Minerals Technologies Inc Q4 FY2021 Earnings Call

Please stand by. We are about to begin. Good day, everyone. And welcome to the Fourth Quarter 2021 Minerals Technologies Earnings Call. Today’s call is being recorded. At this time, I’d like to turn the call over to Erik Aldag, Head of Investor Relations for Minerals Technologies. Please go ahead, Mr. Aldag.

Thank you, Katie. Good morning, everyone. And welcome to our fourth quarter 2021 earnings conference call. Today’s call will be led by Chairman and Chief Executive Officer, Doug Dietrich; and Chief Financial Officer, Matt Garth. Following Doug and Matt’s prepared remarks, we will open it up to questions. I’d like to remind you that beginning on page 15 of our 2020 10-K, we list the various risk factors and conditions that may affect our future results. And I will also point out the Safe Harbor disclaimer on this slide. Statements related to future performance by members of our team are subject to these limitations, cautionary remarks and conditions. Now, I will turn the call over to Doug. Doug?

Thanks, Erik. Good morning, everyone, and welcome to today’s call. I will walk you through our results for the fourth quarter and the full year of 2021. I will also give you my insights on the year, focusing on our key financial and strategic highlights, as well as the various dynamics we faced and successfully managed through. Matt will then discuss our financial results in more detail and outline our first quarter outlook. Following Matt, I will finish up by describing how we see 2022 shaping up as a strong year for us, touching on our key priorities, growth initiatives and market conditions. Let me start by going through the takeaways for the fourth quarter, which concluded a very strong year for MTI. Market demand continued to remain robust and we delivered sales of $477 million, 10% higher than last year and earnings per share of $1.25, an increase of 16%. Despite the market conditions, this is by far the most difficult operating quarter of the year. We had to navigate through a variety of inflationary and logistics pressures, which became more pronounced late in the quarter. Cash flows remained solid through the fourth quarter, capping off a strong year. Operating cash flow was $69 million and free cash flow was $46 million, and we made progress to lower our debt levels by paying down $20 million of debt. Let me share how the quarter played out from an operational perspective and the actions we put in place to address the rapidly changing conditions. Heading into the fourth quarter, we anticipated that inflationary costs and logistics and supply chain challenges would persist, and we positioned ourselves to recover these costs through implemented pricing actions. For much of this transpired as expected; we experienced significant additional cost escalations, notably due to a rapid energy price spike in Europe. We also saw an increase in supply chain disruptions, mainly due to truck and rail availability for shipments. This was exacerbated by COVID-related labor challenges, primarily in the last month of the quarter. The combination of these dynamics led to higher plant operating costs and delayed shipments, resulting in about $5 million of reduced income in the quarter. Despite these circumstances, our global team did a great job executing, adjusting operating schedules, securing freight logistics and taking further pricing measures. Our order books remain robust and the actions we have taken should more than recover the additional cost pressures we faced, setting us up for a stronger first quarter. On the growth and business development front, we had several highlights during the quarter. The integration of Normerica is progressing well, and we executed on significant opportunities in the quarter to grow our Pet Care business further in 2022. We also made a small acquisition of a Specialty PCC asset in the Midwest U.S., which strengthens our logistics and manufacturing capabilities. In addition, we signed two new satellite contracts in Asia, one for a PCC facility in India and another with a packaging customer in China. All in all, it was a productive quarter from a growth perspective, and the operating and pricing adjustments we have already made position us well for a stronger start to 2022. Before Matt gets into the financial details for the quarter, I’d like to review some highlights from 2021. It was a strong year for MTI as our business recovered from the 2020 COVID demand lows to deliver record results. We accomplished this through a combination of operational execution and a focused commitment on advancing our key growth initiatives, which have meaningfully shifted our sales portfolio to be more balanced and stable. To demonstrate this transition, over the past few years, revenue from our consumer-oriented businesses has doubled and today they comprise 30% of our total sales portfolio. It is this portion of our portfolio that’s positioned in higher growth non-cyclical markets. First and foremost, we delivered record annual sales and earnings per share for our company. Sales increased 17% over last year to $1.9 billion, operating income was up 13% to $241 million and our earnings per share grew 26% to $5.02. Serving our customers and innovating to grow with them is what motivates our team. We continue to accomplish this while navigating through complex and rapidly changing conditions during the year. We operated in an environment with sharply rising input costs, which required frequent operational adjustments, strong supply chain management and process improvements. Our teams worked closely and transparently with our customers to manage through these dynamics, and we were successful in implementing a broad array of strategic pricing actions across our portfolio to offset the $50 million in extra costs we had to absorb. The past year required a significant amount of agility from our employees and I am proud how they engaged to drive improvements, efficiently run our operations and support our customers evolving needs. Generating strong cash flow, further strengthening our balance sheet and maintaining flexibility with how we deploy our capital are priorities. Our financial position gives us significant optionality to allocate capital to shareholders while also investing in attractive growth opportunities. We demonstrated this in 2021 by deploying $86 million to fund high return organic projects, as well as to maintain and improve the performance and safety of our facilities. We acquired Normerica and Specialty PCC assets while also returning $82 million to our shareholders through share repurchases and dividends. Our balance sheet remains strong and we kept our net leverage ratio near our target levels of two times EBITDA. Now let me take you through how we advanced a broad range of initiatives, which set us up nicely for continued growth in 2022. We will start with our consumer-oriented products. Most of these businesses are in our Household, Personal Care & Specialty Product line and they performed very well with sales growth of 21%. This growth is a result of our positions in these structurally growing and stable markets and has been bolstered by our investments in new technologies, capacity expansions and through extending the geographical reach of these businesses. The Normerica acquisition is one of those investments, as it further expanded our Pet Care business in North America. We have also realized significant sales increases in other specialty applications, such as Edible Oil Purification and Personal Care, which grew by 48% and 80%, respectively, last year. The next part of our growth strategy that we delivered on during the year was expanding our core product lines in faster growing geographies. Our Metalcasting business continues to grow globally, leveraging our blended bond system value proposition with customers in large foundry markets. Metalcasting sales were up 21% in Asia, as we expanded our customer base and further penetrated into China with sales of our pre-blended products increasing by 20%. We continue to demonstrate our value in other countries and specifically in India, where sales of our blended products were up nearly 40% in 2021. Our PCC business continues to grow geographically with a 22% sales increase in Asia. We benefited from 280,000 tons of new capacity that came online over the past year. In addition, we signed two new satellite contracts in 2021 totaling around 70,000 tons, which will be commissioned by the end of this year. And we are growing in our core markets. Our Refractory segment is a great example of this, as we have captured significant new business in the electric arc furnace market. In 2021, we signed long-term contracts worth $100 million through the deployment of our new portfolio of differentiated refractory products and high-performance laser measurement solutions. Another area where we successfully drove new profitable growth opportunities is by tapping into attractive adjacent markets through a broadened product offering. I will highlight a couple of areas for you. We signed a long-term agreement in December to deploy ground calcium carbonate technology for a new coated paperboard mill in China with a premier packaging customer. And we are really excited about this one, as it's MTI's first GCC satellite offering specifically tailored for packaging customers and represents a fundamental step in our ability to drive new growth opportunities in the white paperboard market. In addition, we have several trials underway with other technologies in both the white and brown packaging space. I talked to you about our broad capabilities in water remediation and the traction we have made with FLUORO-SORB, our proprietary solution for remediating PFAS contamination in groundwater. In 2021, we completed our first major commercialization for a large-scale project and we generated interest in several other large drinking water and soil stabilization projects. Our growth this past year in wastewater remediation was 15% and we see this trajectory continuing in 2022. New product development is an integral part of our growth strategy and we have made significant strides to improve the speed of execution, increase the number of products commercialized and enhance the impact of our latest solutions. Over the past five years, we have cut the time from development to market in half and during the same timeframe we have increased the sales generated from new products by more than 60%. In addition, half of our new products are geared toward sustainable solutions for either MTI or our customers. And lastly, we strengthened our company through the acquisition of Normerica, which met all of our M&A criteria. The addition has made us one of the largest vertically integrated private label pet litter providers globally. And as a commercial and operational integration progresses, we see a clear pathway to drive higher growth rates and profits in our Pet Care business. All told, this was a really productive year for us on all fronts. I will come back to share my perspectives on the year ahead. But to sum up our growth achievements in the past year puts us in an advantageous position for a strong 2022. With that, I will turn over to Matt to take you through our financial results in more detail. Matt?

Thanks, Doug. I will review our fourth quarter results, the performance of our segments, as well as our outlook for the first quarter. I will then turn the call back over to Doug for some additional perspectives on the year ahead. Now, let’s review the fourth quarter results. Sales in the fourth quarter were 10% higher than the prior year and 1% higher sequentially. Organic growth for the company was 4% versus the prior year and the acquisition of Normerica contributed the remainder of the growth. Operating income, excluding special items, was $54.7 million and operating margin was 11.5%. The year-over-year operating income bridge on the top right of this slide shows that we experienced $27.4 million of inflationary cost increases versus the prior year, which we offset with $18.6 million of pricing. In addition, supply chain challenges, including trucking and labor availability, resulted in a delay of volumes from the fourth quarter, particularly in our Processed Minerals and SPCC product lines. The sequential bridge on the bottom right shows how inflation continued to accelerate from the third quarter to the fourth quarter. And heading into the quarter, we expected the pace of inflationary costs to moderate from the third quarter and we expected to recapture some margin with our planned price increases. As we moved through the fourth quarter, inflationary costs accelerated to nearly $10 million, including higher energy costs in Europe and Turkey. We were able to mitigate the unexpected increase with additional pricing in the quarter. However, a portion of the necessary price adjustments could not be passed through contractually until January 1st. In addition, logistics and labor availability challenges resulted in shipping delays, lower productivity at our facilities, and ultimately, higher per unit production costs in the period. These challenges, including the delayed sales volume and the unexpected spike in energy costs resulted in approximately $5 million lower operating income than we originally expected for the quarter. We have already made additional price adjustments in January and our pricing is expected to exceed inflationary pressures, expanding margins in the first quarter. We also expect to catch up on the operational challenges we faced in the fourth quarter. Meanwhile, we continue to control overhead expenses, with SG&A as a percentage of sales at 10.8%, 80 basis points below the prior year. Earnings per share, excluding special items, was $1.25 and represented 16% growth versus the prior year. Earnings per share benefited from foreign exchange gains driven by the depreciation of the Turkish Lira, as well as lower interest expense and a lower share base versus the prior year as we continue to pay down debt to repurchase shares in the quarter. Full year earnings per share was $5.02, a record for the company and represented 26% growth versus the prior year. Now, let’s review the segments in more detail, starting with Performance Materials. Fourth quarter sales for Performance Materials were $256.2 million, 17% higher than the prior year and 2% higher sequentially. The acquisition of Normerica contributed 13% growth versus the prior year and organic sales contributed an additional 4%. Household, Personal Care & Specialty Product sales were 24% above the prior year and 4% higher sequentially driven by Normerica and continued strong demand for consumer-oriented products. Despite strong end market demand and a full order book, our global Pet Care sales came in lower than we expected due to logistics challenges in North America and Europe. Metalcasting sales were 9% higher than the prior year and 16% higher sequentially driven by strong demand globally, continued penetration of green sand bond technologies in Asia and the return of volumes from the third quarter seasonal foundry maintenance outages. Environmental Product sales grew 13% versus the prior year on improved demand for environmental lighting systems, remediation and wastewater treatment. Building Material sales grew 21% versus the prior year on higher levels of project activity. Sales in both of these product lines were lower sequentially due to typical seasonality. Operating income for the segment was $29.1 million and operating margin was 11.4% of sales. Margin was temporarily impacted this quarter by approximately $3 million of logistics challenges and inflationary cost increases that could not be passed through contractually until January 1st of this year, primarily in Pet Care and our Metalcasting business in China. The Normerica business has been navigating the same supply chain and inflationary cost challenges as the rest of our business, and we have deployed pricing and productivity actions to achieve accretion as planned in 2022. Now looking to the first quarter, we see a significant rebound in margins for this segment, driven by pricing actions that went into effect on January 1st and continued strong demand across the product lines. Overall, we expect operating income for this segment to be approximately 20% higher sequentially. And now let’s move to Specialty Minerals. Specialty Minerals sales were $141.5 million in the fourth quarter, 2% higher than the prior year and 4% lower sequentially. PCC and Processed Mineral sales were both 2% above the prior year. This segment was the most impacted by the spike in energy in Europe, as well as logistics and labor challenges we saw in the fourth quarter. Segment operating income was $14.5 million and represented 10.2% of sales. In total, operating income was impacted by $4 million in the quarter, which came from approximately $2 million of unexpected energy inflation, an additional $2 million due to the sales and productivity impact resulting from logistics and labor challenges, primarily in our Northeast U.S. plants. Pricing adjustments were made in January to cover these inflationary costs and while logistics challenges continued into January, we do not foresee these challenges persisting through the quarter. Now moving to the first quarter, we expect higher PCC volume sequentially on the ramp up of our new satellite in India and the restart of a satellite in the U.S., and we expect continued strength in Specialty PCC and processed minerals. We see margins rebounding to more normal levels based on the pricing we have implemented. We should also see improved productivity in shipment volumes depending on the extent to which logistics and labor constraints ease. Overall for the segment, we expect first quarter operating income to be 20% to 25% higher than the fourth quarter. And now let’s move to the Refractory segment. Refractory segment sales were $79.2 million in the fourth quarter, 7% higher than the prior year and 4% higher sequentially on new business volumes and continued strong steel market conditions in North America and Europe. Segment operating income remains strong at $12.4 million, 12% higher than the prior year and operating margin was 15.7% of sales. Turning to the first quarter, we expect another strong operating performance from this segment, with operating income up 20% on incremental volumes from new business. We did see a slight moderation in steel utilization rates in North America in the fourth quarter from the mid-80% range to the low 80s. However, the demand fundamentals for this segment remained strong. Now, let’s take a look at our cash flow and liquidity highlights. Full year cash flow from operations was $232.4 million, capital expenditures were $86 million as we invested in high return growth and productivity projects, as well as sustaining our operations. Free cash flow was $146.4 million. The company used a portion of free cash flow to repurchase $75 million of shares, completing the prior year share repurchase authorization and beginning the new $75 million one-year share repurchase program that the Board of Directors authorized in October. As of the end of the fourth quarter, total liquidity was over $500 million and our net leverage ratio was 2.1 times EBITDA. Our balance sheet remains in a very strong position, which provides us with the flexibility we need to continue to invest in high-value, high-return growth opportunities both organically and inorganically. Looking ahead, we expect another strong year of cash flow generation, with cash from operations increasing commensurately with higher income. Our capital spend will be in the range of $85 million to $95 million for 2022. We have a solid pipeline of high-return organic growth opportunities and we plan to deploy capital spending toward these opportunities, as well as sustaining and improving our operations. Overall, we expect free cash flow to increase to the $150 million to $160 million range for the full year. Now let me summarize our outlook for the first quarter. Overall, we see continued strong demand across our end markets and our order books reflect this. In the fourth quarter, we saw unusually high spikes in energy costs and increased challenges around logistics and labor availability. Our latest view for the first quarter is that the inflationary pressures and logistics challenges will continue. However, we have pricing actions and operational adjustments in place today to more than offset the known increases and significantly expand margins in the first quarter. Overall for the company, we expect a strong performance in the first quarter, with operating income in the range of $63 million to $65 million, 15% to 20% higher than the fourth quarter, and with earnings per share around $1.25. With that, I will turn it back over to Doug to provide some additional perspective on the year ahead. Doug?

Thanks, Matt. As we look ahead, this is going to be another dynamic year, with many of the same inflationary and logistics pressures continuing. But with the momentum across our businesses and the growth projects underway and our strong operating performance, 2022 is shaping up to be another record year for MTI. Overall, I am very excited about where we are as a company and where we are going. We have transformed MTI into a higher growth, higher margin, and higher value company. We have more opportunities in front of us, beyond what I have shared with you today that will further enhance this trajectory. We are well positioned to leverage our balanced portfolio. We have a breadth of attractive projects across our businesses that will drive our sales and earnings momentum this year. We focused on accelerating our geographic penetration and our core product lines and building our growth opportunities in adjacent markets. In addition, we will further strengthen our R&D pipeline with a focus on increasing the percentage of revenue from new products, as well as introducing solutions that help us penetrate attractive markets. With our solid financial footing, we have the resources to execute on all of our growth initiatives. Our strong balance sheet and cash flow generation gives us the flexibility to deploy capital to shareholders while at the same time, accelerating our growth trajectory through acquisitions, similar to what we achieved this past year. We have a targeted list of inorganic opportunities that will continue to transform our company with a focus on profitable growth. Underpinning everything we do is our culture of continuous improvement. Operational excellence is embedded in our company with our employees at its center. It’s our employees and their high level of engagement around problem solving through Kaizen events, utilizing standard work practices, and implementing suggestions to improve daily processes, which enables us to adapt to changing environments. It’s this ingrained culture that is the foundation of MTI’s unique operating capabilities. Sustainability is a core value at MTI and over the past several years we have made significant progress to embed our ESG priority deeper into our company, our operating mindset and our growth strategies. In 2022, we will be focused on promoting our safety, culture of zero injuries, achieving or exceeding our six environmental reduction targets, increasing our product portfolio geared toward sustainable solutions and making MTI a more diverse and inclusive place to work. We look forward to sharing more about these initiatives as we publish our 14th Sustainability Report in July. To sum it all up, we have a winning formula and an engaged team and a leading portfolio of businesses. With sales growth of 10% to 15% expected this year, combined with our distinct operational capabilities, we have all the elements in place to deliver a very strong performance in 2022. I will leave you with a final takeaway. For the past two years, we have demonstrated two key attributes of our company: 2020 is financial resilience during very challenging conditions and this past year it’s significant growth potential. It’s our more balanced portfolio, which has enabled this performance and which will continue to deliver higher levels of profitable growth going forward. With that, I will turn the call over to questions.

Thank you. We will go first to Daniel Moore with CJS Securities.

Thank you. Good morning, Doug. Good morning, Matt. I appreciate the insights as always. To start, I have a couple of administrative items to address. Regarding refractory, you mentioned in Q1 that income increased by 20%. Is this a sequential increase like the other segments, or is it year-over-year?

Yeah. All of our guidance is typically sequentially and that is the case for each of the segments and for the full company sort of Refractory are sequential.

Perfect. Just to clarify, do you expect to recover the $5 million in costs, including labor and logistics, all in Q1 or throughout Q1? I am trying to understand how much of this recovery is included in the forecast.

Yeah. So if you take a look at that $5 million, the easy way to break it out, if you listen to the prepared remarks, about $2 million of that was inflation that we said we were going to capture with pricing going into the first quarter and then the other $3 million was largely related to the logistics and some of the labor challenges that we saw and the impact on our operations. What we have said is, we are going to be able to recover that in the first quarter, so that is embedded in the move from the $54.7 million to a $63 million to $65 million range.

Perfect. Okay. And then, just looking at the, sorry about that, Refractories, I think, you talked about this previously, but a new project that would be about $100 million incremental revenue benefit over the next five years. When do you expect that to start to kick in in terms of timing and ramp?

Sure. Let me kick it off and then I will let Brett Argirakis, who runs the business give you a little bit more color, Dan. Some of those have already started to kick off, probably, more later in the first quarter or second quarter and throughout the year. We have other projects that are planned to kick in probably third quarter and fourth quarter. I think there’s all told, Brett, seven contracts, eight contracts totaling $100 million over the next six years. Why don’t you give a little color on that, if you can?

Sure. There are seven contracts we expect to begin in 2022, out of a total of eight. We anticipate a few of these starting in the first quarter, and then they will gradually ramp up throughout the year. These projects align with our key initiatives that focus on new, durable products, more efficient applications, and safer processes. This is driving our entry into the new EAF market and subsequent expansions, which promise significant growth. Approximately 5 million tons of new steel will be introduced to the market, and we are excited to play a part in this by engaging all our segments in these growth opportunities.

That help Dan. So $100 million over five years, it averages out to $20 million, but they will ramp up a little bit later this year. So you might see an incremental $15 million from those contracts this year as they ramp up? But, yeah, I am pretty excited about the new technologies that we have deployed in this market and should provide that growth through this year and beyond for Refractories.

Excellent. No. That’s very helpful. More bigger picture, just from an M&A perspective, obviously, you have been focused on or you have been a little bit more vocal about the growth in your consumer-oriented businesses. Is that the primary area of focus for future M&A or are you looking at a sort of a wider array of opportunities? Thanks, Doug.

Yes. Wide array. Yeah. I think we do highlight as you picked up on in our consumer-oriented portfolio and we think that’s important, because in my last comments where that we do think that this provides us a bigger portion of the company that sits in structurally growing non-cyclical markets that balances out some of the industrial markets that we are in and there’s some cyclicality that as you have noted. And so, yes, I think, we see opportunities to continue to expand in that consumer where we have vertical integration capabilities, number one, but also where we have technical capabilities to supply those types of consumer specialties. But I think there’s also opportunities in our core markets, core minerals around the world that we are also looking at. So I think it’s balanced across all of industrial and consumer, but certainly, we are focused on continuing that balance through additions to that Consumer Specialty business where we think we add a lot of value.

All right. Very good. I will jump back in queue with any follow-ups. Thanks.

Thanks, Dan.

We will take our next question from Silke Kueck with JPMorgan.

Hi. Good morning. How are you?

Hi, Silke.

I have a question about the Household Care business. It seems that the 24% growth in the quarter included a contribution from Normerica, possibly around 28%. This included a price increase of a couple of percent, maybe about 4%. Were the volumes down by approximately 8%, and was that entirely related to the Pet Care business? How quickly can you recover this business? Will the recovery happen mainly in the first quarter, or will it extend throughout next year? That's my first question.

I want to clarify that your question is about the 8% decline in volumes in Pet Care. This decrease is primarily due to some logistics challenges that Matt mentioned. There are a couple fewer days in the fourth quarter compared to the third quarter, which contributed to this. Additionally, in the fourth quarter, especially in December, trucking and rail services were problematic due to driver shortages and labor supply issues linked to COVID. We had products ready for shipment, but delays in truck arrivals disrupted our productivity. We experienced instances where trucks scheduled for one day didn’t arrive until the next, and some simply never showed up in the last few weeks. Despite this, our order books remain very strong. In Normerica, we encountered similar logistical problems, and the recent trucking strike in Canada did not help either. However, we anticipate these issues will not persist into the first quarter. The decline in Pet Care volume was primarily due to logistics hurdles rather than a drop in demand. We expect this to improve over the quarter and are prepared to capitalize on it. We've implemented pricing strategies to recover more than the anticipated $5 million and are optimistic about growth moving forward this first quarter. I hope this provides clarity on the volume decline in Pet Care.

Okay. So you should see all things being equal and maybe that’s a question with the Performance Materials business overall, given that there was acquisition benefits and positive price, but it looked like there was like no volume growth for the Performance Materials segment in the quarter and you see like really strong volume growth in the first quarter as you expected?

Yeah. We are expecting that. Again, we had some challenges across the business in terms of the last few weeks of the year of shipments. And so some of that’s delayed into the first. We definitely have the order book to fulfill all of it. So it’s not a demand-related issue right now. It is more making sure the operations and getting that packaging. And yeah, we had to move some ships around with getting perspective and I know 10% of our North America plant-based workforces quarantined at some point through December, January. So, but that’s what my comments were that the teams did a great job, navigating ship schedules, moving things around, getting the plants to continue to produce, getting things off the docks, shifting orders. Yeah, it was a challenging quarter. But like I said, it’s not a demand-related issue. We have made those corrections in our plants. We see the logistics loosening up and we have put pricing in place to more than cover the inflation that we saw acutely in the quarter. So we will get all of that back, order books are good and we see a much stronger first quarter coming. This is what we think is more of a fourth quarter kind of acute issue.

That’s helpful. I didn’t mean to criticize. I thought everybody had the same issues, I was just trying to figure out how much volumes might not have been shipped and what might come next year in order to better model it. But that was sort of the question.

I know…

…the question.

I just took your question as an opportunity to lay out some more clarity on what went on. That’s all. So I appreciate that.

Excellent. It’s really helpful. Thank you. And are your Paper business is affected by the strike in Finland? Your PCC Paper business or that doesn’t affect you? Like, it’s hard to gauge, what exactly is happening, whether the plants are operating or not?

No. We did not see any impact from that.

Okay. In the first quarter, this is some that seemed to have happened like at the beginning of the year.

That has not affected us in any meaningful way this quarter.

Okay, that’s helpful. And lastly, I'm trying to understand if there are any geopolitical effects resulting from the situation between Russia and Ukraine. Have your customers expressed any concerns about potential issues with iron input, or are there any projections available? The positive aspect is that there's significant capacity coming online and expected steel production in 2020. However, there's also the question of whether all the necessary raw materials can be sourced. Does your customer base have any insights on how they anticipate things may develop?

Let me explain the impact. Certainly, that is a risk. Everything we've shared is based on the current geopolitical environment. I'm not going to predict what will happen with Russia and Ukraine, but I can tell you about our sales and what might directly affect the company. Our sales in Russia are minimal, under $5 million, so it's not a significant sales concern for us. We do source some materials from Russia, but that represents a very small part of what we source overall. Therefore, the impacts on us would likely be more indirect regarding our customers. Another potential direct impact could be energy; we've observed significant energy price increases in Europe, and energy disruptions could affect the company and many others. Additionally, the indirect impacts of any sanctions imposed, how they influence markets, demand, and the resulting ripple effects are uncertain at this time. However, I can assure you that our supply chains are secure, and our sales into Russia and Ukraine are very limited. We recognize this situation as a risk to the global economies, which could, of course, affect the company and others as well.

Refractory customers have not indicated any concerns about their ability to import sufficient materials or the paperwork required for permits to continue operating.

Our Refractory business in North America relies on materials that are either produced in-house or sourced from outside Russia, so we do not anticipate any issues arising from Russia or Ukraine. We source magnesium oxide from Turkey and also manufacture and mine our own supplies. Additionally, we procure from China, securing those supplies early in the year, even before the Olympics. We produce our own calcium metal and are the only manufacturer of it in North America and the western hemisphere. While we have sourced calcium metal from Russia, we have alternative sources to strengthen our supply chain. This calcium metal is utilized in our calcium wire for the U.S. steel industry. We have assessed our supply redundancies globally to ensure that there will not be any disruptions affecting our customers in the United States or Europe.

That’s helpful. I will move on. My concern was that there was an issue in making the steel. I was less worried about you getting them a bit easier; I was worried about it affecting steel products in the U.S., if you can get the paperwork.

Yeah. I think, Russia is about 1.3 million, yeah, imported in the United States. So I think there’s probably capacity to be able to bring that up in the United States. We see with the new capacity coming online, the 5 million tons that Brett just mentioned. Russia imports about 1.3 million tons into the U.S. I think the U.S. will be able to absorb it, and certainly, we have the capacity to be able to support that from a Refractory standpoint.

That's great. Thank you for clarifying that. My final question is about the PCC Specialty business you acquired in November. What was the purchase price, and what are the sales expected from that business? Thank you very much.

It's a small addition, Silke. The revenue is likely around $10 million from that business in the Midwest, making it a relatively modest purchase price for such a valuable asset.

That’s great. Thank you.

Thanks, Silke.

Thank you. We will take our next question from Mike Harrison with Seaport Research Partners.

Hi. Good morning.

Hi, Mike.

I wanted to go back to the Household and Pet Care segment with a couple of questions. First of all, I guess, maybe a good time to just discuss how the Normerica integration has been going. I mean, aside from the logistical issues that you saw, are you seeing the integration and maybe some of the synergies that you anticipated there playing out and maybe talk about kind of underlying trends around private label and premium cat litter as we get into 2022?

Sure. Thanks, Mike. The integration is progressing well. We have already realized over half of the expected synergies, with the remaining ones primarily related to the timing of vertically integrating our clay supply. We had existing contracts with other clay suppliers when we acquired Normerica, which we plan to integrate as they come to an end. We expect to capture these remaining synergies by the second quarter of this year. Overall, we are very satisfied with the addition of the new employees. They have undergone extensive safety and operational excellence training, and we are in the process of upgrading their plants to meet the standards we uphold at MTI. This process is still ongoing. On the back-office integration front, everything is going smoothly. However, we did face challenges with purchasing, including some inflationary pressures affecting packaging and logistics over the past four months. Many contracts that allow us to manage pricing, as Matt noted, came up on January 1. Thus, it was not unexpected that we encountered some issues toward the end of the year, but we have largely addressed those and are making good progress with the integration. I will hand it over to Jon to discuss the current market conditions concerning private label and the demand outlook. Jon?

Sure. A couple of things just to reiterate, synergy is certainly well in hand. We are working with all of our customers and the market’s been very strong, demand is there. As we have been retooling our operations, we have also been retooling some of our customer relationships. We have worked with them on pricing like we do everybody else that’s been extremely successful and everything’s in place. In addition to that, like I said, demand is extremely strong. We have picked up new customers, we are adding chair positions, winning new contracts and that will push more volume through our plants as well. And we are retooling those plants or debottlenecking them and we are expanding our capacity. So, from a market demand perspective, again, very, very strong, and we see that in Canada and also the U.S. and we are well-positioned to take advantage of it.

All right. Great. And then my other question on the consumer side of the business, you mentioned edible oil purification and some of the Personal Care businesses had grown pretty nicely during 2021. Maybe just talk about this, is that an area where some of these new products and innovation are started to contribute? Maybe talk about kind of how you are growing that organically and are you going to get to a point where you maybe need to look at an acquisition to expand capabilities?

Yeah, Mike, again this is Jon. As you know, we have had a large success with our existing business. As we have built that plant a couple of years ago, we filled it up. We have been growing with customers and new products and innovation. That team has been very energized and looking for opportunities with customers around the world, in Europe and North America, also in Asia. We continue to see that growth expanding as we continue into the year to come and also the years going forward. We have been debottlenecking our plant there as well, expanding capacity, and at the right time, we will make investments where needed in order to continue supplying the products and the demand that our customers are asking for. So very successful and we will continue expanding as we can.

We have numerous opportunities in our consumer businesses. I mentioned wastewater and further developments in our floors, products, and the Personal Care sector, which includes distinct bentonite-based and polymer-based components where we possess unique capabilities. Additionally, we have the edible oil segment, which is also bentonite-based. With the growth trajectory we're observing, we are likely to invest in expanding capacity soon to keep up with this growth. Furthermore, we are considering acquisitions to strengthen our position. Overall, we see a strong opportunity for growth in both areas, as these higher-margin products will contribute positively to our margin growth and targets. We have a positive outlook for both businesses.

All right. Sounds good. And then my last question is around pricing. If I do the math, it looks like you got about 4% or 5% year-on-year pricing overall for the company, is that correct? Where do you expect that pricing number to be as we get to Q1 and maybe talk about kind of pricing contribution by segment? Are there areas where you feel better about being caught up against inflation and areas where your kind of further behind?

You have the numbers right, Mike. To break down our expected 10% to 15% growth simply, last quarter I mentioned we foresee 5% from organic volume, 5% from Normerica, and possibly another 5% from pricing. So with about 10% coming from price and volume, there’s potential for it to be even higher depending on market conditions, alongside another 5% from the year-over-year impact of Normerica. We anticipate being above that 5% in pricing in the first quarter and maintaining it throughout the year, which would help us recover last year's deficit and exceed it. That’s why we remain optimistic about our margins this year. We are facing some challenges, particularly with logistics and securing trucks to supply our customers, but we've successfully managed these issues last year. It's difficult to predict the trajectory of COVID, but with the situation improving since December and January, we feel more confident. Many of our employees are returning to work, which will positively impact us. While we are somewhat behind on energy costs in our paper business due to contractual timing, we are well-prepared in other areas. We've revamped our contracts to be more flexible, increased communication speed with customers, and adjusted our pricing strategy to be more frequent. We raised prices multiple times last year, and we’re ready to continue this approach as needed.

And one additional thing to add just on the mix component that we were talking about, Mike. If you take a look at the third quarter, fourth quarter of 2021, really good performance in the Performance Materials business, yes, rising costs. I talked in the prepared remarks a little bit about some of the delays that impacted that business because of the contractual nature of getting those increases in on January 1st. We will get that. But as we move into the first quarter, you are going to see, as Doug said, that SMI segment start to get some more pricing. So a little bit of a change as to where you are seeing the pricing coming.

All right. Sounds good. Thanks very much.

Thanks, Mike.

We will take our next question from David Silver with CL King.

Yeah. Hi. Good morning.

Good morning, David.

I’d like to follow up on one of Mike’s initial questions about Normerica. Your response was informative regarding the qualitative aspects of that acquisition and integration. However, as I prepared for this call, I noticed that last quarter you outlined some quantitative targets. I would like your insights on two points. First, was Normerica accretive in the fourth quarter? Secondly, for the full year 2022, do you still expect Normerica to be accretive by 5% to 7%, and is the middle, low-end, or high-end of that range more applicable from your perspective as of February 4th? Thank you.

Normerica contributed positively in the fourth quarter, but it was less than our initial expectations. We managed to realize the anticipated synergies during this period; however, we encountered unexpected inflationary pressures and shipping delays. I previously mentioned the recent contract changes effective January 1, which have been resolved, and we expect to recover the costs incurred, leading to a delay in the expected accretion. Nevertheless, considering our operations, workforce, and order volume, we remain confident in achieving the 5% to 7% accretion target for 2022. We just need to navigate through and absorb the costs we faced in the latter half of the previous year and move forward with the changes in the early part of this year.

From a synergy perspective, which we also laid out that $5 million to $7 million, on track and on pace with the synergies. Again, Doug already outlined some of the challenges from an operating income perspective that we saw in the fourth quarter, but the synergies and the integration are moving along as we thought they would.

I think…

Yeah.

Yeah. Go ahead, David. I will let you finish your question.

No. No. If you wanted to add on, please do. Thank you.

Thank you. I wanted to mention that despite the challenges, our original thesis regarding Normerica remains strong. We expect the expected growth to materialize in 2022 as planned. As Jon pointed out, one of the reasons for this acquisition was to enhance our positioning in the North American market, allowing us to cater to a wider range of customers. Our vertically integrated structure enables us to provide additional value to these customers, and we are beginning to see that unfold. New opportunities and contracts are emerging, reinforcing the market's perception of our capabilities as a supplier, not just in North America but also in Europe and globally. This potential for growth and profitability, particularly following the acquisition, is still very much intact. We are looking forward to navigating this inflationary period alongside other businesses. Ultimately, the foundation upon which we made this acquisition and its anticipated benefits for the company are still very much in place.

We will take our next question from David Silver with CL King.

Yeah. Hi. Good morning.

Good morning, David.

Hey. I’d like to follow up on one of Mike’s initial questions about Normerica. Your response was insightful regarding the qualitative progress of that acquisition and integration. However, as I reviewed my notes to prepare for this call, I noticed that last quarter you set some quantitative targets. I was wondering if you could comment on two points. First, was Normerica accretive in the fourth quarter? Secondly, for the full year 2022, is your expectation still that Normerica will be 5% to 7% accretive, and from your perspective on February 4th, is the middle, low-end, or high-end of that range more suitable now? Thank you.

Yes, Normerica was accretive in the fourth quarter, but it was less than we had initially planned. We achieved the expected synergies during the quarter, but we encountered some unexpected inflationary pressures and shipping delays. However, I mentioned that the contracts have changed as of January 1, which has been resolved and we expect to recover those losses. Although there was a slight delay in terms of that accretion, we are confident in our current operations, employee base, order book, and pricing. We anticipate reaching the 5% to 7% accretion target for 2022. We just needed to manage some of the costs encountered in the latter half of the year and move forward with the adjustments made early this year.

From a synergy perspective, which we also laid out that $5 million to $7 million, on track and on pace with the synergies. Again, Doug already outlined some of the challenges from an operating income perspective that we saw in the fourth quarter, but the synergies and the integration are moving along as we thought they would.

I think…

Yeah.

Yeah. Go ahead, David. I will let you finish your question.

No. No. If you wanted to add on, please do. Thank you.

Thank you. I wanted to mention that despite the challenges, our initial thesis regarding Normerica remains strong. We expect the expected benefits to materialize in 2022 as planned. As Jon pointed out, one of the reasons for the acquisition was to enhance our position in the North American market, allowing us to serve a wider range of customers. With our vertically integrated approach, we can provide significantly more value, and we are starting to see that unfold. We’re encountering new opportunities, contracts, and business, which indicates that our capabilities as a supplier are recognized not just in North America, but also in Europe and globally. This reinforces our belief that we can grow this business and increase profitability more significantly than we could before the acquisition. We are enthusiastic about the potential ahead. While we will navigate this inflationary period like other businesses, the rationale behind the acquisition and its expected benefits for the company remain intact.

We will take our next question from Marisa Hernandez with Sidoti & Company.

Hi. Thank you for taking my questions. Most of the questions I have have been asked. But I have a couple of housekeeping questions and then another more general one. So on the Normerica results, can you share with us, what was the contribution of Normerica to revenues in the fourth quarter?

Yeah. It was $28 million.

Thank you, Matt. Great. Regarding the expansion of margins in the first quarter, you had mentioned that you expected to return to margin levels on a product basis, in dollar terms rather than percentage terms, in the first quarter of 2022. Is that still the case?

Yeah. So what we said is that we were going to get on a dollar basis, caught up with the inflationary costs that we have been experienced over the past couple of quarters. And obviously, in the fourth quarter, inflation continued to rise at a rate that was higher than we expected. But we also showed you that pricing that we put into place captured about 80% of what we saw in the fourth quarter. That’s going to carry through into the first quarter, plus the items that we told you about in the segments where we were getting January 1st pricing taking place. So we will actually come net dollar ahead at the end of the first quarter for the first quarter, and overall, we are continuing to drive margin with those price increases against that inflation. If you look through the full year from a margin perspective, we are going to come through the first half of the year, you are going to see that year-over-year inflationary impact in the financials, first quarter, second quarter, because remember in 2021, inflation wasn’t really as a significant factor in the first half, really a second half component. And as we get into the second half with the pricing that we have in place, the additional actions we are taking, getting through some of the logistics and labor challenges, you are going to see that on margin continue to expand significantly into the second half towards our target levels.

Okay. So, obviously, with all the inflation that we are having, it’s a lot more difficult to get to prior margin levels on a percent basis. What is the expectation regarding that? Can we get to pre-pandemic, call it, 14% plus operating margin in the foreseeable future?

So let me try and grab it this way. We have pricing actions in place, given the inflation we have experienced and expect to experience this year, that will get us back to those levels or close to those levels. We also believe that our product line growth will be accretive to those margins, so that by the end of this year, we could hit our target level. Now…

And what is that…

… we expect…

…target level?

And that’s around that 14.5%, 15% range. So, as we sit today…

Okay.

We have a projection indicating growth in our higher margin businesses and established pricing. We need to maintain that spread, and as Matt mentioned, the pricing we have will help us recover from the cost delays we experienced in the first half, with margin expansion anticipated in the second half. While this looks good on paper, we must stay ahead of inflation, which we expect will increase. We need to be agile and efficient in managing our operations, similar to what we accomplished last year. We believe we can maintain our pricing strategy through ongoing discussions, which will help us achieve our targets. This year remains very volatile, likely even more so at the beginning than last year, so we need to remain vigilant. Our company's mechanisms and the foresight we have, along with costs we've already secured, position us well to maintain the price-cost spread needed to restore our margins.

Thank you so much for the color. I appreciate it.

Yeah. Hopefully that helps.

Absolutely. Thank you.

We will now move on to the follow-up from Daniel Moore with CJS Securities.

Yeah. No. Thank you. The follow-up one and two have been covered. So I appreciate the color again.

With no additional questions in queue at this time, I’d like to turn the call back over to Mr. Dietrich for any additional or closing remarks.

Thanks, Katie. Appreciate it. I appreciate everyone joining today. Hopefully we answered questions. Anything else you have we will certainly be willing to follow-up with you and we will talk to you I believe in late April, early May. Matt, is that where we are? Okay. Thank you very much. Stay safe.

That will conclude today’s call. We appreciate your participation.