and liquidity highlights. We continue to generate strong cash flow and maintain ample liquidity. We generated $64 million of cash from operations in the second quarter and $49 million of free cash flow. We used a portion of our free cash flow to pay down $30 million of debt, and our net leverage ratio stands at 2.2x EBITDA. We also took action at the end of the quarter to further improve the liquidity position of the company. On June 30, after the close of the second quarter, we completed a $400 million offering of 5% notes due in 2028. We used the proceeds to repay $148 million of fixed rate term loans, $100 million of borrowings under our revolving credit facility and the remainder for general corporate purposes. As a result of the offering, the company now has more than $675 million of available liquidity, including cash on hand, as well as availability under the revolving credit facility. In these uncertain times, we prudently took advantage of the favorable interest rate environment and our strong credit position to extend our maturities at a fixed rate. We extended our weighted average maturity to 5.5 years, an increase of 2.5 years, and this added liquidity provides us with additional flexibility to be opportunistic and to navigate what lies ahead. With that, let me turn it back over to Doug to discuss our current market conditions.

Thanks, Matt. Before opening the call to questions, I thought it would be helpful to provide commentary on what we're seeing across our businesses and end markets as we move into the third quarter based on sales trends over the past couple of months. I've organized this discussion similarly to what we presented last quarter for clarity and to give you a broad understanding of the various puts and takes and changing conditions. I'll start by saying that compared to where we sat at the beginning of May, we are more optimistic about the trends in our markets, and we feel that the second quarter had the most acute impacts from COVID-19. With this comes some caution as our view forward is looking into an environment that continues to be uncertain. Specifically, in our project-oriented product lines, we are still experiencing volatility in order patterns and timing. Let me now take you through what we're seeing by business segment, touching on some end market dynamics. Starting with Performance Materials, our largest segment, our Household and Personal Care product line, which primarily serves consumer-oriented markets has continued to run its strong demand levels, with growth rates similar to what we've been delivering in recent quarters. We see the sales trajectory remaining steady through the third quarter. Our Metalcasting business experienced a rebound in demand levels at the end of June, which is sustained through July. Volume improvements for this business depend on the transportation sector in North America, primarily in the automotive and heavy truck sectors and how foundries will ramp up and reach normal capacity levels to support that demand. In July, our Metalcasting facilities in North America operated at about 85% of last year's levels. Based on the latest indications from our foundry customers in North America, we expect these rates to improve to around 95% by the end of the quarter. As noted earlier, Metalcasting sales in China grew 9% over last year during the second quarter, and we expect this strong trend to continue through the third. I'll discuss Environmental Products and Building Materials together as they are both project-related businesses. Given the nature of these businesses, order patterns have been volatile and several work site shutdowns have pushed projects into future quarters. We started to see some of these projects come back towards the end of the second quarter and into July, but the demand and timing for completing these projects is dependent upon loosening of regional restrictions. Both of these businesses maintain a robust project pipeline with solid customer pools for our latest technologies, and we expect to complete these projects once they commence. Now let me turn to our Specialty Minerals segment, starting with Paper PCC, where I'll provide color by region. Our PCC facilities in China continue to run at relatively normal demand levels, and our locations in India have been ramping back up since the government shutdowns in April and May. In North America and Europe, 10 of the 12 facilities that took extended downtime during the second quarter are projected to resume production in the third quarter. In total, with the restarts in India, combined with the demand environment in North America and Europe, July volumes have been trending at a rate that is approximately 15% higher compared to June. On the new capacity front, the construction of our satellites in India and China are on track. Our 45,000-ton facility in India will come online in September and our 150,000-ton satellite in China, which will be our largest when completed, is scheduled to be operational by December. In our Specialty PCC, GCC and talc businesses, sales for our pharmaceutical and consumer products have been strong and should remain that way. Demand for our sealant and plastic products that go into the automotive market will be dependent on build rates improving in North America and Europe. And sales for these products that are used in residential and commercial construction applications have steadily improved since June, and this trend should continue in the third quarter. For the Refractories segment, current steel utilization rates in North America and Europe are around 58% and 62%, respectively, and these rates have increased from the low 50s in the second quarter. Several integrated mills have resumed production in North America, and we expect commensurate volume improvements in line with these restarts. We have a strong order book for laser measurement equipment. However, this year, most of these sales will be completed in the fourth quarter. I'll finish up with Energy Services. While COVID-19 led to some early demobilizations from our larger offshore projects, these projects are being rescheduled to resume in the third and fourth quarter. In addition, we've recently been awarded several new projects, which we expect to commence over the next 2 quarters. It's notable that our order book in this segment remains intact. However, we are dealing more with the exact timing of projects as customers reschedule. As you can see, we're managing through a number of evolving market dynamics, including changing customer demand patterns. Importantly, though, activity has modestly picked up across our businesses in July, leading to an overall sales trend that is about 5% higher compared to June. However, it's still only 1% above our full second quarter run rate. We remain focused on navigating these evolving dynamics, and our team's agility positions us to continue to do so. Our key priorities remain keeping our employees and their families safe, serving our customers with value-added products and strengthening our foundation. We've taken thoughtful, decisive actions to adapt to the current market environment and to position our businesses to extend our momentum as market conditions improve. Looking ahead, we continue to see distinct opportunities that we can capitalize on to further drive our operational and financial performance. With our improved cost profile, we are well positioned to expand margins as volumes strengthen. Our broad product portfolio, which delivers cost savings and significant value to our customers, has enabled us to realize new opportunities with customers in several markets, and we expect this trend to drive additional revenue growth. And by taking steps to strengthen our balance sheet and increase liquidity, we are well situated to navigate through existing conditions as well as pursue a wide range of attractive growth opportunities, both organic and inorganic. In closing, I want to thank everyone for joining today's call and recognize our employees for their tremendous efforts during challenging times, and their continued commitment to MTI's ongoing success. With that, let's turn the call over to questions.

And we'll first hear from Daniel Moore of CJS Securities.

I have a lot to cover and there are many moving parts, so I appreciate your patience as I may jump around. Regarding July, I believe I heard you mention that it was about 1% higher than the full Q2 run rate, is that correct? Also, could you provide insights on what June looked like year-over-year, as well as July? I'm trying to understand the trajectory from that perspective.

Yes, that's accurate. Right now in July, we've noticed a 5% increase compared to June. This gives us some perspective as we move into the third quarter. However, it's important to note that the rate for July is still lower than what we experienced in April. In looking back at April and May, we observed a downward trend, which made us a bit cautious. But considering the data from our customers and the developments in July, we are feeling more optimistic than we were three months ago. Nevertheless, the July rate remains below the average for Q2 and does not match the April rate. Year-over-year, I'm unsure about the exact June figures, but I believe they're down by around 10% to 12%, though slightly better than May. In April, we were down 10%, and for the quarter, it was a 14% decline.

You're spot on Doug.

Got it. Yes, it does. Regarding PCC, there are some considerations to note. Many of the facilities are coming back online, but there are also two facilities with a capacity of 75,000 tons that will temporarily shut down in the third quarter. Given our current situation, are we anticipating a further decline in Q3 before we begin to recover and grow again? Essentially, I'm trying to understand how we should approach growth in relation to either Q2 or June levels as we move forward.

Sure. I'll address this and then hand it over to D.J. for more details on future developments. It's unfortunate about the shutdown of the two mechanical-grade paper machines at Verso, which will be closing indefinitely starting in September. On a positive note, we have begun supplying the 35,000-ton contract from our Wickliffe, Kentucky facility from an off-site location, with on-site production expected to resume in November. Additionally, our 45,000-ton satellite facility in India is set to come online in the third quarter. Overall, the third quarter is shaping up to be significantly better than the second quarter, with a 15% increase in volumes in our Paper PCC business. While we might see a slight dip at the end of the quarter due to demand fluctuations before the India satellite starts, we anticipate adding 150,000 tons in December in China and an extra 45,000 tons in India in the first half of next year. Despite a potential marginal decline from the second quarter to the third, the overall capacity additions remain positive, resulting in a net increase of about 150,000 tons.

By about 150,000, yes, that's the amount. Okay. Just wanted to confirm that math based on the announcements that we have as of this moment at least.

Let me clarify that. That's about 150,000-ton positive getting back to normal paper demand levels, right? So one of the questions we have going forward is what is normal? And so we can talk about that a little bit. But right now, the net-net of all of that on the kind of 2019 base volume, that would be a positive 150,000, approximately.

Perfect. Yes, you mentioned in the prepared remarks about the cost reduction, specifically the 280 basis points offset to volume declines due to efficiencies, cost reductions, and pricing actions that are expected to be permanent. Did I understand that correctly? I'm trying to get a clearer picture of the restructuring actions you've implemented and how they may impact volumes as they recover.

Yes. What you saw there, Dan, was about $4 million of pricing and $7 million of cost actions. And those cost actions, you have the carryover from the restructuring we did last year that we are benefiting from. You have a number of positions that will not be replaced based on the efficiencies that we've been able to drive. As a matter of fact, just speaking to that, I mean, the amount of work and effort and engagement that has been done by the team to establish new ways of working, again, just reinforces the culture we have here that we do talk about each quarter and the strong engagement that we continue to have through this pandemic. And that's what's allowing us to say that the majority of that $7 million would be permanent. So the majority could be 2/3, if I'm giving you direct guidance, but give us some play there as we look at the items that really make up the difference where we could have some coming back. It will be in those travel and expense and product testing categories when those types of volumes tick up for us to spend commensurately with that.

Okay. And last for me, just Metalcasting... yes. Go ahead, Doug. I apologize. Go ahead.

I wanted to provide some additional context on our efforts for continuous improvement throughout the quarter. We have been actively seeking ways to enhance our operations and have maintained efficient business systems while working remotely. We are exploring opportunities to reorganize and distribute work globally. Although we have had some retirements, we have also successfully integrated new talent, which is reflected in our numbers. We have been focused on identifying different approaches that can help us advance and improve our organizational efficiency. We believe that 60% to 70% of the improvements we've made are permanent. We continue to identify additional opportunities for ongoing improvements, which we believe will lead to margin enhancement in our operations. We are confident that a substantial portion of our cost reductions will be permanent, and as our volumes increase, we expect to leverage those improvements effectively.

That's helpful. Lastly, Metalcasting. You gave some color around North America as we get into Q3. And if I missed it, forgive me, but just in China. All these foundries, customers back up and running, what capacity and what are you hearing in terms of the trajectory of growth rates from here going forward?

Thank you for the question. I'll start with China and then transition to the U.S. First, regarding China, we are experiencing very strong growth. Several sectors are continuing to recover, and we are performing quite well. For instance, the auto market in China in Q2 was 14% higher than last year, leading many foundries to operate at a high capacity, particularly Tier 1 and Tier 2, who appreciate our value proposition. We are also seeing robust activity in heavy equipment, excavators, agriculture, and municipal segments, which remain steady. The only area of concern is some uncertainty around exports, particularly parts heading to Europe and parts of North America, but overall, the outlook is very positive. In the U.S., the situation is somewhat different. Our focus is heavily on the auto and heavy truck sectors within the transportation segment. While we have presence in agriculture and municipal markets, let's discuss the automotive sector first. Our sales have largely mirrored the performance of the auto industry, with some declines and closures during the quarter, followed by a rebound post the 4th of July holidays when nearly all foundries returned to near full capacity. Looking ahead, we anticipate that the second half of this year will resemble the latter half of 2019 in terms of automotive sales. The heavy truck sector remains strong, with OEMs maintaining robust production and parts availability contributing positively. When we look at agriculture and municipal markets, the agriculture sector, which includes tractors and combines, has seen a decline in the low single digits compared to last year, resulting in our sales being relatively flat and consistent with last year. In contrast, the municipal segment is performing well, with spending on items like manhole covers and grates increasing in low single digits year-on-year. This gives you an overview of the different segments and the trends we are observing.

Next we'll hear from Silke Kueck of JPMorgan.

If you examine the global auto production, you'll notice that the projected build rates for the third quarter are quite similar to those predicted for the first quarter. Given this information, do you think your Metalcasting sales, while not solely reliant on the auto sector, should resemble what you experienced in the first quarter, or is that expectation overly optimistic?

It is possible. Currently, we are observing two main trends. First, there are foundries starting to reopen after experiencing some irregular operations. Secondly, we are noticing some restocking, which is encouraging. The levels we are observing, along with what Jon mentioned about foundries beginning to operate full-time, were not seen during the second quarter. If the build rates and restocking persist, we could maintain those build rates through the third quarter. However, it's important to note that automotive represents about 50% of our exposure to North American foundries, and the heavy truck sector hasn't fully returned to the automotive build rates yet. There are also industrial factors to consider. Nevertheless, for about 50% to 60% of the foundries we work with, reaching those build rates is a viable possibility.

In your Household and Personal Care category, which is likely the largest within the Performance Materials business, there was a sequential slowdown from the first to the second quarter due to sales. I was curious about what caused the slowdown. Additionally, do you anticipate that household care products in the third quarter could resemble the first quarter, considering the rates observed in July?

Yes, it is our largest segment and includes more consumer-oriented products. There are some basic product lines within it, particularly our basic mineral products that support drilling products. This includes drilling fluid additives, which from the first to the second quarter, supplied some onshore drilling and third-party customers but saw a decline. This decline offset the strong growth we experienced in the Fabric Care, Bleaching Earth, Personal Care, and Pet Care segments. In the third quarter, a few things occurred. The largest business in the Household and Personal Care segment is our Pet Care division, which continues to show a growth rate of about 3% to 4%. The average market for pet care, mainly in North America and Europe, grows at around 2% to 3%, while we achieve growth rates of 3% to 4% and sometimes up to 5%, indicating we are exceeding market growth, particularly with the premiumization trend in Europe. These growth trends are expected to continue into the third quarter. However, during the summer months, there is some seasonality in our Pet Care business, as cats tend to spend more time outside. The peak season usually occurs when the weather gets colder. Nevertheless, we anticipate strong growth rates in the Pet Care business as we move into the third quarter and likely see even more strength in the fourth quarter.

That's helpful. And then I have like two more questions, if I may. So when I look at your litigation expenses, like I think you spent like $9 million this year on the Novinda litigation. Maybe you spent like $11 million last year. So like maybe you spent like $20 million on it? I mean what did you recover from that? Or what do you hope to get from Novinda?

Novinda was a joint venture we inherited with the acquisition of AMCOL, which involved mercury sorbent products. That business filed for bankruptcy around 2015 or 2016, and we were engaged in the bankruptcy litigation to defend ourselves. For the past four years, we’ve been involved in arbitration related to that case. The amounts reflected this quarter are the final arbitration figures. There may be some minor legal expenses that will persist until everything is fully resolved, but the binding arbitration settlement is complete. I’m not expecting to gain anything further from this, as it has been concluded this quarter.

Okay. And lastly for Matt, I was wondering whether you had like a cash flow target for the year, either specific or in general terms that you want to discuss?

Yes. Thanks, Silke. I think if you look through the first half of this year, it's been a pretty comparable year to what we saw in 2019 from an overall cash flow and free cash flow perspective. And so as we look at the second half of the year, we are expecting a continued good operating performance to drive to operating cash flow and to ultimately free cash flow with good control over capital expense. What does that necessarily mean? As you look at it, there will be some changes in working capital as we move into the third and fourth quarters. Typically, we see those quarters being our strongest kind of cash flow generating quarters. That's changed a little bit this year based on the impacts from the economic impact from COVID. And so the third quarter actually will be a little bit weaker, but then we are expecting the fourth quarter to continue to be a pretty good cash flow quarter. So all in all, for the year, we're looking at something in the area of $100 million to $120 million in free cash flow. Embedded in that is CapEx between $55 million and $65 million. And we're going to continue to work hard on pulling on working capital levers to help us achieve that level.

Let me also add. I just got to make a quick correction on something from Dan. I think we were actually looking at the change from sequential quarter sales, Dan, and that you were looking at the June rate. The June rate on a year-over-year basis was down 25%.

Next we'll hear from Rosemarie Morbelli of G. Research.

Could you provide more details regarding the market opportunities you are targeting, the timing of your entry into these markets, and your revenue and profitability projections for the next two to three years?

Certainly. Let me frame this for you. When I mentioned opportunities, I was referring to a broad range across our business. Recently, we've identified short-term opportunities to acquire new customers and expand our relationships with existing ones throughout the segment. For example, John highlighted some advancements in Metalcasting in the U.S. and China, where we've attracted new clients and increased our volumes with current ones in China. This has mostly revolved around the premiumization of our blended products. Additionally, we have made significant progress with our Bleaching Earth products in Europe and our new sealant products, as well as our new rheology modification Specialty PCC products for automotive and construction sealants, where we're seeing promising new business. We're leveraging our vertically integrated cost structure, demonstrating value during these times, which has become increasingly important. Our ability to show customers cost savings has become a significant advantage, making our premium and cost-saving products appealing, and we've been able to capitalize on these trends in the second quarter. We anticipate this will contribute to ongoing revenue growth, translating to permanent increases that will support our future growth in the upcoming quarters. Long-term, we are focused on expanding our less cyclical, consumer-oriented operations. We have directed our capital toward the acquisition of Sivomatic. Currently, the Pet Care business is about a $200-million market globally, and we believe there's potential to double that in the next four years through both organic and inorganic growth. We have a unique advantage with our bentonite resources and mines to support this. We're also investing in other consumer-oriented ventures that are expected to grow. Our Environmental Products business, while not directly targeting consumers, is influenced by consumer behavior related to waste disposal and electricity generation, as well as wastewater treatment solutions. We are exploring and developing technologies to enhance this division, especially in high-margin water treatment services. We've discussed our FLUORO-SORB PFAS product, which is gaining momentum through several trials and initial sales. Overall, we see significant opportunities not only in extending our value proposition in current markets but also in reallocating our capital to grow what currently represents 25% of our revenue into a larger share of less cyclical business. In the last quarter, the company benefited from this balanced approach, which aligned sales effectively during these times. I hope this clarifies things for you.

Yes, that’s very helpful. Regarding the 25% contribution from the consumer side, what is your target for that as you grow and invest in those businesses? Could it potentially reach 40% of the total in four years, for instance?

I won't provide an exact percentage, but I believe it's definitely a possibility. Over the coming years, as we strengthen our position in the Pet Care business, we think we could potentially double its size to $200 million, along with additional growth in other areas. A $300 million increase in our Pet Care business could bring it to around 35% to 40% of the company. While I can't specify a timeline right now, we are focusing on product lines where we believe we have a unique ability to serve and grow. We possess the technologies and value proposition to enhance profitability in these areas, and we think this will positively impact our margins. We have seen good returns on our capital investments in these sectors, which we demonstrated with the acquisition of Sivomatic, marking the first step toward other opportunities we identify.

That is very helpful. And since we are talking about Sivomatic acquisition, what are you seeing on the M&A front in this environment? New properties becoming available out of the multiples that are coming down. Are you getting closer? I mean you have obviously increased your liquidity. So I was wondering if there is something out there that you are maybe getting closer to being able to announce?

We've consistently mentioned during our calls that we have a solid portfolio of opportunities we've been exploring for some time. We believe these opportunities fit well within our strategy and will add value. While there’s still some uncertainty in the markets, we remain optimistic about our current position and future outlook. We want to manage the risks present in the market and ensure that our company is well-positioned. Our liquidity is strong, which positions us to navigate challenges effectively and seize opportunities as they arise. Although I've not observed many transactions lately, I acknowledge that some assets may become available at more reasonable multiples than in recent years. Our priority is to carefully manage risks while leveraging our solid balance sheet to pursue both organic and inorganic opportunities swiftly.

Okay. And looking at that doubling in size, is that something that you can achieve just organically? Do you have enough capacity, both in the U.S. and in Turkey with our Sivomatic friends? Or do you need to actually add some minerals in order to be able to achieve that kind of growth?

We have the necessary resources in the near term to support our business activities. We are continuously assessing our reserve positions globally to ensure we maintain strong reserves for the next 30, 40, or even 50 years. Alongside supporting our reserve positions, we need to focus on equipment manufacturing. Given our current growth rates in the Pet Care sector, we will consider expansions to accommodate the increasing packaged and processing demands over the coming years. We believe we have a solid reserve position, but we will be looking to enhance it to ensure we have a long-term view that supports our growth.

Lastly, do you anticipate a significant increase in bad debt? Are you worried about some of your customers possibly being unable to pay?

I'm sorry, did you say bad debt?

Yes, to clarify, the question was whether we are noticing changes in our customers' ability to pay and if that is leading to an increase in our bad debt provisions, and the answer is no. We are actually seeing strong payment performance from our customers. Our teams are in regular communication with them regarding collectibility and their payment schedules, and overall, they are experiencing healthy cash flows. Therefore, we have not observed any changes in our bad debt provisions related to customer payments at this time.

And our final question for today will come from David Silver of CL King.

I wanted to ask a couple of questions about your PCC business. The revenue number this quarter is quite low, much lower than in previous years during the same quarter. When was the last time that business operated at such a level in the second quarter? Also, was there anything particularly different or unusual this time? Was this just a severe downturn in paper production, or do you think customers are being especially cautious? Or is there a shift in papermaking technology leading to mill shutdowns rather than just reducing operating rates? I’m looking for some insight on the severity of the decline in Paper PCC demand over the last quarter or so.

Sure. Let me break this down by region again. In Asia, we did not experience a significant drop-off. We continue to operate with a slight decline, but after a drop-off in the first quarter, our PCC facilities in China are running at near-normal demand levels, and we saw a 4% increase in the second quarter, which aligns with our trend. In India, closures occurred, but those operations are restarting, and we anticipate market demand will pick up in the third quarter. However, your focus seems to be on North America and Europe, with North America facing a more severe situation. I cannot provide an exact answer; I would need to review our PCC business levels in North America—this may be unprecedented. It may be reminiscent of the early 1990s when we began ramping up the satellite model across North America. However, I don’t think the market has previously experienced a 30% decline in paper demand within a single month. The second quarter was certainly unique and was driven largely by the full shutdown of office, school, and university consumption activities, which are beginning to resume. The future of universities, office returns, and elementary and high schools remains uncertain. We witnessed an unprecedented drop in paper production in North America, but we expect some recovery. The timeline for that return is difficult to predict. There's a possibility it may not return to last year's levels, but at least as of July, we noticed an increase in activity in North America, where 9 of our 16 facilities were down, and we expect 7 of those to ramp back up. D.J., would you like to provide some additional insights on North America, given your extensive experience in the paper industry?

Yes, I would agree with Doug. I can't specify the exact time when our volumes were this low, especially not as a percentage of installed capacity. I've never witnessed such a significant drop in uncoated wood-free demand. However, all of our customers are confident that things will improve sequentially, and everyone is considering the long-term outlook for demand in uncoated wood-free. Additionally, Doug mentioned that we secured two new contracts for PCC. Even in this challenging market environment, I still have 10 to 12 active business development initiatives ongoing that have advanced in the past couple of months. While I can't guarantee how many of these will succeed, most growth hinges on displacing existing products, primarily in Asia where we've observed minimal decline, and the long-term outlook for papermaking in Asia remains stable. Although we are currently experiencing uncertainty, business development, especially in the printing and writing papers sector in Asia, is robust, which gives me optimism. In North America, out of those 10 to 12 active opportunities, 3 or 4 are focused on packaging grades. We've been impacted by the reduction in writing paper but are striving to expand in packaging, which appears to be a sustainable market. We're in the early stages of transitioning from producing international papers in writing grades to packaging grades, which will commence in the third quarter. Doug mentioned additional expansions coming online, including one in Europe targeting packaging applications. We also have several new development projects in progress. Your observation on the significant shift in paper consumption is accurate; it's unprecedented, but I believe we can still grow despite these challenges.

Yes, I wanted to add to that. David, the last point is that the uncoated freesheet market in North America, which used to be the largest part of our business, has changed. Now, there are various alternatives and developments in the paper industry. As I mentioned, we are branching into our new yield products and environmental offerings like Envirofil, which has just launched in Europe, and we see opportunities for further expansion there. D.J. highlighted packaging technologies, among others. We still have many opportunities in base pigment volume. Ultimately, even if the market doesn't fully recover, we expect growth in volume for the company over the next 18 months. This includes growth from our new yield products, Envirofil, our innovative filler technologies, and environmental solutions for customers, shifting our focus beyond just coated freesheet.

Well, you addressed my first follow-up, and you also touched on my second follow-up, but I'll rephrase it slightly. A while ago, I believe Doug or possibly D.J. mentioned that the pandemic was causing some difficulties in having your technical staff on site for demonstrations and test runs. I'm curious if those disruptions or bottlenecks have continued or if you could describe the development and demonstration capabilities in this limited travel, pandemic-related situation. This also pertains to PCC, by the way.

Yes. Got it. So look, we've had some really good business development success, albeit some in-person, some virtually. D.J., how about some color. I mean you're right in the thick of these contract negotiations and new product development.

Yes. I would say, David, for our standard PCC offering, we've seen no impact because we've got market data that is able to support our value equation and what we're offering. For these new products, it has impeded our ability to trial. But as I speak right now, we've got trials planned for week after next and a couple of weeks after that, even assuming this current pandemic environment. So yes, it has affected us. Yes, it has slowed us down for the new technologies but the teams have been able to work their way through some of these things and develop ways of safely sharing with the customer what these technologies can do. It's taken us a while to come up with some alternate means. And a lot of discussions are happening on video and a lot of translations going on as English speakers speak with folks in other tongues. But we're able to do it, albeit slower.

And now at this time, I'll turn the call over to Mr. Dietrich for any closing remarks.

Thanks, April. I appreciate it. Look, again, I appreciate everyone taking the time to join the call today. I do hope everyone remains safe and healthy and your families as well. We'll talk to you again in 3 months. Thanks again for attending.

That does conclude today's conference. Thank you all for your participation. You may now disconnect.