Minerals Technologies Inc Q2 FY2021 Earnings Call

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

Thanks Lauren. Good morning everyone and welcome to our second quarter 2021 earnings conference call. Today's call will be led by Chairman and CEO, 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. I do appreciate you joining our call. We've got a lot to cover today. I want to take you through the highlights of a very strong quarter and discuss our acquisition of Normerica. Matt will then review our financial results in more detail and our expectations for the third quarter. And after that, I'll finish the prepared remarks with some commentary on our 13th sustainability report, which we published this week. Let me start with a recap of the quarter. Building on the momentum generated over the past few quarters, we delivered a strong second quarter with several financial and operational highlights that I'll take you through. First and foremost, this was a record quarter for our company, with earnings per share of $1.29. This milestone reflects robust demand across our markets, strong operating performance by our team and continued execution on our growth projects. For perspective, many of our product lines have now reached or exceeded pre-COVID sales levels, but others still have room to improve. Let me give you a feel for how the demand trends, our performance and strategic initiatives across each of our segments led to these results. In Performance Materials, our Metalcasting business continues to perform very well with strong foundry demand globally, and our broad portfolio of consumer-focused businesses in household, personal care and specialty remained on their steady growth track. Specifically sales in our personal care business nearly doubled as we introduced new private label skin care formulations and expanded partnerships with major retail brands. Another large contributor to the segment sales growth in the quarter was the rebound in project activity in both Environmental Products and Building Materials. Within our Specialty Minerals segment, we delivered another quarter of sales growth across all product lines. Paper demand continues to improve in all regions and we're benefiting from the ramp-up of our new satellites. Paper mill operating rates in Normerica have reached nearly 95%, and to underscore the current supply and demand situation one of our customers in Normerica recently announced plans to restart a mill to meet the increased demand. In addition our Specialty PCC, GCC and Talc businesses benefited from robust activity in consumer, automotive and residential construction markets. Our Refractory segment had an impressive quarter marked by steel utilization rates, which are now above 80%. We've also secured several new contracts, which will drive growth in the second half of this year and into next for both our refractory and metallurgical wire product lines. A combination of these positive trends and business development actions in our segments yielded sales of $456 million with growth in every segment and geography. We drove these higher sales into operating income of $64 million, up 53% compared to 2020 and margins expanded to above 14% as we expected. Our team's disciplined operational execution through pricing actions, productivity improvements and strong cost control enabled MTI to deliver these results. We also navigated challenges related to increased input and logistics costs that accelerated during the quarter. Our global teams have done a great job maneuvering through a more dynamic supply chain environment, which includes navigating logistics challenges and energy and raw material inflation. We're well positioned to offset these costs with pricing actions that we've been effectively implementing across our portfolio, and Matt will discuss this more in his comments. Generating strong cash flow, further strengthening our balance sheet and maintaining flexibility with how we deploy our capital to the highest return opportunities are priorities for us. Through the first half of the year, cash from operations and free cash flow were both up 25% over last year. We've been using our cash flow to pay down debt and bolster our liquidity, and we finished the quarter with our lowest net leverage ratio in the past six years. In addition, we've continued with our returns to shareholders through our $75 million buyback program and anticipate fully completing the program under the authorized time frame. Financial strength also provides us the capability to pursue acquisitions, as we have demonstrated with the purchase of Normerica. We advanced our growth initiatives this quarter, focused on new product development and geographic expansion. Let me highlight a few specific areas. On previous calls, we mentioned several positive trials and interest with our FLUORO-SORB product that addresses PFAS contamination in groundwater. And I'm pleased to share that during the quarter we were awarded our first major sale for a large-scale project at a North American department of Defense location. The project has been going very well as FLUORO-SORB efficacy has been demonstrated commercially. We have several other similar type projects in our sales pipeline, as well as for municipal wastewater treatment sites and we have the manufacturing capacity and technical capabilities to pursue them and further grow sales. On the Paper PCC front, we are ramping up production at our new satellites in Asia, which came online at the end of 2020 and represent 200,000 tons of new capacity on an annualized basis. We have another approximately 130,000 tons of capacity coming online now through the middle of next year, including our 40,000 ton expansion for a packaging application in Europe, where we will begin realizing the volume benefit in the third quarter. We are finalizing the construction of our 40,000 ton satellite in India, which will start-up late next quarter and we have also begun construction on a new 50,000 ton satellite in China, which should be operational in the first half of 2022. And finally, we announced the acquisition of Normerica this week, which I'll go through in a moment. To sum up the quarter, it was a very productive one with many positive highlights. We navigated through challenges over the past 18-plus months and created opportunities for ourselves on all fronts, which has put our company in an advantageous position to continue to drive profitable growth going forward. As I mentioned on the previous slide, the exciting news this week is our acquisition of Normerica, and I wanted to spend time discussing who they are, why we pursued the transaction and how Normerica fits into our global Pet Care business. Acquisitions are an important component of how we plan to grow and move MTI to a higher return more balanced portfolio and we've discussed our pipeline of opportunities that align with our strategic initiatives. Normerica was one of those opportunities, as it continues to shift to a more balanced sales portfolio and aligns extremely well with our overall growth strategy in pet care. For background on Normerica, the company was founded in 1992, headquartered in Toronto, Canada and is a leading supplier of branded and private label Pet Care products in North America. Normerica has a long history as a well-run company with an impressive track record of innovation, customer service and profitable growth. The product portfolio consists primarily of bentonite-based cat litter products which are manufactured in facilities in Canada and the United States. Normerica has about 320 employees and in 2020 generated revenue of approximately $140 million. Let me give you some more details on the transaction and its rationale. The combination is highly complementary from a geographic product portfolio customer and operating perspective. Normerica's portfolio of branded and private label bentonite-based cat litter products fits well within our North America business. In addition, Normerica's strategically located footprint throughout the US and Canada combined with our vertically integrated mine-to-market model gives us a unique position in the cat litter market. We are now one of the largest vertically integrated private label pet litter providers globally with a strengthened position in North America. We see further benefits as we can provide enhanced value in terms of consistency and quality and are positioned to serve a broader customer base more efficiently. The purchase price for the transaction was $185 million on pre-synergy EBITDA of approximately $20 million. We will realize synergies from the transaction by leveraging our combined operational footprint and vertically integrated model and through the deployment of our business processes. On a post-synergy basis, we expect the transaction to be about 7.5 times EBITDA similar to the Sivomatic transaction and earnings accretion to begin in the fourth quarter of this year. We expect to fully integrate the business, employees, systems and processes over the next few quarters and accretion will ramp up to 5% to 7% on a full year basis in 2022. Let me step back and describe our existing Pet Care business. We've been profitably growing this business since the acquisition of AMCOL in 2014. Our acquisition of Sivomatic in 2018 gave us a differentiated mine-to-market private label presence in Europe, Normerica is an extension of that private label growth strategy. The Pet Care sector provides stable growth rates and attractive dynamics as domesticated cat ownership continues to rise globally. We are uniquely positioned to serve this market and have invested in expanding our vertically integrated capabilities and product portfolio globally. In addition, the strength and resiliency of our Pet Care business was demonstrated during the past year, when demand was at an all-time high during a period when our businesses serving industrial markets were impacted. On the lower left of the page, you can see how our Pet Care sales have grown organically and inorganically since 2017. With the addition of Normerica and Sivomatic, our Pet Care business has grown from $78 million to $350 million and our household and personal care business is now the largest product line at MTI. This represents a significant shift in our portfolio toward non-cyclical consumer-oriented markets, positioning our company to drive growth rates above our historical averages and we see opportunities to further balance our portfolio. In sum, Normerica is a great strategic fit with our company and this transaction provides many compelling opportunities for growth and value creation. We welcome our newest employees to MTI and look forward to working with them on a seamless integration. With that, let's turn it over to Matt to go through our quarter performance in more detail. Matt?

Thanks, Doug. I'll review our second quarter results, the performance of our segments as well as our outlook for the third quarter. And now let's begin with the second quarter review. Sales in the second quarter were 28% higher than the prior year and 1% higher sequentially, as demand remained strong across the majority of our end markets and we started to see higher levels of activity in our project-oriented businesses. Operating income excluding special items was $64.1 million, 53% higher than the prior year and 9% higher sequentially. Operating margin improved from 13% in the first quarter to 14.1% in the second quarter. The sequential margin improvement played out largely how we expected, as we benefited from the incremental margins of our project-oriented businesses, a more normalized level of corporate expenses and continued pricing actions and productivity, all of which helped to offset higher-than-expected inflationary cost pressures. As you can see in the operating income bridges on this slide, we saw higher costs in the second quarter. The higher costs were primarily driven by energy, logistics and certain raw materials such as lime and packaging. Our teams have done an excellent job managing through these challenges and we are in the process of implementing additional price adjustments in the third quarter which will help mitigate the impact on our margins going forward. In some cases, the price increases are contractual as with the pass-through arrangements in Paper PCC and in other cases they are negotiated based on the value that our products provide. Meanwhile, we continue to control overhead expenses with SG&A as a percentage of sales at 11.3% versus 11.7% in the first quarter and 13.1% in the prior year. Earnings per share excluding special items was $1.29, a record quarter for the company and represented 52% growth above the prior year and 10% above the first quarter. Our effective tax rate for the quarter was 18.9% excluding special items and we expect our effective tax rate to be approximately 20% going forward. And now let's review the segments in more detail starting with Performance Materials. Second quarter sales for Performance Materials were $238.4 million, 24% higher than the prior year and 3% higher sequentially. Metalcasting sales grew 52% versus the prior year, as foundry demand remained strong in North America and China. Sales were relatively flat sequentially and were only modestly impacted by the global semiconductor shortage which caused a limited number of foundry customers to take downtime in the quarter. Household, Personal Care and Specialty Products, our most resilient product line last year grew 17% versus a relatively strong prior year quarter. Demand for our consumer-oriented products has remained strong and growing driven by continued new product development and expansion into new customer channels and geographies. We also saw higher volumes of our specialty drilling products which are benefiting from a rebound in construction, infrastructure and oil drilling activity versus the prior year. Environmental product sales grew 6% versus the prior year and were 53% higher sequentially driven by improving demand for environmental lining systems, water and soil remediation and wastewater treatment. As Doug mentioned, we also delivered on the first major commercialization of our FLUORO-SORB technology for PFAS remediation in the second quarter. Building Materials sales grew 17% versus the prior year and were up 12% sequentially on higher levels of project activity. In North America, we are seeing more commercial construction and infrastructure projects move forward. While in Europe projects have been slower to advance as countries are still in varying stages of reopening. Operating income for the segment grew 55% from the prior year to $34.7 million and was 16% higher sequentially. Operating margin was 14.6% of sales versus 11.7% in the prior year, and 12.9% in the first quarter as higher volumes and our strong operating performance drove incremental margin improvement. Now, looking ahead to the third quarter. We see continued strength in household and personal care and foundry demand remained strong for Metalcasting with lower volume sequentially, due to seasonal foundry outages. Meanwhile, the pipeline for our project-oriented businesses, environmental products and building materials, continues to improve in North America, and the current outlook for the third quarter looks strong. However, we remain cautious on some of our international projects given the potential for a slower reopening outside the US due to COVID. I'd also like to note that, we are seeing higher costs for the plastic and fabric components of our environmental and construction mining systems. While this presents some near-term margin pressure we expect to fully offset these higher costs through the ongoing efforts of our supply chain team, as well as through pricing adjustments. Overall, we expect another strong quarter for this segment with organic sales and margins at similar levels to the second quarter. In addition, Normerica is now part of the Performance Materials segment and the acquisition will contribute two months of sequential sales growth to the segment in the third quarter. As Doug stated earlier, we expect modest EPS accretion to begin in the fourth quarter this year as we move through the integration period, ramping up to full run rate accretion over the next 12 months. And now let's move to Specialty Minerals. Specialty Minerals sales were $142.7 million in the second quarter, 30% higher than the prior year, and 3% lower sequentially. Paper PCC sales grew 31% versus the prior year on recovering paper demand and the continued ramp-up of three new satellites. Specialty PCC sales grew 24% versus the prior year, and higher demand from automotive construction and consumer end markets. Overall PCC sales were 5% lower sequentially, primarily due to temporary paper mill outages in India related to COVID-19 and the typical seasonal paper mill outages we experienced in North America. Process Mineral sales were 31% versus the prior year, and 2% sequentially on continued strength in residential construction and consumer end markets. Operating income for this segment grew 31% to $20 million and represented 14% of sales. Inflation impacted this segment the most, primarily driven by lime and energy cost increases. We have been managing the impact with our supply chain team and we have been adjusting pricing throughout the first half of the year accordingly. We expect the inflationary cost environment to continue and we will also continue with our price adjustments throughout the second half. As you'll recall, the price adjustments for Paper PCC are contractual and they follow a predetermined schedule. Now moving to the third quarter, we expect higher volumes for Paper PCC on higher sales in India and the ramp-up of our packaging expansion in Europe. We also see continued strength in specialty PCC and processed minerals. And overall for the segment, we expect the third quarter to be similar to the second quarter. Sales should increase modestly on a sequential basis. However, we do expect margin pressure to persist due to ongoing higher costs and the timing of Paper PCC increases. And now let's turn to the refractory segment. Refractory segment sales were $74.5 million in the second quarter, 33% higher than the prior year, and 1% higher sequentially as steel utilization rates continue to strengthen in the second quarter. Segment operating income was $11.7 million, 98% higher than the prior year and 3% lower sequentially and operating margin was strong at 15.7% of sales. Steel utilization rates have improved to 84% in North America and 77% in Europe, up from 78% and 72% respectively in the first quarter. Steel production at these levels we should continue to generate strong demand for our refractory products and the productivity that they provide for our customers' furnaces. As Doug mentioned, we see growth ahead for this business as we signed two additional long-term contracts in the second quarter. We've now signed a total of seven new contracts worth $80 million over the next five years, which will provide $16 million of incremental annual revenue ramping up through 2022. Looking ahead, strong market conditions are expected to continue in the third quarter. We should benefit from a few additional laser equipment sales in the third quarter. However, we expect the bulk of our laser equipment sales to occur toward the end of the year as our teams are able to perform more on-site installations. And overall for this segment, we expect a similar performance sequentially. Now, let's take a look at our cash flow and liquidity. Second quarter cash from operations was $67 million versus $64 million in the prior year bringing year-to-date cash from operations to $118 million versus $94 million last year. This was a 25% increase. We deployed $22 million of capital during the quarter on sustaining our operations, mine development, and other high return opportunities. We continue to expect capital expenditures in the range of $80 million to $85 million for the full year split evenly between sustaining and growth capital. Year-to-date, we have used free cash flow to repurchase $37 million of shares. And in total, we have repurchased $54 million under our current $75 million share repurchase program. As of the end of the second quarter, total liquidity was over $700 million and our net leverage ratio was 1.6 times EBITDA. For the acquisition of Normerica, we used $85 million of cash on hand and $100 million of our revolving credit facility. This will initially bring our net leverage ratio to approximately two times EBITDA on a pro forma basis, and we expect to pay down the incremental borrowing over the next 12 months. Our balance sheet remains in a very strong position. And this strength provides us with the flexibility we need to continue to invest in high value, high-return growth opportunities. We expect strong cash flow generation to continue in the second half of the year, and we see free cash flow in the range of $150 million for the full year. And now let me summarize our outlook for the third quarter. Overall, we see similar conditions in the third quarter across our end markets to what we saw in the second quarter. Our consumer-oriented businesses remain robust and paper demand should continue to improve through the third quarter. We will have the typical foundry customer maintenance outages and our project-oriented businesses should continue their recovery. We continue to watch for potential COVID related shutdowns that may impact some of these projects. Inflationary cost pressures will continue in the third quarter. We are keeping pace with higher costs through pricing actions some of which we have already implemented and other price adjustments, primarily in the paper business which will be implemented contractually through the second half. Overall for the company, we anticipate another strong performance in the third quarter with a similar level of operating income to that of the second quarter as well as continued strong cash flow generation. I'll note here again, that we also see two months of sales from the acquisition of Normerica in the third quarter along with purchase accounting adjustments and integration costs. Accretion from the acquisition will begin ramping up in the fourth quarter.

Thanks, Matt. Before we conclude, I'd like to take a quick moment to highlight the publication of our 13th annual sustainability report. This year's report is a significant step forward in terms of reporting and outlining the significant progress around our broad range of sustainability goals. You'll see in the report that we've already exceeded our reduction goals in four of six targets related to emissions, energy and water and are on pace to achieve the other two. In addition, we provided more details regarding our safety culture, how we've evolved our product portfolio toward more sustainable solutions and initiatives around employee engagement, diversity and inclusion and community outreach. I'm very proud of the progress we've made advancing our objectives which is a direct reflection of our employees' involvement and dedication to sustainability at MTI. I encourage you to review the report which is available on our website. To conclude I want to extend my thanks to our 3,500 plus employees for delivering a strong quarter. And also like to welcome our Normerica employees to MTI. With that, let's open it up to questions.

And we'll take our first question from Daniel Moore with CJS Securities.

Thank you. Doug and Matt good morning. Thanks for taking the question. I'll start with Normerica. Really nice to see obviously strategically a great fit. Can you talk a little bit more in terms of detail on the synergies you expect to achieve? I assume you're a supplier there previously. So opportunity to capture margin? And are there any revenue synergies over time as well?

Yes, we do see synergies primarily related to the strategic operating footprint that Normerica adds to our vertically integrated positions in our mines and locations. Over time, we plan to leverage that footprint across the United States and Canada to reach a wider customer base. We anticipate integrating some business processes, and there will also be synergies in our clay supply chain as time goes on. Thus, we view this in three ways. In the long term, we have now established vertically integrated positions in Europe, North America, Asia, and even Australia for private label pet care. Our operations are selling bulk business to branded customers as well as packaged products globally. We believe we can provide stability, quality, and innovation to both regional and global customers, which presents sales opportunities we are excited about. We are pleased to welcome 320 new employees to the company and eager to begin expanding this business. We've been growing our Pet Care business by approximately 18% organically over the last three years. Looking ahead, we think we can maintain a growth rate of about double the market, which is currently growing at around 4% globally. This positions us with a substantial, growing, resilient, and stable product line, and that’s why we are enthusiastic about this development. More details will follow as we pursue these synergies.

Excellent. Beyond Normerica I think the biggest positive surprise at least for me was the pickup in Enviro and construction technologies. And obviously the contract of FLUORO-SORB. Can you maybe discuss the momentum you're seeing there and sustainability?

We anticipated this situation. Last quarter, we projected that as projects began to open up globally, primarily in international markets, we would see progress. While there has been some movement in North America, international COVID shutdowns at construction sites and related delays in decision-making for new projects have been evident over the last 24 months. We observed this in the first quarter, where decisions facilitated site openings, product movement, and project completions. We expect a similar performance in the third quarter. Our main concern remains the COVID-related shutdowns outside the United States, especially in Southeast Asia. Currently, we are predicting a comparable quarter ahead, but we do have some hesitancy in ensuring that this trend continues given the potential impact of COVID variants.

Got it. Maybe one more beyond FLUORO-SORB, what are the maybe one or two products technologies you're most excited about in terms of incremental potential as we think about 2022, 2023 et cetera?

Yes, that's a great question. We are really excited about FLUORO-SORB. Why don't we do this? I'll go around and ask each of the business unit presidents for their thoughts. Let's start with D.J. Can you answer Dan's question?

I'll take more color on FLUORO-SORB too. I wasn't trying to overlook that.

I'm going to let Jon handle that. D.J., why don't you start by sharing your thoughts on paper and performance? What excites you the most?

Yes. Boy Doug on the Performance Minerals side certainly the specialty PCCs that we're launching are exciting. We're getting a lot of market pull out from the sealants business on those. And now on the paper side, all this work we've been doing to try and penetrate packaging is starting to show good traction, especially on some new products. We just ran a trial in brown paper with something that's off of our new yield platform and that looks solid. And then, we've got a couple of other promotions that we're pretty active on new products for packaging. So, I would say those are the ones that are most exciting to me Doug.

Thanks D.J. Jon?

Dan, a couple of things. I'll come back to FLUORO-SORB over in a second. Let me talk about the portfolio a little bit. First of all, it gets me pretty excited, because we're introducing on average about 30 products per year, and we're on track to do that again this year. You've heard about our edible oils business. It's what we call edible oils, also supplies into biodiesel. So, we continue to innovate more selling that plan out pretty well and looking for ways to expand it. Personal care, one of the key drivers, Doug mentioned, the significant growth in personal care. One of the drivers is the new formulations, new technologies as we're dealing with the customers and figuring out new ways to put ingredients into our products that we haven't done before. So again, it's enabling us to almost double that business. Pet care, you heard about we've got eco-friendly packaging. But we also look at the new geographic reach that we have with Normerica, enables us to bring our new innovative products to the Southeast US and California markets. So, pretty exciting there. I'll just wrap up. We've got drilling products new products that are coming out. They are tailored for various types of drilling and various types of solars that are encountered. And they're doing extremely well. So, let me come back to FLUORO-SORB, because I know that was part of your question and the interest as well. We've spent a lot of time developing the product. We saw a market need a couple of years ago. And we introduced our Gen 1 a little while back. That's what's been selling recently. We've also got a Gen 2 that we've recently commercialized, it's a patented technology, so very unique and it's double the efficacy and the efficiency of removal of PFAS. But what gets us really excited is this project, not only the size but also the timing. And it's really an affirmation of the technology that we have and the opportunities that we see. In addition to that, we've got some really good news published by the Orange County Water District. And we've talked about cleanup of drinking water. We see that as another market in that FLUORO-SORB will be able to attack. And Orange County is really important, because they're kind of the model for a lot of the water districts around the world. And so, a lot of people are watching us and the results are showing that we've got a really, really good product, that's very cost-effective and very efficient at removing PFAS. So we're excited about it. We watch what's happening in the regulatory environment. It's advancing at the national level and also at the state levels also oversees. So there's a lot of opportunity. Time will tell how big this can be. But, again pretty excited about the technology there.

Thanks Jon. Brett, how about our refractories?

Yes. Thanks, Doug. Really, if you look at what we've done there's the product portfolio transition to our hybrid products that really allow us similar or better durability at improved cost. I mean this has been really, really great for us and taking it to the next step. We continue to piggyback off of the original formulas to continue to improve. And then secondly, it's the automation of our application in laser equipment. I think tying these together has been really a great foundation for us driving those new agreements and to promote technology from Minteq.

Thanks, Brett. Dan, I may not have more information than what you requested, but there is a lot happening. As Jon mentioned, we launched 42 products last year, and we are on track to introduce a similar number this year, focusing more on sustainable solutions for our customers and for ourselves. It's a broad effort, and we have a lot of initiatives underway that we're really excited about.

I'll take the detail. Thanks and congrats on the momentum, and I'll follow-up with any offline. Thank you.

Thanks, Dan.

The next question comes from Silke Kueck with JPMorgan.

Good morning. How are you?

Hi, Silke. How are you?

Good. I'm also going to start with Normerica, if that's okay. So looks like the EBITDA margin for Normerica is around like 14% and what you're hoping to get to? Is it maybe like 18%, something like that, so maybe this is like $4 million or $5 million synergies you can take out? How about the EBIT margin? You talked about the EBIT margin pre-impose synergies. Do you think there'll be like a 100 basis point gap to where MTX's EBIT margin is of 14%?

So, Silke I think from a synergy perspective, if you listened to the prepared remarks, you're right what Doug guided to in terms of that pre and post multiple would tell you the synergies we're projecting are in the $5 million to $7 million range. From an EBIT margin, we're still early days and we're working through the purchase accounting adjustments. What I'll tell you is, based on the existing DNA in Normerica plus the step-up that we're projecting, and this is just an estimate we'll give you a better sense of what the real number is next quarter. You can think of that in the $8 million to $10 million range.

That's helpful. Thanks for that. Secondly, I also have a question about FLUORO-SORB. You mentioned that it is used with the defense department, likely related to cleaning up contamination from firefighting foam. Can you explain exactly what your product does? Is it used alone, or is it combined with something else? If you have one cleanup site, how long is the product typically used, a few months or up to a year? Also, what revenues do you anticipate from this project?

Let me start by providing an overview of this project. You're correct, and then I will hand it over to Jon for more technical details. The company has a long history in water treatment, and we have developed products for the remediation of groundwater, not only related to PFAS but also in our energy services line for cleaning produced water and flowback water from offshore oil operations. Our business began with products designed to meet EPA standards for cleanup so we can operate offshore, focusing on insights into groundwater contamination. This effort combines our past experience and equipment knowledge to create a product specifically for targeting the PFAS molecule. We have developed this product and have been testing it in various applications, including urgent cleanup sites. As you may know, the Department of Defense has been using firefighting foams, making this a relevant application. Municipal water companies are also keen to ensure their water is safe for drinking. Our product is cost-effective and can be used alongside other solutions. I’ll let Jon elaborate on that. We highlighted this particular project because it represents a $1.7 million opportunity. We've conducted several smaller projects and tests, but demonstrating it on this scale is significant and paves the way for additional projects mentioned by Jon, both smaller and larger ones in the pipeline. Jon, could you provide some technical details about how this project functions and how we're applying it in other scenarios?

Sure, sure. So Silke, the real advantage of FLUORO-SORB is that it is an absorbent that is attracted to both short-chain and long-chain molecules from PFAS. PFAS generation. As you know, PFAS is not one type of material it's a family of materials with a variety of different properties. But what we have found is that our technology has anchor sites where we bind those PFAS molecules to the surface of our absorbent. And it ties it up and it doesn't let it go. So it's really, really effective in cleaning up water, cleaning up soil. They can be put into municipal drinking water and municipal wastewater. It can treat landfill leachates, it can go into in situ soil and groundwater remediation, we can pump it into the ground and again it can prevent the migration of any plumes that might exist in the ground. Like Doug said, we've tested it right now. We're working 75 different projects worldwide. The results are coming back to the efficacy is multiples higher than the most common - commonly used activated carbon. It's also very cost-effective versus Ion exchange. And so we have - certainly there're competing technologies and great products, but our product seems to have a lot of interest because of the efficacy that it has. So it binds those molecules and it absorbs to the surface and it doesn't go. So it's a very effective extraction mechanism.

If I can ask the last question, do you have to reclaim the absorbent since you have to dispose of those?

At some point in time you would have to dispose. So they can be incinerated or they can be put into a landfill. Again, we're working with a lot of the landfill operators to understand their needs and requirements. But yes, you would have to dispose it. It can be also used – I know part of your question was whether it can be used in combination with other materials? Yes it can. And so we find that there are some applications where they may have large volume and they use one filtration medium first and then they really get the effective absorption through the FLUORO-SORB. So a variety of different ways it can be used.

Thank you for the detailed explanation. Want to ask two more questions. One on refractories. Can you remind me how large your refractory business is in Asia and in China? And do you think that's a business that over time – my memory is that it's very small. Do you think that's a business over time that you'll explore or that you're interested in, or what was refractory business in general something that's long-term that's not going to be core?

So yes, you're right. Our business in China, specifically is small and that's – didn't that wait for a long time. It's not – it's been a challenge. The market is different in China. First off there's a number of different refractory producers and providers and many of them by the way are part of the steel producers. And so it's never been a very large business for us, we do have a number of strategic producers, a few strategic producers, steel producers that kind of value the productivity that our product brings but I don't think that's a focus area that we see that's going to grow for the company. However, India has been a very good market for our products and it's been growing consistently over the past 10 to 15 years. We also see Southeast Asia also from that India business and being able to supply from Japan, which is also a very sizable business for us. So I think overall Asia is about 10% of the refractories business, so it's small but India, Southeast Asia and Japan have continued to grow. Our main markets for refractories are North America and Europe. Those two markets really kind of value the productivity that we bring a basic oxygen furnace or an electric arc furnace, and as Brett mentioned, the technologies that we've developed in terms of our new hybrid products, which are higher-performing at a similar price for our customer, tying that with even more automated application and laser technology, improves not only performance in EAF or BOF furnace but also the safety associated with the application and being able to move people out of the way of that furnace. And so wrapping that technology of applications, the product efficacy and the laser technology that we bring, those three things are what's really – and largely what's behind the $80 million of business that Brett has secured for the next five years. So that's where this business has moved but that value proposition plays a little bit more in North America and Europe with producers and the kind of productivity requirements and cost requirements that we have here.

Thank you. And my last question is just about the general performance of the businesses it looks like your minerals business, refractory business, the Performance materials, all operating at – like you said like pre-COVID level or very similar to it. And the only area that's a little bit behind is PCC and yes, I understand you're expanding capacity. Do you think that sales and profitability levels for PCC can get back to 2019 levels in 2021, or what do you think it's more of an event for 2022?

Yes. There are still a few areas that have not fully recovered. I believe paper demand will keep improving, particularly as offices and schools begin to reopen, which will likely increase that demand. This trend is already evident with Domtar's announcement to reopen their Ashdown Mill, expected in the first quarter of next year. Our Environmental products business, including energy services, also has potential for growth in offshore areas. Our project-oriented businesses have just started to gain momentum in the second quarter. There are still some areas within the company that have not bounced back yet, which I expect will contribute to sales and earnings growth in the latter half of the year. However, we are monitoring ongoing issues, particularly in India, where some Paper PCC operations were temporarily shut down due to COVID-19. We are still observing the status of these project-oriented businesses, so we have not completely emerged from these challenges outside the United States. I think there is still growth potential. As for Paper PCC, I believe restoring it to previous levels is likely a 2022 scenario for achieving those margins again. We anticipate growth in demand, particularly in the United States starting in the first quarter, along with three new satellites coming online in the first half of next year and a continued ramp-up of existing ones. Looking further ahead, I want to highlight what D.J. mentioned regarding our packaging opportunities. We are gaining traction with new technologies like NewYield in packaging and have various packaging opportunities in our pipeline. As these opportunities become more actionable, especially in the near term, they will likely contribute to higher margins next year.

Our next question comes from David Silver with CLK.

Yes, good morning. I would like to begin with a few questions regarding your PCC business. I appreciate the detailed overview of the new capacity you've provided. However, I would like to ask D.J. a couple of questions. First, regarding the restart of the Domtar plant, could you describe the scale of that operation? Additionally, what preparations are needed from your end to support this restart? Specifically, was this an existing plant that was shut down and is now being restarted, or do you need to construct something new from the ground up? Is it possible that you will be ready to operate immediately when the mill resumes production? Secondly, I wanted to touch upon the comments concerning customer outages in India due to COVID-19. I hadn’t heard about that situation, but there’s substantial global discussion about variants and the original virus. Considering your operations in emerging markets, especially in Asia, how widespread do you expect another wave of COVID-related outages to be at your satellite plants? If you could provide some context on this matter, it would be helpful, particularly whether this is likely to be an isolated incident or whether it may linger in India or extend to other countries where you have significant operations. Thank you.

D.J., you want to take that?

Absolutely. Thank you, David. First, let me frame the discussion about Domtar. The facility in Ashton, Arkansas, is set to restart one of its paper machines. We have a PCC satellite there that has been operating at reduced rates because we were servicing a couple of off-site customers from that location. We are currently in the process of transitioning those customers to another site, but we've now paused that effort. We will continue to service them as needed and will be ready to support the Ashton facility right away, pending a refresh of our contractual agreements with Domtar. I should also mention that Domtar has sold its paper business to Paper Excellence, which is associated with APT, a partner and customer we’ve worked with for decades. We are excited about the restart at Domtar and eager to learn more about APT and Paper Excellence's plans. We expect this initiative to yield an opportunity of around 30,000 tonnes per year for that machine. Additionally, as Doug noted, U.S. operating rates for these grades are currently at 95%. The restart of that paper machine reflects the market's confidence in maintaining that volume. The general industry sentiment suggests that with this machine back online, the market will be well-supported and should remain stable. Regarding India, the most significant impact we've observed comes from the new capacity we added last year, which is just under 300,000 tons, primarily in China and only mildly affected by COVID. In India, we've launched three new locations, but all have faced delays due to COVID and the challenges our customers have had in obtaining labor for proper production. We see them starting to come back online, and we are ready to supply those customers as soon as their machines are operational. Over the next 12 months, we expect to introduce 130,000 tons, with part of that in packaging in Europe, which remains unaffected. However, 40,000 tons in India has been delayed by about a quarter, so we anticipate seeing that operational by the end of the third quarter or the beginning of the fourth, whereas we had initially expected it to start in the second quarter. As for the potential impact of another round of COVID-related customer outages, I can’t predict with certainty. We experienced relatively low levels last quarter, so I don't foresee a significant change going forward. The situation was challenging, but our customers are beginning to recover. I hope that provides some clarity. Doug, do you have any further insights to add?

It is difficult to predict the future impact of COVID. However, I can assure you that we have maintained all safety protocols at our plants to ensure they are as safe as possible. Our employees have done an excellent job in upholding these safety measures. We are focused on keeping our plants operational and fully prepared to serve our customers. Although there are uncertainties regarding customer behavior, our teams are doing a fantastic job ensuring everyone's safety.

I would like to follow up on a question about NewYield. I'm curious why the adoption of this new technology hasn't been faster. It seems to offer clear economic benefits, and customers have a new marketing opportunity by using a product made from reclaimed paper while also reducing waste. I feel like I'm not doing a great job presenting NewYield, but D.J., do you feel frustrated with the slow adoption rate? Is the selling process particularly lengthy to convince customers? Can you shed some light on why this seemingly viable product hasn't gained more traction in our environmentally conscious market?

That's a great question, David. I wish the process was quicker. The promotional and selling processes, from developing the concept to demonstrating value, have been progressing well. However, demonstrating the value has proven to be challenging. The trial processes have taken longer than anticipated, primarily because we are working with a waste product from our customers' processes. One major concern for our customers is the reliability and predictability of that waste production, which has turned out to be more difficult than expected. Once we overcome that challenge, we proceed to trials where customers assess both the economic and performance aspects of the product before testing it with their clients. Interestingly, most customers aren't marketing this as a different type of paper; instead, they prefer to emphasize the savings and reduced environmental impact, keeping their efforts relatively discreet. Earlier, I mentioned a trial we conducted with NewYield, which is where the paper group is focusing more on packaging. This is exciting but will also take time. The enthusiasm stems from working with brown packaging, which gives us some operational flexibility regarding the color properties of our pigment. However, the production of brown boxes typically involves only fiber, which poses technical challenges. The successful trial for the brown box platform is significant, and while the qualification process for printing and writing grades has been slow due to stability and quality issues, we believe that the brown box segment may be able to move more quickly. Regardless, we still need to deploy our manufacturing capabilities. Each time we receive positive feedback from a customer, it will necessitate either an expansion or the establishment of a new satellite facility. Eventually, I will announce a new NewYield satellite, but there will be a gap between the announcement and when it generates sustainable long-term revenues due to the time required to build the manufacturing site. I hope this gives you the insight you were looking for.

Does that help, David?

Yes. No, that was very helpful. Thank you very much. I'm going to get back in queue.

Okay. Thank you.

Our next question comes from Mike Harrison with Seaport Research Partners.

Hi. Good afternoon. I was wondering in the Metalcasting business, can you quantify the amount of impact on volumes or revenues that you saw related to the chip shortage and some foundry customer outages? And talk about whether you expect that to kind of be at a similar level as we get into the third quarter? And are there any other product lines outside of Metalcasting, where maybe you saw some impacts from customer supply chain disruptions?

Yes, we've noticed a slight impact on Metalcasting. Our product for foundries is versatile and can be used in automotive, industrial, or heavy equipment sectors. We've experienced approximately $1 million in sales impact related to a slight slowdown in the automotive sector, but this is relatively minor. The foundries we work with serve a wide range of industrial markets, and we continue to see strong demand overall. While it might have been $1 million higher due to automotive, we are still experiencing very high demand and are supplying other markets like heavy truck, off-highway, agriculture, and industrial products, including in China. Therefore, the impact has been minimal up to this point.

All right. And then, within the Specialty Minerals business that's where you kind of called out the margin impact in raw materials versus pricing being maybe the biggest concern. Maybe just comment in a little bit more detail what your expectations are for raws and pricing as we get into the third quarter? And are there any other impacts we need to keep in mind in terms of cost versus price in the other two segments?

Let's start at a higher level. You're right that Specialty Minerals experienced the most significant impact from inflationary factors. However, overall sales and demand across the company are strong. Many product lines are seeing sales and demand levels return to pre-pandemic figures, which is encouraging. This demand enables us to engage in ongoing discussions with our customers regarding the value of our products and to address key inflationary pressures. Energy has been the primary concern this year, particularly affecting our process Minerals businesses. Additionally, we are witnessing raw material inflation across the board, which is set to increase in the second half of the year as raw material costs, including those related to energy, rise. For example, higher oil prices will impact some textiles used in our mining systems and other packaging materials. We are anticipating a rise in raw material costs as we move into the latter half of the year. Furthermore, logistics have been tight and are expected to remain so into the second half. Our teams are actively working on both supply chain and commercial fronts. So far, we have managed inflation effectively. We've engaged in productive and transparent discussions with our customers about price adjustments, which helps us address inflationary pressures. For the full year, we expect to offset inflation through pricing. While we anticipate some acceleration in inflation in the second half, we're looking at about 2% inflation on our overall cost of goods sold. Our vertical integration puts us in a solid position since we manage most of what we use to produce our products in-house. Lastly, we continuously emphasize pricing based on the value of our products, which facilitates ongoing conversations about pricing adjustments throughout the year. It's important to note that there is a pricing lag in Paper PCC, meaning that while our line pricing is increasing, there can be a delay of up to six months before we capture those increases.

All right. Thanks very much.

Thanks, Mike.

We take our next question from Daniel Moore with CJS Securities.

Make it short and sweet. I just want to make sure, I heard correctly Matt, 5% to 7% earnings or EPS accretion fiscal 2022 for Normerica. Is that the right way to think about it?

That's the right way to look at it. So, its 5% to 7% EPS accretion in 2022, also what I said was about $5 million to $7 million of synergies that we're looking at. Look, just a follow-up on the one thing about margins. We do see this being a strong contributor to margins as we move forward as well.

That is perfect. Thank you.

Our next question comes from Rosemarie Morbelli with Gabelli & Company.

Thank you. Good morning everyone.

Hi Rose. How are you?

I am good. Thank you. How are you?

Good.

I was wondering if you could touch on the size of the pet business in North America, because you bought Sivomatic that was based in Europe. Now you are adding Normerica. So if you could give us out of the $351 million of revenues for this segment what is North America and the rest of the world?

Of the $350 million, I'd estimate that North America accounts for about $220 million to $225 million.

No. I was…

And when …

No. I was going to say that part of the growth is coming from Asia, which is likely growing the fastest.

No, no. It's all right. We…

It shouldn't be right…

So if we look at the profitability is it as profitable in the U.S., or is it more profitable in Europe since you seem to be focusing at what Sivomatic was focusing on the higher premium type of pet leader.

Profitability is generally similar across the globe, though we do see different cost structures in North America and Europe related to our mines and transportation expenses. Overall, they are comparable, but the growth rates vary. North America's growth rate aligns more closely with GDP, as cat ownership is well established there. In Europe, the premium products made by Sivomatic are experiencing faster growth than in North America. Meanwhile, our business in Asia is also growing, though from a smaller base, at the highest rate. We have also begun to enter new channels, expanding beyond major outlets to include online platforms in both Europe and North America. In Asia, the majority of sales occur online, particularly in China, which drives a faster growth rate. While profitability is similar, the cost structures differ slightly, and we anticipate growth rates of over eight percent if we can maintain this momentum in the coming years. I hope this provides insight into the sizes and growth rates.

Yes, it does. Thank you. You are adding Normerica and will supply them with Bentonite from your online source. What type of reserves do you have, and while I am sure it is mentioned in the K, could you remind me how large your reserves are and whether this additional demand will reduce them?

No. We have plenty of reserves. We have historically sold a portion of Normerica's clay supply. We have long-lived reserves in Wyoming and Montana, with proven reserves extending out 20 to 30 years. Additionally, we have other indicative reserves and land in Wyoming that are even further out, so we are well-positioned in the United States to meet the supply needs of the combined business for the foreseeable future.

This addition enhances your consumer-focused business, which was previously around 25% of the total, with a goal of reaching 50%. Where do we currently stand? What steps are needed to achieve the 50% target? Are you considering divesting certain operations that are not consumer-focused, which could quickly improve the ratio?

Let me address the target first. I'm not certain if we've publicly announced that the target is 50%. There have been questions on this call about where we can go, and it's possible that we could reach that point. What we are really focused on is identifying where we can effectively serve the market. We refer to this as mine to market, or in this context, mine to shelf. We believe we are uniquely positioned to supply this type of market, which demonstrates different growth rates that involve innovative product development. This aligns perfectly with what Minerals Technologies represents, making it a great fit. There are opportunities to expand further into consumer-oriented products, while we will still maintain an industrial aspect to the company. Currently, we're at around 30% in this area. We see additional opportunities, and as these segments grow at the rates I've mentioned, particularly in personal care, pet care, and edible oil purification, they will naturally become a larger part of our company. There may also be inorganic opportunities to consider. While I won’t commit to reaching the 50% target specifically, our goal is to create a more balanced mix of industrial and consumer business, leading to a more sustainable and higher growth rate than we have seen historically. This transaction supports that direction. From an operational perspective, owning the mines already enhances our margin growth as well. Overall, I believe this is a strong story that enhances shareholder value, particularly with this transaction.

Right. I appreciate the input and congratulations.

Thank you.

And at this time, I'd like to turn the call back to Mr. Dietrich for any additional or closing remarks.

Well, thank you very much for joining today. I appreciate all the questions and I appreciate you hanging in there for a few extra minutes. We'll talk to you again at the end of the third quarter. Take care of till then. Thanks.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.