Minerals Technologies Inc Q1 FY2021 Earnings Call

Good day, everyone and welcome to the First Quarter 2021 Minerals Technologies Earnings Call. Today's call is being recorded. And at this time, I would like to turn the call over to Erik Aldag, Head of Investor Relations for Minerals Technologies. Please go ahead.

Thanks, Lisa. Good morning, everyone and welcome to our first quarter 2021 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'll open it up to questions. I'd like to remind you that beginning on Page 15 of our 2020 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. Now I'll turn the call over to Doug. Doug?

Thanks for the introduction, Erik and good morning, everyone. We appreciate you joining today's call to discuss our first quarter 2021 results and I hope you're all staying safe and healthy. I'll take you through the sales and operating highlights of our strong start to the year and touch on current market trends. I'll then turn it over to Matt to review our financial results in more detail and discuss our expectations for the second quarter. I'll finish up the call today by outlining the progress we're making with a broad range of growth initiatives. Last year, our teams throughout the world worked hard to efficiently operate our facilities, protect our employees, serve our customers and simultaneously position us to capitalize on the recovery. As a result of these actions and our continued focus on responding to this dynamic environment, we are well positioned to leverage the momentum from the end of the year to deliver a strong first quarter. Before going through the quarter highlights, I wanted to share that we'll be discussing our business results today in three operating segments rather than four. As detailed in our earnings release last night, we have realigned our Energy Services segment and combined it with the Environmental Products product line in Performance Materials. I'll take you through this further when I speak about our growth highlights. Our first quarter performance was highlighted by sales and operating growth in every segment. Specifically, we drove solid geographic growth in our core product lines, increased volumes through capacity expansions and new PCC satellite start-ups and improved sales from recently commercialized value-added products. In addition, we continued with our proactive operational measures including pricing and productivity improvements and overhead cost control, all of which drove income and cash flow higher compared to last year. Demand in many of our major end markets continued to trend upward. Several of our markets recovered to pre-COVID levels. These dynamics helped drive sales of $453 million, an increase of 5% sequentially and up 8% compared to last year. Generated $59 million of operating income and earnings per share of $1.17, up 4% and a record first quarter EPS for our company. In addition, cash from operations and free cash flow were up 68% and 142% respectively over last year. As we discussed on our earnings call in February, we expected that demand conditions in our end markets would continue to strengthen through the first quarter and that's how conditions played out. Consumer-oriented markets such as pet care, fabric care and food and pharmaceutical remained robust through the first quarter continuing our growth trajectory. Automotive and residential construction markets remained strong. Steel markets further improved from the fourth quarter with utilization rates reaching close to 80% in the US and our paper end markets continued to rebound from a slow 2020. Our project-oriented businesses including environmental products and building materials are recovering and indications point to continued improvement through the second quarter. These mostly favorable end market conditions drove sales growth across the majority of our product lines. Performance Materials sales in our Household, Personal Care and Specialty business increased 14%, driven by our global pet care platform, but also double-digit increases in other specialty applications that we've been investing in to enhance our technology and manufacturing capabilities including fabric care, personal care and edible oil purification. Metal testing business performed well as sales grew 32% driven by strong demand in both North America and Asia from foundries serving automotive, heavy truck and agriculture markets. In both regions, the improved foundry conditions that we saw in the fourth quarter maintained that trajectory through the first. Specifically, Metalcasting sales in Asia were up 52% over 2020 with much of this growth coming in China. Penetration of our blended products has also accelerated in China and sales increased 62% compared to last year. In addition, we continue to extend our value proposition with customers beyond China. Last quarter in India, which is the second largest casting market globally, sales of our blended products were up 21% over 2020. Within our Specialty Minerals segment, our specialty PCC business had another strong quarter with sales up 17% over last year. Our new capacity expansions are supporting increased customer demand for our food and pharmaceutical and high-performance sealant products. In addition, we benefited from exceptionally strong demand higher than usual in the first quarter from our ground calcium carbonate and talc products that serve the automotive and residential construction markets. Paper PCC sales increased 5% driven by improving end market conditions and the ramp-up of new satellites. In fact, the net of the mill closures over the past year and the new capacity additions that occurred in 2020, paper PCC volumes this quarter were slightly above the first quarter of 2019. Finishing up our sales highlights, our Refractory segment had a great quarter with sales increasing 7% over 2020 and margins remaining at 16.2%. This was achieved despite lower laser equipment sales and commissioning of new orders continues to be difficult due to COVID travel restrictions. We also had a solid operating quarter. Our performance reflects our team's disciplined execution in managing costs, implementing pricing measures and driving productivity improvements. As a result, margins expanded across the majority of our businesses. We strategically implemented price increases across our portfolio. These increases have fully offset the higher raw material, energy and logistics costs we were beginning to see. While margins dipped slightly for the company as a whole this quarter, this was primarily due to higher corporate expenses. We see margins above 14% in the second quarter and have the potential to move higher towards the second half of the year with continued improvement across our businesses. Now let me turn it over to Matt to review this and take you through the financial results in more detail. Matt?

Thanks Doug. I will review our first quarter results, the performance of our segments, as well as our outlook for the second quarter. Now let's begin by reviewing the first quarter results. Overall sales in the first quarter were 5% higher sequentially and 8% higher than the prior year as the majority of our end markets remained strong and each of our segments grew sales versus the prior year. Remember that we combined the Energy Services segment into Environmental Products within the Performance Materials segment this quarter. Operating income was $58.8 million or 1% higher than the prior year. As Doug mentioned, operating margins improved across the majority of our businesses as shown in the margin bridge on the bottom right of this page. However, a few discrete items impacted our overall margin in the quarter. First, our Environmental Products and Building Materials businesses have yet to experience a meaningful recovery due to ongoing project delays and COVID related restrictions. Lower contribution from these businesses had an unfavorable impact on our margin of approximately 80 basis points in the quarter. Second, while our underlying corporate expenses were stable, we experienced higher than usual mark-to-market adjustments related to the change in stock price during the quarter. This is a normal adjustment we make every quarter and we are calling it out today because of the size of the variance, which was approximately $3.5 million year-over-year. Adjusting for these impacts the rest of MTI grew operating margin by 60 basis points over the prior year. Continued pricing actions more than offset inflationary cost pressures on raw materials, energy and logistics. In addition, we continue to drive productivity with a 6% year-over-year improvement in the number of hours worked per ton. Going forward, we expect operating margin to expand as our project-oriented businesses recover and corporate expenses return to a more normal level. Earnings per share of $1.17 was a record for the first quarter and was 4% above prior year and 8% above the fourth quarter excluding special items. Our effective tax rate for the quarter was 18% and we expect our full year effective tax rate to be approximately 20%. Now let's review the segments in more detail starting with Performance Materials. First quarter sales for Performance Materials were $230.9 million, 5% higher sequentially and 9% higher than the prior year. Metalcasting sales increased 6% sequentially and 32% versus the prior year as foundry demand remained strong in both North America and China. Household, Personal Care & Specialty Products sales increased 7% sequentially and 14% versus the prior year on double-digit growth across several consumer-oriented product lines. Building Materials sales grew 11% sequentially and were 18% lower than the prior year as project activity started to increase late in the first quarter. Meanwhile, Environmental Products moved through a challenging quarter with sales down 4% sequentially and 29% versus the prior year. Operating income for the segment was $29.8 million, 9% higher than the prior year. Operating margin was 12.9% of sales, the same level as the prior year. Just as a note these results include the consolidation of Energy Services into the segment. Operating margin was impacted sequentially by seasonally higher energy and mining costs. I'd like to take a moment to provide some insight on the strength of the margins in this business. Excluding Environmental Products and Building Materials, which had a weaker quarter than last year, operating margins for the rest of this segment were above 15% in the quarter. As our project-oriented businesses recover, we expect overall segment margins to improve accordingly. Now looking to the second quarter, we expect continued strength in Household and Personal Care with some leveling off from a strong start to the year. Meanwhile, the Environmental Products and Building Materials product lines are seeing signs of recovery as more of the types of projects that we serve are getting underway. And overall for the segment, we expect a strong second quarter with sales at similar levels to the first quarter. We also expect operating margin to improve on a sequential basis primarily due to incremental contributions from our project-oriented businesses, continued pricing actions and continued productivity. Now let's move to Specialty Minerals. Specialty Mineral sales were $147.8 million in the first quarter, 6% higher sequentially and 8% higher than the prior year. Paper PCC sales were 8% higher sequentially and 5% higher than the prior year as paper mill operating rates continued to improve and all regions grew sales sequentially. In addition, ramp-ups continued for our three new Paper PCC satellite plants in China, India, and the United States. Specialty PCC sales increased 4% sequentially and 17% versus the prior year as automotive, construction, and consumer demand remain strong. Processed Minerals sales increased 5% sequentially and 10% versus the prior year on strength in residential construction and automotive markets. Segment operating income was $21.1 million, 4% higher than the prior year. Operating margin was 14.3% of sales and was temporarily impacted by seasonally higher energy costs. Looking ahead to the second quarter, we expect continued strength in Specialty PCC and Processed Minerals. The second quarter is typically a seasonally stronger quarter for these product lines as construction activity ramps up. However, the seasonal dynamics may play out differently this year given the strong start we saw in the first quarter. We expect Paper PCC demand to remain steady and our new satellites will continue to ramp up. We expect a temporary impact on volumes as North American papermakers take their typically scheduled maintenance outages in the second quarter. Overall for the segment, we expect second quarter sales to be similar sequentially and we expect higher margin on more favorable operating conditions and continued pricing actions. Now let's turn to the Refractory segment. Refractory segment sales were $73.9 million in the first quarter, the same level as the fourth quarter and 7% higher than the prior year as continued improvement in steel mill utilization rates was offset by fewer laser measurement equipment sales compared to the fourth quarter. Segment operating income was $12 million and represented 16.2% of sales compared to 15% in the fourth quarter and 16.2% in the prior year. Steel utilization rates improved to 78% in North America and 72% in Europe in the first quarter, up from 75% and 70% respectively in the fourth quarter. And looking ahead, we expect the second quarter to be similar from a market perspective. Note that there are several customer furnace relines scheduled for the second quarter, and these relines result in temporarily lower demand for refractory products. In addition, while our laser equipment sales are typically weighted to the second half of the year, we're also facing delays on laser equipment installations and servicing during the ongoing COVID restrictions. Overall, for the segment, we expect sales to be relatively flat on a sequential basis and operating margins to remain strong. Now let's take a look at our cash flow and liquidity highlights. First quarter cash from operations was $51 million versus $30 million in the prior year, and free cash flow was $33 million versus $14 million in the prior year. We deployed $18 million of capital during the quarter to grow the business, develop our mines and improve our operations. We used a portion of free cash flow to repurchase $20 million of shares in the first quarter, and we have repurchased $37 million so far under our current $75 million program. The company is in a solid financial position with over $650 million of liquidity and a net leverage ratio of 1.8 times EBITDA. Our balance sheet strength provides us with significant flexibility for how we deploy capital to the most attractive opportunities. Now let me summarize our outlook for the second quarter. In Performance Materials, we expect continued strength across the segment, with the recovery of our project-oriented businesses, which will improve segment margins. In Specialty Minerals, we expect similar market conditions and typical North American paper mill maintenance outages. Our new PCC satellites will continue to ramp up, including a new packaging satellite in Europe, starting at the end of the first quarter – second quarter. And our margin should also benefit from improved operating conditions and pricing. In Refractories, we expect market conditions to remain strong with temporarily lower refractory products volume due to the timing of scheduled customer furnace relines. And overall for the company, we expect second quarter sales to be similar to the first quarter. We see continued strength and recovery across our end markets and in particular, our project-oriented businesses should start to see meaningful increases in activity. The only area of uncertainty is the potential impact of semiconductor shortages that may temporarily impact automotive and steel market and demand. Now from an operating margin perspective, we expect to return to above 14% of sales, as we continue to implement pricing actions, proactively manage inflationary cost increases, and drive productivity improvements. We also expect another quarter of strong free cash flow. In summary, we have the elements in place to deliver another strong performance in the second quarter.

Thanks, Matt. Before opening the call to Q&A, let's take a few minutes to highlight the progress we continue to make with our strategic growth initiatives. As I touched on earlier, our portfolio of consumer products which represents approximately 25% of our total sales remains a key part of our growth strategy. And we delivered double-digit sales increases in these core businesses. We continue to see opportunities to organically grow them. Geographic expansion of our core product lines is one of our growth strategies. And Asia is a key region for that growth. The first quarter sales in Asia increased 33%, with all of our major countries contributing. This was driven by a broad base of businesses, new PCC capacity coming online at our sites in China and India, continued penetration of our greensand bond products and an expanding customer base in fabric care, pet care, and edible oil purification. A specific highlight in the quarter was our PCC growth where we signed a contract with Pulp and Paper for a 50,000-ton satellite in China which should be operational in the second quarter of 2022. 200,000 tons of new production capacity that came online at the end of last year in China and India will further contribute to volume growth this year as they fully ramp up. We're also on track to commission two additional satellites this year, totaling over 70,000 tons one for a packaging application in Europe, and another for a standard PCC plant in India. For the past several years we've invested in developing new technologies for treating industrial wastewater and other environmental water challenges. Our FLUORO-SORB product that addresses PFAS contamination is one example of these newer technologies. As I mentioned earlier, we realigned Energy Services into Environmental Products. With this combination, we will accelerate the deployment of these technologies, as we bring together the technical knowledge and capabilities in our current Environmental Products business with the high flow rate, processing expertise that we've built in Energy Services. This new structure will improve collaboration and better align complementary technologies and capabilities to further drive growth. New product development is an integral part of our growth strategy. And we've taken significant steps to improve the speed of execution increase the number of products commercialized and enhance the impact of our latest solutions. To dimension our new product pipeline our total portfolio comprises over 300 products from early-stage development to commercialization, representing around $800 million of revenue at full potential which is an increase of about 30%, compared to where we were two years ago. We continue to expand sales of our latest Specialty PCC products which are supported by our capacity expansions. Specific to the first quarter we launched several new Bentonite-based formulations for construction drilling applications. Acquisitions are also an important part of how we intend to grow and move MTI to a higher return more balanced portfolio. We continue to see a strong pipeline of minerals-based opportunities that align with our strategic initiatives. And we have the balance sheet strength and flexibility to pursue them. As always, we'll maintain our disciplined approach to M&A. To summarize, our call today, the COVID pandemic has challenged our normal ways of working and higher virus rates continue to affect several of our regions. Our culture of connectivity and collaboration has enabled us to differentiate MTI with our customers, and maintain our strong safety and operating culture. We'll continue to build on these strengths during 2021. Even though a few of our end markets are only now beginning to improve, we had a solid first quarter with strong momentum across the majority of our businesses. With favorable demand trends in our markets, our new technology launches, capacity additions and continued strong operating performance, we have the elements in place to go from one of our most challenging years, to one of our strongest. With that let's open up the call to questions.

Thank you. We'll take our first question from Mike Harrison with Seaport Global Securities.

Hi, good morning. Congrats on the nice start to the year. The Household and Personal Care business, I think most people associate the pet care business there as being the biggest piece. And maybe you can talk about the strength and opportunities you're seeing there, but it sounded like you're seeing growth in other areas. You mentioned fabric care, health and beauty maybe some of the edible oils or other food and beverage applications. Maybe talk a little bit more broadly about what's driving the strength in HPC?

Sure. Thanks, Mike. So let me start off and then I'll probably pass it off to Jon Hastings to give you a little bit more color there. Yes, the Household and Personal Care business, the largest portion of that business is pet care. And as you know we've been investing in both organically and inorganically growing that portion of that segment to that business. We see a lot of opportunities to continue to invest organically, specifically there. But we've also invested a lot in – not a lot but we've invested in our other product lines there, which as you mentioned edible oil purification and in fabric care. And those are starting to expand not only from our traditional geographies but also into Asia the big area for them and beyond that. So yes, we are investing in those. We see a lot of opportunities to grow them organically. I don't know Jon, do you want to give – is there anything you can give more color in some of those product lines and how we're seeing that traction going forward?

Sure. Happy to Doug. Hi, Mike. A couple of things start with edible oil purification. One of the reasons that we're able to grow is we have a very unique deposit – mineral deposit in Turkey that we've been able to mine. We built a plant. We've run all sorts of trials with customers. And over the course of the past couple of years, we've continued to expand that business, as they see the value in that unique mineral deposit. That business continues to grow. Just year-on-year first quarter, we doubled the size of the business to the prior year and that was even up from the prior year before that. So customers are recognizing the value and they continue to see excellent application of the mineral and we continue to grow. In addition, if you look at our Personal Care business, we continue to invest in and expand our capability of supplying personal care products around the world but predominantly here in the United States. Those again are unique technologies that the customers really enjoy and apply to their specific uses and we continue to grow that business. Pet care you know, pretty well. We're expanding in different geographies, some new markets. We continue to expand with new channels including ecommerce. We introduce new SKUs and new innovation products all the time and we continue to grow more than twice the market growth. All sorts of different opportunities. Fabric, I'll wrap up with fabric, we have a business that mainly goes into dry laundry detergents. And as those markets continue to grow in different areas of the world, we supply the products out of several different plant sites. And again, we continue to experience the benefits of the technologies and linking up with some of the key producers of the laundry detergents. So again, a variety of different reasons for growth but I hope that provides a little clarity.

Mike, I'm just going to add one last thought there. And that is when we talk about Personal Care, everything that Jon just mentioned is we have a fundamental capability in the company. Many of these are bentonite-based products, they're technologies that are around the adaptation of that mineral or a tangential technology that's come from that adaptation of that mineral to personal care, to edible oil purification, pet care, fabric care. So they stem from a really deep foundation in the company to be able to supply these products in this kind of market. And that's why we feel investing in it organically, even inorganically is something that really fits well with the company.

All right. And then over on the metalcasting side, I think you mentioned that the semiconductor shortage and maybe other supply chain issues is something that is an area of caution on the outlook there, maybe talk in a little bit more detail, if you've seen a meaningful reduction in foundry demand at this point, or kind of how they're running and approaching the auto business?

Yes. We supply the automotive industry through a variety of products both in our Minerals, Specialty PCC through automotive, rheology modification for sealants, of course through our foundry products and around the world. Right now we haven't – we're keeping our eye on it. We've seen some impact I think from right now a lot of the supply chains are very thin downstream. We know the automotive makers are continuing to build in inventories of those and we're seeing that continued pull-through in our foundries and through our minerals-based businesses. That said, we are also aware of some of the commentary. And we've seen a couple of shifts, a couple of days taking out. What we do see and what we do know right now is that, if this becomes a little bit more of a challenge here in the second quarter, we think that will be short-lived and that will be made up through the sort of the back half of the year. So it's a little hard to predict. The best knowledge that we have right now is what we've given you in our current forecast. But we're keeping our eye on it, but we think, if anything if that comes through the second we'll just be made up in the back half of the year.

All right. And then maybe one for Matt. The free cash flow was obviously very nice in the first quarter here. Maybe some thoughts on the cash flow, free cash flow outlook for this year compared to the $175 million you did last year?

Yes. I mean, Mike and good to talk to you. And typically, when we come into a year, we tell you we're targeting about $150 million of free cash flow. Obviously, a very strong start to here in 2021. But as we look through the rest of the year, we continue to think that the $150 million is a good target. Embedded in that would be around $80 million to $85 million of CapEx. That's about $20 million higher than what we did last year. And really that CapEx is being directed towards the very strong growth opportunities we have across the businesses. As we've talked about in our performance review here today, a lot of our product lines are in either a sold-out nature or a very strong demand nature. And so being able to make investments that are paying off quickly and our high-return in ourselves is really what the priority of that cash flow is and how we're deploying it thus the increase in CapEx here this year.

All right. Sounds good. Thanks very much.

You’re welcome.

Our next question comes from Rosemarie Morbelli with Gabelli Research. Please go ahead.

Thank you. Good morning everyone.

Hi, Rosemarie.

Looking at your consumer-oriented product lines, pet is the largest business, but you are obviously growing the other categories. Is the margin difference substantial between pet and, for example, edible oil? My best guess is that the margin for edible oil would be lower?

Without getting into specific margins, I can say that they are all strong. While there are differences by product category and region, our positions vary between bulk products and high specialty products in Europe. Our edible oil purification stands out as a specialized and high-value product, likely on the higher end of that spectrum, but there is a range. I can confirm that all margins are improving due to significant progress and investments in productivity and efficiencies in production, as well as our focus on value-added pricing. We continue to enhance those margins and believe that with additional scale and planned investments, we can further drive improvement.

Thanks. Regarding Turkey and the bentonite mine, which has higher quality bentonite compared to other sources, did they have any applications beyond pet care when you acquired it, or have you been developing other applications from that resource?

Well, let me talk about, we have a very high-quality bentonite around the world. And so but I think you're referring to our Sivomatic pet care acquisition.

Right.

That did come with those mines in Turkey. It is very white from a color standpoint, which has allowed us to position it as a premium product in the pet care market. We have successfully developed a premium white market in Europe. The Bleaching Earth products come from a mine that MTI has operated, and we have created this Bleaching Earth product based on the unique qualities of that mineral. Additionally, we have mines in other parts of the world that can support similar applications. For now, our current focus is on those mines, which has contributed to our growth not just across Europe, but also in the edible oil sector and broader markets in Southeast Asia and Asia. This positioning will help us continue to expand our customer base, as demonstrated in the first quarter.

Okay. And still staying on the bentonite, you mentioned that you were developing quite a few new products bentonite-based. Can you give us a little more detail on what those new products might be or end market applications?

Yes, we're focusing on our bentonite reserves globally and our company's ability to adjust to various end uses. This quarter, we've introduced a couple of new drilling products that we haven't mentioned before. This is significant because we've received very positive feedback from customers regarding our latest offerings in the drilling sector. I'm referring to large tunneling infrastructure drilling as well as horizontal directional drilling. We've listened to customer input and addressed some global challenges by adapting and launching new products, which has been well received. I also want to emphasize our capabilities in pet care and foundry, but I wanted to shed light on other areas where we can apply our bentonite-based products to add value. For instance, in water treatment, we discuss our FLUORO-SORB product for wastewater treatment, particularly targeting PFAS issues. We have developed other technologies related to PFAS and other contaminants, showcasing the variety of solutions we offer. Our portfolio includes around 300 different products with an estimated value of $800 million, spanning a wide range of applications. We're continually enhancing our core products while also developing new ones, particularly in infrastructure drilling and wastewater treatment, which we believe are significant growth areas for us. Our strategy includes merging the mineral technologies with the processing technology we have in Energy Services to create a promising array of opportunities.

Thank you. That's was very helpful.

Our next question comes from Dan Moore with CJS Securities.

Hi. Good morning. This is Brendan on for Dan. Just wanted to ask about the monthly cadence of your revenue and demand recovery this quarter and then anything you can speak to about April as well?

Yes. As we came into the year, I think, I mentioned that the first quarter typically we have some seasonality. We actually didn't experience that seasonality here in the first quarter. Those businesses that are impacted year-after-year from that seasonality are your Performance Minerals business, your Performance Materials business where you get some slowdowns in customer demand, as well as some changes in the mining picture that we have in those businesses. Demand remained strong throughout the quarter coming in from January at a very good rate from the fourth quarter. I think if you recall what we said in the fourth quarter about the first quarter is that we had very strong momentum. That did continue at a nice ratable rate across January, February and March. What you are starting to see and I think Doug talked about it a bit, you are seeing some of the movement in the demand for metalcasting just based on one or two days from some of our customer. Most of that did continue through in our forecast that we're giving you so you have that there, but for the rest of the portfolio, you see a very strong look here in April, that momentum is continuing. At the same time like I said, you saw in the project-oriented businesses, a pickup coming in March. And that is going to be what we're going to see happening in the April, May, June timeframe to help offset some of those things we talked about that are going to take place in the Refractory segment where you're going to have some relines because some customer revenue is going to come out. Same thing temporarily, same thing is going to happen in your Paper PCC businesses when the paper mills take outages. So those revenues are ramping up in the project-oriented businesses. The rest of the portfolio remains very strong outside of those couple of temporary items that are going to keep sales in a similar basis to where we are in the first quarter.

Sounds good. And then could you speak more on any signs that you are seeing a recovery in demand and the two that you called out the Environmental Services and the Building Materials?

Yes, in March we mentioned that you are starting to see some of the projects we are involved in begin to pick up. Decisions are being made to kick off commercial construction activities, particularly in underground waterproofing. These projects are starting to move forward, which is alleviating some of the COVID-related delays we've experienced. People are returning to the project sites, and this is contributing to increased volumes in those areas.

Brendon, I want to add a few points. First, the pace of our sales this year is significantly different than usual, and I believe you're noticing this trend among many other companies as well. We had anticipated some seasonal slowdowns due to weather affecting residential construction. However, despite supply chain challenges and automotive demands, our performance in the first quarter was quite strong, and we expect that to continue into the second quarter. We will encounter some typical maintenance-related shutdowns at paper mills this year. Currently, we are experiencing strong demand across our businesses, but we have not yet seen a rebound in several of our project-oriented product lines. We anticipate that these will start to build momentum through the second quarter and gain even more strength in the latter half of the year. Specifically, we expect stronger performance from our offshore environmental products and oil drilling operations in the second half, as offshore typically rebounds later than onshore. The same applies to our building, waterproofing, and environmental projects. This year is somewhat different; typically, we see a strong second and third quarter, but we believe that the seasonal patterns are blending this year. Still, we think the momentum will continue to build through the second quarter and possibly into the latter half of the year.

Okay. Thank you very much.

Our next question comes from David Silver with CL King. Please go ahead.

Yes, good morning. I would like to start with a couple of questions regarding your PCC business. Specifically, I was hoping D.J. or Doug could provide an overview of your new project pipeline. Given the global economy reopening and increased activity in various industries, do you think this environment might lead to a faster pace of project decisions? Could you highlight what’s currently in the project pipeline and, based on your past experiences in similar cycles, is this the kind of situation where customers might complete their due diligence and make decisions more quickly? Thank you.

Okay. Thanks, David. Yes, let me pass that to D.J. Monagle. I think, he can give you some insights on kind of current paper market conditions and our pipeline of opportunities.

Thanks for the question, David. To provide some context, we're noticing an increase in demand and strong operating rates in the US, which is beneficial, along with a significant interest from Asia in our products. While there is some risk of change when shifting to our offerings, the strong demand is evident. For instance, we saw success with a project involving a Chinese papermaker, which resulted in a signed agreement in a short timeframe. We are also engaged in discussions with others on similar opportunities, driven by the need for competitiveness in quality and cost, especially with major players like Chenming entering the market with higher quality paper. Additionally, rising pulp prices are positively impacting our value proposition. Demand remains strong in both China and India, particularly for traditional PCC applications in printing and writing grades, and we've also witnessed some interest in our new packaging offerings, although that is still in an earlier stage of development. Globally, outside of China and India, we have trials underway for a new variant of our NewYield product. This product is showing promise, helping customers address environmental pressures while offering a high-value pigment. We're optimistic about commercializing at least one of these soon, particularly in Europe. Moreover, our early-stage projects involve expanding into the packaging sector, focusing on both traditional PCC projects and some new products we aim to bring to market.

If I could just follow-up on a couple of points. So first of all, I'll be stealing your risk of change comment. I kind of like that description. But you mentioned the U.S. market and some time ago you secured a restart, I guess, the Phoenix paper project in Kentucky. I was wondering if maybe you could just provide a real quick update on the progress there and whether that trend towards restarting domestic capacity might continue? And then secondly, on your packaging comments, would you say that the packaging opportunities you see are more a continuation, I guess, of the linerboard area of packaging, or are you potentially pursuing additional subsectors, I guess, within packaging grade papers? Thank you.

Let me address your questions in the order you presented them, David. First, I'm pleased with Wickliffe's strong performance, which aligns with the positive growth comments Matt shared. Currently, we are not experiencing many restarts, with operating rates in North America at 95%. We expect demand to increase short-term, especially with schools reopening and people returning to work. As we approach fall, we anticipate a slight uptick in demand, although this could be balanced out by increased imports, a trend we see broadly in the industry. Additionally, as it relates to packaging, International Paper transitioned their Selma operation from printing and writing grades to a packaging grade last year, and we supported their efforts by modifying our product to meet their new premium linerboard needs. Similar transitions are happening at other facilities like Jackson, Alabama, where the Packaging Corporation of America plans to shift their operations towards packaging. We are optimistic about how we can assist them with our strategic capabilities in white top linerboard grades. Focusing on our packaging portfolio, we are witnessing increased demand for white top linerboards, similar to what we see at Selma and Jackson, and we expect further developments in Europe later this year. Our PCC products are well-suited for these applications, particularly for premium printing that enhances shelf appeal, with significant demand emerging in both China and the U.S. Lastly, we're also developing new products aimed at traditional brown paper grades, including innovations from our environmentally focused projects like NewYield. We are early in the process of integrating new technologies into standard brown boxes. Overall, there’s a lot happening, but aside from Wickliffe, I don't foresee many conversions back to printing and writing grades in the U.S.; rather, we are well-positioned to aid in the packaging transitions we observe.

So David, to address your initial question, I believe you are inquiring about whether the current environment is more favorable for improvement or seizing opportunities. In some respects, it remains similar, but there are also notable differences. We've expanded our product range beyond just base filler, which is seeing improvement. There are numerous opportunities arising from conversions, cost savings, and quality requirements in the market. Additionally, we have developed new technologies related to packaging and environmental solutions. As our customers face challenges regarding higher quality packaging and environmental issues, we are equipped with the necessary technologies. Therefore, we have positioned ourselves to seize more opportunities. If you were to ask D.J., he would likely confirm that our pipeline of opportunities has increased as a result. Overall, I believe we are well-placed to capitalize on new prospects across a broader spectrum.

Okay, that's great. I have a question related to mergers and acquisitions or capital deployment. Recently, there has been renewed interest in Elementis from outside parties. While there are some similarities and differences with the new interested party, I’m curious if you could discuss the M&A pipeline you perceive. You mentioned opportunity capture, but do you think the current environment might lead to increasing valuations, potentially pushing some of your pipeline opportunities beyond your comfort zone? Could you describe how you view the opportunity set, overall valuation environment, and your willingness to engage in deals at this stage? Thank you.

Sure. I think acquisitions will be a key way for us to grow the company. We have a solid portfolio of opportunities that align with our strategy and growth objectives, focusing on areas central to our business where we can create additional value. Many of these opportunities are related to our core product lines, either dealing with our main minerals or being closely related to markets we currently serve or technologies we are very familiar with and that align with our company's culture. That being said, I believe two things have occurred. First, there is a significant amount of capital available, which could lead to higher valuations. Second, over the past year, companies may have made strategic decisions about what they want to retain or divest. We will be observant and may find opportunities as companies decide it’s time to move on from certain assets. We will maintain our discipline regarding the value we can deliver. If valuations become too inflated, that’s fine; we will stay disciplined in our approach to M&A and how we utilize our cash. We have choices for our cash and numerous opportunities to grow organically, which we have discussed today. We also have options for returning value directly to shareholders. When we identify attractive M&A opportunities with the potential for high returns, we will pursue those.

All right, that’s great. Thank you very much.

Thanks, David.

We'll take our next question from Silke Kueck with JPMorgan.

Hi. Good morning. How are you?

It's okay. How are you?

I have a question about your guidance. And so, this is like the third quarter in a row that you're giving like flat sales guidance. And I think in the fourth quarter, you beat that sales guidance, but I don't know like $40 million or so in the first quarter you beat it by $20 million. And you're giving like flat sales guidance again. And usually, usually there's like a step-up of like $30 million or $35 million from the first and second quarter. And I understand that you started strong, and there's some shutdowns, but those happen every year. And so, why the conservative sales guidance, or is it just the very low end of what you think you plan to achieve?

No. Silke, I think what we do every quarter is try and give you the best perspective on what we see at the time. And obviously there is favorability. There's also risk in our forecast. And so we manage those as we move through the quarter. I think what you've seen over the last call it two or three quarters is a return to the markets that has been very strong. And that has helped drive volumes faster I think than what we or anyone else has been expecting. And so, yes, that plays through. Here in the first quarter, remember, and I think you just spoke to it. We typically see a seasonal impact in our first and fourth quarters of about 10% in sales. And what we just said was we didn't really see a lot of that in the fourth quarter. We didn't see it in the first quarter. And so, you're operating at a very strong rate across those businesses that are typically seasonally impacted. And so that carries through to the second quarter, right? When you would typically see that normal seasonal bump up that you just spoke about well they're already operating at that rate. The difference here in the second quarter like we spoke about, yes, you have the typical outages in Paper PCC. Those are temporary. Those are typical. You have your temporary impacts in the Refractories business where their customers are doing the relines. Listen, some of those have been pushed out, and over time they're going to need to be done. And so, you've seen in our Refractories business, those relines being pushed out. And so, now they're going to start happening. That is in the forecast. When you look at what is offsetting those, and I think this is what you're speaking to some of the businesses that haven't really come back yet that you haven't seen the demand return so those project-oriented businesses, and you just heard Doug speak about quite a few of the specific impacts in those businesses, Building Materials, Environmental Products and Energy Services and how they're going to transact through the course of the year. You're starting to see those revenues and those projects begin to be let. And that's what's pulling differently to offset those temporary and typical shutdowns and impacts that we have. The other thing that we have in our outlook is the impact from the chip shortage that may impact the automotive and steel markets. And so like we said, we haven't given a significant dollar amount in terms of what that could be, because at this point we haven't seen it. Our customers are continuing to perform and pull. But should there be something there? That's a caveat. We've taken some conservatism based on the fact that we do have customers who are pulling out shifts. And so I think we're giving you a very robust view of what the second quarter could look like from a top line perspective. And importantly, let's remember this. What we're talking about is from a margin perspective, driving the margin back above 14%, right? And on our way, as we've talked about previously, to getting back to above 15%, and which Doug said, you may see that coming later in the year as volumes continue to return. Point there being, we're dealing with a number of inflationary factors that didn't necessarily impact us in the first quarter. Our pricing more than offset the inflationary factors. Those are going to continue in energy and in freight into the second quarter. But guess what our teams have been very active and at the forefront speaking with customers driving value through the products that we have. And you heard us all say it on this call, we price on the value that we deliver, not necessarily on the commodity value. So a good point in fact here is in the Performance Minerals business, you've seen us raise prices three times already this year. We're going to continue to drive at that. And so maintaining that stature, that connection with our customers staying ahead of it to move that margin is also an important part.

Thank you for that. Typically, the first quarter is when we see the highest demand for working capital. This year, however, the first quarter has been relatively low. I've noticed that your payables decreased from last quarter. Is this due to a timing issue, or have you been able to manage your working capital more effectively?

Yeah. I think we've done some very good things over the past couple of years, focusing on all components of working capital. What you are seeing here in the first quarter is the fact that we've been able to improve the efficiency, pretty sizably in both our accounts receivable and in inventories. So we did last year, obviously work on our position our efficiencies in terms of both of those two categories. You're seeing that translate here into the first quarter where you typically see us draw down in some areas, but revenues are typically rising. And so the efficiency if you look at it on a days' basis has improved dramatically on a year-over-year basis.

And lastly, I was wondering how much of the price increases that you have announced in January like how much of those that you achieved? And remember that you said we are targeting 3% for PCC maybe 5% to 10% for a tug product. It was sort of like a wide range rather specialty products like 3% to 10%. Like how much have you gotten so far? And how much more you're trying to achieve for the rest of the year?

Let me address that. Some of our price increases in areas like paper are based on contracts, allowing us to adjust pricing every six months. Regarding the percentage increases you mentioned, yes, we have raised prices, reflecting strong demand for our new products and their value. We have successfully captured 100% of the price increase from these initiatives. Additionally, in some cases, we have already adjusted prices three times this year, which is atypical as such changes usually occur once a year. We've built strong relationships with our customers to ensure our pricing mirrors the value we deliver. We are also experiencing high demand for many of our products, which we are able to meet. Overall, we've done well in capturing these price increases, which have addressed all of the inflationary pressures we've encountered so far.

Yeah a phenomenal job. Thanks very much.

Sure. Thank you.

We have a follow-up question from Mike Harrison with Seaport Global Securities.

Hi, Mike.

Hi. Just one more and I apologize if you discussed this in greater detail already. But are there some cost benefits from putting the Energy Services business into the environmental business and kind of removing that segment structure, or is that pretty de minimis?

No. I think there's not a lot of cost synergies associated directly with that. I think though that the efficiency is associated with being able to tie in those technologies to sell new products. The more of the efficiencies we see on the commercial side also efficiencies with combining the knowledge base I think will happen. So not a lot of direct cost synergies much more on the synergies in terms of technology development joint development and on the commercial side.

Okay. And then in terms of the inflationary environment you're in, you guys I think did a good job telegraphing that you expected some seasonal increases in energy and in mining costs. Were all of those increases pretty much in line with your expectations, or did they run a little bit higher than what you were anticipating when you gave your Q1 outlook?

Pretty much in line. I think obviously the way you forecast things, it never always plays out exactly that. So I think the team has done a great job just making sure we're keeping our eye on everything coming at us, not only just in the first quarter, but we're looking at that next quarter and all the quarters out. So we've got like I like to call it we have the headlights on and the team has done a great job. I would say areas that have been some challenging and I think you'll hear this from other companies logistics are very tight. Shipping logistics doesn't necessarily impact us. We don't export as much. We operate pretty much localized in the countries where we manufacture and sell. Logistics are challenging, but we've been working, the team has done a great job working through those items. So maybe a little bit different than we forecast, but from a total aggregate basis pretty much right on what we thought.

Okay. And then last question for me is on Refractories. It seems like that business typically has stronger margin in Q1 and then the rest of the year is more subdued. Is there something structural that causes that or is it just kind of coincidence that that seems to be the trend for the last few years?

Historically, margins have been higher in the fourth quarter, primarily due to increased sales of our Ferrotron laser equipment during that time. We've previously discussed this, and I'll hand it over to Brett Argirakis, who manages the business. Over the past several years, the business has transformed its profile and improved its margin structure. It’s no longer just about first and fourth quarter performance; instead, it's a different dynamic that has developed over time. Brett, could you provide some more insights on what you've been doing?

Sure. Thanks for the question, Mike. There are a couple of factors at play. Steel production is critical, and with stronger utilization rates and higher steel prices, those rates are being driven upwards. As Matt pointed out, steelmakers are operating their furnaces vigorously to take advantage of these steel prices. Another aspect is our ongoing business focus, which has been a priority for several years, particularly in product development. We've been developing more efficient formulations that enhance performance for our customers and lower the cost per ton of steel. While our laser equipment investment slowed during COVID, we're still committed to this technology, and we're expecting it to rebound soon due to continued customer demand. Additionally, we've excelled in expense control, price management, and manufacturing efficiencies. Our backward integration in Turkey with our NGO and in our wire operations has also contributed to our efficiency. The team has collaborated effectively. Lastly, we've seen significant growth in new business. We announced five new accounts in our last call, including some greenfield sites focused on refractory alloy wire and calcium wire. Overall, our team has demonstrated strong performance across the board.

Yes, Mike one of the things we don't talk about very often but Brett just mentioned it is our vertical integration in calcium. We are the only manufacturer of calcium metal in the Western Hemisphere. I don't think people know that. But in times like this with demand and logistics and challenges around the world and moving products being able to be vertically integrated in a core product that's essential to steel manufacturers around the world that's been demonstrated to our customers. So, not only the product development that Brett mentioned our vertical integration and stability through times like this has really resonated I think with the customer base. And so we're helping bring them more value and stability and I think that's accruing to us as well.

All right. It sounds like a lot of positive dynamics there. Thanks for the color.

Thanks for the question.

And at this time, I would like to turn the call back to Mr. Doug Dietrich for any closing remarks.

Thank you very much. I really appreciate everyone joining today and look forward to talking to you after our second quarter. Take care everyone.

And that does conclude today's presentation. Thank you for your participation. You may now disconnect.