Minerals Technologies Inc Q4 FY2020 Earnings Call

Good day, everyone, and welcome to the Fourth Quarter 2020 Minerals Technologies Earnings Call. Today’s call is being recorded. At this time, I would like to turn the call over to Mr. Erik Aldag, Head of Investor Relations for Minerals Technologies. Please go ahead, Mr. Aldag.

Thank you, Sierra. Good morning, everyone, and welcome to our fourth quarter 2020 earnings conference call. Today’s call will be led by Chief Executive Officer, Doug Dietrich; and Chief Financial Officer, Matt Garth. Following Doug and Matt’s 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 will 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 will now turn the call over to Doug. Doug?

Thanks, Erik, and good morning, everyone. I appreciate you taking the time to join our call and I hope you are all staying safe and healthy. I will start by providing my perspective on what we achieved in 2020 from a strategic and operational standpoint and the various dynamics we successfully managed through. I will then discuss some of the highlights of our performance in the fourth quarter. Matt will provide a more detailed look at our financial results and I will conclude the prepared remarks with insight into how we see 2021 shaping up, touching on our key priorities, growth initiatives, and market trends. As you saw from the release last night, we finished 2020 with a strong fourth quarter. Before I go through the quarter, however, I want to take some time to provide my perspective on the full-year, which will put this quarter into context. To characterize the year, managing through this pandemic has challenged us on every front, and I am very proud of all of our employees for their unwavering commitment, agility, and execution focus, all key qualities that define our culture and our company. Our performance reflected the strength of our diverse mix of businesses and high-value product portfolio, which enabled us to expand our positions with existing customers and capture opportunities with new ones. Proactive operational measures to reduce costs and increase pricing led to an improved margin profile. In addition, we successfully implemented virtual tools, evolved our processes to help improve efficiency, and enhance connectivity with our employees and customers. Protecting the health and safety of our employees is one of our core values. Since the onset of the pandemic, we put in place a robust series of protocols to protect our employees while ensuring the safe and efficient operations of our facilities. While implementing these new work practices, our employees stayed focused on improving our safety performance, which resulted in 2020 having the lowest recordable injury rate in MTI’s history. This is a testament to the strength of our people, capabilities, and processes. They were able to swiftly adapt, retool, and embrace change and drive our safety culture forward. Now let me take you through how the year unfolded from an operational and commercial perspective. Agility is the word that comes to mind, as we managed through significant demand changes in our end markets, uncertain customer order patterns, and production curtailments. The global pandemic, which continues to affect demand in our industrial markets, had the most notable impact in the second and third quarters. During this time, we focused on making several operational adjustments at our plants, including maintenance activities and manufacturing process improvements. And when markets recovered in the last four months of the year, we were well-positioned to take advantage of the higher volumes. Our consumer-oriented businesses, both Performance Materials and Specialty Minerals, remained consistently strong throughout 2020. Much of this performance was driven by our global Pet Care business, which grew by 7%, but also through solid increases in Personal Care, Edible Oil Purification, and Other Food and Pharmaceutical applications. After experiencing large volume drops in our minerals businesses in the second quarter, many of our end markets, including automotive, residential construction, and steel steadily improved throughout the back half of the year. In contrast, some of our other end markets such as paper and large environmental and building projects are still recovering. While the demand environment was volatile this past year, our team’s disciplined execution and aggressive cost control put our company in a good position to leverage improving sales into income. These efforts resulted in higher overall operating and EBITDA margins compared to 2019. Taking measures to enhance our operational efficiency, including variable cost adjustments and structural overhead savings, as well as continued price increases, productivity improvements, and higher sales of new products. Generating sustained cash flow and creating flexibility around our capital structure have been top priorities. During 2020, we delivered strong free cash flow of $175 million, slightly higher than last year. We used the cash generated to reduce net debt by $122 million and returned $48 million to our shareholders through share repurchases and dividends. I speak often about our culture of continuous improvement, but I wanted to describe how this deeply ingrained operating model is a key reason why we quickly adapted to a dynamic environment to deliver these results. Our people and their engagement in the company drive this mindset and this unique recipe for MTI to be agile. We conducted 8,600 problem-solving Kaizen events and received nearly 65,000 suggestions from our employees throughout 2020, keeping at a similar pace to last year. To put this in context, on average, nearly 24 Kaizen events are held each day, and we are receiving 178 suggestions from our employees across MTI on how to improve our daily processes. This is a significant level of involvement in our continuous improvement culture, especially as many of these activities occurred virtually this past year. There are countless examples of how we have transformed our processes and capabilities to drive efficiencies, improve collaboration, and further demonstrate our value proposition to our customers in a virtual existence. We successfully implemented tools that allow us to remotely commission a new PCC satellite or that can support trialing and commercializing new products and applications. We can now perform specialized maintenance assessments remotely without our engineers needing to be physically present at the plant. And we have developed a webinar series that allows our technical teams to virtually engage with a broader group of customers and more quickly provide them with our value-added solutions. These tools are becoming a significant competitive advantage to our company and will remain a permanent part of how we work in the future. We also advanced our strategic growth initiatives during the year. We remain the leader in greensand bond systems for the global foundry market. There are significant opportunities to leverage our deep technical expertise and value proposition with customers in large foundry markets, such as China and India. This year, we both expanded our customer base and further extended our penetration into China, as sales of our pre-blended products increased by 17%. For the world’s largest PCC producer, with the most advanced portfolio of technologies, including high filler and summer packaging, and paper waste recycling. Our objective is to increase PCC volumes globally through base filler contracts in under-penetrated regions by capitalizing on growing opportunities in adjacent markets, where we can deploy these latest solutions. In 2020, we commissioned three new satellites, which total over 200,000 tons of new capacity and our growth continued on a strong track in China, where PCC sales increased by 13% over last year. We have invested in strengthening our capabilities, resources, and new technologies for our consumer-oriented products, which is delivering results, as these more resilient products comprise 25% of our total portfolio. While our Pet Care business has contributed much of this strength, as we grow our global portfolio of premium products and enter new channels such as e-commerce, we are also growing other Specialty applications, including Edible Oil Purification, Personal Care, and Fabric Care. Our new product development efforts progressed well in 2020, as we continue to accelerate the pace of commercialization and drive new revenue prospects. We commercialized 44 value-added products and incorporated sustainability indicators as part of the new product development process to ensure we are meeting both our own environmental goals and those of our customers. The last pillar of our growth strategy is M&A, where we maintain an active pipeline of potential mine-to-market opportunities. We made a small acquisition of a hauling and mining company, which further strengthened our vertically integrated position at our bentonite mines in Wyoming, and we pursued an acquisition of Elementis, which we feel is a strong strategic fit with our company. Through this process, we demonstrated our commitment to remaining disciplined in our approach to deploying capital for inorganic opportunities. The results we achieved in 2020 under challenging conditions underscore the power of our operating culture, the resilience of our global market-leading positions, and the strength of our financial foundation. We finished with momentum across many of our businesses. We are exiting 2020 in a stronger position than when we entered it. With that backdrop, let me go through the takeaways for the fourth quarter. As discussed on our last call, we expected that demand trends in many of our major end markets would continue to strengthen through the final months of the year, and that’s largely how things played out with some of the markets we serve, especially transportation and industrial, improving more than we expected. These dynamics help drive sales of $432 million and 11% sequential improvement. Financially, we generated $61 million of operating income and earnings per share of $1.08, both sequential and year-over-year improvements. Despite the lower year-over-year sales, the overall operating margin improved 90 basis points sequentially and 220 basis points compared to last year. In addition, our EBITDA margin was up 170 basis points. Cash flows remained robust through the fourth quarter, capping off a strong cash flow year. Operating cash flow for the quarter was $92 million, up 16% compared to last year. Free cash flow was $72 million, up 8%. We made progress to lower our debt levels by paying down $80 million. We also returned $17 million to shareholders through dividends and repurchases. We will take a moment to briefly highlight the progress we made with our growth initiatives in the quarter. Our Metalcasting business performed well; we saw strong demand from North American foundries, and our growth momentum in China accelerated, with sales increasing by 29% over last year. Demand for our portfolio of consumer products remains strong and sales in our Household, Personal Care & Specialty Products line were up 6% over last year. Our Ground Calcium Carbonate and Talc businesses had a solid quarter, supported by significantly improved demand for our applications that go into the Automotive and Residential Construction markets. On the PCC front, we ramped up production at our new facility in India; our 150,000 ton satellite in China came online at the end of the quarter, and we resumed production at our satellite in Wickliffe, Kentucky. Specialty PCC sales were up 23% compared to last year, as our new capacity expansions supported the increased demand for our latest sealant products. In Refractories, we signed three additional five-year contracts, building on the two contracts from last quarter, supplying our refractory and metallurgical wire products in the U.S. Contracts combined represent $14 million in incremental revenue on an annualized basis. I want to share some specific highlights as they help round out a solid operational, financial, and strategic quarter for MTI and lay the foundation for growth in 2021. With that, I will turn over to Matt to walk you through our financial results in more detail. Matt?

Thanks, Doug. I will review our financial results, the performance of our four segments, as well as our outlook for the first quarter. I will then turn it back over to Doug for additional perspective on the year ahead. And now let’s review the fourth quarter results. Sales in the fourth quarter were 11% higher sequentially and 2% below the prior year. Gross margin, operating margin, and EBITDA margin improved versus the prior year, as our actions on pricing, productivity, and cost control have resulted in higher levels of profitability. Our effective tax rate for the quarter was 18.6% versus 17.6% in the prior year and 19.8% in the third quarter, and we expect our effective tax rate to be approximately 20% going forward. Earnings per share excluding special items was $1.08 and reported earnings was $0.91 per share. Special charges included acquisition-related expenses, costs associated with the cybersecurity incident, and the non-cash pension settlement charge. Now moving to the bridges on the right side of the slide, you can see lower volume had a $12 million impact on sales versus the prior year, which was partially offset by favorable pricing. Operating income was $8 million higher than the prior year, as the impacts from lower volume were entirely offset by pricing and cost actions, as well as the favorable mix of earnings. Operating margin improved by 220 basis points versus the prior year. Now let’s turn to the full year highlights. Full year sales were 11% lower than 2019. We experienced the most profound impacts of the COVID-19 pandemic on our end markets in the second and third quarters of 2020. Demand improved gradually across several end markets in the third quarter and accelerated in the fourth quarter. Despite the challenging market environment, we improved our margins versus the prior year through the actions we took on pricing and cost over the last 18 months and the efficiencies we realized in 2020, including reducing SG&A by $30 million or 6% versus 2019. Earnings per share excluding special items was $3.99 and reported earnings was $3.29 per share. The sales bridge on the top right of this slide shows that we faced nearly $200 million of topline impact from lower volume in 2020, which translated to a $51 million operating income impact. We offset more than half of this impact through favorable pricing and cost actions, and operating margin improved by 30 basis points versus the prior year. The company is positioned very well for profitable growth and further margin improvement as volumes return with continued end market recovery. And now let’s review the segments in more detail, starting with Performance Materials. Fourth quarter sales for Performance Materials were slightly above the prior year and 6% sequentially. Metalcasting sales grew 6% versus the prior year and 17% sequentially, as foundry production improved in North America and demand remains strong in China. Household, Personal Care & Specialty Products sales were also strong, up 6% versus the prior year, continuing strong demand for consumer-oriented products. Pet Care, Personal Care, and Edible Oil Purification all realized double-digit year-over-year growth in the quarter. Environmental Products and Building Materials experienced typical seasonal volume reductions in the fourth quarter, as well as continued delays for new commercial construction projects, which resulted in lower sales sequentially and versus the prior year. Operating income for the segment was $30.3 million, up 31% versus the prior year. Operating margin was 15% of sales versus 14.8% in the third quarter and 11.5% in the prior year. Continued pricing actions, variable cost control, and expense reductions resulted in significant margin expansion for the segment. Now we expect continued strength through most product lines in this segment through the first quarter. We expect some leveling off from the acceleration and demand that we saw in the fourth quarter, and we also expect the project-oriented businesses to remain at lower levels in the first quarter. So, overall, we expect first quarter sales to be similar to the fourth quarter. And now let’s move to Specialty Minerals. Specialty Minerals sales were $138.9 million in the fourth quarter, 2% below the prior year and 11% higher sequentially. Paper PCC sales increased 12% sequentially, as paper mill operating rates gradually improved, and we ramped up a new satellite in India. We also restarted our satellite in Wickliffe, Kentucky, and we brought online our 150,000 ton satellite in China, the company’s largest PCC satellite to date. Specialty PCC sales were strong, up 23% versus the prior year and 13% sequentially, a robust demand from consumer-oriented markets, residential construction, and automotive end markets. Processed Minerals sales increased 10% versus the prior year and 8% sequentially on strong residential construction and automotive demand. Operating income excluding special items was $21.9 million, up 13% versus the prior year despite the lower sales. Operating margin was 15.8% of sales, compared to 14.3% in the third quarter and 13.7% in the prior year. And looking ahead, we expect continued strength in Specialty PCC and Processed Minerals and sequential growth in Paper PCC as our new satellites ramp up. Overall for the segment, we expect first quarter sales to be modestly higher sequentially. Now, let’s review the Refractory segment. Refractory segment sales were $73.9 million in the fourth quarter, up 1% versus the prior year and 25% higher sequentially, as steel mill utilization rates continued to gradually improve in North America and Europe. Operating income increased 7% versus the prior and 52% sequentially to $11.1 million and represented 15% of sales, compared with 12.3% in the third quarter and 14.2% in the prior year. Steel utilization rates are currently hovering around 75% in North America and 70% in Europe, up from a low point of around 50% in the second quarter of 2020. Further improvement in steel mill utilization will depend upon the strength of demand from construction, automotive, and infrastructure end markets going forward. Now, at this point, we expect the first quarter to be similar to the fourth quarter from a market perspective, although note that our laser equipment sales are typically weighted more heavily toward the second half of the year. Now, let’s move to Energy Services. The Energy Services business continued to experience customer project delays in the fourth quarter. Sales were $16.8 million, and operating income was $600,000. Activity increased sequentially in the deepwater basins where we operate; however, earnings were below prior year levels. Now looking to the first quarter, we expect similar levels of activity to the fourth quarter. Now let’s move to our cash flow and liquidity highlights. Fourth quarter cash operations were $92 million versus $80 million in the prior year, and free cash flow was $72 million versus $67 million in the prior year. We deployed $20 million of capital during the quarter to grow the business, to develop our mines, and improve our operations. We paid $80 million of term loan debt in the fourth quarter, leaving our net debt at $562 million and our net leverage ratio at 1.8 times EBITDA. We also repurchased $15 million of shares in the fourth quarter, bringing the 2020 total to $41 million. Despite the end market challenges we experienced in 2020, we generated higher cash flows than in the prior year, increased liquidity by $221.9 million, and reduced net debt by $122 million, all of which has further strengthened the company’s balance sheet. This balance sheet strength provides us with significant flexibility for how we deploy capital for the most attractive opportunities. Now let me summarize our outlook for the first quarter. We expect similar market conditions in the first quarter to what we experienced in the fourth quarter. I’d like to note that we experienced relatively favorable operating conditions in the fourth quarter. We typically experienced higher mining and energy costs while operating in the colder months, which could lead to temporarily higher costs in the first quarter. In Performance Materials, we expect continued strength in consumer-oriented markets, with some leveling off from the acceleration we saw in the fourth quarter. We also expect continued strength in Metalcasting. In Specialty Minerals, our Paper PCC business is positioned for growth, with 150,000 tons of capacity ramping up in China. We expect continued solid demand for Specialty PCC and Processed Minerals, driven by residential construction and consumer-oriented products. In our Services businesses, we expect stable Refractories demand to be partially offset by fewer laser equipment sales in the first quarter, and we expect demand for our deepwater filtration and well testing services to remain at a similar level, with activity increasing in the second quarter. Overall, we expect first quarter sales at around the same levels as the fourth quarter. With that, let me turn it back over to Doug to provide some perspective on the year ahead.

Thanks, Matt. I will now provide some perspective on our markets and touch on some high-level operational and strategic themes for the year. As we look ahead, this will be another dynamic year and with the momentum across many of our businesses, 2021 is shaping up to be a solid year for MTI. We expect our consumer-oriented businesses to maintain their strength from last year and continue their solid growth trajectory. The Metalcasting, Specialty PCC, Ground Calcium Carbonate, and Talc businesses primarily serving transportation and residential construction sectors are recovering nicely and in some cases, exceeding pre-COVID demand levels. The Refractories business is benefiting from gradually improving steel utilization rates, and current indications point to continued strength in steel end markets. In our Paper business, base demand in North America and Europe should improve during the year, and Asia will remain on its strong track. We will also see a full year of volume growth from the new satellites that started up in late 2020 and we have two additional satellites totaling approximately 70,000 tons that will come online in the middle of this year. Finally, it will be a slower start to the year for our Energy Services, Building Materials, and Environmental Products businesses, and we anticipate project activity picking up in the second quarter. Across the portfolio, we have a number of attractive projects in hand that will accrue to volume growth in 2021. We will be focused on accelerating our geographic expansion in our core product lines. New product development remains a key priority for us. We have made significant progress to improve the speed of execution, increase the number of products we commercialize, and enhance the impact of our latest solutions. For the past five years, we have cut the time from development to market in half, and at the same time, increased our sales from new products by more than 50%. These metrics should continue to strengthen in 2021. Some notable technologies to highlight include water remediation solutions to address PFAS, ECC for packaging and tissue applications, enhanced formulations for Edible Oil Purification, and our 100% carbon-neutral healthcare product. Many of these new products are helping us penetrate more consumer-oriented applications and adjacencies with customers. Our solid financial footing allows us the resources to execute on the initiatives I just mentioned. In addition, our strong balance sheet with debt at targeted levels gives us the flexibility to also deploy capital to shareholders through dividends and share repurchases, as well as toward acquisitions. Continuous improvement is at the core of how we operate; we will develop new innovative ways to adapt and enhance our virtual tools to drive more value by improving our connections with customers, speeding up our problem-solving capabilities, and further enabling internal collaboration. Lastly, sustainability and ESG leadership has been a focus of ours for a long time. Over the past several years, we have taken meaningful steps to embed these activities deeper into our company. Two items to highlight: we are on track to meet or exceed our environmental reduction targets in six focus areas. More than half of our new product pipeline is now geared toward sustainable solutions. We will continue to advance and strengthen our broad range of ESG initiatives this year and look forward to publishing our 13th annual report in July. In closing, I want to thank our global team. Our company’s strengths have been showcased during these times of adversity. I am proud of how we have responded with agility and perseverance. Heading into 2021, our team is engaged, focused on operating safely and efficiently, and aligned behind our culture. With the positive momentum generated at the end of last year, we are well-positioned to execute on the attractive opportunities in front of us. With that, let’s open the call for questions.

All right. We will take the first question from Daniel Moore with CJS Securities.

Thank you, Doug. Matt. Good morning, and thanks for taking questions.

Hi, Dan.

I wanted to start with a little bit of a crystal ball on maybe some of the businesses that are still being impacted. And if we look specifically at Performance Materials, Environmental, and Building Materials, still at a pretty low base, $110 million, $115 million combined revenue or so in 2020. Look out two years to three years, not looking for the cadence of recovery, but where do you see those businesses getting back to in a sort of post-COVID world, and what kind of incremental should we be thinking about?

Yes. I am not going to go that far out, Dan. But I think they get back to where they were for sure. A couple of things to consider, there’s a mix of influences here, and I will pass it over to Jon Hastings to give them a little more color. There are still some acute impacts from COVID and sites being closed and limited activity going on at current waterproofing sites around the world, that’s primarily in Europe at the moment. At the same time, like in our Building Products. Same thing with Environmental Products; a big landfill remediation and some of our higher-end Resistex-type industrial landfill complex, the same thing is happening. Then in Energy Services, we still have a solid pipeline this year of projects. We have had a couple of them demobilized in December due to COVID outbreaks, being rescheduled, but we’d look probably toward the beginning of the second quarter. So things are still shifting around with some of those COVID-related issues. The challenge is that we are not in the building envelope above ground; we are in the below ground. So when you are digging new holes, waterproofing new holes, we still have a solid pipeline of those projects, but they haven’t broken ground yet. We expect them to. We are also in our slow period in the winter for these businesses and building construction starts to ramp up in the second. We see that rate that we are at in 2019 coming back this year, but it’s going to be that rate more in the second and third quarters. And I guess I gave a little bit more detail. Jon, do you have anything to add to that, at least on Environmental and Building?

Hi, Dan. This is Jon. Thanks, Doug. Yes, a couple of things just to highlight. As Doug said, COVID certainly threw a curveball at us, inducing a lot of delays, delays with manpower, delays with funding and new projects. You think about Environmental with all the landfills; it’s dependent on municipal budgets. We are starting to see that change. We are getting an increasing number of submittals and project proposals. So we are looking at Q2 and Q3 as ramping back up, and this is one of the last sectors within Performance Materials to recover from the COVID-induced downturn. Keep in mind, like Doug said, with Building, we are in more than just the big building projects that you see with office buildings and office complexes. We are also in infrastructure. So we are involved in tunneling projects, metro stations, and other types of business. It’s all that together that we are watching, and we see the uptick. So, yes, we’ve had some challenges over the past couple of quarters, but we are not straying from our long-term strategy. Environmental, we have got products that really do a good job of preventing groundwater contamination from hazardous waste. And we also have great waterproofing technologies. We are recognized as the world’s leader. We are efficient in manufacturing them and distributing them to the projects when they do go. We have got a healthy pipeline, and so we think this will continue to rebound as we go into Q2 and Q3. Hope that helps.

No doubt. No doubt. Yes. Just kind of thinking about it from a longer-term perspective. Shifting gears, the Metalcasting, you returned to nice growth and clearly seeing - you have got some new comps coming up. From sort of Q4 revenue as a base, how incremental revenue is still ahead in terms of recovery? And then how do you see, beyond that, longer-term growth expectations once we fully recovered? And just kind of remind us of the ramp and the opportunity that’s ahead of you in China, in particular?

Yes. I think there are a couple of things. Let’s start with North America. We are seeing some demand shift, and we have been closely monitoring our order books in North America, where we observe strong demand. Our customers indicate that their pipelines are thin, and they have a long list of back orders. Therefore, we expect continued strong demand throughout the first half of this year at a minimum. North America is looking very strong across all automotive, truck, and industrial testing applications. In China, we experienced a 30% growth in the fourth quarter, and for the entire year, our blended products increased by 17% compared to last year. This growth is coming from strong demand for auto build rates, heavy trucks, and industrial applications, as well as from new customers. We are starting to expand our addressable market to a broader base and transitioning our core base into the blended system. Our strategy from the last decade is ongoing and will continue to accelerate. I want to emphasize that in North America, the penetration rate of blended products is over 90%, while in China it is still around 25%. The Chinese market is four times larger than that of the United States, with many under-penetrated customers who do not currently use blended products. There is significant potential for growth. While the 30% growth may not be sustainable every quarter, we have averaged 10% to 12% growth per year for the past five years, and we expect that trend to continue, possibly at a faster pace.

Very helpful. Okay. Maybe one more and shifting back to the more near-term. What was overall revenue growth in January? It was relatively flat in line with your guide. And then just trying to - making sure I triangulated the commentary. For fiscal Q1, we are thinking revenue relatively flat sequentially with maybe slightly lower adjusted EBIT margins given some of those input costs. Is that the right way to think about it?

Yes, Dan, that’s what the guidance indicates. It looks quite similar to the overall sales from the fourth quarter. We also mentioned some of the cost factors, particularly the mining costs, on a quarter-over-quarter basis due to potential cold weather impacts.

Got it. Okay. That’s very helpful. Thanks, Matt. I will jump back with my follow-ups. Thank you.

We will now take the next question from Steve O’Hara with Sidoti.

Hi. Good morning. Thanks for taking the question.

Hi, Steve.

Hi. Maybe start with the margins. Maybe following up on the last question, I mean, pretty, I would say, very solid performance in the fourth quarter kind of given pandemic, et cetera. I mean, you noted cost increases in some areas. I mean, was there anything there that you don’t feel sustainable in terms of margin performance where you think you have got a benefit either maybe a competitor wasn’t operating or something like that, where, kind of beating the pandemic or these increases other than what you noted so far kind of building back towards where you want to be?

No, there's nothing specific to mention. I believe the performance is a result of the various factors we've been working on for some time. We've focused on maintaining cost control across the board, leading to a 4% productivity increase this year compared to last. This is in line with our typical performance; we've achieved 5% and even 6% in previous years. Given the reduced volume, this outcome is commendable. It's a regular year for productivity improvement, alongside some control over variable costs. We've implemented changes in our overheads that we anticipate will be lasting. Additionally, we've experienced a favorable volume environment with a good mix, which we expect to continue, supported by strong pricing. We've invested effort into ensuring our product pricing aligns with the value we provide, a commitment that extends beyond the fourth quarter. This has been a consistent focus for us over the last couple of years. Everything seems to be falling into place. In the second and third quarters, we dedicated time to make significant changes, with our team engaged in important work at our facilities to enhance processes. Many of the improvement initiatives took place over the summer to prepare us for an anticipated uptick in volume. We believe we're in a strong position for that recovery. I feel that we have reached a more sustainable level of performance compared to last year, which is why I stated we are finishing this year in a stronger position than we began. However, there are still some product lines that have yet to bounce back. As we observe growth in paper volumes and new projects in Building and Environmental as well as Energy Services, we anticipate additional volume on our current cost base. Therefore, we're confident that our mix will evolve throughout the year. We may encounter some short-term energy cost challenges in the first quarter but believe we've progressed to a different level and are committed to maintaining and possibly improving this performance.

Thank you for the insights. Regarding Building Products, which I understand are primarily used in non-residential construction, I’m curious about potential opportunities in the residential market. Is the cost of your products a barrier to entering that space, or is there already a well-defined market that uses a different mix of products than what you offer?

Jon, do you want to take that one?

Sure, Doug. Regarding the diversification of Building Products, we are involved in a variety of different projects, including large commercial construction activities and infrastructure, such as tunnels and metro stations. We also focus on waterproofing and have the capability to supply small projects. Most of the residential projects we encounter, whether single-family or multifamily, don't require extensive subterranean waterproofing. However, we are continuously exploring ways to apply our technologies in areas like green roofs or other applications within the building envelope. There are certainly opportunities for us in these areas. We have the necessary technologies and marketing in those segments. Although it may not represent a significant volume for us, we are committed to exploring and expanding our presence in those technologies as well. Hope that helps.

Yes. That’s very helpful. Thanks. I will jump back in the queue. Thanks with that.

All right. The next question is from Rosemarie Morbelli with G. Research.

Thank you. Good morning, everyone.

Hi, Rosemarie.

I was wondering if you could talk about the potential impact of or potential benefit from any infrastructure bill that may come up.

Yes, we operate in construction steel, and I believe we would benefit from that, Rosemarie. Infrastructure development is likely to drive demand for various building products, including steel. As Jon mentioned, it might also involve waterproofing projects and some of our environmental solutions. We discussed this several years ago when we anticipated an infrastructure bill, and I think we would see benefits across many areas of our company.

Can you put a dollar amount?

It depends on the infrastructure, but I can't provide a specific dollar amount at this moment, Rosemarie. There are various factors to consider. It will definitely benefit our Refractories business and steel. Our Ground Calcium Carbonate and Talc businesses, which are involved in many construction applications, along with our building products, waterproofing, and infrastructure waterproofing, would also see advantages. If there is a specific infrastructure program, it may differ in scope compared to broader initiatives like rail, which could support our Metalcasting business, as we supply foundry services to rail markets. The impact generally varies, but if we are discussing highways, tunnels, infrastructure in cities, and rail, it will likely have a broad positive effect across the company. I would estimate that at least 60% of the company could be positively impacted by this.

Thank you. That is very helpful, actually. Looking at the fourth quarter margins, they are significantly above last year, except for Energy. Is this something that could be achievable on an annualized basis in the long term?

Yes, we believe the changes we've implemented to enhance some of our lower-margin businesses over the past couple of years through new technologies, improved pricing, and product mix are effective. We are intentionally expanding our consumer-oriented businesses, which generally contribute positively to our margins. We have focused on addressing short-term imbalances, such as pricing, along with long-term initiatives involving technology and higher-margin sectors. We are actively growing these areas and see opportunities for our consumer-oriented products on a global scale. For instance, our Pet Care business experienced a 7% growth this past year, and we've significantly improved its margin profile over recent years while expanding it geographically. Additionally, our Pet Care business grew by 23% in China this past year. We are implementing various strategies to enhance our overall profile. This year, we have eliminated some structural costs, similar to our efforts last year. Given our product portfolio, pricing strategies, cost management, and structural adjustments, we believe this level is sustainable, and we can build upon it. While we face short-term cost challenges such as tightening transportation globally and seasonal energy impacts, we are confident in managing these issues to maintain this margin level.

So if you look at those consumable product lines, what would be the geographic split currently?

Our Pet Care business is primarily focused on North America and Europe, with significant growth over the past year in the U.K. We're also experiencing growth in Asia, particularly in China, which is one of our larger markets. Our Specialty business in Animal Health is mainly centered in Europe, but we see opportunities with our customer base in Asia as well. Similarly, in our Bleaching Earth segment, we recognize potential growth. Our Fabric Care business operates on a global scale; we have a strong presence in dry laundry detergents, including softeners and surfactant granules, which are predominantly outside the United States, especially in India, Southeast Asia, and China, where dry laundry detergent usage remains high. These regions are rapidly expanding markets for laundry detergent, and we're focusing our growth efforts there. In our Specialty Minerals Group, our Specialty PCC serves not only automotive sealants but also pharmaceuticals and food applications. We recently expanded our facilities in both the U.S. and the U.K., contributing to our growth in these consumer applications. We've seen particularly notable growth in Europe for some consumer products, including Specialty PCC. Overall, our growth is evident across various product lines and is occurring on a global scale.

Thanks, Doug. That is really very helpful. And just one last question if I may, have you given up on Elementis?

I can’t comment on that right now, Rosemarie. What I can tell you is that, as you saw through the releases, we felt that Elementis is a strong strategic fit. We made a very strong offer that we believed was beneficial for both their shareholders and ours, and we sought some engagement. Unfortunately, that didn’t happen. And that’s where we are now. So I will leave it at that.

All right. The next question is from Mike Harrison with Seaport Global Securities.

Hi. Good morning. I don't want to ask specifically about Elementis, but could you comment on the M&A pipeline, assuming Elementis is behind us? Is there any possibility of activity on the M&A front in 2021?

Yes. Hi, Mike. I can say that we have a well-suited portfolio for the company. We have the ability to take unique reserves from around the world and transform them into specialized functional additives. This approach is similar to what MTI did when it acquired AMCOL. We are focused on similar minerals that we currently operate with, as well as new minerals in the markets we serve. Overall, we believe it’s essential to understand the elements and minerals involved, ensuring they align with our technological capabilities. We are observing both small and larger companies, and we think some opportunities may become actionable in the future. We remain patient and meticulous in determining their value. This mindset reflects how we perceive Elementis. We have minor projects in our pipeline to support our reserves and growth globally. As we expand in regions like China and beyond, we aim to sustain that growth. This is part of our strategy to not only grow organically but also to bring in smaller complements to our core markets. We believe we can enhance our growth inorganically within the same core product line. Our approach includes a mix of smaller and larger opportunities that fit our mine-to-market framework, utilizing our technology to adapt minerals for specialty applications. This could involve our existing minerals or new ones, but they will integrate into the markets we serve. I hope that clarifies things.

Yes. That’s helpful. Thanks. And I wanted to ask, as we are thinking about the margin progression next year. I know you mentioned that about two-thirds of the cost reduction in 2020 would be permanent. That suggests that a third of it comes back at some point and presumably there’s some kind of incentive comp reset. But just how much of a headwind should we think about those factors being on an operating income basis in 2021 versus ‘20?

Sure. Remember, Mike, so what we said was we had about $13 million of reduction. Included in that $13 million reduction were some costs related to the cyber event. So really on a year-over-year basis you are looking more in like the $15 million range just from an overall expense perspective. So that two-thirds ends up being about $9 million to $10 million, which we would think is sustainable. Now, as you are looking at 2021, that is a combination of some T&E coming back, some positions that we held off on being filled. But that will all be dependent on the growth coming back, right? So, as Doug said, we are very disciplined, very prudent with how we spend, and we are looking at the growth as it’s coming back, and we will assign expense levels commensurately with those volumes. So two-thirds being permanent and that other piece will merit out as sales come back.

All right. And then the last question I had is on the kind of the raw material front. With your mine-to-market strategy, I feel like you have some insulation from a lot of raw material dynamics. But I am also sure that there are other areas where you are probably going to have to manage through some inflation in ‘21. What are the segments or product lines where you maybe have some concerns or you are most focused on raw material inflation? And maybe how much of a price lag headwind should we be thinking about for the first half of ‘21?

I will start by agreeing with you, Matt. We are largely vertically integrated in most of our Minerals businesses. Therefore, the inflation impacts us more on the Energy side, which includes costs related to diesel fuel, natural gas, and similar items. We have a strategy in place for purchasing energy, and as Matt noted, there are typical short-term increases during the winter months, which is why mining and drying costs for minerals tend to rise during that season. We source the precursor to our PCC globally and handle these costs formulaically. If we face higher costs, we pass those on through our pricing, but there's often a lag, with some contracts experiencing delays of one to six months. This mechanism was evident in 2018 and 2019. In our Refractories sector, we procure magnesium oxide, and its pricing fluctuates based on demand trends. We have made several structural adjustments over the past couple of years to strengthen our vertical integration for this product. Currently, we are about 25% integrated, with roughly 50% of our European operations being vertically integrated. We have also established strategic partnerships and secured longer-term supply agreements. Looking ahead to 2021, we feel confident due to the measures we implemented in 2020 concerning raw material costs. Our only concerns for this year relate to short-term energy fluctuations and transportation, which is tightening globally, particularly for truck and ship logistics. However, we typically operate in a localized manner, buying, selling, and manufacturing within countries, limiting our need for imports and exports. The rising truck freight costs are something we are monitoring closely, but we are generally equipped to manage these in our pricing structure and ensure that our cost bases remain stable.

All right. Thanks for the color there.

Yes.

All right. The next question is from David Silver with CL King.

Yes. Hi and good afternoon. I kind of feel like the movie back to school. I have one PCC-oriented question but it has about 17 parts here. But no, I was wondering if D.J. could maybe just, to start off, if we could just talk a little bit about the large scale project in China that came on? And in particular, I guess, I was hoping you might shed some light on maybe a typical ramp-up for that large scale project. And I guess, I would just say, where do you think it is now and over what period of time does it take 12 months to ramp up to the nameplate capacity or a different time period, the cadence there? And then secondly, also on PCC, I am looking at my new project list and I was just wondering if you could maybe highlight. I think I have two or possibly three projects, one in Europe and one or two in India that are scheduled to come either kind of right about now or later on, let’s say, the first half of 2021, so just to highlight on the cadence of additional new projects? And finally, I was just wondering in the fourth quarter, there was a nice recovery there sequentially, but if you could peg kind of a utilization rate on the PCC side, that would be helpful? Thank you.

Sure. Let me start with utilization rates. Currently, they are aligning with our expectations for the fourth quarter. In Europe, operating rates are around 70% and are gradually approaching 75%. North America has increased to the mid-80s and is likely to reach 90% by the second half of 2021. This improvement follows a lower base due to previous shutdowns. The markets where these operating rates affect our sales are on a solid growth path. In Asia, growth is primarily driven by our penetration rate rather than operating rates. Regarding the 200,000 tons referred to by Doug, our plant in India is currently at 45,000 tons and is expected to be around 80% to 90% utilized by the end of the first quarter, depending on customer demand. The PCC plant is nearing completion of its transition and should be mostly finished by the second quarter. The China satellite, which began operations in December, is currently at about 50% utilization. We expect it to increase to 60% or 70% by the end of the second quarter and to operate at full capacity by the beginning of the fourth quarter, depending on customer needs. You also mentioned two additional satellites launching in 2021, one in India, which was originally scheduled for Q2 but has been delayed due to the pandemic, and another in Europe, both of which will ramp up in the third quarter. The European satellite will enhance our penetration into packaging. By the end of the year, based on these grade mixes, we anticipate running close to design rates. I hope this provides helpful insight.

And David…

Thank you very much. That sounds very correct.

One perspective I want to share is to view everything within a broader timeframe. We are currently assessing the impact of 2020 and the various factors that shaped our situation, including the shutdowns we experienced. Comparing to our full-year 2019 volumes, we anticipate that 2021 will yield higher volumes than 2019. While we understand that ramping up operations, signing contracts, and building facilities requires time, when we look back at the changes in the market since 2019 alongside the challenges we faced last year, combined with what we are currently implementing and plan to roll out in the first half or by midyear, we expect a positive volume increase compared to 2019. Additionally, we continue to see substantial business development activity, and we have a solid pipeline of base filler contracts we are progressing. Our potential packaging opportunities have grown since the middle of last year, and we are exploring new technologies that could open doors to other markets beyond packaging, including fiber markets and possibly tissue. I wanted to share this from a broader, long-term perspective looking ahead over the next year or two.

Thank you for that. I know we're past the top of the hour, so I appreciate it. I would like to see if Doug could provide some strategic context regarding the broad price increase that was announced a few weeks ago. The increase is 3% across the board, with certain high-value product lines seeing a 10% increase. When I see such announcements, I wonder if this is a proactive move or if it's necessary to address cost increases or logistics challenges that were mentioned earlier. Additionally, I'm curious why Talc is receiving a 10% increase while many other larger or more popular product lines are experiencing lower proposed price increases. Could you provide some perspective on that?

Sure. Well, I don’t want to sound weird, but I don’t think it’s either. Probably it’s offensive or defensive. I think in kind of my mind, many cases pricing costs have nothing to do with each other and we price the products on the value that we feel that they bring in the marketplace. And we feel that many cases our products have tremendous value in the applications we are putting them into, and then on the other side of it, we work to make sure that we are the lowest cost, most competitive supplier we can be. And so we work every day at lowering and securing our input costs and productivities and variable cost controls to make sure no matter what, we are the lowest cost provider of the highest valued products. And so I think what that is, as I mentioned, we make sure we look at what our products do and how they create value, and that they are priced accordingly. Now, we have to take, obviously, the market and the market and other substitutions that they may have or other products choices they have into account, and when we do all of that, we feel that these are the appropriate changes to make. So I think it’s maybe either neither or some of both, David, I guess, is what I guess that answers your question, offensive and defensive.

Yes. The answer often varies. For my last question directed at Matt, I've noticed that many of the industrial companies I follow have reported a currency benefit this quarter due to a weaker U.S. dollar. I might have missed it, but I didn’t catch any mention of this in the presentation slide or the press release from last night. Was there a significant currency translation impact included in the results that you could clarify for us? Thank you very much.

Yes. Certainly. Certainly, David. Not much. It is on the bridge, and as you can see there, it is not significant. That being said, the businesses which have the biggest translation opportunities for us from an economic perspective are the PCC business and also on the Refractory side, and that’s where you are seeing at this quarter. But in the fourth quarter, it wasn’t significant.

Okay. That’s it for me. I really appreciate it. Thank you very much.

Thanks, David.

All right. And the next question is from Silke Kueck with JPMorgan.

Hi. How are you?

Hi, Silke.

I have just a few questions. International Paper said they may intend to spin off their printing paper business, and it’s probably like a business that consumes some PCC. Does it matter at all to MTX or it doesn’t?

Maybe I will start off.

Yes. I do, Doug. So, Silke, the way I am looking at it just to build on what Doug said. Contractually, everything is fine and so the base businesses will remain. But if I look at where International Paper, the part that is staying as International Paper is, they focus more on packaging and our ability to come to them with some higher value-added products as they keep working that strategy is enhanced as demonstrated by what we are doing with them and their new product that they are launching out of Selma. The flip side on this new company that I will be focused on coated freesheet. No question that that helps us position some of the newer products that we have both for high filler technologies and some of these environmental issues, where that group is likely more empowered to really take advantage of these, and we think we can help them pre-substantially improving their performance.

Pulp prices have significantly increased; metals were around $650 a ton in September, and now they are nearly $1,000 a ton. Does this help Minerals Technologies accelerate PCC usage, or is MTX unaffected by the rising pulp prices?

Doug, is it okay if I take that?

Yes. Go ahead, D.J.

Okay. So, Silke, it absolutely helps us on these business development programs. So for those customers in our existing satellites or contracts remain in place, and they are built to go through the ups and the peaks and valleys of any pulp pricing. But our business development pipeline is very robust. I can’t say that we have had increased calls, because the phone lines have been pretty busy, but especially our Asian customers or potential customers have, I would say, a heightened sense of interest and a heightened sense of pace in looking at a standard PCC in printing and writing grades, and I do think that that’s attributed to what they see as the long-term prospects for pulp pricing. So it does help our value equation tremendously, and it does further differentiate us from any other mineral alternatives. So pulp pricing in general helps us with these new projects.

And if I can ask like a last question just on the same subject, how long does it take for a new customer to phase in the product? If my memory is in the old days, it used to take several months, you have to take online, offline and try the product and try it at various stages. And does it take a year to win a new customer, or can you do it in a couple of months, or like, how long does the process take?

So two different ways of looking at our technologies. For the base PCC, from the time it takes when we signed the deal, it’s reasonable to think that nine months to a year before we get the plants up and running, and then a few months to transition into our product. For some of our high filler technologies, where we can promote something to an existing customer, getting through those great structures probably takes the six months plus, but that’s a sort of taste for those two items.

Okay. And my last question is for Matt. In terms of, I was wondering if you can share your thoughts about CapEx for 2021 and any operating cash flow or free cash flow targets you may want to share? Thank you.

Yes. No. Sure. Thanks, Silke. And as you saw in 2020, we had strong repeat of what we did in 2019 with free cash flow in that $175 million area, with CapEx in the mid-$60 million area. So, as you look at 2021, we are expecting CapEx to rise to around $80 million. We will be investing in additional growth areas for the company. Sustaining CapEx will largely remain similar to what you saw in 2020. So that additional CapEx that we are spending is coming from return-seeking opportunities. From an overall free cash flow perspective, look, what we have told you over the past several years is that we expect the company to be able to produce above $150 million of free cash flow, and as we look at 2021, that’s obviously what the team will be working to do, and we will continue to update you on that as we move through the year.

Okay. Thanks very much.

All right. At this time, I’d like to turn the conference call back to Mr. Dietrich for any closing remarks.

Well, thanks everybody. I appreciate you joining the call today and for your patience as we made it through all of the questions. I hope everyone stays safe and healthy, and we will speak to you again in a few months. Thanks.